**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM20-F**

 
| **o**                                            | **REGISTRATION  STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF  1934** |
|--------------------------------------------------|------------------------------------------------------------------------------------------------------|
|                                             |                                                                                                 |
| **ý**                                       | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**            |
|                                             |
| **For the fiscal year ended December  31, 2002** |
|                                             |
| **o**                                            | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**        |
|                                             |
| **Commission file number 0-29004**               |

 

| **NOVATEL INC.**                                                    |
|---------------------------------------------------------------------|
| (Exact  name of Registrant as specified in its charter)             |
|                                                                |
| **N/A**                                                             |
| (Translation  of Registrant’s name into English)               |
|                                                                |
| **Canada**                                                          |
| (Jurisdiction  of incorporation or organization)                    |
|                                                                |
| **1120 – 68th Avenue N.E.,  Calgary, Alberta, Canada T2E 8S5** |
| (Address  of principal executive offices)                           |

 

SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(b) OFTHE ACT: **NONE**

 

SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(g) OFTHE ACT:

**Common Shares**

(Titleof Class)

 

SECURITIES FOR WHICH THERE IS A REPORTING OBLIGATION PURSUANT TO SECTION15(d) OF THE ACT: **NONE**

 

At December31, 2002, Registrant had outstanding 7,684,815 Common Shares, no par value.

 

Indicate bycheck mark whether the Registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports) and (2) has been subject to such filingrequirement for the past 90 days.

 

ý Yes                  o No

 

Indicate bycheck mark which financial statement item the Registrant has elected to follow.

o Item17                        ý Item 18

 

 

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*The dollar amounts presented in this Annual Report on Form20-F are in Canadian currency unless otherwise noted (CDN$1 = US$0.6762 onMarch 20, 2003), and are presented in accordance with accounting principlesgenerally accepted in Canada. Historic rates of exchange appear in Part I,“Item 3 - Key Information, Selected Financial Data.” The material differencesbetween Canadian and U.S. generally accepted accounting principles (“GAAP”)which would bear upon the Company’s financial statements and, moreparticularly, income (loss) applicable to share equity and retained earnings,are disclosed in Note 20 of Notes to Consolidated Financial Statements.*

* *

*Certain statements in this Annual Report constituteforward-looking statements within the meaning of the Private SecuritiesLitigation Reform Act of 1995.  Suchforward-looking statements involve known and unknown risks, uncertainties and otherfactors that may cause the actual results, performance or achievements of theCompany, or developments in the Company’s industry, to differ materially fromthe anticipated results, performance or achievements expressed or implied bysuch forward-looking statements.  Suchfactors include, but are not limited to, operating results of subsidiaries andjoint ventures, establishing and maintaining effective distribution channels,certification and market acceptance of the Company’s new products, impact andtiming of large orders, credit risks of customers and joint ventures, financingof joint ventures, pricing pressures in the market and other competitivefactors, maintaining technological leadership, timing of revenue recognition inconnection with certain contracts, the ability to maintain supply of productsfrom subcontract manufacturers, the procurement of components to buildproducts, product defects and the impact of industry consolidations, togetherwith the other risks and uncertainties described under “Item 3 – KeyInformation, Risk Factors” in Part I of this Annual Report.*

 

**PART I**

 

**Item 1****              Identity of Directors, Senior Management, Advisers**

 

Not applicable

 

**Item 2****              Offer Statistics and Expected Timetable**

 

Not applicable

 

**Item  3****           KeyInformation**

 

NovAtel designs, markets and supports abroad range of products which determine precise geographic locations using theGlobal Positioning System (“GPS”). NovAtel’s GPS products are used principallyfor applications in high-end markets such as the surveying, geographicinformation systems (“GIS”), aviation, unmanned vehicles, marine, mining andmachine control, agriculture and precise timing markets, rather than forapplications in low-end markets such as the vehicle navigation andconsumer/cellular markets.  Unless thecontext requires otherwise, references herein to “NovAtel” or the “Company”refer to NovAtel Inc., including its subsidiary, Mezure, Inc. and jointventure, Point, Inc.

 

**A.****                                    Selected Financial Data**

 

(a)                                  Summary Financial Information

 

The following table sets forth selectedfinancial data of the Company for the periods indicated. The selected financialdata for the years ended December 31, 2000, 2001 and 2002 have been derivedfrom the Company’s audited consolidated financial statements, which appearelsewhere in this Annual Report. The selected financial data for the yearsended December 31, 1998 and 1999 have been derived from the Company’s auditedconsolidated financial statements, not included in this Annual Report. Thefollowing unaudited summary financial information, in the opinion of management,has been prepared on the same basis as the audited consolidated financialstatements and contain all adjustments, consisting only of normal recurringadjustments, necessary for a fair presentation of the financial condition andresults of operations for such periods. The table sets forth, in Canadiandollars and U.S. dollars, the selected financial data as prepared in accordancewith Canadian generally accepted accounting principles (“Canadian GAAP”). Thefinancial data should be read in conjunction with “Item 5 – Operating andFinancial Review and Prospects” and the Consolidated Financial Statements ofthe Company and Notes thereto included elsewhere in this Annual Report.

 

 

1

----

 
|                                                                |   | **Year Ended December 31,**                |       |
|---------------------------------------------------------------------|--------|--------------------------------------------|------------|
|                                                                |   | **1998**                                   |       | **1999** |   | **2000** |   | **2001** |   | **2002** |   |
|                                                                |   | **(in thousands, except per share  data)** | ** ** |
| **Statement of Operations Data(1):**                                |   |                                       |       |   |   |   |   |   |   |   |   |
| Revenues:                                                           |   |                                       |       |   |   |   |   |   |   |   |   |
| Product sales                                                       |   | $                                          | 21,468     |   | $ | 23,363 |   | $ | 23,980 |   | $ | 23,241 |   | $ | 27,255 |   |
| NRE fees                                                            |   | 99                                         |       | 863 |   | 863 |   | 4,996 |   | 6,179 |   |
| Total revenues                                                      |   | 21,567                                     |       | 24,226 |   | 24,843 |   | 28,237 |   | 33,434 |   |
|                                                                |   |                                       |       |   |   |   |   |   |   |   |   |
| Cost of sales:                                                      |   |                                       |       |   |   |   |   |   |   |   |   |
| Cost of product sales                                               |   | 8,629                                      |       | 12,096 |   | 10,360 |   | 10,730 |   | 12,020 |   |
| Cost of NRE fees                                                    |   | 45                                         |       | 550 |   | 482 |   | 2,542 |   | 4,055 |   |
| Total cost of sales                                                 |   | 8,674                                      |       | 12,646 |   | 10,842 |   | 13,272 |   | 16,075 |   |
|                                                                |   |                                       |       |   |   |   |   |   |   |   |   |
| Gross profit                                                        |   | 12,893                                     |       | 11,580 |   | 14,001 |   | 14,965 |   | 17,359 |   |
|                                                                |   |                                       |       |   |   |   |   |   |   |   |   |
| Operating expenses:                                                 |   |                                       |       |   |   |   |   |   |   |   |   |
| Research and development                                            |   | 8,234                                      |       | 6,902 |   | 8,161 |   | 6,827 |   | 5,519 |   |
| Selling and marketing                                               |   | 4,621                                      |       | 3,925 |   | 4,527 |   | 3,859 |   | 5,717 |   |
| General and administration                                          |   | 3,561                                      |       | 2,783 |   | 3,661 |   | 4,170 |   | 4,433 |   |
| Total operating expenses                                            |   | 16,416                                     |       | 13,610 |   | 16,349 |   | 14,856 |   | 15,669 |   |
|                                                                |   |                                       |       |   |   |   |   |   |   |   |   |
| Operating income (loss)                                             |   | (3,523                                     | )          | (2,030 | ) | (2,348 | ) | 109 |   | 1,690 |   |
|                                                                |   |                                       |       |   |   |   |   |   |   |   |   |
| Interest income, net                                                |   | 212                                        |       | 374 |   | 319 |   | 138 |   | 84 |   |
| Other expense                                                       |   | (236                                       | )          | (204 | ) | (769 | ) | (124 | ) | (200 | ) |
|                                                                |   |                                       |       |   |   |   |   |   |   |   |   |
| Income (loss) from continuing operations – before income taxes |   | (3,547                                     | )          | (1,860 | ) | (2,798 | ) | 123 |   | 1,574 |   |
|                                                                |   |                                       |       |   |   |   |   |   |   |   |   |
| Provision for income taxes                                          |   | 87                                         |       | 123 |   | 13 |   | 13 |   | 77 |   |
|                                                                |   |                                       |       |   |   |   |   |   |   |   |   |
| Net income (loss) from continuing operations                        |   | (3,634                                     | )          | (1,983 | ) | (2,811 | ) | 110 |   | 1,497 |   |
|                                                                |   |                                       |       |   |   |   |   |   |   |   |   |
| Net income from discontinued operations                             |   | 1,304                                      |       | 949 |   | 16 |   | — |   | — |   |
| Net income (loss)                                                   |   | $                                          | (2,330     | ) | $ | (1,034 | ) | $ | (2,795 | ) | $ | 110 |   | 1,497 |   |
|                                                                |   |                                       |       |   |   |   |   |   |   |   |   |
| Net income (loss) per share (basic):                                |   |                                       |       |   |   |   |   |   |   |   |   |
| Continuing operations                                               |   | $                                          | (0.47      | ) | $ | (0.26 | ) | $ | (0.37 | ) | $ | 0.01 |   | $ | 0.19 |   |
| Discontinued operations                                             |   | 0.17                                       |       | 0.13 |   | 0.01 |   | — |   | — |   |
| Net income (loss) per share                                         |   | $                                          | (0.30      | ) | $ | (0.13 | ) | $ | (0.36 | ) | $ | 0.01 |   | $ | 0.19 |   |
| Weighted average shares outstanding (basic)                         |   | 7,673                                      |       | 7,674 |   | 7,676 |   | 7,690 |   | 7,681 |   |
|                                                                |   |                                       |       |   |   |   |   |   |   |   |   |
| Net income (loss) per share (diluted):                              |   |                                       |       |   |   |   |   |   |   |   |   |
| Continuing operations                                               |   | $                                          | (0.47      | ) | $ | (0.26 | ) | $ | (0.37 | ) | $ | 0.01 |   | $ | 0.19 |   |
| Discontinued operations                                             |   | 0.17                                       |       | 0.13 |   | 0.01 |   | — |   | — |   |
| Net income (loss) per share                                         |   | $                                          | (0.30      | ) | $ | (0.13 | ) | $ | (0.36 | ) | $ | 0.01 |   | $ | 0.19 |   |
| Weighted average shares outstanding (diluted)                       |   | 7,673                                      |       | 7,704 |   | 7,816 |   | 7,704 |   | 7,824 |   |

 

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*Footnotes appear on pages4-9*

 

2

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|                                                  |   | **Year  Ended December 31,**               |   |
|-------------------------------------------------------|--------|--------------------------------------------|--------|
|                                                  |   | **2001**                                   |   | **2002** |   |
|                                                  |   | **(in  thousands, except per share data)** |   |
| **(US$ equivalent)(2)**                               |   |                                       |   |   |   |
|                                                  |   |                                       |   |   |   |
| Revenues:                                             |   |                                       |   |   |   |
| Product sales                                         |   | $                                          | 15,716 |   | $ | 18,430 |   |
| NRE fees                                              |   | 3,378                                      |   | 4,178 |   |
| Total revenues                                        |   | 19,094                                     |   | 22,608 |   |
|                                                  |   |                                       |   |   |   |
| Cost of sales:                                        |   |                                       |   |   |   |
| Cost of product sales                                 |   | 7,256                                      |   | 8,128 |   |
| Cost of NRE fees                                      |   | 1,719                                      |   | 2,742 |   |
| Total cost of sales                                   |   | 8,975                                      |   | 10,870 |   |
|                                                  |   |                                       |   |   |   |
| Gross profit                                          |   | 10,119                                     |   | 11,738 |   |
|                                                  |   |                                       |   |   |   |
| Operating expenses:                                   |   |                                       |   |   |   |
| Research and development                              |   | 4,616                                      |   | 3,732 |   |
| Selling and marketing                                 |   | 2,609                                      |   | 3,866 |   |
| General and administration                            |   | 2,820                                      |   | 2,997 |   |
| Total operating expenses                              |   | 10,045                                     |   | 10,595 |   |
|                                                  |   |                                       |   |   |   |
| Operating income                                      |   | 74                                         |   | 1,143 |   |
|                                                  |   |                                       |   |   |   |
| Interest income, net                                  |   | 93                                         |   | 57 |   |
| Other expense                                         |   | (84                                        | )      | (136 | ) |
| Income from continuing operations before income taxes |   | 83                                         |   | 1,064 |   |
|                                                  |   |                                       |   |   |   |
| Provision for income taxes                            |   | 9                                          |   | 52 |   |
| Net income from continuing operations                 |   | 74                                         |   | 1,012 |   |
|                                                  |   |                                       |   |   |   |
| Net income from discontinued operations               |   | —                                     |   | — |   |
| Net income                                            |   | $                                          | 74     |   | $ | 1,012 |   |
|                                                  |   |                                       |   |   |   |
| Net income per share (basic):                         |   |                                       |   |   |   |
| Continuing operations                                 |   | $                                          | 0.01   |   | $ | 0.13 |   |
| Discontinued operations                               |   | —                                     |   | — |   |
| Net income per share                                  |   | $                                          | 0.01   |   | $ | 0.13 |   |
| Weighted average shares outstanding (basic)           |   | 7,690                                      |   | 7,681 |   |
|                                                  |   |                                       |   |   |   |
| Net income per share (diluted):                       |   |                                       |   |   |   |
| Continuing operations                                 |   | $                                          | 0.01   |   | $ | 0.13 |   |
| Discontinued operations                               |   | —                                     |   | — |   |
| Net income per share                                  |   | $                                          | 0.01   |   | $ | 0.13 |   |
| Weighted average shares outstanding (diluted)         |   | 7,704                                      |   | 7,824 |   |

 

3

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|                            |   | **December  31,**  |       | **US$  Equivalent  December 31,  2002(2)** |   |
|---------------------------------|--------|--------------------|------------|--------------------------------------------|--------|
| **Balance  Sheet Data(1):**     |   | **1998**           |       | **1999**                                   |   | **2000** |   | **2001** |   | **2002** |   |   |
| **(Canadian  $)**               |   | **(in thousands)** | ** ** |
|                            |   |               |       |                                       |   |   |   |   |   |   |   |   |   |
| Working capital                 |   | $                  | 8,123      |                                       | $      | 13,957 |   | $ | 11,279 |   | $ | 12,284 |   | $ | 14,372 |   | $ | 9,718 |   |
| Total assets                    |   | 29,460             |       | 29,204                                     |   | 28,830 |   | 27,821 |   | 30,890 |   | 20,888 |   |
| Bank advances                   |   | —             |       | —                                     |   | — |   | — |   | — |   | — |   |
| Long-term liabilities           |   | 922                |       | 549                                        |   | 307 |   | 253 |   | 98 |   | 66 |   |
| Total shareholders’ equity |   | 22,786             |       | 21,752                                     |   | 18,969 |   | 19,086 |   | 20,547 |   | 13,894 |   |
|                                 |        |                    |            |                                            |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)                                  The consolidated financial statements have been prepared inaccordance with generally accepted accounting principles in Canada (CanadianGAAP or Canadian principles). The significant differences from U.S. generallyaccepted accounting principles (U.S. GAAP or U.S. principles) are as follows ($thousands):

 

**i) *Revenue Recognition***

 

In December 1999, the U.S. Securities andExchange Commission (SEC) issued Staff Accounting Bulletin (“SAB”) 101, RevenueRecognition in Financial Statements, which provides guidance related to revenuerecognition based on the interpretations and practices of the SEC.  The Company believes that its revenuerecognition policies are in accordance with the guidance provided in SAB 101.

 

**ii) *Deferred Development Costs***

 

In the year ended December 31, 2002, theCompany deferred $125 of development costs ($4 in 2001, $757 in 2000, $1,275 in1999 and $528 in 1998) in accordance with Canadian GAAP.  Under U.S. GAAP, these costs would beexpensed as incurred as research and development costs.

 

In the year ended December 31, 2002, theCompany amortized $57 of deferred development costs ($36 in 2001, $nil in 2000,1999 and 1998) in accordance with Canadian GAAP.  Under U.S. GAAP, these costs would have been expensed in theperiod when the originating expenditures were incurred.

 

Further, for U.S. GAAP purposes, theCompany would have recharacterized the goodwill acquired on the Mezure, Inc.share acquisition of $231 as development related costs, and these costs wouldhave been expensed on acquisition in 2001.

 

***iii) Derivatives and Hedging Activities***

 

The Company has historically entered intoforeign exchange options and forward contracts to manage its exposure toforeign currency fluctuations.  In June1998, the FASB issued SFAS 133, “Accounting for Derivative Instruments andHedging Activities” subsequently amended by SFAS 137 and SFAS 138. Thesepronouncements establish accounting and reporting standards for derivativeinstruments, including certain derivative instruments embedded in othercontracts, and for hedging activities. They require companies to recognize all derivatives as either assets orliabilities on the balance sheet and measure those instruments at fairvalue.  Gains or losses resulting fromchanges in the value of those derivatives would be accounted for depending onthe use of the derivative and whether it qualifies for hedge accounting.  Had the Company prepared its consolidatedfinancial statements in accordance with U.S. GAAP, it would have applied thepronouncements of SFAS 133, 137 and 138 effective January 1, 2001, on aprospective basis without restatement of prior period financial statements.  The adoption of these accounting standardswould not have had a material effect on the Company’s financial position andresults of operations for the years ended December 31, 2002 and December 31,2001.

 

Prior to 2001, as required under U.S. GAAP,the Company would have recorded these financial instruments at fair value atthe ending date of each reporting period, resulting in an additional loss of$21 in 2000, additional income of $329 in 1999 and an additional loss of $308in 1998.

 

4

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**iv) *Investment in Joint Ventures***

 

The accounts of the Company’s 49.0% jointventure interest in Point, Inc. and its 48.7% joint venture interest in Mezure,Inc. (prior to the Company acquiring a 74% controlling interest on July 23,2001) are proportionately consolidated as required under Canadian GAAP.  Under U.S. GAAP, proportionate consolidationis not permitted, and the Company’s investment in these joint ventures would beaccounted for using the equity method. As permitted by SEC guidance, the effects of this difference inaccounting principles have not been reflected in the accompanying tables.

 

In addition, during 2002, the Companyrecognized a gain of $121 related to the reduction of its equity interest inMezure, Inc. from approximately 74% to 70%. Under U.S. GAAP, the Company would have reflected the effects of thistransaction as a direct increase in shareholder’s equity of $160 afterconsideration of the impact of previous U.S. GAAP adjustments.

 

**v) *Income Taxes***

 

Effective January 1, 2000, the Companyadopted the liability method of income tax accounting for Canadian GAAP, whichis consistent with the accounting required under U.S. principles.  In 1999 and prior years, the Companyaccounted for income taxes for Canadian GAAP under the deferral method.  In 1999 and prior years, under U.S.principles, deferred income taxes would be recognized, at enacted rates, toreflect the future effects of tax carryforwards and temporary differencesarising between the tax bases of assets and liabilities and their financialreporting amounts at each balance sheet date.

 

If U.S. GAAP had been followed in 1999 andprior years, the Company would also have recorded the tax benefits attributableto the estimated Canadian net operating loss carryforwards, research anddevelopment costs and unutilized investment tax credits and U.S. net operatingloss carryforwards, available to offset future taxable income, subject tocertain limitations.  However, the Companywould also have established a full valuation allowance against the calculatedtax benefits, since it was uncertain whether any of these tax benefits wouldhave been realized.  As no significantincome taxes were payable other than large corporation tax, and as a fullvaluation allowance would have been recorded against the deferred tax assets asdetermined under U.S. GAAP, this difference between Canadian and U.S. GAAP hadno effect on the Company’s consolidated financial statements presented herein.

 

**vi) *ComprehensiveIncome***

 

Under U.S. GAAP, during 1998, the Companywould have been required to adopt SFAS 130, “Reporting ComprehensiveIncome”.  Had the Company adopted SFAS130, it would have recorded a loss of $49 within other comprehensive income, relatedto the fair value of foreign exchange contracts and options, in the year endedDecember 31, 2002 ($1 income in 2001, $nil in 2000, 1999 and 1998).

 

**vii) *New******U.S. GAAP AccountingPronouncements***

 

In August 2001, the FASB approved for issuance SFAS 143, “Accountingfor Asset Retirement Obligations.”  Thisstatement is effective for fiscal years beginning after June 15, 2002.  This statement requires that the fair valueof the liability for an asset retirement obligation be recognized in the periodin which it is incurred if a reasonable estimate of fair value can bemade.  Associated asset retirement costsare capitalized as part of the carrying amount of the long-lived asset.  The Company does not expect the adoption ofSFAS 143 in January 2003 to have a material impact on the Company’s financialstatements.

 

In August 2001, the FASB approved for issuance SFAS 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets”, effective for fiscalyears commencing after December 15, 2001. This statement addresses financial accounting and reporting for theimpairment or disposal of long-lived assets, and supercedes the existing,standard, SFAS 121 and the accounting and reporting provisions of APB Opinion30.  The adoption of SFAS 144 would nothave had a material impact on the Company’s financial statements.

 

5

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In November 2002, the FASB issued Interpretation No. 45 “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others” (FIN 45).  FIN 45 elaborates on the disclosures the Company must make aboutthe Company’s obligations under certain guarantees that the Company hasissued.  It also requires the Company torecognize, at the inception of a guarantee, a liability for the fair value ofthe obligations the Company has undertaken in issuing the guarantee.  The initial recognition and initialmeasurement provisions are to be applied only to guarantees issued or modifiedafter December 31, 2002.  Adoption ofthese provisions will not have a material impact on the Company’s financialposition or results of operations.

 

In January 2002, the FASB issued Statement No. 148 “Accounting forStock-Based Compensation — Transition and Disclosure, an Amendment of FASBStatement No. 123” (FAS 148).  FAS 148amends FAS 123 “Accounting for Stock-Based Compensation”, to providealternative methods of transition for a voluntary change to the fair valuebased method of accounting for stock-based employee compensation.  In addition, FAS 148 amends the disclosurerequirements of FAS 123 to require prominent disclosures in both annual andinterim financial statements about the method for accounting for stock-basedemployee compensation and the effect of the method used on reported results.  FAS 148 has no material impact on theCompany’s financial statements, as the Company does not plan to adopt the fairvalue method of accounting for stock options at the current time.

 

The following standards issued by the FASB do not impact the Company:

 

•                       Statement No. 145– “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB StatementNo. 13, and Technical Corrections”, effective for financial  statements issued on or after May 15, 2002;

•                       Statement No. 146– “Accounting for Costs Associated with Exit or Disposal Activities”, effectivefor exit or disposal activities initiated after December 31, 2002;

•                       Statement No. 147– “Acquisitions of Certain Financial Institutions – an Amendment of FASBStatements No. 72 and 144 and FASB Interpretation No. 9”, effective foracquisitions on or after October 1, 2002; and

•                       Interpretation No.46 – “Consolidation of Variable Interest Entities”, effective for financialstatements issued after January 31, 2003.

 

**viii) *Summary******of the Differencesbetween Canadian and U.S. GAAP***

 

The effects ofthe above-noted differences between U.S. and Canadian GAAP produces thefollowing differences on the presented statement of operations data:

 
|                                                                      |   | **1998** |   | **1999** |   | **2000** |   | **2001** |   | **2002** |   |
|---------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|
|                                                                      |   |     |   |     |   |     |   |     |   |     |   |
| **Net income (loss) from continuing****operations  – Canadian GAAP** |   | $        | (3,634 | )        | $      | (1,983   | )      | $        | (2,811 | )        | $      | 110 |   | $ | 1,497 |   |
| Adjustments to U.S. GAAP                                                  |   |     |   |     |   |     |   |     |   |     |   |
| Deferred development costs                                                |   | (528     | )      | (1,275   | )      | (757     | )      | (4       | )      | (125     | )      |
| Amortization of deferred development costs                                |   | 3⁄4   |   | 3⁄4   |   | 3⁄4   |   | 36       |   | 57       |   |
| Fair value of financial instruments                                       |   | (308     | )      | 329      |   | (21      | )      | 1        |   | 3⁄4   |   |
| Gain on dilution of equity interest in Mezure, Inc.                       |   | 3⁄4   |   | 3⁄4   |   | 3⁄4   |   | 3⁄4   |   | (121     | )      |
| Write off of Mezure, Inc. development related costs                       |   | 3⁄4   |   | 3⁄4   |   | 3⁄4   |   | (231     | )      | 3⁄4   |   |
| **Net income (loss) from continuing****operations  – U.S. GAAP**     |   | $        | (4,470 | )        | $      | (2,929   | )      | $        | (3,589 | )        | $      | (88 | ) | $ | 1,308 |   |
|                                                                      |   |     |   |     |   |     |   |     |   |     |   |
| Net income (loss) from discontinued operations – Canadian GAAP       |   | $        | 1,304  |     | $      | 949      |   | $        | 16     |     | $      | — |   | $ | — |   |
|                                                                      |   |     |   |     |   |     |   |     |   |     |   |
| **Net income (loss) – U.S. GAAP**                                    |   | $        | (3,166 | )        | $      | (1,980   | )      | $        | (3,573 | )        | $      | (88 | ) | $ | 1,308 |   |

 

6

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Net income(loss) per share as computed under Canadian and U.S. GAAP is as set forth belowfor the following periods:

 
|                                                       |   | **Year Ended December 31,** |   |
|------------------------------------------------------------|--------|-----------------------------|--------|
|                                                       |   | **1998**                    |   | **1999** |   | **2000** |   | **2001** |   | **2002** |   |
| **Net income (loss) per share from continuing operations** |   |                        |   |   |   |   |   |   |   |   |   |
|                                                       |   |                        |   |   |   |   |   |   |   |   |   |
| Canadian GAAP – basic                                 |   | $                           | (0.47  | ) | $ | (0.26 | ) | $ | (0.37 | ) | $ | 0.01 |   | $ | 0.19 |   |
|                                                       |   |                        |   |   |   |   |   |   |   |   |   |
| U.S. GAAP – basic                                     |   | $                           | (0.58  | ) | $ | (0.38 | ) | $ | (0.47 | ) | $ | (0.01 | ) | $ | 0.17 |   |
|                                                       |   |                        |   |   |   |   |   |   |   |   |   |
| Canadian GAAP – diluted                               |   | $                           | (0.47  | ) | $ | (0.26 | ) | $ | (0.37 | ) | $ | 0.01 |   | $ | 0.19 |   |
|                                                       |   |                        |   |   |   |   |   |   |   |   |   |
| U.S. GAAP – diluted                                   |   | $                           | (0.58  | ) | $ | (0.38 | ) | $ | (0.47 | ) | $ | (0.01 | ) | $ | 0.17 |   |

 
|                            |   | **Year Ended December 31,** |   |
|---------------------------------|--------|-----------------------------|--------|
|                            |   | **1998**                    |   | **1999** |   | **2000** |   | **2001** |   | **2002** |   |
| **Net income (loss) per share** |   |                        |   |   |   |   |   |   |   |   |   |
|                            |   |                        |   |   |   |   |   |   |   |   |   |
| Canadian GAAP – basic      |   | $                           | (0.30  | ) | $ | (0.13 | ) | $ | (0.36 | ) | $ | 0.01 |   | $ | 0.19 |   |
|                            |   |                        |   |   |   |   |   |   |   |   |   |
| U.S. GAAP – basic          |   | $                           | (0.41  | ) | $ | (0.26 | ) | $ | (0.47 | ) | $ | (0.01 | ) | $ | 0.17 |   |
|                            |   |                        |   |   |   |   |   |   |   |   |   |
| Canadian GAAP – diluted    |   | $                           | (0.30  | ) | $ | (0.13 | ) | $ | (0.36 | ) | $ | 0.01 |   | $ | 0.19 |   |
|                            |   |                        |   |   |   |   |   |   |   |   |   |
| U.S. GAAP – diluted        |   | $                           | (0.41  | ) | $ | (0.26 | ) | $ | (0.47 | ) | $ | (0.01 | ) | $ | 0.17 |   |

 

7

----

 

Thereconciliation of the selected consolidated financial data between U.S. andCanadian GAAP produces the following differences on the presented balance sheetdata:

 
|                                         |   | **Year Ended December 31,** |   |
|----------------------------------------------|--------|-----------------------------|--------|
|                                         |   | **1998**                    |   | **1999** |   | **2000** |   | **2001** |   | **2002** |   |
|                                         |   |                        |   |   |   |   |   |   |   |   |   |
| **Total Assets**                             |   |                        |   |   |   |   |   |   |   |   |   |
|                                         |   |                        |   |   |   |   |   |   |   |   |   |
| Canadian GAAP                                |   | $                           | 29,460 |   | $ | 29,204 |   | $ | 28,830 |   | $ | 27,821 |   | $ | 30,890 |   |
|                                         |   |                        |   |   |   |   |   |   |   |   |   |
| Adjustments to U.S. GAAP                     |   |                        |   |   |   |   |   |   |   |   |   |
| Deferred development costs                   |   | (528                        | )      | (1,803 | ) | (2,560 | ) | (2,528 | ) | (2,596 | ) |
| Fair value of financial instruments.         |   | 3⁄4                      |   | 21 |   | (1 | ) | 3⁄4 |   | 3⁄4 |   |
| Write off of Mezure, Inc.  development costs |   | 3⁄4                      |   | 3⁄4 |   | 3⁄4 |   | (231 | ) | (192 | ) |
| U.S. GAAP                                    |   | $                           | 28,932 |   | $ | 27,422 |   | $ | 26,269 |   | $ | 25,062 |   | $ | 28,102 |   |
|                                         |   |                        |   |   |   |   |   |   |   |   |   |
| **Total Shareholders’ Equity**          |   |                        |   |   |   |   |   |   |   |   |   |
|                                         |   |                        |   |   |   |   |   |   |   |   |   |
| Canadian GAAP                                |   | $                           | 22,786 |   | $ | 21,752 |   | $ | 18,969 |   | $ | 19,086 |   | $ | 20,547 |   |
|                                         |   |                        |   |   |   |   |   |   |   |   |   |
| Adjustments to U.S. GAAP                     |   |                        |   |   |   |   |   |   |   |   |   |
| Deferred development costs                   |   | (528                        | )      | (1,803 | ) | (2,560 | ) | (2,528 | ) | (2,596 | ) |
| Fair value of financial instruments          |   | (308                        | )      | 21 |   | (1 | ) | 3⁄4 |   | 3⁄4 |   |
| Write off of Mezure, Inc.  development costs |   | 3⁄4                      |   | 3⁄4 |   | 3⁄4 |   | (231 | ) | (192 | ) |
|                                         |   |                        |   |   |   |   |   |   |   |   |   |
| U.S. GAAP                                    |   | $                           | 21,950 |   | $ | 19,970 |   | $ | 16,408 |   | $ | 16,327 |   | $ | 17,759 |   |

 

----

(2)                                  Canadian dollar amounts for all years presented have been translatedinto U.S. dollars solely for the convenience of the reader at the rate ofUS$0.6762 per CDN$1.00, which was the exchange rate as of March 20, 2003. Thesetranslations are not necessarily representative of the amounts that would havebeen reported if the Company historically had reported its financial statementsin U.S. dollars. In addition, the rates utilized are not necessarily indicativeof the rates in effect at any other time.

 

(b)                                 Canadian and U.S. Dollar Exchange Rate.

 

The following table sets forth, for eachperiod presented, the high and low exchange rates, the average of the exchange rateson the last day of each month during the indicated period and the exchangerates at the end of the indicated period for one Canadian dollar, expressed inU.S. dollars, based on the noon buying rate in New York City for cabletransfers payable in Canadian dollars as certified for customs purposes by theFederal Reserve Bank of New York:

 

8

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|       |   | **U.S. Dollars Per Canadian Dollar** |   |
|------------|--------|--------------------------------------|--------|
|       |   |                                 |   |
|       |   | **Year  Ended December 31,**         |   |
|       |   | **1998**                             |   | **1999** |   | **2000** |   | **2001** |   | **2002** |   |
| Average    |   | $                                    | 0.6740 |   | $ | 0.6730 |   | $ | 0.6732 |   | $ | 0.6457 |   | $ | 0.6368 |   |
|       |   |                                 |   |   |   |   |   |   |   |   |   |
| High       |   | 0.7105                               |   | 0.6925 |   | 0.6969 |   | 0.6697 |   | 0.6619 |   |
|       |   |                                 |   |   |   |   |   |   |   |   |   |
| Low        |   | 0.6341                               |   | 0.6535 |   | 0.6410 |   | 0.6241 |   | 0.6200 |   |
|       |   |                                 |   |   |   |   |   |   |   |   |   |
| Period end |   | 0.6504                               |   | 0.6888 |   | 0.6669 |   | 0.6267 |   | 0.6329 |   |
|            |        |                                      |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
|   |   | **Month  Ended**    |   |
|--------|--------|---------------------|--------|
|   |   | **September  2002** |   | **October  2002** |   | **November  2002** |   | **December  2002** |   | **January  2003** |   | **February  2003** |   |
| High   |   | $                   | 0.6433 |   | $ | 0.6407 |   | $ | 0.6440 |   | $ | 0.6461 |   | $ | 0.6570 |   | $ | 0.6720 |   |
|   |   |                |   |   |   |   |   |   |   |   |   |   |   |
| Low    |   | 0.6304              |   | 0.6272 |   | 0.6288 |   | 0.6329 |   | 0.6349 |   | 0.6530 |   |
|        |        |                     |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

On March 20, 2003, the exchange rate wasUS$0.6762 per CDN$1.00.

 

(c) Dividends

 

The Company hasnot paid any cash dividends since its inception. The Board of Directors may paycash dividends in the foreseeable future, but intends to retain the majority ofearnings, if any, for use in its business operations.

 

**B.****                                    Capitalization and Indebtedness**

 

Not applicable

 

**C.****                                    Reasons for the Offer and Use of Proceeds**

 

Not applicable

 

**D.****                                    Risk Factors**

 

*In addition to the other information set forth in thisAnnual Report, the following risk factors should be considered carefully inevaluating the Company. This Annual Report contains certain forward-lookingstatements and intentions. The cautionary statements made in this Annual Reportshould be read as being applicable to all related forward-looking statementswherever they appear in this Annual Report. The Company’s actual results coulddiffer materially from those discussed here. Factors that could cause orcontribute to such differences include those discussed below, as well as thosediscussed elsewhere in this Annual Report.*

 

*Periodic Fluctuations in Results of Operations*

 

The Company’s results of operations havefluctuated and can be expected to continue to fluctuate on a periodic basis asa result of a number of factors which affect revenue, gross margin andoperating expenses. Annual and quarterly revenues have fluctuated because of anumber of factors, including timing of major contracts, operating

 

9

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results of subsidiaries and joint ventures,certification and market acceptance of the Company’s new products, impact andtiming of large orders, pricing pressures in the market, establishing andmaintaining effective distribution channels, fluctuations in non-recurring engineering(“NRE”) fees, seasonality of customer purchase patterns and the timing ofindustry trade shows.

 

Shipments under a major contract couldresult in unusually high revenue levels when compared to revenues in otherperiods.  For example, revenue from theEuropean Geostationary Navigation Overlay System (“EGNOS”) program  accounted for 2.8% of  total revenue in 2002 compared to 10.2% in2001.

 

Revenues can be expected to varysignificantly as a result of a lack of a significant order backlog, fluctuationsin demand for existing products, operating results of joint ventures andsubsidiaries, the rate of development of new markets, the degree of marketacceptance of new products, increased competition and the general strength ofdomestic and international economic conditions. Furthermore, if the Companywere unable to deliver sufficient quantities of products in a timely manner,due to factors such as parts supply shortages or customs delays, the Company’srevenues could be adversely affected. Gross margin as a percentage of revenuevaries primarily as a result of product sales mix, changes in materials andcontract manufacturing costs, liquidation of discontinued inventory, andabsorption of fixed manufacturing costs. As revenues derived from sales of WAASand similar receivers decrease as a percentage of total revenues, gross marginpercentage will be adversely affected as these sales generally have highergross margin percentages. The Company’s OEM products typically have highergross margins than the sale of survey products by Point, Inc., and,consequently, the sale of survey products through Point could adversely affectthe Company’s gross margins as a percentage of revenue.  A shortfall from anticipated revenue couldadversely affect results of operations and income (loss) per share. Inaddition, if the Company were to receive a major contract, it would likelyincrease its expenditures to support such a contract. If revenue from thecontract were delayed for any reason, including cancellation or deferral of thecontract, the Company’s results of operations could be adversely affected. See“Item 5 – Operating and Financial Review and Prospects, Operating Results.”

 

The Company sells GPS receivers to Point,Inc. (“Point”), which incorporates these receivers into surveying systems thatare in turn sold through the Sokkia Co., Ltd. (“Sokkia”) distribution channelsand through independent dealers and distributors.  The Company’s consolidated financial statements include theCompany’s proportionate 49% joint venture interest in the accounts ofPoint.  Point is subject to similartypes of risks as the Company.  Therecan be no assurance that Point’s operations may not have a material adverseeffect on the Company’s business, financial condition and results of operations.  (See further discussion below).

 

*Expansion and Development of New DistributionChannels*

 

The Company sells its OEM products directlyto OEM customers and through strategic relationships.  The Company expects to continue to utilize these relationships tosell to companies that will incorporate the Company’s products into theirproducts and services. Accordingly, the success of the Company will bedependent in large part on its ability to continue its existing relationshipsand develop new OEM and other third party relationships.

 

The Company cannot predict nor control theextent to which its distribution network will be successful in marketingproducts incorporating the Company’s products. A material loss of any of theCompany’s OEM customers or strategic partners, either as a result ofcompetitive products offered by other companies or products developedinternally by these OEM customers and strategic partners, or their inability topenetrate their respective market segments, could have a material adverseeffect on the Company’s business, financial condition and results ofoperations. There can be no assurance that the Company can continue to attractOEM customers, dealers and strategic partners and any inability to do so couldmaterially adversely affect the Company’s business, financial condition andresults of operations.

 

In the surveying market the Company’sproducts currently are sold to Point which integrates them into survey productssold by Sokkia through its worldwide distribution system and through otherindependent dealers and distributors. There can be no assurance that Sokkia will be successful in distributingGPS survey products.

 

The Company plans to continue expanding itsdistribution channels. There can be no assurance that such expansion will besuccessfully completed, that the cost of such expansion will not exceed therevenues generated, or

 

10

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that the Company’s sales and marketing organizationwill be able to successfully compete against the more extensive and well-fundedsales and marketing operations of many of the Company’s current or potentialcompetitors. The Company’s inability to manage effectively its distributionexpansion could have a material adverse effect on the Company’s business,financial condition and results of operations. See “Item 4 – Information on theCompany, Business Overview - Sales, Marketing and Distribution.”

 

*Acquisition and Integration of NewBusinesses*

 

On February 11, 2003,the Company announced the signing of a Memorandum of Understanding (“MOU”) withCMC Electronics Inc. to acquire CMC Electronics’ Global Positioning System(GPS) OEM product line.  The new productline will extend the Company’s current high-performance, upgradeable L1 andL1/L2 product line into the mid-level L1 market.  This will increase the Company’s total addressable market in coresegments and should also create entry points into new vertical markets, such astiming and marine.  The target date forthe actual transfer of the business is early April 2003.

