WASHINGTON, D.C. 20549
FORM 20-F
AMENDMENT NO. 4
(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 ____________
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
22,151,934 Shares of common stock
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: October 31, 2001, the exchange rate of Canadian dollars into
United States dollars was 1.5926 Canadian to $1.00 United States.
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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, 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, 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, and for the nine months ending July 31, 2001
from the unaudited financial statements of DSI, prepared in accordance
with Canadian G.A.A.P. These principles, 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 presented are in Canadian dollars,
unless otherwise noted. All 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)
- --------------------------------------------------------------------------------
9 Months 2000 1999 1998 1997 1996
Ending
07-31-01
- --------------------------------------------------------------------------------
Revenues $154 $628 $0 $0 $0 $0
- --------------------------------------------------------------------------------
Net Loss $2,072 $755 $1,125 $852 $822 $939
- --------------------------------------------------------------------------------
Total $2,226 $1,383 $1,125 $852 $822 $939
- --------------------------------------------------------------------------------
Loss Per Share $0.10 $0.04 $0.07 $0.06 $0.08 $0.13
- --------------------------------------------------------------------------------
Dividend Per Share $0 $0 $0 $0 $0 $0
- --------------------------------------------------------------------------------
Balance Sheet - Selected Data
As at October 31
(In thousands)
- --------------------------------------------------------------------------------
07-31-01 2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------
Total Assets $3,665 $5,263 $1,068 $1,710 $1,683 $905
- --------------------------------------------------------------------------------
Long Term Debt $0 $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)
- --------------------------------------------------------------------------------
07-31-01 2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------
Revenues $154 $628 $0 $0 $0 $0
- --------------------------------------------------------------------------------
Net Loss $2,052 $737 $1,027 $990 $1,044 $983
- --------------------------------------------------------------------------------
Total $2,206 $1,365 $1,027 $990 $1,044 $983
- --------------------------------------------------------------------------------
Loss Per Share $0.10 $0.03 $0.07 $0.07 $0.11 $0.13
- --------------------------------------------------------------------------------
Dividend Per Share $0 $0 $0 $0 $0 $0
- --------------------------------------------------------------------------------
Balance Sheet - Selected Data
As at October 31
(In thousands)
- --------------------------------------------------------------------------------
07-31-01 2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------
Total Assets $2,809 $4,347 $137 $677 $788 $232
- --------------------------------------------------------------------------------
Long Term Debt $0 $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 fiscal years ending October 31 of each year;
and the average exchange rates reported at noon on the last day of each month
during such periods by Bank of Canada.
Fiscal Year Ending 07-31-01 2000 1999 1998 1997 1996
October 31
Rate at End of Period $1.5303 $1.5225 $1.4713 $1.5429 $1.4084 $1.3383
Average Rate During $1.5333 $1.4768 $1.4941 $1.4717 $1.3781 $1.3647
Period
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The following chart shows the high and low exchange rates for each month during
the previous six months from February 2001 through July 2001:
- --------------------------------------------------------------------------------
Feb-01 Mar-01 Apr-01 May-01 Jun-01 Jul-01
- --------------------------------------------------------------------------------
HIGH RATE 1.5316 1.5774 1.5789 1.5540 1.5357 1.5448
- --------------------------------------------------------------------------------
LOW RATE 1.4936 1.5380 1.5356 1.5309 1.5145 1.5099
- --------------------------------------------------------------------------------
Dividend Policy
DSI has not paid any dividends during the past five years and does not
anticipate paying any dividends in the foreseeable future. The directors of DSI
will determine if and when any dividends should be declared and paid if DSI's
financial situation warrants such action at the time.
B. Capitalization and Indebtedness
At July 31, 2001, DSI's working capital was $2.0 million and there were no
long-term debts. The shareholder's equity at July 31, 2001 amounted to
$3.4 million. The total share capital was $11 million (consisting of
22,151,934 outstanding shares of common stock) and an accumulated deficit
of $7.8 million.
C. Risk Factors
1) DSI has a limited operating history and has generated limited revenues and
may continue to operate at a loss. 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 collaborative effort. 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.
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2) DSI has only one option agreement to license its technology. There can be
no assurance that Net Face LLC will exercise its option to license the
gesture recognition technology for personal computer games, console games
and Internet television and pay DSI its license fee of $4,800,000 and an
equity interest in Net Face. The option expires in December 2002 and DSI
has no other agreements for the commercialization of its products. On June
29, 2001, Securities Biometrics Inc. acquired 100% of NetFace LLC. On
October 31, 2001, DSI terminated Securities Biometrics' option to license
technology for banking and financial transactions after the optionee
failed to exercise the option.
3) DSI is in the early stage of product development. DSI has working
prototypes of a multipoint touchpad ("MPT") capable of detecting the
position and force of up to ten fingers simultaneously and a gesture
recognition software system capable of identifying gestures on the MPT and
translating them into commands to be recognized by other software
applications. However, this technology has not yet been fully commercially
tested. Accordingly, there can be no assurances that DSI can achieve the
necessary technical objectives. There is no guarantee that DSI will be
able to adapt the system for mass-scale production in the event that DSI's
marketing initiatives are successful. There can be no assurances if 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 or commercially viable to sustain mass
production.
4) DSI will need future financing. DSI will require substantial additional
funds for its product development programs, marketing, distribution and
operating expenses. Capital requirements will depend on a variety of
factors, including the rate of progress of DSI's product development,
products marketing and distribution, 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 with other entities. In
addition, 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 continues
growth of its operations.
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 other companies
engaged in similar field. At this time, DSI has no present
commitments for future financing. There can be no assurances that
any additional financing will be available when needed, or, if
available, is on acceptable terms. Insufficient funds may prevent
DSI from implementing its business strategy to the extent possible,
and could result in delay, scale back, or elimination of its only
product development program, or granting a license to third parties
of DSI's rights to commercialize products or technologies that DSI
would otherwise seek to develop itself.
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5) DSI is dependent upon its proprietary technology. DSI relies primarily on
a combination of patent, copyright, and trade secret laws, as well as
confidentiality arrangements and contractual provisions to protect its
technology and products from exploitation by competitors. DSI has three
patents filed with the United States Patent Office and one patent filed
with the Canadian Patent Office. DSI also has one patent pending in the
United States and one pending in 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.
DSI also intends to apply for additional patents in the United
States and other countries. There can be no assurance that all of
these patents will be recognized in commercially relevant countries
(e.g. countries in which the product is sold) and even if recognized
and filed will appropriately protect DSI's products and technology.
Further, copyright laws may not provide useful protection against
competitive software that is slightly different than DSI's software
but includes similar technology to DSI. The non-establishment of
effective patent, trade secret or copyright protection could have a
material adverse effect on DSI's business, results of operations and
financial condition.
6) 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 are protected by technology patents 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 to be substantially
better than the current point and click technology.
7) 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 advancement
from existing point and click technology and is a major shift in
paradigms. This may cause resistance in market acceptance and adaptation.
8) DSI intends 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.
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9) 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.
10) 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 DSI in the future or that any such assertion will not
result in costly litigation or require DSI 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.
11) 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. 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. DSI has not obtained keyperson life insurance with respect to
any employees, directors or consultants.
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.
12) 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
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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.
13) No Dividends Anticipated. DSI has never declared or paid cash dividends on
shares of its Common Stock since its inception and does not intend to
declare or pay dividends on shares of 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 300-905 West Pender Street, Vancouver, BC, V6C 1L6,
telephone number (604) 685-9109.
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.
Since 1997, DSI's business activities have been mainly research & development of
unique gesture recognition technologies that enable human-machine communication
using hand gestures. Since its inception, the Company has been successful in
developing the technology, conducting technical evaluations and patenting the
technology in United States and Canada.
A. Business overview
Introduction
DSI's mission is to simplify human interaction with computers and electronic
devices using natural hand gestures. DSI's patented technology related to
gesture recognition includes both proprietary software and touch pads that allow
its users to operate devices by touching and sliding multiple fingers on a
"DatoPad", an intelligent touchpad capable of recognizing motion and translating
motion to certain commands for other software applications.
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,
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which will offer a wide array of "end-to-end" solutions targeted towards
specific market segments.
DSI has three patents filed with the United States Patent & Trademarks Office
for its gesture recognition technology. DSI has applied for one patent in the
United States and 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;
o filing for additional patents pertaining to a new generation
multi-touch gesture recognition algorithm; and
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 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 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.
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The first generation of DSI's product will enable users to communicate with
computing devices through gesture recognition. A touch pad designed by DSI will
recognize the gestures and will serve as the input device to the computing
device, either by complimenting existing input devices (as the mouse, and
keyboard) or replacing such devices altogether. Early market studies with
specialty PC programs such as CAD/CAM, animation and graphics have been
conducted as a test market before exploring mass computer and on-line gaming
markets. In addition, the Company believes that the next generations of its
technology will feature biometrics developed for the security industry as a
method of authentication for credit card and other financial transactions and
general authentication for security access with applications for governments and
the private sector. The Company believes the end users of this generation of
technology will consist of large banks, financial institutions, governments and
large corporations.
