WASHINGTON, D.C. 20549
FORM 20-F
Amendment No. 1
(Mark one)
|X| REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR (G) OF THE
SECURITIES EXCHANGE ACT OF 1934
or
|_| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 2000
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to _________
Commission File Number: _________________________
DSI DATOTECH SYSTEMS INC.
(Exact Name of Registrant as Specified in its Charter)
Canada
(Jurisdiction of Incorporation or Organization)
300 - 905 West Pender Street, Vancouver, BC V6C 1L6
(Address of Principal Executive Offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
None
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Common Shares, without par value
(Title of Class)
Securities for which there is a reporting obligation pursuant
to Section 15(d) of the Act:
None
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the date of this registration
21,652,334 Common Shares
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) for the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES |_| NO |X|
Indicate by check mark which financial statement item the registrant has elected
to follow.
ITEM 17 |X| ITEM 18 |_|
(Applicable only to issuers involved in bankruptcy
proceedings during the past five years)
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) for the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Not Applicable
Except as otherwise noted, all dollar amounts are presented in Canadian dollars.
Exchange Rate: At October 31, 2000, the exchange rate of Canadian dollars into
United States dollars was 1.5225 Canadian to $1.00 United States.
Item 1. Identity of Directors, Senior Management and Advisors
A. Directors and Senior Management
Mr. Edward C. Pardiak was appointed Director, Chairman of the Board and
Chief Financial Officer of DSI Datotech Systems Inc. (the "Company" or
"DSI") in 1997. During the year 2000 Mr. Pardiak was appointed Chief
Executive Officer of DSI. Mr. Pardiak is responsible for the management
and development of DSI including the day-to-day management of DSI and the
financial and business management of DSI. The business address for Mr.
Pardiak is 300 - 905 West Pender Street, Vancouver, BC, Canada, V6C 1L6.
Mr. Robert M. Egery was appointed Officer of DSI in 1998. On December 1,
2000, Mr. Egery was appointed President and Chief Operating Officer of
DSI. Mr. Egery is responsible for the management and development of DSI
including the day-to-day management of DSI and the financial and business
management of DSI. The business address for Mr. Egery is 300 - 905 West
Pender Street, Vancouver, BC Canada, V6C 1L6.
Dr. Thomas Calvert was appointed Director in 1998 and appointed Secretary
for DSI during 2000. Dr. Calvert is responsible for the Corporate
Secretarial function of DSI and is a member of the Compensation Committee
and the Audit Committee of DSI. The business address for Dr. Calvert is
TechBC, Ste 1280, 13401 108 Avenue, Surrey, BC, Canada, V3T 5T3.
Mr. Allan S. Gibbins was appointed Director of DSI in 1998. Mr. Gibbins is
a member of the Compensation and the Audit Committee of DSI. The business
address for Mr. Gibbins is Hubbell Canada Inc., 870 Brock Road S.,
Pickering, ON, Canada, L1W 1Z8.
B. Advisors.
Not Applicable.
C. Auditors.
The Auditor for DSI is G. Ross McDonald, Chartered Accountants, located at
543 Granville Street, Suite 1502, Vancouver, Canada, BC V6C 1X8.
Item 2. Offer Statistics and Expected Timetable
Not Applicable
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Item 3. Key Information
A. Selected Financial Data
Set forth below is selected financial information for the years ended
October 31, 1996 through October 31, 2000 derived from the Audited
Financial Statements of DSI prepared in accordance with Canadian G.A.A.P.
These principals, as applied to DSI, do not differ materially from U.S.
G.A.A.P. except as disclosed in Note 10 to DSI's Financial Statements. All
figures in this registration statement are in Canadian dollars, unless
otherwise noted. This information should be read in conjunction with DSI's
Financial Statements included in this Registration Statement.
Financial Statement Data - Canadian G.A.A.P
Statement of Loss and Deficit - Selected Data
Year Ended October 31
(In thousands, except per share data)
--------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
--------------------------------------------------------------------------------------------
Revenues $628 $0 $0 $0 $0
--------------------------------------------------------------------------------------------
Net Loss $755 $1,125 $852 $822 $940
--------------------------------------------------------------------------------------------
Total $1,034 $1,125 $852 $822 $940
--------------------------------------------------------------------------------------------
Loss Per Share $0.04 $0.08 $0.07 $0.10 $0.14
--------------------------------------------------------------------------------------------
Dividend Per Share $0 $0 $0 $0 $0
--------------------------------------------------------------------------------------------
Balance Sheet - Selected Data
As at October 31
(In thousands)
--------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
--------------------------------------------------------------------------------------------
Total Assets $5,263 $1,068 $1,710 $1,683 $905
--------------------------------------------------------------------------------------------
Long Term Debt $0 $0 $0 $0 $0
--------------------------------------------------------------------------------------------
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Financial Statement Data - U.S. G.A.A.P
Statement of Loss and Deficit - Selected Data
Year Ended October 31
(In thousands, except per share data)
--------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
--------------------------------------------------------------------------------------------
Revenues $628 $0 $0 $0 $0
--------------------------------------------------------------------------------------------
Net Loss $737 $1,027 $990 $1,044 $983
--------------------------------------------------------------------------------------------
Total $1,034 $1,027 $990 $1,044 $983
--------------------------------------------------------------------------------------------
Loss Per Share $0.03 $0.07 $0.07 $0.11 $0.13
--------------------------------------------------------------------------------------------
Dividend Per Share $0 $0 $0 $0 $0
--------------------------------------------------------------------------------------------
Balance Sheet - Selected Data
As at October 31
(In thousands)
--------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
--------------------------------------------------------------------------------------------
Total Assets $4,347 $137 $677 $788 $232
--------------------------------------------------------------------------------------------
Long Term Debt $0 $0 $0 $0 $0
--------------------------------------------------------------------------------------------
Currency and Exchange Rates
All dollar amounts set forth in this Registration Statement are in Canadian
dollars, except where otherwise indicated. The following table sets forth the
rates of exchange for the Canadian dollar, expressed in United States dollars,
in effect at the end of each of the October 31 fiscal year periods indicated;
and the average exchange rates based on the last day of each month during such
periods, in each case based on the noon rate as per the Bank of Canada.
Fiscal Year Ending 2000 1999 1998 1997 1996
October 31
Rate at End of Period $1.5225 $1.4713 $1.5429 $1.4084 $1.3383
Average Rate During Period $1.4768 $1.4941 $1.4717 $1.3781 $1.3647
The following chart shows the high and low exchange rates for each month during
the previous six months from May through October 2000:
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May June July August September October
- ---------------------------------------------------------------------------------------------------------
High Rate 1.5081 1.4911 1.4907 1.4888 1.5070 1.5271
- ---------------------------------------------------------------------------------------------------------
Low Rate 1.4783 1.4653 1.4641 1.4722 1.4735 1.4954
- ---------------------------------------------------------------------------------------------------------
Dividend Policy
DSI has not paid any dividends during the past five years and it has no plan to
pay dividends at this time. The directors of DSI will determine if and when
dividend should be declared and paid in the future based on DSI's financial
position at the relevant time.
B. Capitalization and Indebtedness
At October 31, 2000, DSI's working capital was $3.9 million and had no
long-term debts. The shareholder's equity at October 31, 2000 amounted to
$5.1 million. The total share capital was $10.8 million (consisting of
21,109,370 outstanding common shares) and an accumulated deficit of $5.7
million.
C. Risk Factors
1) DSI has a limited operating history and may continue to operate at a
loss. DSI has a limited operating history and has generated limited
revenues. DSI has been primarily engaged in product research and
development. For the fiscal year ended October 31, 2000, DSI
generated revenues of $777,200 of which $628,000 were from the
signing of license-to-option agreements with two organizations,
Netface LLC and Security Biometrics Inc. DSI expects that operating
losses will continue, as total costs and expenses continue to
increase due to product development and product marketing and
distribution. The ability of DSI to achieve profitability will
depend significantly on its ability to fully develop its gesture
recognition technology products, and to develop the capacity to
manufacture and market any of these products either by itself or as
part of a collaboration. There can be no assurance that DSI will be
able to achieve profitability. Therefore, the extent of future
losses and the time required to achieve profitability is highly
uncertain.
2) DSI is in the early stage of product development. A working
prototype of the Gesture Input and Control System exists. However,
the technology has not yet been fully commercially tested in a
working environment. Accordingly, there can be no assurances that
DSI can achieve the necessary technical objectives. There is further
no guarantee that DSI will be able to adapt the system to mass-scale
production in the event that DSI's marketing initiatives are
successful. There can be no assurance that these or any of DSI's
proposed products can be successfully commercialized. Therefore,
there is substantial risk that DSI's product developments may not
prove to be successful.
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3) DSI will need future financing. DSI will require substantial
additional funds for its product development programs, marketing and
distribution and operating expenses. Capital requirements will
depend on a variety of factors, including the rate of progress of
DSI's product development, products distribution and marketing, and
the cost of filing, prosecuting, defending and enforcing any patent
claims and other intellectual property rights, maintaining
technological and market competitiveness, licensing and other
relationships and the terms of any such licensing, collaborative or
other relationships that DSI may establish. Also, the fixed
commitments, including salaries and fees for employees and
consultants, rent, payments with respect to licensing and other
agreements are substantial, and will most likely increase as DSI
grows.
DSI plans to raise substantial additional capital to fund its
future operations through debt and equity financing, and possibly
through collaborative, licensing or other arrangements with
corporate partners. DSI has no present commitments for future
financing. There can be no assurance that additional financing will
be available when needed, or, if available, is so on acceptable
terms. Insufficient funds may prevent DSI from implementing its
business strategy to the extent planned, and could result in delay,
scale back, or elimination of its sole product development program,
or result in the license to third parties of the rights to
commercialize products or technologies that DSI would otherwise
seek to develop itself. There can be no assurance that additional
financing will be available when needed, or, if available, is so on
acceptable terms. Insufficient funds may prevent DSI from
implementing its business strategy to the extent planned, and could
result in delay, scale back, or elimination of its sole product
development program, or result in the license to third parties of
the rights to commercialize products or technologies that DSI would
otherwise seek to develop itself.
4) DSI is dependent upon its proprietary technology. DSI relies
primarily on a combination of patent, copyright, and trade secret
laws, as well as confidentiality procedures and contractual
provisions to protect its technology and products from exploitation
by competitors. DSI has three United States patents, one Canadian
patent and one patent pending in each of the United States and
Canada. While DSI believes that its software technology is
adequately protected against infringement, there is no assurance of
effective protection against competition. Monitoring and identifying
the unauthorized use of DSI's technology may prove difficult. There
is a possibility of disclosure of confidential information related
to DSI's technology and the potential for infringement of
intellectual property rights of another party by DSI and liability
on the part of DSI for infringement by one of its clients.
DSI also intend s to apply for additional patents in the United
States and other countries. There can be no assurance that all of
these patents will issue in commercially relevant countries (e.g.
countries in which the product is sold) and even if issued will
appropriately protect DSI's products and technology. Further,
copyright laws may not provide useful protection against competitive
software that is different than DSI's software. The
non-establishment of effective patent, trade secret or copyright
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protection could have a material adverse effect on DSI's business,
results of operations and financial condition.
5) DSI may face new competition. To the best of DSI's knowledge, it has
no direct competition today, its indirect competitors, manufacturers
of current pointing, input and other interface products, may enter
the race for this market segment. Although DSI believes that its
gesture recognition technology products will enjoy technology patent
protection and application advantages, other companies involved in
the development of products related to tradition point and click
technology of mice and keyboards, including Interlink Electronics
Ltd., Kensington and Logitech, have substantially greater
technological, financial, research and development, manufacturing,
human and marketing resources and experience than DSI. Such
companies may therefore succeed in developing products that are more
effective or less costly than DSI's products, or may be more
successful in marketing and distributing their products. DSI's
ability to sell the gesture recognition technology based products
will, in part depend on its ability to demonstrate these products
are substantially better than the current point and click technology
6) DSI may have difficulty achieving market acceptance because of the
significant change represented by its technology. DSI's gesture
recognition technology represents a significant technological change
from existing point and click technology and is a major shift in
paradigms. This may cause resistance in market acceptance and
adaptation.
7) DSI intents to rely on third party manufacturers. DSI's strategy is
to outsource most of the required manufacturing. Reliance on third
party producers and manufacturers may delay the introduction of
product to market.
8) DSI has limited marketing and sales capabilities. DSI does not have
a large group of internal marketing and sales resources and
personnel. In order to market the gesture recognition technology
based products and any other products it may develop, DSI intends to
form marketing and distribution agreements with third parties, in
addition to its own internal marketing and distribution efforts.
There can be no assurance that DSI will be able to successfully
enter into such arrangements with third parties on acceptable terms,
if at all. To the extent that DSI arranges with third parties to
market its products, the success of such products may depend on the
efforts of such third parties. There can be no assurance that any of
DSI's proposed marketing schedules or plans can or will be met.
9) DSI relies on trade secrets and proprietary know-how. Although DSI
does not believe that its products infringe on the rights of third
parties, there can be no assurance that third parties will not
assert infringement claims against us in the future or that any such
assertion will not result in costly litigation or require us to
obtain a license to intellectual property rights of such third
parties. In addition, there can be no assurance that such licenses
will be available on reasonable terms or at all, which could have a
material adverse effect on DSI's business, results of operations and
financial condition.
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10) DSI is dependent on certain key personnel and does not maintain key
man life insurance. DSI's success will depend in large part upon the
services of a number of key employees and consultants, including
Edward Pardiak, DSI's Chairman of the Board of Directors and Chief
Executive Officer, and Robert Egery, DSI's President. DSI has not
obtained keyperson life insurance with respect to any employees,
directors or consultants. The loss of the services of Mr. Pardiak,
Mr. Egery or other key employees or consultants could have a
material adverse effect on DSI's business, results of operations and
financial condition. Due to the highly specialized scientific nature
of DSI's business, DSI is highly dependent upon DSI's ability to
attract and retain qualified scientific, technical and managerial
personnel. The loss of services of existing personnel and/or the
failure to recruit key scientific, technical and managerial
personnel in a timely manner would be detrimental to DSI, DSI's
product development programs, and to its overall business.
Competition for qualified engineering personnel is intense and there
can be no assurance that DSI will be able to continue to attract and
retain the necessary qualified personnel.
11) DSI may experience difficulty in the management of growth If
successful, DSI may experience rapid expansion of its business. A
continuing period of rapid growth could place a significant strain
on DSI's management, operations and other resources. DSI's ability
to manage its growth would require us to continue to invest in its
operations, including its financial and management information
systems, and to retain, motivate and effectively manage its
employees. If DSI's management is unable to manage growth
effectively, the quality of its services and products, its ability
to retain key personnel and its results of operations could be
materially and adversely affected.
12) No Dividends Anticipated. DSI has never declared or paid cash
dividends on its Common Stock since its inception and does not
intend to declare or pay dividends on its Common Stock in the
foreseeable future. DSI intends to retain any earnings, if any, in
order to finance future growth of its business. Consequently,
dividends may or may not be paid in the near future.
Item 4. Information on DSI
A. History and Development of DSI
DSI Datotech Systems Inc. was incorporated under the laws of the Province of
British Columbia, Canada on May 7, 1987 under the name Rhino Resources Inc.
Rhino Resources Inc. changed its name to DSI Datotech Systems Inc. on April 19,
1996. DSI trades under the commercial name of Datotech and has a registered
business address located at 712-525 Seymour Street, Vancouver, B.C. V6B 3H7,
telephone number (604) 685-9109.
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DSI is a development stage company involved in the development of gesture
recognition technology to facilitate the user's interface with computers and
electronic devices to promote greater ease and efficiency in the input of data
and information. Prior to October 1997, DSI was involved in resource
exploration. In October 1997, DSI divested itself of all natural resource
properties and ceased all activities within the natural resource sector.
A. Business overview
Introduction
DSI's mission is to make human interaction with computers and electronic devices
easy and simple using natural hand gestures. DSI's patented gesture recognition
technology includes both proprietary software and touch pads that allow people
to operate these devices in a natural manner by touching and sliding multiple
fingers on a "DatoPad." DSI designs and develops gesture recognition software
and intelligent touch pads. DSI believes that the ease of use and flexibility of
gesture recognition technology are superior to the point and click technologies
found in keyboards and mouse devices which are commonly used to input
information into computers. DSI intends to be a key provider of human-machine
interfaces, which will offer a wide array of "end-to end" solutions targeted
towards specific market segments.