 

Based on the MOU, theCompany expects the purchase price of the CMC Electronics’ GPS OEM product lineto be comprised of approximately $130,000 at closing and $600,000 payable overtime as a royalty on revenue generated by this business.  The Company’s inability to effectivelyintegrate the product development, marketing, production and the distributionof CMC Electronics’ GPS OEM  productline could have a material adverse effect on the Company’s business, financialcondition and results of operations.

 

*Dependence on New Products*

 

Although the Company expects to makesignificant investments in research and development to continue to enhanceexisting products, develop new products which incorporate new and existingtechnologies and achieve market acceptance for such products, there can be noassurance that such new products or product enhancements will be successfullydeveloped or, if developed, that any such new products or product enhancementswill be developed in time to capture market opportunities or achieve asignificant or sustainable level of market acceptance in new and existingmarkets. The development of new, technologically advanced products and productenhancements is a complex and uncertain process requiring accurate anticipationof technological and market trends. Any inability on the part of the Company tosuccessfully define, develop and introduce new products and productenhancements may materially adversely affect the Company’s growth potential andresults of operations. In addition, development and manufacturing schedules fortechnology products are difficult to predict, and there can be no assurancethat the Company will achieve timely initial customer shipments of newproducts. The timely availability of these products in the market place andtheir acceptance by customers are important to the future success of theCompany. The Company has previously experienced delays in shipping certain ofits products and any future delays, whether due to manufacturing delays, productdesign and development delays, lack of market acceptance, delays in anyrequired regulatory approval, or otherwise, could adversely affect customeracceptance of the Company’s products and have a material adverse effect on theCompany’s business, financial condition and results of operations. From time totime, the Company or its competitors may announce new products, capabilities ortechnologies that have the potential to replace or shorten the life cycles ofthe Company’s existing products. No assurance can be given that announcementsof currently planned or other new products will not cause customers to defer orstop purchasing the Company’s products until the Company’s or theircompetitor’s new products become available. In addition, certain of the Company’sproducts are subject to governmental and similar certifications before they canbe sold. Any inability or delay in obtaining such certifications could have amaterial adverse effect on the Company’s business, financial condition andresults of operations. See “Item 4 – Information on the Company, BusinessOverview – Research and Development.”

 

*Discontinuance of Older Products*

 

As the Company develops newer products,many of the Company’s older products will reach their end of life.  As the Company discontinues themanufacturing and sale of these older products, the Company must manage theliquidation of inventory, supplier commitments and customer expectations.  If the Company were unable to properlymanage the discontinuation of these older products, it could have a materialadverse effect on the Company’s business, financial condition and results ofoperations.

 

11

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*Competition; Pricing Pressures*

 

The Company believes that its ability tocompete successfully depends on a number of factors, both within and outside ofits control, including the performance, quality and price of the Company’s andits competitors’ products, the timing and success of new product introductionsby the Company, its OEM customers and its competitors, the emergence of new GPStechnologies and competing technologies, the development of technologicalinnovations, the efficiency of production, the rate at which the Company’s OEMcustomers incorporate the Company’s products into their products, the numberand nature of the Company’s competitors in a given market, the assertion ofintellectual property rights and general market and economic conditions.Depending on market segments, the Company faces competition from other GPSsuppliers such as Trimble Navigation Limited, Thales Group, Topcon PositioningSystems, Javad Navigation Systems, Leica Geosystems, NavComm Technologies andAllan Osborne Associates. In addition, the Company faces competition fromlarge, established companies that participate in the GPS markets such asRockwell Corporation.

 

The Companyexpects competition to continue to intensify from various larger domestic andinternational competitors and new market entrants, some of which may be currentCompany customers, as they begin to offer products, services or systems whichcompete with the Company’s products. There can be no assurance that theCompany’s current or future competitors, many of whom, individually or togetherwith their corporate parents, have substantially greater financial resources,research and development resources, greater distribution, marketing and othercapabilities than the Company, will not apply these resources and capabilitiesto compete successfully against the Company. A number of the markets in whichthe Company sells its products are also served by non-GPS technologies, some ofwhich are currently more widely accepted and less expensive than GPS-basedsystems. The success of GPS-based systems against these competing technologiesdepends in part upon whether GPS systems can offer significant improvements inproductivity, accuracy and reliability in a cost-effective manner. The Companybelieves that its ability to compete successfully in the future againstexisting and additional competitors will depend largely on its ability tocombine technologies, systems and products with significantly differentiatedfeatures compared to currently available products, with a high level ofcustomer support. There can be no assurance that the Company will be able tosuccessfully implement this strategy. The Company also believes that in certainemerging markets its success will depend on its ability to form and maintainstrategic relationships with established systems providers and industry leaderssuch as CMC Electronics and Sokkia.  TheCompany’s failure to form and maintain such relationships, or the preemption ofsuch relationships by the actions of the Company’s GPS competitors, couldadversely affect the Company’s ability to penetrate emerging GPS markets. Inaddition, prices of the Company’s products have declined since theirintroduction due to competitive pressure. There can be no assurance thatcompetitive pressures will not further result in decreased prices and lowermargins for the Company’s products. Such price and margin decreases could havea material adverse effect on the Company’s business, financial condition andresults of operations. See “Item 4 – Information on the Company, BusinessOverview – Competition.”

 

*Competition; IndustryConsolidation*

 

The GPS industry has been going through aconsolidation phase over the past several years.  GPS companies have been selecting strategic partners to merge,acquire or form joint businesses in an effort to remain cost competitive andmeet customer requirements.  TheCompany’s formation of Point, a joint venture with Sokkia, one of the largestsurvey companies in the world, is an example of the consolidation occurring inthe GPS industry.  Since 2000, the GPSindustry has witnessed the joining of Trimble Navigation Limited withSpectra-Precision, Topcon with Javad Positioning Systems (JPS), now known asTopcon Positioning Systems, and Racal Avionics Ltd. with Thomson-CSF, now knownas Thales Group (“Thales”).  In July 2001,Thales****acquired MagellanCorporation who had previously merged with Ashtech, Inc.  This consolidation phase will continue forthe foreseeable future resulting in fewer, but larger companies.  Industry consolidation, by creating strongerand larger potential competitors, could have a material adverse effect on theCompany’s business, financial condition and results of operations.

 

*Uncertain Market Development*

 

The Company currently addresses thefollowing markets for the application of GPS technology: surveying and GIS,aerospace, agriculture, precise timing, marine, unmanned vehicles, mining andmachine control.  Although

 

12

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the Company believes that these markets have growthpotential for sales of GPS products, there can be no assurance that suchmarkets will continue to develop, particularly given that GPS-based systems arestill in an early stage of adoption in some of these markets, or that even ifthey develop, such markets will develop in a direction beneficial to theCompany’s products or product positioning or in the time frame in which theCompany expects to launch products for these markets.  Any development of these markets away from GPS technologies orthe GPS products offered by the Company could have a material adverse effect onthe Company’s growth potential and its business, financial condition andresults of operations. The Company also believes that in certain emergingmarkets its success will depend on its ability to form and maintain strategicrelationships with established systems providers and industry leaders. TheCompany’s failure to form and maintain such relationships, or the preemption ofsuch relationships by the actions of the Company’s other GPS competitors, couldadversely affect the Company’s ability to penetrate emerging GPS markets. Inaddition, the Company’s future growth will depend upon the timely developmentof the markets in which the Company currently competes, the Company’s abilityto continue to identify and exploit new markets for its products, and the Company’sability to open new channels of distribution for its existing and futureproducts. Any inability on the part of the Company to effectively andefficiently exploit opportunities in new or emerging markets through successfulproduct marketing, new and timely product introductions and productenhancements and establishing new distribution channels for its products couldhave a material adverse effect on the Company’s growth and business, financialcondition and results of operations. Further, to the extent the Company buildsinventory in anticipation of potential sales in a new market, the failure ofthat market to develop could have a material adverse effect on the Company’sbusiness, financial condition and results of operations.

 

*Management of the Business*

 

The Company’s ability to manage itsbusiness will be substantially dependent upon its ability to efficiently andeffectively allocate resources to conduct research and development, productimplementation, sales and marketing activities, financial management andcustomer support services. Accordingly, the Company’s future results ofoperations will depend on the continuing ability of its officers and other keyemployees to conduct business effectively and to improve the Company’soperations. The Company will need to continue to improve its operational,financial and management systems. There can be no assurance that the Companywill be able to manage business shortfalls or expansion successfully, and anyinability to do so would have a material adverse effect on the Company’sbusiness, financial condition and results of operations. The Company mustsuccessfully manage research and development projects, the control of overheadexpenses and inventories and the management and training of its employee base.The Company’s inability to manage these and other factors could have a materialadverse effect on the Company’s business, financial condition and results ofoperations. See “Item 6 - Directors, Senior Management and Employees.”

 

*Dependence on Key Suppliers and Manufacturers*

 

The Company believes there are a number ofqualified vendors for most of the parts and components used in its products.However, several components are purchased from a single source. In many cases,despite the availability of multiple sources, the Company may select a singlesource in order to maintain quality control. Components for which the Companycurrently does not have multiple sources include application-specificintegrated circuits manufactured to the Company’s proprietary design suppliedby Arrow Electronics Canada Ltd., RF filters from Insight Components, Inc.,microprocessors from Intel Corporation and duplexers from Comnav EngineeringInc.

 

The Company experienced significantproduction delays in the past caused by an insufficient supply of certaincomponents. If the Company is unable to obtain a sufficient supply of itssingle source components from its current vendors, the Company may be requiredto obtain such components from alternative sources at higher prices and may experiencea delay or interruption in product shipments, which could adversely affect theCompany’s business, financial condition and results of operations and damagecustomer relationships until an alternative source can be obtained. The Companyhas received notices of last buy opportunities for certain components.  At this time, all last buy notices have beenresolved by placing orders for parts, substituting alternate parts orscheduling the redesign of products to remove such parts prior to exhaustingthe existing supply.  The Company hastaken steps to ensure adequate supply of these components and commenced productredesigns, as may be required.

 

13

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Also, asignificant increase in the price of one or more components could adverselyaffect the Company’s business, financial condition and results of operations.Although the Company has instituted vendor audit programs, there can be noassurance that the Company will not face problems with the quality of componentsin the future that could result in delays in supplies, interrupt shipments andrequire modification of products already sold by the Company, any of whichcould have a material adverse effect on the Company’s business, financialcondition and results of operations. The Company currently relies on a primarysubcontractor to manufacture the majority of its Circuit Card Assemblies(“CCA”).  There can be no assurance thatthe primary subcontractor will be able to manufacture the Company’s products ina timely and reliable manner. The failure by a subcontractor to manufacture theCompany’s products in a timely and reliable manner could have a materialadverse effect on the Company’s business, financial condition and results ofoperations.

 

*Point, Inc.*

 

The Companysells GPS receivers to Point which incorporates these receivers into surveyingsystems that are in turn partially sold through Sokkia’s distribution channelsand through independent dealers and distributors.  The Company’s consolidated financial statements include theCompany’s proportionate 49% joint venture interest in the accounts ofPoint.  Point is subject to similartypes of risks as the Company.

 

As of December31, 2002, the Company and Sokkia have collectively loaned Point US$4,830,000,the Company’s share being US$2,367,000. The loans are secured by the assets of Point.  During 2002, the Company and Sokkia advanced US$830,000 in newloans to Point with the Company’s share being US$407,000.  In addition, the Company and Sokkia providedUS$1,500,000 in equity financing to Point. The Company’s share of the equity financing was US$735,000 and theCompany equity interest in Point remained at 49%.

 

Point isdependent on the Company and Sokkia for product supply, distribution andfinancing.  Should Sokkia and theCompany discontinue their support, Point’s ability to continue as a goingconcern would be impaired.  If Pointwere not able to continue operations and was liquidated in an orderly winddown, the Company believes that its maximum loss exposure in the statement ofoperations to Point as of December 31, 2002, would be approximately $900,000,comprised primarily of working capital related items, after consideration ofthe effects of the proportionate consolidation of Point.  The financial statements contained herein donot reflect any adjustments that would be required if Point’s operations werediscontinued.

 

The Company is disappointed in theoperating performance of Point particularly the lower than expected revenueswhich the Company had anticipated would increase after the April 2002restructuring.  The Company continues towork with Point’s management and Sokkia to improve the operating results ofPoint.  However, there can be noassurance that the Company will be successful in these efforts.

 

*Mezure, Inc.*

 

On January 26, 2001, the Company acquired a48.7% equity interest in Mezure, Inc. (“Mezure”).  Mezure was established in 2000 and had been working with theCompany to develop market applications combining GPS, wireless infrastructureand the Internet.  On July 23, 2001, theCompany acquired a further 25.3% interest in Mezure after exercising its optionto convert US$200,000 in loans previously advanced to Mezure and charged tooperations during 2001 into additional common shares.  Effective with this conversion, the Company owned a 74%controlling interest in Mezure.  InApril 2002, the Company’s equity interest was diluted to approximately 70%. Mezure is subject to similar types of risks as the Company.  In the latter part of 2002, the Companynotified Mezure that it intended to limit future equity investment andfinancial support to Mezure and shift the focus of its relationship with Mezureto one of a supplier of products, as opposed to one of equity ownership.  As a result, Mezure would be required toobtain additional external financing, which would dilute the Company’s equityinterest in Mezure.  If Mezure wereunable to obtain adequate external financing, it may decide to discontinue itsoperations.  On February 28, 2003,Mezure notified its shareholders that as a result of shortfalls in cash flowsfrom operations and its inability to meet current vendor obligations, Mezurewould pursue a federal bankruptcy filing. On March 5, 2003, the Company’s representatives on the Board of Directorsof Mezure resigned from the Mezure Board of Directors.  If Mezure were unable to continueoperations, it is not expected to have a material adverse effect on theCompany’s business, financial condition and results of operations.

 

14

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*Aviation Industry and Current WorldEvents*

 

In 2002, the Company had $10.5 million inrevenue from the Aerospace and Defense market sector, a substantial portion ofwhich was derived from sales to the aviation industry.  In the past 18 months, the aviation industryhas experienced an economic slow down in response to activities arising fromthe events of September 11, 2001 in the United States.  In addition, as of December 31, 2002, theCompany has deferred $2.6 million of costs related to the development of acertified aviation GPS receiver.  Aprotracted downturn in the aviation industry could result in a material adverseeffect on the Company’s revenue from this market, the ability of the Company torecover the deferred development costs, and the Company’s financial conditionand results of operations.

 

*Concentration of Stock Ownership*

 

As of March 17, 2003, CMC Electronics Inc.(“CMC Electronics”) owned approximately 58% of the outstanding Common Shares ofthe Company.  As a result, CMCElectronics is able to exercise significant influence over management of thebusiness, including such matters as budgets, profitability, acquisitions anddevelopment of new markets.  Inaddition, the controlling interest by CMC Electronics has a significant effecton public securities market issues such as analyst coverage and stock price.

 

In April 2001, an investorgroup led by ONCAP L.P. (“ONCAP”) acquired control of CMC Electronics.  ONCAP is a CDN$400million investment partnership established in December 1999 by Onex Corporationand several of Canada’s largest pension funds and financial institutions.  ONCAP is able to exercise significantinfluence over CMC Electronics, and therefore, the Company.

 

CMC Electronics, acting alone, is able toexercise significant influence over all matters requiring shareholder approval,including the election of directors and approval of significant corporatetransactions.  Such concentration ofownership may also have the effect of delaying or preventing a change incontrol of the Company. See “Item 7 — Major Shareholders and Related PartyTransactions.”

 

*Dependence on Key Personnel*

 

The Company’s future success depends, inpart, on its ability to attract and retain qualified technical, marketing,sales and management personnel. Competition for such personnel is intense andthe number of persons with relevant experience, particularly in engineering, islimited. Any inability on the part of the Company to attract and retainadditional key employees or the loss of one or more of its current keyemployees could materially adversely affect the Company’s business, financialcondition and results of operations. The Company currently has employment contracts with Werner Gartner,Executive Vice President and Chief Financial Officer and Patrick C. Fenton,Chief Technology Officer.  The Companydoes not maintain key man life insurance for any of its executive officers.

 

*Reliance on Satellite Networks*

 

The Company’s products rely on signals fromGPS NAVSTAR and, to a lesser extent, GLONASS satellites. NAVSTAR satellites andtheir ground support systems are complex electronic systems subject toelectronic and mechanical failures and possible sabotage. As of February 2003,there were 27 usable satellites, three more than the design requirement.  The satellites have a limited design life ofbetween seven and 11 years and the satellites are also subject to damage by thehostile space environment in which they operate. The repair of damaged ormalfunctioning satellites is nearly impossible. If a significant number ofsatellites were to become inoperable, there could be a substantial delay beforethey are replaced with new satellites. A reduction in the number of operatingsatellites would impair the current usefulness of the GPS system or the growthof current and additional market opportunities, which, in either case, wouldadversely affect the Company’s business, financial condition and results ofoperations. Spare satellites have been launched to address these concerns.  There can be no assurance that the U.S.Government will remain committed to the operation and maintenance of GPSsatellites over a long period of time, or that the policies of the U.S.Government for the use of GPS without charge will remain unchanged.

 

Prior to May 21, 2000, the accuracy of GPSwas reduced by the distortion of GPS signals as a result of SelectiveAvailability (“SA”), which was controlled by the U.S. Department of Defense.Selective Availability was

 

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the activated, intentional system-wide degradation ofstand-alone GPS accuracy from approximately 25 meters to approximately 100meters. The Department of Defense implemented SA in order to deny hostileforces accurate position, time and velocity information supplied by GPS. Incertain military applications, classified devices are utilized to decode the SAdegradation and return accuracies to their original levels. The Company has todate been able to design products that will reduce the degradation that can becaused by SA. Although the U.S. Government discontinued the use of SA effectiveMay 21, 2000, there can be no assurance that the U.S. Government will not takefurther actions which would adversely affect the use of GPS. These actionscould include various methods of degrading the system, rendering it inoperableor the re-implementation of SA by the U.S. Department of Defense in times ofmilitary action.  There can be noassurance that the Company would be able to design products to compensate forthese further actions. In addition, to protect national security interests,various U.S. Government agencies have indicated their intention to limit orprohibit the use of techniques which compensate for SA and such limitations orprohibitions could have a material adverse effect on the Company’s business,financial condition and results of operations. Certain European governmentorganizations have expressed concern regarding the susceptibility of GPSequipment to intentional or inadvertent signal interference. Such concern couldtranslate into reduced demand for GPS products in certain geographic regions.

 

The EuropeanCommunity (EC) and European Space Agency (ESA) are completing plans to launchfull-scale development of a new generation global navigation satellite system(“Galileo”). The Company has some involvement in Galileo definition activities;undertaking a study on high level User and Galileo Sensor Station receiverrequirements for Thales Avionics Limited (France) (“Thales Avionics”).  Other initiatives include a contract fromPublic Works and Government Services Canada (“PW&GSC”) on receiverinteroperability in Canada and a recent award for pre-development work onGround Reference Receivers (“GRR”) involving specification, architecture and receiversoftware modelling for the GRR.  TheCompany expects to be involved in further Galileo receiver developmentactivities in the future, once the EC and ESA have resolved political issues onGalileo project leadership. There can be no assurance that the Company will beable to design products to use Galileo.

 

*Interference with the Reception of GPS Signals*

 

GPS technologyis dependent on the use of the radio frequency spectrum.  The assignment of spectrum is controlled bythe International Telecommunications Union (“ITU”).  The Federal Communications Commission (“FCC”) and Industry Canadaare responsible for the assignment of spectrum for non-government use in theUnited States and Canada, respectively, in accordance with ITUregulations.  Any ITU, FCC or IndustryCanada reallocation of radio frequency spectrum, including frequency bandsegmentation or sharing of spectrum, could cause interference with thereception of GPS signals and may materially and adversely affect the utilityand reliability of the Company’s products, which would, in turn, have amaterial adverse effect on the Company’s operating results.  In addition, emissions from mobile satelliteservice and other equipment operating in adjacent frequency bands or inband maymaterially and adversely affect the utility and reliability of the Company’sproducts, which could result in a material adverse effect on the Company’soperating results.

 

On May 11, 2000, the FCC issued a Notice of ProposedRulemaking that proposed rules for the operation of Ultra-Wideband (“UWB”)radio devices on an unlicensed basis in the frequency bands allocated toGPS.  A coalition of companies and tradeassociates, including various airline companies, the Air Transport Associationof America and the U.S. GPS Industry Council, submitted a proposal for theregulation of UWB devices to the FCC in November 2001.  On February 14, 2002, the FCC approved thecommercial use of UWB technology at conservative power limits.  The current standards of operation setlimits on what radio frequencies UWB devices can be operating in, includingavoiding those frequencies used by the military and companies that sell globalpositioning services.  As of January2003, the FCC has upheld its ruling to allow the production of UWB devices with“conservative” power limits.  This maylead the way for a proliferation of personal wireless devices that would bemanufactured and sold on the open market without licence requirements.  No restrictions on the density of thesedevices will be defined.  Therefore, itis possible that the GPS noise floor could be contaminated and rise by as muchas 10 times the current level when operating in an area with a high density ofoperating UWB devices.  This degradationof the GPS signal-to-noise ratio would adversely affect the performance of thereceivers.  The Company is addingadditional Digital Signal Processing (“DSP”) algorithms to its next generationGPS receivers to enable tracking of weak GPS signals or continue to operate  in high noise floor environments.  If the FCC expands or changes the currentUWB standards, UWB devices might cause interference with the reception of GPSsignals.  Such interference could reducedemand

 

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for GPSproducts in the future.  Any resultingchange in market demand for GPS products could have a material adverse effecton the Company’s financial results.

 

*Risks Associated with LegalProceedings*

 

The Company is currently subject to severallegal and administrative proceedings. The Company believes that it hasmeritorious defenses and claims with respect to these matters. There can be noassurance, however, that these proceedings can be resolved without the Companypaying any damages or assessments. Any resolution of these legal and administrativeproceedings which involves a judgment or finding against the Company could havea material adverse effect on the business, financial condition and results ofoperations of the Company.  See “Item 4-  Information on the Company, BusinessOverview - Legal Proceedings.”

 

*Patents and Proprietary Rights;Patent Litigation*

 

The Company currently holds 21 U.S. patentsand 29 related foreign patents which expire at various dates no earlier thanNovember 28, 2010. The Company has also received a notice of allowance for oneU.S. patent and the Company has numerous pending U.S. and foreign patentapplications.  The Company currentlylicenses certain peripheral aspects of its technology from third parties.Although the Company believes that its patents and trademarks have value, therecan be no assurance that the Company’s patents and trademarks, or anyadditional patents and trademarks that may be obtained in the future, willprovide meaningful protection from competition. The Company believes itssuccess will depend primarily upon the experience, creative skills, technicalexpertise and marketing and sales ability of its personnel. The value of theCompany’s products relies substantially on the Company’s technical innovationin fields in which there are many current patent filings. The Companyrecognizes that as new patents are issued or are brought to the Company’sattention by the holders of such patents, it may be necessary for the Companyto withdraw products from the market, negotiate a license from such patentholders, redesign its products or pay damages assessed as a result oflitigation. Such events could have a material adverse effect on the Company’sbusiness, financial condition and results of operations. In addition, the legalcosts and engineering time required to safeguard intellectual property or todefend against litigation could become a significant expense of operations. TheCompany has received written notices from BTG USA Inc., U.S. Department of theNavy, Western Atlas International, Inc. and Michael Baker Corporation(GeoResearch Inc.) alleging patent infringement of their respective patents. Noformal claim has been brought by any of the parties. The Company believes thatit has valid defenses to these claims should formal proceedings be commenced.In protecting its intellectual property rights the Company has sent out lettersto third parties regarding potential infringement, requesting that they enterinto license agreements with the Company if they wish to continue using certaintechnologies. In response to one of these letters, a recipient claimed that theCompany’s Narrow Correlator tracking technology patents were invalid. Suchparty subsequently agreed to withdraw its claim and entered into a licenseagreement for the use of the Company’s Narrow Correlator tracking technology.While no intellectual property right of the Company has been invalidated ordeclared unenforceable, there can be no assurance that such rights will not beinvalidated due to the existence of prior art or otherwise held unenforceable.

 

In November 1994, the Company commenced anaction against Trimble Navigation Limited (“Trimble”) seeking relief anddamages for an alleged infringement of the Company’s U.S. Patent No. 5,101,416(the “Narrow Correlator patent”). In March 1995, Trimble commenced an actionagainst the Company seeking relief and damages for an alleged infringement ofTrimble’s U.S. Patent No. 5,390,207 (the “207 patent”). In January 1996,Trimble filed a complaint with the International Trade Commission in the U.S.seeking to ban imports of the Company’s products into the U.S. which allegedlyinfringed upon the 207 patent. All of these claims were resolved on July 16,1996 when the Company and Trimble entered into a settlement agreement by crosslicensing certain technologies, including a Narrow Correlator license toTrimble. The 1996 settlement agreement with Trimble includes a provision thatTrimble may, at its sole option, terminate the licenses and rights granted upona direct change of control. As at December 31, 2002, intangible assets included$492,000 related to the Company’s settlement agreement with Trimble.  On June 26, 2001, the Company receivednotice from Trimble terminating the licenses and rights under the settlementagreement in connection with the share acquisition of the Company by CMCElectronics in April 1998.  The Companyhas sought legal advice regarding Trimble’s termination rights under the 1996settlement agreement and is continuing to evaluate the impact, if any, ofTrimble’s notice of termination.  Asthis matter has not been resolved as of March 17, 2003, the Company has notprovided for any impairment of these intangible assets.

 

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See “Item 4 – Information on the Company, BusinessOverview - Research and Development and Patents, Trademarks and Licenses.”

 

*Foreign Currency Exchange*

 

Most of the Company’s revenues have been,and are likely to continue to be, realized in currencies other than theCanadian dollar, principally the U.S. dollar. A significant portion of theCompany’s expenses, however, will be incurred in Canadian dollars. Accordingly,fluctuations in the exchange rates between the U.S. dollar and other foreigncurrencies and the Canadian dollar could have a material adverse effect on theCompany’s results from operations. If the Canadian dollar increases in valuerelative to the U.S. dollar, the Company’s reported Canadian dollar revenuesand net income may be materially and adversely affected. The Company usesforeign currency options and forward foreign currency contracts to reduce itsexposure to fluctuations in the U.S. dollar. There can be no assurance that theCompany will be successful in such hedging activities.

 

*Risks Associated with International Sales*

 

The Company plans to continue to expand itsinternational sales and marketing efforts. There are a number of risks inherent in the Company’s internationalbusiness activities, including unexpected changes in Canadian, United States orother government policies concerning the import and export of goods, servicesand technology and other regulatory requirements, tariffs and other tradebarriers, costs and risks of localizing products for foreign countries, longeraccounts receivable payment cycles, potentially adverse tax consequences,limits on repatriation of earnings and the burdens of complying with a widevariety of foreign laws. Fluctuations in currency exchange rates couldmaterially adversely affect sales denominated in currencies other than theCanadian dollar and cause a reduction in revenues derived from sales in aparticular country. The financial stability of foreign markets could alsoaffect the Company’s international sales. There can be no assurance that suchfactors will not materially adversely affect the revenues from the Company’sfuture international sales and, consequently, the Company’s results ofoperations. In addition, revenues of the Company earned abroad may be subjectto taxation by more than one jurisdiction, which could materially adverselyaffect the Company’s earnings. Furthermore, in certain foreign markets, theremay be a reluctance to purchase products based on GPS technology, given thecontrol of GPS by the U.S. Government. Each of these factors could have anadverse effect on the Company’s business, financial condition and results ofoperations. See “Item 4 – Information on the Company, Business Overview -Sales, Marketing and Distribution.”

 

*Historical Losses*

 

The Company had net losses in 1998, 1999,2000 while in 1997, 2001 and 2002, the Company recorded net income. There canbe no assurance that the Company will be profitable in the future.

 

**Item 4****              Informationon the Company**

 

**A.****                                    History and Development of the Company**

 

NovAtel Inc. was incorporated in October1978 under the *Canada Business CorporationsAct*(“CBCA” or the “Act”). The Company’s principal executive officesare located at 1120 – 68th Avenue N.E., Calgary, Alberta, Canada T2E 8S5, andits telephone number is (403) 295-4500.

 

Initially, the Company was engaged inseveral communication businesses. In 1992, the Company was reorganized and soldto Telexel Holding Limited, a Canadian corporation controlled by Horst J.Pudwill and Barbara Pudwill. The Company divested all of its non-GPS businessesin a series of transactions beginning in March 1994 and ending in August 1996.As a result of these divestitures, the Company now focuses exclusively on theGPS business.

 

On April 17, 1998, CMC Electronics Inc.(“CMC Electronics”) (formerly BAE SYSTEMS CANADA INC.) purchased approximately58% of the Company’s total shares outstanding from the Company’s two principal

 

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shareholders.  On April 11, 2001, an investor group led byONCAP L.P. (“ONCAP”) acquired control of the Company through the acquisition ofCMC Electronics.

 

The various divested and discontinuedbusinesses of the Company are accounted for as discontinued operations.Accordingly, the operating results of these discontinued businesses have beensegregated from the operating results of the GPS business and reported as netincome (loss) from discontinued operations in the Consolidated FinancialStatements included elsewhere in this Annual Report. Financial results for theperiods presented herein have been reclassified to conform to thispresentation.

 

The Company’s principal capitalexpenditures over the last three years were $1.2 million in 2002, $937,000 in2001 and $1.5 million in 2000 and were primarily for equipment for research anddevelopment, computer equipment and software and patents/trademarks.  The Company expects the capital expendituresof approximately $2.5 million in 2003 to be internally financed.

 

On July 20, 1999, theCompany entered into an agreement with Sokkia to form a joint venture known asPoint.  The ownership of Point is 51%Sokkia and 49% the Company.  TheCompany’s Custom Products Group, which was responsible for the development ofsurvey products, was transferred to Point effective August 1, 1999.  In addition, Sokkia transferred in theformer Sokkia Technology, Inc. organization which had been conducting advancedmeasurement solutions research and development for Sokkia.  Point provides Sokkia’s global marketingorganization with advanced measurement solutions for the fields of surveying,mapping, geographical information systems (GIS), construction and constructionmachine control.  Sokkia’s distributionsystem includes more than 25 subsidiaries and additional representatives aroundthe world, each having its own dealer network.

 

Point is dependent onthe Company and Sokkia for product supply, distribution and financing.  Should Sokkia and the Company discontinuetheir support, Point’s ability to continue as a going concern would beimpaired.  If Point were not able tocontinue operations and was liquidated in an orderly wind down, the Companybelieves that its maximum loss exposure in the statement of operations to Pointas of December 31, 2002 after consideration of the effects of the proportionateconsolidation of Point would be approximately $900,000 comprised primarily ofworking capital related items (see “Risk Factors”).

 

On January 26, 2001, the Company acquired a48.7% equity interest in Mezure, Inc. (“Mezure”).  Mezure was established in early 2000 and had been working withthe Company to develop market applications combining GPS, wirelessinfrastructure and the Internet.  OnJuly 23, 2001, the Company acquired an additional 25.3% interest in Mezureafter exercising its option to convert US$200,000 in loans previously advancedto Mezure and charged to operations during 2001 into additional commonshares.  Effective with this conversion,the Company acquired a 74% controlling interest in Mezure and beganconsolidating Mezure’s financial results. In April 2002, a third party investor converted $159 of notes payableinto an additional 522 common shares of Mezure, which reduced the Company’sequity investment in Mezure from approximately 74% to 70%.  In the latter part of 2002, the Companynotified Mezure that it intended to limit future equity investment andfinancial support to Mezure and shift the focus of its relationship with Mezureto one of a supplier of products, as opposed to one of equity ownership.  As a result, Mezure would be required toobtain additional external financing, which would dilute the Company’s equityinterest in Mezure.  If Mezure wereunable to obtain adequate external financing, it may decide to discontinue itsoperations. On February 28, 2003, Mezure notified its shareholders that as aresult of shortfalls in cash flows from operations and its inability to meetcurrent vendor obligations, Mezure would pursue a federal bankruptcyfiling.  On March 5, 2003, the Company’srepresentatives on the Board of Directors of Mezure resigned from the MezureBoard of Directors.  If Mezure wereunable to continue operations, it is not expected to have a material adverseeffect on the Company’s business, financial condition and results ofoperations.

 

**B.****                                    BusinessOverview**

 

**General**

 

NovAtel designs, markets and supports abroad range of products which determine precise geographic locations using theGlobal Positioning System (“GPS”). NovAtel’s GPS products are used principallyfor applications in high-end markets such as the surveying, geographicinformation systems (GIS), aviation, unmanned

 

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vehicles, marine, mining and machine control andagriculture markets, and precise timing, rather than for applications inlow-end markets such as the vehicle navigation and consumer/cellular markets.

 

**Industry Background**

 

Precise determination of locations is afundamental requirement for many human activities. GPS is used for a variety ofpurposes, including navigating, tracking, mapping, conducting geographicalsurveys and monitoring crop yield. With GPS technology, one receiver canprovide all relevant positioning data 24 hours a day worldwide, which offersmany advantages over traditional positioning systems. GPS is the most widelyaccepted and commercialized satellite navigation system in the world. It isbased on signals provided by a minimum of 24 orbiting NAVSTAR satelliteslaunched, funded and controlled by the U.S. Department of Defense. GLONASS, asimilar system established by the former Soviet Union, is controlled andoperated by the Russian Government. Other satellite navigation systems may belaunched, for example, Galileo, in the future by government bodies,organizations such as the European Community or private corporations.

 

The major markets for GPS receiver systems includesurveying, GIS, aviation, marine, mining and machine control, agriculture,timing, vehicle navigation and tracking and consumer/cellular applicationsmarkets, such as GPS-equipped mobile phones and personal computers. The vehiclenavigation and consumer/cellular applications markets, which the Company refersto as the “low-end” markets, are characterized by high volume sales andcompetition among large consumer electronics companies. The remaining markets,which the Company refers to as the “high-end” markets, historically have beenserved by a limited number of smaller specialized GPS companies and requireproducts with higher performance and accuracy and more advanced technology.

 

GPS positioning is based on a triangulationtechnique that precisely measures the distance from a GPS receiver tosatellites which continuously transmit precisely timed radio signals. The GPSreceivers calculate the distance by measuring the travel time of the satellitesignal. Four satellites are required to compute the three dimensional positionof the receiver. At any point in time, there are likely to be six to eightsatellites in sight of a receiver. With more satellites in sight, a receivercan collect more data, thus making the calculations faster and more accurate.

 

The NAVSTAR satellites continuouslytransmit two signals on different frequencies, L1 and L2, from a distance of16,000 miles above the earth. These signals are considerably weaker than an FMradio signal. The L1 signal carries a non-encrypted code and is freelyavailable to all GPS receivers. It provides an accuracy of approximately 25meters. However, to deny precise positioning to hostile forces, the U.S.Department of Defense was able to deteriorate the L1 signal with a measurecalled Selective Availability (“SA”), which reduced the positional accuracy forusers of the non-encrypted L1 signal to approximately 100 meters.  The U.S. Government discontinued the use ofSA in May 2000.  The L2 signal has anencrypted code, which is only accessible with a military decryption device thatis controlled by the U.S. Department of Defense, and provides accuracies ofabout 15 meters. Accuracy is also limited by factors which influence thetransmitted signal such as ionospheric conditions, multipath effects caused byreflecting objects, timing errors and other distortions. Some of these effectscan be reduced by using the L2 signal with dual frequency receivers. Dualfrequency receivers utilize the L1 and L2 signals from each satellite toestimate and virtually eliminate these distortions. The U.S. Government hadpreviously announced that two new civilian signals would be added to GPS, thefirst of these to be available on new satellites scheduled to be launched in2003.  In January 1999, the U.S. Governmentalso announced a commitment of US$400 million to support the implementation ofthese new signals.  Budgetary decisionsby the United States Congress may result in a funding shortage for theseprograms, which may in turn result in program delays.

 

Many users of GPS applications require muchhigher levels of accuracy than the system was originally designed to provide.To reach position accuracies between five meters and a few centimeters, atechnique called differential GPS (“DGPS”) is used. One or more receivers areplaced at a known location and continuously compare their calculated locationcoordinates with the known location coordinates to measure the GPS errors. Themeasurements done by these fixed base stations can either be transmitted toremote receivers in real-time or recorded over time and integrated later withthe data collected by the mobile receivers.

 

Accuracy is just one of the importantfactors to the users of GPS products. Other factors include time to first fix,reacquisition time, resistance to multipath effects, receiver sensitivity,jamming resistance, data integrity

 

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and the rate at which positioning information isoutput. Chipsets and design kits are commercially available for companies todesign and manufacture their own GPS receivers providing basic positioning datawithin three to five meters. Only a few, highly specialized GPS companies havethe capabilities to develop and produce receivers that provide accuracies fromone meter to the sub-centimeter level and show high levels of integrity indynamic environments. Many applications in the surveying, GIS, aviation,marine, unmanned vehicles, mining and machine control, agriculture and precisetiming markets require this level of performance and accuracy, as compared withthe vehicle navigation and consumer/cellular applications.

 

Furthermore, new GPS applications andincreasingly complex GPS systems are emerging, which will continue to require ahigh degree of accuracy combined with higher product performance by GPS receivers.In addition to these technological challenges, users of GPS receivers willcontinue to demand high reliability, ease of use, flexible integration andsignificant customer support.

 

**The NovAtel Solution**

 

NovAtel addresses the needs of the high-endGPS markets by offering advanced GPS products that can provide sub-centimeterlevel accuracy and that are small in size, provide significant computationalpower, maintain a high degree of reliability in dynamic environments and areeasy to use and integrate into various applications. This is achieved through aunique combination of RF, VLSI and DSP design. The RF section provides veryclean signal reception and filtering which reduces the effects of interferenceand noise on GPS signals. NovAtel’s high density, proprietary VLSI chips,together with the DSP section, provide signal processing together with rangeand position computation in real time with a high degree of speed andreliability. The Company’s innovative receiver designs also allow the Company touse a limited number of hardware platforms to offer a variety of GPS products,which serve multiple markets, through software enhancements. These designsfacilitate shorter product development and production times, reducedmanufacturing complexities and lower product costs. The Company also benefitsfrom a strong reputation for providing quality products and superior customersupport.

 

**Strategy**

 

The Company’s objective is to be a leadingprovider of precise global positioning and augmentation technologies.  This leadership position requires asubstantial and continual investment in research and development and acommitment to excellent customer support. The Company’s product focus in its chosen markets is directed towardsthe OEM customer.  These customersintegrate the Company’s technology into their end products and solutions.  They require the Company’s assistance inaccomplishing this integration and expect the Company’s continued commitment toimproving their value and capabilities in the future.  These skills and expertise are applied to the following marketareas:

 

*Focus on Precision Positioning Markets.*  The Company focuses on theprecision GPS based markets, where customers demand high performance, accuracyand reliability. The Company believes that its technology combined with itscommitment to research and development, position the Company well to compete inthe precision GPS market. The Company has spent an average of approximately 24%of its total revenues on research and development in the last three years.  The Company believes the technology it hasdeveloped such as Narrow Correlator tracking technology, which is incorporatedinto most of the Company’s GPS products, has established the Company as a technologicalleader.  The Company’s research anddevelopment efforts are directed toward faster, lower cost and smallerprecision GPS receivers that will be able to operate accurately under adverseconditions, such as dense foliage and highly dynamic environments.  In such environments, GPS may needassistance in acquiring a position.  TheCompany’s future development includes the integration of a number of othertechnologies that help in this acquisition, such as inertial technology andcommunications.