Dato Gesture Technology Overview
Hand gestures are universal, natural and effective forms of communication and
provide an acceptable method for people to interact with new generations of
information technology. DSI's gesture recognition technology interprets hand
gestures performed with any combination of movements of the finger touching a
proprietary "intelligent" touch pad. This technology integrates sensors,
software and application programs into a proprietary input system. The touch pad
will be available in different sizes and shapes depending on its specific
applications. Sensors in the touch pad are capable of tracking the position and
force of simultaneous contacts by multiple fingers and process each
configuration as a different application to be interpreted by the software. 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:
! a small footprint for integration into a portable or hand-held devices;
! eyes-free operation, a necessary characteristic for many applications like
graphic design and games;
! sliding, rather than striking buttons reduces physical effort and strain;
and
! programmability to replace repetitive complex input sequences with a
single gesture
Future enhancements are planned to add character entry, user-defined custom
gestures, security features and to integrate gesture recognition technology with
voice recognition.
DSI's management has continued to focus on the development of gesture
recognition technology including elements to support applications to drive
demand and acceptance
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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 including
applications for graphic design and animation, computer aided design (CAD),
gaming (Video Games) and web tv.
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 conducted a market research study
(performed 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 market research, an initial prototype was developed
aimed at professional and power users including: CAD specialists, graphics
artists, multimedia developers and information managers.
The DatoPad
Input and pointing devices have become a universal method of operating and
interfacing 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 simplifying
the interface between the user and the machine. DSI's solution includes 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 the mouse 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:
> Cut,
> Paste,
> Save,
> Move,
> Enlarge or shrink, and
> Rotate objects
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Several characteristics of the DatoPad(TM) input system suggest advantages for
particular applications:
! The DatoPad(TM) is fully reverse compatible with current devices.
! The DatoPad(TM) is scalable to various shapes and sizes to reflect a
variety of applications.
! Eyes-free operation provides a significant advantage in applications like
computer aided design, graphics, and multimedia design which require the
operator's visual attention.
! Sliding fingers rather than striking buttons, allows input sequences to be
performed quickly with minimal physical effort.
! The user will be able to program their own gestures as they relate to
specific applications thus personalizing their interaction with
applications and devices.
! 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:
. users of professional software;
. gesture recognition technology integrated portable computers; and
. gesture recognition technology integrated desktop keyboards.
DSI intends to channel its products to market by forming strategic alliances and
partnership with 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
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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 has paid DSI U.S. $200,000. The prototype was delivered to NetFace
as planned in June 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 December 2002. On
June 29, 2001, Securities Biometrics Inc. acquired 100% of NetFace LLC.
DSI entered into an option agreement with Security Biometrics, Inc. on August
22, 2000. Biometrics had the right to evaluate the commercial value of DSI's
technology for use in interfaces and software for banking and financial
transactions. 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. An additional US$3,000,000 was due
under the option by July 22, 2001 in order to obtain the license. Biometrics
elected not to make such payment and the option was terminated by DSI.
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 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
15
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 16, 2015.
4. Canadian Patent (2,098,179) 1998 "Pointing Gesture Method of
Communication"; Expiry December 16, 2011.
DSI has also applied for one patent in the United States and 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
DSI does not believe that its products are materially affected by government
regulation of its proposed products.
16
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. Interaction Technologies Ltd. is an inactive entity
with no revenue, expenses or capital. There are currently no plans to
activate this subsidiary.
D. Property Plant and Equipment
DSI initially established its principal place of business in Vancouver,
British Columbia, Canada where it holds a lease for the 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.
Additionally in June 2001, DSI established its presence in eastern North
America with offices in Dorval, Quebec, where it leases office space of
4,000 square feet. The lease expires November 29, 2004.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Overview
Since 1996 DSI Datotech Systems Inc. (DSI) has been concentrating on the
research, development, licensing and commercialization of Gesture Recognition
Technology (GRT) enabled products and technology for various industries. DSI
currently an option-to-license agreement with NetFace LLC specific to the gaming
industry. In June 2001, Security Biometrics acquired 100% of NetFace LLC. DSI
plans to channel its products to market by forming strategic alliance and
partnerships with established distribution channels, sale of stand alone
products directly to the market, and through licensing agreements with major
software/hardware OEMs.
Fiscal Quarter ended July 31, 2001 compared to the Quarter ended July 31, 2000
Operations
DSI officially delivered the GRT enabled prototype to NetFace LLC in June 2001.
DSI is continuing with the development of the GRT-enabled products. Through the
development of the GRT, DSI stands to become a key provider of human-machine
interfaces that will offer a wide array of end-to-end solutions for computers,
appliances and application hardware.
To facilitate the commercialization of its products. DSI opened an office in
Dorval, Quebec by leasing a 4,000 square foot facility. DSI now has a team of
senior members in its Quebec office in to assist with the commercialization of
its product. At August 1, 2001, the number of employees at DSI was 23, 7 in the
Montreal office and 16 in the Vancouver office. DSI's Vancouver office continues
with its core research and development functions.
Resources
There was a cash and short-term deposits balance of $2,167,401 as at July 31,
2001. These funds have been, and will continue to be utilized for the research
and development of GRT, the development of the prototypes, commercialization of
the products and related expenses.
Revenue
During the quarter ending July 31, 2001, DSI received option revenue of $150,000
from NetFace for the delivery of the prototype as per the agreement. During the
quarter ending July 31, 2000, there was option revenue of $147,730 from NetFace.
Investment Income
Investment and interest income was lower by $40,494 during the quarter ending
July 31, 2001 ($25,976) as compared to the quarter ending July 31, 2000
($66,470). This was due to cash balance being lower at July 31, 2001
($2,167,401) than at July 31, 2000 ($4,079,315), thus reducing the investment
income.
Research and Development
Total Research and Development expenditure increased by $108,478 from the
quarter ending July 31, 2000 ($132,943) as compared to the quarter ending July
31, 2001 ($241,421). This increase was reflected in the increase in salaries and
benefits as there were more research engineers during the quarter ending July
31, 2001 than during the quarter ending July 31, 2000.
General and Administrative
General and Administrative expenses increased from $316,423 for the quarter
ending July 31, 2000 to $547,236 for the quarter ending July 31, 2001, an
increase of $230,812. This increase was mainly due to:
o Salaries management fees and benefits (increase of $125,000) due to
additional employees being hired.
o Investor relations and promotions increased by $15,000 due to payments
being made to a consulting firm for handling of the investor relations
functions.
o Legal and accounting (increase of $9,000).
o Rent increased by $17,000 due to the expanded facilities.
o Consulting and market research increased by $42,000. A study was done to
identify markets and consultants were hired to review the operations.
o Travel (increase of $18,000), which was due to more employees and travel
by the Quebec staff to the Vancouver facilities.
o Corporate Marketing decreased by $14,000.
o Office and other expenses (increase of $18,000) mostly due to setting up
of the facilities in Montreal.
17
* 1 moved from here; text not shown
Fiscal Year Ended October 31, 2000 ("Fiscal 2000") compared to Fiscal Year
Ended October 31, 1999 ("Fiscal 1999")
Revenue and Investment Income
**1 Option revenue of $627,730 was received during the fiscal 2000 for
two option agreements, one with Netface LLC and one with Security
Biometrics
18
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
fiscal 1999 to $498,382 for fiscal 2000, an increase of 7%. There will be
a substantial increase in the research and development expenditure for the
year ending October 31, 2001 ("Fiscal 2001")for the further development of
the acceptable prototype for the option agreements.
The major increase was in salaries which increased by $97,878 from fiscal
1999 ($279,813) to fiscal 2000 ($377,691) as there were additional
engineers hired in the 2000 fiscal year.
General and Administrative
General and administrative expenses increased from $670,143 for fiscal
1999 to $1,034,036 for fiscal 2000, an increase of $363,893 (54%). This
increase is mainly due to:
o Management Fee - increase of $101,800 was partially due to the
change in management during the fiscal 2000.
o Investor Relations and Promo - increase of $19,720 due to fees paid
for identifying investors in Europe.
o Consulting Fees - increase of $85,446. The increase was mostly due
to hiring of consultant for recruitment and office plan for the new
location.
o Legal and accounting - increase of $33,270 which included fees for
stating the financials in US GAAP and legal counsel for financing
opportunities in the United States.
o Travel and accommodation increased by $38,426 which was mainly due
to travel to Europe and the US to pursue additional financing.
o Recruitment - $32,813. This was for advertising positions on the web
and payment to recruiting agencies for hiring of employees.
o Telephone - $11,685 increase primarily due to an increase in the
cell phone usage.