DSI has three United States patents for its gesture recognition technology. DSI
has applied for one patent in the United States and one patent in Canada for a
multitouch interface. DSI's technology seeks to significantly boost user
productively by allowing the user to fully focus on the task at hand rather than
the details of interface, and accomplish their work objectives with greater
speed in a simple and natural manner. Gesture recognition technology brings
improved performance to gesture recognition technology enabled touch pads that
are deemed mice replacements, and greatly enhances keyboard functionality. The
touch pads may be of any size, shape or form depending on the nature of the
application. The software design is of a flexible and open architecture class,
with the potential to form a gesture recognition based human-machine operating
system.
Key developments in DSI's operations to date include:
o Obtaining three patents applicable to gesture recognition technology and
interface development;
o Designing, developing and building proof of concept prototypes;
o Performing a focused research market study through an independent
research firm: Benchmark;
o Developing its research and development staff; and
o filing for additional patents pertaining to a new generation multi-touch
gesture recognition algorithm.
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o Executing two options to obtain exclusive licenses to DSI's technology
for two industries.
The pointing and input control systems market is a growing multi-billion dollar
industry. Pointing and input control systems are found across numerous
industries such as personal computers, personal digital assistants, games and
entertainment, stationary and mobile communications, home appliances, security
and access control systems and many others. According to a private study
conducted for DSI in 1997 by Benchmark Research Inc., pointing and input control
device sales in 1997 for the personal computer, gaming, and entertainment market
segments represented were approximately US $3,000,000. The markets had projected
sales of US$5,400,000 in 2001, with an approximate installed based of 315
million mice/trackball input and pointing devices.
DSI's technology leverages the acceptance of the touch pad by enhancing it with
gesture recognition technology, extending the functionality of the pad, and
making the interface between the user and the machine more natural and
intuitive. DSI is introducing higher levels of input device programmability to
further adapt the interface to suit the natural characteristics and tendencies
of the user.
Dato Gesture Technology Overview
Hand gestures are a universal, natural and effective form of communication and
provide an accepted way for people to interact with new generations of
information technology. DSI's gesture recognition technology interprets hand
gestures performed with any combination of digits of the hand touching a
proprietary "intelligent" touch pad. This technology integrates sensors,
software and application programs into a unique, leading edge proprietary input
system. The touch pad can be designed in various sizes and forms as required by
different applications. Sensors in the pad track the position and force of
multiple simultaneous finger contacts and process this information to interpret
hand gestures performed by the user.
Each multi-touch gesture is mapped to electronic codes and passed through an
interface to control a computer or other electronic device. DSI's next
generation design is reverse-compatible with existing touch pad pointing devices
and also recognizes a useful set of default gestures, which can be mapped to
perform many standard functions. Advanced product development will provide
user-defined custom gestures in addition to the defaults.
Gesture recognition technology provides a compact, general-purpose input system,
which is a powerful alternative to more traditional human-machine interaction
via knobs, keys and buttons, and pointing devices. Several characteristics of
gesture recognition technology suggest advantages for particular applications,
for example:
o a small footprint for integration into a portable or hand-held devices;
o eyes-free operation, a necessary characteristic for many applications
like graphic design and games;
o sliding, rather than striking buttons reduces physical effort and
strain; and
o programmability to replace repetitive complex input sequences with a
single gesture
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Future enhancements are planned to add character entry, user-defined custom
gestures, security features and to integrate gesture recognition technology with
voice recognition.
DSI management has continued to focus on the development of gesture recognition
technology including elements to support applications that will drive demand and
acceptance of gesture recognition technology. Once DSI's gesture recognition
technology application portfolio is fully interoperable, platform providers will
be able to utilize DSI's gesture recognition technology enabled products.
Product Development
In 1997/1998 and 2000, DSI received approval for a market research grant in the
Market Assessment of Research and Technology (MART) Program, which is jointly
offered by the British Columbia Science and Technology Agency and the Canadian
National Research Council. In 1997, DSI proceeded with a market research study
(conducted by Benchmark Research Inc.) to develop its business strategy, focus
its research and development activities and to assist DSI in commercializing its
technology. Based on DSI's focused market research, an initial product version
is aimed at professional and power user market segments including CAD
specialists, graphics artists, multimedia developers and, information managers.
The DatoPad
Input and pointing devices have become a universal method in the way in which
people operate and interface with computers. DSI's gesture recognition
technology interprets hand gestures performed on a proprietary device called a
DatoPad(TM). This technology leverages market acceptance of the touch pad by
enhancing it with gesture recognition technology, extending the functionality of
the pad and making the interface between the user and the machine more simple
and natural. DSI's solution introduces higher levels of input device
programmability. Each gesture is mapped to an electronic code and passed through
an interface to control a computer or electronic appliance. In February 2001,
DSI presented its first video gaming prototype using gesture recognition
technology.
The device will be programmed with defaults and have the capability to be
customized by the user to perform specific functions for each gesture code. The
patented technology thus provides a compact, general-purpose input system, which
DSI believes is a more powerful alternative to current traditional input and
pointing technologies such as mice and trackball.
The DatoPad will be approximately the size and thickness of a conventional mouse
pad. The initial product configuration is able to recognize up to ten digits of
the hand. The pad communicates with a personal computer via a Universal Serial
Bus, serial cable or wireless link. The surface of the device accommodates
touching with all five digits of the hand in a comfortable posture. The pad is
reverse compatible with existing pointing devices and functions as a standard
pointing device when touched with a single finger or stylus. Touching with more
than one finger activates the gesture recognition technology software allowing
the user quick access to a large number of shortcuts to perform standard
functions including
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o Cut
o Paste
o Save
o Move
o Enlarge or shrink objects
o Rotate objects
Several characteristics of the DatoPad(TM) input system suggest advantages
for particular applications:
o The DatoPad(TM) is fully reverse compatible with current devices.
o The DatoPad(TM) is scalable to various shapes and sizes to reflect a variety
of applications.
o Eyes-free operation provides a significant advantage in applications like
computer aided design, graphics, and multimedia design which require the
operator's visual attention.
o Sliding fingers rather than striking buttons, allows input sequences to be
performed quickly with minimal physical effort.
o The user will be able to program their own gestures as they relate to
specific applications thus personalizing their interaction with applications
and devices.
o Future enhancements will allow character entry and user-defined custom
gestures such as signatures.
Markets
The commercialization of DSI's products will be driven by a three-pronged
strategy of forming strategic alliances and partnerships; selling stand-alone
products to address the installed market base and licensing agreements with
major software/hardware original equipment manufacturers. DSI expects to focus
its initial product introduction on the professional segment of the interface
systems market. DSI will also seek to take advantage of growth in Internet-based
technologies and e-commerce.
DSI's market penetration strategy focuses on the traditional input and pointing
device market segments. DSI will be focusing on three strategic computer
segments. This includes initially developing and marketing its DatoPad(TM) for:
o users of professional software;
o gesture recognition technology integrated portable computers; and
o gesture recognition technology integrated desktop keyboards.
DSI intends to channel its products to market by forming strategic alliances and
partnership with
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established distribution channels, sale of stand alone product directly to the
market, and through licensing agreements with major software/hardware OEMs.
DSI will approach both horizontal and vertical markets. DSI's approach to
horizontal markets is to grant an option to a third party to have exclusive
rights to market the products to a particular industry. Under the agreements
executed to date, DSI received a cash payment for the option and will receive an
additional cash payment if the optionee elects to license the technology
following the optionee's evaluation of the technology. As a condition for
granting the license, DSI also receives an equity interest in the licensee and
the opportunity to generate revenues from working with sublicenses in the
development of specific applications for the products.
DSI entered into an option agreement with NetFace LLC on June 28, 2000. NetFace
has the right to evaluate the commercial value of DSI's intellectual property
rights in technology, including the gesture recognition technology, for use in
interfaces for personal computer games, console games and Internet television.
In consideration for an option to enter into an exclusive license agreement with
DSI for the purpose of utilizing DSI's intellectual property rights for such
use, NetFace will pay DSI U.S. $200,000, of which U.S. $100,000 has been
received. The balance is due upon delivery by DSI of a reasonably acceptable
prototype to NetFace. DSI has completed a prototype of its Datopad for use in
video games that it anticipates will be delivered to NetFace for evaluation in
the spring of 2001.
Should the option be exercised, DSI will enter into a license agreement with
NetFace. In consideration of the license, DSI will receive U.S. $5,000,000, less
the option fees of U.S. $200,000, and a 20% Class B membership interest in
NetFace. The option period terminates eighteen months from the date a prototype
reasonably acceptable to NetFace is made available by DSI to NetFace.
DSI entered into an option agreement with Security Biometrics, Inc. on August
22, 2000. Biometrics has the right to evaluate the commercial value of DSI's
technology for use in interfaces and software for banking and financial
transactions. DSI and Biometrics believe that the gesture recognition technology
can be used to eliminate identity fraud, thereby reducing transaction costs and
losses. Biometrics paid DSI a fee of US$320,000 for an option to enter into an
exclusive license agreement with DSI for the purpose of utilizing DSI's
intellectual property rights for such use.
Under the option agreement with Biometrics, an additional US $3,000,000 is due
by July 22, 2001. The funds will be used exclusively toward the development of a
prototype reasonably acceptable to Biometrics which prototype is to be made
available to Biometrics within twelve months of receiving the US $3,000,000.
Biometrics, upon receipt of the acceptable prototype, has three months in which
to exercise the option, upon which a licensing agreement will be signed in
consideration of US $8,000,000, less the above amount of US $3,320,000, and a
perpetual non-dilutive 20% common share interest in Biometrics company or its
assignee.
In its approach to vertical markets, DSI seeks to sell its products and
technology to the producers or users of products that can be used across
industry segments, such as computer manufacturers and manufacturers of other
products that use traditional point and click interfaces. DSI will
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primarily seek to license its technology and products to others to be sold under
their brand names but may also sell products under its brand names. DSI will
initially attempt to outsource the manufacture of its components and assemble it
products. DSI intends to then outsource the manufacture and assembly of its
products. DSI also intends to license its gesture recognition technology
directly to original equipment manufactures of computers and computer related
equipment.
Patents & Trademarks
DSI has three United States patents for its gesture recognition technology and
is extending these with additional international patents on a recently improved
and advanced method of human-machine interaction based on hand gestures. DSI is
preparing to file for additional patents specific to a multi-touch gesture
recognition software.
DSI owns the following patents:
1. US Patent 5,203,704 (1993), "Method of Communication Using Pointing Vector
Gestures and Mnemonic Devices to Assist in Learning Pointing Vector Gestures";
Expiry December 21, 2010.
2. US Design Patent D354,735 (1995), "Switch Housing for Providing Various
Different Functions to Keys of a Single Key Pad"; Expiry January 24, 2009.
3. US Patent 5,808,567 (1998), "Apparatus and Method of Communicating Using
Three Digits of a Hand"; Expiry September 15, 2015.
4. Canadian Patent (2,098,179) 1998 "Pointing Gesture Method of Communication",
with Japanese application on hold; expiry December 16, 2011.
DSI has also applied for one patent in the United States and one patent in
Canada for a multitouch interface.
DSI holds the following U.S. trademarks in respect of its technology:
1. US Trademarks "DatO" (2,090,374) and "Spelsa" (2,007,836).
2. US Trademarks (pending) "Interfacing With the Future."
Competition
To the best of DSI's knowledge, there are no companies producing gesture
recognition technology products or applications that are in direct competition
with DSI's gesture recognition technology. Indirect competition may come from
existing input and pointing device manufacturers, for example touchpads,
integrated touchpads and keyboards. Such indirect competitors include Interlink
Electronics Ltd., Kensington and Logitech. DSI's may seek to partner with an
indirect competitors to enabler them to enhance their products using DSI's
technology.
Government Regulations
15
DSI does not believe that its products are materially affected by government
regulation of its proposed products.
DSI is a Canadian Corporation and is governed by the laws of Canada. The shares
of DSI are listed on the Canadian Venture Exchange.
C. Organizational Structure
DSI has one wholly owned subsidiary that was incorporated as 3259722 Canada,
Inc. on May 14, 1996 pursuant to the laws of Canada. The subsidiary
subsequently changed its name to Interaction Technologies Ltd. on July 19,
2000. Reference to the "Company" or "DSI" include references to the
subsidiary.
D. Property Plant and Equipment
DSI has its principal place of business located in Vancouver, British
Columbia, Canada where it holds a lease its business premises with an office
space of 5,721 square feet and an annual rent of $108,527.40.The term of
this lease is due to expire November 30, 2005.
Item 5. Operating and Financial Review and Prospects
A. Operating Results
To ensure the development of DSI, DSI's management will continue to
diversify the source of revenues and pursue licensing and royalty
agreements. DSI now concentrates its efforts in the improvement and
commercialization of gesture recognition technology applications for the
human-machine interface.
Fiscal Year Ended October 31, 2000 compared to Fiscal Year Ended October 31,
1999
Revenue and Investment Income
Option revenue of $627,730 was received during the fiscal year ended October
31, 2000 for two option agreements, one with Netface LLC and one with
Security Biometrics Inc. Investment and interest income increased to
$149,470 due to the investment of funds from the shares issued this year.
Expenses
Research and Development
Total research and development expenditure increased from $465,897 for the
year ended October 31, 1999 to $498,382 for the year ended October 31, 2000,
an increase of 7%.
16
There will be a substantial increase in the research and development
expenditure for the year ending October 31, 2001 for the further development
of the acceptable prototype for the option agreements.
General and Administrative
General and administrative expenses increased from $670,143 for the year
ended October 31, 1999 to $1,034,036 for the year ended October 31, 2000,
and increase of $363,893 (54%). This increase is mainly due to:
o Higher management and consulting fees (increase of $185,000) included
fees for the market analysis and marketing plans.
o Legal and accounting (increase of $33,000) which included fees for
stating the financials in US GAAP and legal counsel for financing
opportunities in the US.
o Travel (increase of $38,000), which included travel to Europe and the US
to pursue additional financing.
Income Taxes
DSI has accumulated non-capital losses for tax purposes, the potential
benefits of which are not recorded in the financial statements. The losses
may be carried forward to reduce taxable income in future years and, unless
utilized, will expire as follows:
Year Loss Amount
2001 $ 162,600
2002 227,100
2003 732,200
2004 881,800
2005 865,300
2006 966,600
2007 725,900
------------------------------------------------------
TOTAL $ 4,561,500
======================================================
In the fiscal year ended October 31, 2000, DSI's net operating loss
decreased by 33% to $755,218 as compared to $1,125,451 in the fiscal year
ended October 31, 1999. The loss per share decreased $0.04 to $0.04. DSI has
accumulated non-capital losses of approximately $4.6 million, which can be
carried forward to reduce taxable income in future years. These potential
income tax benefits arising from the foregoing are not recorded in the
financial statements.
Fiscal Year Ended October 31, 1999 compared to Fiscal Year Ended October 31,
1998
Revenue and Investment Income
There were no revenues reported for the fiscal years ending October 31, 1999
and 1998. Investment income for the fiscal year 1999 was $16,876 lower than
the year 1998 as DSI had lower cash and investment during fiscal 1999 than
during fiscal 1998.
17
General and Administrative
There was a decrease in General and Administrative Expenses in the fiscal
year ended October 31, 1999 to $670,143 from $689,157 for the fiscal year
ended October 31, 1998.
Loss per Share
The loss per share increased from $0.07 per share in fiscal 1998 to $0.08
per share in fiscal 1999, an increase of $0.01 per share. This was mainly
due to the increased research and development expenditure in fiscal 1999.
B. Liquidity and Capital Resources
In the fiscal year ended October 31, 2000, DSI's primary source of funds was
from the issue of Common Shares. DSI considers its operating cash flows and
ability to raise equity capital as principal indicators of its liquidity.