 

*Continue to Expand Presence in Geomatics Sector.*  The Geomatics sector ismade up of surveying and GIS markets.  On July 20, 1999, the Company entered into anagreement with Sokkia to form a joint venture known as Point.  The ownership of Point is 51% Sokkia and 49%the Company.  The Company’s Custom ProductsGroup, which was responsible for the development of survey products, wastransferred to Point effective August 1, 1999. In addition, Sokkia transferred in the Sokkia Technology, Inc.organization which had been conducting advanced measurement solutions researchand development for Sokkia.  Pointprovides Sokkia’s global marketing organization with advanced measurementsolutions for the fields of surveying, mapping, geographical information

 

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systems (GIS), construction andconstruction machine control.  Sokkia’sdistribution system includes more than 25 subsidiaries and additionalrepresentatives around the world, each having its own dealer network.

 

*Opportunities for Aerospace and Defense.*  The Aerospace and Defensesector is made up of aviation, space and defense markets.  The Company has built a strong presence inground based navigation aids.  Over thepast several years, the Company has gained valuable experience supplying theground reference receivers to the United States Federal Aviation Administration(“FAA”) Wide Area Augmentation System (“WAAS”), Japan’s Multi-FunctionalTransport Satellite-based Augmentation System (“MSAS”) and China’s SatelliteNavigation Augmentation System (“SNAS”). To date the Company has delivered more than 320 receivers to beinstalled at WAAS, MSAS and SNAS sites around the United States, Japan, Chinaand Europe.  A similar GPS/GLONASS basednavigation system is being developed in Europe known as European GeostationaryOverlay System (“EGNOS”). Other countries planning WAAS or a similar systeminclude Canada, Mexico, Australia, Chile, India and Korea.  The FAA has begun procurement activities forthe Local Area Augmentation System (“LAAS”). Principal bidders include Raytheon Company (Raytheon”), Honeywell Inc.(“Honeywell”) and Thales ATM, Inc. (“Thales ATM”).  The LAAS program is intended to complement the WAAS program andprovide GPS precision approach and landing guidance at airports through theU.S. and worldwide.  Together these systems will function to supplyusers of the U.S. National Airspace System with seamless satellite-basednavigation for all phases of flight. Recent vulnerability analysis by the FAAVolpe Centre has begun efforts to focus on GPS as a sole source of navigation,however, both WAAS and LAAS remain the backbone of future navigation in theU.S.

 

The certified GPSreceiver jointly developed by the Company and CMC Electronics is now beingintegrated into Honeywell airborne systems and is also intended for Honeywell’sLAAS ground station program.  TheCompany is actively working with both Raytheon and Thales ATM  to develop a receiver, known as the LGF4receiver, for their LAAS ground stations.

 

*Build Special Applications Business**. ***The Special Applications sector is made up of  GPS component sales and associatedengineering service revenue for marine, agriculture, unmanned vehicles,robotics, construction/grading, geomatics, scientific, dealers (other thanthose that can be identified with a particular market sector) and miscellaneousmarkets.  In addition, a SpecialApplications customer base provides the Company with access to a wide range ofGPS applications and allows the Company to participate in new productdevelopments as these applications emerge and evolve. The Company provides itscustomers full access to its latest GPS technology and provides a highlyqualified technical customer support staff to advise on the system integrationefforts of these customers. The Company believes that its combination oftechnology and responsiveness to the customer gives it a competitive edge.  The Special Applications business isweighted heavily towards entrepreneurial endeavours and the support and growthof emerging markets.  The Company’sreceivers are designed to provide the highest degree of flexibility addressingthe widest possible range of applications. From this emerge new strategic customers and markets.

 

On February 21, 2002,the Company signed an agreement with Leica Geosystems (“Leica”), setting outthe parties’ intention to enter into a strategic cooperation arrangement; theobjective of the agreement being the common development of new technology forGPS and its advancement in the high-accuracy geomatics segment.  More specifically, the Company will developa custom version of existing GPS engines and other components for Leica.

 

*Provide Superior Customer Support.*  The Company benefits from astrong reputation for providing quality products and superior customer support.NovAtel provides quick turnaround time when addressing customer concerns, andprovides software upgrades and application consulting in order to assist itscustomers in the systems integration process. The Company is able to achievethis high level of service by employing qualified engineers and technicians whoadvise and provide support to the Company’s customers. Because of theirfrequent interaction with the customer base, these engineers and techniciansare an effective marketing tool. They also provide the Company with valuablecustomer input relating to product improvements and enhancements andopportunities for new products. Further, the Company has offices in Great Britain and the United Statesto better support customer needs.

 

*Expand International Presence.*  In 2002, the Companyderived approximately 50% of its total revenues from the sale of its productsto countries outside the United States and Canada, while in 2000 and 2001 thepercentage was approximately 48%.  Totaldollar revenues from international sales increased from $13.6 million in 2001to $16.6 million in 2002.

 

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The Company plans to expand itsinternational sales and marketing effort and believes that opportunity forexpansion exists in many of these regions, particularly the United States, Asiaand Europe.  This expansion is expectedthrough continued expansion****of itsdealer network, sales of the survey products developed by Point through theSokkia distribution network and new strategic relationships. The Companycurrently has dealers serving more than 11 countries worldwide.  Inaddition,  Sokkia’s distribution systemincludes more than 25 subsidiaries and additional representatives around theworld, each having its own dealer network. The Company has an office in GreatBritain to provide more responsive sales and technical support to the Company’scustomers and distributors in Europe.

 

**Markets**

 

NovAtel currently targets surveying, GIS,and mining and machine control applications primarily through Point, andaerospace, agriculture, precise timing and GPS/INS applications markets throughits own sales force and dealer network. The unmanned vehicle market has shown steady growth, and the Company’srelationship with BEELINE Technologies and AGCO Corporation has furtherstrengthened the Company’s position in the agricultural guidance market.

 

*Surveying*

 

Surveying involves the establishment ofprecise points and boundaries consisting of the collection and processing ofposition information. Applications which the Company addresses in the surveyingmarket include control surveying, construction and engineering surveys, routesurveying and geodetic research. Compared with traditional survey methods, GPSoffers many advantages such as not requiring line of sight between land basedreference points. The primary need of the surveying market is the highest levelof accuracy that can be achieved with dual frequency GPS technology(sub-centimeter level). There is a growing requirement to be able to meet theaccuracy needs in real time with high reliability and low latency (time delayin performing position computation). In addition to the accuracy requirement,the survey market demands ease of use, not only in the field equipment, butalso in any personal computer-based pre- and post-processing software. Theequipment must also be usable in a variety of different applications andphysical environments.

 

*GIS (Geographic Information Systems)*

 

GIS applications include large scalemapping of geographic and man-made features, data collecting for GIS databases,natural resource management, ground contour mapping and utility infrastructure.Large amounts of position and attribute data such as size, variety, conditionand color must be obtained. GIS databases are used by federal, state, countyand city governments and by utility companies for a variety of applicationsrequiring accurate information on the location of natural resources andmunicipal infrastructure such as utilities and transportation networks.Traditionally, large scale mapping has been accomplished by photogrammetricanalysis of aerial photographs, a technique which is expensive and subject toweather and seasonal restrictions. The GIS market requires positionalaccuracies ranging from 20 centimeters to one meter. Also, the ability toprovide attribute information for the measured points must be flexible,efficient and user definable to satisfy the varied needs of this market. Theequipment must be easy to learn and operate, as many users do not have mappingor GPS experience. This market seeks to reduce the cost of map production andthe cost of constructing and augmenting GIS databases, while increasing theiraccuracy.

 

*Aerospace*

 

GPS technology is ideally suited for 24hour worldwide enroute navigation and precision approach and landing ofaircraft. Historically, a number of different types of vintage ground basednavigational aids have formed the backbone of a complex system used by aircraftto navigate over land and sea. The aircraft fly a network of indirect, fixed“airways” to pick up signals from these ground navigational systems. Thesenavigational aid systems are labor intensive, and integration and maintenanceof these systems is expensive as compared to the more flexible lower cost GPStechnology. GPS technology allows for global “direct routing” and sinceaircraft will broadcast their position, there is no need for additional groundbased navigational aids, thus reducing costs. In addition, under the currentsystem aircraft have to transition from enroute navigational aids to finalapproach and landing guidance

 

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systems. GPS technology obviates the need for thiscomplex transition and thus further reduces ground installation costs. Civilaviation authorities in various countries are currently implementing GPS astheir primary navigation systems. In particular, the Radio Navigation Plans asadopted by the FAA in the United States and the equivalent regulatory agenciesin Canada, Japan and Mexico are based on GPS technology for primary navigation.Similarly, a GPS/GLONASS based navigation system known as EGNOS is beingdeveloped in Europe and a GPS based navigation system known as SNAS is beingdeveloped in China.  The positionalaccuracy requirements for aviation applications range from 100 meters forenroute navigation to less than one meter for precision landing. While theseaccuracies are easily achievable with GPS, the integrity of the computedposition is critical. There must be a high degree of certainty of thesepositions especially when dealing with passenger aircraft. Therefore, mucheffort goes into designing the GPS system in order to reduce the effects ofsignal jamming and multipath on these systems, while incorporating designredundancy. The Johns Hopkins University Applied Physics Laboratory conducted astudy which concluded that augmented GPS can satisfy performance requirementsto be the only navigation system installed in an aircraft and the only serviceused for operations anywhere in the U.S. NationalAirspace System.

 

*Precision Agriculture*

 

Precision agriculture is an emerging marketfor the use of GPS technology. GPS technology can be used in agriculture forcrop dusting, yield monitoring, terrain analysis, soil sampling, variable ratetechnology and precise guidance. Precision farming is gaining increasedacceptance as a result of cost savings, increased yields and reducedenvironmental impact resulting from effective and efficient applications ofchemicals, fertilizers and seed. Positional accuracies of one to three metersare required for crop dusting, soil sampling and yield monitoring. Crop dustingrequires that GPS receivers function in highly dynamic situations (turns andloops). Higher accuracy is necessary for terrain analysis, variable ratetechnology and precise guidance. In these cases, the agriculture user requiresreal time positioning at the 20 centimeter level or better with fast updaterates. The operating environment in agriculture is often severe with heavyvibration and shock, as well as dust and rain. GPS equipment must be robust andreliable to stand up to the demands of this market.

 

*Mining and Machine Control*

 

Mining and machine control is an emergingmarket for the use of GPS technology. Safety and efficiency are very importantin the movement of earth and mined materials. As the construction and miningindustries have moved towards higher automation and robotics to improve safetyand efficiency, these industries have focused on GPS technology as a way toensure accurate positioning. A dual frequency receiver is necessary to providethe high positioning accuracy required by the mining and constructionindustries (typically less than two centimeters) as well as providing thisaccurate position in real time. Due to the working environment, the equipmentused also must be very robust (operate during heavy vibration) and providerapid positional updates to ensure reliable and precise guidance.  Mining and machine control applications willbenefit greatly from GPS/INS developments.

 

*Unmanned Vehicles*

 

The unmanned vehicle market is still at avery young stage.  The majority ofsystems that are in use primarily involve military applications.  The Company has been involved in this marketand continues to work with companies delivering products into the militaryspace.  There are also numerouscommercial applications that allow tasks to be completed with far less or nohuman involvement, but most of these applications are in the development stage.

 

**Products**

 

NovAtel offers a broad range of GPSproducts that are easy to use and integrate, highly reliable and provide a highdegree of accuracy. The Company uses a unique combination of RF, VLSI and DSPdesign to provide many features on one receiver board. The Company recentlyintroduced new capabilities for OEM4 generation receivers.  These receiver boards are sold to OEMcustomers for integration into their own products. The innovative receiverdesigns enable the Company to differentiate product features using software,which is embedded in the receiver, thereby reducing the need for a variety ofhardware platforms. These designs facilitate shorter product development andproduction times, reduced manufacturing complexities and lower product costs.

 

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***OEM GPS Receivers***

 

*OEM4.*  In September 2002, the Company announced its latest generationGPS engine, the OEM4-G2.  This newengine is available with an Application Programming Interface (API) option – anenhancement that allows system developers to write specialized applicationsoftware to run on the OEM4-G2.  Alsointroduced in 2002 was the ProPak-LB. This new positioning engine, coupled with NovAtel’s GPS-600 LB antenna,enables developers and integrators to offer their customers technology thatdelivers decimetre-level accuracy autonomously with subscription to OmniSTAR’snew High Performance (HP) satellite service. Powered by NovAtel’s OEM4 GPS Card, the ProPak-LB is the first OmniSTARHP enabled GPS engine on the market.

 

In February 2003, the Company alsoannounced the OEM4-G2L and the ProPak-G2. The OEM4-G2L is a compact (60mm x 100mm x16mm) and light (65g) highperformance GPS engine (business card size versus the passport size of theOEM4-G2).  It incorporates the Company’slatest patented positioning technology, Pulse Aperture Correlator (“PAC”), toachieve less than 2 cm accuracy with RT-2 corrections.  The OEM4-G2L also features two serial portswith one port supporting speeds up to 921 kbps, a USB port and low powerconsumption.  It is also available withthe API option.  The ProPak-G2 is arugged, lightweight enclosure designed to house the OEM4 -G2 engine.  It is shock, water and dust resistant andcan be used as a base station or a rover. It also features three bi-directional COM ports and low powerconsumption.  The ProPak-G2 is availablewith either LEMO or DB-9 connectors.  AnOEM4-G2 or OEM4-G2L receiver can be configured as L1, L1 real-time kinematic(“RTK”), L1/L2 or L1/L2 RTK through software command.  This product also features PAC. In 2001, the Company introduced the Black Diamond System (“BDS”)combining dual frequency GPS with an Inertial Measurement Unit (“IMU”).  The BDS is a tightly integrated inertialnavigation system capable of continuous operation with fast data rates andattitude determination.

 

*DL Series of Receivers. *The DL Series of receivers were introduced in 1999, nowincorporating NovAtel’s OEM4-G2 receivers, the DL Series provides a removablePCMCIA memory card eliminating the need for separate data collectors.  Dual battery management and a built inscheduling function allows the users to pre-program multiple logging sessionsfor stand-alone (autonomous) operation. Front panel operation, access to the memory card and LED statusindicators provides greater flexibility and ease of use.  The DL series was expanded in 2001 toinclude compact flash data storage and the Company’s first receiver with a UserInterface Display.

 

*MEDLL Receiver.*  The MEDLL receiver was introduced in 1995and features the Multipath Estimating Delay Lock Loop technology, whichprovides superior GPS performance in high multipath environments. Utilizingmultiple Performance Series boards, this stand-alone unit offers code andcarrier multipath rejection improvement of 90% over Narrow Correlator trackingtechnology.

 

***Antennas***

 

*GPS-700.*  In February 2003, the Company introduced the GPS-700 antennaseries.  This series incorporates theCompany’s patented Pinwheel technology and is designed to enhance the performanceof the OEM4-G2 and OEM4-G2L engines. The series is available in L1 (GPS-701) and L1/L2 (GPS-702) models andis smaller and lighter than the existing 600 series.  It delivers improved L2 as well as low elevation angle satellitetracking.  The GPS-700 series alsofeatures enhanced out-of-band inference rejection and utilizes the Company’spatented Pinwheel aperture coupled slot array technology.

 

***Aviation Products***

 

*WAAS Reference Receiver.* The WAASGPS Reference Receiver is a custom GPS receiver system designed to meet FAAnavigation performance requirements for domestic enroute, terminal,non-precision approach and precision approach phases of flight. The WAASReference Receiver combines the NovAtel MEDLL receiver, along with theMiLLennium and GEO processing receivers packaged in a rack mountable enclosure.In 1998, this product was incorporated into the Japanese MSAS program.  In 2001 and 2002, several systems weresupplied to the Chinese SNAS network. This product has also been incorporated into the European EGNOS programwith additional Satellite Failure Detection (“SFD”) capability.  The Company believes that its product is theleader for WAAS reference stations in providing the highest level ofWAAS-specific performance.

 

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Other related products include a *Test Bed Receiver* and *mini-WAAS receiver*, both used in groundreference networks.  The Company alsooffers a *Multipath Assessment Tool*(MAT)software which is used in reference site antenna location.  The Company also has access to the GNSSAcertified receiver developed jointly with CMC Electronics, for non-airborneapplications.

 

***Point Products***

 

*Axis III.*  The Axis III system uses GPS technology for GIS datacollection.  Axis features a fullyintegrated DGPS receiver and a pen-based software field solution with real timemapping capabilities.  The Axis systemfeatures a 12 channel L1 GPS receiver with an internal dual channel beaconreceiver.

 

*Radian and Radian IS.*  The Radian system uses the Company’s dualfrequency DL Series receiver to provide centimeter-level accuracy in real timesurveys and millimeter level in post processed surveys.  The Radian system may be used as a rover ora base station.  The data structure isconveniently formatted for RTK and post processing applications.  The Radian IS, the next generation receiver,integrates the receiver, antenna, data memory and batteries into onelightweight and rugged component.

 

*Stratus.*  An easy to learn, simple to use, cable free GPS survey system forhigh accuracy, high productivity applications. Stratus provides the ability to perform a multitude of surveys fromcentimeter-level static surveys, such as control and boundary, to kinematicjobs, such as topographic or as-built surveys.

 

*GSR2600.*  The GSR2600 is a high-performance GPS receiver for use in bothRTK and post-processing applications. This receiver is capable of receiving and tracking up to 12 GPSsatellites on L1 and L2 channels, has fast data update rates, and integratesmemory (Compact Flash Card) for data logging. A handheld data collector canalso be used with the GSR2600 to aid in data collection.

 

**Technology**

 

NovAtel established itself as atechnological leader in the GPS industry through the introduction of itspatented Narrow Correlator tracking technology in 1992. Narrow Correlatortracking technology allowed NovAtel to provide sub-meter positioning accuracywith a single frequency receiver while reducing the effects of multipath.Historically, GPS receivers used a 1.0 code chip correlator spacing in theimplementation of delay lock loops (DLL) for tracking the L1 code. NarrowCorrelator tracking technology enables the receiver to narrow as well asselectively vary the correlator spacing from 0.1 to 1.0 code chips. Thisprovides a significant reduction of tracking errors in the presence of bothnoise and multipath. To implement this technique, the Company has been able todraw upon its previous experience in cellular communications to assist in thedevelopment of a unique combination of RF, VLSI and DSP design. The NovAtel RFsection provides very clean signal reception and filtering which reduces theeffects of interference and noise on the GPS signals. The high density,proprietary VLSI chips, together with the DSP section, provide signalprocessing together with range and position computation in real time with ahigh degree of accuracy, speed and reliability. Using technology developed forits former cellular communications business, the Company conducts on-boardcircuit testing, thus eliminating the need for expensive test stations.

 

The Company continued its technologyadvancements with the introduction in 1994 of Multipath Elimination Technology(“MET”). MET expanded upon the Narrow Correlator tracking technology by addingtwo additional correlators to remove 25% to 50% of the residual multipath. METis a software option that can be added to Performance Series receivers. In1995, the Company introduced Multipath Estimating Delay Lock Loop (“MEDLL”)technology. MEDLL offers a more rigorous approach to the reduction of multipatheffects using hardware and software. MEDLL further extends the MET concept byadding multiple correlators which estimate and eliminate the multipath effectsby up to 90%. MEDLL is implemented by using multiple Performance Series receiverslinked to a common RF deck. The Company also introduced RT-20, a RTK techniquewhich enables single frequency receivers to achieve real time positioningaccuracy of 20 centimeters or less. RTK positioning utilizes the phasemeasurement of the transmitted GPS frequencies and attempts to calculate thenumber of cycles between the satellite and the receiver (ambiguity resolution).This provides a very accurate distance which can achieve positional accuraciesof a few centimeters. Ambiguity resolution is most easily and reliablyaccomplished with a dual frequency receiver. Single frequency receivers aresusceptible to incorrect ambiguity resolution, due to factors such asionospheric effects, which could provide positional errors of a few meters.RT-20 uses a floating ambiguity

 

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resolution algorithm. This floating algorithm does notachieve the same accuracy as a fixed solution, however, it ensures stable andreliable 20 centimeter or less positioning accuracy in static as well asdynamic environments. RT-20 is a software option that can be added toPerformance Series receivers.

 

These developments were followed in 1996 bythe MiLLennium dual frequency receiver and RT-2. MiLLennium is based upon acustom design ASIC chip combined with Narrow Correlator tracking technology andP-code delayed correlation technology. MiLLennium has 24 configurable trackingchannels and can independently track Narrow Correlator C/A code on L1, trackP-code on L2 and provides full wavelength phase observations on L1 and L2.MiLLennium enables users to achieve the highest accuracy capabilities of GPS(sub-centimeter). RT-2 is RTK software which allows a MiLLennium receiver toachieve real time positioning accuracy of two centimeters or less. RT-2 uses afixed ambiguity resolution algorithm which takes full advantage of the L2frequency received by the MiLLennium and provides stable and reliable resultsto the user. RT-2 is a software option that can be added to the MiLLennium receiver.

 

Continuing to advance its technologicalleadership, in 1997, the Company introduced the BeeLine receiver.  BeeLine is a real-time azimuth determinationand kinematic positioning system.  This16 channel L1/L1 configuration combines a 2-D attitude solution with RT-20position.  BeeLine features sevenmilliradian RTK azimuth accuracy, 20 centimeter positional accuracy and highdata output rates.  Fast and robust “onthe fly” initialization algorithms provide superior performance and ease ofuse.

 

In 1998, the Company introduced three newreceivers designed to provide users with technology that is applicable in reallife situations and that meet customers’ needs.  The MiLLennium – WAAS receiver uses the WAAS signal tosignificantly enhance position accuracy. The MiLLennium – GLONASS receiver offers one card access to both GPS andGLONASS satellite constellations, providing enhanced system reliability andbroader satellite coverage.  Finally,the DL Series of receivers provide a removable PCMCIA memory card, eliminatingthe need for separate data collectors, dual battery management and a built inscheduling function allowing the user to pre-program multiple logging sessionsfor stand alone (autonomous) operation.

 

In 1999, the Company introduced the OEM4, atthe time the smallest 24 channel, dual frequency GPS receiver on themarket.  In 2000, the Company introduceda new antenna, the GPS-600, utilizing the Company’s patent pending Pinwheelaperture coupled slot array technology. Without the aid of a choke ring, the antenna approaches the sameaccuracy and reduction of multipath provided with the use of a choke ringground plain.  However, as no choke ringis required, the GPS-600 is much smaller and lighter.

 

In September 2000, the Company introducedits new Pulse Aperture Correlation (“PAC”) technology.  Available exclusively on the Company’s OEM4product line, PAC technology implements the latest digital signal processingtechniques to provide superior tracking capability in the presence ofmultipath.  PAC technology effectivelydoubles the pseudorange accuracy of the Narrow Correlator tracking technologyand increases multipath rejection characteristics by up to a factor ofeight.  PAC technology virtuallyeliminates the effect of multipath between 0.1 and 0.9 C/A code chips.

 

In September 2001, the Company introducedthe Black Diamond System (“BDS”), a GPS and inertial navigation system (“INS”)integrated product.  The INS containsaccelerometers and gyroscopic sensors that can maintain an estimate of theusers position when the GPS signals are blocked or limited.  The current INS sensor chosen for the BDSproduct requires U.S. State Department approval for sale and export.  The State Department approval process isslow and tedious, limiting the general acceptance of this product to a fewcustomers.

 

**Research and Development**

 

The Company’s technological leadershipposition is the result, in large part, of its strong commitment to research anddevelopment. The Company has invested heavily in developing GPS technology,including the design of proprietary software and integrated circuits for GPSreceivers. The Company expensed $8.2 million, $6.9 million and $5.5 millionrepresenting approximately 33%, 24% and 17% of total revenues in 2000, 2001 and2002, respectively, on research and development.

 

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Research costs are charged to operations asincurred.  Development costs, includingsoftware development costs, are charged to operations as incurred unless theymeet specific criteria related to technical, market and financialfeasibility.  In these circumstances,the costs are deferred and amortized on a systematic basis, subject torecoverability.  The Company hasdeferred $2.6 million related to the development of a certified aviation GPSreceiver.  With the GPS receiverreaching the commercialization stage, the Company has commenced amortizingthese deferred costs, using a method similar to the unit-of-production methodof amortization.

 

Often a new product is initially developedfor a customer or strategic partner who is willing to purchase developmentstage products. The Company has used feedback from such initial customers as asource of information in designing and refining its products, and in defining,with greater precision, customer needs in emerging market areas. The Companyexpects that a significant portion of future revenue will continue to bederived from sales of newly introduced products by the Company.  The Company has previously experienceddelays in shipping certain of its products and any future delays, whether dueto production delays, product design and development delays, lack of marketacceptance, delays in any required regulatory approval or otherwise, could havea material adverse effect on the Company’s results of operations. The Company’sfuture success depends on its ability to develop and produce new competitiveproducts. Advances in product technology will require continued substantialinvestment in research and development to maintain or improve the Company’smarket position.

 

Development and production schedules fortechnology products are difficult to predict, and accordingly, there can be noassurance that the Company or Point will achieve timely initial customershipments of new products. The timely availability of these products in volumeand their acceptance by customers are important to the future success of theCompany. A number of the markets in which the Company sells its products arealso served by non-GPS technologies, some of which are currently more widelyaccepted and less expensive than GPS-based systems. The success of GPS-basedsystems against these competing technologies depends, in part, upon whether GPSsystems can offer significant improvements in productivity, accuracy andreliability in a cost-effective manner. In addition, from time to time, theCompany or its competitors may announce new products, capabilities ortechnologies that have the potential to replace or shorten the life cycles ofthe Company’s existing products. No assurance can be given that announcementsof currently planned or other new products will not cause customers to defer orstop purchasing the Company’s products until the Company’s or its competitors’new products become available. Certain of the Company’s and Point’s productsare also subject to governmental and similar certifications before they can besold. An inability or delay in obtaining such certification could have anadverse effect on the Company’s business, financial condition and results ofoperations.

 

**Customers**

 

During the past two years the Company hassold its products to over 300 customers worldwide.  Sales to key customers (outside of Point/Sokkia), ShenzhenShenyuan, BEELINE Technologies (formerly Agsystems) and Thales Avionics, accountedfor 11.3%, 10.3% and 3.3%, respectively, of the Company’s total revenues in2002.  In comparison, sales to ThalesAvionics, Shenzhen Shenyuan and BEELINE Technologies (formerly Agsystems)  accounted for 10.3%, 7.2% and 5.5%,respectively, of the Company’s total revenues in 2001.

 

The Company’s revenue also included theCompany’s sales to Point, net of intercompany eliminations, and the Company’sproportionate share of sales by Point. Sales to Point, net of intercompany eliminations, accounted for 2.2% oftotal revenues in 2002, compared to 2.5% of total revenues in 2001.  The Company’s proportionate share ofrevenues from Point accounted for 13.7% of total revenues in 2002 compared to19.3% of total revenues in 2001.  See“Item 5 — Operating and Financial Review and Prospects, Operating Results.”

 

**Sales, Marketing and Distribution**

 

The Company’s strategy is to achieve broadmarket penetration by employing multiple distribution channels, including OEMs,strategic relationships and a network of dealers and resellers. The Companyrecognizes the importance of sales, marketing and product distribution ascritical to its future success.  Thenumber of independent dealers and resellers of the Company’s products was approximately13 in 2002.  In addition, Sokkia’sdistribution system includes more than 25 subsidiaries and additionalrepresentatives around the world, each having its own dealer network.  The Company has offices in the United Statesand Great Britain to provide more responsive sales and technical support to theCompany’s customers and distributors in these regions.

 

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The Company seeks to enter into strategicrelationships to penetrate various markets, for technical cooperation or forintegrated product development.

 

The Company has developed its sales andmarketing capabilities in anticipation and in response to customer needs asthey arise in its multiple markets. The in-house sales and marketing effortsare focused on product management, distribution management and promotions. Eachmarket requires specific attention to the needs of its sales and distributionchannels, which are rapidly changing. The Company must continue to manage itsfuture growth effectively, otherwise customer acceptance and results ofoperations may be adversely affected.

 

Customer support is essential not only foroptimal service to customers in support of their system integration effort, butalso to provide quick turn-around time with regard to customer concerns andproblems when dealing with products. The Company’s customer support staff alsoprovides software upgrades and application consulting to assist its customersin the systems integration process. The Company is able to achieve a high levelof customer support by employing qualified engineers and technicians who adviseand provide support to the Company’s customers. Because of their frequentinteraction with the customer base, these engineers and technicians are aneffective marketing tool. They are also able to provide the Company withvaluable customer input relating to product improvements and enhancements andopportunities for new products.

 

The Company derived approximately 52%, 52%and 50% of its total revenues in 2000, 2001 and 2002, respectively, from salesto customers in Canada and the United States. The Company plans to continue to increase its international sales andmarketing efforts.  The percentage oftotal revenues from international sales was 50% in 2002 compared to 48% in2001.  Total dollar revenues frominternational sales increased from $13.6 million in 2001 to $16.6 million in2002. There are a number of risks inherent in the Company’s internationalbusiness activities, including unexpected changes in Canadian, United States orother government policies concerning the import and export of goods, servicesand technology and other regulatory requirements, tariffs and other tradebarriers, costs and risks of localizing products for foreign countries, longeraccounts receivable payment cycles, potentially adverse tax consequences,limits on repatriation of earnings and the burdens of complying with a widevariety of foreign laws. Fluctuations in currency exchange rates couldmaterially adversely affect sales denominated in currencies other than the Canadiandollar and cause a reduction in revenues derived from sales in a particularcountry. The financial stability of foreign markets could also affect theCompany’s international sales. There can be no assurance that such factors willnot materially adversely affect the revenues from the Company’s futureinternational sales and, consequently, the Company’s results of operations. Inaddition, revenues of the Company earned abroad may be subject to taxation bymore than one jurisdiction, which could materially adversely affect theCompany’s earnings. Furthermore, in certain foreign markets, there may be areluctance to purchase products based on GPS technology, given the control ofGPS by the U.S. Government. Each of these factors could have an adverse effect onthe Company’s business, financial condition and results of operations.

 

**Competition**

 

The Company believes that its ability tocompete successfully depends on a number of factors, both within and outside ofits control, including the performance, quality and price of the Company’s andits competitors’ products, the timing and success of new product introductionsby the Company, its OEM customers and its competitors, the emergence of new GPStechnologies and competing technologies, the development of technologicalinnovations, the efficiency of production, the rate at which the Company’s OEMcustomers incorporate the Company’s products into their products, the numberand nature of the Company’s competitors in a given market, the assertion ofintellectual property rights and general market and economic conditions.Depending on market segments, the Company faces competition from other GPSsuppliers such as Trimble Navigation Limited, Thales Group, Topcon PositioningSystems, Javad Navigation Systems, Leica Geosystems, NavComm Technologies andAllan Osborne Associates. In addition, the Company faces competition fromlarge, established companies that participate in the GPS markets such asRockwell Corporation.  The Companyexpects competition to continue to intensify from various larger domestic andinternational competitors and new market entrants, some of which may be currentCompany customers, as they begin to offer products, services or systems whichcompete with the Company’s products. There can be no assurance that theCompany’s current or future competitors, many of whom, individually or togetherwith their corporate parents, have substantially greater financial resources,research and development resources, greater distribution, marketing and othercapabilities than the Company, will not apply those

 

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resources and capabilities to compete successfullyagainst the Company. A number of the markets in which the Company sells itsproducts are also served by non-GPS technologies, some of which are currentlymore widely accepted and less expensive than GPS-based systems. The success ofGPS-based systems against these competing technologies depends in part uponwhether GPS systems can offer significant improvements in productivity,accuracy and reliability in a cost-effective manner. The Company believes thatits ability to compete successfully in the future against existing andadditional competitors will depend largely on its ability to combine systemsand products with significantly differentiated features compared to currentlyavailable products, with a high level of customer support. There can be noassurances that the Company will be able to successfully implement thisstrategy. The Company also believes that in certain emerging markets itssuccess will depend on its ability to form and maintain strategic relationshipswith established systems providers and industry leaders such as CMC Electronicsand Sokkia. The Company’s failure to form and maintain such relationships, orthe preemption of such relationships by the actions of the Company’s other GPScompetitors, could adversely affect the Company’s ability to penetrate emergingGPS markets. In addition, prices of the Company’s products have declined sincetheir introduction due to competitive pressure. There can be no assurance thatcompetitive pressures will not further result in decreased prices and lowermargins for the Company’s products. Such price and margin decreases could havea material adverse effect on the Company’s business, financial condition andresults of operations.

 

**Operations**

 

The Company subcontracts the manufacturingof its GPS receivers at the circuit card assembly (“CCA”) level whileconfiguring and assembling the receivers in-house. The number of basicCCA-level products is limited because the Company achieves productdifferentiation by loading different software packages on a common hardwareplatform. The Company receives pre-tested CCAs, configures the CCAs by loadingthe appropriate software and, for some products, mounts the CCAs in differentenclosures. The configurability of the receivers by software load allows theCompany to maintain a reduced inventory level of semi-finished goods andprovide quick order turnaround.

 

The Company currently uses subcontractorsfor CCA manufacturing, the primary one being Raven Industries Inc. of SiouxFalls, South Dakota. Subcontracting the manufacturing process requires littlecapital equipment and consequently allows growth without large capital investments.It also provides high flexibility in the choice of manufacturing processes.

 

The Company believes there are a number ofqualified vendors for most of the parts and components used in its products.However, several components are purchased from a single source. In many cases,despite the availability of multiple sources, the Company may select a singlesource in order to maintain quality control. Components for which the Companycurrently does not have multiple sources include application-specific integratedcircuits manufactured to the Company’s proprietary design supplied by ArrowElectronics Canada Ltd., RF filters from Insight Components Inc.,microprocessors from Intel Corporation and duplexers from Comnav EngineeringInc.  The Company experiencedsignificant production delays in the past caused by an insufficient supply ofcertain components. If the Company is unable to obtain a sufficient supply ofits single source components from its current vendors, the Company may berequired to obtain such components from alternative sources at higher pricesand may experience a delay or interruption in product shipments, which couldadversely affect the Company’s business, financial condition and results ofoperations and damage customer relationships until an alternative source can beobtained.  The Company has receivednotices about last buy opportunities for certain components.  The Company has taken steps to ensureadequate supply of these components and commenced product redesigns, as may berequired. Also, a significant increase in the price of one or more componentscould adversely affect the Company’s business, financial condition and resultsof operations. Although the Company has instituted vendor audit programs, therecan be no assurance that the Company will not face problems with the quality ofcomponents in the future that could result in delays in supplies, interruptshipments and require modification of products already sold by the Company, anyof which could have a material adverse effect on the Company’s business,financial condition and results of operations. In addition, there can be noassurance that the manufacturing subcontractors will be able to manufacture theCompany’s products in a timely and reliable manner. The failure by a subcontractorto manufacture the Company’s products in a timely and reliable manner couldhave a material adverse effect on the Company’s business, financial conditionand results of operations.

 

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**Patents, Trademarks and Licenses**

 

The Company currently holds 21 U.S. patentsand 29 related foreign patents which expire at various dates no earlier thanNovember 28, 2010.  The Company has alsoreceived a notice of allowance for one U.S. patent and the Company has numerouspending U.S. and foreign patent applications. The Company currently has numerous trademarks worldwide, including theNovAtel trademark, which is registered or pending in 31 countries.

 

The Company has copyrights and intellectualproperty rights to its proprietary software and custom integrated circuitdesigns. In 1997, the Company purchased a license with respect to its SoftSurvsoftware, which is a full-featured GPS dual frequency data post-processingpackage for surveying applications.  Thepurchase allows for more control over the pricing, costs, support anddevelopment of SoftSurv.  In 1999, theCompany licensed SoftSurv and certain intellectual property related to its enduser products to Point.

 

Although the Company believes that itspatents and trademarks have value, there can be no assurance that the Company’spatents and trademarks, or any additional patents and trademarks that may beobtained in the future, will provide meaningful protection from competition.The Company believes that its success will depend primarily upon theexperience, creative skills, technical expertise, management skills andmarketing and sales ability of its personnel. The value of the Company’sproducts relies substantially on the Company’s technical innovation in fieldsin which there are many current patent filings. The Company recognizes that asnew patents are issued or are brought to the Company’s attention by the holdersof such patents, it may be necessary for the Company to withdraw products fromthe market, negotiate a license from such patent holders, redesign its productsor pay damages assessed as a result of litigation. Such events could have amaterial adverse effect on the Company’s business, financial condition andresults of operations. In addition, the legal costs and engineering timerequired to safeguard intellectual property or to defend against litigationcould become significant. The Company has received written notices from BTG USAInc., the U.S. Department of the Navy, Western Atlas International, Inc. andMichael Baker Corporation (GeoResearch Inc.) alleging patent infringement oftheir respective patents. No formal claim has been brought by any of theparties. The Company believes that it has valid defences to these claims shouldformal proceedings be commenced. In protecting its intellectual property rightsthe Company has sent out letters to third parties regarding potentialinfringements, requesting that they enter into license agreements with theCompany if they wish to continue using certain technologies. In response to oneof these letters, a recipient claimed that the Company’s Narrow Correlatortracking technology patents were invalid. Such party subsequently agreed towithdraw its claim and entered into a license agreement for the use of theCompany’s Narrow Correlator tracking technology. While no intellectual propertyright of the Company has been invalidated or declared unenforceable, there canbe no assurance that such rights will not be invalidated due to the existenceof prior art or otherwise held unenforceable.

 

In November 1994, the Company commenced anaction against Trimble Navigation Limited (“Trimble”) seeking relief anddamages for an alleged infringement of the Company’s U.S. Patent No. 5,101,416(the “Narrow Correlator patent”). In March 1995, Trimble commenced an actionagainst the Company seeking relief and damages for an alleged infringement ofTrimble’s U.S. Patent No. 5,390,207 (the “207 patent”). In January 1996,Trimble filed a complaint with the International Trade Commission in the U.S.seeking to ban imports of the Company’s products into the U.S. which allegedlyinfringed upon the 207 patent. All of these claims were resolved on July 16,1996 when the Company and Trimble entered into a settlement agreement by crosslicensing certain technologies, including a Narrow Correlator license toTrimble. The 1996 settlement agreement with Trimble includes a provision thatTrimble may, at its sole option, terminate the licenses and rights granted upona direct change of control. As at December 31, 2002, intangible assets included$492,000 related to the Company’s settlement agreement with Trimble.  On June 26, 2001, the Company receivednotice from Trimble terminating the licenses and rights under the settlementagreement in connection with the share acquisition of the Company by CMCElectronics in April 1998.  The Companyhas sought legal advice regarding Trimble’s termination rights under the 1996settlement agreement and is continuing to evaluate the impact, if any, ofTrimble’s notice of termination.  Asthis matter has not been resolved as of March 17, 2003, the Company has notprovided for any impairment of these intangible assets.