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
===========================================================
19
In the fiscal 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 ("Fiscal 1999") compared to Fiscal Year Ended
October 31, 1998 ("Fiscal 1998")
Revenue and Investment Income
There were no revenues reported for the fiscals 1999 and 1998. Investment
income for the fiscal 1999 was $16,876 lower than fiscal 1998 as DSI had
lower cash and investment during fiscal 1999 than during fiscal 1998.
General and Administrative
There was a decrease in General and Administrative Expenses in the fiscal
1999 ($670,143) from fiscal 1998 ($689,157).
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
There was a cash and short-term deposits balance of $2,167,401 at October
31, 2001. These funds have been, and will continue to be utilized for the
research and development of GRT, the development of the prototypes and
related expenses.
In Fiscal 2000, DSI's primary source of funds was from the issue of shares
of common stock. DSI considers its operating cash flows and ability to
raise equity capital as principal indicators of its liquidity. During
Fiscal 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 Fiscal 1999. Although working capital
is not considered to be an indicator of DSI's liquidity, DSI's working
capital at end of Fiscal 2000 was $3,922,221, an increase of $4,088,777
from Fiscal 1999 as of July 31. In the Fiscal 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.
20
DSI has no long-term debt. Current liabilities of $212,679 included
accounts payable and accrued liabilities, which decreased by $23,000 from
Fiscal 1999. DSI has license-to-option agreements with Netface LLC. DSI
intends primarily to meet its commitment to Netface 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 shares of equity.
During Fiscal 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 shares of common stock and $56,759 paid
in cash and other share issue costs of $8,399. Each unit consisted
of one share of common stock and one warrant to acquire one
additional share of common stock 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 share of common stock
and one-half warrant, each full warrant exercisable to acquire one
additional share of common stock 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 share of common stock and one-half
warrant, each full warrant exercisable to acquire one additional
share of common stock 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 share of common stock and
one-half warrant, each full warrant exercisable to acquire one
additional share of common stock 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 share of common stock and one-half warrant,
each full warrant exercisable to acquire one additional share of
common stock at $2.16 per share to April 20, 2002.
DSI believes that it has sufficient cash on hand to meet its anticipated
requirements through the spring of 2002. 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 and there are no assurances that any further financing will be
available.
21
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:
High-resolution multi-touch sensors adapted from touchpad technology
used in many notebook computers.
A sensor-independent proprietary gesture recognition algorithm,
which can be used with a variety of sensor technologies.
* 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.
22
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 the 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 October
31, 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
Michel Lavallee 39 Vice President Engineering and
R&D
Gary Chamandy-Cook 45 Vice President Finance and
Administration
John Paul Higgins 42 Vice President Corporate
Development
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
23
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, 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,
24
sales and marketing, product management and contracts and project
execution. Mr. Heaney received his Bachelor of Engineering from Concordia
University, Montreal, in 1983.
Michel Lavallee
Mr. Michel Lavallee was appointed VP Engineering & RD of DSI Datotech
Systems Inc. effective June 25, 2001. From June 2000 to June 2001 Mr.
Lavallee was the VP Technology and Chief Technology Officer for
DTI-Infogrames (division of Infogrames Europe) a company producing and
distributing gaming software for the In-Flight Entertainment (IFE) and
Interactive Television (iTV) markets. From 1994 to 2000 he was Director of
R&D, Software Engineering and Director of Business Development for the
Centre de Research Informatique de Montreal (CRIM). CRIM specializes in
offering technology learning courses and leading edge research and
development services across the various information technology fields. Mr.
Lavallee brings over 17 years experience with complex computerized
systems, most of which was spent in various management positions for
small, medium and large companies. Mr. Lavallee has a B. Sc. Computer
Science (Systems) from Canada's Royal Military College in St-Jean sur
Richelieu.
Gary Chamandy-Cook
Mr. Gary Chamandy-Cook was appointed the position of VP, Finance and
Administration effective June 10, 2001. From 2000 to June 2001 Mr.
Chamandy-Cook was Chief Financial Officer for BDO Road Digital Inc., a
company offering high-speed terminals that access email and the internet
from public locations. From 1990 to 1999 he was the President and CFO of
Radius Maple Leaf Footwear Inc., a leading injection moulding footwear
producer. He has a strong financial and business background with over 20
years experience at senior management levels for various businesses. Mr.
Chamandy-Cook was most recently Chief Financial Officer for VDO Road
Digital Inc., a company offering high-speed terminals that access e-mail
and the Internet from public locations. Mr. Chamandy-Cook has a B.Comm
from McGill University where he majored in Finance and Marketing.
John Paul Higgins
Mr. Paul Higgins was appointed Vice-President, Corporate Development in
2001. Mr. Higgins, over a 17 year period, has held increasingly senior
positions in systems engineering, product and channel management,
communications and business development with Lockheed Martin Canada,
Nortel APS, Astec APS (an Emerson company) and most recently Lumenon
Innovative Lightwave Technology. Mr. Higgins has a B.E.Sc. (Electrical
Engineering) from University of Western Ontario.
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.
25
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:
- ---------------------------------------------------------------------------------------------------------------------------------
Annual Compensation Long Term Compensation
- ---------------------------------------------------------------------------------------------------------------------------------
Awards Payouts
- ---------------------------------------------------------------------------------------------------------------------------------
Securities Restricted
Under Shares or
Other Annual Options/ Restricted LTIP(2) All Other
Name and Principal Year Salary Bonus Compensation SARs 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 1999 $120,000 Nil $3,600 50,000 Nil Nil $2,900
and Chief Executive 2000 $120,000 Nil $3,600 95,000 Nil Nil $2,900
Officer
- ---------------------------------------------------------------------------------------------------------------------------------
Elli Segev, 1998 $120,000 $40,000 $4,315.25 50,000 Nil Nil $1,500
Former President, 1999 $120,000 Nil $3,600 50,000 Nil Nil $2,900
Former Chief 2000 $110,000 Nil $3,300 95,000 Nil Nil $2,900
Executive Officer
(Up to October 6, 2000)
- ---------------------------------------------------------------------------------------------------------------------------------
(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.
Additional compensation to be awarded to Mr. Pardiak under the Pardiak
Agreement is 1,300,000 shares of common stock 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.
26
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.
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 Since December 13, 1999
Telecom Inc.
- --------------------------------------------------------------------------------
Wayne A. Taylor President, FGH Insurance Since December 13, 1999
Agencies Ltd.
- --------------------------------------------------------------------------------
Dr. Calvert and Mr. Gibbins are members of DSI's Audit Committee and DSI's
Compensation Committee.
D. Employees
As at October 31, 2001, DSI had 28 full-time employees including 16
engineers, scientists and technicians and 5 administrative, marketing and
support staff.
27
E. Share Ownership
The following table sets forth certain information concerning the
beneficial ownership of DSI's shares of common stock or options to
purchase shares of common stock as at June 30, 2001 for each officer and
director of DSI at that date:
- --------------------------------------------------------------------------------
Number of Shares Percentage of Shares
Name of Beneficial Shareholder of Common Stock(1) of Common Stock
- --------------------------------------------------------------------------------
Edward C. Pardiak 2,246,184(2) 10.1%
- --------------------------------------------------------------------------------
Robert M. Egery 187,500(3) 0.9%
- --------------------------------------------------------------------------------
Allan S. Gibbins 273,850(4) 1.2%
- --------------------------------------------------------------------------------
Thomas Calvert 185,750(5) 0.8%
- --------------------------------------------------------------------------------
Timothy Heaney 31,250(6) 0.1%
- --------------------------------------------------------------------------------
Michel Lavallee 31,250(7) 0.1%
- --------------------------------------------------------------------------------
Gary Chamandy-Cook 64,250(8) 0.3%
- --------------------------------------------------------------------------------
John Paul Higgins 31,250(9) 0.1%
- --------------------------------------------------------------------------------
1) As at June 30, 2001, the number of shares of common stock outstanding was
22,012,334.
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 shares of common
stock at an exercise price of $0.66 per share. Also includes options
issued to Mr. Pardiak to purchase (i) 230,000 shares of common stock at an
exercise price of $0.75 per share, (ii) 70,000 shares of common stock at
an exercise price of $0.80 per share, (iii) 50,000 shares of common stock
at an exercise price of $0.40 per share, (iv) 45,000 shares of common
stock at an exercise price of $1.12 per share, (v) 37,500 shares of common
stock at an exercise price of $0.80 per share, (vi) 40,000 shares of
common stock at an exercise price of $0.50 per share. Does not include
unvested options issued to Mr. Pardiak to purchase (i) 12,500 shares of
common stock at an exercise price of $0.80 per share, and (ii) 65,000
shares of common stock at an exercise price of $0.50 per share.
3) Includes options to purchase 187,500 shares of common stock at an exercise
price of $0.50 per share. Does not include unvested options to purchase
162,500 shares of common stock at an exercise price of $0.50 per share.