During the fiscal year ended October 31, 2000, DSI had cash inflow of $5
million from private placement of share capital ($3.8 Million), exercise of
warrants ($1.9 Million) and exercise of options ($437,000), leaving a cash
balance at October 31, 2000 of $4,079,315 compared to $64,000 at October 31,
1999. Although working capital is not considered to be an indicator of DSI's
liquidity, DSI's working capital at October 31, 2000 was $3,922,221, an
increase of $4,088,777 from October 31, 1999. In the fiscal year ended
October 31, 2000, cash resources were utilized in the investment in gesture
recognition technology, including recruitment of additional employees the
research and development of the gesture recognition technology. DSI
relocated to its new premises in October 2000 to provide more space for the
engineers and the laboratory. Cash resources were utilized in the purchase
of capital equipment such as furniture and computers.
DSI has no long-term debt. Current liabilities of $212,679 included accounts
payable and accrued liabilities, which decreased by $23,000 from October 31,
1999. DSI has license-to-option agreements with Netface LLC and Security
Biometrics Inc. DSI intends primarily to meet its commitment to Netface and
Security Biometrics while continuing to develop other product applications.
The funds required for this purpose will be derived from its current cash
position and possibly the issuance of common shares.
18
During the year ended October 31, 2000, DSI completed private placements as
follows:
i. 2,456,140 units at $0.57 per unit for gross proceeds of $1,400,000 less
finders' fees of 50,000 common shares and $56,759 paid in cash and other
share issue costs of $8,399. Each unit consisted of one common share and
one warrant to acquire one additional common share at $0.57 per share to
January 26, 2001 and at $0.66 per share to January 26, 2002.
ii. 912,000 units at $1.75 per unit for gross proceeds of $1,596,000 less
commissions of $159,600, fees of $93,687 and other share issue costs of
$44,508. Each unit consisted of one common share and one-half warrant,
each full warrant exercisable to acquire one additional common share at
$2.16 per share to April 10, 2002. The agent also received compensation
warrants which may be exercised to acquire 91,200 units at $1.75 per
unit to October 10, 2001, each unit consists of one common share and
one-half warrant, each full warrant exercisable to acquire one
additional common share at $2.16 per share to April 10, 2002.
iii.357,854 units at $1.75 per unit for gross proceeds of $626,245 less
commissions of $25,000, fees of $15,000 and other share issue costs of
$1,499. Each unit consisted of one common share and one-half warrant,
each full warrant exercisable to acquire one additional common share at
$2.16 to April 20, 2002. The agent also received compensation warrants
which may be exercised to acquire 35,785 units at $1.75 per unit to
October 20, 2001, each unit consists of one common share and one-half
warrant, each full warrant exercisable to acquire one additional common
share at $2.16 per share to April 20, 2002.
DSI believes that it has sufficient cash on hand to meet its anticipated
requirements at least through October 31, 2002. The funds will be used to
meet DSI's general operating expenses, capital needs for research and
development and obligations to the optionees of its technology. DSI will
require substantial additional funds for its product development programs,
marketing and distribution and operating expenses. While management is
pursuing additional financing, DSI currently has no commitments for
additional financing.
C. Research and Development, Patents and Licenses, etc.
Research and Development
As at October 31, 2000, research and development costs accrued (exclusive of
accumulated amortization) were $1,549,748, including $61,765 accrued in the
most current year. To support the market entry product, current research and
development activities are focused on three areas:
o High-resolution multi-touch sensors adapted from touchpad technology
used in many notebook computers.
o A sensor-independent proprietary gesture recognition algorithm, which
can be used with a variety of sensor technologies.
19
o Application interfaces aimed at and designed for professional users of
high-end software applications like Adobe Photoshop, etc.
The gesture recognition algorithm forms an engine, similar to an operating
system, for gesture based human-machine interaction, and is the foundation
for DSI's technology. This software will be designed to reside in a custom
microchip. This approach will facilitate technology transfer and licensing
to third parties, and ensure DSI's intellectual property protection.
In addition, a Canadian patent has been granted for "Pointing Gesture Method
of Communication", based on US Patent 5,203,704.
D. Trend Information
DSI faces the general risk of technology. It received its first revenues in
the fiscal year ended October 31, 2000 from signing two license-to-option
agreements with Netface LLC and Security Biometrics Inc. DSI plans to market
its product through forming strategic alliances and partnerships;
stand-alone products to address the installed market base; and licensing
agreements with major software/hardware original equipment manufacturers.
Item 6. Directors, Senior Management and Employees
A. Directors and Senior Management
Directors are elected each year at the annual meeting of the shareholders of
DSI. The most recent meeting of he shareholders was held on February 21,
2001. The following table sets out the names of the Management, their
positions and offices in DSI, principal occupations, the period of time that
they have been Directors of DSI. All of the directors are residents of
Canada.
The following table lists the directors and officers of DSI as at February
28, 2001:
Name Age Position
Edward C. Pardiak 48 Director, Chairman of the Board,
Chief Financial Officer and Chief
Executive Officer
Robert M. Egery 48 President, Chief Operating Officer
and Director
Thomas Calvert 64 Director and Secretary
Allan S. Gibbins 51 Director
Timothy Heaney 41 Vice President Marketing
20
Edward C. Pardiak
Mr. Edward C. Pardiak was appointed Director, Chairman of the Board and
Chief Financial Officer in April 1997. In October 2000, the Board of
Directors elected Mr. Pardiak as President and Chief Executive Officer of
DSI. He ceased being President in December 2000. Mr. Pardiak has extensive
international experience in licensing, royalty agreements, finance and
project management on the African, Asian, European and American continents.
From 1976 to 1985 he held management positions with international Fortune
500 companies such as Seagram & Sons Ltd. Mr. Pardiak is a Director and the
President of Augen Capital Corp., a public financial holding company with
wholly owned merchant banking subsidiaries. He has a B.SC. from McGill
University, a B.A. (Honors with Distinction) in Economics and a M.B.A. in
finance and strategic management from Concordia University. He is currently
completing his Doctorate in Strategic Management and has lectured at the
graduate level at Concordia University.
Robert M. Egery
Mr. Robert M. Egery was appointed President and Chief Operating Officer of
DSI Datotech effective December 1, 2000. Mr. Egery has more than 20 years of
experience in high technology. During his career he has held senior
management positions in sales and marketing, business development,
contracts, engineering and program management and over 10 years at the
vice-presidential level. At AlliedSignal (Honeywell), he gained invaluable
experience in bringing new products to market, in electronics production and
in international marketing and alliances. He developed a strong background
in systems integration, software development and product diversification at
Lockheed Martin and most recently he developed a global service delivery
business at Bombardier. Mr. Egery holds bachelor degrees in Commerce and
Electrical Engineering.
Thomas Calvert
Dr. Thomas Calvert was appointed Director of DSI in January 1998. In October
2000 the Board of Directors elected Dr. Calvert as Secretary of DSI. In 1997
Dr. Calvert founded Credo Interactive Inc. and is currently Board Chair of
that company. Since 1996, Dr. Calvert has been the President and CEO of
Credo Multimedia Software Inc. Dr. Calvert is Vice-President for Research
and External Affairs at the Technical University of BC. He is currently on
leave from his position at Simon Fraser University where he holds joint
appointments as Professor in the Schools of Computing Science and
Engineering Science. Since 1996, Dr. Calvert is Co-leader of the
TeleLearning Network of Centers of Excellence, a national project sponsored
by SFU. He joined Kinetic Effects Research Inc. as President from 1992 to
1996. Dr. Calvert served as President of the Science Council of BC between
1990 and 1992. In addition to his numerous honors and awards, Dr. Calvert
has served on the Senate and Board of Governors of SFU, and on a number of
external boards including Science World, BC Advanced Systems Institute,
TRIUMF, Software Productivity Center,
21
Jumpstart Performance Society, and the Center for Image and Sound Research.
Dr. Tom Calvert has published over 100 papers and book chapters. He received
his Doctorate in Electrical Engineering from Carnegie Mellon University in
the United States.
Allan S. Gibbins
Mr. Allan S. Gibbins was appointed Director of DSI in January 1998. Mr.
Gibbins held increasing senior management positions over a period of 16
years with DuPont Canada Inc. In 1986 he was the Director of ITT Cannon
Canada Ltd., and served between 1988 and 1992 as Vice-President and General
Manager of Nutone Electrical Inc. Since 1992, Mr. Gibbins is the President
and CEO of Hubbell (Canada) Inc. The sales are in excess of $85 million
representing multi-divisional product lines. He is the Chairman of the
Electrical, Electronic Manufacturers Association of Canada (EEMAC). Mr.
Gibbins has a Bachelor of Science (Honors, Chemistry) from Concordia
University in Montreal. He brings many years of sales and marketing
experience in such diverse industries as electrical, electronic, plastics,
textile fibers, paint and chemicals. He has outstanding skills in the areas
of merger and acquisition negotiation, financial control systems,
restructuring, training and team building.
Timothy Heaney
Mr. Timothy Heaney was appointed VP Marketing of DSI Datotech Systems Inc.
effective February 19, 2001. From 1994 through 2001, he was the Director of
Marketing for SR Telecom Inc., a manufacturer of microwave
telecommunications systems. Mr. Heaney is a professional engineer with over
17 years experience in international business development, sales and
marketing, product management and contracts and project execution. Mr.
Heaney received his Bachelor of Engineering from Concordia University,
Montreal, in 1983.
Family Relationship Between any Director and Executive Officer
Mr. Edward Pardiak, Director and Chairman of the Board, and Mr. Allan
Gibbins, Director, are brothers-in-law.
B. Compensation
The following table sets forth the compensation paid to DSI's directors and
members of its supervisory bodies for the last three fiscal years:
22
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Compensation Long Term Compensation
- ------------------------------------------------------------------------------------------------------------------------------------
Awards Payouts
- ------------------------------------------------------------------------------------------------------------------------------------
Securities Restricted
Other Under Options/ Shares or
Annual SARs(1) Restricted LTIP(2) All Other
Name and Principal Year Salary Bonus Compensation Granted Share Units Payouts Compensation
Position ($) ($) ($) (#) ($) ($) ($)
- ------------------------------------------------------------------------------------------------------------------------------------
Edward C. Pardiak, 1998 $120,000 $40,000 $4,379.60 70,000 Nil Nil $2,000
Chairman, President and
Chief Executive Officer 1999 $120,000 Nil $3,600 50,000 Nil Nil $2,900
2000 $120,000 Nil $3,600 95,000 Nil Nil $2,900
- ------------------------------------------------------------------------------------------------------------------------------------
Elli Segev, 1998 $120,000 $40,000 $4,315.25 50,000 Nil Nil $1,500
Former President, Former
Chief Executive Officer
(Up to October 6, 2000) 1999 $120,000 Nil $3,600 50,000 Nil Nil $2,900
2000 $110,000 Nil $3,300 95,000 Nil Nil $2,900
- ------------------------------------------------------------------------------------------------------------------------------------
(1) "SAR" or "stock appreciation right" means a right granted by DSI, as
compensation for services rendered, to receive a payment of cash or an
issue or transfer of securities based wholly or in part on changes in
the trading price of publicly traded securities of DSI.
(2) "LTIP" or "long term incentive plan" means any plan that provides
compensation intended to serve as incentive for performance to occur
over a period longer than one financial year, but does not include
option or stock appreciation right plans or plans for compensation
through restricted shares or restricted share units.
Employment Contracts
DSI has entered into an agreement with Edward C. Pardiak Holding Limited
(the "Pardiak Agreement"), which is controlled by Mr. Edward C. Pardiak,
Chief Executive Officer and Chairman of the Board, effective November 1,
2000. The Pardiak Agreement provides for an initial term of two years
and with successive renewal terms of one year. Renewal is at the
discretion of DSI. Pursuant to the Pardiak Agreement, Mr. Pardiak is to
be paid a fee of $12,500 per month together with a car allowance in the
amount of $1,000 per month. DSI may terminate the Pardiak Agreement for
cause. If the Pardiak Agreement is terminated by DSI for any reason
other than cause, then DSI shall pay Mr. Pardiak a lump sum payment in
an amount equal to the compensation per the agreement in full of not
less than one year's compensation.
23
Additional compensation to be awarded to Mr. Pardiak under the Pardiak
Agreement is 1,300,000 common shares that are held by an escrow agent as
performance shares pursuant to the terms and provisions of an escrow
agreement. DSI has entered into an escrow agreement by and among the
Pacific Corporate Trust Company (the "Trustee"), DSI and Pardiak
Management International Limited dated as of November 17, 1997. The
Trustee holds 1,300,000 shares in escrow until directed to be released
by the Canadian Venture Exchange. Under the escrow agreement, the shares
will be released when DSI achieves earnings before taxes and
depreciation of $250,000.
DSI has entered into an agreement with Lemtra Management Inc. (the
"Lemtra Agreement"), which is controlled by Mr. Robert M. Egery,
President and Chief Operating Officer and Director of DSI effective
December 1, 2000. The Lemtra Agreement provides for an initial term of
two years and with successive renewal terms of one year. Renewal is at
the discretion of DSI. Pursuant to the Lemtra Agreement, Mr. Egery is to
be paid a fee of $12,500 per month together with a car allowance in the
amount of $700 per month. DSI may terminate the Lemtra Agreement for
cause. If the Lemtra Agreement is terminated by DSI for any reason other
than cause, then DSI shall pay Mr. Egery a lump sum payment in an amount
equal to the compensation per the agreement in full of not less than one
year's compensation.
DSI has entered into a Financial Consulting Agreement by and between DSI
and Wayne Alan Taylor who is an Advisory Board member. Pursuant to the
Financial Consulting Agreement, DSI has paid Mr. Taylor $38,000 through
October 31, 2000.
Board Committees
Members of the Advisory Board are elected by the Directors of DSI. The
advisors have in-depth knowledge of innovative technologies and
financial experience that augments DSI's management capabilities and
technology leadership in gesture recognition technology. The following
table sets out the names of the Advisory Board members, their principal
occupations and the period of time that they have been Advisory Board
Directors of DSI. The Advisory Board has no formal authority. All of the
Advisory Board members are residents of Canada.
- ----------------------------------------------------------------------------------------------
Name Principal Occupation Period as Advisory Board Member
- ----------------------------------------------------------------------------------------------
Kenneth P. Barr President and CEO, Combined Telecom Since December 13, 1999
Inc.
- ----------------------------------------------------------------------------------------------
Wayne A. Taylor President, FGH Insurance Agencies Ltd. Since December 13, 1999
- ----------------------------------------------------------------------------------------------
24
Dr. Calvert and Mr. Gibbins are members of DSI's Audit Committee and DSI's
Compensation Committee.
D. Employees
As at February 28, 2001, DSI had 19 full-time employees and 1 part-time
employee, including Mr. Edward C. Pardiak, the Chairman, Chief Financial
Officer and Chief Executive Officer, Mr. Robert Egery, President and Chief
Operating Officer, Mr. Timothy Heaney, Vice President of Marketing, 11
engineers, scientists and technicians and 6 administrative, marketing and
support staff.
E. Share Ownership
The following table sets forth certain information concerning the beneficial
ownership of DSI's Common Shares or options to purchase common shares as at
February 28, 2001 for each officer and director of DSI at that date:
- -----------------------------------------------------------------------------------------------
Name of Beneficial Shareholder Number of Common Shares (1) Percentage of Common Shares
- -----------------------------------------------------------------------------------------------
Edward C. Pardiak 2,196,184(2) 9.8%
- -----------------------------------------------------------------------------------------------
Robert M. Egery 175,000 (3) --
- -----------------------------------------------------------------------------------------------
Allan S. Gibbins 252,100 (4) 1.2%
- -----------------------------------------------------------------------------------------------
Thomas Calvert 164,000 (5) --
- -----------------------------------------------------------------------------------------------
Timothy Heaney 31,250 (6) --
- -----------------------------------------------------------------------------------------------
1) As at February 28, 2001, the number of common shares outstanding was
21,652,334.