 

**Legal Proceedings**

 

A claim was made in the Court of Queen’sBench of Alberta, Judicial District of Calgary, in July 1995, by a formerdealer of the Company, Premier GPS Inc. (“Premier”), arising, in part, out ofthe Company’s refusal to

 

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renew its dealer agreement with Premier.  Premier is alleging breach of contract bythe Company and seeking damages in the amount of $500,000, special damages inan amount to be ascertained at trial, and an additional $500,000 in punitive orexemplary damages, plus interest and costs. The Company filed a Statement of Defence and Counterclaim on September14, 1995 seeking judgment for approximately $74,000 (unpaid invoices), damagesfor conspiracy, breach of trust and breach of fiduciary duty, and an Order forreturn of certain beta test equipment or damages, interest and costs.  This lawsuit has largely been inactive.

 

The Company believes that it hasmeritorious defenses and claims with respect to outstanding lawsuits.  The Company believes that the ultimateliability with respect to the resolution of these matters will not have amaterial adverse effect on the Company’s business, financial condition orresults of operations.  There can be noassurance, however, that the Company will prevail in the outstanding or pendinglitigations, and an adverse outcome could have a material adverse effect on theCompany’s business, financial condition and results of operations.

 

**C.****                                                            Organizational Structure**

 

On April 17, 1998, CMC Electronics Inc.(“CMC Electronics”) purchased approximately 58% of the Company’s total sharesoutstanding from the Company’s two principal shareholders.

 

On April 11, 2001, an investor group led byONCAP L.P. (“ONCAP”) acquired control of the Company through the acquisition ofCMC Electronics.

 

The Company does not have any significantsubsidiaries.

 

**D.****                                                            Property, Plant and Equipment**

 

In January 1999, the Company concluded asale/leaseback arrangement by which the Company’s Calgary facility, includingcertain adjacent land, was sold for net proceeds of $6.9 million, resulting ina gain of $1.1 million.  Contemporaneously,the Company entered into a lease agreement with a minimum 10 year term. Thegain on the sale has been deferred and is being amortized over the initial termof the lease. The Company currently leases approximately 46,000 square feet forall of its operations in Calgary, Alberta, Canada.  The lease provides for an expansion of up to an additional 25,000square feet and for additional parking. The Company believes that itsfacilities are adequate to support its current and anticipated near term futureoperations.  In September 2001, theCompany entered into a sale/leaseback transaction with HSBC Leasing wherebycertain tooling and computer equipment was sold, in exchange for $300,000 cash,and a three year lease obligation.

 

**Item 5****                                      Operating and Financial Review and Prospects**

 

**A.****                                                            Operating Results**

 

**Overview**

 

NovAtel designs, markets and supports abroad range of products which determine precise geographic locations using theGlobal Positioning System (“GPS”). NovAtel’s GPS products are used principallyfor applications in high-end markets such as the surveying, geographicalinformation systems (“GIS”), aviation, unmanned vehicles, marine, mining andmachine control, agriculture and precise timing markets, rather than forapplications in low-end markets such as the vehicle navigation andconsumer/cellular markets.  Unless thecontext requires otherwise, references herein to “NovAtel” or the “Company”refer to NovAtel, Inc., including its subsidiary, Mezure, Inc. and jointventure, Point, Inc.

 

The Company was incorporated in 1978 andsince that time has been engaged in several communications businesses. In 1992,the Company was reorganized and sold to Telexel Holding Limited. The Companydivested all of its non-GPS businesses in a series of transactions beginning inMarch 1994 and ending in August 1996. As a result of these divestitures, theCompany now focuses exclusively on the GPS business.

 

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The various divested and discontinuedbusinesses of the Company are accounted for as discontinued operations.Accordingly, the operating results of these discontinued businesses have beensegregated from the operating results of the GPS business and reported as netincome (loss) from discontinued operations in the Consolidated FinancialStatements included elsewhere in this Annual Report.

 

The Company’s consolidated financialstatements include the Company’s proportionate share of the Point, Inc.(“Point”) accounts as required under Canadian GAAP.  The Company sells its products to Point which incorporates theminto surveying systems that are in turn sold through the Sokkia Co., Ltd.(“Sokkia”) distribution channels and through independent dealers anddistributors.  In addition, the Companyprovides facilities, computer support and development and logistical supportfor Point’s Calgary operations.  TheCompany’s consolidated Statements of Operations include the Company’sproportionate share of each of the equivalent line items reflected on Point’sStatement of Operations.  Similarly, theCompany consolidates its proportionate share of each line item of Point’sBalance Sheet (see “Item 1.D – Risk Factors”).

 

On January 26, 2001, the Company acquired a48.7% joint venture interest in Mezure, Inc. (“Mezure”) in exchange for US$400of loans receivable which the Company had previously advanced and charged tooperations in 2000.  On July 23, 2001,the Company acquired an additional 25.3% equity interest in Mezure afterexercising its option to convert US$200 in loans receivable, which the Companypreviously advanced and charged to operations in the first quarter 2001, intoadditional common shares.  With the July23, 2001 acquisition of additional shares, the Company acquired control ofMezure and commenced full consolidation of Mezure’s operations.  In April 2002, the Company’s equity interestwas diluted to approximately 70% (see “Item 1.D – Risk Factors”).

 

On February 11, 2003, the Company announcedthe signing of a Memorandum of Understanding (“MOU”) with CMC Electronics Inc.to acquire CMC Electronics’ Global Positioning System (GPS) OEM productline.  The new product line will extendthe Company’s current high-performance, upgradeable L1 and L1/L2 product lineinto the mid-level L1 market.  This willincrease the Company’s total addressable market in core segments and shouldalso create entry points into new vertical markets, such as timing andmarine.  The target date for the actualtransfer of the business is in early April 2003.

 

In August 2001, the Board of Directorsauthorized the Company to repurchase up to a maximum of 230,829 Common Shares(representing 3% of the common shares issued and outstanding at the programcommencement) through a share repurchase program.  The term of the program was from September 4, 2001 to September3, 2002.  As of the end of the program,the Company had repurchased a total of 23,000 Common Shares at an average priceof US$2.57 per share.

 

Including the results of the discontinuedoperations, the Company incurred losses in each of 1993, 1994, 1995, 1998, 1999and 2000. Despite these losses on a consolidated basis, the GPS business unitincreased its sales since the introduction of its first products from $456,000in 1992 to $27.0 million in 1997 and had profits in 1993, 1995, 1996 and1997.  However, in 1998, revenues fromthe GPS business declined to $21.6 million, mainly as a result of lower WideArea Augmentation Systems (“WAAS”) program revenues, and the Company incurred aloss from continuing operations of $3.6 million.  After the sales decline in 1998, the Company’s revenues increasedin each of the next four years and reached $33.4 million in 2002.  The Company incurred a net loss fromcontinuing operations of $2.0 million in 1999 and $2.8 million in 2000.  In 2001 and 2002, the Company recorded netincome of $110,000 and $1.5 million, respectively.  There can be no assurance that the Company will be able toincrease revenues or generate profits.

 

The Company’s results of operations havefluctuated and can be expected to continue to fluctuate on a periodic basis asa result of a number of factors which affect revenue, gross margin andoperating expenses. Annual and quarterly revenues have fluctuated because of anumber of factors, including revenue generated from major contracts, operatingresults of subsidiaries and joint ventures, certification and market acceptanceof the Company’s new products, impact and timing of large orders, pricingpressures in the market, establishing and maintaining effective distributionchannels, fluctuations in non-recurring engineering (“NRE”) fees, seasonalityof customer purchase patterns and the timing of industry trade shows. Shipmentsunder a major contract could result in unusually high revenue and income levelswhen compared to revenues and income in other periods.  For example, revenue from the EuropeanGeostationary Navigation Overlay System (“EGNOS”) program accounted for 2.8% oftotal revenue in 2002 compared to 10.2% in 2001.  There can be no assurance that the Company will receive major contractsin the future, and the failure to do so could have a material adverse effect onthe Company’s business,

 

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financial condition and results of operations.  The Company sells GPS receivers to Point,which incorporates these receivers into surveying systems that are in turn soldthrough the Sokkia distribution channels and through independent dealers anddistributors.  The proportionate shareof the accounts of Point are included in the Company’s accounts.  Point is subject to all of the same types ofrisks as the Company.  There can be noassurance that Point’s results may not have a material adverse effect on theCompany’s business, financial condition and results of operations.

 

Revenues can be expected to varysignificantly as a result of a lack of a significant order backlog,fluctuations in demand for existing products, operating results of subsidiariesand joint ventures, the rate of development of new markets, the degree ofmarket acceptance of new products, increased competition and the generalstrength of domestic and international economic conditions. Furthermore, if theCompany were unable to deliver sufficient quantities of products in a timelymanner, due to factors such as parts supply shortages or customs delays, theCompany’s revenues could be adversely affected.

 

Gross margin as a percentage of revenuevaries primarily as a result of product sales mix, level of non-recurringengineering (“NRE”) revenue, changes in materials and contract manufacturingcosts, liquidation of discontinued inventory, and absorption of fixedmanufacturing costs.  The Company’soriginal equipment manufacturer (“OEM”) and WAAS products typically have highergross margins than the sale of survey products by Point, and, consequently, thesale of survey products through Point adversely affects the Company’s grossmargin percentages.

 

The Company faces competition from avariety of competitors. Prices of the Company’s products have declined sincetheir introduction due to competitive pressures. The Company expectscompetition to increase, which is expected to result in further price decreasesand lower gross margins for the Company’s products. In addition, the Company’ssuccess will depend to a substantial degree upon its ability to develop andintroduce in a timely manner new products and product enhancements to itsexisting GPS product portfolio. The Company expects to make significantinvestments in research and development to continue to enhance existingproducts, develop new products which incorporate new and existing technologies,expand and develop new distribution channels and achieve market acceptance forsuch products. There can be no assurance that the Company will be successful insuch efforts.

 

The Company’s revenues have been derivedprincipally from product sales. Revenues from product sales are generallyrecognized upon shipment. The Company generally ships its products promptlyafter acceptance of a purchase order. Accordingly, the Company does not maintainproduct backlog, nor does the Company consider backlog to be a significantindicator of future revenues.

 

**Results of Operations**

 

The various divested and discontinuedbusinesses are accounted for as discontinued operations. The following tablesets forth the percentage of total revenues represented by certain items in theCompany’s statement of operations for the periods indicated:

 

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|                              |   | **Year  Ended December 31,** |   |
|-----------------------------------|--------|------------------------------|--------|
|                              |   | **2000**                     |   | **2001** |   | **2002** |   |
| Revenues                          |   | 100.0                        | %      | 100.0 | % | 100.0 | % |
|                              |   |                         |   |   |   |   |   |
| Gross profit – product sales |   | 56.8                         |   | 53.8 |   | 55.9 |   |
| Gross profit – NRE fees      |   | 44.1                         |   | 49.1 |   | 34.4 |   |
| Total gross  profit               |   | 56.4                         |   | 53.0 |   | 51.9 |   |
|                              |   |                         |   |   |   |   |   |
| Operating expenses:               |   |                         |   |   |   |   |   |
| Research and  development         |   | 32.9                         |   | 24.2 |   | 16.5 |   |
| Selling and  marketing            |   | 18.2                         |   | 13.6 |   | 17.1 |   |
| General and  administration       |   | 14.7                         |   | 14.8 |   | 13.3 |   |
| Total  operating expenses         |   | 65.8                         |   | 52.6 |   | 46.9 |   |
| Operating income (loss)           |   | (9.4                         | )      | 0.4 |   | 5.0 |   |
| Interest income                   |   | 1.3                          |   | 0.4 |   | 0.3 |   |
| Other expense                     |   | (3.2                         | )      | (0.4 | ) | (0.6 | ) |
| Income (loss) before income taxes |   | (11.3                        | )      | 0.4 |   | 4.7 |   |
| Provision for income taxes        |   | 0.0                          |   | 0.0 |   | 0.2 |   |
| Net income (loss)                 |   | (11.3                        | )%     | 0.4 | % | 4.5 | % |

 

**2002 Compared to 2001**

 

*Revenues.*  Revenues include productsales and non-recurring engineering fees. Product sales revenues consist primarily of sales of original equipmentmanufacturer (“OEM”) boards, software, software upgrades, Wide AreaAugmentation System (“WAAS”) type receivers and end user products for the GISand survey markets.  The Company categorizesits revenues into the following three market sectors:  1) Geomatics;  2)Aerospace and Defense; and  3) SpecialApplications.

 

Total revenues increased 18% from $28.2million in 2001 to $33.4 million in 2002. The following table sets forth revenue by market sector for 2002 and2001.

 
|                     |   | **2002** |   | **2001** |   | **Change** |   |
|--------------------------|--------|----------|--------|----------|--------|------------|--------|
|                     |   | **$**    |   | **%**    |   | **$**      |   | **%** |   | **$** |   | **%** |   |
| Geomatics                |   | $        | 5,959  |     | 18     | %          | $      | 7,040 |   | 25 | % | $ | (1,081 | ) | (15 | )% |
| Aerospace  & Defense |   | 10,486   |   | 31       | %      | 8,846      |   | 31 | % | 1,640 |   | 19 | % |
| Special  Applications    |   | 16,755   |   | 50       | %      | 11,945     |   | 42 | % | 4,810 |   | 40 | % |
| Other                    |   | 234      |   | 1        | %      | 406        |   | 2 | % | (172 | ) | (42 | )% |
| TOTAL                    |   | $        | 33,434 |     | 100    | %          | $      | 28,237 |   | 100 | % | $ | 5,197 |   | 18 | % |

 

*Geomatics*

 

The Geomatics sector is made up of thesurveying and GIS markets.  In 2002,Geomatics revenues were largely comprised of the Company’s sales to Point, netof intercompany eliminations, and the Company’s proportionate share of sales byPoint.

 

In July 1999, the Company transitioned to anew GPS surveying partner, Sokkia, a leader in surveying.  The establishment of this partnershipreflected a move from a supplier relationship to a fully integrated developmentteam.  Sokkia and the Company formed ajoint venture known as Point.  Theownership of Point is 51% Sokkia and 49% the Company.  Point provides Sokkia’s global marketing organization withadvanced measurement solutions for the fields of surveying, mapping,geographical information systems (GIS), construction and construction machinecontrol.  Sokkia’s distribution systemincludes more than 25 subsidiaries and additional representatives around theworld, each having its own dealer network.

 

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Point’s operations were restructured inApril 2002, with the aim of focusing operating activities on sales, marketingand distribution, as opposed to product development.  The Company is disappointed in the operating performance ofPoint, particularly the lower than expected revenues which the Company hadanticipated would increase after the April 2002 restructuring.  The Company continues to work with Point,management and Sokkia to improve the operating results of Point.  However, there can be no assurance that theCompany will be successful in these efforts.

 

Geomatics revenues decreased 15% from $7.0million in 2001 to $6.0 million in 2002. The decrease in revenue was primarily caused by lower sales by Pointinto Sokkia’s distribution system, partially attributable to a restructuring ofSokkia’s U.S. organization in 2002, a reduction in new product introductions byPoint in 2002, and continuing difficulties in establishing effectivedistribution of Point products in certain of Sokkia’s geographic markets,particularly Asia and Europe.

 

*Aerospace and Defense*

 

The Aerospace and Defense sector is made upof aviation and defense markets. Revenues from the Aerospace and Defense sector are highly dependent onthe timing of large government funded programs.  Sales in this sector include WAAS receiver sales related to theU.S. Wide Area Augmentation System (“WAAS”), the Japanese MTSAT Satellite-basedAugmentation System (“MSAS”), the Chinese Satellite Navigation AugmentationSystem (“SNAS”) and to the European Geostationary Overlay System (“EGNOS”).

 

Aerospace and Defense sales were $10.5million in 2002 compared to $8.8 million for 2001, an increase of 19%, with themajority of the growth coming from higher revenue from the Chinese SNASprogram, which contributed $3.8 million revenue in 2002 compared to $2.0million revenue in 2001.  In addition,new NRE contracts relating to the WAAS and LAAS programs offset lower NRErevenue from the Company’s EGNOS program which was largely completed in2002.  The Company’s EGNOS relatedrevenue decreased to $938,000 in 2002 compared to $2.9 million in 2001.

 

The Company is working with Thales AvionicsLimited (formerly Racal Avionics Ltd.) (“Thales Avionics”) to supply onesection of the EGNOS Remote Integrity Monitoring System (“RIMS-C”).  The Thales/NovAtel RIMS-C channel willprovide integrity and correction data within the EGNOS ground network.  Under the contract the Company developed newGPS receiver processing for Satellite Failure Detection, qualified varioussoftware programs and delivered a number of EGNOS reviews.  The Company has largely completed itscurrent work under the existing EGNOS contract.  The EGNOS receivers have the same hardware configuration as theCompany’s WAAS receivers, with added software qualification andfunctionality.  There can be noassurance that the Company will receive commitments for future participation inthe EGNOS program.

 

Further, the FAA has begun procurementactivities for the phase Local Area Augmentation System (“LAAS”).  Principal bidders include Raytheon Company(“Raytheon”), Honeywell Inc. (“Honeywell”) and Thales ATM, Inc. (“Thales ATM”).  The LAAS program is intended to complementthe WAAS program and provide precision approach landing guidance usingGPS.  Together these will function tosupply users of the U.S. National Airspace System with seamless satellite-basednavigation for all phases of flight.

 

Both Raytheon NLS and Thales ATM have nowcontracted with the Company for the next phase of development of a LAASreceiver for their certified reference stations.  The Company plans to develop prototype LAAS receivers forincorporation in Raytheon’s and Thales’ ground reference stations.

 

In June 2002, the Company received acontract from the FAA to develop the next generation WAAS receiver.  The contract covers receiver development andqualifications work over a 21 month period and also includes an additionaloption, exercisable at the FAA’s discretion, for the development of a newbroadband WAAS antenna.  The basiscontract has a value of US$2.4 million and the option is worth US$835,000.

 

The certified GPS receiver jointlydeveloped by the Company and CMC Electronics is now being integrated intoHoneywell airborne systems and is also intended for Honeywell’s LAAS groundstation program.  While the Company hasparticipated in previous phases of WAAS, EGNOS, SNAS, LAAS and MSAS and has relationshipswith Raytheon, Thales and Honeywell, the Company currently has no commitments,other than those described

 

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above pertaining to engineering service contracts, forfuture participation in the WAAS, EGNOS, SNAS, MSAS or LAAS programs and therecan be no assurance that the Company will receive commitments for futureparticipation in these programs.

 

*Special Applications*

 

The Special Applications sector is made upof marine, agriculture, unmanned vehicles, robotics, construction/grading,scientific, dealers (other than those that can be identified with a particularmarket sector) and miscellaneous markets. Special Applications revenues were $16.8 million in 2002 compared to$11.9 million in 2001, an increase of 40% primarily attributable to highershipments to the agricultural market, including a ramp up of initial shipmentsfor AGCO Corporation, who recently purchased the former agricultural divisionfrom Caterpillar Agricultural Products, Inc. (“Caterpillar”), and engineeringservice revenue pertaining to the development of new core positioning productsfor Leica Geosystems (“Leica”).

 

In November 2001, the Company announcedthat it had signed an agreement with BEELINE Technologies, Inc. (“BEELINE”) tosupply the GPS and communications engine of its precision agricultural guidancesystems.  The contract is over a sixyear term and covers both OEM and after market sales in the US and globalagricultural guidance markets.  Inaddition, in November 2001, BEELINE signed an agreement with Caterpillar tosupply components for Caterpillar’s new satellite navigation system, which willbe factory installed on Caterpillar’s new series of tractors.

 

On February 21, 2002, the Company signed anagreement with Leica, setting out the parties’ intention to enter into astrategic cooperation arrangement, the objective of the agreement being thecommon development of new technology for GPS and its advancement in thehigh-accuracy segment.  Morespecifically, the Company will develop a custom version of existing GPS enginesand other components for Leica.

 

In 2002 and 2001, the Company derivedapproximately 50% of its total revenues from the sale of its products tocountries outside the United States and Canada.  Revenues from international sales increased from $13.6 million in2001 to $16.6 million in 2002, primarily due to higher sales into China, Japanand Australia.

 

*Gross Profit.*  Gross profit as apercentage of total revenues decreased from 53.0% in 2001 to 52% in 2002.  The decrease in gross margin as a percentageof revenue is primarily attributable to lower gross margins as a percentage ofrevenue from engineering contracts, which generally earn lower gross margins asa percent of revenue, and higher provisions for inventory obsolescence relatedto the discontinuance of various older products.

 

*Research and development.*  Research and developmentexpenses consist primarily of engineering personnel expenses, contractedresearch and development expenses, amortization of purchased technology,equipment costs and facility and computer support costs.  Research and development expenses decreased19% from $6.8 million in 2001 to $5.5 million in 2002 and decreased as apercentage of total revenues from 24.2% in 2001 to 16.5% in 2002.  The reduction in research and developmentexpense in 2002 reflected higher customer funded engineering programs and lowerexpenditures at Point, which was restructured in April 2002.  The Company expects research and developmentexpenses to be between 16% and 17% of revenue in 2003.

 

*Selling and marketing.*  Selling and marketingexpenses consist primarily of compensation of sales and marketing personnel aswell as expenses for advertising and promotion, trade shows, facilities andother expenses related to the sale of the Company’s products.  Selling and marketing expenses increased 48%from $3.9 million in 2001 to $5.7 million in 2002 and increased as a percentageof total revenues from 13.6% in 2001 to 17.1% in 2002.  The increase in selling and marketingexpenses was due to higher Point related costs resulting from the April 2002restructuring, which included a shift in focus from product development toproduct sales and distribution, higher external commissions, increasedmarketing personnel costs, a new distribution initiative in the Asian marketsand higher travel costs.

 

*General and administration.*  General and administrationexpenses consist primarily of salaries of administrative personnel, corporateoverhead and facilities expenses. General and administration expenses increased 6% from $4.2 million in2001 to $4.4 million in 2002 and decreased as a percentage of total revenuesfrom 14.8% in 2001 to

 

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13.3% in 2002, partially a reflection of higherpersonnel costs related to the Company’s employee profit sharing program andsenior management bonus program.

* *

*Interest income. *TheCompany earned net interest income of $84,000 in 2002 compared to $138,000 in2001.  The reduced interest income isattributable to lower interest rates. The Company’s cash deposits not required for operations are invested inshort-term interest bearing instruments.

 

*Other expense.*  Other expense in 2002 was$200,000 compared to $124,000 in 2001. Other expense in 2002 included costs of $84,000 related to the April2002 restructuring of Point, $131,000 related to executive relocation, $42,000related to foreign exchange losses and $47,000 related to cash discount costsat Point, partially offset by a gain of $121,000 arising from the dilution ofthe Company’s interest in Mezure.  Inthe 2001 period, other expenses included $164,000 cash discounts at Point,partially offset by gains on disposal of fixed assets.

 

*Provision for income taxes.*  The provision for incometaxes which consists primarily of Canadian federal large corporations tax(“LCT”) and the consolidated proportionate share of income taxes related toPoint, Inc., was $77,000 in 2002, compared to $13,000 in 2001.  The increase was mainly attributable to a highertax base for LCT.

 

**2001 Compared to 2000**

 

*Revenues. *Total revenues increased 14%from $24.8 million in 2000 to $28.2 million in 2001.  The following table sets forth revenue by market sector for 2001and 2000.

 
|                     |   | **2001** |   | **2000** |   | **Change** |   |
|--------------------------|--------|----------|--------|----------|--------|------------|--------|
|                     |   | **$**    |   | **%**    |   | **$**      |   | **%** |   | **$** |   | **%** |   |
| Geomatics                |   | $        | 7,040  |     | 25     | %          | $      | 8,513 |   | 34 | % | $ | (1,473 | ) | (17 | )% |
| Aerospace  & Defense |   | 8,846    |   | 31       | %      | 4,969      |   | 20 | % | 3,877 |   | 78 | % |
| Special  Applications    |   | 11,945   |   | 42       | %      | 11,128     |   | 45 | % | 817 |   | 7 | % |
| Other                    |   | 406      |   | 2        | %      | 233        |   | 1 | % | 173 |   | 74 | % |
| TOTAL                    |   | $        | 28,237 |     | 100    | %          | $      | 24,843 |   | 100 | % | $ | 3,394 |   | 14 | % |

 

*Geomatics*

 

Geomatics revenues decreased 17% from $8.5million in 2000 to $7.0 million in 2001. The decrease in revenue was primarily caused by longer than plannedproduct development lead times, which delayed the launch of new products, andslower than anticipated sell through of products at Point.

 

*Aerospace and Defense*

 

Aerospace and Defense sales were $8.8million in 2001 compared to $5.0 million for 2000, an increase of 78%, with themajority of the growth coming from higher revenue from the EGNOS program, whichcontributed $2.9 million in revenue in 2001 compared to $560,000 in 2000 and toa lesser extent from additional NRE contracts related to the WAAS and LAASprograms.  Additional shipments for theChinese SNAS program were completed in late 2001 and accounted for $2.0 millioncompared to $2.7 million in 2000.

 

*Special Applications*

 

Special Applications revenues were $11.9million in 2001 compared to $11.1 million in 2000, an increase of 7% largelydue to higher shipments of OEM4 receivers to certain customers and an NREcontract related to the new L5 GPS signal.

 

In 2001 and 2000, the Company derivedapproximately 48% of its total revenues from the sale of its products tocountries outside the United States and Canada.  Revenues from international sales increased from $12.0 million in2000 to $13.6 million in 2001.

 

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*Gross Profit.*  Gross profit as apercentage of total revenues decreased from 56.4% in 2000 to 53.0% in2001.  The decrease in gross margin as apercentage of revenue is primarily attributable to product mix with a higherproportion of 2001 revenue coming from engineering contracts, which generallyearn lower gross margins as a percent of revenue and higher provisions forinventory obsolescence.

 

*Research and development.*  Research and developmentexpenses decreased 16% from $8.2 million in 2000 to $6.8 million in 2001 anddecreased as a percentage of total revenues from 32.9% in 2000 to 24.2% in2001.  The reduction in research anddevelopment expense in 2001 reflected higher customer funded engineeringprograms and lower expenditures at Point relating to a staff restructuring inJanuary 2001, partially offset by lower deferred developments costs.

 

*Selling and marketing.*  Selling and marketingexpenses decreased 14.8% from $4.5 million in 2000 to $3.9 million in 2001 anddecreased as a percentage of total revenues from 18.2% in 2000 to 13.6% in2001.  The reduction in selling andmarketing expenses was due to lower external commissions relating to the ChinaSNAS contract, lower expenditures at Point relating to a staff restructuring inJanuary 2001 and lower costs attributable to Mezure.

 

*General and administration.*  General and administrationexpenses increased 13.9% from $3.7 million in 2000 to $4.2 million in 2001 andincreased as a percentage of total revenues from 14.7% in 2000 to 14.8% in2001.  Higher general and administrationexpenses relating to Mezure accounted for the majority of the increase.

 

*Interest income.*  The Company earned netinterest income of $138,000 in 2001 compared to $319,000 in 2000.  The Company’s cash deposits not required foroperations are invested in short-term interest bearing instruments.  The reduced interest income is attributableto lower cash balances available for investment and lower interest rates.

 

*Other income (expense).*  Other expense in 2001 was$124,000 consisting mainly of financing charges related to sales paid toSokkia, by Point.  Other expense was$769,000 in 2000, mainly comprised of $548,000 related to the reorganization ofthe Company’s senior management and $147,000 as a result of a minor workforcereduction at Point.

 

*Provision for income taxes.*  The provision for incometaxes which consists primarily of Canadian federal large corporations tax andthe proportionate share of income taxes related to Point, remained constant at$13,000 in 2000 and 2001.

 

*Discontinued operations.*  The Company had nodiscontinued operations in 2001 compared to an income from discontinuedoperations of $16,000 in 2000.

 

**Quarterly Results of Operations**

 

The following tables present certainunaudited statement of operations data for each of the Company’s last eightfiscal quarters and the percentage relationship of certain items to totalrevenues for the respective periods. This unaudited data has been prepared onthe same basis as the audited financial statements and, in the opinion ofmanagement, contains all adjustments, consisting only of normal recurringadjustments, necessary for a fair presentation of such data.

 

39

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|                                                          |   | **Quarter  Ended** |   |
|---------------------------------------------------------------|--------|--------------------|--------|
|                                                          |   | **2001**           |   | **2002** |   |
|                                                          |   | **March  31**      |   | **June  30** |   | **Sept.  29** |   | **Dec.  31** |   | **March  30** |   | **June  29** |   | **Sept.  28** |   | **Dec.  31** |   |
|                                                          |   | **(in thousands)** |   |
|                                                          |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenues                                                      |   | $                  | 7,000  |   | $ | 6,520 |   | $ | 6,905 |   | $ | 7,812 |   | $ | 7,294 |   | $ | 8,004 |   | $ | 6,812 |   | $ | 11,324 |   |
| Cost  of sales                                                |   | 3,717              |   | 3,019 |   | 3,533 |   | 3,003 |   | 3,602 |   | 4,034 |   | 3,787 |   | 4,652 |   |
| Gross  profit                                                 |   | 3,283              |   | 3,501 |   | 3,372 |   | 4,809 |   | 3,692 |   | 3,970 |   | 3,025 |   | 6,672 |   |
| Operating  expenses:                                          |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Research  and development                                     |   | 1,881              |   | 1,866 |   | 1,477 |   | 1,603 |   | 1,565 |   | 1,366 |   | 1,078 |   | 1,510 |   |
| Selling  and marketing                                        |   | 929                |   | 835 |   | 856 |   | 1,239 |   | 803 |   | 1,246 |   | 1,246 |   | 2,422 |   |
| General  and administration                                   |   | 892                |   | 1,070 |   | 1,040 |   | 1,168 |   | 1,029 |   | 1,093 |   | 1,032 |   | 1,279 |   |
| Total  operating expenses                                     |   | 3,702              |   | 3,771 |   | 3,373 |   | 4,010 |   | 3,397 |   | 3,705 |   | 3,356 |   | 5,211 |   |
| Operating  income (loss)                                      |   | (419               | )      | (270 | ) | (1 | ) | 799 |   | 295 |   | 265 |   | (331 | ) | 1,461 |   |
| Interest  income, net                                         |   | 51                 |   | 47 |   | 24 |   | 16 |   | 10 |   | 18 |   | 25 |   | 31 |   |
| Other  income (expense)                                       |   | 84                 |   | (227 | ) | 68 |   | (49 | ) | (223 | ) | 21 |   | 43 |   | (41 | ) |
| Income  (loss) from continuing operations before income taxes |   | (284               | )      | (450 | ) | 91 |   | 766 |   | 82 |   | 304 |   | (263 | ) | 1,451 |   |
| Provision  for (recovery of) income taxes                     |   | 12                 |   | (11 | ) | 12 |   | — |   | 9 |   | 9 |   | 45 |   | 14 |   |
| Net  income (loss) from continuing operations                 |   | $                  | (296   | ) | $ | (439 | ) | $ | 79 |   | $ | 766 |   | $ | 73 |   | $ | 295 |   | $ | (308 | ) | $ | 1,437 |   |

 
|                                                          |   | **Quarter  Ended** |   |
|---------------------------------------------------------------|--------|--------------------|--------|
|                                                          |   | **2001**           |   | **2002** |   |
|                                                          |   | **March 31**       |   | **June  30** |   | **Sept.  29** |   | **Dec.  31** |   | **March  30** |   | **June  29** |   | **Sept.  28** |   | **Dec.  31** |   |
| Revenues                                                      |   | 100.0              | %      | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
| Gross  profit                                                 |   | 46.9               |   | 53.7 |   | 48.8 |   | 61.5 |   | 50.6 |   | 49.6 |   | 44.4 |   | 58.9 |   |
| Operating  expenses:                                          |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Research  and development                                     |   | 26.9               |   | 28.6 |   | 21.4 |   | 20.5 |   | 21.5 |   | 17.1 |   | 15.8 |   | 13.3 |   |
| Selling  and marketing                                        |   | 13.3               |   | 12.8 |   | 12.4 |   | 15.8 |   | 11.0 |   | 15.6 |   | 18.3 |   | 21.4 |   |
| General  and administration                                   |   | 12.7               |   | 16.4 |   | 15.0 |   | 15.0 |   | 14.1 |   | 13.6 |   | 15.2 |   | 11.3 |   |
| Total  operating expenses                                     |   | 52.9               |   | 57.8 |   | 48.8 |   | 51.3 |   | 46.6 |   | 46.3 |   | 49.3 |   | 46.0 |   |
| Operating  income (loss)                                      |   | (6.0               | )      | (4.1 | ) | — |   | 10.2 |   | 4.0 |   | 3.3 |   | (4.9 | ) | 12.9 |   |
| Interest  income, net                                         |   | 0.7                |   | 0.7 |   | 0.3 |   | 0.2 |   | 0.1 |   | 0.2 |   | 0.4 |   | 0.3 |   |
| Other  income (expense)                                       |   | 1.2                |   | (3.5 | ) | 1.0 |   | (0.6 | ) | (3.0 | ) | 0.3 |   | 0.6 |   | (0.4 | ) |
| Income  (loss) from continuing operations before income taxes |   | (4.1               | )      | (6.9 | ) | 1.3 |   | 9.8 |   | 1.1 |   | 3.8 |   | (3.9 | ) | 12.8 |   |
| Provision  for (recovery of income taxes)                     |   | 0.1                |   | (0.2 | ) | 0.2 |   | — |   | 0.1 |   | 0.1 |   | 0.6 |   | 0.1 |   |
| Net  income (loss) from continuing operations                 |   | (4.2               | )%     | (6.7 | )% | 1.1 | % | 9.8 | % | 1.0 | % | 3.7 | % | (4.5 | )% | 12.7 | % |

 

40

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The following table sets forth Geomatics,Aerospace and Defense, Special Applications and manufacturing componentrevenues for the last eight quarters.

 
|                   |   | **Quarter  Ended** |   |
|------------------------|--------|--------------------|--------|
|                   |   | **2001**           |   | **2002** |   |
|                   |   | **March  31**      |   | **June  30** |   | **Sept.  29** |   | **Dec.  31** |   | **March  30** |   | **June  29** |   | **Sept.  28** |   | **Dec.  31** |   |
|                   |   | **(in thousands)** |   |
|                   |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Geomatics              |   | $                  | 2,410  |   | $ | 1,986 |   | $ | 1,362 |   | $ | 1,282 |   | $ | 1,353 |   | $ | 1,848 |   | $ | 1,395 |   | $ | 1,363 |   |
| Aerospace  and Defense |   | 1,365              |   | 992 |   | 2,528 |   | 3,961 |   | 1,543 |   | 2,215 |   | 1,466 |   | 5,262 |   |
| Special  Applications  |   | 3,204              |   | 3,353 |   | 2,859 |   | 2,529 |   | 4,396 |   | 3,940 |   | 3,951 |   | 4,468 |   |
| Other                  |   | 21                 |   | 189 |   | 156 |   | 40 |   | 2 |   | 1 |   | — |   | 231 |   |
| Total  revenues        |   | $                  | 7,000  |   | $ | 6,520 |   | $ | 6,905 |   | $ | 7,812 |   | $ | 7,294 |   | $ | 8,004 |   | $ | 6,812 |   | $ | 11,324 |   |

 

The Company’s quarterly results ofoperations have fluctuated and are expected to continue to fluctuate because ofa number of factors, including revenue generated from major contracts,operating results of joint ventures and subsidiaries, new product introductions,fluctuations in NRE fees, seasonality of customer purchase patterns and thetiming of industry trade shows.

 

In addition, revenues can be expected tovary significantly as a result of a lack of a significant order backlog,fluctuations in demand for existing products, the rate of development of newmarkets, the degree of market acceptance of new products, increased competitionand the general strength of domestic and international economic conditions.Furthermore, if the Company were unable to deliver sufficient quantities ofproducts in a timely manner, due to factors such as parts supply shortages orcustoms delays, the Company’s revenues could be adversely affected.

 

In 2002, quarterly operating expensesfluctuated due to the impact of changes in staffing levels, recovery ofresearch and development expenses from NRE fees, commissions related to theChinese SNAS program and provisions at year end related to the Company’semployee profit sharing program and senior management bonus  program. The Company expects operating expenses to decrease in 2003 byapproximately 2% - 3%, primarily as a result of higher customer fundedengineering contracts, reduced external sales commissions, lower depreciationexpenses, reduced costs associated with Mezure, partially offset by highersalaries and increased staffing levels. The Company expects operating expense as a percentage of revenue todecline to approximately 41% to 42% in 2003 from 47% in 2002, mostly as aresult of increased revenue.  Ashortfall from anticipated revenues could adversely affect results ofoperations and income (loss) per share. In addition, if the Company were toreceive a major contract, it would likely increase its expenditures to supportsuch contract. If revenues from the contract were delayed for any reason,including cancellation or deferral of the contract, the Company’s results ofoperations could be adversely affected as it attempted to adjust itsexpenditures downward.

 

**Taxes**

 

The Company has not recorded a provisionfor income taxes in Canada, other than for large corporations tax, due topreviously incurred losses, credits and costs. As of December 31, 2002, losses,investment tax credits, depreciation and research and development costs areavailable to reduce future taxable income and taxes payable in Canada. TheCompany has determined that the acquisition of a majority of the Common Sharesof the Company by CMC Electronics in 1998, BAE SYSTEMS p.l.c.’s acquisition ofthe majority of the common shares of CMC Electronics in November 1999 and ONCAPL.P.’s acquisition of the majority of the commons shares of CMC Electronics inApril 2001 constitute acquisition of control of the Company for Canadian incometax purposes.  Accordingly, theavailability of certain of the Company’s Canadian income tax losses, researchand development costs, depreciation deductible for tax purposes and investmenttax credits may be subject to limitation. The ultimate availability and amountof these losses, credits and costs may be dependent upon future Canada Customsand Revenue Agency audits. See Note 14 of Notes to Consolidated FinancialStatements.

 

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# **Critical AccountingPolicies**

 

                The Company applies a number of criticalaccounting policies and estimates in preparing the Company’s consolidatedfinancial statements.  A discussion ofthe Company’s critical accounting policies and estimates follows.

### *** ***

### ***RevenueRecognition***

 

Revenues from product sales are recognized at the timeof shipment to the customer. Revenues from non-recurring engineering fees arerecognized at the time services are rendered. On long-term contracts, revenue is generally recognized using thepercentage of completion method relative to total costs incurred or customermilestones achieved.  Revisions in costand profit estimates during the course of work are reflected in the period inwhich the need for revision becomes known. Losses, if any, are recognized fully when first anticipated.  Some contracts contain penalty provisionsbased on performance relative to established targets.  Such penalties are included in revenue or cost estimates whenamounts can be reasonably determined. On certain long-term contracts, in which the customer pays establishedrates for time and materials, revenue is recognized as services are renderedand costs are incurred.

 

In 2002,approximately $6.2 million of the Company’s revenue was derived from NREservice fees.  Approximately 60% ofthese revenues were recognized from contracts on which the Company used thepercentage of completion method.

 

At the timethe Company recognizes revenue, the Company reduces the measurement of revenueby an estimate of the expected returns of product and priceadjustments.  The provision forproduct returns and price adjustments is assessed for adequacy at each quarterend and is based on recent historical experience and known customerclaims.  The provision for productreturns and price adjustments was $289,000 as of December 31, 2002 compared to$136,000 at December 31, 2001, with the increase attributable to higher revenueand a known customer claim as of December 31, 2002.