4) Includes options to purchase (i) 100,000 shares of common stock at an
exercise price of $0.80 per share, (ii) 50,000 shares of common stocks at
an exercise price of $0.40 per share, (iii) 12,000 shares of common stock
at an exercise price of $1.12 per share, (iv) 18,750 shares of common
stock at an exercise price of $1.00 per share and (v) 37,500 shares of
common stock at an exercise price of $0.50 per share. Does not include
unvested options to purchase (i) 6,250 shares of common stock at an
exercise price of $1.00 per share and (ii) 62,500 shares of common stock
at an exercise price of $0.50 per share.
5) Includes options to purchase (i) 100,000 shares of common stock at an
exercise price of $0.80 per share, (ii) 12,500 shares of common stock at
an exercise price of $0.40 per share, (iii) 12,000 shares of common stock
at an exercise price of $1.12 per share, (iv) 18,750 shares of common
stock at an exercise price of $1.00 per share and (v) 37,500 shares of
common stock at an exercise price of $0.50 per share. Does not include
unvested options to purchase (i) 6,250 shares of common stock at an
exercise price of $1.00 per share and (ii) 62,500 shares of common stock
at an exercise price of $0.50 per share.
6) Includes options to purchase 31,250 shares of common stock at an exercise
price of $0.50 per share. Does not include unvested options to purchase
93,750 shares of common stock at an exercise price of $0.50.
7) Includes options to purchase 31,250 shares of common stock at an exercise
price of $0.50 per share. Does not include unvested options to purchase
93,750 shares of common stock at an exercise price of $0.50.
28
8) Includes options to purchase 31,250 shares of common stock at an exercise
price of $0.50 per share. Does not include unvested options to purchase
93,750 shares of common stock at an exercise price of $0.50.
9) Includes options to purchase 31,250 shares of common stock at an exercise
price of $0.50 per share. Does not include unvested options to purchase
93,750 shares of common stock at an exercise price of $0.50.
The Directors and Officers of DSI, as a whole, are the beneficial owners
of 3,082,534 shares of common stock, including options to purchase
1,215,250 shares of common stock, representing 13.9% of the issued and
outstanding capital of DSI as at October 31, 2001, assuming exercise of
their vested options.
The following table lists the stock options granted to the Directors and
Employees of DSI during the fiscal year ended October 31, 2000.
- ----------------------------------------------------------------------------------------------------
Name of Optionee Number of Percentage of Exercise Market Value Expiration
Securities Total Options Or Base of Securities Date
Under Granted to Price Underlying (yy/mm/dd)
Options Employees in ($/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
- ----------------------------------------------------------------------------------------------------
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%
- ----------------------------------------------------------------------------------------------------
29
Item 7. Major Shareholders and Related Party Transactions
A. Major Shareholders
The following table sets forth certain information regarding the
beneficial ownership of the shares of common stock of DSI, as of June 30,
2001, by each person, who is known by DSI to own beneficially more than
five percent of the outstanding shares of common stock.
- --------------------------------------------------------------------------------
Number of Shares Percentage of Shares
Name of Beneficial Shareholder of Common Stock(1) of Common Stock
- --------------------------------------------------------------------------------
Edward C. Pardiak 2,246,184(2) 10.1%
- --------------------------------------------------------------------------------
Elli Segev 1,300,000(3) 5.91%
- --------------------------------------------------------------------------------
1) As at October 31, 2001, the number of shares of common stock outstanding
was 22,151,934.
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 shares of common
stock at an exercise price of $0.66 per share. Also includes options
issued to Mr. Pardiak to purchase (i) 230,000 shares of common stock at an
exercise price of $0.75 per share, (ii) 70,000 shares of common stock at
an exercise price of $0.80 per share, (iii) 50,000 shares of common stock
at an exercise price of $0.40 per share, (iv) 37,500 shares of common
stock at an exercise price of $1.12 per share, (v) 37,500 shares of common
stock at an exercise price of $0.80 per share, (vi) 40,000 shares of
common stock at an exercise price of $0.50 per share. Does not include
unvested options issued to Mr. Pardiak to purchase (i) 12,500 shares of
common stock at an exercise price of $0.80 per share, and (ii) 65,000
shares of common stock at an exercise price of $0.50 per share.
1) 1,300,000 shares of common stock 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.
30
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 of common stock 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
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 $0.35 and $1.11 Canadian.
The following table sets forth the reported low and high bid prices for the
shares of common stock of DSI as quoted on the CDNX on a quarterly basis for the
fiscal years 1999 and 2000 and for the first and second quarters of fiscal 2001,
and on monthly basis for May and June 2001. All figures are in Canadian Dollars.
Quarter High Low
- ------- ---- ---
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
11/01/00 to 01/31/01 $0.92 $0.40
02/01/01 to 04/30/01 $0.80 $0.50
05/01/01 to 07/31/01 $1.11 $0.35
Month High Low
- ----- ---- ---
08/01/01 to 08/31/01 $0.78 $0.55
09/01/01 to 09/30/01 $0.70 $0.50
10/01/01 to 10/31/01 $0.60 $0.42
At October 31, 2001, DSI had 22,151,934 shares of common stock issued and
outstanding and estimated 1,564 record owners.
31
Item 10. Additional Information
A. Share Capital
(a) The authorized share capital consists of 100,000,000 shares of
common stock 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
=========================================================================================
32
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.
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 exercisable through
December 2002 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 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 had the right to 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 was to pay DSI additional
consideration in cash and securities of Biometrics on or before July 22,
2001. The option to license agreement was terminated on October 31, 2001
after Biometrics did not exercise the option.
33
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
shares of common stock, 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
shares of common stock 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 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 shares of common stock 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 shares of common stock 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.
34
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 shares of common stock 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
shares of common stock 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 shares of common
stock.
The Investment Act would not apply to certain transactions in relation to
shares of common stock of DSI, including:
a. an acquisition of shares of common stock 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 a 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.
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.
35
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 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 upon 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.
36
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
D. American Depositary Receipts
Not Applicable
Shares of Common Stock
DSI's authorized share capital consists of 100,000,000 shares of common stock
without par value and as at April 30, 2001 DSI had 21,594,734 shares of common
stock issued and outstanding. Holders of DSI's shares of common stock:
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 shares of Common stock 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.
37
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.
Page No.
--------
Nine Months ended July 31, 2001
Consolidated Balance Sheets F-1
Consolidated Statements of Operations and Deficits F-2
Consolidated Statements of Cash Flows F-3
Notes to Consolidated Financial Statements F-4
Fiscal Years Ended October 31, 2000 and October 31, 1999
Certificate filed with British Columbia Securities Commission F-12
Management's Responsibility F-14
Auditor's Report F-15
Consolidated Balance Sheets F-16
Consolidated Statements of Loss and Deficit F-17
Consolidated Statements of Cash Flows F-18
Notes to Consolidated Financial Statements F-19
Fiscal Years Ended October 31, 1999 and October 31, 1998
Certificate filed with British Columbia Securities Commission F-34
Management's Responsibility F-36
Auditor's Report F-37
Consolidated Balance Sheets F-38
Consolidated Statements of Loss and Deficit F-39
Consolidated Statements of Cash Flows F-40
Notes to Consolidated Financial Statements F-41
38
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 Interactive 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 Consulting 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)
4.7 Consulting Agreement between DSI Datotech Systems Inc. and Pardiak
Management International Ltd. dated November 1, 2000 (2).
4.8 Consulting Agreement between DSI Datotech Systems Inc. and Robert
Egery dated December 1, 2000 (2).
4.9 CIBC Letter of Credit dated July 21, 2000.(2)
8.1 List of Subsidiaries(1)
23.1 Consent of G. Ross McDonald.(3)
(1) Previously filed with the registration statement on April 16,
2001 and incorporated herein by reference.
(2) Previously filed with the SEC along with amendment No. 2 on
October 2, 2001
(3) Filed herewith.
39
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: December 27, 2001
40
DSI DATOTECH SYSTEMS INC.
BALANCE SHEETS
(Unaudited)
- --------------------------------------------------------------------------------
July 31, October 31,
2001 2000
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and short term deposits $ 2,167,401 $ 4,079,315
Accounts receivable and advances 78,146 25,389
Prepaid expense 36,643 30,196
- --------------------------------------------------------------------------------
2,282,190 4,134,900
INVESTMENT IN GESTURE RECOGNITION
TECHNOLOGY (Note 2) 855,653 915,803
CAPITAL ASSETS (Note 3) 527,009 212,564
- --------------------------------------------------------------------------------
$ 3,664,852 $ 5,263,267
================================================================================
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 276,594 $ 212,679
- --------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
SHARE CAPITAL (Note 4) 11,170,147 10,760,777
DEFICIT (7,781,889) (5,710,189)
- --------------------------------------------------------------------------------
3,388,258 5,050,588
- --------------------------------------------------------------------------------
$ 3,664,852 $ 5,263,267
================================================================================
APPROVED BY THE DIRECTORS
"Edward C. Pardiak"
- ---------------------------------------------
Director - Edward C. Pardiak
"Robert M. Egery"
- ---------------------------------------------
Director - Robert M. Egery
F-1
DSI DATOTECH SYSTEMS INC.