2) Includes 1,536,842 shares owned by Pardiak Management International Limited,
a corporation controlled by Edward Pardiak, including 1,300,000 being held
in escrow, and warrants to purchase 236,842 common shares at an exercise
price of $0.66 per share. Also includes options issued to Mr. Pardiak to
purchase (i) 230,000 common shares at an exercise price of $0.75 per share,
(ii) 70,000 common shares at an exercise price of $0.80 per share, (iii)
50,000 common shares at an exercise price of $0.40 per share, (iv) 33,750
common shares at an exercise price of $1.12 per share, (v) 25,000 common
shares at an exercise price of $0.80 per share and (vi) 13,750 common shares
at an exercise price of $0.50 per share. Does not include unvested options
issued to Mr. Pardiak to purchase (i) 11,250 common shares at an exercise
price of $1.12 per share, (ii) 25,000 common shares at an exercise price of
$0.80 per share and (iii) 31,250 common shares at an exercise price of $0.50
per share.
3) Includes options to purchase 175,000 common shares at an exercise price of
$0.50 per share. Does not include unvested options to purchase 125,000
common shares at an exercise price of $0.50 per share.
25
4) Includes options to purchase (i) 100,000 common shares at an exercise price
of $0.40 per share, (ii) 50,000 common shares at an exercise price of $0.40
per share, (iii) 9,000 common shares at an exercise price of $1.12 per
share, (iv) 12,500 common shares at an exercise price of $1.00 per share and
(v) 25,000 common shares at an exercise price of $0.50 per share. Does not
include unvested options to purchase (i) 3,000 common shares at an exercise
price of $1.12 per share, (ii) 12,500 common shares at an exercise price of
$1.00 per share and (iii) 25,000 common shares at an exercise price of $0.50
per share.
5) Includes options to purchase (i) 100,000 common shares at an exercise price
of $0.80 per share, (ii) 12,500 common shares at an exercise price of $0.40
per share, (iii) 9,000 common shares at an exercise price of $1.12 per
share, (iv) 12,500 common shares at an exercise price of $1.00 per share and
(v) 25,000 common shares at an exercise price of $0.50 per share. Does not
include unvested options to purchase (i) 3,000 common shares at an exercise
price of $1.12 per share, (ii) 12,500 common shares at an exercise price of
$1.12 per share and (iii) 25,000 common shares at an exercise price of $0.50
per share.
6) Includes options to purchase 31,500 common shares at an exercise price of
$0.50 per share. Does not include unvested options to purchase 93,250 common
shares at an exercise price of $0.50.
The Directors and Officers of DSI, as a whole, are the beneficial owners of
2,818,534 shares, including options to purchase 1,221,091 common share,
representing 12.3% of the issued and outstanding capital of DSI as at
February 28, 2001, assuming exercise of their vested options.
The following table lists the stock options granted to the Directors and
Employees of DSI during the fiscal year ended October 31, 2000.
Name of Optionee Number of Percentage of Exercise Market Value Expiration
Securities Total Options Or Base of Securities Date
Under Granted to Price Underlying (yy/mm/dd)
Options Employees in ($/Security) Options on the
Granted Fiscal 2000 Date of Grant
($/Security)
--------------------------------------------------------------------------------------------------------------
Wayne Taylor 30,000 3.07% $0.40 $0.43 11/18/02
--------------------------------------------------------------------------------------------------------------
Kenneth P. Barr 30,000 3.07% $0.40 $0.43 11/18/02
--------------------------------------------------------------------------------------------------------------
Evan Graham 64,000 6.55% $0.40 $0.43 11/18/04
--------------------------------------------------------------------------------------------------------------
Betsy Shimokura 45,000 4.61% $0.40 $0.43 11/18/04
--------------------------------------------------------------------------------------------------------------
David Fernandes 24,000 2.46% $0.40 $0.43 11/18/04
--------------------------------------------------------------------------------------------------------------
Paul Rada 22,000 2.25% $0.40 $0.43 11/18/04
--------------------------------------------------------------------------------------------------------------
Shyan Ku 22,000 2.25% $0.40 $0.43 11/18/04
--------------------------------------------------------------------------------------------------------------
Robert Wiebe 12,000 1.23% $0.40 $0.43 11/18/04
--------------------------------------------------------------------------------------------------------------
Shyan Ku 30,000 3.07% $1.12 $1.40 04/12/05
--------------------------------------------------------------------------------------------------------------
Paul Rada 30,000 3.07% $1.12 $1.40 04/12/05
--------------------------------------------------------------------------------------------------------------
26
--------------------------------------------------------------------------------------------------------------
Robert Wiebe 10,000 1.02% $1.12 $1.40 04/12/05
--------------------------------------------------------------------------------------------------------------
Evan Graham 37,000 3.79% $1.12 $1.40 04/12/05
--------------------------------------------------------------------------------------------------------------
Betsy Shimokura 27,000 2.76% $1.12 $1.40 04/12/05
--------------------------------------------------------------------------------------------------------------
Elli Segev 45,000 4.61% $1.12 $1.40 04/12/05
--------------------------------------------------------------------------------------------------------------
Edward C. Pardiak 45,000 4.61% $1.12 $1.40 04/12/05
--------------------------------------------------------------------------------------------------------------
Tom Calvert 12,000 1.23% $1.12 $1.40 04/12/05
--------------------------------------------------------------------------------------------------------------
Allan S. Gibbins 12,000 1.23% $1.12 $1.40 04/12/05
--------------------------------------------------------------------------------------------------------------
Alison J. Taylor 20,000 2.05% $1.12 $1.40 04/12/05
--------------------------------------------------------------------------------------------------------------
Wayne Taylor 150,000 15.35% $1.00 $1.00 06/02/03
--------------------------------------------------------------------------------------------------------------
Kenneth P. Barr 70,000 7.16% $1.00 $1.00 06/02/03
--------------------------------------------------------------------------------------------------------------
Tom Calvert 25,000 2.56% $1.00 $1.00 06/02/03
--------------------------------------------------------------------------------------------------------------
Allan S. Gibbins 25,000 2.56% $1.00 $1.00 06/02/03
--------------------------------------------------------------------------------------------------------------
Debbie Bortolussi 30,000 3.07% $0.80 $1.00 06/02/03
--------------------------------------------------------------------------------------------------------------
Elli Segev 50,000 5.12% $0.80 $1.00 06/02/05
--------------------------------------------------------------------------------------------------------------
Edward C. Pardiak 50,000 5.12% $0.80 $1.00 06/02/05
--------------------------------------------------------------------------------------------------------------
Betsy Shimokura 20,000 2.05% $0.80 $1.00 06/02/03
--------------------------------------------------------------------------------------------------------------
Martin Livesey 20,000 2.05% $1.12 $1.20 06/28/05
--------------------------------------------------------------------------------------------------------------
Jeffrey Sketchley 20,000 2.05% $1.12 $0.92 09/25/05
--------------------------------------------------------------------------------------------------------------
TOTAL 977,000 100.00%
--------------------------------------------------------------------------------------------------------------
Item 7. Major Shareholders and Related Party Transactions
A. Major Shareholders
The following table sets forth certain information regarding the beneficial
ownership of the Common Shares of DSI, as of February 28, 2001, by each person,
who is known by DSI to own beneficially more than five percent of the
outstanding Common Shares.
---------------------------------------------------------------------------------------------
Name of Beneficial Shareholder Number of Common Shares(1) Percentage of Common Shares
---------------------------------------------------------------------------------------------
Edward C. Pardiak 2,196,184(2) 9.8%
---------------------------------------------------------------------------------------------
Elli Segev 1,300,000 6.0%
---------------------------------------------------------------------------------------------
1) As at February 28, 2001, the number of common shares outstanding was
21,652,334.
2) Includes 1,536,842 shares owned by Pardiak Management International
Limited, a corporation controlled by Edward Pardiak, including 1,300,000
being held in escrow, and warrants to purchase 236,842 common shares at
an exercise price of $0.66 per
27
share. Also includes options issued to Mr. Pardiak to purchase (i)
230,000 common shares at an exercise price of $0.75 per share, (ii)
70,000 common shares at an exercise price of $0.80 per share, (iii)
50,000 common shares at an exercise price of $0.40 per share, (iv)
33,750 common shares at an exercise price of $1.12 per share, (v) 25,000
common shares at an exercise price of $0.80 per share and (vi) 13,750
common shares at an exercise price of $0.50 per share. Does not include
unvested options issued to Mr. Pardiak to purchase (i) 11,250 common
shares at an exercise price of $1.12 per share, (ii) 25,000 common
shares at an exercise price of $0.80 per share and (iii) 31,250 common
shares at an exercise price of $0.50 per share.
3) 1,300,000 shares are held by an escrow agent for Elli Segev Holdings
Limited, a corporation controlled by Elli Segev.
B. Related Party Transactions
DSI has entered into an agreement with Edward C. Pardiak Holding Limited
(the "Pardiak Agreement"), which is controlled by Mr. Edward C. Pardiak,
Chief Executive Officer and Chairman of the Board, effective November 1,
2000. The Pardiak Agreement provides for an initial term of two years and
with successive renewal terms of one year. Renewal is at the discretion of
DSI. Pursuant to the Pardiak Agreement, Mr. Pardiak is to be paid a fee of
$12,500 per month together with a car allowance in the amount of $1,000 per
month. DSI may terminate the Pardiak Agreement for cause. If the Pardiak
Agreement is terminated by DSI for any reason other than cause, then DSI
shall pay Mr. Pardiak a lump sum payment in an amount equal to the
compensation per the agreement in full of not less than one year's
compensation.
The share of compensation to be awarded to Mr. Pardiak under the Pardiak
Agreement is 1,300,000 common shares that are to be held by an escrow agent
as performance shares pursuant to the terms and provisions of an escrow
agreement.
DSI has entered into an escrow agreement by and among the Pacific Corporate
Trust Company (the "Trustee"), DSI and Pardiak Management International
Limited dated as of November 17, 1997 whereby the Trustee is holding
1,300,000 shares in escrow until directed to be released by the Vancouver
Stock Exchange. So long as the shares are held in escrow, Pardiak Management
International Limited may exercise all voting rights attached to the shares
but waived the right to receive dividends or any distributions in the event
of a winding up or dissolution of DSI. One escrow share will be released for
each $0.25 in operating revenue each year.
C. Interest of Experts and Counsel
None
Item 8. Financial Information
A. Consolidated Statements and Other Financial Information
28
Refer to Item 17
B. Significant Changes
None
Item 9. Listing
Markets
DSI's shares are listed and posted for trading on the CDNX (symbol DSI). The
12-month high-low stock range has been between $0.40 and $2.25 Canadian.
The following table sets forth the reported low and high bid prices for the
Common Shares of DSI as quoted on the CDNX on a quarterly basis for the fiscal
years 1999 and 2000, and on monthly basis from November 1, 2000 to February 28,
2001. All figures are in Canadian Dollars.
Quarter High Low
------- ---- ---
11/01/98 to 01/31/99 $0.57 $0.27
02/01/99 to 04/30/99 $0.60 $0.28
05/01/99 to 07/31/99 $0.43 $0.25
08/01/99 to 10/31/99 $0.40 $0.22
11/01/99 to 01/31/00 $1.30 $0.20
02/01/00 to 04/30/00 $2.65 $0.80
05/01/00 to 07/31/00 $1.75 $1.00
08/01/00 to 10/31/00 $1.20 $0.62
Month High Low
------ ---- ---
11/01/00 to 11/30/00 $0.70 $0.50
12/01/00 to 12/31/00 $0.67 $0.40
01/01/01 to 01/31/01 $0.92 $0.40
02/01/01 to 02/28/01 $0.80 $0.50
At February 28, 2001, DSI had 21,652,334 common shares issued and outstanding
and estimated 1,564 record owners.
Item 10. Additional Information
29
A. Share Capital
(a) The authorized share capital consists of 100,000,000 common shares
without par value.
Issued:
2000 1999
- ---------------------------------------------------------------------------------------------------------------
No. of No. of
Shares Amount Shares Amount
- ---------------------------------------------------------------------------------------------------------------
Balance, beginning of year 15,057,940 $ 5,834,305 13,953,940 $ 5,569,546
- ---------------------------------------------------------------------------------------------------------------
Issued during the year
For cash
- private placements, net 3,775,994 3,217,792 1,104,000 264,759
of share issue costs
- exercise of options 437,250 220,200 -- --
- exercise of warrants 1,895,786 1,535,313 -- --
- ---------------------------------------------------------------------------------------------------------------
6,109,030 4,973,305 1,104,000 264,759
- ---------------------------------------------------------------------------------------------------------------
21,166,970 10,807,610 15,057,940 5,834,305
Less:
Company shares held, net (57,600) (46,833) (57,600) (46,833)
of shares resold
- ---------------------------------------------------------------------------------------------------------------
Balance, end of year 21,109,370 $ 10,760,777 15,000,340 $ 5,787,472
===============================================================================================================
B. Memorandum and Articles of Association
DSI's Certificate of Incorporation was ordinarily filed with the Ministry of
Finance and Corporate Relations, Registrar of Companies in the Province of
British Columbia, Canada on May 7, 1987 under the name Rhino Resources Inc.
with the entry number 326273. DSI changed its name by filing of a
Certificate of Change of Name to DSI Datotech Systems Inc. on April 19,
1996. DSI was incorporated to conduct all lawful business pursuant to the
laws of British Columbia and DSI's Certificate of Incorporation and Articles
do not describe a business object or purpose.
Pursuant to Part 11 of DSI's Articles (the "Articles") a director will
disclose his interest in and not vote in respect of any proposed contract or
transaction with DSI in which he is in any way directly or indirectly
interested, but such director will be counted in the quorum at the meeting
of the directors at which the proposed contract or transaction is approved.
Pursuant to Part 13 of the Articles, DSI has established a Compensation
Committee whose members consist of Dr. Thomas Calvert and Mr. Alan S.
Gibbins. The Compensation Committee may meet and adjourn, as the members
deem appropriate. Questions to be determined at a meeting shall be
determined by a majority of votes. The Committee follows strict voting
procedures. Each resolution has to be voted by a majority of the Directors.
This is usually done by a unanimous vote. The Chairman has no additional
power for voting.
30
Pursuant to Part 10 of the Articles, the directors may borrow money in such
amounts and upon such security and on such terms and conditions as they deem
fit, for and on behalf of DSI. The Articles may be amended by special
resolution or at the shareholders annual general meeting and by filing
thereafter with Registrar of Companies in the Province of British Columbia,
that is, they must disclose how borrowing provisions may be varied.
DSI has one class of shares, common shares, which gives the shareholders one
vote for each common share held.
C. Material Contracts
DSI has entered into an option agreement with NetFace LLC dated as of June
28, 2000. Pursuant to the terms of the option agreement, NetFace has the
right to evaluate the commercial value of DSI's intellectual property rights
in technology, including the gesture recognition technology, for use in
interfaces for personal computer games, console games and Internet
television. NetFace paid DSI a fee for an option to enter into an exclusive
license agreement with DSI for the purpose of utilizing DSI's intellectual
property rights for such use. Upon exercise of such option, NetFace shall
pay DSI additional consideration in cash and securities of NetFace.
DSI has entered into an option agreement with Security Biometrics Inc.
("Biometrics") dated as of August 22, 2000. Pursuant to the terms of the
option agreement, Biometrics shall evaluate the commercial value of DSI's
intellectual property rights in technology, including the gesture
recognition technology, for use in the interface and software for banking
and financial transactions. Further Biometrics paid DSI a fee for an option
to enter into an exclusive license agreement with DSI for the purpose of
utilizing DSI's intellectual property rights for such use. Upon the exercise
of such option, Biometrics shall pay DSI additional consideration in cash
and securities of Biometrics.
D. Exchange Controls
There is no law or government decree of regulation in Canada that restricts
the export or import of capital, or that affects the remittance of
dividends, interest or other payments to a non-resident holder of Common
Shares, other than withholding tax requirements.
There is no limitation imposed by Canadian law or by the articles or other
charter documents of DSI on the right of a non-resident to hold or vote
Common Shares of DSI, other than as provided in the Investment Canada Act,
as amended (the "Investment Act").
The Investment Act generally prohibits implementation of a reviewable
investment by an individual, government or agency thereof, corporation,
partnership, trust or joint venture
31
that is not a "Canadian" as defined in the Investment Act (a
"non-Canadian"), unless, after review the Minister responsible for the
Investment Act is satisfied that the investment is likely to be of net
benefit to Canada. If an investment by a non-Canadian is not a reviewable
investment, it nevertheless requires the filing of a short notice, which may
be given at any time up to 30 days after the implementation of the
investment.