 

The Company generally ships its products FCA(“Free Carrier”) shipping point, and accordingly, recognizes revenue at thetime of shipment, provided that collection of payment is reasonably assured andno significant obligations on the Company’s part remain.

 

### ***Inventories***

 

Rawmaterials and components, work-in-progress, and finished goods inventories arerecorded at the lower of cost and net realizable value. Cost is determined on afirst-in, first-out basis and includes materials, labor and manufacturingoverhead.

 

TheCompany establishes provisions for obsolete and excess inventory.  The Company’s products have product lifecycles that range on average from two to four years.  At both the product introduction and product discontinuationstage, there is a higher degree of risk of inventory obsolescence.  The provision for obsolete and excessinventory is evaluated for adequacy at each quarter end.  As of December 31, 2002, the Company’sprovision for obsolete and excess inventory was $1.5 million or 23% of thegross value of the inventory compared to $964,000 or 13% of the gross value ofthe inventory at December 31, 2001, with the increase attributable to thediscontinuation of certain product lines in 2002.

 

Theestimate of the provision for obsolete and excess inventory is partially basedon expected future product sales, which are difficult to forecast for certainproducts.  As of December 31, 2002, theCompany had approximately $0.5 million (net value) of WAAS receiver inventoryfor which no firm customer commitments were on hand.  Based on the Company’s assessment of future market opportunities,the Company expects that the value of this inventory will be realized throughfuture sales, but if this is not achieved, all or a portion of this inventorymay be written off.

 

 

42

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## ***        Allowance for Doubtful Accounts***

 

                The Company establishes provisions for doubtful accounts  receivable. These provisions are established at the time revenue is recognized andare re-evaluated at each quarter end for adequacy.  In determining the adequacy of the provision, the Companyconsiders known uncollectable or at risk receivables as well as the agingprofile of other receivables.  In 2002,the provision for doubtful accounts included in the statement of operations was$434,000 or 1.3% of revenue compared to $273,000 or 1.0% of revenue in 2001.

 

                As of December 31, 2002, the provision for doubtful accounts was$788,000 or 7.4% of the gross value of the receivables compared to $540,000 or8.0% at December 31, 2001.  The higherdollar amount of the provision reflects higher revenues in general and highersales by Point to customers outside of Sokkia’s distribution in 2002.

 

#### ***      Provision for Future Warranty Costs***

 

                Warranty costs are accrued, to the extent that they are not recoverablefrom third party manufacturers, for the estimated cost to repair products forthe balance of the warranty periods.

 

                The Company’sproducts are covered by standard warranty plans that extend normally 12 monthsto 18 months from the date of product shipment.  A few customers have negotiated extended warranty terms thatrange up to three years.

 

                The Company provides for the costs ofexpected future warranty claims at the time of product shipment.  The adequacy of the provision is assessed ateach quarter end and is based on historical experience of warranty claims andcosts.  As of December 31, 2002, theCompany’s provision for future warranty claims was $344,000 compared to$285,000 as of December 31, 2001, with the increase attributable primarily toincreased revenue from product shipments.

 

#### ***      Research and Development Costs andDeferred Development Costs***

### *** ***

Researchcosts are charged to operations as incurred. Development costs, includingsoftware development costs, are charged to operations as incurred unless theymeet specific criteria related to technical, market and financial feasibility.  In these circumstances, the costs aredeferred and amortized on a systematic basis, subject to an estimate ofrecoverability.

 

In the yearended December 31, 2002, the Company deferred $125,000 of development costsrelated to the development of a certified aviation GPS receiver, compared to$4,000 in 2001 and $757,000 in 2000. With the GPS receiver reaching the commercialization stage, the Companyhas commenced amortizing these deferred costs, using a method similar to theunit-of-production method of amortization. The Company amortized $57,000 of these deferred costs in the year endedDecember 31, 2002 compared to $36,000 in 2001.

 

At December 31, 2002, theCompany had deferred $2.6 million of development costs.  The continued deferral of these costs issubject to recoverability based on estimates of future sales of the certifiedaviation GPS receiver.  Should futureactual sales of this receiver be materially lower from the current estimatedsales, all or a portion of the deferred development cost would be charged toresults of operations.

 

                The Company assesses therecoverability of the deferred development costs at each quarter end.  The continued deferral of the developmentcosts and the underlying estimate of future sales of the certified aviation receiverhave been reviewed with the Company’s Audit Committee.

 

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**B.****                                                            Liquidity and Capital Resources**

 

In 2002, cash provided by operations was$3.2 million, compared to cash used in operations of $423,000 in 2001.  Cash provided by operations in 2002consisted primarily of $1.5 million of net income, $2.1 million in amortizationexpenses, partially offset by a $189,000 increase in working capital.  The increase in working capital is causedmainly by an increase in accounts receivable, offset by lower inventories andhigher accounts payable.

 

In 2002, cash provided by financingactivities was $435,000, related primarily to financing activities at Mezureand Point, partially offset by capital lease payments.  In the comparable period in 2001, $70,000cash was provided by financing activities, related primarily to capital leasesand financing activities at Point, Inc. and Mezure, Inc.

 

In 2002, cash used in investing activitieswas $1.8 million, pertaining mainly to the purchase of capital equipment and a$588,000 equity investment (net after inter-company eliminations) in Point,Inc.  In 2001, cash used in investingactivities was $908,000, primarily attributable to the purchase of capitalequipment.

 

At December 31, 2002, the Company had cashand short-term investments of $6.6 million. The Company has credit agreements with the HSBC Bank Canada and theToronto Dominion Bank under which the Company can borrow up to $1.7 million forday-to-day operating requirements and $1.8 million to support the marginrequirement related to the purchase of between US $5.5 and US $7.5 million offoreign exchange contracts (depending on the maturity date of thecontracts).  The lines of credit arepayable on demand and are secured by certain of the Company’s assets.  At December 31, 2002, portions of the linesof credit were utilized to support $79,000 of letters of credit ($80,000 atDecember 31, 2001) and US$3.0 million in foreign exchange contracts leaving$1.6 million available for day-to-day operating requirements and the margincapacity necessary to enter into an additional US $2.5 to US $4.5 million inforward foreign exchange contracts (depending on the maturity date of thecontracts).

 

The following table sets forth theCompany’s contractual obligations and commitments to make future payments undercontracts, excluding trade and related party trade payables:

 
|                                                             |   | **Payments  due by period (in thousands)** |   |
|------------------------------------------------------------------|--------|--------------------------------------------|--------|
| **Contractual  Obligations**                                     |   | **Total**                                  |   | **Less  than 1  year** |   | **1-3  years** |   | **3-5  years** |   | **More  than 5  years** |   |
| Capital  lease obligations                                       |   | $                                          | 203    |   | $ | 102 |   | $ | 101 |   | $ | — |   | $ | — |   |
| Operating  leases                                                |   | 5,847                                      |   | 909 |   | 2,941 |   | 1,795 |   | 202 |   |
| Purchase  obligations for inventory, capital assets and services |   | 4,754                                      |   | 4,460 |   | 294 |   | 3⁄4 |   | 3⁄4 |   |
| Notes  payable                                                   |   | 2,418                                      |   | 2,418 |   | 3⁄4 |   | 3⁄4 |   | 3⁄4 |   |
| Total                                                            |   | $                                          | 13,222 |   | $ | 7,889 |   | $ | 3,336 |   | $ | 1,795 |   | $ | 202 |   |

 

As of December 31, 2002, the Company andSokkia have collectively loaned Point, Inc. US$4.83 million, the Company’sshare being US$2.37 million.  The loansare secured by the assets of Point, Inc. and bore interest at rates between 3%and 6% during 2002 (6% in 2001 and U.S. prime rate in 2000).  On January 23, 2003, the Company and Sokkiaagreed to extend the due dates on the loans such that US$4.33 million is due onJune 30, 2003 and US$500,000 is due December 31, 2003.  During 2002, the Company and Sokkia advancedUS$830,000 in new loans to Point, Inc., with the Company’s share beingUS$407,000.  In addition, the Companyand Sokkia provided US$1.5 million in equity financing to Point, Inc.  The Company’s share of the equity financingwas US$735,000 and the Company’s equity interest in Point, Inc. remained at49%.

 

Point, Inc. is dependent on the Company andSokkia for product supply, distribution and financing.  Should Sokkia and the Company discontinuetheir support, Point, Inc.’s ability to continue as a going concern would beimpaired.  If Point were not able tocontinue operations and was liquidated in an orderly wind down, the Companybelieves that its maximum loss exposure in the statement of operations toPoint, Inc., as of December 31, 2002, would be approximately $900,000,comprised primarily of working capital related items, after consideration ofthe effects of the proportionate consolidation of Point, Inc.  The financial statements contained herein donot reflect any adjustments that would be required if Point, Inc.’s operationswere discontinued.

 

The Company believes that its existingcash, cash equivalents, short term investments, available lines of credit andanticipated cash generated from operations will be sufficient to satisfy itscurrently anticipated cash needs for at least the next twelve months.

 

While the Company believes that inflationhas not had a material effect on its results of operations, there can be noassurance that inflation will not have a material effect on the Company’sresults of operations in the future.

 

**C.****                                                            Research and Development, Patents and Licences, etc.**

 

See “Item 4 – Information on the Company,Business Overview - Research and Development.”

 

**Patents, Trademarks and Licenses**

 

See “Item 4 – Information on the Company,Business Overview - Patents, Trademarks and Licenses.”

 

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**D.****                                                            Trend Information**

 

See “Item 5 – A. Operating Results” above.

 

**Item 6****                                      Directors, Senior Management and Employees**

 

**A.****                                                            Directors and Senior Management**

 

The following table sets forth certaininformation, as of March 17, 2003, regarding the executive officers, directorsand certain key employees of the Company:

 
| **Name**                             |   | **Age** |       | **Position**                                         |       | **Director    Since** |   | **Executive  Officer   Since** |       |
|--------------------------------------|--------|---------|------------|------------------------------------------------------|------------|-----------------------|--------|--------------------------------|------------|
| **Directors and Executive Officers** |   |    |       |                                                 |       |                  |   |                           |       |
| W.  James Close                      |   | 56      |       | Chairman of the Board                                |       | 1998                  |   | —                         |       |
| Jonathan  W. Ladd                    |   | 47      |       | President and Chief Executive Officer                |       | 2002                  |   | 2002                           |       |
| Werner  Gartner                      |   | 46      |       | Executive Vice President and Chief Financial Officer |       | 2001                  |   | 1995                           |       |
| Richard  D. Orman                    |   | 54      |       | Vice Chairman of the Board                           |       | 1994                  |   | —                         |       |
| Gregory  O. Baylin                   |   | 33      |       | Director                                             |       | 2001                  |   | —                         |       |
| Gregory  A. Yeldon                   |   | 43      |       | Director                                             |       | 1998                  |   | —                         |       |
| Joel  A. Schleicher                  |   | 51      |       | Director                                             |       | 1997                  |   | —                         |       |
| David  E. Vaughn                     |   | 57      |       | Director                                             |       | 2001                  |   | —                         |       |
| Charles  R. Trimble                  |   | 61      |       | Director                                             |       | 2002                  |   | —                         |       |
|                                 |   |    |       |                                                 |       |                  |   |                           |       |
| **Key Employees**                    |   |    | ** ** |                                                 | ** ** |                  |   |                           | ** ** |
| Patrick  C. Fenton                   |   | 45      |       | Vice President and Chief Technology Officer          |       | —                |   | —                         |       |
| Graham  C. Purves                    |   | 40      |       | Vice President, Sales                                |       | —                |   | —                         |       |
| Anthony  J. Murfin                   |   | 55      |       | Vice President, Business Development                 |       | —                |   | —                         |       |
| Farlin  A. Halsey, Jr.               |   | 37      |       | Vice President, Marketing                            |       | —                |   | —                         |       |

 

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**W. James Close** has served as Chairmanof the Board of Directors of the Company since January 1999 and a Director ofthe Company since September 1998.  Mr.Close has been President and Chief Executive Officer of CMC Electronics Inc.since July 1, 1998.  Mr. Close wasPresident of AlliedSignal Aerospace Canada Inc. prior to joining CMCElectronics Inc.  Mr. Close is also aDirector with CMC Electronics Inc.

 

**Jonathan W. Ladd** has served asPresident and Chief Executive Officer of the Company since February, 2002.  From July 2001 to November 2001, Mr. Laddwas Senior Vice President, Engineering at Thales Navigation and President ofThales’ Russian subsidiary, Ashtech A/O. From 1990 to 2001, Mr. Ladd held several other management positions atMagellan Corporation, including Senior Vice President, Advanced TechnologyGroup and Vice President and General Manager of Ashtech Precision ProductsBusiness Unit.

 

**Werner Gartner** has served as ExecutiveVice President and Chief Financial Officer of the Company since October 1996and a Director of the Company from July 2001. Mr. Gartner was also a Director of the Company from November 1995 untilApril 1998. From November 6, 2000 to February 26, 2001 Mr. Gartner, in additionto his regular duties, served as Acting Interim President and Chief ExecutiveOfficer.  From August 1990 to October1996, Mr. Gartner served in a variety of financial positions at the Companyincluding Vice President, Finance and Corporate Controller.

 

**Patrick C. Fenton** was appointed ChiefTechnology Officer in January 2002.  Mr.Fenton previously served as Vice President, Technology from October 1998 and asVice President, Research and Development since March 1997.  Mr. Fenton previously served as Director,Research and Development for the Company’s GPS business unit since February1995 and was Chief Engineer for

 

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the GPS business unit from November 1993 to February1995. Mr. Fenton joined the Company in July 1989 when the Company purchased theassets of Norstar Instruments, a division of Nortech Surveys (a spin offcompany from Shell Canada Resources) and served the Company in variouscapacities.

 

**Richard D. Orman** has served as ViceChairman of the Board of Directors since March 1997 and as a Director of theCompany since January 1994. Mr. Orman currently serves as Chairman and ChiefExecutive Officer of Hemisphere International Inc. in Calgary, Canada, which hefounded in July 2000. From August 1995 to October 1998, Mr. Orman served asChairman and Chief Executive Officer of Kappa Energy Company Inc. (now VanguardOil Corporation) in Calgary, Canada and continues to serve as a Director.  From May 1986 to December 1992, Mr. Ormanserved as a member of the Alberta legislature and as Minister of Employmentfrom May 1986 to September 1988, Minister of Labor from September 1988 to April1989 and Minister of Energy from April 1989 to December 1992.

 

**Gregory O. Baylin** has served as aDirector of the Company since August 2001. Mr. Baylin has been a principal with ONCAP Management Partners sinceJanuary 2000.  From September 1994 toDecember 1999, Mr. Baylin served in various capacities, including as anAssociate Director, with Scotia Capital Markets.  Mr. Baylin is also a Director with CMC Electronics Inc.

 

**Gregory A. Yeldon** has served as aDirector of the Company since April 1998. Mr. Yeldon has been Vice President and Chief Financial Officer for CMCElectronics Inc. since July 1995.  FromOctober 1994 to July 1995 Mr. Yeldon was Corporate Controller for CMCElectronics Inc. and from February 1988 to October 1994 he was Director ofFinance and Administration of Micronav International Inc.

 

**Joel A. Schleicher** has served as aDirector of the Company since March 1997. Mr. Schleicher is currently involved with private equity firms servingas a consultant and advisor in the review of telecom, internet and ITinvestments.  Mr. Schleicher was Chairmanand Chief Executive Officer of Interpath Communications Inc. (prior to theiracquisition of USinternetworking, Inc.) from June 2000 to June 2002.  Mr. Schleicher also serves as a Director ofTechTronic Industries Co. Ltd. and Terremark Worldwide, Inc.  Mr. Schleicher was President and ChiefExecutive Officer of Expanets, Inc. from June 1998 to December 1999.  Mr. Schleicher was a business consultant,advisor and investor with and to leverage buyout firms from July 1997 to June1998. From June 1996 to June 1997, Mr. Schleicher served as President and ChiefExecutive Officer of ProCommunications, Inc. From July 1995 to June 1996, Mr. Schleicher was a private investor. From1989 to July 1995, Mr. Schleicher served as Chief Operating Officer for and a directorof Nextel Communications, Inc.

 

**David E. Vaughn** has served as aDirector of the Company since July 2001. Mr. Vaughn also served as Presidentand Chief Executive Officer to the Company from February 2001 to February2002.  From January 1999 to December2000, Mr. Vaughn was Senior Vice President and Chief Operations Officer withMagellan Corporation.  Also withMagellan, Mr. Vaughn served as Senior Vice President, Strategic BusinessAlliances from August 1998 to January 1999. From May 1991 to July 1998, Mr. Vaughn was with Trimble NavigationLimited in a variety of positions including Executive Vice President, Trackingand Communications Products Division and, most recently, as Executive VicePresident, Corporate Business Development.

 

**Charles R. Trimble** has served as aDirector of the Company since January 2002. Mr. Trimble is currently serving as Chairman of the United States GPSIndustry Council (USGIC).  Mr. Trimblealso serves as a Director of KVH Industries, Inc.  Mr. Trimble was one of the founders of Trimble Navigation Limitedin 1978 and served as President, Chief Executive Officer and a director ofTrimble Navigation Limited from 1981 to 1998.

 

**Graham C. Purves** was appointed VicePresident, Sales in January 2002.  Mr.Purves previously served as Vice President, Sales and Marketing from October1998.  Mr. Purves assumed additionalresponsibility for product development in July 1999. Mr. Purves was previouslyDirector, Custom Products Group from January 1, 1998 until October 26,1998.  Mr. Purves was Director, BusinessOperations for the Company’s GPS business unit since August 1994 until February1998. From August 1988 to August 1994 Mr. Purves has served in variouscapacities at the Company including Manager, VLSI Design Group.

 

**Anthony J. Murfin** was appointed VicePresident, Business Development in January 2002.  Mr. Murfin has also served as Director, Aviation Group fromJanuary 1, 1998.  Mr. Murfin waspreviously Director, Corporate 

 

46

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Accounts for the Company from May 1996 to December1997 and was Director of Sales from April 1994 to May 1996. From January 1980to April 1994, Mr. Murfin served in various capacities including BusinessDevelopment Manager in the Avionics Division of CMC Electronics Inc. FromSeptember 1977 until January 1980 Mr. Murfin was employed at CAE Electronics.

 

**Farlin A. Halsey, Jr.** was appointedVice President, Marketing in July 2002. From August 2001 to January 2002, Mr. Halsey was Vice President ofMarketing for JP Mobile, a mobile server company.  From July 1999 to August 2001, Mr. Halsey was Director ofMarketing-Personal Navigation with Navigation Technologies Corporation. FromApril 1993 to July 1999, Mr. Halsey served in various sales and marketingpositions for Topcon America Corporation.

 

**B.****                                                            Compensation**

 

Directors who are not employees of theCompany receive $10,000 per year for services provided in their capacity asdirectors plus $1,000 for each Board of Directors meeting such directorattends, except for the Chairman of the Board of Directors who receives $20,000per year and $2,000 for each meeting he attends and the Vice Chairman whoreceives $15,000 per year and $1,500 for each meeting he attends.  Directors are also paid $1,000 per meetingof the Compensation and Audit and Finance Committee.  Notwithstanding the foregoing, James Close, Gregory Yeldon andGreg Baylin, being representatives of CMC Electronics, have waived any fees towhich they are otherwise entitled.  Inaddition, all directors are reimbursed for expenses incurred by them in theircapacity as directors.  Other than withrespect to reimbursement of expenses, directors who are employees of theCompany do not receive additional compensation for service as a director.  The aggregate amount of cash compensationpaid or accrued by the Company to all officers and directors as a group duringfiscal 2002 was $983,838.

 

The following Summary Compensation Tablesets forth the compensation earned during each of the three years endedDecember 31, 2002 by the Company’s President, the Company’s other currentexecutive officers whose salary and bonus for services in all capacities to theCompany exceeded US$100,000 during such year (collectively, the “NamedExecutive Officers”), and all directors and executive officers as a group:

 

**Summary Compensation Table**

 
|                                                                                                                     |   |             |   |       |                      | **Annual  Compensation** |    |                             |   |
|--------------------------------------------------------------------------------------------------------------------------|--------|------------------|--------|------------|---------------------------|--------------------------|---------|----------------------------------|--------|
| **Name and Principal Position**                                                                                          |   | **Year**         |   | **Salary** |                      | **Bonus**                |    | **Other  Annual   Compensation** |   |
|                                                                                                                     |   |             |   |       |                      |                     |    |                             |   |
| Jonathan  W. Ladd   Chief Executive Officer and President                                                                |   | 2002             |   | $          | 239,038                   | (1)                      | $       | 119,418                          |   | $ | 130,830 | (2) |
|                                                                                                                     |   |             |   |       |                      |                     |    |                             |   |
| Werner Gartner                                                                                                           |   | 2002             |   | $          | 169,837                   |                     | $       | 69,300                           |   | $ | 8,359 | (4) |
| Executive  Vice President and                                                                                            |   | 2001             |   | $          | 162,458                   |                     | $       | 33,000                           |   | $ | 27,024 | (3)(4) |
| Chief  Financial Officer                                                                                                 |   | 2000             |   | $          | 150,000                   | (4)                      | $       | —                           |   | $ | 24,904 | (3)(4) |
|                                                                                                                     |   |             |   |       |                      |                     |    |                             |   |
| David E. Vaughn                                                                                                          |   | 2002             |   | $          | 80,087                    | (5)                      | $       | —                           |   | $ | 105,269 | (5) |
| Former Chief  Executive Officer and President                                                                            |   | 2001             |   | $          | 341,000                   | (5)                      | $       | —                           |   | $ | — |   |
|                                                                                                                     |   |             |   |       |                      |                     |    |                             |   |
| All directors and executive officers as a group   (ten persons in 2002, eight persons in 2001 and   nine persons in 2000 |   | 2002  2001  2000 |   | $  $  $    | 550,662  558,458  537,207 |                     | $  $  $ | 188,718  33,000   —         |   | $  $  $ | 244,458  27,024  405,541 |   |

 

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(1)                                  Mr. Ladd was appointed Chief Executive Officer and President inFebruary 2002.

(2)                                  Represents Mr. Ladd’s total relocation costs paid by the Company.

 

47

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(3)                                  Includes compensation for Mr. Gartner for assuming, in addition tohis regular duties, the duties of Acting Interim President and Chief ExecutiveOfficer, after Mr. Douglas R. Reid’s (former Chief Executive Officer andPresident) resignation in November 2000, of $17,500 in 2000 and $17,500 in2001.

(4)                                  Includes matching contributions made by the Company on behalf ofeach Named Executive Officer into their respective Registered Retirement SavingsPlans (“RRSP”).  Re-classified for 2000.

(5)                                  Mr. Vaughn resigned as Chief Executive Officer and President inFebruary 2002.  Mr. Vaughn’scompensation includes $80,087 in consulting fees as Chief Executive Officer andPresident for January and February 2002 and $105,269 for acting as a consultantto the Company for the remainder of 2002. Mr. Vaughn’s fees do not include director’s fees of $4,500 paid forBoard of Director services in 2002.

 

**Stock Option Plans**

 

The Company has registered up to 1,115,000Common Shares and 146,000 Common Shares, for issuance under the Company’sEmployee Stock Option Plan and Directors Stock Option Plan, respectively.  Both Plans provide an opportunity foreligible participants of the Company to acquire Common Shares of theCompany.  Under the Plans, eligibleemployees of the Company and non-employees who have some relationship with theCompany may receive grants of options to purchase Common Shares.  The prices for the Common Shares are asspecified in the various option agreements governing the issuance of suchCommon Shares.  Such prices aredetermined in relation to the market price of the Common Shares on therespective dates upon which such options are granted.

 

The following table sets forth certaininformation regarding outstanding options to purchase securities held by theCompany’s executive officers and directors as of March 17, 2003.

 
| **Title  – Stock Options**                                 |   | **Total    Amount** |   | **Purchase    Price(1)** |   | **Expiration    Date** |   |
|-----------------------------------------------------------------|--------|---------------------|--------|--------------------------|--------|------------------------|--------|
|                                                            |   |                |   |                     |   |                   |   |
| Jonathan  W. Ladd                                               |   | 30,000              |   | US$2.50                  |   | 2/18/2012              |   |
|                                                            |   | 30,000              |   | US$2.25                  |   | 2/12/2013              |   |
|                                                            |   | 20,000              |   | US$2.25                  |   | 2/12/2013              |   |
|                                                            |   |                |   |                     |   |                   |   |
| David  E. Vaughn(3)                                             |   | 30,000              |   | US$2.00                  |   | 8/15/2004              |   |
|                                                            |   |                |   |                     |   |                   |   |
| Werner  Gartner                                                 |   | 60,000              |   | US$7.50                  |   | 2/6/2007               |   |
|                                                            |   | 20,000              |   | US$7.50                  |   | 6/30/2007              |   |
|                                                            |   | 12,000              |   | US$1.38                  |   | 3/28/2009              |   |
|                                                            |   | 7,000               |   | US$3.06                  |   | 1/16/2010              |   |
|                                                            |   | 12,000              |   | US$1.69                  |   | 1/11/2011              |   |
|                                                            |   | 15,000              |   | US$2.25                  |   | 1/14/2012              |   |
|                                                            |   | 15,000              |   | US$2.25                  |   | 2/12/2013              |   |
|                                                            |   |                |   |                     |   |                   |   |
| W.  James Close(2)                                              |   | —              |   | —                   |   | —                 |   |
| Gregory  A. Yeldon(2)                                           |   | —              |   | —                   |   | —                 |   |
| Gregory  O. Baylin(2)                                           |   | —              |   | —                   |   | —                 |   |
|                                                            |   |                |   |                     |   |                   |   |
| Richard  D. Orman                                               |   | 7,400               |   | US$7.50                  |   | 2/6/2007               |   |
|                                                            |   | 12,600              |   | US$7.50                  |   | 3/19/2007              |   |
|                                                            |   |  7,000         |   | US$1.38                  |   | 3/28/2009              |   |
|                                                            |   | 7,000               |   | US$1.69                  |   | 1/11/2011              |   |
|                                                            |   | 7,000               |   | US$2.26                  |   | 1/16/2012              |   |
|                                                            |   |                |   |                     |   |                   |   |
| Joel  A. Schleicher                                             |   | 20,000              |   | US$7.50                  |   | 3/19/2007              |   |
|                                                            |   | 7,000               |   | US$1.38                  |   | 3/28/2009              |   |
|                                                            |   | 7,000               |   | US$1.69                  |   | 1/11/2011              |   |
|                                                            |   | 7,000               |   | US$2.26                  |   | 1/16/2012              |   |
|                                                            |   |                |   |                     |   |                   |   |
| Charles  R. Trimble                                             |   | 7,000               |   | US$2.26                  |   | 1/16/2012              |   |
|                                                            |   |                |   |                     |   |                   |   |
| All  directors and executive officers as a group (nine persons) |   | 340,000             |   |                     |   |                   |   |

 

48

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(1)                                  All options were granted at not less than fair market value at dateof grant.

(2)                                  Messrs. Close, Yeldon and Baylin, being representatives of CMCElectronics, have waived the right to receive any stock options that they wouldotherwise be entitled.

(3)                                  Mr. Vaughn resigned as Chief Executive Officer and President inFebruary 2002.

 

**C.****                                                            Board Practices**

 

All directors hold office until the nextannual meeting of the Company’s shareholders, which has been in July for thepast several years, or until their respective successors are duly appointed bythe Board of Directors or their positions are earlier vacated by resignation orotherwise.

 

Executive officers are appointed by theboard of directors on an annual basis and serve until the next annual meetingof the board of directors or until their respective successors are dulyappointed or their positions are earlier vacated by resignation or otherwise.

 

**Board Committees**

 

The Audit and Finance Committee makesrecommendations to the Board of Directors with respect to the engagement ordischarge of independent auditors, to review with the independent auditors theplan and results of the auditing engagement, to review the Company’s internalauditing procedures, system of internal accounting controls and financialmanagement and to make inquiries into matters within the scope of itsfunctions. The members of the Audit and Finance Committee were Richard D.Orman, Joel A. Schleicher and Gregory A. Yeldon.  The Board of Directors and the Audit Committee have adopted awritten charter of the Audit Committee. The Audit Committee reviews and assesses the adequacy of the charter onan annual basis.

 

The Compensation Committee reviews andmakes recommendations to the Board of Directors concerning the compensation ofthe key management employees of the Company and the administration of theCompany’s stock option plans.  Themembers of the Compensation Committee were Richard D. Orman and W. James Close.

 

**D.****                                                            Employees**

 

As of December 31, 2002, the Company, notincluding Point, employed 120 permanent persons (113 in 2001 and 102 in 2000),including 57 in research and product development (51 in 2001 and 48 in 2000),13 in sales and marketing (16 in 2001 and 10 in 2000), 28 in operations (18 in2001 and 20 in 2000 ) and 22 in administration and finance (28 in 2001 and 24in 2000).  The number of temporary andcontract personnel was three as of December 31, 2002 (one in 2001 and six in2000). Separately, Point employed 38 permanent staff at December 31, 2002compared to 42 at December 31, 2001 and 52 at December 31, 2000.

 

The Company’s (excluding Point) staffturnover rate for 2002 was 4.5% (not including involuntary separations).Competition in recruiting personnel is intense, and the number of persons withrelevant experience, particularly in engineering, is limited. The Companybelieves that its future success depends, in part, on its ability to attractand retain qualified technical, marketing, sales and management personnel. Anyinability by the Company to attract and retain additional key employees or theloss of one or more of its current key employees could materially adverselyaffect the Company’s business, financial condition and results of operations.None of the Company’s employees is represented by a labor union, and theCompany has not experienced any work stoppages.

 

**E.****                                                              Share Ownership**

 

The following table sets forth as of March17, 2003, the ownership of the Company’s Common Shares by each director andofficer and all directors and officers as a group:

 

49

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|                                                                |   | **Shares  Beneficially  Owned** |   |
|---------------------------------------------------------------------|--------|---------------------------------|--------|
| **Name**                                                            |   | **Shares**                      |   | **Percent** |   |
| W.  James Close(1)(2)(3)                                            |   | 4,697,500                       |   | 61.1 | % |
| Gregory  A. Yeldon(1)(2)                                            |   | 4,694,500                       |   | 61.1 | % |
| Jonathan  W. Ladd (4)(5)                                            |   | 7,500                           |   |   | * |
| David  E. Vaughn(6)(7)                                              |   | 30,000                          |   |   | * |
| Werner  Gartner(8)                                                  |   | 124,000                         |   | 1.6 | % |
| Richard  D. Orman(9)                                                |   | 31,500                          |   |   | * |
| Joel  A. Schleicher(10)                                             |   | 30,500                          |   |   | * |
| Gregory  O. Baylin(1)(2)                                            |   | 4,694,500                       |   | 61.1 | % |
| Charles  R. Trimble(11)                                             |   | 1,750                           |   |   | * |
| All  directors and executive officers as a group (nine persons)(12) |   | 4,922,750                       |   | 62.3 | % |

 

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*                                                                 Less than 1%.

 

(1)                                                          Represents 4,694,500 Common Shares held by CMC Electronics with whomMessrs. Close, Yeldon and Baylin are affiliated.

 

(2)                                                          The amount shown includes 220,000 Common Shares that are the subjectof a Right of First Refusal and Call Option Agreement (the “Option Agreement”)and a Pledge and Escrow Agreement (the “Pledge Agreement”), in each casebetween CMC Electronics and Telexel Holding Limited (“Telexel” — see note 8).  The Option Agreement provides for (i) aright of first refusal through April 17, 2003 granting CMC Electronics theright to acquire the 220,000 Common Shares (the “Remaining Shares”) of theCompany which were not sold by Telexel to CMC Electronics on the same terms andconditions as those offered to a third party and (ii) a call option throughApril 17, 2008 granting CMC Electronics the right to purchase, at the pricespecified therein, the Remaining Shares if such purchase is necessary to allowCMC Electronics to continue to hold at least 51% of the outstanding CommonShares in the event of the dilution of its percentage ownership as a result ofthe exercise of employee and director stock options and CMC Electronics hasbeen unable to purchase on the open market Common Shares sufficient for thispurpose.  The Option Agreement furtherprovides that Telexel will not transfer the Remaining Shares during the term ofthe right of first refusal and call option, except to give effect to the OptionAgreement and the Pledge Agreement.

 

(3)                                                          Includes 3,000 Common Shares owned by Mr. Close’s wife.

 

(4)                                                          Mr. Ladd was appointed Chief Executive Officer and President inFebruary 2002.

 

(5)                                                          Represents vested stock options to purchase 7,500 Common Shares ofthe Company as of March 17, 2003.

 

(6)                                                          Mr. Vaughn resigned as Chief Executive Officer and President inFebruary 2002.

 

(7)                                                          Represents vested stock options to purchase 30,000 Common Shares ofthe Company as of March 17, 2003.

 

(8)                                                          Includes vested stock options to purchase 104,000 Common Shares ofthe Company as of March 17, 2003.

 

(9)                                                          Includes vested stock options to purchase 30,500 Common Shares ofthe Company as of March 17, 2003.

 

(10)                                                    Represents vested stock options to purchase 30,500 Common Shares ofthe Company as of March 17, 2003.

 

(11)                                                    Represents vested stock options to purchase 1,750 Common Shares ofthe Company as of March 17, 2003.

 

50

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(12)                                                    Includes vested stock options to purchase 204,250 Common Shares ofthe Company as of March 17, 2003.

 

**Item 7****                                      Major Shareholders and Related Party Transactions**

 

**A.****                                                            Major Shareholders**

 

The following table sets forth as of March17, 2003 those persons known to the Company to be owners of more than 5% of theCompany’s Common Shares:

 

|                        |   | **Shares  Beneficially  Owned** |       |
|-----------------------------|--------|---------------------------------|------------|
| **Name**                    |   | **Shares**                      |       | **Percent** |   |
|                        |   |                            | ** ** |   | ** ** |
| CMC  Electronics Inc.(1)(2) |   | 4,694,500                       |       | 61.1 | % |

 

(1)                                                          The address of CMC Electronics Inc. is 600 Dr. Frederik PhilipsBoulevard, Ville Saint-Laurent, Quebec, Canada H4M 2S9.  CMC Electronics may be deemed to be a“control person” of the Company within the meaning of the rules and regulationsof the Securities and Exchange Commission.

 

(2)                                                          The amount shown includes 220,000 Common Shares that are the subjectof a Right of First Refusal and Call Option Agreement (the “Option Agreement”)and a Pledge and Escrow Agreement (the “Pledge Agreement”), in each casebetween CMC Electronics and Telexel Holding Limited (“Telexel”).  The Option Agreement provides for (i) aright of first refusal through April 17, 2003 granting CMC Electronics theright to acquire the 220,000 Common Shares (the “Remaining Shares”) of theCompany which were not sold by Telexel to CMC Electronics on the same terms andconditions as those offered to a third party and (ii) a call option throughApril 17, 2008 granting CMC Electronics the right to purchase, at the pricespecified therein, the Remaining Shares if such purchase is necessary to allowCMC Electronics to continue to hold at least 51% of the outstanding CommonShares in the event of the dilution of its percentage ownership as a result ofthe exercise of employee and director stock options and CMC Electronics hasbeen unable to purchase on the open market Common Shares sufficient for thispurpose.  The Option Agreement furtherprovides that Telexel will not transfer the Remaining Shares during the term ofthe right of first refusal and call option, except to give effect to the OptionAgreement and the Pledge Agreement.

 

**B.****                                                            Related Party Transactions**

 

The Company is an authorized reseller ofcertain CMC Electronics GPS products. In 2002, the Company purchased $701,000 of products from CMCElectronics.  In addition in 2002, theCompany purchased $125,000 of contracted engineering services and $162,000 ofmiscellaneous services, primarily legal and insurance related, from CMCElectronics.

 

In 2002, the Company sold $1,451,000 ofproduct to Point, the Company’s joint venture with Sokkia.  In addition, the Company provided $365,000in facilities, computer systems support and research and development support toPoint and earned $106,000 in royalties on Point product sales.  The above financial transactions between theCompany and Point are on a gross basis, before intercompany eliminations.

 

During 2002, the Company and Sokkiaadvanced US$830,000 in new loans to Point with the Company’s share beingUS$407,000.  The related party notesreceivable of $1,932,000 ($1,595,000 at December 31, 2001) reflects theCompany’s proportionate joint venture interest in the aggregate borrowing byPoint from the Company and Sokkia of US$4,830,000, which was outstanding as ofMarch 17, 2003.  The loans are securedby the assets of Point, and bore interest at rates between 3% and 6% during2002 (6% in 2001 and U.S. prime rate in 2000). On January 23, 2003, the Company and Sokkia agreed to extend the duedates on the loans such that US$4,330,000 is due on June 30, 2003 andUS$500,000 is due December 31, 2003.

 

51

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In addition, the Company and Sokkiaprovided US$1,500,000 in equity financing to Point.  The Company’s share of the equity financing was US$735,000 andthe Company’s equity interest in Point remained at 49%.

 

In January 2001, the Company signed anumber of agreements under which the Company acquired a 48.7% equity interestin Mezure.  The agreements included aUS$400,000 cash investment which the Company had previously advanced and forwhich the Company had made a full provision. The Company also advanced a further US$270,000 loan to Mezure fromJanuary 5 to July 23, 2001.  The Companyhas recorded a full provision against the potential non-payment of theseloans.  On July 23, 2001, the Companyacquired a further 25.3% interest in Mezure after exercising its option toconvert US$200,000 in loans to Mezure into additional common shares.  Effective with this conversion, the Companyacquired a 74% controlling interest in Mezure and consolidated Mezure’sfinancial results.  In April 2002, theCompany’s equity interest was diluted to approximately 70%.

 

David E. Vaughn, the Company’s former ChiefExecutive Officer and President until February 2002, continued to provideconsultant services to the Company on various business matters.  In 2002, the Company paid Mr. Vaughn$105,269 for these services.

 

On February 11, 2003, the Company announcedthe signing of a Memorandum of Understanding (“MOU”) with CMC Electronics Inc.to acquire CMC Electronics’ Global Positioning System (GPS) OEM productline.  The new product line will extend theCompany’s current high-performance, upgradeable L1 and L1/L2 product line intothe mid-level L1 market.  This willincrease the Company’s total addressable market in core segments and shouldalso create entry points into new vertical markets, such as timing andmarine.  Based on the MOU, the Companyexpects the purchase price of the CMC Electronics’ GPS OEM product line to becomprised of approximately $130,000 at closing and $600,000 payable over timeas a royalty on revenue generated by this business (see “Risk Factors”).  The target date for the actual transfer ofthe business is in early April 2003.

 

**C.****                                                            Interests of Experts and Counsel**

 

Not applicable

 

**Item 8****                                      Financial Information**

 

**A.****                                                            Consolidated Statements and Other Financial Information**

 

See Item 18 “Financial Statements” and“Item 4 -  Information on the Company,Business Overview - Legal  Proceedings.”

 

**Item 9****                                      The Offer and Listing**

 

**A.****                                                            Offer and Listing Details**

 

The Company’s common shares have been listed on TheNasdaq Stock Market since February 7, 1997. The following are the price ranges as reported by The Nasdaq StockMarket for the periods indicated.