STATEMENTS OF OPERATIONS AND DEFICIT
(Unaudited)
- ----------------------------------------------------------------------------------------------------
Three Months Ended July 31, Nine Months Ended July 31,
2001 2000 2001 2000
- ----------------------------------------------------------------------------------------------------
REVENUE
Option income $ 150,000 $ 147,730 $ 150,000 $ 147,730
Licensing fees -- -- 3,750 --
Investment income and recoveries 25,976 66,470 129,861 72,828
- ----------------------------------------------------------------------------------------------------
175,976 214,200 283,611 220,558
- ----------------------------------------------------------------------------------------------------
EXPENSES
RESEARCH AND DEVELOPMENT
Salaries and benefits 175,892 89,624 564,620 247,233
Amortization 57,610 30,820 130,996 58,820
Prototype development 7,919 12,499 24,268 22,022
Consultants -- -- 6,425 --
Reports -- -- -- 8,710
- ----------------------------------------------------------------------------------------------------
241,421 132,943 726,309 336,785
- ----------------------------------------------------------------------------------------------------
GENERAL AND ADMINISTRATIVE
Management fees and benefits 141,282 60,000 339,436 180,000
Salaries and benefits 60,744 16,999 232,510 42,242
Travel and accommodation 46,951 28,703 126,472 39,019
Recruitment and staff training 18,786 26,910 106,862 29,609
Investor relations and promotion 27,785 13,703 94,531 20,439
Rent 27,132 10,101 81,746 28,803
Consulting fees 41,400 24,196 75,992 29,512
Office and miscellaneous 28,701 3,410 74,557 26,060
Corporate marketing 74,432 88,140 74,432 88,140
Legal, audit and accounting 21,420 12,286 73,790 23,029
Printing and shareholders information 6,128 5,299 55,546 22,936
Telephone and communications 8,650 8,881 28,566 18,290
Amortization 3,795 8,222 26,370 17,202
Market research 25,725 -- 25,725 --
Corporation capital tax 3,181 -- 19,087 --
Insurance 5,558 4,800 18,840 15,573
Transfer agent 692 3,638 7,744 12,800
Regulatory fees 3,458 1,135 7,278 4,391
Equipment rental 1,415 -- 4,381 --
- ----------------------------------------------------------------------------------------------------
547,235 316,423 1,473,865 598,045
- ----------------------------------------------------------------------------------------------------
NET LOSS BEFORE THE FOLLOWING 612,680 235,166 1,916,563 714,272
Restructuring costs 501 -- 155,137 --
- ----------------------------------------------------------------------------------------------------
NET LOSS FOR THE PERIOD 613,181 235,166 2,071,700 714,272
DEFICIT, BEGINNING OF PERIOD 7,168,708 5,434,077 5,710,189 4,954,271
- ----------------------------------------------------------------------------------------------------
DEFICIT, END OF PERIOD $ 7,781,889 $ 5,669,243 $ 7,781,889 $ 5,669,243
====================================================================================================
LOSS PER SHARE $ 0.03 $ 0.01 $ 0.10 $ 0.04
====================================================================================================
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 21,571,885 18,328,319 21,571,885 18,328,319
====================================================================================================
F-2
DSI DATOTECH SYSTEMS INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
- ------------------------------------------------------------------------------------------------------------
Three Months Ended July 31, Nine Months Ended July 31,
2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net loss for the period $ (613,181) $ (235,166) $(2,071,700) $ (714,272)
Less item not requiring cash
Amortization 61,405 39,042 157,366 76,022
- ------------------------------------------------------------------------------------------------------------
(551,776) (196,124) (1,914,334) (638,250)
- ------------------------------------------------------------------------------------------------------------
Net change in non-cash working
capital items
Accounts receivable and advances (78,146) 19,559 (52,757) (12,822)
Prepaid expense 4,227 20,818 (6,447) (14,550)
Accounts payable and accrued liabilities 94,402 (57,710) 63,915 (214,348)
- ------------------------------------------------------------------------------------------------------------
Cash applied to operating activities (531,293) (213,457) (1,909,623) (879,970)
- ------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Investment in Gesture Recognition Technology -- (10,552) -- (31,634)
Capital assets (72,846) (28,781) (411,661) (40,378)
- ------------------------------------------------------------------------------------------------------------
Cash applied to investing activities (72,846) (39,333) (411,661) (72,012)
- ------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Shares issued for cash, net of share issue
costs 173,786 125,546 409,370 4,915,845
Share subscriptions -- (37,500) -- --
- ------------------------------------------------------------------------------------------------------------
Cash from financing activities 173,786 88,046 409,370 4,915,845
- ------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH
AND SHORT TERM DEPOSITS (430,353) (164,744) (1,911,914) 3,963,863
CASH AND SHORT TERM DEPOSITS,
BEGINNING OF PERIOD 2,597,754 4,192,616 4,079,315 64,009
- ------------------------------------------------------------------------------------------------------------
CASH AND SHORT TERM DEPOSITS,
END OF PERIOD $ 2,167,401 $ 4,027,872 $ 2,167,401 $ 4,027,872
============================================================================================================
F-3
DSI DATOTECH SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JULY 31, 2001
(Unaudited)
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The accompanying unaudited interim financial statements are prepared
in accordance with generally accepted accounting principles ("GAAP")
in Canada. They do not include all of the information and
disclosures required by Canadian GAAP for annual financial
statements. In the opinion of management, all adjustments considered
necessary for fair presentation have been included in these
financial statements. The interim financial statements should be
read in conjunction with the Company's financial statements
including the notes thereto for the year ended October 31, 2000.
The Company's wholly owned subsidiary, Interactive Technologies Ltd.
("Interactive"), has been inactive since its incorporation. It is
management's intention to allow the charter on Interactive to lapse.
Certain amounts from the prior period have been reclassified to
conform to the current period's presentation.
(b) Change in Accounting Policy
(i) Income Tax
In the first quarter of 2001, the Company retroactively
adopted the new Recommendations of the Canadian Institute of
Chartered Accountants for accounting for income taxes, which
requires the use of the asset and liability method. This
change has been applied retroactively without restatement of
prior periods. Under this method of tax allocation, future
income tax assets and liabilities are determined based on
differences between the financial statement carrying values
and their respective income tax basis (temporary differences).
Future income tax assets and liabilities are measured using
the tax rates expected to be in effect when the temporary
differences are likely to reverse. The effect of future income
tax assets and liabilities of a change in tax rates is
included in operations in the period in which the change is
enacted or substantially assured. The amount of future income
tax assets recognized is limited to the amount of the benefit
that is likely to be realized.
Prior to adoption of the new recommendations, income tax
expense was determined using the deferral method of tax
allocation. Under this method, future income tax expense was
based on differences in the recognition of revenues and
expenses for income tax and financial reporting purposes.
The adoption of the new standard had no effect on net loss for
the nine months ended July 31, 2001.
(ii) Revenue Recognition
Revenue from the licensing of technology is recognized when
the Company has completed or fulfilled the terms of the
licensing agreement including delivery, acceptance and any
elements essential pursuant to the terms of the licensing
agreement.
Revenue from the granting of options to acquire the rights to
exploit the technology is recognized upon fulfillment of terms
pursuant to the option agreements and when collectibility is
assured.
F-4
DSI DATOTECH SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JULY 31, 2001
(Unaudited)
- --------------------------------------------------------------------------------
2. INVESTMENT IN GESTURE RECOGNITION TECHNOLOGY
Acquisition and development costs to date:
--------------------------------------------------------------------------
Acquisition costs $ 246,830
Development costs
Balance, October 31, 2000 and July 31, 2001 1,302,913
--------------------------------------------------------------------------
1,549,748
Less: accumulated amortization (694,095)
--------------------------------------------------------------------------
$ 855,653
==========================================================================
On August 22, 2000 the Company entered into an Option and License
agreement with Security Biometrics Inc. ("SBI"). Under this agreement, SBI
has the financial obligation of US$3,000,000 which was due July 22, 2001.
As payment has not been received, SBI has been in contact with DSI and has
provided written confirmation of its intention to correct this breach. DSI
has taken this request under advisement.
3. CAPITAL ASSETS
--------------------------------------------------------------------------
Accumulated Net Book
Cost Amortization Value
--------------------------------------------------------------------------
Furniture and equipment $235,361 $ 47,710 $187,651
Computer equipment 271,433 106,822 164,611
Leasehold improvements 205,691 30,944 174,747
--------------------------------------------------------------------------
$712,485 $185,476 $527,009
==========================================================================
4. SHARE CAPITAL
(a) The authorized share capital consists of 100,000,000 common shares
without par value.