An investment in Common Shares of DSI by a non-Canadian that is a "WTO
Investor" (an individual or other entity that is a national of, or has the
right of permanent residence in, a member of the World Trade Organization,
current members of which include the European Community, Germany, Japan,
Mexico, the United Kingdom and the United States, or a WTO
investor-controlled entity, as defined in the Investment Act) would be
reviewable under the Investment Act if it were an investment to acquire
direct control, through a purchase of assets or voting interests, of DSI and
the value of the assets of DSI equaled or exceeded $192 million, the
threshold established for 2000, as indicated on the financial statements of
DSI for its fiscal year immediately preceding the implementation of the
investment. In subsequent years, such threshold amount may be increased or
decreased in accordance with the provisions of the Investment Act.
An investment in Common Shares of DSI by a non-Canadian, other than a WTO
Investor, would be reviewable under the Investment Act if it were an
investment to acquire direct control of DSI and the value of the assets were
$5.0 million or more, as indicated on the financial statements of DSI for
its fiscal year immediately preceding the implementation of the investment.
A non-Canadian, whether a WTO investor or otherwise, would acquire control
of DSI for the purposes of the Investment Act if he, she or it acquired a
majority of the Common Shares of DSI or acquired all or substantially all of
the assets used in conjunction with DSI's business. The acquisition of less
than a majority, but one-third or more of the Common Shares of DSI, would be
presumed to be an acquisition of control of DSI unless it could be
established that DSI was not controlled in fact by the acquirer through the
ownership of the Common Shares.
The Investment Act would not apply to certain transactions in relation to
Common Shares of DSI, including:
a. an acquisition of Common Shares of DSI by any person if the acquisition
were made in the ordinary course of that person's business as a trader
or dealer in securities;
b. an acquisition of control of DSI in connection with the realization of
security granted for a loan or other financial assistance and not for
any purpose related to the provisions of the Investment Act; and
c. an acquisition of control of DSI by reason of an amalgamation, merger,
consolidation or corporate reorganization following which the ultimate
direct or indirect control in fact of DSI, through the ownership of
voting interests, remains unchanged.
32
E. Taxation
The following is a summary of the material Canadian federal income tax
considerations, as of the date hereof, generally applicable to security
holders who deal at arm's length with DSI, who, for purposes of the Income
Tax Act (Canada) (the "Canadian Tax Act") and any applicable tax treaty or
convention, have not been and will not be resident or deemed to be resident
in Canada at any time while they have held shares of DSI, to whom such
shares are capital property, and to whom such shares are not "taxable
Canadian property" (as defined in the Canadian Tax Act). This summary does
not apply to a non-resident insurer.
Generally, shares of DSI will be considered to be capital property to a
holder thereof provided that the holder does not use such shares in the
course of carrying on a business and has not acquired them in one or more
transactions considered to be an adventure in the nature of trade. All
security holders should consult their own tax advisors as to whether, as a
matter of fact, they hold shares of DSI as capital property for the purposes
of the Canadian Tax Act.
This discussion is based on the current provisions of the Canadian Tax Act
and the regulations thereunder, the current provisions of the Canada-United
States Income Tax Convention (the "Tax Treaty") and current published
administrative practices of the Canada Customs and Revenue Agency. This
discussion takes into account specific proposals to amend the Canadian Tax
Act and the regulations thereunder publicly announced by or on behalf of the
Minister of Finance (Canada) prior to the date hereof (the "Proposed
Amendments") and assumes that all such Proposed Amendments will be enacted
in their present form. No assurances can be given that the Proposed
Amendments will be enacted in the form proposed, if at all; however the
Canadian federal income tax considerations generally applicable to security
holders described herein will not be different in a material adverse way if
the Proposed Amendments are not enacted.
Except for the foregoing, this discussion does not take into account or
anticipate any changes in law, whether by legislative, administrative or
judicial decision or action, nor does it take into account provincial,
territorial or foreign income tax legislation or considerations, which may
differ from the Canadian federal income tax considerations described herein.
WHILE INTENDED TO ADDRESS ALL MATERIAL CANADIAN FEDERAL INCOME TAX
CONSIDERATIONS, THIS SUMMARY IS OF A GENERAL NATURE ONLY. THEREFORE,
SECURITY HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THEIR
PARTICULAR CIRCUMSTANCES.
Generally, shares of DSI will not be taxable Canadian property at a
particular time provided that such shares are listed on a prescribed stock
exchange (which exchanges currently include the Toronto Stock Exchange), the
holder does not use or hold, and is not deemed to use or hold, the shares of
DSI in connection with carrying on a business in Canada and the holder,
persons with whom such holder does not deal at arm's length, or the holder
and such persons, has not owned (or had under option) 25% or more of the
issued shares of any class or series of the capital stock of DSI at any time
within five years preceding the
33
particular time.
A holder of shares of DSI that are not taxable Canadian property will not be
subject to tax under the Canadian Tax Act on the sale or other disposition
of shares.
Dividends paid or deemed to be paid on the shares of DSI are subject to
non-resident withholding tax under the Canadian Tax Act at the rate of 25%,
although such rate may be reduced under the provisions of an applicable
income tax treaty or convention. For example, under the Tax Treaty, the rate
is reduced to 5% in respect of dividends paid to a company that is the
beneficial owner thereof, that is resident in the United States for purposes
of the Tax Treaty and that owns at least 10% of the voting stock of DSI. In
all other cases, the rate is reduced to 15% in respect of dividends paid to
the beneficial owner thereof that is resident in the United States for
purposes of the Tax Treaty.
F. Dividends and Paying Agents
Not Applicable
G. Statements by Experts
The consolidated financial statements of DSI at October 31, 2000 and for
the three years then ended included in this Registration Statement have
been audited by H. Ross McDonald, Chartered Accountants and independent
auditors, as stated in their reports appearing herein, and are included in
reliance upon the reports of such firm given their authority as experts
in accounting and auditing and their consent and authorization. Such
firm's address is 543 Granville Street, Suite 1502, Vancouver, Canada, BC
V6C 1X8.
H. Documents on Display
Not Applicable
I. Subsidiary Information
DSI has one wholly owned subsidiary, Interaction Technology Ltd., which was
incorporated on May 14, 1996 pursuant to the laws of Canada. Its business
address is 300 - 905 West Pender Street, Vancouver, BC, Canada, V6C 1L6.
Item 12. Description of Securities Other than Equity Securities
A. Debt Securities
Not Applicable
B. Warrants and Rights
Not Applicable
C. Other Securities
Not Applicable
34
D. American Depositary Receipts
Not Applicable
Common Shares
DSI's authorized share capital consists of 100,000,000 Common Shares without par
value and as at October 31, 2000, DSI had 21,109,370 Common Shares issued and
outstanding.
Holders of DSI's Common Shares:
o Have equal ratable rights to dividends from funds legally available for
payment of dividends when, as and if declared by the board of directors;
o Are entitled to share ratably in all of the assets available for
distribution to holders of Common Shares upon liquidation, dissolution or
winding up of our affairs; and
o Do not have preemptive, subscription or conversion rights, or redemption or
access to any sinking fund.
PART III
Item 13. Defaults, Dividend Arrearages and Delinquencies
None
Item 14. Material Modifications to the Rights of Security Holders and the Use of
Proceeds
Not Applicable
Item 15. Reserved
Item 16. Reserved
Item 17. Financial Statements
Index to Financial Statements of DSI Datotech Systems Inc.
35
Page No.
--------
Fiscal Years Ended October 31, 2000 and 1999
Auditors Report F-1
Balance Sheet F-2
Statement of Loss and Deficit F-3
Statement of Cash Flows F-4
Notes to Financial Statements F-5
Fiscal Years Ended October 31, 1999 and 1998
Auditors Report F-19
Balance Sheet F-20
Statement of Loss and Deficit F-21
Statement of Cash Flows F-22
Notes to Financial Statements F-23
Item 19. Exhibits
1.1 Certificate of Incorporation of Rhino Resources Inc. dated May 7,
1987(1)
1.2 Certificate of Change of Name from Rhino Resources Inc. to DSI Datotech
Systems Inc. dated April 19, 1996(1)
1.3 Articles (Bylaws) of DSI Datotech Systems Inc. filed as of January 28,
1998(1)
1.4 Certificate of Incorporation of 3259722 Canada Inc. dated May 14,
1996.(1)
1.5 Bylaws of 3259722 Canada Inc. dated November 1, 1998.(1)
1.6 Certificate of Amendment for change of name from 3259722 Canada Inc. to
Interaction Technology Ltd. dated July 21, 2000.(1)
4.1 Gross Lease between CT Management Corp. and DSI Datotech Systems Inc.,
dated as of July 25, 2000.(1)
4.2 DSI Datotech Systems Inc. 1996 Stock Option Plan dated as of November
15, 1996.(1)
4.3 Agreement between DSI Datotech Systems Inc. and Edward C. Pardiak
Holdings Limited, dated as of August 1, 1997.(1)
4.4 Escrow Agreement by and among Pacific Corporate Trust Company, DSI
Datotech Systems Inc., Pardiak Management International Limited dated as
of November 17, 1997.(1)
4.5 Option Agreement by and between DSI Datotech Systems Inc. and Security
Biometrics Inc. dated August 22, 2000, with form of license agreement
attached as exhibit.(1)
4.6 Option Agreement by and between DSI Datotech Systems Inc. and NetFace
LLC dated June 2000, with form of license agreement attached as
exhibit.(1)
8.1 List of Subsidiaries(1)
23.1 Consent of G. Ross McDonald.(2)
(1) Previously filed with the registration statement on April 13, 2001 and
incorporated herein by reference.
(2) Filed herewith.
36
SIGNATURES
The Registrant hereby certifies that it meets all of the requirements for filing
on Form 20-F and that it has duly caused and authorized the undersigned to sign
this registration statement on its behalf.
DSI Datotech Systems Inc.
By: /s/ Edward C. Pardiak
---------------------
Edward C. Pardiak
Chief Executive Officer and Chief Financial Officer
Date: May 11, 2001
20F41201.DOC
37
G. Ross McDonald*
Chartered Accountant
- --------------------------------------------------------------------------------
*Denotes incorporated professional Suite 1502, 543 Granville Street
Vancouver, B.C. V6C 1X8
Tel: (604) 685-8646
Fax: (604) 684-6334
AUDITOR'S REPORT
TO THE SHAREHOLDERS OF DSI DATOTECH SYSTEMS INC.
I have audited the consolidated balance sheets of DSI Datotech Systems Inc. as
at October 31, 2000 and 1999 and the consolidated statements of loss and deficit
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. My responsibility is to express an
opinion on these financial statements based on my audits.
I conducted my audit in accordance with generally accepted auditing standards in
the United States of America. Those standards require that I plan and perform an
audit to obtain reasonable assurance whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.
In my opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at October 31, 2000
and 1999 and the results of its operations and the cash flows for the years then
ended in accordance with generally accepted accounting principles in Canada.
I also reported separately on December 13, 2000, to the shareholders of the
Company, on my audits, conducted in accordance with Canadian generally accepted
auditing standards, when I expressed an opinion without reservation on the
October 31, 2000 and 1999 consolidated financial statements, prepared in
accordance with Canadian generally accepted accounting principles.
Canadian generally accepted accounting principles vary in certain significant
respects from accounting principles generally accepted in the United States.
Application of accounting principles generally accepted in the United States
would have affected results of operations and cash flows for each of the years
in the two year period ended October 31, 2000 and assets and shareholders'
equity as at October 31, 2000 and 1999 to the extent summarized in Note 9 to the
consolidated financial statements.
/s/ G. Ross McDonald
- ------------------------
G. Ross McDonald
Chartered Accountant
Vancouver, British Columbia, Canada
December 13, 2000
F-1
DSI DATOTECH SYSTEMS INC.
CONSOLIDATED BALANCE SHEETS
October 31
- -----------------------------------------------------------------------------------------------
2000 1999
- -----------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and short term deposits $ 4,079,315 $ 64,009
Accounts receivable and advances 25,389 2,140
Prepaid expense 30,196 2,660
- -----------------------------------------------------------------------------------------------
4,134,900 68,809
INVESTMENT IN GESTURE RECOGNITION
TECHNOLOGY (Notes 1(b)(i) and 2) 915,803 934,237
CAPITAL ASSETS (Note 1 (b)(ii) and 3) 212,564 64,820
- -----------------------------------------------------------------------------------------------
$ 5,263,267 $ 1,067,866
===============================================================================================
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 212,679 $ 235,365
- -----------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
SHARE CAPITAL (Note 4) 10,760,777 5,787,472
DEFICIT (5,710,189) (4,954,971)
- -----------------------------------------------------------------------------------------------
5,050,588 832,501
- -----------------------------------------------------------------------------------------------
$ 5,263,267 $ 1,067,866
===============================================================================================
CONTINGENT LIABILITIES AND COMMITMENTS (Note 7)
APPROVED BY THE DIRECTORS
"Edward C. Pardiak"
- ------------------------------
Director - Edward C. Pardiak
"Robert M. Egery"
- ------------------------------
Director - Robert M. Egery
F-2
DSI DATOTECH SYSTEMS INC.
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT
For the Years Ended October 31
- -----------------------------------------------------------------------------------------------
2000 1999
- -----------------------------------------------------------------------------------------------
REVENUE
Option income $ 627,730 $ --
Investment income and recoveries 149,470 9,589
- -----------------------------------------------------------------------------------------------
777,200 9,589
- -----------------------------------------------------------------------------------------------
EXPENSES
RESEARCH AND DEVELOPMENT
Salaries and benefits 377,691 279,813
Amortization 80,199 135,872
Prototype development 37,653 41,315
Reports 2,839 --
Consultants -- 7,897
- -----------------------------------------------------------------------------------------------
498,382 464,897
- -----------------------------------------------------------------------------------------------
GENERAL AND ADMINISTRATIVE
Management fees 350,000 48,200
Investor relations and promotion 117,010 97,290
Consulting fees 104,946 19,500
Legal, audit and accounting 80,319 47,049
Salaries and benefits 65,190 56,623
Travel and accommodation 59,969 21,543
Office and miscellaneous 44,096 26,288
Rent 38,904 34,975
Recruitment 32,813 -
Printing and shareholders information 32,012 26,770
Telephone 30,458 18,773
Amortization 27,346 19,554
Insurance 19,573 19,446
Transfer agent 14,142 13,932
Equipment rental 9,628 15,960
Regulatory fees 7,630 4,240
- -----------------------------------------------------------------------------------------------
1,034,036 670,143
- -----------------------------------------------------------------------------------------------
NET LOSS FOR THE YEAR 755,218 1,125,451
DEFICIT, BEGINNING OF YEAR 4,954,971 3,829,520
- -----------------------------------------------------------------------------------------------
DEFICIT, END OF YEAR $ 5,710,189 $ 4,954,971
===============================================================================================
LOSS PER SHARE $ 0.04 $ 0.08
===============================================================================================
F-3
DSI DATOTECH SYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended October 31
- -----------------------------------------------------------------------------------------------
2000 1999
- -----------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net loss for the year $ (755,218) $ (1,125,451)
Less item not requiring cash
Amortization 107,545 155,426
- -----------------------------------------------------------------------------------------------
(647,673) (970,025)
Net change in non-cash working capital items
Accounts receivable and advances (23,249) 5,688
Loan receivable -- 25,000
Prepaid expense (27,536) 16,567
Accounts payable and accrued liabilities (22,686) 219,000
- -----------------------------------------------------------------------------------------------
Cash applied to operating activities (721,144) (703,770)
- -----------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Investment in Gesture Recognition Technology (61,765) (37,353)
Capital assets (175,090) (24,316)
- -----------------------------------------------------------------------------------------------
Cash applied to investing activities (236,855) (61,669)
- -----------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Shares issued for cash, net of share issue costs 4,973,305 264,759
- -----------------------------------------------------------------------------------------------
Cash from financing activities 4,973,305 264,759
- -----------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH
AND SHORT TERM DEPOSITS 4,015,306 (500,680)
CASH AND SHORT TERM DEPOSITS,
BEGINNING OF YEAR 64,009 564,689
- -----------------------------------------------------------------------------------------------
CASH AND SHORT TERM DEPOSITS,
END OF YEAR $ 4,079,315 $ 64,009
===============================================================================================
F-4
DSI DATOTECH SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 2000 AND 1999
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
These consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, Interaction Technology Ltd.,
which is inactive as at October 31, 2000.