 

|                  |   | **US $** |   |
|-----------------------|--------|----------|--------|
|                  |   | **High** |   | **Low** |   |
| **Annual**            |   |     |   |   |   |
| 2002                  |   | $        | 5.200  |   | $ | 1.760 |   |
| 2001                  |   | $        | 2.750  |   | $ | 1.250 |   |
| 2000                  |   | $        | 10.500 |   | $ | 1.188 |   |
| 1999                  |   | $        | 3.813  |   | $ | 1.000 |   |
| 1998                  |   | $        | 10.750 |   | $ | 1.313 |   |
| 1997 (Feb – Dec) |   | $        | 12.375 |   | $ | 4.500 |   |
|                  |   |     |   |   |   |
| **Quarterly**         |   |     |   |   |   |
| Q4 – 2002        |   | $        | 2.820  |   | $ | 1.760 |   |
| Q3 – 2002        |   | $        | 2.840  |   | $ | 1.810 |   |
| Q2 – 2002        |   | $        | 5.200  |   | $ | 2.550 |   |
| Q1 – 2002        |   | $        | 4.000  |   | $ | 2.100 |   |
| Q4 – 2001        |   | $        | 3.050  |   | $ | 1.400 |   |
| Q3 – 2001        |   | $        | 2.310  |   | $ | 1.300 |   |
| Q2 – 2001        |   | $        | 2.100  |   | $ | 1.250 |   |
| Q1 – 2001        |   | $        | 2.688  |   | $ | 1.281 |   |
|                  |   |     |   |   |   |
| **Monthly**           |   |     |   |   |   |
| February 2003         |   | $        | 3.000  |   | $ | 1.900 |   |
| January 2003          |   | $        | 2.900  |   | $ | 2.000 |   |
| December 2002         |   | $        | 2.820  |   | $ | 2.110 |   |
| November 2002         |   | $        | 2.800  |   | $ | 1.800 |   |
| October 2002          |   | $        | 2.200  |   | $ | 1.760 |   |
| September 2002        |   | $        | 2.310  |   | $ | 1.810 |   |

 

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**B.****                                                            Plan of Distribution**

 

Not applicable

 

**C.****                                                            Markets**

 

Effective February 4, 1997, the Company’sshares commenced trading in the United States on the Nasdaq National Markettier of The Nasdaq Stock Market under the symbol “NGPSF.”  The Company’s shares are not listed on anyother non-United States trading market. On March 15, 1999, the Company’s symbol was changed to “NGPS”.

 

Prior to February 4, 1997, the Company’s shares were not listed on any tradingmarket.

 

A significant number of the Company’ssecurities are held in street name. To the best of the Company’s knowledge, asof March 14, 2003, there were 12 shareholders of record resident in the UnitedStates, including Cede & Co., holding approximately 2,979,745 shares,representing 38.77% of the Company’s shares then outstanding.  In total the Company has 24 shareholders ofrecord.

 

**D.****                                                            Selling Shareholders**

 

Not applicable

 

**E.****                                                              Dilution**

 

Not applicable

 

**F.****                                                              Expenses of the Issue**

 

Not applicable

 

**Item 10****                               Additional Information**

 

**A.****                                                            Share Capital**

 

Not applicable

 

53

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**B.****                                                            Articles and By-laws**

 

The Corporation is registered under the *Canada Business Corporations Act* (“CBCA” orthe “Act”) as corporation number 076226-1 and has the capacity and, subject tothe provisions of the Act, the rights, powers and privileges of a naturalperson.

 

**Powers of Directors**

 

Subject to any unanimous shareholderagreement, the directors shall manage or supervise the management of thebusiness and affairs of the Corporation and may exercise all such powers and doall such acts and things as may be exercised or done by the Corporation and arenot by the Act, the articles, the by-laws, any special resolution of theCorporation, a unanimous shareholder agreement or by statute expressly directedor required to be done in some other manner. Notwithstanding any vacancy among the directors, the remaining directorsmay exercise all the powers of the board so long as a quorum of the boardremains in office.

 

The Act requires every director or officerwho is a party to a material contract or a proposed material contract with theCorporation, or who is a director or officer of or has a material interest inany person who is a party to a material contract or a proposed materialcontract with the Corporation to disclose in writing to the Corporation orrequest to have entered in the minutes of meetings of directors the nature andextent of his or her interest, and refrain from voting in respect of thematerial contract or proposed material contract if and when prohibited by theCBCA.  However, a director who isprohibited by the CBCA from voting on a material contract or proposed materialcontract will be counted in determining whether a quorum is present for thepurpose of the resolution.  The articlesand by-laws do not require an independent quorum to enable the directors tovote compensation to themselves or any member of their body.  The Act also provides that the shareholdersof the Corporation may examine the portion of any minutes of the meetings ofthe Directors that contain such disclosures of conflict of interest.

 

Unless the articles or by-laws of or aunanimous shareholder agreement relating to the Corporation otherwise provide,the articles of the Corporation are deemed to state that the directors of theCorporation may, without authorization of the shareholders, (a) borrow money onthe credit of the Corporation, (b) issue, reissue, sell or pledge debt obligationsof the Corporation, (c) to the extent permitted by the CBCA, give financialassistance to anyone by means of a loan, guarantee or otherwise to secureperformance of an obligation of such person, and (d) mortgage, hypothecate,pledge or otherwise create a security interest in all or any property of theCorporation, owned or subsequently acquired, to secure any obligation of theCorporation.  The Corporation does nothave a unanimous shareholder agreement and its articles and by-laws do notlimit the above powers.

 

Directors of the Corporation are notrequired to own shares of the Corporation in order to qualify as a director andthe directors are not required to retire upon reaching a specified age.

 

**Description of Securities**

 

The Corporation is authorized to issue anunlimited number of Common Shares and an unlimited number of First PreferenceShares.

 

Holders of Common Shares are entitled toreceive notice of and to attend all meetings of the shareholders of theCorporation, except meetings at which holders of another specified class ofshares are exclusively entitled to vote, and are entitled to one vote for eachCommon Share held on all votes taken at such meetings. The holders of CommonShares are entitled to receive such dividends as the directors may in theirdiscretion declare, regardless of whether dividends are declared on any otherclass of shares.  Upon liquidation,dissolution or wind-up of the Corporation, the holders of Common Shares areentitled to receive any remaining property after payment of any amount requiredto redeem or retract the issued and outstanding First Preference Shares.

 

The First Preference Shares may be issuedin one or more series with each series to consist of such number of shares asmay, before the issue of the series, be fixed by the directors of theCorporation.  The directors areauthorized, before the issue of the series, to determine the designation,rights, privileges, restrictions and conditions attaching to the FirstPreference Shares of each series.

 

54

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The First Preference Shares of each seriesrank equally with respect to the payment of dividends and the distribution ofassets or return of capital in the event of liquidation, dissolution orwinding-up and in priority to the Common Shares and any other shares of theCorporation ranking junior to the First Preference Shares.  In addition, if any amount of cumulativedividend or declared non-cumulative dividend or an amount payable on return ofcapital in respect of shares of a series of First Preference Shares is not paidin full, the shares of the series are entitled to participate rateably with theshares of any other series of the same class in respect of such amounts.

 

In accordance with the provisions of theCBCA, the amendment of certain rights of holders of a class of shares,including Common Shares, requires the approval of not less than two-thirds ofthe votes cast by the holders of such shares voting at a special meeting ofsuch holders.  Pursuant to the Company’sBy-laws a quorum for a meeting of the holders of Common Shares occurs whenpersons not being less than two in number and holding or representing by proxynot less than 33 1/3% of the issued and outstanding Common Shares entitled tovote at such meetings are present, unless a higher number is designated by theBoard.  In circumstances where therights of Commons Shares may be amended to add, change or remove any provisionsrestricting or constraining the issue, transfer or ownership of Common Shares,holders of Common Shares have the right under the CBCA to dissent from suchamendment and require the Company to pay them the then fair value of the CommonShares.

 

**Shareholder Meetings**

 

There are two types of shareholdermeetings:  the regular annual meetingand the special meeting.  Pursuant tothe CBCA, the annual shareholder meeting shall be held not later than fifteenmonths after the holding of the last preceding annual meeting but no later than6 months after the end of the Corporation’s preceding financial year, unless anorder extending the time for calling the annual meeting is obtained. TheDirectors may at any time call a special meeting of shareholders.

 

A notice stating the day, hour and place ofmeeting and, if special business is to be transacted details of the nature ofthe business, must be served by sending such notice to each person who isentitled to notice of such meeting and who on the record date for noticeappears on the records of the Corporation or its transfer agent as a shareholderentitled to vote at the meeting and to each director of the Corporation and tothe auditor of the Corporation by prepaid mail not less than 21 days and notmore than 60 days before the meeting unless such requirement is otherwisewaived.  The Corporation must fix arecord date in advance of the meeting for the purpose of determiningshareholders entitled to notice of the meeting.  Only shareholders of record on such date will be entitled tonotice of the meeting.

 

Votes at meetings of shareholders may begiven either personally or by proxy. Every shareholder, including a shareholder that is a body corporate,entitled to vote at a meeting of shareholders may by means of a proxy appoint aproxyholder or one or more alternate proxyholders, who need not beshareholders, as his nominee to attend and act at the meeting in the manner, tothe extent and with the authority conferred by the proxy.

 

**C.****                                                            Material Contracts**

 

In the past two years, the Company has notentered into any material contracts other than contracts entered into in theordinary course of  business.  See “Item 4 - Information on the Company.”

 

**D.****                                                            Exchange Controls**

 

*Investment Canada Act*

 

Canada has no system of exchange controls.There is no law, government decree or regulation in Canada restricting theexport or import of capital or affecting the remittance of dividends, interestor other payments to a non-resident holder of Common Shares, other thanwithholding tax requirements. See “Item 10 - Additional Information, Taxation.”

 

There is no limitation imposed by Canadianlaw or by the articles or other charter documents of the Company on the rightof a non-resident to hold or vote Common Shares or Preferred Shares of theCompany with voting rights (collectively, “Voting Shares”), other than asprovided in the Investment Canada Act (the “Investment Act”), as amended by theWorld Trade Organization Agreement Implementation Act (the “WTOA Act”). TheInvestment Act

 

55

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generally prohibits implementation of a reviewableinvestment by an individual, government or agency thereof, corporation,partnership, trust or joint venture that is not a “Canadian,” as defined in theInvestment Act (a “non-Canadian”), unless, after review, the minister responsiblefor the Investment Act is satisfied that the investment is likely to be of netbenefit to Canada. An investment in Voting Shares of the Company by anon-Canadian (other than a “WTO Investor,” as defined below) would bereviewable under the Investment Act if it were an investment to acquire controlof the Company and the Company was not, immediately prior to the implementationof the investment, controlled by a WTO Investor, and the value of the assets ofthe Company were $5.0 million or more. An investment in Voting Shares of theCompany by a WTO Investor would be reviewable under the Investment Act if itwere an investment to acquire direct control of the Company, and the value ofthe assets of the Company equalled or exceeded $218 million for the year 2002and $223 million for the year 2003.  Anon-Canadian, whether a WTO Investor or otherwise, would acquire control of theCompany for purposes of the Investment Act if he or she acquired a majority ofthe Voting Shares of the Company. The acquisition of less than a majority, butat least one-third of the Voting Shares of the Company, would be presumed to bean acquisition of control of the Company, unless it could be established thatthe Company was not controlled in fact by the acquirer through the ownership ofVoting Shares. In general, an individual is a WTO Investor if he or she is a“national” of a country (other than Canada) that is a member of the World TradeOrganization (“WTO Member”) or has a right of permanent residence in a WTOMember other than Canada. A corporation or other entity will be a WTO investorif it is a “WTO investor-controlled entity” pursuant to detailed rules set outin the Investment Act. The United States is a WTO Member.

 

Certain transactions involving VotingShares of the Company would be exempt from the Investment Act, including: (a)an acquisition of Voting Shares of the Company if the acquisition were made inconnection with the person’s business as a trader or dealer in securities; (b)an acquisition of control of the Company in connection with the realization ofa security interest granted for a loan or other financial assistance and notfor any purpose related to the provisions of the Investment Act; and (c) anacquisition of control of the Company by reason of an amalgamation, merger,consolidation or corporate reorganization, following which the ultimate director indirect control in fact of the Company, through the ownership of votinginterests, remains unchanged.

 

**E.****                                                              Taxation**

 

This summary of the primary income taxconsiderations takes into account the current provisions of the *Income Tax Act*(Canada) (the “Tax Act”),the regulations thereunder, all specific proposals to amend the Tax Actpublicly announced prior to the date of this report, and the current publishedadministrative practices and policies of the Canada Customs and Revenue Agency.It assumes that all proposals to amend the Tax Act will be enacted in theirpresent form and otherwise does not take into account or anticipate changes inthe law, whether by way of judicial decision or legislative action nor does ittake into account provincial, territorial or foreign tax legislation orconsiderations.  This summary isgenerally applicable to persons who acquire Common Shares pursuant to thisoffering who (i) throughout the period during which the purchaser owns theCommon Shares, is not resident in Canada for the purposes of the Tax Act and isa resident of the United States for the purposes of the Convention, (ii) holdsCommon Shares as capital property, (iii) deals at arm’s length with theCompany, (iv) does not use or hold, and is not deemed to use or hold, suchCommon Shares in, or in the course of, carrying on a business or providingindependent personal services in Canada, and (v) does not own, or is not treatedas owning, 10% or more of the outstanding voting shares of the Company (a “U.S.Holder”).

 

This summary is not exhaustive of allpotential Canadian income tax consequences to a U.S. Holder of acquiring,holding or disposing of Common Shares. The Common Shares generally will be considered to be capital property toa U.S. Holder unless either the U.S. Holder holds those shares in the course ofcarrying on a business or the U.S. Holder has acquired those shares in one ormore transactions considered to be an adventure in the nature of trade.

 

Dividends paid or credited, or deemed to bepaid or credited by the Company to a U.S. Holder are subject to Canadianwithholding tax at the rate of 15% (reduced from 25% by the Convention) forU.S. Holders who beneficially own the dividends.  The Company assumes responsibility for the withholding of tax ondividends to a U.S. Holder at the source.

 

56

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A U.S. Holder will not be subject to taxunder the Tax Act on any gain in respect of the disposition or deemeddisposition of Common Shares unless those Common Shares constitute “taxableCanadian property” as defined in the Tax Act. The Common Shares generally willnot constitute taxable Canadian property to a U.S. Holder unless the U.S.Holder, persons with whom the U.S. Holder does not deal at arm’s length, or theU.S. Holder together with those persons, owns, or has at any time within the 60month period ending at the time of the disposition owned, 25% or more of theissued shares of any class or series of the Company.  If the foregoing test is met, any rights to acquire such sharesalso will be considered taxable Canadian property to that U.S. Holder. Even ifthe Common Shares are taxable Canadian property to a U.S. Holder, under theConvention, gains derived by a U.S. Holder from the disposition of CommonShares generally would not be taxable in Canada unless the value of the CommonShares is derived principally from real property situated in Canada.

 

**F.****                                                              Dividends and Paying Agents**

 

Not applicable

 

**G.****                                                            Statement by Experts**

 

Not applicable

 

**H.****                                                            Documents on Display**

 

Documents concerning the Company referredto in this Annual Report may be inspected at its headquarters at 1120 – 68thAvenue N.E., Calgary, Alberta, T2E 8S5, CANADA.  The Company provides access to its Quarterly Reports filed onForm 6-K and Annual Report on Form 20-F on its internet website free of charge,as soon as reasonably practicable after those reports are electronically filed.

 

The Corporation’s SEC filings, and theexhibits thereto, are available for inspection and copying at the publicreference facilities maintained by the Commission in Room 1024, 450 FifthStreet N.W., Washington, D.C., 20549. Copies of these filings may be obtained from these offices after thepayment of prescribed fees.  Please callthe Commission at 1-800-SEC-0330 for further information on the publicreference rooms.

 

As a foreign private issuer, theCorporation is exempt from the rules under the Securities Exchange Act of 1934,as amended, prescribing the furnishing and content of proxy statements toshareholders.  As the Corporation is aforeign private issuer, the Corporation’s directors and officers are alsoexempt from the shortswing profit recovery and disclosure regime of section 16of the Exchange Act.

 

**I.****                                                                 Subsidiary Information**

 

Not applicable

 

**Item 11****                               Quantitive and Qualitative Disclosures about Market Risk**

 

Most of the Company’s revenues (over 95% in2002) are earned in currencies other than the Canadian dollar, principally theU.S. dollar. A substantial portion of the Company’s expenses, however, havebeen and will continue to be incurred in Canadian dollars. Accordingly,fluctuations in exchange rates between the U.S. dollar and the Canadian dollarcould materially affect the Company’s results of operations.  In the normal course of business, theCompany uses foreign currency options and forward foreign currency contracts toreduce its exposure to fluctuations in the U.S. dollar to Canadian dollarexchange rates.  At December 31, 2002,the Company had forward foreign currency contracts to sell US $3.0 millionbetween February 28, 2003 and April 30, 2003 at rates between $0.6429 and$0.6440.  Derivative financialinstruments are not used for speculative purposes.  There can be no assurance that the Company will be successful insuch hedging activities.

 

The following table sets forth thepotential gains on losses that would arise on the Company’s foreign currencyoptions and forward foreign currency contracts as of December 31, 2002, undervarious hypothetical US dollar to Canadian dollar exchange rates:

 

57

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| **CDN$ vs.US$** |   | **Gain/(loss)** |     |
|-----------------|--------|-----------------|----------|
|            |   | **CDN$**        |     |
|            |   |            |     |
| $               | 0.58   |            | $        | (190,000 | ) |
|            | 0.60   |            | (130,000 | ) |
|            | 0.62   |            | (70,000  | ) |
|            | 0.64   |            | (10,000  | ) |
|            | 0.66   |            | 50,000   |   |
|            | 0.68   |            | 110,000  |   |
|            | 0.70   |            | 170,000  |   |
|                 |        |                 |          |  |  |

 

The Company is not subject to significantinterest rate risk due to the short-term maturities of its outstanding loans.

 

**Item 12****       Descriptionof Securities other than Equity Securities**

 

Not applicable

 

**PART II**

 

**Item 13****       Defaults, Dividend Arrearages and Delinquencies**

 

Not applicable.

 

**Item 14****       Material Modifications to the Rights of Security Holders and Use ofProceeds**

 

Not applicable.

 

**Item 15****       Controls and Procedures**

 

*Evaluation of Disclosure Controls and Procedures.*  The Company’s ChiefExecutive Officer and Chief Financial Officer, after evaluating the effectivesof the Company’s “disclosure controls and procedures” (as defined in theSecurities Exchange Act of 1934, Rules 13a-14(c) and 15-d-14(c)) as of a date(the “Evaluation Date”) within 90 days before the filing date of this annualreport, have concluded that as of the Evaluation Date, the Company’s disclosurecontrols and procedures were adequate and designed to ensure that materialinformation relating to the Company would be made know to them by others withinthose entities.

 

*Changes in Internal Controls.*  There were no significant changes in theCompany’s internal controls or to the Company’s knowledge, in other factorsthat could significantly affect the Company’s disclosure controls andprocedures subsequent to the Evaluation Date.

 

**Item 16****       [Reserved]**

 

Not applicable.

 

**Item 17****       Financial Statements**

 

Not applicable.

 

**Item 18****       Financial Statements**

 

See Item 19 below for Financial Statementsfiled as a part of this Annual Report.

 

58

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**Item 19****       Financial Statements and Exhibits**

 

(a)                                  Financial Statements

 

1. Report ofIndependent Chartered Accountants

 

2.Consolidated Balance Sheets

 

3.Consolidated Statements of Operations

 

4.Consolidated Statements of Shareholders’ Equity (Deficit)

 

5.Consolidated Statements of Cash Flows

 

6. Notes toConsolidated Financial Statements

 

7. FinancialStatement Schedules

 

(b)                                 Exhibits

 
| 2.1   |   | Agreement of Purchase and Sale of Assets dated  November 3, 1995 between NovAtel Communications Ltd. and Harris  Corporation.(1)                                                                                                          |
|-------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.2   |   | Asset Purchase Agreement dated July 12, 1996 between  NovAtel Communications Ltd., NovAtel Wireless, Inc., NovAtel Wireless  Solutions, Inc. and NovAtel Wireless Technology, Inc.(1)                                                     |
| 2.3   |   | Amendment to the Asset Purchase Agreement dated  August 21, 1996 between NovAtel Communications Ltd., NovAtel Wireless, Inc.,  NovAtel Wireless Solutions, Inc. and NovAtel Wireless Technology, Inc.(1)                                  |
| 3.1   |   | Restated Articles of Incorporation of Registrant.(1)                                                                                                                                                                                      |
| 3.2   |   | Restated Bylaws of Registrant.(1)                                                                                                                                                                                                         |
| 4.1   |   | Form of Common Stock Certificate.(1)                                                                                                                                                                                                      |
| 10.1  |   | Directors Stock Option Plan.(1)                                                                                                                                                                                                           |
| 10.2  |   | Stock Option Plan with form of stock option  agreement.(1)                                                                                                                                                                                |
| 10.3  |   | Form of Indemnification Agreement to be entered into  between Registrant and certain directors and officers.(1)                                                                                                                           |
| 10.4  |   | Intellectual Property License and Assignment  Agreement dated November 3, 1995 between NovAtel Communications Ltd. and  Harris Corporation.(1)                                                                                            |
| 10.5  |   | Technology Agreement dated February 27, 1994 between  Japan Radio Co., Ltd., JRC Canada Inc., JRC International Inc., Telexel  Holding, Ltd., NovAtel Communications Ltd. and NovAtel Carcom, Inc.(1)                                     |
| 10.6  |   | Share Purchase Agreement dated May 13, 1992 between  her Majesty the Queen in Right of Alberta, 473654 Alberta Ltd., 475342  Alberta Ltd., 496072 Alberta Ltd. and Telexel Holding Limited.(1)                                            |
| 10.7  |   | Post Purchase Agreement dated May 29, 1992 between  Her Majesty the Queen in Right of Alberta, 496072 Alberta Ltd., Telexel  Holding Limited and NovAtel Communications Ltd.(1)                                                           |
| 10.8  |   | Surplus Systems Assets Agreement dated May 29, 1992  between NovAtel Communications Ltd., 475342 Alberta Ltd. and Her Majesty the  Queen in Right of the Province of Alberta.(3)                                                          |
| 10.9  |   | Settlement Agreement dated March 18, 1994 between  North West Trust Company, as representative of 496072 Alberta Ltd., Telexel  Holding Limited and NovAtel Communications Ltd.(1)                                                        |
| 10.10 |   | Letter dated February 7, 1997 amending Settlement  Agreement.(2)                                                                                                                                                                          |
| 10.11 |   | Post Purchase Agreement Amending Agreement dated  March 18, 1994 between Her Majesty the Queen in Right of Alberta, 496072  Alberta Ltd., Telexel Holding Limited and NovAtel Communications Ltd.(1)                                      |
| 10.12 |   | Guarantee of Post Purchase Agreement dated May 29,  1992 by NovAtel Communications Ltd. in favour of Her Majesty the Queen in  Right of Alberta (amended by Settlement Agreement dated March 18, 1994, filed  hereto as Exhibit 10.9).(1) |
| 10.13 |   | Definitive Project Agreement #1 dated July 1, 1998  between Canadian Marconi Company and NovAtel Inc.(3)                                                                                                                                  |

 

59

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| 10.14 |   | Reseller and License Agreement dated May 22, 1998  between NovAtel Inc. and Canadian Marconi Company.(3)                               |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------|
| 10.15 |   | Final Agreement dated December 31, 1997 between  ViaSat Geo-Technologie Inc. and NovAtel Inc. (2)                                      |
| 10.16 |   | Employment Agreement dated July 1, 1997 between  NovAtel Inc. and Werner Gartner. (2)                                                  |
| 10.17 |   | Lease Agreement (Building) dated January 29, 1999  between Christian Schumacher and NovAtel Inc.(3)                                    |
| 10.18 |   | Agreement made effective July 20, 1999 between  NovAtel Inc. and Sokkia Co., Ltd.(4)                                                   |
| 10.19 |   | License Agreement made effective August 1, 1999  between NovAtel Inc., Sokkia Co., Ltd. and Point, Inc.(4)                             |
| 10.20 |   | Agreement dated June 28, 2000 between NovAtel Inc.  and Raven Industries Inc.(5)                                                       |
| 10.21 |   | Operating Loan Credit Facility Letter from HSBC Bank  Canada made effective November 6, 2000.(5)                                       |
| 10.22 |   | Amendment No. 1 to Definitive Project Agreement made  effective November 15, 2000 between NovAtel Inc. and BAE Systems Canada  Inc.(5) |
| 10.23 |   | Amendment made effective January 26, 2001 to  Operating Loan Credit Facility Letter from HSBC Bank Canada.(5)                          |
| 10.24 |   | Amendment dated February 2, 2001 to the Agreement  between NovAtel Inc. and Raven Industries Inc.(5)                                   |
| 10.25 |   | Consulting Services Agreement dated February 19,  2001 between NovAtel Inc. and David E. Vaughn.(5)                                    |
| 10.26 |   | Amendment dated May 8, 2001 to the Agreement between  NovAtel Inc. and Raven Industries Inc. (6)                                       |
| 10.27 |   | Amendment dated June 18, 2001 to the Agreement  between NovAtel Inc. and Raven Industries Inc. (6)                                     |
| 10.28 |   | Offer Letter of Employment dated January 3, 2002  between NovAtel Inc. and Jonathan W. Ladd. (6)                                       |
| 10.29 |   | Operating Line of Credit Facility Letter from The  Toronto Dominion Bank dated June 5, 2002.                                           |
| 10.30 |   | Amendment No. 2 to Definitive Project Agreement made  effective October 1, 2002 between NovAtel Inc. and CMC Electronics Inc.          |
| 21.1  |   | List of Subsidiaries. (1)                                                                                                              |
| 23.1  |   | Consent of Deloitte & Touche LLP.                                                                                                  |
| 99.1  |   | Section 906 Certifications of Chief Executive  Officer and Chief Financial Officer.                                                    |

 

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(1)                                  Incorporated by reference to Registrant’s registration statement onForm F-1 (Registration Statement No. 333-6088).

 

(2)                                  Incorporated by reference to Registrant’s annual report on Form 20-Ffor the year ended December 31, 1997.

 

(3)                                  Incorporated by reference to Registrant’s annual report on Form 20-Ffor the year ended December 31, 1998.

 

(4)                                  Incorporated by reference to Registrant’s annual report on Form 20-Ffor the year ended December 31, 1999.

 

(5)                                  Incorporated by reference to Registrant’s annual report on Form 20-Ffor the year ended December 31, 2000.

 

(6)                                  Incorporated by reference to Registrant’s annual report on Form 20-Ffor the year ended December 31, 2001.

 

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**SIGNATURES**

 

The Registrant hereby certifies that itmeets all of the requirements for filing on Form 20-F and that it has dulycaused and authorized the undersigned to sign this annual report on its behalf.

 

 
|   | NOVATEL INC. |
|--------|--------------|
|   |         |   |
|   |         |   |
|   | By:          | /s/ JONATHAN W. LADD |   |
|   |         | Jonathan W. Ladd  President and Chief Executive Officer |

 

 

Date:  March31, 2003

 

61

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**CERTIFICATIONS**

I, JONATHAN W. LADD, certify that:

 

1.                                       I have reviewed this annual report on Form 20-F of NovAtel Inc.

 

2.                                       Based on my knowledge, this annual report does not contain anyuntrue statement of a material fact or omit to state a material fact necessaryto make the statements made, in light of the circumstances under which suchstatements were made, not misleading with respect to the period covered by thisannual report;

 

3.                                       Based on my knowledge, the financial statements, and other financialinformation included in this annual report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this annual report;

 

4.                                       The registrant’s other certifying officer and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-14 and 15d-14) for the registrant and have:

 

a)              designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this annual report is being prepared;

 

b)             evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

c)              presentedin this annual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                                       The registrant’s other certifying officer and I have disclosed,based on our most recent evaluation, to the registrant’s auditors and the auditcommittee of registrant’s board of directors (or persons performing theequivalent function):

 

a)              allsignificant deficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)             anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.                                       The registrant’s other certifying officer and I have indicated inthis annual report whether or not there were significant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

Date:                    March 31, 2003

 
|   | /s/ JONATHAN W. LADD                              |
|--------|---------------------------------------------------|
|   | Jonathan W. Ladd *(Principal  Executive Officer)* |

 

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I,WERNER GARTNER, certify that:

 

1.                                       I have reviewed this annual report on Form 20-F of NovAtel Inc.;

 

2.                                       Based on my knowledge, this annual report does not contain anyuntrue statement of a material fact or omit to state a material fact necessaryto make the statements made, in light of the circumstances under which suchstatements were made, not misleading with respect to the period covered by thisannual report;

 

3.                                       Based on my knowledge, the financial statements, and other financialinformation included in this annual report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this annual report;

 

4.                                       The registrant’s other certifying officer and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-14 and 15d-14) for the registrant and have:

 

a)              designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this annual report is being prepared;

 

b)             evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

c)              presentedin this annual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                                       The registrant’s other certifying officer and I have disclosed,based on our most recent evaluation, to the registrant’s auditors and the auditcommittee of registrant’s board of directors (or persons performing theequivalent function):

 

a)              allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)             anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.                                       The registrant’s other certifying officer and I have indicated inthis annual report whether or not there were significant changes in internalcontrols or in other factors that could significantly affect internal controlssubsequent to the date of our most recent evaluation, including any correctiveactions with regard to significant deficiencies and material weaknesses.

 

Date:                    March 31, 2003

 
|   | /s/ WERNER GARTNER                              |
|--------|-------------------------------------------------|
|   | Werner Gartner *(Principal  Financial Officer)* |

 

63

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**NOVATEL INC.**

 

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

 
| Reports of Independent  Chartered Accountants         |
|-------------------------------------------------------|
|                                                  |
| Consolidated Balance Sheets                           |
|                                                  |
| Consolidated  Statements of Operations                |
|                                                  |
| Consolidated  Statements of Shareholders’ Equity |
|                                                  |
| Consolidated  Statements of Cash Flows                |
|                                                  |
| Notes to  Consolidated Financial Statements           |

 

64

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**REPORT OF INDEPENDENTAUDITORS**

 

**To the Shareholders of NovAtel Inc.,**

 

We have audited the consolidated balancesheet of NovAtel Inc. as at December 31, 2002 and the consolidated statementsof operations, shareholders’ equity and cash flows for the year then ended.These financial statements are the responsibility of the Company’s management.Our responsibility is to express an opinion on these financial statements basedon our audit.

 

We conducted our audit in accordance withgenerally accepted auditing standards in Canada and the United States. Thosestandards require that we plan and perform an audit to obtain reasonableassurance whether the financial statements are free of material misstatement.An audit includes examining, on a test basis, evidence supporting the amountsand disclosures in the financial statements. An audit also includes assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.

 

In our opinion, these consolidatedfinancial statements present fairly, in all material respects, the financialposition of the Company as at December 31, 2002 and the results of itsoperations and its cash flows for the year then ended in accordance withCanadian generally accepted accounting principles.

 

The consolidated financial statements as atDecember 31, 2001 and for each of the two years in the period ended December 31,2001 were audited by other auditors who have ceased operations.  Those auditors expressed an opinion withoutreservation on those consolidated financial statements in their report datedFebruary 1, 2002.

 
|             |   |   | /s/ DELOITTE  & TOUCHE LLP |                       |
|------------------|--------|--------|--------------------------------|----------------------------|
| Calgary,  Canada |   |   |                           | DELOITTE  & TOUCHE LLP |   |
| March 5,  2003   |   |   |                           | Chartered  Accountants     |
|                  |        |        |                                |                            |  |  |

 

**COMMENTS BY AUDITORS FOR US READERS ON CANADA-US REPORTINGDIFFERENCES**

 

In the UnitedStates of America, reporting standards for auditors require the addition of anexplanatory paragraph outlining changes in accounting principles that have beenimplemented in the financial statements. As discussed in Note 2 to the consolidated financial statements, in 2002the Company changed its method of accounting for stock options to conform tothe new Canadian Institute of Chartered Accountants Handbook recommendationsSection 3870.

 
|             |   |   | /s/ DELOITTE  & TOUCHE LLP |                       |
|------------------|--------|--------|--------------------------------|----------------------------|
| Calgary,  Canada |   |   |                           | DELOITTE  & TOUCHE LLP |   |
| March 5,  2003   |   |   |                           | Chartered  Accountants     |
|                  |        |        |                                |                            |  |  |

 

65

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This is a copy of the report previously issued byArthur Andersen LLP.  The report has notbeen reissued by Arthur Andersen LLP nor has Arthur Andersen LLP provided aconsent to the inclusion of its report in this Annual Report on Form 20-F.

 

**REPORT OF INDEPENDENT CHARTERED ACCOUNTANTS**

 

**To the Shareholders of NovAtel Inc.,**

 

We have audited the consolidated balancesheets of NovAtel Inc. as at December 31, 2001 and 2000 and the consolidatedstatements of operations, shareholders’ equity and cash flows for each of thethree years in the period ended December 31, 2001. These financial statementsare the responsibility of the Company’s management. Our responsibility is toexpress an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance withgenerally accepted auditing standards in Canada and the United States. Thosestandards require that we plan and perform an audit to obtain reasonableassurance whether the financial statements are free of material misstatement.An audit includes examining, on a test basis, evidence supporting the amountsand disclosures in the financial statements. An audit also includes assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.

 

In our opinion, these consolidatedfinancial statements present fairly, in all material respects, the financialposition of the Company as at December 31, 2001 and 2000 and the results of itsoperations and its cash flows for each of the three years in the period endedDecember 31, 2001 in accordance with Canadian generally accepted accountingprinciples.