Issued:
--------------------------------------------------------------------------
No. of Shares Amount
--------------------------------------------------------------------------
Balance, October 31, 2000 21,166,970 $ 10,807,610
--------------------------------------------------------------------------
Issued during the period
For cash
- exercise of options 330,750 132,300
- exercise of warrants 654,214 277,070
--------------------------------------------------------------------------
984,964 409,370
--------------------------------------------------------------------------
22,151,934 11,216,980
Less:
Company shares held (57,600) (46,833)
--------------------------------------------------------------------------
Balance, July 31, 2001 22,094,334 $ 11,170,147
==========================================================================
F-5
DSI DATOTECH SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JULY 31, 2001
(Unaudited)
- --------------------------------------------------------------------------------
4. SHARE CAPITAL
(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.
The following summarizes information about stock options granted and
outstanding at July 31, 2001, and changes during the period then
ended:
--------------------------------------------------------------------------
Weighted Average
No. of Options Exercise Price
--------------------------------------------------------------------------
Outstanding, October 31, 2000 2,408,500 $ 0.75
Granted 1,395,000 0.50
Exercised (330,750) 0.40
Cancelled/expired (791,750) 0.81
--------------------------------------------------------------------------
Outstanding, July 31, 2001 2,681,000 $ 0.65
==========================================================================
Options exercisable, July 31, 2001 1,622,500 $ 0.70
==========================================================================
As at July 31, 2001, outstanding options to acquire 2,691,000 common
shares are exercisable as follows:
--------------------------------------------------------------------------
No. of Exercise Expiry
Shares Price Date
--------------------------------------------------------------------------
230,000 0.75 May 9, 2002
37,500 0.40 November 4, 2002
45,000 0.40 November 18, 2002
270,000 0.80 January 13, 2003
370,000 1.00 June 2, 2003
50,000 0.50 September 22, 2003
112,500 0.40 December 11, 2003
20,000 0.40 January 4, 2004
22,000 0.40 November 18, 2004
99,000 1.12 April 12, 2005
50,000 0.80 June 2, 2005
20,000 1.12 June 28, 2005
20,000 1.12 September 25, 2005
350,000 0.50 November 14, 2005
340,000 0.50 February 22, 2006
145,000 0.50 April 25, 2006
500,000 0.50 June 25, 2006
---------
2,681,000
=========
F-6
DSI DATOTECH SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JULY 31, 2001
(Unaudited)
- --------------------------------------------------------------------------------
4. SHARE CAPITAL (continued)
(d) As at July 31, 2001, outstanding warrants to purchase 2,792,048
common shares are exercisable as follows:
--------------------------------------------------------------------------
No. of Exercise Expiry
Warrants Shares Price Date
------------------------------------- --------- ------------------
2,023,426 $ 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
=========
2,792,048
=========
* agent's compensation warrants exercisable to acquire 91,200
and 35,785 units, each unit consisting of one common share and
share purchase warrants exercisable to acquire 45,600 common
shares at $2.16 per share until April 10, 2002 and to acquire
17,893 common shares at $2.16 per share to April 20, 2002
respectively.
5. RELATED PARTY TRANSACTIONS
A total of $324,000 was paid to three companies controlled by directors
and a former officer of the Company for management and administrative
services.
Included in restructuring costs is an amount of $100,000 paid to a company
controlled by a director for a signing bonus.
6. SEGMENT DISCLOSURES
The Company is organized and managed as a single reportable business
segment. The Company's operations are substantially all related to the
research, development, sales and licensing of its Gesture Recognition
Technology.
Financial information on the Company's geographic areas is as follows:
--------------------------------------------------------------------------
Three Months Ended Nine Months Ended
July 31, July 31,
2001 2000 2001 2000
--------------------------------------------------------------------------
Revenue
Canada $ 25,976 $ 66,470 $129,861 $ 72,828
United States 150,000 147,730 $153,750 $147,730
--------------------------------------------------------------------------
$175,976 $214,200 $283,611 $220,558
==========================================================================
All of the Company's assets are located in Canada.
F-7
DSI DATOTECH SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JULY 31, 2001
(Unaudited)
- --------------------------------------------------------------------------------
7. DIFFERENCES BETWEEN CANADIAN AND UNITED STATED GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (GAAP)
These financial statements have been prepared in accordance with Canadian
GAAP which differs in some respects from U.S. GAAP. The differences
between Canadian and U.S. GAAP are summarized below:
(a) Comprehensive Income
Under U.S. GAAP, Statement of Financial Accounting Standards No. 130
(SFAS 130), "Reporting Comprehensive Income", establishes standards
for the reporting and display of comprehensive income and its
components in general-purpose financial statements. Items defined as
other comprehensive income are separately classified in the
financial statements and the accumulated balance of other
comprehensive income (loss) is reported separately in shareholders'
equity on the balance sheet. For the periods ended July 31, 2001 and
2000, the Company's comprehensive loss was the same as its net loss.
(b) Loss Per Share
The calculation of loss per share in accordance with U.S. GAAP
corresponds with that in Canada, except as follows:
Pursuant to the Requirements of SFAS No. 128, shares issued on a
contingent basis are excluded from the calculation of loss per
share.
- Loss per share under U.S. GAAP has been restated to exclude a
total of 3,068,750 common shares issued at $0.01 per share in
prior years. The shares were issued pursuant to the policies
of the Canadian Venture Exchange (the "Exchange") whereby
shares may be issued to senior directors at a discount under
an incentive program. The shares are held in escrow and may be
released from escrow only upon the fulfillment of performance
criteria as set out under the rules of the Exchange and the
attainment of Exchange approval for such release.
Consideration received for the shares is credited to share
capital upon the issuance of the shares. Compensation expense
will be recognized upon the release of the shares from escrow
and measures using the intrinsic value on the date the
performance criteria is satisfied.
(c) Compensatory Options
i) Employees
The following summarizes information about employee stock options
granted and outstanding at July 31, 2001, and changes during the
period then ended:
--------------------------------------------------------------------------
Nine Months Ended July 31, 2001
--------------------------------------------------------------------------
Weighted Average
No. of Options Exercise Price
--------------------------------------------------------------------------
Outstanding at October 31, 2000 599,500 $0.72
Granted 615,000 0.50
Exercised (180,750) 0.40
Expired/Cancelled (366,750) 0.48
--------------------------------------------------------------------------
Outstanding at July 31, 2001 667,000 $0.52
--------------------------------------------------------------------------
Options exercisable at
July 31, 2001 228,250 $0.61
--------------------------------------------------------------------------
The weighted average fair value of the stock options granted during
the period ended July 31, 2001 was $0.31. Summary information about
the 667,000 options outstanding at July 31, 2001 follows:
--------------------------------------------------------------------------
Options Options Weighted
Exercisable Outstanding Average
July 31, 2001 July 31, 2001 Remaining Life
--------------------------------------------------------------------------
Range of Exercise Price
$0.40 to $0.50 180,750 597,000 4.6 years
$1.12 47,500 70,000 3.0 years
--------------------------------------------------------------------------
228,250 667,000 4.4 years
==========================================================================
Pro-forma information regarding net loss and loss per share is
required by SFAS 123, Accounting for Stock-Based Compensation, 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.
F-8
DSI DATOTECH SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JULY 31, 2001
(Unaudited)
- --------------------------------------------------------------------------------
7. DIFFERENCES BETWEEN CANADIAN AND UNITED STATED GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (GAAP) (continued)
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 period ended July 31, 2001.
--------------------------------------------------------------------------
Risk-free interest rate 3.25%
Expected dividend yield --
Expected stock price volatility 78%
Expected life in years 3.97%
--------------------------------------------------------------------------
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 the period ended July
31, 2001 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:
--------------------------------------------------------------------------
Net loss, under U.S. GAAP $ 2,011,550
Pro-forma net loss $ 2,070,376
--------------------------------------------------------------------------
Basic and diluted loss per share $ 0.11
Pro-forma basic and diluted
loss per share $ 0.11
--------------------------------------------------------------------------
Weighted average number of shares
outstanding 18,503,135
--------------------------------------------------------------------------
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
The following summarizes information about non-employee stock
options granted and outstanding at July 31, 2001 and changes during
the period then ended:
--------------------------------------------------------------------------
Weighted Average
No. of Options Exercise Price
--------------------------------------------------------------------------
Outstanding at October 31, 2000 1,809,000 $0.76
Granted 780,000 0.50
Exercised (150,000) 0.40
Expired (425,000) 0.80
--------------------------------------------------------------------------
Outstanding at July 31, 2001 2,014,000 $0.68
--------------------------------------------------------------------------
Options exercisable at
July 31, 2001 1,394,250 $0.72
--------------------------------------------------------------------------
Stock options granted to non-employees are accounted for using the
fair value method, in accordance with SFAS No. 123. The fair values
of the options were estimated using the Black-Scholes Option
Pricing Model, with the following weighted average assumptions for
the grants made in the period ended July 31, 2001.