(b) Amortization
(i) Investment in Gesture Recognition Technology
Costs related to the acquisition and development of the Gesture
Recognition Technology are stated at cost less accumulated
amortization. Amortization is recorded on a straight line basis over
seventeen years. Additional amortization may be recorded for items
deemed to be obsolete or no longer valid to the development of the
technology.
(ii) Capital Assets
Capital assets are stated at cost less accumulated amortization.
Amortization is provided on a declining balance basis on office
furniture and equipment at 20% per annum and on computer equipment
at 30% per annum. Leasehold improvements are amortized on a straight
line basis over five years.
(c) Foreign Currency Translation
Amounts stated in foreign currency are translated into Canadian dollars
as follows:
Current assets and liabilities at the rates of exchange prevailing at
balance sheet date. Non-monetary assets and liabilities at the rates of
exchange in effect on the dates of the transactions; and revenue and
expenses at average rates of exchange for the period.
(d) Loss per share
Loss per share is calculated using the weighted average number of shares
outstanding during the year. Fully diluted loss per share has not been
calculated since the exercise of outstanding options and warrants would
have the effect of reducing loss per share.
(e) Financial Instruments
The carrying value of current assets and current liabilities at October
31, 2000 approximates their fair values due to the relatively short
periods to maturity of these instruments.
(f) Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of the assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Significant areas requiring
the use of management estimates relate to the determination of
environmental obligations, impairment of assets and rate for
amortization. Actual results could differ from those estimates.
F-5
DSI DATOTECH SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 2000 AND 1999
- --------------------------------------------------------------------------------
1. significant accounting policies (continued)
(g) Stock-based compensation plans
The Company has a fixed stock option plan. No compensation expense is
recognized when stock or stock options are issued to directors and
employees. Any consideration paid by directors and employees on exercise
of stock options or purchase of shares is credited to share capital.
(h) Research and development
Research and development costs are recorded as an expense of the period
in which they are incurred. Certain development costs may be deferred
where the product is technically or commercially feasible. The
recoverability of these deferred costs is dependent upon the Company's
ability to obtain necessary financing to complete development and to
successfully commercialize the use of the product.
(i) Comparative amounts
Certain amounts in the prior year have been restated to confirm with the
current year's presentation.
2. INVESTMENT IN GESTURE RECOGNITION TECHNOLOGY
(a) Pursuant to four agreements entered into in November 1990, March 1991,
May 1995 and August 1996, the Company acquired a patented invention
known as the Gesture Recognition Technology, a new gesture based input
technology for computerized communications, in consideration of
acquisition costs in the aggregate of $246,830 (paid), 1,000,000 common
shares to be issued based on cumulative cash flows generated from
operations of the Company and a 5.5% royalty on revenues received from
the commercialization of the technology and from the sale of products
incorporating the technology. A minimum semi-annual advance royalty of
$30,000 was payable commencing on May 1, 1996. These agreements, and all
commitments made under the terms of these agreements, were cancelled
pursuant to a new agreement entered into on November 4, 1999.
On November 4, 1999, the Company entered into an agreement which
superceded the afore-mentioned agreements. The Company granted a licence
to the original inventor of the technology to commercialize the
technology based on certain patents held by the Company. In
consideration, the Company will receive a royalty of 3% of gross sales
from sales realized by the licencee of products made using the
technology. The Company will pay a royalty of 0.5% of gross sales
realized by the Company and any of its other licencees from the sales of
products made using the licensed intellectual property to the licencee.
In satisfaction of all amounts owed to the licencee under the previous
agreements, the Company paid a total of $35,000 over a ten month period
commencing on the execution of this agreement.
(b) Pursuant to an agreement dated June 28, 2000, the Company granted an
option to a company to acquire the exclusive rights to exploit the
technology and proprietary property related to the technology for the
video gaming and internet/interactive television market segments. In
consideration for the option, the optionee will pay the Company U.S.
$200,000, of which U.S. $100,000 has been received. The balance is due
upon delivery by the Company of a reasonably acceptable prototype to the
optionee.
F-6
DSI DATOTECH SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 2000 AND 1999
- --------------------------------------------------------------------------------
2. INVESTMENT IN GESTURE RECOGNITION TECHNOLOGY (continued)
Should the option be exercised, the Company will enter into a licence
agreement with the optionee. In consideration of the licence, the Company
will receive U.S. $5,000,000, less the afore-mentioned option fees of U.S.
$200,000, and a 20% Class B membership interest in the optionee.
The option period commences upon the date of the agreement and terminates
eighteen months from the date a prototype reasonably acceptable to the
optionee is made available by the Company to the optionee.
(c) Pursuant to an agreement dated August 22, 2000, the Company granted an
option to a company to acquire the exclusive licensing rights for the
exploitation of the Company's developed technology relating to
interfaces and software for executing banking and financial transactions
in consideration of US $320,000 (received).
An additional US $3,000,000 is due within eleven months of the signing
of this agreement. The funds will be used exclusively toward the
development of a prototype reasonably acceptable to the optionee which
prototype is to be made available to the optionee within twelve months
of receiving the US $3,000,000.
The optionee, upon receipt of the acceptable prototype, has three months
in which to exercise the option, upon which a licensing agreement will
be signed in consideration of US $8,000,000, less the above amount of US
$3,320,000, and a perpetual non-dilutive 20% common share interest in
the optionee company or its assignee.
Acquisition and development costs to date:
2000 1999
----------------------------------------------------------------------------
Acquisition costs $ 246,830 $ 246,830
----------------------------------------------------------------------------
Development costs
Balance, beginning of year 1,241,153 1,203,800
----------------------------------------------------------------------------
Additions
Royalties 35,000 30,000
Patent costs and fees 26,765 7,249
Materials -- 104
----------------------------------------------------------------------------
61,765 37,353
----------------------------------------------------------------------------
Balance, end of year 1,302,918 1,241,153
----------------------------------------------------------------------------
1,549,748 1,487,983
Less: accumulated amortization (633,945) (553,746)
----------------------------------------------------------------------------
$ 915,803 $ 934,237
============================================================================
F-7
DSI DATOTECH SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 2000 AND 1999
- --------------------------------------------------------------------------------
3. CAPITAL ASSETS
2000 1999
---------------------------------------------------------------------------------------------
Accumulated Net Book Net Book
Cost Amortization Value Value
---------------------------------------------------------------------------------------------
Furniture and equipment $ 68,779 $ 27,004 $ 41,775 $ 21,013
Computer equipment 132,879 61,256 71,623 43,807
Leasehold improvements 99,166 -- 99,166 --
---------------------------------------------------------------------------------------------
$ 300,824 $ 88,260 $ 212,564 $ 64,820
=============================================================================================
No amortization has been recorded on leasehold improvements during the year
ended October 31, 2000 as all costs pertain to the Company's new office
premises to which the Company relocated on October 23, 2000. Amortization
will be recorded commencing in the next fiscal period.
4. SHARE CAPITAL
(a) The authorized share capital consists of 100,000,000 common shares
without par value.
Issued:
2000 1999
------------------------------------------------------------------------------------------------------
No. of No. of
Shares Amount Shares Amount
------------------------------------------------------------------------------------------------------
Balance, beginning of year 15,057,940 $ 5,834,305 13,953,940 $ 5,569,546
------------------------------------------------------------------------------------------------------
Issued during the year
For cash
- private placements, net
of share issue costs 3,775,994 3,217,792 1,104,000 264,759
- exercise of options 437,250 220,200 -- --
- exercise of warrants 1,895,786 1,535,313 -- --
-------------------------------------------------------------------------------------------------------
6,109,030 4,973,305 1,104,000 264,759
-------------------------------------------------------------------------------------------------------
21,166,970 10,807,610 15,057,940 5,834,305
Less:
Company shares held, net
of shares resold (57,600) (46,833) (57,600) (46,833)
------------------------------------------------------------------------------------------------------
Balance, end of year 21,109,370 $ 10,760,777 15,000,340 $ 5,787,472
======================================================================================================
F-8
DSI DATOTECH SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 2000 AND 1999
- --------------------------------------------------------------------------------
4. SHARE CAPITAL (continued)
During the year ended October 31, 2000, the Company completed private
placements as follows:
(i) for 2,456,140 units at $0.57 per unit for gross proceeds of $1,400,000
less finders fees of 50,000 common shares and $56,759 paid in cash and
other share issue costs of $8,399. Each unit consisted of one common
share and one warrant to acquire one additional common share at $0.57
per share to January 26, 2001 and at $0.66 per share to January 26,
2002.
(ii)for 912,000 units at $1.75 per unit for gross proceeds of $1,596,000
less commissions of $159,600, fees of $93,687 and other share issue
costs of $44,508. Each unit consisted of one common share and one-half
warrant, each full warrant exercisable to acquire one additional common
share at $2.16 per share to April 10, 2002. The agent also received
compensation warrants which may be exercised to acquire 91,200 units at
$1.75 per unit to October 10, 2001, each unit consists of one common
share and one-half warrant, each full warrant exercisable to acquire one
additional common share at $2.16 per share to April 10, 2002.
(iii)for 357,854 units at $1.75 per unit for gross proceeds of $626,245 less
commissions of $25,000, fees of $15,000 and other share issue costs of
$1,499. Each unit consisted of one common share and one-half warrant,
each full warrant exercisable to acquire one additional common share at
$2.16 to April 20, 2002. The agent also received compensation warrants
which may be exercised to acquire 35,785 units at $1.75 per unit to
October 20, 2001, each unit consists of one common share and one-half
warrant, each full warrant exercisable to acquire one additional common
share at $2.16 per share to April 20, 2002.
(b) A total of 3,068,750 common shares issued at $0.01 per share are subject to
escrow restrictions, release of the shares is subject to the approval of
regulatory authorities.
(c) The Company has granted options to directors, officers and employees to
purchase common shares at exercise prices determined by reference to the
market value on the date of the grant. Under the Company's stock option
plan, options may be granted for up to 4,150,000 common shares.
F-9
DSI DATOTECH SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 2000 AND 1999
- --------------------------------------------------------------------------------
4. SHARE CAPITAL (continued)
The following summarizes information about stock options granted and
outstanding at October 31, 2000 and 1999, and changes during the years then
ended:
Year Ended Year Ended
October 31, 2000 October 31, 1999
- ---------------------------------------------------------------------------------------------------------
Weighted Weighted
Average Average
No. of Exercise No. of Exercise
Options Price Options Price
- ---------------------------------------------------------------------------------------------------------
Outstanding at beginning
of year 1,710,000 $ 0.65 1,400,000 $ 0.72
Granted 1,557,000 0.94 360,000 0.40
Exercised 437,250 0.50 -- --
Cancelled/expired 421,250 1.29 50,000 0.80
- ---------------------------------------------------------------------------------------------------------
Outstanding at end of year 2,408,500 $ 0.75 1,710,000 $ 0.65
=========================================================================================================
Options exercisable at
end of year 1,654,000 $ 0.75 1,710,000 $ 0.65
=========================================================================================================
The options expire on various dates commencing on September 1, 2001 to
September 25, 2005.
(d) As at October 31, 2000, outstanding warrants to purchase 3,667,045 common
shares are exercisable as follows:
No. of Exercise Expiry
Shares Price Date
--------- -------- ----------------
360,000 $0.29 July 19, 2001
2,317,640 0.57 January 26, 2001
or 0.66 January 26, 2002
91,200 * 1.75 October 10, 2001
35,785 * 1.75 October 20, 2001
456,000 2.16 April 10, 2002
185,637 2.16 April 20, 2002
---------
3,446,262
=========
* agent's compensation warrants exercisable for units consisting of common
shares and share purchase warrants (see notes 4(a)(i) and (ii)).
5. DIRECTORS' REMUNERATION AND RELATED PARTY TRANSACTIONS
A total of $350,000 (1999 - $248,200) was paid or accrued to two companies
controlled by directors during the year for management and consulting
services.
F-10
DSI DATOTECH SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 2000 AND 1999
- --------------------------------------------------------------------------------
6. INCOME TAXES
The company has accumulated non-capital losses for tax purposes, the
potential benefits of which are not recorded in the financial statements.
The losses may be carried forward to reduce taxable income in future years
and, unless utilized, will expire as follows:
2001 $ 162,600
2002 227,100
2003 732,200
2004 881,800
2005 865,300
2006 966,600
2007 725,900
-------------------------------------------------------
$ 4,561,500
=======================================================
7. CONTINGENT LIABILITIES AND COMMITMENTS
(a) During 1998, a petition was made against the Company with respect to
certain allegations of non-compliance with the Company Act by a former
employee. No damages have been sought. The Company is of the opinion
that the petition is without merit.
The Company commenced a suit against the above-mentioned former employee
and certain other persons, including some former directors of the
Company. The Company is seeking damages for misappropriation, injurious
falsehoods and other wrongs.
There has been no further action on either the petition or the suit as
at October 31, 2000. The company is of the opinion that the petition is
without merit and, subsequent to the period end, has instructed its
legal counsel to file a dismissal of action.
(b) During 1997, a claim was made against the Company in the amount of
$130,727 by the purchasers of a mineral property sold in a prior year,
for the return of the purchase price plus additional costs. The Company
is of the opinion that the claim is without merit and has filed a
Statement of Defence in response to this action. No further action has
been taken on the claim as at October 31, 2000.
(c) The Company entered into two separate agreements with two companies
controlled by two directors for management services in consideration of
$10,000 per month each plus certain health benefits. The agreements are
for a two year term ending July 31, 1999 and are renewable, upon expiry,
for future one year terms at rates of consideration which may be
renegotiated. Should the agreements not be renewed, sixty days notice
must be given by the Company and one year's compensation paid on the
date of termination. The agreements were renewed for a one year term on
August 1, 1999 with no change in consideration.
Subsequent to the year end, new agreements were completed effective
November 1, 2000 and December 1, 2000 respectively with two directors
for management services in consideration of $12,500 per month each plus
performance bonuses and benefits. The agreements are for two year terms
and if terminated by the Company during the term, one year's
compensation will be payable in a lump sum. Renewal and signing bonuses
in the aggregate of $150,000 are payable pursuant to the terms of these
agreements. An aggregate 1,300,000 performance shares will also be
issued to the two directors, subject to regulatory approval.
7. CONTINGENT LIABILITIES AND COMMITMENTS (continued)
F-11
DSI DATOTECH SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 2000 AND 1999
- --------------------------------------------------------------------------------
(d) The Company conducts certain activities related to marketing, financial
development and human resources through companies or individuals
contracted on short term bases in consideration of monthly fees, finders
fees or commissions for the arrangement of financing for the Company,
and stock options to acquire common shares of the Company. The terms of
the contracts are generally for one year periods and expire during 2001.
(e) The Company entered into an agreement for the rental of office premises
for the period March 1, 2000 to January 31, 2001 at a cost of $37,000
per year. On July 25, 2000, the Company entered into an agreement for
the rental of new office premises for a five year term commencing on
December 1, 2000. Gross annual rents of approximately $109,000 are
payable plus additional charges for expenses.
(f) The Company has arranged for a line of credit of up to $600,000 with a
financial institution to be secured by certain money market investments
held by the Company at the institution. Interest is payable at the prime
rate on Canadian dollar loans and overdrafts and at the U.S. base rate
on U.S. dollar loans and overdrafts.
8. SUBSEQUENT EVENTS
(a) The Company is preparing documentation for the application of the
listing of the Company's shares on a United States securities exchange.
(b) Options to acquire 144,250 common shares were exercised for proceeds of
$57,700.
(c) Options to acquire 360,000 common shares were granted. The options are
exercisable at $0.60 per share to November 1, 2005 as to 10,000 shares
and at $0.50 per share to November 14, 2005 as to 350,000 shares. The
options to acquire the 350,000 shares are subject to regulatory
approval.