 

 
|              | /s/ ARTHUR  ANDERSEN LLP |
|-------------------|--------------------------|
| Calgary,  Canada  | ARTHUR  ANDERSEN LLP     |
| February 1,  2002 |                     | Chartered  Accountants |

 

66

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**NOVATEL INC.**

 

**CONSOLIDATED BALANCESHEETS**

**(in thousands)**

 
|                                                        |   | **December  31,** |       |
|-------------------------------------------------------------|--------|-------------------|------------|
|                                                        |   | **2002**          |       | **2001** |   |
| **ASSETS**                                                  |   |              |       |   |   |
|                                                        |   |              |       |   |   |
| Current assets:                                             |   |              |       |   |   |
| Cash and short-term investments (Note 8)                    |   | $                 | 6,572      |   | $ | 4,794 |   |
| Accounts receivable (Notes 3 and 12)                        |   | 9,634             |       | 6,050 |   |
| Related party receivables (Note 15)                         |   | 730               |       | 665 |   |
| Related party notes receivable (Note 15)                    |   | 1,932             |       | 1,595 |   |
| Inventories (Note 4)                                        |   | 4,780             |       | 6,562 |   |
| Prepaid expenses and deposits                               |   | 284               |       | 286 |   |
| Total current assets                                        |   | 23,932            |       | 19,952 |   |
|                                                        |   |              |       |   |   |
| Capital assets (Note 5)                                     |   | 2,460             |       | 2,854 |   |
| Intangible assets (Notes 6 and 9)                           |   | 1,902             |       | 2,487 |   |
| Deferred development costs (Note 7)                         |   | 2,596             |       | 2,528 |   |
| Total assets                                                |   | $                 | 30,890     |   | $ | 27,821 |   |
|                                                        |   |              | ** ** |   | ** ** |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**              |   |              | ** ** |   | ** ** |
|                                                        |   |              | ** ** |   | ** ** |
| Current liabilities:                                        |   |              |       |   |   |
| Accounts payable and accrued liabilities                    |   | $                 | 5,848      |   | $ | 4,469 |   |
| Related party payables (Note 15)                            |   | 327               |       | 418 |   |
| Notes payable (Notes 16 and 17)                             |   | 2,418             |       | 1,964 |   |
| Deferred revenue and customer deposits                      |   | 531               |       | 202 |   |
| Provision for future warranty costs                         |   | 344               |       | 285 |   |
| Capital lease obligations – current portion (Note 9)   |   | 92                |       | 330 |   |
| Total current liabilities                                   |   | 9,560             |       | 7,668 |   |
|                                                        |   |              |       |   |   |
| Deferred gain on sale/leaseback of capital assets (Note 5)  |   | 685               |       | 814 |   |
| Capital lease obligations – long-term portion (Note 9) |   | 98                |       | 253 |   |
| Total liabilities                                           |   | 10,343            |       | 8,735 |   |
|                                                        |   |              |       |   |   |
| Commitments and contingencies (Note 9)                      |   |              |       |   |   |
|                                                        |   |              |       |   |   |
| Shareholders’ equity (Note 11):                        |   |              |       |   |   |
| Capital stock                                               |   | 35,572            |       | 35,596 |   |
| Contributed surplus                                         |   | 13                |       | 25 |   |
| Deficit                                                     |   | (15,038           | )          | (16,535 | ) |
| Total shareholders’ equity                             |   | 20,547            |       | 19,086 |   |
| Total liabilities and shareholders’ equity             |   | $                 | 30,890     |   | $ | 27,821 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements

 

67

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**NOVATEL INC.**

 

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(in thousands, except per share data)**

 
|                                                         |   | **Year  Ended December 31,** |   |
|--------------------------------------------------------------|--------|------------------------------|--------|
|                                                         |   | **2002**                     |   | **2001** |   | **2000** |   |
| Revenues (Notes 12 and 15)                                   |   |                         |   |   |   |   |   |
| Product sales                                                |   | $                            | 27,255 |   | $ | 23,241 |   | $ | 23,980 |   |
| NRE fees                                                     |   | 6,179                        |   | 4,996 |   | 863 |   |
| Total revenues                                               |   | 33,434                       |   | 28,237 |   | 24,843 |   |
|                                                         |   |                         |   |   |   |   |   |
| Cost of sales (Note 15)                                      |   |                         |   |   |   |   |   |
| Cost of product sales                                        |   | 12,020                       |   | 10,730 |   | 10,360 |   |
| Cost of NRE fees                                             |   | 4,055                        |   | 2,542 |   | 482 |   |
| Total cost of sales                                          |   | 16,075                       |   | 13,272 |   | 10,842 |   |
|                                                         |   |                         |   |   |   |   |   |
| Gross profit                                                 |   | 17,359                       |   | 14,965 |   | 14,001 |   |
|                                                         |   |                         |   |   |   |   |   |
| Operating expenses:                                          |   |                         |   |   |   |   |   |
| Research and development                                     |   | 5,519                        |   | 6,827 |   | 8,161 |   |
| Selling and marketing                                        |   | 5,717                        |   | 3,859 |   | 4,527 |   |
| General and administration                                   |   | 4,433                        |   | 4,170 |   | 3,661 |   |
| Total operating expenses                                     |   | 15,669                       |   | 14,856 |   | 16,349 |   |
|                                                         |   |                         |   |   |   |   |   |
| Operating income (loss)                                      |   | 1,690                        |   | 109 |   | (2,348 | ) |
|                                                         |   |                         |   |   |   |   |   |
| Interest income, net                                         |   | 84                           |   | 138 |   | 319 |   |
| Other expense (Note 13)                                      |   | (200                         | )      | (124 | ) | (769 | ) |
|                                                         |   |                         |   |   |   |   |   |
| Income (loss) from continuing operations before income taxes |   | 1,574                        |   | 123 |   | (2,798 | ) |
|                                                         |   |                         |   |   |   |   |   |
| Provision for income taxes (Note 14)                         |   | 77                           |   | 13 |   | 13 |   |
|                                                         |   |                         |   |   |   |   |   |
| Net income (loss) from continuing operations                 |   | 1,497                        |   | 110 |   | (2,811 | ) |
|                                                         |   |                         |   |   |   |   |   |
| Net income from discontinued operations                      |   | 3⁄4                       |   | 3⁄4 |   | 16 |   |
|                                                         |   |                         |   |   |   |   |   |
| Net income (loss)                                            |   | $                            | 1,497  |   | $ | 110 |   | $ | (2,795 | ) |
|                                                         |   |                         |   |   |   |   |   |
| Net income (loss) per share (basic) (Note 11)                |   |                         |   |   |   |   |   |
| Continuing operations                                        |   | $                            | 0.19   |   | $ | 0.01 |   | $ | (0.37 | ) |
| Discontinued operations                                      |   | 3⁄4                       |   | 3⁄4 |   | 0.01 |   |
| Net income (loss) per share                                  |   | $                            | 0.19   |   | $ | 0.01 |   | $ | (0.36 | ) |
|                                                         |   |                         |   |   |   |   |   |
| Weighted average shares outstanding (basic) (Note 11)        |   | 7,681                        |   | 7,690 |   | 7,676 |   |
|                                                         |   |                         |   |   |   |   |   |
| Net income (loss) per share (diluted) (Note 11)              |   |                         |   |   |   |   |   |
| Continuing operations                                        |   | $                            | 0.19   |   | $ | 0.01 |   | $ | (0.37 | ) |
| Discontinued operations                                      |   | 3⁄4                       |   | 3⁄4 |   | 0.01 |   |
| Net income (loss) per share                                  |   | $                            | 0.19   |   | $ | 0.01 |   | $ | (0.36 | ) |
|                                                         |   |                         |   |   |   |   |   |
| Weighted average shares outstanding (diluted) (Note 11)      |   | 7,824                        |   | 7,704 |   | 7,816 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

68

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**NOVATEL INC.**

 

**CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY**

**(in thousands)**

 
|                 |   | **Common Shares (Note 11)** |   | **Contributed  Surplus** |   | **Deficit** |   | **Total  Shareholders’  Equity** |   |
|----------------------|--------|-----------------------------|--------|--------------------------|--------|-------------|--------|---------------------------------------|--------|
|                 |   | **Number**                  |   | **Amount**               |   |        |   |                                  |
|                 |   |                        |   |                     |   |        |   |                                  |   |   |   |
| December 31, 1999    |   | 7,674                       |   | $                        | 35,602 |        | $      | —                                |   | $ | (13,850 | ) | $ | 21,752 |   |
| Common shares issued |   | 4                           |   | 12                       |   | 3⁄4      |   | 3⁄4                                |   | 12 |   |
| Net loss             |   | 3⁄4                      |   | 3⁄4                   |   | 3⁄4      |   | (2,795                                | )      | (2,795 | ) |
| December 31, 2000    |   | 7,678                       |   | $                        | 35,614 |        | $      | —                                |   | $ | (16,645 | ) | $ | 18,969 |   |
| Common shares issued |   | 17                          |   | 35                       |   | 3⁄4      |   | 3⁄4                                |   | 35 |   |
| Repurchase of shares |   | (12                         | )      | (53                      | )      | 25          |   | 3⁄4                                |   | (28 | ) |
| Net income           |   | 3⁄4                      |   | 3⁄4                   |   | 3⁄4      |   | 110                                   |   | 110 |   |
| December 31, 2001    |   | 7,683                       |   | $                        | 35,596 |        | $      | 25                                    |   | $ | (16,535 | ) | $ | 19,086 |   |
| Common shares issued |   | 14                          |   | 31                       |   | 3⁄4      |   | 3⁄4                                |   | 31 |   |
| Repurchase of shares |   | (12                         | )      | (55                      | )      | (12         | )      | 3⁄4                                |   | (67 | ) |
| Net income           |   | 3⁄4                      |   | 3⁄4                   |   | 3⁄4      |   | 1,497                                 |   | 1,497 |   |
| December 31, 2002    |   | 7,685                       |   | $                        | 35,572 |        | $      | 13                                    |   | $ | (15,038 | ) | $ | 20,547 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

69

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**NOVATEL INC.**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(in thousands)**

 
|                                                                    |   | **Year  Ended December 31,** |   |
|-------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                    |   | **2002**                     |   | **2001** |   | **2000** |   |
| Operating activities:                                                   |   |                         |   |   |   |   |   |
| Net income (loss) from continuing operations                            |   | $                            | 1,497  |   | $ | 110 |   | $ | (2,811 | ) |
| Net income from discontinued operations                                 |   | 3⁄4                       |   | 3⁄4 |   | 16 |   |
| Charges and credits to operations not involving an outlay of cash:      |   |                         |   |   |   |   |   |
| Amortization                                                            |   | 2,127                        |   | 2,415 |   | 2,666 |   |
| Gain on disposal of capital assets                                      |   | (23                          | )      | (5 | ) | (74 | ) |
| Gain on dilution of equity interest in Mezure, Inc. (Note 17)           |   | (121                         | )      | 3⁄4 |   | 3⁄4 |   |
| Amortization of deferred gain on sale/leaseback of capital assets       |   | (129                         | )      | (130 | ) | (154 | ) |
| Non-controlling interest                                                |   | 3⁄4                       |   | (11 | ) | 8 |   |
| Net change in non-cash working capital related to operations (Note  18) |   | (189                         | )      | (2,802 | ) | 1,022 |   |
| Cash provided by (used in) operating activities                         |   | 3,162                        |   | (423 | ) | 673 |   |
|                                                                    |   |                         |   |   |   |   |   |
| Financing activities:                                                   |   |                         |   |   |   |   |   |
| Issuance of shares (Note 11)                                            |   | 31                           |   | 35 |   | 12 |   |
| Repurchase of shares (Note 11)                                          |   | (67                          | )      | (28 | ) | 3⁄4 |   |
| Equity financing of joint venture (Note 16)                             |   | 588                          |   | 3⁄4 |   | 3⁄4 |   |
| Related party notes receivable                                          |   | (337                         | )      | (169 | ) | (1,426 | ) |
| Notes payable                                                           |   | 613                          |   | 184 |   | 1,426 |   |
| (Decrease) increase in capital lease obligations (Note 5)               |   | (393                         | )      | 48 |   | (388 | ) |
| Cash provided by (used in) financing activities                         |   | 435                          |   | 70 |   | (376 | ) |
|                                                                    |   |                         |   |   |   |   |   |
| Increase (decrease) in cash before investing activities                 |   | 3,597                        |   | (353 | ) | 297 |   |
|                                                                    |   |                         |   |   |   |   |   |
| Investing activities:                                                   |   |                         |   |   |   |   |   |
| Purchase of capital and intangible assets                               |   | (1,204                       | )      | (937 | ) | (1,487 | ) |
| Proceeds from disposal of capital assets                                |   | 98                           |   | 36 |   | 145 |   |
| Investment in Point, Inc. (Note 16)                                     |   | (588                         | )      | 3⁄4 |   | 3⁄4 |   |
| Investment in Mezure, Inc. (Note 17)                                    |   | 3⁄4                       |   | (3 | ) | 3⁄4 |   |
| Settlement payment on divestitures                                      |   | 3⁄4                       |   | 3⁄4 |   | (423 | ) |
| Deferred development costs                                              |   | (125                         | )      | (4 | ) | (757 | ) |
| Cash used in investing activities                                       |   | (1,819                       | )      | (908 | ) | (2,522 | ) |
|                                                                    |   |                         |   |   |   |   |   |
| Increase (decrease) in cash and short-term investments                  |   | 1,778                        |   | (1,261 | ) | (2,225 | ) |
| Cash and short-term investments, beginning of year                      |   | 4,794                        |   | 6,055 |   | 8,280 |   |
| Cash and short-term investments, end of year                            |   | $                            | 6,572  |   | $ | 4,794 |   | $ | 6,055 |   |
|                                                                    |   |                         |   |   |   |   |   |
| Cash and short-term investments consisted of:                           |   |                         |   |   |   |   |   |
| Cash and cash equivalents                                               |   | $                            | 1,700  |   | $ | 1,938 |   | $ | 1,895 |   |
| Restricted short-term investments                                       |   | 3,455                        |   | 2,827 |   | 4,160 |   |
| Other short-term investments                                            |   | 1,417                        |   | 29 |   | 3⁄4 |   |
|                                                                    |   | $                            | 6,572  |   | $ | 4,794 |   | $ | 6,055 |   |
|                                                                    |   |                         |   |   |   |   |   |
| Interest paid related to bank advances and capital lease obligations    |   | $                            | 27     |   | $ | 33 |   | $ | 49 |   |
| Income taxes paid                                                       |   | $                            | 40     |   | $ | 71 |   | $ | 54 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

70

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**NOVATEL INC.**

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(in thousands, except per share data and unless otherwise stated)**

 

*Note 1**                                    Nature of Business*

 

NovAtel Inc. (NovAtel or the Company) isincorporated under the laws of Canada. The Company designs, markets andsupports a broad range of products that determine precise geographic locationsusing the Global Positioning System (GPS).

 

On July 20, 1999, the Company and SokkiaCo., Ltd. formed a company, Point, Inc. to develop and distribute GPS basedproducts for surveying, mapping, geographical information systems, constructionand construction machine control applications, on a world-wide basis (see Note16).

 

On April 17, 1998, CMC Electronics Inc.(CMC Electronics), formerly BAE SYSTEMS CANADA INC., acquired 58.3% of theCompany’s outstanding common shares from the Company’s two former principalshareholders.  On November 29, 1999, BAESYSTEMS p.l.c. acquired control of the Company through the acquisition ofapproximately 51.6% of the common shares of CMC Electronics (see Notes 9 and14).  On April 11, 2001, an investorgroup led by ONCAP L.P. (ONCAP) acquired control of the Company through theacquisition of CMC Electronics (see Note 14).

 

As of December 31, 2002, the Company owneda 70% equity interest in Mezure, Inc., a company developing a GPS, wirelesscommunication and interest based product for deformation monitoring of manmadeand natural structures.  Mezure, Inc.,is dependent on external financing to continue its operations (see Note 17 and21).

 

*Note 2**                                    Significant Accounting Policies*

 

The consolidated financial statements havebeen prepared by management in accordance with generally accepted accounting principlesin Canada and are stated in Canadian dollars. The material differences between Canadian and United States of America(U.S.) generally accepted accounting principles are described in Note 20.  The preparation of financial statements inaccordance with generally accepted accounting principles requires management tomake estimates and assumptions that affect the reported amounts of assets andliabilities and the disclosure of contingent assets and liabilities at the dateof the financial statements, and revenues and expenses during the reportingperiod. Actual results could differ from those estimated.

 

a) ***Principles of Consolidation***

 

The consolidated financial statementsinclude the accounts of the Company, its subsidiaries and its proportionate 49%joint venture interest in the accounts of Point, Inc.

 

b) ***Foreign Currency Translation***

 

Foreign subsidiaries and Point, Inc. areconsidered financially and operationally dependent on the Company and aretranslated into Canadian dollars using current rates of exchange for monetaryassets and liabilities, historical rates of exchange for non-monetary assetsand liabilities, and average rates for the period for revenues and expenses,except amortization and cost of sales, which are translated at the rate of exchangeapplicable to the related assets. Gains and losses resulting from thesetranslation adjustments are included in other income (expense).

 

Transactions and monetary balancesdenominated in a currency other than the Canadian dollar are translated intoCanadian dollars using yearly average and year-end exchange rates,respectively. Gains and losses arising from this translation process areincluded in income.

 

c)***Cash and Cash Equivalents***

 

Cash and cash equivalents include highlyliquid investments which have original maturities of 90 days or less.

 

71

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d)***Inventories***

 

Raw materials and components,work-in-progress, and finished goods inventories are recorded at the lower ofcost or net realizable value. Cost is determined on a first-in, first-out basisand includes materials, labour and manufacturing overhead.

 

e)***Capital Assets, Intangible Assets and Amortization***

 

Capital assets are recorded at cost.  Maintenance and repair costs of a routinenature are charged to operations as incurred, and renewals and betterments thatextend the economic useful life of an asset are capitalized.

 

Capital assets and intangible assets areamortized on a straight-line basis using the expected useful lives of theassets:

 

| Computer and ancillary equipment   |   | 4  years             |   |
|------------------------------------|--------|----------------------|--------|
|                               |   |                 |   |
| Research and development equipment |   | 4  years             |   |
|                               |   |                 |   |
| Production equipment               |   | 5  years             |   |
|                               |   |                 |   |
| Leasehold improvements             |   | over  term of leases |   |
|                               |   |                 |   |
| Furniture and fixtures             |   | 10  years            |   |
|                               |   |                 |   |
| Product tooling                    |   | 2  years             |   |
|                               |   |                 |   |
| Patents and other intangibles      |   | 5 -  10 years        |   |

 

Capital assets and intangible assets areassessed for future recoverability or impairment by estimating future netundiscounted cash flows and residual values. When an impairment has occurred, a loss is recognized in the period.

 

                *f)**Revenue Recognition***

 

                Revenues from product sales arerecognized at the time of shipment to the customer.  Revenues from non-recurring engineering fees are recognized atthe time services are rendered.  Onlong-term contracts, revenue is generally recognized using the percentage ofcompletion method relative to total cost incurred or customer milestonesachieved.  Revisions in cost and profitestimates during the course of work are reflected in the period in which theneed for revision becomes known. Losses, if any, are recognized fully whenfirst anticipated. Some contracts contain penalty provisions based onperformance relative to established targets. Such penalities are included in revenue or cost estimates when amountscan be resonably determined.  On certainlong-term contracts,  in which thecustomer pays established rates for time and materials, revenue is recognizedas services are rendered and costs are incurred.

 

g)***Research and Development Costs***

 

Research costs are charged to operations asincurred. Development costs, including software development costs, are chargedto operations as incurred unless they meet specific criteria related totechnical, market and financial feasibility. In these circumstances, the costs are deferred and amortized on asystematic basis, subject to an estimate of recoverability.

 

h)***Provision for Future Warranty Costs***

 

Warranty costs are accrued, to the extentthat they are not recoverable from third party manufacturers, for the estimatedcost to repair products for the balance of the warranty periods.

 

i)***Stock-based Compensation Plans***

 

Effective January 1, 2002, the Companyadopted the provisions of Section 3870 of the Handbook of the CanadianInstitute of Chartered Accountants with respect to accounting for stock-basedcompensation and other stock-based payments. The Company has elected to continue to use the intrinsic value basedmethod of accounting for stock-based compensation arrangements and to disclosethe pro forma results of using the fair value based method.  Accordingly, the net earnings for thereported periods remain unchanged and the pro forma results of using the fairvalue based method are disclosed in Note 19. The Company is applying the new recommendations to all options granted.

 

72

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j)***Income Taxes***

 

Effective January 1, 2000, the Companyadopted the liability method of accounting for income taxes.  Under this method, current income taxes arerecognized for the estimated income taxes payable for the current year.  Future income tax assets and liabilities arerecognized for temporary differences between the tax and accounting bases ofassets and liabilities as well as for the benefit of losses available to becarried forward to future years for tax purposes that are more likely than notto be realized.

 

k) ***Investment Tax Credits***

 

Investment tax credits relating toscientific research and development and capital expenditures are accounted forusing the cost reduction method as they are received, as there is not a highdegree of assurance that the Company will be able to realize the benefit fromthese credits.

 

l)***Post Employment Benefits***

 

The Company currently provides certain life insurance and extendedhealth care benefits for employees as they retire.  Substantially all of the health care benefits are self-insured,while life insurance benefits are provided through an insurance contract.  The Company recognizes the cost of providingsuch benefits as the related services are rendered by employees.

 

m)***Earnings Per Share***

 

Effective January 1, 2001, the Companyadopted the revised provisions of Section 3500 of the Handbook of the CanadianInstitute of Chartered Accountants with respect to earnings per share.  The new standard requires that the “treasurystock” method rather than the “imputed earnings” approach be used to determinethe dilutive effect of instruments such as warrants and options.  Under the treasury stock method, diluted earningsper share are computed as if the instruments were exercised at the beginning ofthe period (or the time of issuance, if later) and the funds obtained were usedto purchase common shares of the Company at the average market price during theperiod.  The new accounting policy hasbeen applied retroactively with restatement of prior period financialstatements and had no impact on the reported results for any current or priorperiod reported herein.

 

n) ***Goodwill***

 

Effective July 1, 2001, the Company adopted the provisions of Section3062 of the Handbook of the Canadian Institute of Chartered Accountants withrespect to goodwill and intangibles. Goodwill arising after July 1, 2001 is recorded at cost and is notsubject to amortization.  EffectiveJanuary 1, 2002, goodwill is subject to a fair value impairment test at leastannually.

 

*Note 3**                                    Accounts Receivable*

 

|                              |   | **December  31,  2002** |   | **December  31,  2001** |   |
|-----------------------------------|--------|-------------------------|--------|-------------------------|--------|
|                              |   |                    |   |                    |   |
| Trade receivables, net            |   | $                       | 9,215  |                    | $      | 5,919 |   |
| Goods and Services Tax receivable |   | 279                     |   | 97                      |   |
| Other                             |   | 140                     |   | 34                      |   |
|                              |   | $                       | 9,634  |                    | $      | 6,050 |   |

 

The receivable balances are net of anallowance for doubtful accounts and sales returns of $1,077 at December 31,2002 and $676 at December 31, 2001.

 

*Note 4**                                    Inventories*

** **

|                         |   | **December  31,  2002** |   | **December  31,  2001** |   |
|------------------------------|--------|-------------------------|--------|-------------------------|--------|
|                         |   |                    |   |                    |   |
| Raw materials and components |   | $                       | 1,257  |                    | $      | 1,995 |   |
| Work-in-progress             |   | 207                     |   | 349                     |   |
| Finished goods               |   | 3,316                   |   | 4,218                   |   |
|                         |   | $                       | 4,780  |                    | $      | 6,562 |   |

 

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The inventory balances are net of aprovision for excess and obsolete inventory of $1,461 at December 31, 2002 and$964 at December 31, 2001.

 

*Note 5**                                    Capital Assets*

** **
|                                           |   | **December 31, 2002** |       | **December 31, 2001**         |       |
|------------------------------------------------|--------|-----------------------|------------|-------------------------------|------------|
|                                           |   | **Cost**              |       | **Accumulated  Amortization** |       | **Net** |   | **Cost** |   | **Accumulated  Amortization** |   | **Net** |   |
|                                           |   |                  | ** ** |                          | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Computer and ancillary equipment               |   | $                     | 5,534      |                          | $          | 4,779 |   | $ | 755 |   | $ | 5,088 |   | $ | 4,315 |   | $ | 773 |   |
| Production, research and development equipment |   | 2,898                 |       | 2,238                         |       | 660 |   | 2,568 |   | 1,929 |   | 639 |   |
| Leasehold improvements                         |   | 111                   |       | 32                            |       | 79 |   | 111 |   | 14 |   | 97 |   |
| Furniture and fixtures                         |   | 1,778                 |       | 1,013                         |       | 765 |   | 602 |   | 311 |   | 291 |   |
| Product tooling                                |   | 1,136                 |       | 1,047                         |       | 89 |   | 1,101 |   | 957 |   | 144 |   |
| Equipment under capital lease                  |   | 296                   |       | 184                           |       | 112 |   | 1,457 |   | 547 |   | 910 |   |
|                                           |   | $                     | 11,753     |                          | $          | 9,293 |   | $ | 2,460 |   | $ | 10,927 |   | $ | 8,073 |   | $ | 2,854 |   |

 

On January 29, 1999, the Company concludeda sale/leaseback arrangement by which the Calgary facility, including certainadjacent land, with a carrying value of $5,812 at time of sale, was sold fornet proceeds of $6,922, resulting in a gain of $1,110.  The gain on the sale of the facility hasbeen deferred and is being amortized over the ten year term of the lease.

 

On September 28, 2001, the Company enteredinto a sale/leaseback transaction with HSBC Leasing, whereby certain toolingand computer equipment was sold for $300 and a three year lease obligation.

 

*Note 6**                                    Intangible Assets*

 

Intangible assets, comprised primarily ofpatents, purchased technology and goodwill, are net of accumulated amortizationof $3,856 at December 31, 2002 and $3,106 at December 31, 2001.

 

*Note 7**                                    Deferred Development Costs*

** **

|                       |   | **December  31,  2002** |   | **December  31,  2001** |   |
|----------------------------|--------|-------------------------|--------|-------------------------|--------|
|                       |   |                    |   |                    |   |
| Deferred development costs |   | $                       | 2,689  |                    | $      | 2,564 |   |
| Accumulated amortization   |   | (93                     | )      | (36                     | )      |
|                       |   | $                       | 2,596  |                    | $      | 2,528 |   |

 

In the year ended December 31, 2002, theCompany deferred $125 of development costs related to the development of acertified aviation GPS receiver, compared to $4 in 2001 and $757 in 2000.  With the GPS receiver reaching thecommercialization stage, the Company has commenced amortizing these deferredcosts, using a method similar to the unit-of-production method of amortization.  The Company amortized $57 of these deferredcosts in the year ended December 31, 2002 ($36 in 2001 and $nil in 2000).

 

At December 31, 2002, the Company haddeferred $2,596 of development costs. The continued deferral of these costs is subject to recoverability basedon estimates of future sales of the certified aviation GPS receiver.  Should

 

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future actual sales of this receiver be materiallylower from the current estimated sales, all or a portion of the deferreddevelopment costs would be charged to results of operations.

 

*Note 8**                                    Bank Advances*

 

At December 31, 2002, lines of credit wereavailable with the HSBC Bank Canada and the Toronto Dominion Bank.  The lines of credit are payable on demandand are secured by $3,455 of short-term investments held as compensatingbalances.******Thebank advances bear interest at the banks’ prime rate on Canadian dollaradvances.

 

In aggregate, the Company can borrow up to$1,650 for day-to-day operating requirements and $1,770 to support the marginrequirements related to the purchase of between US $5,468 and US $7,500 offorward foreign exchange contracts (depending on the maturity date of thecontracts).  At December 31, 2002,portions of the lines of credit were utilized to support $79 of letters ofcredit ($80 at December 31, 2001) and the margin requirements on US $3,000 inforward foreign exchange contracts leaving $1,571 available for day-to-dayoperating requirements and the margin capacity available to enter into anadditional US $2,468 to US $4,500 in forward foreign exchange contracts(depending on the maturity date of the contracts).

 

*Note 9**                                    Commitments and Contingencies*

 

a) At December 31, 2002, purchasecommitments were outstanding for approximately $4.8 million pertainingprimarily to the acquisition of inventory, supplies and services.

 

b) The Company’s facilities and certaincomputer equipment, office equipment and furniture are leased for variousperiods up to 2009.  Payments under theleasing arrangements are as follows:

 
|                                          |   | **Capital  Leases** |   | **Operating  Leases** |   |
|-----------------------------------------------|--------|---------------------|--------|-----------------------|--------|
|                                          |   |                |   |                  |   |
| 2003                                          |   | $                   | 102    |                  | $      | 909 |   |
| 2004                                          |   | 101                 |   | 997                   |   |
| 2005                                          |   | 3⁄4              |   | 1,000                 |   |
| 2006                                          |   | 3⁄4              |   | 944                   |   |
| 2007                                          |   | 3⁄4              |   | 895                   |   |
| 2008 and beyond                               |   | 3⁄4              |   | 1,102                 |   |
| Total future minimum lease payments           |   | 203                 |   | $                     | 5,847  |   |
| Less: imputed interest (7.0%)                 |   | (13                 | )      |                  |   |
| Balance of capital lease obligations          |   | 190                 |   |                  |   |
| Less: current portion                         |   | (92                 | )      |                  |   |
| Capital lease obligations - long-term portion |   | $                   | 98     |                  |   |   |

 

c) As at December 31, 2002, intangibleassets included $492 related to the Company’s 1996 settlement agreement withTrimble Navigation Limited (Trimble). This settlement agreement with Trimble includes a**provision that Trimble may, at its soleoption, terminate rights granted thereunder, including licenses, should theCompany undergo a direct change in control. On June 26, 2001, the Company received notice from Trimble terminatingthe licenses and rights under the settlement agreement in connection with theshare acquisition by CMC Electronics in April 1998.  The Company has sought legal advice regarding Trimble’stermination rights under the 1996 settlement agreement and is continuing toevaluate the impact, if any, of Trimble’s notice of termination.  As this matter has not been resolved as ofDecember 31, 2002, the Company has not provided for any impairment of theseintangible assets.

 

d) The Company is subject to legalproceedings and other claims which arise in the ordinary course of itsbusiness. The Company has sought legal advice on these matters. In the opinionof management, the ultimate liability with

 

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respect to the resolution of these actions is notexpected to materially affect the financial position or results of operations.

 

*Note 10**                             Financial Instruments*

 

In the normal course of business, theCompany uses foreign currency options and forward foreign currency contracts toreduce its exposure to fluctuations in the U.S. dollar to Canadian dollarexchange rates.  The Company documentsthe relationship between hedging instruments and hedged items, as well as itsrisk management objective for undertaking hedging transactions.  The process includes linking hedginginstruments to assets and liabilities on the balance sheet or to forecastedtransactions.  The Company also assesses,both at the hedge’s inception and on an ongoing basis, whether the foreigncurrency contracts that are used in hedging transactions are effective inoffsetting changes in fair values or cash flows of hedged items.  The contracts are normally for terms of upto twelve months and are used as hedges of the Company’s net U.S. dollar cashrequirements.  The contracts are notused for trading or speculative purposes. Foreign exchange gains and losses on foreign currency contracts used tohedge current foreign currency assets and liabilities are accrued under currentassets or liabilities on the balance sheet and recognized currently in otherincome/expense, net, offsetting the respective translation gains and lossesrecognized on the underlying asset or liability.

 

Foreign exchange gains and losses onforeign currency contracts used to hedge anticipated U.S. dollar cashrequirements beyond 60 days are recognized when the underlying cash flows arerealized.

 

At December 31, 2002, the Company hasforeign currency options and forward foreign currency contracts to sell US$3,000 between February 28, 2003 and April 30, 2003 at rates between $0.6429and $0.6440.

 

The carrying values of other financialinstruments, which include cash and short-term investments, accountsreceivable, related party receivables and advances, related party notesreceivable, accounts payable, related party payables and notes payableapproximate their fair value because of the near-term maturity of theseinstruments.  The carrying value ofcapital lease obligations approximate their fair value, as the imputed interestrates on these obligations approximate market rates.

 

*Note 11**                             Shareholders’ Equity*

 

The Company has authorized an unlimitednumber of common shares and first preference shares, of which 7,685 commonshares are outstanding as of December 31, 2002 (7,683 in 2001 and 7,678 in2000).

 

Net income (loss) per share figurespresented in the Company’s financial statements are based upon the weightedaverage number of shares outstanding. Diluted net income (loss) per share figures are computed as if thedilutive instruments were exercised at the beginning of the period (or the timeof issuance, if later) and the funds obtained were used to purchase commonshares at the average market price during the period.

 

On September 4, 2001, the Companyimplemented a share repurchase program, under which the Company couldrepurchase up to 3% of the outstanding shares over the following twelve monthperiod.  By the time the program expiredon September 3, 2002, the Company had repurchased 23 shares.

 

The Company maintains stock option plansfor employees and members of the Board of Directors.  Under the plans, participants are granted options to purchasecommon shares at no less than the market value on the date of the grant.  The options have vesting periods rangingfrom three to four years and expire ten years from the date of the grant exceptfor 30 options granted on February 13, 2001, which have a six month vestingperiod. As of December 31, 2002, the Company has authorized the granting of upto 1,261 options to purchase common shares of the Company under the stockoption plans, of which 38 had been exercised.

 

A summary of the status of the Company’sstock option plans as of December 31, 2002, 2001 and 2000, and changes duringthe years ending on those dates is presented below:

 

76

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|                               |   | **2002**                |   | **2001**                               |   | **2000**                |   |
|------------------------------------|--------|-------------------------|--------|----------------------------------------|--------|-------------------------|--------|
| **Options**                        |   | **Number    of Shares** |   | **Weighted-  Average  Exercise Price** |   | **Number    of Shares** |   | **Weighted-  Average  Exercise Price** |   | **Number  of Shares** |   | **Weighted-  Average  Exercise Price** |   |
| Outstanding at beginning of year   |   | 834                     |   | US $5.08                               |   | 954                     |   | US $6.19 |   | 938 |   | US $6.37 |   |
| Granted                            |   | 198                     |   | 2.41                                   |   | 175                     |   | 1.74 |   | 105 |   | 3.07 |   |
| Exercised                          |   | (13                     | )      | 1.47                                   |   | (17                     | )      | 1.38 |   | (4 | ) | 1.95 |   |
| Forfeited                          |   | (45                     | )      | 4.87                                   |   | (278                    | )      | 6.99 |   | (85 | ) | 4.54 |   |
| Outstanding at End of year         |   | 974                     |   | US  $4.59                              |   | 834                     |   | US  $5.08 |   | 954 |   | US  $6.19 |   |
| Options exercisable at end of year |   | 624                     |   | US  $5.94                              |   | 553                     |   | US  $6.47 |   | 697 |   | US  $7.09 |   |

 

The following table summarizes informationabout the stock option plans as of December 31, 2002:

 
|                          |   | **Options  Outstanding**  |   | **Options  Exercisable**                          |   |
|-------------------------------|--------|---------------------------|--------|---------------------------------------------------|--------|
| **Range of  Exercise Prices** |   | **Number    Outstanding** |   | **Weighted-Average  Remaining  Contractual Life** |   | **Weighted-Average  Exercise Price** |   | **Number  Exercisable** |   | **Weighted-Average  Exercise Price** |   |
| US $7.50 to  $11.25           |   | 438                       |   | 4.4                                               | years  | US $7.67 |   | 438 |   | US $7.67 |   |
| $4.00                         |   | 3                         |   | 9.3                                               |   | 4.00 |   | 3⁄4 |   | 3⁄4 |   |
| $2.25 to $3.44                |   | 257                       |   | 8.5                                               |   | 2.58 |   | 36 |   | 3.07 |   |
| $1.38 to $2.00                |   | 276                       |   | 6.6                                               |   | 1.59 |   | 150 |   | 1.57 |   |
| US $1.38 to $11.25            |   | 974                       |   | 6.1                                               |   | US  $4.59 |   | 624 |   | US $5.94 |   |

 

In January and February 2003, the Companygranted an additional 184 options, with an exercise price of US $2.25, toemployees.

 

*Note 12**                             Major Customers, Export Sales and Suppliers*

 

Certain major customers accounted forsignificant portions of the sales from continuing operations.  The table below reflects customers whosepurchases represented more than 10% of the Company’s total revenues in any ofthe periods indicated.

 
|                        |   | **Sales  by Major Customer** |   |
|-----------------------------|--------|------------------------------|--------|
|                        |   | **Year  Ended December 31,** |   |
|                        |   | **2002**                     |   | **2001** |   | **2000** |   |
|                        |   |                         |   |   |   |   |   |
| Customer A                  |   | $                            | 3,781  |   | $ | 2,035 |   | $ | 2,663 |   |
| Customer B                  |   | 3,431                        |   | 1,546 |   | 1,823 |   |
| Customer C                  |   | 3,151                        |   | 6,108 |   | 7,211 |   |
| Customer D                  |   | 1,091                        |   | 2,919 |   | 560 |   |
|                        |   | $                            | 11,454 |   | $ | 12,608 |   | $ | 12,257 |   |
| Percentage of total revenue |   | 34                           | %      | 45 | % | 49 | % |

 

Accounts receivable and related partyreceivables related to these major customers at December 31 were $5,255 in 2002and $3,253 in 2001.

 
|           |   | **Sales  by Geographic Market** |   |
|----------------|--------|---------------------------------|--------|
|           |   | **Year  Ended December 31,**    |   |
|           |   | **2002**                        |   | **2001** |   | **2000** |   |
|           |   |                            |   |   |   |   |   |   |   |   |   |   |   |
| U.S.A          |   | $                               | 14,175 |   | 43 | % | $ | 12,163 |   | 43 | % | $ | 10,555 |   | 43 | % |
| Europe         |   | 5,515                           |   | 16 | % | 6,027 |   | 21 | % | 3,776 |   | 15 | % |
| Asia/Australia |   | 10,646                          |   | 32 | % | 7,537 |   | 27 | % | 7,944 |   | 32 | % |
| Canada         |   | 2,681                           |   | 8 | % | 2,495 |   | 9 | % | 2,337 |   | 9 | % |
| Other          |   | 417                             |   | 1 | % | 15 |   | — |   | 231 |   | 1 | % |
|           |   | $                               | 33,434 |   | 100 | % | $ | 28,237 |   | 100 | % | $ | 24,843 |   | 100 | % |

 

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Certain of the Company’s productsincorporate components that are either procured from sole source suppliers orwhich are in short supply. In the opinion of management, the Company has takenmeasures to mitigate the risk associated with the availability of thesecomponents.

 

*Note 13**                             Other Expense*

* *
|                                                |   | **Year  Ended December 31,** |   |
|-----------------------------------------------------|--------|------------------------------|--------|
|                                                |   | **2002**                     |   | **2001** |   | **2000** |   |
|                                                |   |                         |   |   |   |   |   |
| Employee relocation                                 |   | $                            | (128   | ) | $ | — |   | $ | — |   |
| Employee termination costs                          |   | (84                          | )      | 3⁄4 |   | (695 | ) |
| Foreign exchange                                    |   | (42                          | )      | 4 |   | (13 | ) |
| Gain on dilution of equity interest in Mezure, Inc. |   | 121                          |   | 3⁄4 |   | 3⁄4 |   |
| Financing charge on sales by Point                  |   | (47                          | )      | (164 | ) | (165 | ) |
| Miscellaneous                                       |   | (20                          | )      | 36 |   | 104 |   |
|                                                |   | $                            | (200   | ) | $ | (124 | ) | $ | (769 | ) |

 

The 2000 employee termination costs include$548 related to the reorganization of the Company’s senior management.

 

*Note 14**                             Income Taxes*

 

As described in Note 2, effective January1, 2000, the Company changed its policy for accounting for income taxes byadopting the liability method of accounting for income taxes.  The new accounting policy was appliedretroactively without restatement of prior period financial statements and hadno impact on the financial position and reported results of operations for anycurrent or prior periods.

 

78

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Temporary differences that give rise tofuture income tax assets and liabilities as of December 31 are as follows:

 

|                                       |   | **December  31, 2002** |   | **December  31, 2001** |   |
|--------------------------------------------|--------|------------------------|--------|------------------------|--------|
| Future income tax assets                   |   |                   |   |                   |   |
| Loss carry forwards                        |   | $                      | 8,100  |                   | $      | 11,800 |   |
| Scientific research deductions and credits |   | 50,400                 |   | 50,600                 |   |
| Reserves not currently deductible for tax  |   | 850                    |   | 850                    |   |
| Capital assets                             |   | 500                    |   | 300                    |   |
| Deferred gain on sale of building          |   | 250                    |   | 300                    |   |
|                                       |   | 60,100                 |   | 63,850                 |   |
| Future income tax liabilities              |   |                   |   |                   |   |
| Intangible assets                          |   | (300                   | )      | (500                   | )      |
| Deferred development costs                 |   | (400                   | )      | (400                   | )      |
| Leased assets                              |   | (50                    | )      | (100                   | )      |
|                                       |   | (750                   | )      | (1,000                 | )      |
|                                       |   |                   |   |                   |   |
| Valuation allowance                        |   | (59,350                | )      | (62,850                | )      |
|                                       |   | $                      | — |                   | $      | — |   |

 

The following table reconciles the differences between the incometax that would result solely by applying statutory rates and the income taxprovided for in the statements of operations.

 
|                                                          |   | **Year  ended December 31,** |   |
|---------------------------------------------------------------|--------|------------------------------|--------|
|                                                          |   | **2002**                     |   | **2001** |   | **2000** |   |
|                                                          |   |                         |   |   |   |   |   |   |   |   |   |   |   |
| Income  (loss) from continuing operations before income taxes |   | $                            | 1,574  |   |   |   | $ | 123 |   |   |   | $ | (2,798 | ) |   |   |
| Statutory  income tax expense (recovery)                      |   | $                            | 619    |   | 39.3 | % | $ | 52 |   | 42.1 | % | $ | (1,248 | ) | 44.6 | % |
| Adjusted  for the effects of:                                 |   |                         |   |   |   |   |   |   |   |   |   |   |   |
| Amortization  expense                                         |   | 638                          |   |   |   | 857 |   |   |   | 1,090 |   |   |   |
| Research  & development costs                             |   | 1,160                        |   |   |   | 1,399 |   |   |   | 1,231 |   |   |   |
| Deferred  development costs                                   |   | 3⁄4                       |   |   |   | (2 | ) |   |   | (338 | ) |   |   |
| Terminal  loss on capital assets upon acquisition of control  |   | 3⁄4                       |   |   |   | (861 | ) |   |   | 3⁄4 |   |   |   |
| Other                                                         |   | (48                          | )      |   |   | 276 |   |   |   | (165 | ) |   |   |
| Tax  loss carryforward                                        |   | (2,369                       | )      |   |   | (1,760 | ) |   |   | (570 | ) |   |   |
| Large  corporation tax                                        |   | 77                           |   |   |   | 52 |   |   |   | 13 |   |   |   |
| Provision  for income tax                                     |   | $                            | 77     |   | 4.9 | % | $ | 13 |   | 10.6 | % | $ | 13 |   | N/A |   |
|                                                               |        |                              |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

a)***Canadian Income Taxes***

 

At December 31, 2002, losses were availablefor Canadian income tax purposes that can be carried forward to reduce futureCanadian taxable income.  These lossesexpire as follows:

 

| 2004   |   | $      | 15,500 |   |
|--------|--------|--------|--------|--------|
| 2005   |   | 3⁄4 |   |
| 2006   |   | 1,600  |   |
|   |   | $      | 17,100 |   |

 

In addition, the Company has approximately$142 million of research and development costs deducted in the accounts, inexcess of amounts claimed for Canadian income tax purposes.

 

79

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The Company also has unutilized investmenttax credits of $6.8 million available to reduce future Canadian incometaxes.  These credits expire as follows:

 

| 2003   |   | $     | 1,200  |   |
|--------|--------|-------|--------|--------|
| 2004   |   | 1,600 |   |
| 2005   |   | 700   |   |
| 2006   |   | 400   |   |
| 2007   |   | 200   |   |
| 2008   |   | 600   |   |
| 2009   |   | 400   |   |
| 2010   |   | 500   |   |
| 2011   |   | 100   |   |
| 2012   |   | 700   |   |
| 2013   |   | 400   |   |
|   |   | $     | 6,800  |   |

 

The Company has determined that CMC Electronics’acquisition of a majority of the common shares of the Company on April 17,1998, BAE SYSTEMS p.l.c.’s acquisition of the majority of the common shares ofCMC Electronics on November 29, 1999 and ONCAP’s acquisition of the commonshares of CMC Electronics on April 11, 2001, constitute acquisitions-of-controlof the Company for Canadian income tax purposes.  Accordingly, the availability of certain of the Company’sCanadian losses, deductions, and investment tax credits may be subject tolimitation.