Risk-free interest rate 3.25%
Expected dividend yield --
Expected stock price volatility 78%
Expected life in years 2.8
Summary information about the Company's non-employee options
outstanding at July 31, 2001 is as follows:
--------------------------------------------------------------------------
Options Options Weighted
Summary of Exercisable Outstanding Average
Exercise Prices July 31, 2001 July 31, 2001 Remaining Life
--------------------------------------------------------------------------
$0.40 195,000 195,000 1.8
0.50 332,500 830,000 4.3
0.75 230,000 230,000 0.8
0.80 307,500 320,000 1.8
1.00 277,500 370,000 1.8
1.12 51,750 69,000 1.7
--------------------------------------------------------------------------
1,394,250 2,014,000 2.8
==========================================================================
(d) Difference in Accounting Policy
Under Canadian GAAP, the Company has capitalized certain acquisition
and development costs related to the investment in Gesture
Recognition Technology. Under U.S. GAAP, pursuant to the
requirements under SFAS No. 86, all costs are charged to research
and development expenses when incurred until technical feasibility
has been established for the product. Thereafter, all software
production costs shall be capitalized and subsequently reported at
the lower of amortized cost or net realizable value. Capitalized
costs will be amortized based on current and future revenue for the
product with an annual minimum equal to the straight-line
amortization over the remaining estimated economic life of the
product.
F-9
DSI DATOTECH SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JULY 31, 2001
(Unaudited)
- --------------------------------------------------------------------------------
7. DIFFERENCES BETWEEN CANADIAN AND UNITED STATED GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (GAAP) (continued)
(e) Reconciliation
The effect of the differences between Canadian GAAP and U.S. GAAP on
the balance sheets and statements of operations and deficit and cash
flows is summarized as follows:
Balance Sheets
Increase (decrease) in accounts to comply with U.S. GAAP:
- --------------------------------------------------------------------------------
July 31, October 31,
2001 2000
- --------------------------------------------------------------------------------
Total assets under Canadian GAAP $ 3,664,852 $ 5,263,267
Decrease in Investment in Gesture
Recognition Technology (855,653) (915,803)
- --------------------------------------------------------------------------------
Total assets under U.S. GAAP $ 2,809,199 $ 4,347,464
================================================================================
Shareholders' equity under Canadian GAAP $ 3,388,258 $ 5,050,588
Increase in deficit due to the write-off
of the Investment in Gesture
Recognition Technology (855,653) (915,803)
- --------------------------------------------------------------------------------
Total shareholder's equity under
U.S. GAAP $ 2,532,605 $ 4,134,785
================================================================================
F-10
DSI DATOTECH SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JULY 31, 2001
(Unaudited)
- --------------------------------------------------------------------------------
7. DIFFERENCES BETWEEN CANADIAN AND UNITED STATED GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (GAAP) (continued)
Statements of Operations and Deficit
- --------------------------------------------------------------------------------------------------------------------------------
Three Months Ended July 31, Nine Months Ended July 31,
2001 2000 2001 2000
- --------------------------------------------------------------------------------------------------------------------------------
Net loss under Canadian GAAP $ (613,181) $ (235,166) $(2,071,700) $ (714,272)
Decrease in amortization of
Investment in gesture recognition
technology 20,050 30,820 60,150 58,820
Increase in research and development
and expense -- (10,552) -- (31,634)
- --------------------------------------------------------------------------------------------------------------------------------
Net loss under U.S. GAAP $ (593,131) $ (214,898) $(2,011,550) $ (687,086)
================================================================================================================================
Basic and diluted net loss per share,
under U.S. GAAP $ (0.03) $ (0.10) $ (0.11) $ (0.04)
================================================================================================================================
Weighed average number of shares
outstanding 18,503,135 15,259,569 18,503,135 15,259,569
================================================================================================================================
Statements of Cash Flows
- --------------------------------------------------------------------------------------------------------------------------------
Three Months Ended July 31, Nine Months Ended July 31,
2001 2000 2001 2000
- --------------------------------------------------------------------------------------------------------------------------------
Cash applied to operating activities
under Canadian GAAP $ (531,293) $ (213,457) $(1,909,623) $ (879,970)
Increase in research and
development expenses -- (10,522) -- (31,634)
- --------------------------------------------------------------------------------------------------------------------------------
Cash applied to operating activities
under U.S. GAAP $ (531,293) $ (224,009) $(1,909,623) $ (911,604)
- --------------------------------------------------------------------------------------------------------------------------------
Cash applied to investing activities
under Canadian GAAP $ (72,846) $ (39,333) $ (411,661) $ (72,012)
Decrease in Investment in Gesture
Recognition Technology -- 10,552 -- 31,634
- --------------------------------------------------------------------------------------------------------------------------------
Cash applied to investing activities
under U.S. GAAP $ (72,846) $ (28,781) $ (411,661) $ (40,378)
================================================================================================================================
F-11
BC FORM 51-901F
Quarterly and Year End Report
Incorporated as part of: |X| Schedule A
|_| Schedules B & C
ISSUER DETAILS:
For Quarter Ended: October 31, 2000
---------------------------------------------------
Date of Report: December 22, 2000
---------------------------------------------------
Name of Issuer: DSI Datotech Systems Inc.
---------------------------------------------------
Issuer's Address: 300 - 905 West Pender Street
---------------------------------------------------
Vancouver, B.C. V6C 1L6
---------------------------------------------------
Issuer's Fax Number: (604) 685-9159
---------------------------------------------------
Issuer's Phone Number: (604) 685-9109
---------------------------------------------------
Contact Person: Robert M. Egery
---------------------------------------------------
Contact Position: President
---------------------------------------------------
Contact Telephone Number: (604) 685-9109
---------------------------------------------------
Contact E-mail: lemtra@videotron.ca
---------------------------------------------------
Web Site Address: www.dato.com
---------------------------------------------------
CERTIFICATE
The Schedule(s) required to complete this Quarterly Report are attached and the
disclosure contained therein has been approved by the Board of Directors. A copy
of this Quarterly Report will be provided to any shareholder who requests it.
Please note this form is incorporated as part of both the required filing of
Schedule A and Schedules B & C.
Edward C. Pardiak "Edward C. Pardiak" 00/12/22
- --------------------------------------------------------------------------------
Name of Director Signed (typed) Date Signed (YY/MM/DD)
Robert M. Egery "Robert M. Egery" 00/12/22
- --------------------------------------------------------------------------------
Name of Director Signed (typed) Date Signed (YY/MM/DD)
F-12
DSI Datotech Systems Inc.
CONSOLIDATED Financial Statements
OCTOBER 31, 2000 and 1999
F-13
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The consolidated financial statements of DSI Datotech Systems Inc. are the
responsibility of the Company's management. The consolidated financial
statements are prepared in accordance with accounting principles generally
accepted in Canada and reflect management's best current estimates.
Management has developed and maintains a system of internal control to ensure
that the Company's assets are protected from loss or improper use, transactions
are authorized and properly recorded and financial records are reliable.
The Board of Directors carries out its responsibilities for these financial
statements through its Audit Committee. The Audit Committee meets periodically
with management and the auditor to review the financial statements and the
results of audit examinations.
G. Ross McDonald, C.A. has audited the consolidated financial statements and his
report outlines the scope of his examination and gives his opinion on the
financial statements.
"Robert M. Egery"
------------------------------------
Robert M. Egery
President
F-14
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 audits 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.
"G. Ross McDonald" (signed)
- -----------------------------
G. Ross McDonald
Chartered Accountant
Vancouver, British Columbia, Canada
December 13, 2000
F-15
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-16
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 350,000 248,200
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-17
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
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
- --------------------------------------------------------------------------------
F-18
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-19
DSI DATOTECH SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 2000 AND 1999
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES (continued)
(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.
(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) Revenue recognition
Revenue from the licensing of technology is recognized when the
Company has completed or fulfilled the terms of the licencing
agreement including delivery, acceptance and any elements essential
pursuant to the terms of the licensing agreement.
Revenue from the granting of options to acquire the rights to
exploit the technology is recognized upon fulfillment of terms
pursuant to the option agreements and when collectibility is
assured.
(j) Comparative amounts
Certain amounts in the prior year have been restated to confirm with
the current year's presentation.
F-20
DSI DATOTECH SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 2000 AND 1999
- --------------------------------------------------------------------------------
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.
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).
F-21
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)
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-22
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 Shares Amount No. of 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-23
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-24
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)).
F-25
DSI DATOTECH SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 2000 AND 1999
- --------------------------------------------------------------------------------
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.
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.
F-26
DSI DATOTECH SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 2000 AND 1999
- --------------------------------------------------------------------------------
7. CONTINGENT LIABILITIES AND COMMITMENTS (continued)
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.