(d) Options to acquire 10,000 common shares at $0.40 per share and 10,000
common shares at $1.12 per share have been cancelled.
F-12
DSI DATOTECH SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 2000 AND 1999
- --------------------------------------------------------------------------------
9. Additional Disclosure - NOTE U.S/CANADIAN G.A.A.P. DISCLOSURE
In order to comply with generally accepted accounting principles in the
United States of America, the following additional information is
provided:
a) Income Taxes
The Company's provision for income taxes (recovery) is made up as
follows:
2000 1999 1998
-------- ---------- --------
Loss before income taxes $755,218 $1,125,451 $851,568
Combined basic Canadian
federal and provincial income
tax rate 46% 46% 46%
-------- ---------- --------
Provision for taxes (recovery) 347,400 517,707 391,721
on basic rate
Increase (decrease)in taxes resulting from:
Benefit of tax loss carried
forward not recognized in
accounts (347,400) (517,707) (391,721)
-------- ---------- --------
Actual tax provision (recovery) $ - $ - $ -
======== ========== ========
b) Earnings Per Share
The calculation of earnings per share in accordance with generally
accepted accounting principles in the United States corresponds with that
in Canada for the following reason:
- the inclusion of stock options as common stock equivalents is
antidilutive for each period presented and therefore is not
included in the calculation of earnings per share.
c) Difference in accounting policy
The company has capitalized certain acquisition and development costs
related to the Investment in Gesture Recognition Technology. Generally
accepted accounting principles in the United States of America require
that these expenditures be charged to operations as incurred.
F-13
DSI DATOTECH SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 2000 AND 1999
- --------------------------------------------------------------------------------
9. Additional Disclosure - NOTE U.S/CANADIAN G.A.A.P. DISCLOSURE - Cont'd
d) Compensatory Options/Warrants
i) Employees
The following summarizes information about stock options granted and
outstanding at October 31, 2000 and 1999, the warrants purchased by
employees at market price, and changes during the year then ended:
Year Ended Year Ended
October 31, 2000 October 31, 1999
---------------- ----------------
Weighted Weighted
# Options Average # Options Average
and Exercise and Exercise
Warrants Price Warrants Price
-------- ----- -------- -----
Outstanding at beginning
of period 1,821,000 $ 0.56 1,025,000 $ 0.75
Granted 692,000 0.85 796,000 0.31
Exercised (593,250) 0.32 - -
Expired (41,750) 0.58 - $ -
--------- -------- --------- --------
Outstanding at end
of period 1,878,000 $ 0.74 1,821,000 $ 0.75
========= ======== ========= ========
Options/warrants exercisable
at end of period 1,878,000 $ 0.74 1,821,000 $ 0.75
========= ======== ========= ========
The weighted average fair value of the stock options granted and warrants
purchased during the years ended October 31, 2000 and 1999 was $0.82 and
$0.23 respectively.
F-14
DSI DATOTECH SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 2000 AND 1999
- --------------------------------------------------------------------------------
9. Additional Disclosure - NOTE U.S/CANADIAN G.A.A.P. DISCLOSURE - Cont'd
Summary information about the 1,878,000 options outstanding at October 31,
2000 follows:
Options
Outstanding Weighted
October 31. Average
Range of Exercise Price 2000 Remaining Life
----------------------- ---- --------------
$0.40 to $0.50 48,000 3.4 years
$0.75 to $0.80 1,040,000 2.0 years
$1.00 to $1.12 358,000 4.2 years
--------- ---------
1,878,000 2.8 years
========= =========
Pro-forma information regarding net loss and loss per share is required by
Statement of Financial Accounting Standards No.123, Accounting for
Stock-Based Compensation (SFAS No. 123) and has been determined as if the
Company has accounted for its employee stock options under the fair value
method.
The Black-Scholes option valuation model was developed for use in
estimating for the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require highly subjective assumptions including the expected stock
price volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially effect
the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
The fair value for these options at the date of grant was estimated using
the Black-Scholes option pricing model with the following weighted average
assumptions for the fiscal years ended October 31, 2000 and 1999.
2000 1999
---- ----
Risk-free interest rate 6.22% 5.11%
Expected dividend yield - -
Expected stock price volatility 1.14 1.15
Expected life in years 4.80 3.36
F-15
DSI DATOTECH SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 2000 AND 1999
- --------------------------------------------------------------------------------
9. Additional Disclosure - NOTE U.S/CANADIAN G.A.A.P. DISCLOSURE - Cont'd
For the purposes of pro-forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The
pro-forma effect on net loss for fiscal year 2000 and 1999 may not be
representative of the actual results had the Company accounted for the
stock options using the fair value method. The Company's pro-forma
information follows:
2000 1999
---- ----
Net loss, as reported $ 755,218 $ 1,125,451
----------- -----------
Pro-forma net loss $ 1,220,618 $ 1,282,691
----------- -----------
Basic and diluted loss
Share $ 0.04 $ 0.08
----------- -----------
Pro-forma basic and diluted
----------- -----------
Loss per share $ 0.07 $ 0.09
----------- -----------
Because SFAS No. 123 applies only to stock-based compensation awards for
the fiscal year ended February 29, 1996 and future years, the pro-forma
disclosures under SFAS No. 123 are not likely to be indicative of future
disclosures until the disclosures reflect all outstanding, non-vested
awards.
ii) Non-Employees
Year Ended Year Ended
October 31, 2000 October 31, 1999
---------------- ----------------
Weighted Weighted
# Options Average # Options Average
and Exercise and Exercise
Warrants Price Warrants Price
-------- ----- -------- -----
Outstanding at beginning
of period 2,411,600 $0.88 3,693,932 $1.10
Granted 865,000 1.02 718,000 0.28
Exercised (1,517,286) 0.96 - -
Expired (772,814) 1.32 (2,000,332) $2.02
---------- ----- ---------- -----
Outstanding at end
of period 986,500 $0.54 2,411,600 $0.88
========== ===== ========== =====
Options/Warrants exercisable
at end of period 986,500 $0.54 2,411,600 $0.88
========== ===== ========== =====
F-16
DSI DATOTECH SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 2000 AND 1999
- --------------------------------------------------------------------------------
9. Additional Disclosure - NOTE U.S/CANADIAN G.A.A.P. DISCLOSURE - Cont'd
The values of the consideration received were based on the values of the
options granted and warrants purchased. The values of the warrants were
estimated using the Black-Scholes Option Pricing Model with the following
weighted average assumptions for the grants made in 2000 and 1999:
2000 1999
---- ----
Risk-free interest rate 6.2% 5.5%
Expected dividend yield - -
Expected stock price volatility 1.1 1.2
Expected life in years 3.5 2.1
Summary information about the Company's options/warrants outstanding at
October 31, 2000 is as follows:
Options
Outstanding Weighted
Summary of October 31, Average
Exercise Prices 2000 Remaining Life
--------------- ---- --------------
$0.25 454,000 0.70
$0.40 182,500 2.00
$0.80 30,000 2.60
$1.00 320,000 4.00
------- ----
986,500 2.00
======= ====
e) Reconciliation
The effect on the financial statements of compliance with generally
accepted accounting standards in the United States would be as follows:
F-17
DSI DATOTECH SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 2000 AND 1999
- --------------------------------------------------------------------------------
9. Additional Disclosure - NOTE U.S/CANADIAN G.A.A.P. DISCLOSURE - Cont'd
Income Statement
Year Ended Year Ended Year Ended
October 31, October 31, October 31,
2000 1999 1998
---- ---- ----
Net loss as shown in the
financial statements $(755,218) $(1,125,451) $(851,568)
--------- ----------- ---------
Decrease in amortization of
Investment in gesture
recognition technology 80,199 135,871 90,435
--------- ----------- ---------
Increase in research and
development and expense (61,765) (37,353) (228,450)
--------- ----------- ---------
Net loss according to generally
accepted accounting principles
in the United States $(736,784) $(1,026,933) $(989,583)
========= =========== =========
Loss per common share according
to generally accepted accounting
principles in the United States:
Primary $ 0.03 $ 0.07 $ 0.07
========= =========== =========
Balance Sheet
Increase (decrease) in account to comply with generally accepted
accounting standards in the United States:
October 31, October 31,
2000 1999
---- ----
Investment in Gesture Recognition
Technology $(915,803) $(934,237)
--------- ---------
Deficit $(915,803) $(934,237)
========= =========
F-18
G. Ross McDonald*
Chartered Accountant
- --------------------------------------------------------------------------------
*Denotes incorporated professional Suite 1502, 543 Granville Street
Vancouver, B.C. V6C 1X8
Tel: (604) 685-8646
Fax: (604) 684-6334
AUDITOR'S REPORT
TO THE SHAREHOLDERS OF DSI DATOTECH SYSTEMS INC.
I have audited the consolidated balance sheets of DSI Datotech Systems Inc. as
at October 31, 1999 and 1998 and the consolidated statements of loss and deficit
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. My responsibility is to express an
opinion on these financial statements based on my audits.
I conducted my audit in accordance with generally accepted auditing standards in
the United States of America. Those standards require that I plan and perform an
audit to obtain reasonable assurance whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.
In my opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at October 31, 1999
and 1998 and the results of its operations and the cash flows for the years then
ended in accordance with generally accepted accounting principles in Canada.
I also reported separately on February 9, 2000, to the shareholders of the
Company, on my audits, conducted in accordance with Canadian generally accepted
auditing standards, when I expressed an opinion without reservation on the
October 31, 1999 and 1998 consolidated financial statements, prepared in
accordance with Canadian generally accepted accounting principles.
Canadian generally accepted accounting principles vary in certain significant
respects from accounting principles generally accepted in the United States.
Application of accounting principles generally accepted in the United States
would have affected results of operations and cash flows for each of the years
in the two year period ended October 31, 1999 and assets and shareholders'
equity as at October 31, 1999 and 1998 to the extent summarized in Note 10 to
the consolidated financial statements.
/s/ G. Ross McDonald
- ------------------------
G. Ross McDonald
Chartered Accountant
Vancouver, British Columbia, Canada
February 9, 2000, except Note 10 which is at November 3, 2000
F-19
DSI DATOTECH SYSTEMS INC.
BALANCE SHEETS
October 31
1999 1998
------------ -----------
ASSETS
CURRENT ASSETS
Cash and short term deposits $ 64,009 $ 564,689
Accounts receivable and advances 2,140 7,829
Loan receivable -- 25,000
Prepaid expense 2,660 19,227
------------ -----------
68,809 616,745
INVESTMENT IN GESTURE RECOGNITION
TECHNOLOGY (Notes 1(a)(i) and 2) 934,237 1,032,755
CAPITAL ASSETS (Note 1 (a)(ii) and 3) 64,820 60,058
------------ -----------
$ 1,067,866 $ 1,709,558
============ ===========
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 235,365 $ 16,365
------------ -----------
SHAREHOLDERS' EQUITY
SHARE CAPITAL (Note 4) 5,787,472 5,522,713
DEFICIT (4,954,971) (3,829,520)
------------ -----------
832,501 1,693,193
------------ -----------
$ 1,067,866 $ 1,709,558
============ ===========
CONTINGENT LIABILITIES AND COMMITMENTS (Note 7)
APPROVED BY THE DIRECTORS
"Elli Segev"
- --------------------------
Director - Elli Segev
"Edward C. Pardiak"
- --------------------------
Director - Edward C. Pardiak
F-20
DSI DATOTECH SYSTEMS INC.
STATEMENTS OF LOSS AND DEFICIT
For the Years Ended October 31
1999 1998
------------ -----------
EXPENSES
Research and development $ 329,025 $ 98,441
Management fees 248,200 295,000
Amortization and depreciation 155,426 106,389
Investor relations and promotion 124,060 113,596
Salaries and benefits 56,623 53,815
Legal, audit and accounting 47,049 50,441
Rent 34,975 46,127
Consulting fees 19,500 5,682
Office and miscellaneous 26,288 26,380
Travel and accommodation 21,543 9,933
Insurance 19,446 9,210
Telephone 18,773 19,564
Equipment rental 15,960 27,950
Transfer agent 13,932 8,655
Regulatory fees 4,240 6,850
------------ -----------
1,135,040 878,033
Less: interest income (9,589) (26,465)
------------ -----------
NET LOSS FOR THE YEAR 1,125,451 851,568
DEFICIT, BEGINNING OF YEAR 3,829,520 2,974,035
EXCESS COST OF ACQUIRED SHARE
CAPITAL OVER PROCEEDS -- 3,917
------------ -----------
DEFICIT, END OF YEAR $ 4,954,971 $ 3,829,520
============ ===========
LOSS PER SHARE $ 0.08 $ 0.07
============ ===========
F-21
DSI DATOTECH SYSTEMS INC.
STATEMENTS OF CASH FLOWS
For the Years Ended October 31
1999 1998
------------ -----------
OPERATING ACTIVITIES
Net loss for the year $ (1,125,452) $ (851,568)
Less items not requiring cash
Amortization and depreciation 155,426 106,389
------------ -----------
(970,026) (745,179)
Net change in non-cash working capital items
Accounts receivable and advances 5,689 22,866
Loan receivable 25,000 (25,000)
Prepaid expense 16,567 (16,567)
Accounts payable and accrued liabilities 219,000 (71,801)
------------ -----------
Cash applied to operating activities (703,770) (835,681)
------------ -----------
INVESTING ACTIVITIES
Investment in Gesture Recognition Technology (37,353) (228,450)
Capital assets (24,316) (32,097)
------------ -----------
Cash applied to investing activities (61,669) (260,547)
------------ -----------
FINANCING ACTIVITIES
Shares issued for cash, net of share issue costs 264,759 1,000,711
Shares purchased for cash -- (94,433)
Shares resold for cash -- 43,682
------------ -----------
Cash from financing activities 264,759 949,960
------------ -----------
DECREASE IN CASH (500,680) (146,268)
CASH, BEGINNING OF YEAR 564,689 710,957
------------ -----------
CASH, END OF YEAR $ 64,009 $ 564,689
============ ===========
F-22
DSI DATOTECH SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS
For the Years Ended October 31, 1999 and 1998
1. SIGNIFICANT ACCOUNTING POLICIES
(a) Depreciation and Amortization
(i) Investment in Gesture Recognition Technology
All costs related to the acquisition and development of the Gesture
Recognition Technology are stated at cost less accumulated
amortization. Amortization is provided on hardware, software and
materials costs on a declining balance basis at 30% per annum and on
all other costs on a straight line basis over seventeen years.
Additional amortization may be recorded for items deemed to be
obsolete or no longer valid to the development of the technology.
(ii) Capital Assets
Capital assets are stated at cost less accumulated depreciation.
Depreciation is provided on a declining balance basis on office
furniture and equipment at 20% per annum and on computer equipment
at 30% per annum.
(b) Foreign Currency Translation
Amounts stated in foreign currency are translated into Canadian dollars
as follows:
Current assets and liabilities at the rates of exchange prevailing at
balance sheet date. Non-monetary assets and liabilities at the rates of
exchange in effect on the dates of the transactions; and revenue and
expenses at average rates of exchange for the year.
(c) Loss per share
Loss per share is calculated using the weighted average number of shares
outstanding during the year. Fully diluted loss per share has not been
calculated since the exercise of outstanding options and warrants would
have the effect of reducing loss per share.
(d) Financial Instruments
The carrying value of current assets and current liabilities at October
31, 1999 and 1998 approximates their fair values due to the relatively
short periods to maturity of these instruments.
(e) Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of the assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Significant areas requiring
the use of management estimates relate to the determination of
environmental obligations, impairment of mineral claims and deferred
exploration expenditures and rate for depletion and amortization. Actual
results could differ from those estimates.
(f) Stock-based compensation plans
The Company has a fixed stock option plan. No compensation expense is
recognized when stock or stock options are issued to directors and
employees. Any consideration paid by directors and employees on exercise
of stock options or purchase of stock is credited to share capital.
F-23
DSI DATOTECH SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS
For the Years Ended October 31, 1999 and 1998
1. SIGNIFICANT ACCOUNTING POLICIES (continued)
(g) Research and development
Research and development costs are recorded as an expense of the period
in which they are incurred. Certain development costs may be deferred
where the product is technically or commercially feasible. The
recoverability of these deferred costs is dependent upon the Company's
ability to obtain necessary financing to complete development and to
successfully commercialize the use of the product.