 

The ultimate availability and amount of thelosses and other tax benefits described above may be dependent upon futureCanada Customs and Revenue Agency audits. An adverse determination could resultin a significant decrease in the availability and amount of the tax benefitsdescribed above.

 

b)***U.S. Income Taxes***

 

The Company’s fully-owned U.S. subsidiariesfile a consolidated U.S. federal income tax return. They have net operatingloss carryforwards totalling approximately US $38.0 million which expire in2007 and 2008. However, these operating loss carryforwards will besubstantially limited due to the acquisitions-of-control by CMC Electronics,BAE SYSTEMS p.l.c. and ONCAP.

 

*Note 15**                             Related Party Transactions*

 

In the normal course of business, the Companyhad the following transactions, measured at the exchange amount, with itsrelated parties:

 
|                                                                                   |   | **Year Ended December 31,** |   |
|----------------------------------------------------------------------------------------|--------|-----------------------------|--------|
|                                                                                   |   | **2002**                    |   | **2001** |   | **2000** |   |
|                                                                                   |   |                        |   |   |   |   |   |
| Product sales to Point, Inc.                                                           |   | $                           | 740    |   | $ | 727 |   | $ | 1,732 |   |
| Services provided to Point, Inc.                                                       |   | 186                         |   | 149 |   | 266 |   |
| Royalty income from Point, Inc.                                                        |   | 54                          |   | 69 |   | 149 |   |
| Engineering services charged by Point, Inc.                                            |   | 58                          |   | 3⁄4 |   | 3⁄4 |   |
| Inventory purchases from CMC Electronics and Point, Inc.                               |   | 703                         |   | 188 |   | 41 |   |
| Contracted development costs charged by CMC Electronics                                |   | 125                         |   | 154 |   | 320 |   |
| Product sales to CMC Electronics                                                       |   | 191                         |   | 5 |   | 3⁄4 |   |
| Other charges from CMC Electronics                                                     |   | 162                         |   | 103 |   | 39 |   |
| Other charges from Point, Inc.                                                         |   | 3⁄4                      |   | 6 |   | 11 |   |
| Royalties charged to CMC Electronics                                                   |   | 76                          |   | 42 |   | 3⁄4 |   |
| Engineering services charged to CMC Electronics                                        |   | 29                          |   | 28 |   | 3⁄4 |   |
| Consulting fees charged by David E. Vaughn, after resignation as CEO  in February 2002 |   | 105                         |   | — |   | — |   |
|                                                                                        |        |                             |        |  |  |  |  |  |  |  |

 

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Significant related party receivables atDecember 31, 2002 consist of $673 from Point, Inc. ($589 at December 31, 2001)and $57 from CMC Electronics ($74 at December 31, 2001).  Related party payables at December 31, 2002were comprised of amounts due to CMC Electronics of $318 ($399 at December 31,2001) and $9 to Point, Inc. ($19 at December 31, 2001).

 

During 2002, the Company and Sokkiaadvanced US $830 in new loans to Point, Inc., with the Company’s share being US$407.  The related party notesreceivable of $1,932 ($1,595 at December 31, 2001) reflects the Company’sproportionate joint venture interest in the aggregate borrowings by Point, Inc.from NovAtel and Sokkia Co., Ltd. (Sokkia) of US $4,830.  The loans are secured by the assets ofPoint, Inc., and bore interest at rates between 3% and 6% during 2002 (6% in2001 and US prime rate in 2000).  OnFebruary 13, 2003, the Company and Sokkia agreed to extend the due dates on theloans such that US $4,330 is due on June 30, 2003 and US $500 is due December31, 2003 (see Note 16).

 

In addition, the Company and Sokkiaprovided US $1,500 in equity financing to Point, Inc.  The Company’s share of the equity financing was US $735 and theCompany’s equity interest in Point, Inc. remained at 49% (see Note 16).

 

*Note 16**                             Investment in Point, Inc.*

 

On July 20, 1999, the Company and Sokkia Co.,Ltd. formed a joint venture, Point, Inc., to distribute GPS based products forsurveying, mapping, geographical information systems, construction andconstruction machine control applications, on a worldwide basis.  The consolidated financial statementspresented herein include the Company’s proportionate share of the accounts ofPoint, Inc.

 

The following is a summary of the Company’sproportionate share of the financial position, operating results, and cashflows of Point, Inc.:

 
|                       |   | **Year Ended December 31,** |   |
|----------------------------|--------|-----------------------------|--------|
|                       |   | **2002**                    |   | **2001** |   | **2000** |   |
|                       |   |                        |   |   |   |   |   |
| Current assets             |   | $                           | 2,247  |   | $ | 1,630 |   | $ | 2,679 |   |
| Non-current assets         |   | 139                         |   | 143 |   | 70 |   |
| Total assets               |   | $                           | 2,386  |   | $ | 1,773 |   | $ | 2,749 |   |
|                       |   |                        |   |   |   |   |   |
| Current liabilities        |   | $                           | 3,477  |   | $ | 3,072 |   | $ | 2,524 |   |
| Long-term liabilities      |   | 3⁄4                      |   | 3⁄4 |   | 3⁄4 |   |
| Total liabilities          |   | $                           | 3,477  |   | $ | 3,072 |   | $ | 2,524 |   |
|                       |   |                        |   |   |   |   |   |
| Revenues                   |   | $                           | 4,635  |   | $ | 5,458 |   | $ | 5,750 |   |
| Expenses                   |   | 6,076                       |   | 6,899 |   | 8,083 |   |
| Loss                       |   | $                           | (1,441 | ) | $ | (1,441 | ) | $ | (2,333 | ) |
|                       |   |                        |   |   |   |   |   |
| Cash provided by (used in) |   |                        |   |   |   |   |   |
| Operating activities       |   | $                           | (1,929 | ) | $ | (202 | ) | $ | (2,268 | ) |
| Investing activities       |   | $                           | (48    | ) | $ | (128 | ) | $ | (48 | ) |
| Financing activities       |   | $                           | 923    |   | $ | 169 |   | $ | 1,426 |   |

 

Included in current liabilities is theCompany’s share of notes payable by Point, Inc. to Sokkia, in the amount of $1,932($1,595 at December 31, 2001).  Theloans are secured by the assets of Point, Inc., and bore interest at ratesbetween 3% and 6% during 2002 (6% in 2001 and US prime rate in 2000).  On February 13, 2003, the Company and Sokkiaagreed to extend the due dates on the loans such that US $4,330 is due on June30, 2003 and US $500 is due on December 31, 2003.

 

During 2002, the Company and Sokkiaadvanced US $830 in new loans to Point, Inc., with the Company’s share being US$407.  In addition, the Company andSokkia provided US $1,500 in equity financing to Point, Inc.  The Company’s share of the equity financingwas US $735 and the Company’s equity interest in Point, Inc. remained at 49% .

 

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Point, Inc. is dependent on the Company andSokkia for product supply, distribution and financing.  Should Sokkia and the Company discontinuetheir support, Point, Inc.’s ability to continue as a going concern would beimpaired.  If the existing loans toPoint, Inc. of US $4,830 were ultimately not repaid by Point, Inc. to theCompany and Sokkia, or if Point, Inc. were liquidated in an orderly wind-down,the Company believes that its maximum loss exposure in the statement ofoperations to Point, Inc., as of December 31, 2002, after consideration of theeffects of the proportionate consolidation of Point, Inc., would beapproximately $900, comprised primarily of working capital related items.  These financial statements do not reflectany adjustment that would be required if Point, Inc.’s operations werediscontinued.

 

*Note 17**                             Investment in Mezure, Inc.*

 

On January 26, 2001, the Company acquired a48.7% joint venture interest in Mezure, Inc. in exchange for US$400 of loansreceivable which the Company had previously advanced and charged to operationsin 2000.

 

On July 23, 2001, the Company acquired anadditional 25.3% equity interest in Mezure after exercising its option toconvert US$200 in loans receivable, which the Company previously advanced andcharged to operations in the first quarter 2001, into additional commonshares.  With the July 23, 2001acquisition of additional shares, the Company acquired control of Mezure, Inc.,and commenced full consolidation of Mezure, Inc.’s operations from that dateforward.

 

In April 2002, a third party investorconverted $159 of notes payable into an additional 522 common shares of Mezure,which reduced the Company’s equity investment in Mezure from approximately 74%to 70%.  The Company has recognized again of $121 relating to its reduced ownership interest in Mezure which hasbeen reflected in other income within the statement of operations in the periodended December 31, 2002.  (See Note 21)

 

The following transactions pertaining toMezure were included in the Company’s consolidated financial results on aproportionate basis for the period January 26, 2001 to July 23, 2001.

 
|                       |   | **Year  Ended  December 31, 2001** |   |
|----------------------------|--------|------------------------------------|--------|
| Revenue                    |   | $                                  | — |   |
| Expenses                   |   | 326                                |   |
| Loss                       |   | $                                  | (326   | ) |
|                       |   |                               |   |
| Cash provided by (used in) |   |                               |   |
| Operating activities       |   | $                                  | (327   | ) |
| Investing activities       |   | $                                  | (19    | ) |
| Financing activities       |   | $                                  | 105    |   |

 

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*Note 18**                             Consolidated Statements of Cash Flows*

 

The net changes in non-cash working capitalrelated to operations include:

 
|                                                                                     |   | **Year  ended December 31,** |   |
|------------------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                                     |   | **2002**                     |   | **2001** |   | **2000** |   |
|                                                                                     |   |                         |   |   |   |   |   |
| (Increase) decrease in accounts receivable and related party  receivables                |   | $                            | (3,649 | ) | $ | (1,304 | ) | $ | 2,039 |   |
| Decrease (increase) in inventories                                                       |   | 1,782                        |   | (30 | ) | (2,848 | ) |
| Decrease (increase) in prepaid expenses and deposits                                     |   | 2                            |   | 135 |   | (109 | ) |
| Increase (decrease) in accounts payable, accrued liabilities and  related party payables |   | 1,288                        |   | (1,577 | ) | 1,689 |   |
| Increase (decrease) in deferred revenue                                                  |   | 329                          |   | (43 | ) | 245 |   |
| Increase in provision for future warranty costs                                          |   | 59                           |   | 17 |   | 22 |   |
| Net change in non-cash working capital                                                   |   | (189                         | )      | (2,802 | ) | 1,038 |   |
|                                                                                     |   |                         |   |   |   |   |   |
| Non-cash working capital items related to divestitures                                   |   | 3⁄4                       |   | 3⁄4 |   | (16 | ) |
| Net change in non-cash working capital related to operations                             |   | $                            | (189   | ) | $ | (2,802 | ) | $ | 1,022 |   |

 

*Note 19**                             Stock-Based Compensation*

 

At December 31, 2002, the Company hadissued 974 options to employees and directors to purchase common shares underits stock-based compensation plans (see Notes 2 and 11).  As the Company applied an intrinsic valuebased method to account for its plans, no compensation cost was recognizedwithin the statement of operations for the year ended December 31, 2002.  Had compensation cost for the Company’sstock-based compensation plans been determined based on the fair value of theoptions at the grant dates, the Company’s pro forma net income (loss) and netincome (loss) per share would have been as follows:

 

|                                |   | **Year Ended  December 31, 2002** |   |
|-------------------------------------|--------|-----------------------------------|--------|
|                                |   |                              |   |   |   |
| Net income (loss)                   |   | As reported                       |   | $ | 1,497 |   |
|                                |   | Pro forma                         |   | 1,107 |   |
|                                |   |                              |   |   |   |
| Basic net income (loss) per share   |   | As reported                       |   | $ | 0.19 |   |
|                                |   | Pro forma                         |   | 0.14 |   |
|                                |   |                              |   |   |   |
| Diluted net income (loss) per share |   | As reported                       |   | $ | 0.19 |   |
|                                |   | Pro forma                         |   | 0.14 |   |

 

The fair valueof each option granted is estimated using the Black-Scholes option pricingmodel with the following weighted-average assumptions used for options grantedin 2002, 2001 and 2000:  dividend yieldof 0%; expected lives of 10 years; expected volatility of 135% in 2002, 135% in2001 and 143% in 2000; and risk free interest rates of  4.3% in 2002, 4.3% in 2001 and 5.8% in 2000.

 

*Note 20**                             Differences between Canadian and United States Generally AcceptedAccounting Principles*

 

The consolidated financial statements havebeen prepared in accordance with generally accepted accounting principles inCanada (Canadian GAAP or Canadian principles). The significant differences fromU.S. generally accepted accounting principles (U.S. GAAP or U.S. principles)are as follows:

 

83

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a)***Revenue Recognition***

 

In December 1999, the U.S. Securities andExchange Commission (SEC) issued Staff Accounting Bulletin (“SAB”) 101, RevenueRecognition in Financial Statements, which provides guidance related to revenuerecognition based on the interpretations and practices of the SEC.  The Company believes that its revenuerecognition policies are in accordance with the guidance provided in SAB 101.

 

b) ***Deferred Development Costs***

 

In the year ended December 31, 2002, theCompany deferred $125 of development costs ($4 in 2001 and $757 in 2000) inaccordance with Canadian GAAP.  UnderU.S. GAAP, these costs would be expensed as incurred as research anddevelopment costs.

 

In the year ended December 31, 2002, theCompany amortized $57 of deferred development costs ($36 in 2001 and $nil in2000) in accordance with Canadian GAAP. Under U.S. GAAP, these costs would have been expensed in the periodswhen the originating expenditures were incurred.

 

Further, for U.S. GAAP purposes, theCompany would have recharacterized the goodwill acquired on the Mezure, Inc.share acquisition of $231 as development related costs, and these costs wouldhave been expensed on acquisition in 2001.

 

c)***Derivatives and Hedging Activities***

 

The Company has historically entered intoforeign exchange options and forward contracts to manage its exposure toforeign currency fluctuations.  In June1998, the FASB issued SFAS 133, “Accounting for Derivative Instruments andHedging Activities” subsequently amended by SFAS 137 and SFAS 138. Thesepronouncements establish accounting and reporting standards for derivativeinstruments, including certain derivative instruments embedded in othercontracts, and for hedging activities. They require companies to recognize all derivatives as either assets orliabilities on the balance sheet and measure those instruments at fairvalue.  Gains or losses resulting fromchanges in the value of those derivatives would be accounted for depending onthe use of the derivative and whether it qualifies for hedge accounting.  Had the Company prepared its consolidatedfinancial statements in accordance with U.S. GAAP, it would have applied thepronouncements of SFAS 133, 137 and 138 effective January 1, 2001, on aprospective basis without restatement of prior period financial statements.  The adoption of these accounting standardswould not have had a material effect on the Company’s financial position andresults of operations for the years ended December 31, 2002 and December 31,2001.

 

Prior to 2001, as required under U.S. GAAP,the Company would have recorded these financial instruments at fair value atthe ending date of each reporting period, resulting in an additional loss of$21 in 2000.

 

d) ***Investment in Joint Ventures***

 

The accounts of the Company’s 49.0% jointventure interest in Point, Inc. and 48.7% joint venture interest in Mezure,Inc. (prior to the Company acquiring a 74% controlling interest on July 23,2001) are proportionately consolidated as required under Canadian GAAP.  Under U.S. GAAP, proportionate consolidationis not permitted, and the Company’s investment in these joint ventures would beaccounted for using the equity method. As permitted by SEC guidance, the effects of this difference inaccounting principles have not been reflected in the accompanying tables.

 

In addition, during 2002, the Companyrecognized a gain of $121 related to the reduction of its equity interest inMezure from approximately 74% to 70%. Under U.S. GAAP, the Company would have reflected the effects of this transactionas a direct increase in shareholders’ equity of $160 after consideration of theimpact of previous U.S. GAAP adjustments

 

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e) ***Comprehensive Income***

 

Under U.S. GAAP, the Company would havebeen required to adopt SFAS 130, “Reporting Comprehensive Income”.  Had the Company adopted SFAS 130, it wouldhave recorded a loss of $49 within other comprehensive income, related to thefair value of foreign exchange contracts and options, in the year endedDecember 31, 2002 ($1 income in 2001 and $nil in 2000).

 

f) ***New U.S. GAAP Accounting Pronouncements***

 

In August 2001, the FASB approved for issuance SFAS 143, “Accountingfor Asset Retirement Obligations.”  Thisstatement is effective for fiscal years beginning after June 15, 2002.  This statement requires that the fair valueof the liability for an asset retirement obligation be recognized in the periodin which it is incurred if a reasonable estimate of fair value can bemade.  Associated asset retirement costsare capitalized as part of the carrying amount of the long-lived asset.  The Company does not expect the adoption ofSFAS 143 in January 2003 to have a material impact on the Company’s financialstatements.

 

In August 2001, the FASB approved for issuance SFAS 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets”, effective for fiscalyears commencing after December 15, 2001. This statement addresses financial accounting and reporting for theimpairment or disposal of long-lived assets, and supercedes the existingstandard, SFAS 121 and the accounting and reporting provisions of APB Opinion30.  The adoption of SFAS 144 would nothave had a material impact on the Company’s financial position and results ofoperation for the years ended December 31, 2002, 2001 and 2000.

 

In November 2002, the FASB issued Interpretation No.45 “Guarantor’s Accounting and Disclosure Requirements for Guarantees,Including Indirect Guarantees of Indebtedness of Others” (FIN 45).  FIN 45 elaborates on the disclosures theCompany must make about the Company’s obligations under certain guarantees thatthe Company has issued.  It alsorequires the Company to recognize, at the inception of a guarantee, a liabilityfor the fair value of the obligations the Company has undertaken in issuing theguarantee.  The initial recognition andinitial measurement provisions are to be applied only to guarantees issued ormodified after December 31, 2002. Adoption of these provisions will not have a material impact on theCompany’s financial position or results of operations.

 

In January 2002, the FASB issued Statement No. 148“Accounting for Stock-Based Compensation - Transition and Disclosure, anAmendment of FASB Statement no. 123” (FAS 148).  FAS 148 amends FAS 123 “Accounting for Stock-Based Compensation”,to provide alternative methods of transition for a voluntary change to the fairvalue based method of accounting for stock-based employee compensation.  In addition, FAS 148 amends the disclosurerequirements of FAS 123 to require prominent disclosures in both annual andinterim financial statements about the method for accounting for stock-basedemployee compensation and the effect of the method used on reportedresults.  FAS 148 has no material impacton the Company’s financial statements, as the Company does not plan to adoptthe fair value method of accounting for stock options at the current time.

 

The following standards issued by the FASB do notimpact the Company:

 

•                       Statement No. 145 - “Rescission of FASB Statements No. 4, 44, and64, Amendment of FASB Statement No. 13, and Technical Corrections”, effectivefor financial statements issued on or after May 15, 2002;

•                       Statement No. 146 - “Accounting for Costs Associated with Exit orDisposal Activities”, effective for exit or disposal activities initiated afterDecember 31, 2002;

**•**                       Statement No.147 - “Acquisitions of Certain Financial Institutions - an Amendment of FASBStatements No. 72 and 144 and FASB Interpretation No. 9”, effective foracquisitions on or after October 1, 2002; and

•                       Interpretation No. 46 - “Consolidation of Variable InterestEntities”, effective for financial statements issued after January 31, 2003.

 

85

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g) ***Summary of the Differences Between Canadian and U.S. GAAP***

 

The effects of the above-noted differencesbetween Canadian and U.S. GAAP on the statements of operations and on thebalance sheets are as follows:

 
|                                                                     |   | **Year Ended December 31,** |   |
|--------------------------------------------------------------------------|--------|-----------------------------|--------|
|                                                                     |   | **2002**                    |   | **2001** |   | **2000** |   |
|                                                                     |   |                        |   |   |   |   |   |
| **Net income (loss) from continuing operations** –**Canadian GAAP** |   | $                           | 1,497  |   | $ | 110 |   | $ | (2,811 | ) |
| Adjustments to U.S. GAAP                                                 |   |                        |   |   |   |   |   |
| Deferred development costs                                               |   | (125                        | )      | (4 | ) | (757 | ) |
| Amortization of deferred development costs                               |   | 57                          |   | 36 |   | 3⁄4 |   |
| Fair value of financial instruments                                      |   | 3⁄4                      |   | 1 |   | (21 | ) |
| Gain on dilution of equity interest in Mezure, Inc.                      |   | (121                        | )      | 3⁄4 |   | 3⁄4 |   |
| Write-off of Mezure, Inc. development  related costs                     |   |                        |   | (231 | ) | 3⁄4 |   |
| **Net income (loss) from continuing operations – U.S. GAAP**        |   | $                           | 1,308  |   | $ | (88 | ) | $ | (3,589 | ) |
|                                                                     |   |                        |   |   |   |   |   |
| Net income from discontinued operations – Canadian GAAP             |   | 3⁄4                      |   | 3⁄4 |   | 16 |   |
|                                                                     |   |                        |   |   |   |   |   |
| **Net income (loss) – U.S. GAAP**                                   |   | 1,308                       |   | (88 | ) | (3,573 | ) |
|                                                                     |   |                        |   |   |   |   |   |
| Net unrealised (loss) gain on foreign  exchange contracts                |   | (49                         | )      | 1 |   | 3⁄4 |   |
|                                                                     |   |                        |   |   |   |   |   |
| **Comprehensive income (loss)**                                          |   | $                           | 1,259  |   | $ | (87 | ) | $ | (3,573 | ) |

 
|                                                               |   | **Year Ended  December 31,** |   |
|--------------------------------------------------------------------|--------|------------------------------|--------|
|                                                               |   | **2002**                     |   | **2001** | ** ** |
| **Total Assets**                                                   |   |                         |   |   |   |
| Canadian GAAP                                                      |   | $                            | 30,890 |   | $ | 27,821 |   |
|                                                               |   |                         |   |   |   |
| Adjustments to U.S. GAAP                                           |   |                         |   |   |   |
| Deferred development costs                                         |   | (2,596                       | )      | (2,528 | ) |
| Fair value of financial instruments                                |   | 3⁄4                       |   | 3⁄4 |   |
| Write-off of Mezure, Inc. development related  costs               |   | (192                         | )      | (231 | ) |
|                                                               |   |                         |   |   |   |
| U.S. GAAP                                                          |   | $                            | 28,102 |   | $ | 25,062 |   |
|                                                               |   |                         |   |   |   |
| **Total Shareholders’ Equity**                                |   |                         |   |   |   |
| Canadian GAAP                                                      |   | $                            | 20,547 |   | $ | 19,086 |   |
|                                                               |   |                         |   |   |   |
| Adjustments to U.S. GAAP                                           |   |                         |   |   |   |
| Deferred development costs                                         |   | (2,596                       | )      | (2,528 | ) |
| Fair value of financial instruments                                |   | 3⁄4                       |   | 3⁄4 |   |
| Write-off of Mezure, Inc. development related  costs               |   | (192                         | )      | (231 | ) |
|                                                               |   |                         |   |   |   |
| U.S. GAAP – before other comprehensive income                 |   | 17,759                       |   | 16,327 |   |
|                                                               |   |                         |   |   |   |
| Accumulated other comprehensive (loss) income                      |   | (48                          | )      | 1 |   |
|                                                               |   |                         |   |   |   |
| U.S. GAAP – including accumulated other  comprehensive income |   | $                            | 17,711 |   | $ | 16,328 |   |

 

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h) ***Net Income/(Loss) per Share***

 

Net income (loss) per share as computedunder Canadian and U.S. principles is as set forth below for the followingperiods:

 
|                        |   | **Year Ended December 31,**                   |   |
|-----------------------------|--------|-----------------------------------------------|--------|
|                        |   | **Canadian GAAP**                             |   | **U.S. GAAP** |   |
|                        |   | **Net Income (Loss) per Share –  Basic** |   | **Net Income (Loss) per Share –  Basic** | ** ** |
|                        |   | **2002**                                      |   | **2001** |   | **2000** |   | **2002** |   | **2001** |   | **2000** | ** ** |
|                        |   |                                          |   |   |   |   |   |   |   |   |   |   |   |
| Continuing operations       |   | $                                             | 0.19   |   | $ | 0.01 |   | $ | (0.37 | ) | $ | 0.17 |   | $ | (0.01 | ) | $ | (0.47 | ) |
| Discontinued operations     |   | 3⁄4                                        |   | 3⁄4 |   | 0.01 |   | 3⁄4 |   | 3⁄4 |   | 3⁄4 |   |
| Net income (loss) per share |   | $                                             | 0.19   |   | $ | 0.01 |   | $ | (0.36 | ) | $ | 0.17 |   | $ | (0.01 | ) | $ | (0.47 | ) |

 
|                        |   | **Net Income (Loss) per Share –  Diluted** |   | **Net Income (Loss) per Share –  Diluted** |   |
|-----------------------------|--------|-------------------------------------------------|--------|-------------------------------------------------|--------|
|                        |   | **2002**                                        |   | **2001**                                        |   | **2000** |   | **2002** |   | **2001** |   | **2000** |   |
|                        |   |                                            |   |                                            |   |   |   |   |   |   |   |   |   |
| Continuing operations       |   | $                                               | 0.19   |                                            | $      | 0.01 |   | $ | (0.37 | ) | $ | 0.17 |   | $ | (0.01 | ) | $ | (0.47 | ) |
| Discontinued operations     |   | 3⁄4                                          |   | 3⁄4                                          |   | 0.01 |   | 3⁄4 |   | 3⁄4 |   | 3⁄4 |   |
| Net income (loss) per share |   | $                                               | 0.19   |                                            | $      | 0.01 |   | $ | (0.36 | ) | $ | 0.17 |   | $ | (0.01 | ) | $ | (0.47 | ) |

 

i)***Stock-Based Compensation***

 

Statement of Financial Accounting Standards(SFAS) 123 “Accounting for Stock-Based Compensation” establishes a fair valuebased method of accounting for stock-based compensation.  Companies have the option of including theeffect of this pronouncement in determining their net income, or alternatively,may continue to apply the accounting provisions of APB Opinion 25, but mustcomply with the disclosure requirements of SFAS 123.  Had the Company prepared its consolidated financial statements inaccordance with U.S. GAAP, the Company would have accounted for its stock-basedcompensation in accordance with APB Opinion 25.

 

At December 31, 2002, the Company hadissued to employees and directors 974 options (834 in 2001 and 954 in 2000) topurchase common shares under its stock-based compensation plans (see Note11).  As the Company would have appliedAPB Opinion 25 and related Interpretations in accounting for its plans, nocompensation cost would have been recognized within the statement of operationsunder U.S. principles in 2002, 2001 and 2000. Had compensation cost for the Company’s stock-based compensation plansbeen determined based on the fair value of the options at the grant dates, theCompany’s pro forma net income (loss) from continuing operations and net income(loss) per share would have been as follows:

 
|                                                                        |      |        |   | **Year  Ended December 31,** |   |
|-----------------------------------------------------------------------------|-----------|-------------|--------|------------------------------|--------|
|                                                                        |      |        |   | **2002**                     |   | **2001** |   | **2000** |   |
|                                                                        |      |        |   |                         |   |   |   |   |   |
| Net loss from continuing operations (U.S. GAAP)                             |      | As reported |   | $                            | 1,308  |   | $ | (88 | ) | $ | (3,589 | ) |
|                                                                        | Pro forma |        | $      | 918                          |   | $ | (575 | ) | $ | (4,314 | ) |
|                                                                        |      |        |   |                         |   |   |   |   |   |
| Basic net income (loss) per share from continuing operations (U.S.  GAAP)   |      | As reported |   | $                            | 0.17   |   | $ | (0.01 | ) | $ | (0.47 | ) |
|                                                                        | Pro forma |        | $      | 0.12                         |   | $ | (0.07 | ) | $ | (0.56 | ) |
|                                                                        |      |        |   |                         |   |   |   |   |   |
| Diluted net income (loss) per share from continuing operations (U.S.  GAAP) |      | As reported |   | $                            | 0.17   |   | $ | (0.01 | ) | $ | (0.47 | ) |
|                                                                        | Pro forma |        | $      | 0.12                         |   | $ | (0.07 | ) | $ | (0.56 | ) |

 

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The fair value of each option granted isestimated using the Black-Scholes option pricing model with the followingweighted-average assumptions used for options granted in 2002, 2001 and2000:  dividend yield of 0%; expectedlives of 10 years; expected volatility of 135% in 2002, 135% in 2001 and 143%in 2000; and risk free interest rates of 4.3% in 2002, 4.3% in 2001and 5.8% in 2000.

 

*Note 21**                             Subsequent Events*

 

a)***Proposed acquisition of CMC Electronics’ OEM GPS business***

 

The Company announced on February 11, 2003the signing of a Memorandum of Understanding (MOU) with CMC Electronics withregards to the Company’s acquisition of CMC Electronics’ Global PositioningSystem (GPS) OEM product line.  Based onthe MOU, the Company expects the purchase price of the CMC Electronics’ GPS OEMproduct line to be comprised of approximately $130 at closing and $600 payableover time as a royalty on the revenue generated by this business.  The Company expects that the acquisition ofthis business will be completed in April 2003.

 

b)***Mezure***

 

In February 2003, Mezure was informed thatthe minority shareholder who had been providing financial support required tofund Mezure’s operating activities would discontinue such support.  On February 28, 2003, Mezure notified itsshareholders that as a result of shortfalls in cash flows from operations andits inability to meet current vendor obligations, Mezure intended to pursue afederal bankruptcy filing.  On March 5,2003, the Company’s representatives on the Board of Directors of Mezure, whoare affiliated with the Company, resigned from the Mezure Board ofDirectors.  If Mezure were unable tocontinue operations, the Company does not expect this discontinuation to have amaterial adverse effect on the Company’s financial condition and results of operations.

 

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**SCHEDULE II**

**Valuation and Qualifying Accounts**

 
| **2000**                                    |   | **Balance  at   beginning   of period** |   | **Additions** |   | **Deductions** |   | **Balance  at   end of   period** |   |
|---------------------------------------------|--------|-----------------------------------------|--------|---------------|--------|----------------|--------|-----------------------------------|--------|
| Provision for excess and obsolete inventory |   | $                                       | 720    |          | 116    |           | (35    | )                                 | $      | 801 |   |
|                                        |   |                                    |   |          |   |           |   |                              |   |
| Allowance  for doubtful accounts            |   | $                                       | 768    |          | 13     |           | (242   | )                                 | $      | 539 |   |
|                                        |   |                                    |   |          |   |           |   |                              |   |
| Provision  for future warranty costs        |   | $                                       | 246    |          | 78     |           | (56    | )                                 | $      | 268 |   |

 
| **2001**                                     |   | **Balance at   beginning   of period** |   | **Additions** |   | **Deductions** |   | **Balance at   end of   period** |   |
|----------------------------------------------|--------|----------------------------------------|--------|---------------|--------|----------------|--------|----------------------------------|--------|
|                                         |   |                                   |   |          |   |           |   |                             |   |
| Provision  for excess and obsolete inventory |   | $                                      | 801    |          | 518    |           | (355   | )                                | $      | 964 |   |
|                                         |   |                                   |   |          |   |           |   |                             |   |
| Allowance  for doubtful accounts             |   | $                                      | 539    |          | 307    |           | (170   | )                                | $      | 676 |   |
|                                         |   |                                   |   |          |   |           |   |                             |   |
| Provision  for future warranty costs         |   | $                                      | 268    |          | 148    |           | (131   | )                                | $      | 285 |   |

 
| **2002**                                     |   | **Balance at   beginning   of period** |   | **Additions** |   | **Deductions** |   | **Balance at   end of   period** |   |
|----------------------------------------------|--------|----------------------------------------|--------|---------------|--------|----------------|--------|----------------------------------|--------|
|                                         |   |                                   |   |          |   |           |   |                             |   |
| Provision  for excess and obsolete inventory |   | $                                      | 964    |          | 777    |           | (280   | )                                | $      | 1,461 |   |
|                                         |   |                                   |   |          |   |           |   |                             |   |
| Allowance  for doubtful accounts             |   | $                                      | 676    |          | 587    |           | (186   | )                                | $      | 1,077 |   |
|                                         |   |                                   |   |          |   |           |   |                             |   |
| Provision  for future warranty costs         |   | $                                      | 285    |          | 203    |           | (144   | )                                | $      | 344 |   |

 

89

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EXHIBIT INDEX

 
| **Exhibit   Number** |   | **Exhibit**                                                                                                                                                                                                                               |
|----------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |   |                                                                                                                                                                                                                                      |
| 2.1                  |   | Agreement of Purchase and Sale of Assets dated  November 3, 1995 between NovAtel Communications Ltd. and Harris  Corporation.(1)                                                                                                          |
| 2.2                  |   | Asset Purchase Agreement dated July 12, 1996 between  NovAtel Communications Ltd., NovAtel Wireless, Inc., NovAtel Wireless  Solutions, Inc. and NovAtel Wireless Technology, Inc.(1)                                                     |
| 2.3                  |   | Amendment to the Asset Purchase Agreement dated  August 21, 1996 between NovAtel Communications Ltd., NovAtel Wireless, Inc.,  NovAtel Wireless Solutions, Inc. and NovAtel Wireless Technology, Inc.(1)                                  |
| 3.1                  |   | Restated Articles of Incorporation of Registrant.(1)                                                                                                                                                                                      |
| 3.2                  |   | Restated Bylaws of Registrant.(1)                                                                                                                                                                                                         |
| 4.1                  |   | Form of Common Stock Certificate.(1)                                                                                                                                                                                                      |
| 10.1                 |   | Directors Stock Option Plan.(1)                                                                                                                                                                                                           |
| 10.2                 |   | Stock Option Plan with form of stock option  agreement.(1)                                                                                                                                                                                |
| 10.3                 |   | Form of Indemnification Agreement to be entered into  between Registrant and certain directors and officers.(1)                                                                                                                           |
| 10.4                 |   | Intellectual Property License and Assignment  Agreement dated November 3, 1995 between NovAtel Communications Ltd. and  Harris Corporation.(1)                                                                                            |
| 10.5                 |   | Technology Agreement dated February 27, 1994 between  Japan Radio Co., Ltd., JRC Canada Inc., JRC International Inc., Telexel  Holding, Ltd., NovAtel Communications Ltd. and NovAtel Carcom, Inc.(1)                                     |
| 10.6                 |   | Share Purchase Agreement dated May 13, 1992 between  her Majesty the Queen in Right of Alberta, 473654 Alberta Ltd., 475342 Alberta  Ltd., 496072 Alberta Ltd. and Telexel Holding Limited.(1)                                            |
| 10.7                 |   | Post Purchase Agreement dated May 29, 1992 between  Her Majesty the Queen in Right of Alberta, 496072 Alberta Ltd., Telexel  Holding Limited and NovAtel Communications Ltd.(1)                                                           |
| 10.8                 |   | Surplus Systems Assets Agreement dated May 29, 1992  between NovAtel Communications Ltd., 475342 Alberta Ltd. and Her Majesty the  Queen in Right of the Province of Alberta.(3)                                                          |
| 10.9                 |   | Settlement Agreement dated March 18, 1994 between  North West Trust Company, as representative of 496072 Alberta Ltd., Telexel  Holding Limited and NovAtel Communications Ltd.(1)                                                        |
| 10.10                |   | Letter dated February 7, 1997 amending Settlement  Agreement. (2)                                                                                                                                                                         |
| 10.11                |   | Post Purchase Agreement Amending Agreement dated  March 18, 1994 between Her Majesty the Queen in Right of Alberta, 496072  Alberta Ltd., Telexel Holding Limited and NovAtel Communications Ltd.(1)                                      |
| 10.12                |   | Guarantee of Post Purchase Agreement dated May 29,  1992 by NovAtel Communications Ltd. in favour of Her Majesty the Queen in  Right of Alberta (amended by Settlement Agreement dated March 18, 1994, filed  hereto as Exhibit 10.9).(1) |
| 10.13                |   | Definitive Project Agreement #1 dated July 1, 1998  between Canadian Marconi Company and NovAtel Inc.(3)                                                                                                                                  |
| 10.14                |   | Reseller and License Agreement dated May 22, 1998  between NovAtel Inc. and Canadian Marconi Company.(3)                                                                                                                                  |
| 10.15                |   | Final Agreement dated December 31, 1997 between  ViaSat Geo-Technologie Inc. and NovAtel Inc. (2)                                                                                                                                         |
| 10.16                |   | Employment Agreement dated July 1, 1997 between  NovAtel Inc. and Werner Gartner. (2)                                                                                                                                                     |
| 10.17                |   | Lease Agreement (Building) dated January 29, 1999  between Christian Schumacher and NovAtel Inc.(3)                                                                                                                                       |

 

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| 10.18 |   | Agreement made effective July 20, 1999 between  NovAtel Inc. and Sokkia Co., Ltd.(4)                                                   |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------|
| 10.19 |   | License Agreement made effective August 1, 1999  between NovAtel Inc., Sokkia Co., Ltd. and Point, Inc.(4)                             |
| 10.20 |   | Agreement dated June 28, 2000 between NovAtel Inc.  and Raven Industries Inc.(5)                                                       |
| 10.21 |   | Operating Loan Credit Facility Letter from HSBC Bank  Canada made effective November 6, 2000.(5)                                       |
| 10.22 |   | Amendment No. 1 to Definitive Project Agreement made  effective November 15, 2000 between NovAtel Inc. and BAE Systems Canada  Inc.(5) |
| 10.23 |   | Amendment made effective January 26, 2001 to Operating  Loan Credit Facility Letter from HSBC Bank Canada.(5)                          |
| 10.24 |   | Amendment dated February 2, 2001 to the Agreement  between NovAtel Inc. and Raven Industries Inc.(5)                                   |
| 10.25 |   | Consulting Services Agreement dated February 19,  2001 between NovAtel Inc. and David E. Vaughn.(5)                                    |
| 10.26 |   | Amendment dated May 8, 2001 to the Agreement between  NovAtel Inc. and Raven Industries Inc. (6)                                       |
| 10.27 |   | Amendment dated June 18, 2001 to the Agreement  between NovAtel Inc. and Raven Industries Inc. (6)                                     |
| 10.28 |   | Offer Letter of Employment dated January 3, 2002  between NovAtel Inc. and Jonathan W. Ladd. (6)                                       |
| 10.29 |   | Operating Line of Credit Facility Letter from The  Toronto Dominion Bank dated June 5, 2002.                                           |
| 10.30 |   | Amendment No. 2 to Definitive Project Agreement made  effective October 1, 2002 between NovAtel Inc. and CMC Electronics Inc.          |
| 21.1  |   | List of Subsidiaries. (1)                                                                                                              |
| 23.1  |   | Consent of Deloitte & Touche LLP.                                                                                                  |
| 99.1  |   | Section 906 Certifications of Chief Executive  Officer and Chief Financial Officer.                                                    |

 

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(1)                                  Incorporated by reference to Registrant’s registration statement onForm F-1 (Registration Statement No. 333-6088).

 

(2)                                  Incorporated by reference to Registrant’s annual report on Form 20-Ffor the year ended December 31, 1997.

 

(3)                                  Incorporated by reference to Registrant’s annual report on Form 20-Ffor the year ended December 31, 1998.

 

(4)                                  Incorporated by reference to Registrant’s annual report on Form 20-Ffor the year ended December 31, 1999.

 

(5)                                  Incorporated by reference to Registrant’s annual report on Form 20-Ffor the year ended December 31, 2000.

 

(6)                                  Incorporated by reference to Registrant’s annual report on Form 20-Ffor the year ended December 31, 2001.

 

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