2. INVESTMENT IN GESTURE RECOGNITION TECHNOLOGY
Pursuant to agreements dated November 30, 1990 and March 20, 1991, the
Company acquired from Seth McCloud ("McCloud") an exclusive licence to
manufacture and market a patent invention known as the Gesture Alphabet, a
new technology for computerized communications, in consideration of U.S.
$8,500 (paid), research and development expenditure of U.S. $150,000
(expended), 100,000 shares of the Company to earn the North American rights
to the invention (issued), and, at a subsequent date, subject to third party
valuation and regulatory approval, the maximum number of shares allowable to
attain the rights to the technology for the rest of the world, and annual
royalties calculated at 6% of gross profit.
Pursuant to agreements dated May 1, 1995 and August 29, 1996, which replaced
the previous agreements, the Company acquired the world-wide licence to
commercialize the Gesture Recognition Technology in consideration of 100,000
common shares to terminate the previous agreements (issued), 1,000,000
common shares to be issued based on cumulative cash flow generated by the
Company, and royalty fees of 5.5% of revenues received from the
commercialization of the technology and 5.5% of the gross profit from the
sale of products which incorporate the technology. A minimum semi-annual
advance royalty fee of $30,000 is payable commencing on May 1, 1996.
On November 4, 1999, the Company entered into an agreement, subject to
regulatory approval, which supercedes all previous agreements. The Company
granted a licence to McCloud to commercialize technology based on the
patents held by the Company. In consideration, the Company will receive a
royalty of 3% of gross sales from sales realized by McCloud of products made
using the technology. The Company will pay a royalty of 0.5% of gross sales
realized by the Company and any of its other licencees from the sales of
products made using the licensed intellectual property to McCloud.
In satisfaction of all amounts owed to McCloud under the previous
agreements, the Company will pay a total of $35,000 to McCloud over a ten
month period commencing on the execution of this agreement.
F-24
DSI DATOTECH SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS
For the Years Ended October 31, 1999 and 1998
2. INVESTMENT IN GESTURE RECOGNITION TECHNOLOGY (continued)
Acquisition and development costs to date:
1999 1998
------------ -----------
Acquisition costs $ 246,830 $ 246,830
------------ -----------
Development costs
Balance, beginning of year 1,203,800 975,350
------------ -----------
Additions
Salaries, benefits and consulting fees - 125,354
Hardware, software and materials 104 7,346
Patent costs and fees 7,249 8,319
Prototype development -- 27,431
Royalties 30,000 60,000
------------ -----------
37,353 228,450
------------ -----------
Balance, end of year 1,241,153 1,203,800
------------ -----------
1,487,983 1,450,630
Less: accumulated amortization (553,746) (417,875)
------------ -----------
$ 934,237 $ 1,032,755
============ ===========
3. CAPITAL ASSETS
1999 1998
---------------------------------------------------
Accumulated Net Book Net Book
Cost Depreciation Value Value
--------------------------------------- ---------
Furniture and equipment $ 41,040 $ 20,027 $ 21,013 $ 16,990
Computer equipment 84,693 40,886 43,807 43,068
---------- -- --------- -------- ---------
$ 125,733 $ 60,913 $ 64,820 $ 60,058
========== ========= ======== =========
F-25
DSI DATOTECH SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS
For the Years Ended October 31, 1999 and 1998
4. SHARE CAPITAL
(a) The authorized share capital consists of 100,000,000 common shares
without par value.
Issued:
1999 1998
-------------------------- ---------------------------
No. of No. of
Shares Amount Shares Amount
---------- ------------ ---------- ------------
Balance, beginning of year 13,953,940 $ 5,569,546 9,875,340 $ 4,568,835
---------- ------------ ---------- -------------
Issued during the year
For cash
- private placements, net
of share issue costs 1,104,000 264,759 1,418,600 938,711
- escrowed shares -- -- 2,600,000 26,000
- exercise of warrants -- -- 60,000 36,000
---------- ------------ ---------- -------------
1,104,000 264,759 4,078,600 1,000,711
---------- ------------ ---------- -------------
15,057,940 5,834,305 13,953,940 5,569,546
Less:
Company shares held, net
of shares resold (57,600) (46,833) (57,600) (46,833)
---------- ------------ ---------- -------------
Balance, end of year 15,000,340 $ 5,787,472 13,896,340 $ 5,522,713
========== ============ ========== =============
(b) A total of 3,068,750 common shares issued at $0.01 per share are subject
to escrow restrictions, release of the shares is subject to the approval
of regulatory authorities. Of these shares, a total of 2,600,000 were
issued during the year ended October 31, 1998 to two directors.
(c) The Company has granted options to directors, officers and employees to
purchase common shares at exercise prices determined by reference to the
market value on the date of the grant. Under the Company's stock option
plan, options may be granted for up to 2,800,000 common shares.
F-26
DSI DATOTECH SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS
For the Years Ended October 31, 1999 and 1998
4. SHARE CAPITAL (continued)
As at October 31, 1999, outstanding options granted to directors and
employees are as follows:
No. of Exercise Expiry
Shares Price Date
---------------- ------------- ------------------------
75,000 $0.75 December 3, 1999
300,000 0.75 December 3, 2001
150,000 0.50 September 1, 2001
50,000 0.50 September 15, 2001
50,000 0.50 September 22, 2001
50,000 0.75 March 15, 2002
230,000 0.75 May 9, 2002
425,000 0.80 January 13, 2003
10,000 0.53 May 25, 2003
10,000 0.40 September 22, 2003
320,000 0.40 December 11, 2003
20,000 0.40 January 4, 2004
20,000 0.40 April 6, 2004
---------
1,710,000
=========
(d) As at October 31, 1999, outstanding warrants to purchase 2,522,600
common shares are exercisable as follows:
- 1,418,600 common shares at a price of $1.25 per share to April 29,
2000.
- 744,000 common shares at a price of $0.25 per share to June 14, 2000
or at $0.29 per share to June 14, 2001.
- 360,000 common shares at a price of $0.25 per share to July 19, 2000
or at $0.29 per share to July 19, 2001.
5. DIRECTORS' REMUNERATION AND RELATED PARTY TRANSACTIONS
(a) A total of $248,200 (1998 - $332,000) was paid or is owing to directors
and two companies controlled by directors during the year for management
and consulting services.
(b) Included in accounts payable is an amount of $185,400 owing to two
companies controlled by directors of the Company for management and
consulting fees.
6. INCOME TAXES
The company has accumulated non-capital losses for tax purposes of
approximately $4,025,000 which may be carried forward to reduce taxable
income in future years expiring at various dates to the year 2006. The
potential income tax benefits arising from the foregoing are not recorded in
the financial statements.
7. CONTINGENT LIABILITIES AND COMMITMENTS
(a) During the year ended October 31, 1998, a petition was made against the
Company with respect to certain allegations of non-compliance with the
Company Act by a former employee. No damages have been sought. The
Company is of the opinion that the petition is without merit.
F-27
DSI DATOTECH SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS
For the Years Ended October 31, 1999 and 1998
7. CONTINGENT LIABILITies AND COMMITMENTS (continued)
The Company commenced a suit against the above-mentioned former employee and
certain other persons, including some former directors of the Company. The
Company is seeking damages for misappropriation, injurious falsehoods and
other wrongs.
There has been no further action on either the petition or the suit during
the fiscal year ended October 31, 1999.
(b) On August 21, 1997, a claim was made against the Company in the amount
of $130,727 by the purchasers of the Ned Property, a mineral property
which was sold in a prior year, for the return of the purchase price
plus additional costs. The Company is of the opinion that the claim is
without merit and has filed a Statement of Defence in response to this
action. No further action has been taken on the claim during the fiscal
year ended October 31, 1999.
(c) The Company has entered into two separate agreements with two companies
controlled by two directors of the Company for management services in
consideration of $10,000 per month each plus certain health benefits.
The agreements are for a two year term ending July 31, 1999 and are
renewable, upon expiry, for future one year terms at rates of
consideration which may be renegotiated. Should the agreements not be
renewed, sixty days notice must be given by the Company and one year's
compensation paid on the date of termination. The agreements were
renewed for a one year term on August 1, 1999.
(d) The Company entered into an agreement for the rental of office premises
for the period March 1, 2000 to January 31, 2001 at a cost of $37,000
per year.
8. SUBSEQUENT EVENTS
(a) Private Placement
The Company completed a private placement for the issue of 2,456,140
units at a price of $0.57 per unit for gross proceeds of $1,400,000 less
commissions of $86,798. Each unit consists of one common share and one
non-transferable share purchase warrant exercisable to acquire one
additional common share at a price of $0.57 per share to January 26,
2001 and at $0.66 per share to January 26, 2002. The commission is
payable in cash and shares of the Company.
(b) Options Granted
The Company granted stock options to directors and employees to acquire
a total of 449,000 common shares at a price of $0.40 per share and
expiring on various dates from November 4, 2002 to November 18, 2004.
(c) Exercise of Warrants
The Company issued a total of 556,000 common shares for gross proceeds
of $139,000 pursuant to the exercise of warrants at a price of $0.25 per
share.
F-28
DSI DATOTECH SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS
For the Years Ended October 31, 1999 and 1998
8. SUBSEQUENT EVENTS (continued)
(d) Financial Consulting Agreement
Pursuant to an agreement dated January 28, 2000 and subject to
regulatory approval, the Company entered into an agreement with a
consultant to obtain sources of long-term financing for the Company in
consideration of commissions based on the amount of financing arranged
by the consultant.
The Company also granted an option to the consultant to acquire the
exclusive right to commercialize the Gesture Technology for the banking
and financial transaction industry in consideration of the Company
receiving a 20% equity interest in any partnership or corporation that
would acquire the subject licence for the amount of US$8,000,000.
9. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize
the year 2000 as 1900 or some other date, resulting in errors when
information using year 2000 dates is processed. In addition, similar
problems may arise in some systems which use certain dates in 1999 to
represent something other than a date. Although the change in date has
occurred, it is not possible to conclude that all aspects of the Year 2000
Issue that may affect the entity, including those related to customers,
suppliers, or other third parties, have been fully resolved.
10. ADDITIONAL DISCLOSURE
In order to comply with generally accepted accounting principles in the
United States of America, the following additional information is provided:
(a) Income taxes
The Company's provision for income taxes (recovery) is made up as
follows:
1999 1998 1997
--------------------------------------------------------------------------------------------
Loss before income taxes $ 1,125,451 $ 851,568 $ 822,449
Combined basic Canadian federal
and provincial income tax rate 46% 46% 46%
--------------------------------------------------------------------------------------------
Provision for taxes (recovery) on basic rate 517,707 391,721 378,327
Increase (decrease) in taxes resulting from:
Benefit of tax loss carried forward not
recognized in accounts (517,707) (391,721) (378,327)
--------------------------------------------------------------------------------------------
Actual tax provision (recovery) $ -- $ -- $ --
============================================================================================
(b) Earnings per share
The calculation of earnings per share in accordance with generally
accepted accounting principles in the United States corresponds with
that in Canada for the following reasons:
- the inclusion of stock options as common stock equivalents is
antidilutive for each period presented and therefore is not included
in the calculation of earnings per share.
F-29
DSI DATOTECH SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS
For the Years Ended October 31, 1999 and 1998
10. ADDITIONAL DISCLOSURE (continued)
(c) Difference in accounting policy
The company has capitalized certain acquisition and development costs
related to the Investment in Gesture Recognition Technology. Generally
accepted accounting principles in the United States of America require
that these expenditures be charged to operations as incurred.
(d) The following summarizes information about stock options granted and
outstanding at October 31, 1999 and 1998, and changes during the years
then ended:
Year Ended Year Ended
October 31, 1999 October 31, 1998
--------------------------------------------------------------------------------------
Weighted Weighted
Average Average
No. of Exercise No. of Exercise
Options Price Options Price
--------------------------------------------------------------------------------------
Outstanding at beginning
of year 1,400,000 $ 0.72 1,190,000 $ 0.75
Granted 360,000 0.40 865,000 0.73
Exercised - -- -- --
Expired/Cancelled (50,000) 0.80 (655,000) 0.54
--------------------------------------------------------------------------------------
Outstanding at end of year 1,710,000 $ 0.65 1,400,000 $ 0.72
======================================================================================
Options exercisable at
end of year 1,710,000 $ 0.65 1,400,000 $ 0.72
======================================================================================
The weighted average fair value of the stock options granted during the
year ended October 31, 1998 was $0.23. Summary information about the
1,710,000 options outstanding at October 31, 1999 follows:
Options Weighted
Outstanding Average
October 31, 1999 Remaining Life
-----------------------------------------------------------------------
Range of Exercise Price
$0.40 to $0.53 630,000 2.9 years
$0.75 to $0.80 1,080,000 2.5 years
-----------------------------------------------------------------------
1,710,000 2.6 years
=======================================================================
Pro-forma information regarding net loss and loss per share is required
by Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS No. 123) and has been determined as if
the Company has accounted for its employee stock options under the fair
value method.
F-30
DSI DATOTECH SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS
For the Years Ended October 31, 1999 and 1998
10. ADDITIONAL DISCLOSURE (continued)
The Black-Scholes option valuation model was developed for use in estimating
for the fair value of traded options which have no vesting restrictions and
are fully transferable. In addition, option valuation models require highly
subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially effect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
The fair value for these options at the date of grant was estimated using
the Black-Scholes option pricing model with the following weighted average
assumptions for the fiscal years ended October 31, 1999 and 1998.
1999 1998
--------------------------------------------------------
Risk-free interest rate 5.11% 5.22%
Expected dividend yield -- --
Expected stock price volatility 1.15 1.15
Expected life in years 3.36 5.00
For the purposes of pro-forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The
pro-forma effect on net loss for fiscal year 1999 and 1998 may not be
representative of the actual results had the Company accounted for the stock
options using the fair value method. The Company's pro-forma information
follows:
1999 1998
---------------------------------------------------------------------
Net loss, as reported $ 1,125,451 $ 851,568
---------------------------------------------------------------------
Pro-forma net loss $ 1,279,351 $ 1,285,568
---------------------------------------------------------------------
Basic and diluted loss per share $ 0.08 $ 0.07
---------------------------------------------------------------------
Pro-forma basic and diluted
Loss per share $ 0.09 $ 0.11
---------------------------------------------------------------------
Because SFAS No. 123 applies only to stock-based compensation awards for the
fiscal year ended February 29, 1996 and future years, the pro-forma
disclosures under SFAS No. 123 are not likely to be indicative of future
disclosures until the disclosures reflect all outstanding, nonvested awards.
F-31
DSI DATOTECH SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS
For the Years Ended October 31, 1999 and 1998
10. ADDITIONAL DISCLOSURE (continued)
(e) Reconciliation
The effect on the financial statements of compliance with generally
accepted accounting standards in the United States would be as follows:
Income Statement
Year Ended Year Ended Year Ended
October 31, October 31, October 31,
1999 1998 1997
-------------------------------------------------------------------------------------------------------
Net loss as shown in the financial
statements $ (1,125,451) $ (851,568) $ (822,449)
-------------------------------------------------------------------------------------------------------
Decrease in amortization of Investment
in gesture recognition technology 135,871 90,435 91,890
-------------------------------------------------------------------------------------------------------
Increase in research and development
and expense (37,353) (228,450) (313,698)
-------------------------------------------------------------------------------------------------------
Net loss according to generally accepted
accounting principles in the United States $ (1,026,933) $ (989,583) $ (1,044,257)
=======================================================================================================
Loss per common share according to generally accepted accounting
principles in the United States:
Primary $ 0.07 $ 0.08 0.12
=======================================================================================================
Balance Sheet
Increase (decrease) in account to comply with generally accepted
accounting standards in the United States:
October 31, October 31,
1999 1998
------------------------------------------------------------------------
Investment in Gesture Recognition Technology $ (934,237) $ (1,032,755)
------------------------------------------------------------------------
Deficit $ (934,237) $ (1,032,755)
========================================================================
F-31