(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-27
DSI DATOTECH SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 2000 AND 1999
- --------------------------------------------------------------------------------
9. SEGMENT DISCLOSURES
The Company is organized and managed as a single reportable business
segment. The Company's operations are substantially all related to the
research, development and sales of its Gesture Recognition Technology.
Financial information on the Company's geographic areas is as follows:
--------------------------------------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------
Revenue
Canada $145,720 $ 9,589 $ --
United States 631,480 -- --
--------------------------------------------------------------------------
$777,200 $ 9,589 $ --
==========================================================================
All of the Company's assets are located in Canada.
10. DIFFERENCES BETWEEN CANADIAN AND UNITED STATED GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (GAAP)
These consolidated financial statements have been prepared in accordance
with Canadian GAAP which differs in some respects from U.S. GAAP. The
differences between Canadian and U.S. GAAP are summarized below:
(a) Income Tax
Under Canadian GAAP until December 31, 1999, corporate income taxes
were accounted for using the deferral method of income tax
allocation whereby deferred taxes are provided on differences
between accounting and taxable income due to the difference in the
timing of recognition of items in income for accounting and tax
purposes ("timing differences"). Under U.S. GAAP, corporate income
taxes are accounted for using the liability method of income tax
allocation, which is comparable to the Canadian standard adopted in
2000, whereby future taxes are provided on "temporary differences"
which is a broader concept than "timing differences" and future tax
liabilities and assets are not offset against each other, as under
Canadian GAAP prior to 2000. Under U.S. GAAP and Canadian GAAP in
2000, future tax assets are reduced by a valuation allowance if,
based on the weight of available evidence, it is more likely than
not that some portion or all of the deferred tax assets will not be
realized.
F-28
DSI DATOTECH SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 2000 AND 1999
- --------------------------------------------------------------------------------
10. DIFFERENCES BETWEEN CANADIAN AND UNITED STATED GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (GAAP) (continued)
The Company's provision for income taxes (recovery) is made up as follows:
- --------------------------------------------------------------------------------
2000 1999 1998
- --------------------------------------------------------------------------------
Net loss under Canadian GAAP $ (755,218) $(1,125,451) $ (851,568)
Adjustments under U.S. GAAP
Decrease in amortization of
Investment in Gesture Technology 80,199 135,871 90,435
Increase in research and
development expenses (61,765) (37,353) (228,450)
- --------------------------------------------------------------------------------
Net loss under U.S. GAAP (736,784) (1,026,933) (989,583)
- --------------------------------------------------------------------------------
Income tax benefit computed at
Canadian statutory rate of 46% 338,920 472,389 455,208
Unrecognized tax losses (338,920) (472,389) (455,208)
- --------------------------------------------------------------------------------
Actual tax provision (recovery) -- -- --
================================================================================
Future income tax assets
Net tax losses carried forward (2,081,098) (1,837,834) (1,475,322)
Temporary differences on assets 63,784 105,803 272,320
Valuation allowance for future
income tax assets 2,017,314 1,732,031 1,203,002
- --------------------------------------------------------------------------------
Net future income tax assets -- -- --
Future income tax liabilities -- -- --
- --------------------------------------------------------------------------------
Future income tax assets, net $ -- $ -- $ --
================================================================================
(b) Comprehensive Income
Under U.S. GAAP, Statement of Financial Accounting Standards No. 130
(SFAS 130), "Reporting Comprehensive Income", establishes standards
for the reporting and display of comprehensive income and its
components in general-purpose financial statements. Items defined as
other comprehensive income are separately classified in the
financial statements and the accumulated balance of other
comprehensive income (loss) is reported separately in shareholders'
equity on the balance sheet. For fiscal years 2000, 1999 and 1998,
the Company's comprehensive loss was the same as its net loss.
F-29
DSI DATOTECH SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 2000 AND 1999
- --------------------------------------------------------------------------------
10. DIFFERENCES BETWEEN CANADIAN AND UNITED STATED GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (GAAP) (continued)
(c) Loss Per Share
The calculation of loss per share in accordance with U.S. GAAP
corresponds with that in Canada, except as follows:
- pursuant to the requirements of SFAS No. 128, shares issued on
a contingent basis are excluded from the calculation of loss
per share.
- Loss per share under U.S. GAAP has been restated to exclude a
total of 3,068,750 common shares issued at $0.01 per share in
prior years. The shares were issued pursuant to the policies
of the Canadian Venture Exchange (the "Exchange") whereby
shares may be issued to senior directors at a discount under
an incentive program. The shares are held in escrow and may be
released from escrow only upon the fulfillment of performance
criteria as set out under the rules of the Exchange and the
attainment of Exchange approval for such release.
Consideration received for the shares is credited to share
capital upon the issuance of the shares. Compensation expense
will be recognized upon the release of the shares from escrow
and measured using the intrinsic value on the date the
performance criteria is satisfied.
(d) Compensatory Options
i) Employees
The following summarizes information about employee 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 410,000 $0.61 250,000 $0.75
Granted 428,000 0.77 160,000 0.40
Exercised (109,750) 0.56 -- --
Expired/Cancelled (128,750) 0.66 -- --
- --------------------------------------------------------------------------------
Outstanding at end of year 599,500 $0.72 410,000 $0.61
================================================================================
Options exercisable at
end of year 401,000 $0.67 410,000 $0.61
================================================================================
The weighting average fair value of the stock options granted during
the year ended October 31, 2000 was $0.44. Summary information about
the 599,500 options outstanding at October 31, 2000 follows:
- --------------------------------------------------------------------------------
Options Options Weighted
Exercisable Outstanding Average
October 31, 2000 October 31, 2000 Remaining Life
- --------------------------------------------------------------------------------
Range of Exercise Price
$0.40 189,000 265,500 3.5 years
$0.75 to $0.80 125,000 140,000 2.5 years
$1.12 87,000 194,000 3.0 years
- --------------------------------------------------------------------------------
401,000 599,500 3.1 years
================================================================================
Pro-forma information regarding net loss and loss per share is
required by SFAS 123, Accounting for Stock-Based Compensation, 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 126% 78%
Expected life in years 3.06% 2.66%
--------------------------------------------------------------------
F-30
DSI DATOTECH SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 2000 AND 1999
- --------------------------------------------------------------------------------
10. DIFFERENCES BETWEEN CANADIAN AND UNITED STATED GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (GAAP) (continued)
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, under U.S. GAAP $ 736,784 $ 1,026,933
Pro-forma net loss $ 835,116 1,066,489
--------------------------------------------------------------------------
Basic and diluted loss per share $ 0.05 $ 0.09
Pro-forma basic and diluted
loss per share $ 0.05 $ 0.10
--------------------------------------------------------------------------
Weighted average number of shares
outstanding 15,924,146 11,219,480
--------------------------------------------------------------------------
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
The following summarizes information about non-employee 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 1,300,000 $0.66 1,150,000 $0.71
Granted 1,129,000 1.01 200,000 0.40
Exercised (327,500) 0.48 -- --
Expired (292,500) 1.57 (50,000) 0.80
- --------------------------------------------------------------------------------
Outstanding at end of year 1,809,000 0.76 1,300,000 $0.66
================================================================================
Options exercisable at
end of year 1,253,000 $0.71 1,300,000 $0.66
================================================================================
Stock options granted to non-employees are accounted for using the
fair value method, in accordance with SFAS No. 123. The fair values
of the options 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 6.22% 5.11%
Expected dividend yield -- --
Expected stock price volatility 126% 78%
Expected life in years 2.6 3.4
Summary information about the Company's non-employee options
outstanding at October 31, 2000 is as follows:
- --------------------------------------------------------------------------------
Options Options Weighted
Summary of Exercisable Outstanding Average
Exercise Prices October 31, 2000 October 31, 2000 Remaining Life
- --------------------------------------------------------------------------------
$0.40 221,000 345,000 2.5
0.50 50,000 50,000 0.9
0.75 480,000 480,000 1.3
0.80 352,500 450,000 3.2
1.00 92,500 370,000 2.6
1.12 57,000 114,000 2.5
- --------------------------------------------------------------------------------
1,253,000 1,809,000 2.3
================================================================================
(e) Difference in Accounting Policy
Under Canadian GAAP, the Company has capitalized certain acquisition
and development costs related to the investment in Gesture
Recognition Technology. Under U.S. GAAP, pursuant to the
requirements under SFAS No. 86, all costs are charged to research
and development expenses when incurred until technical feasibility
has been established for the product. Thereafter, all software
production costs shall be capitalized and subsequently reported at
the lower of amortized cost or net realizable value. Capitalized
costs will be amortized based on current and future revenue for the
product with an annual minimum equal to the straight-line
amortization over the remaining estimated economic life of the
product.
F-31
DSI DATOTECH SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 2000 AND 1999
- --------------------------------------------------------------------------------
10. DIFFERENCES BETWEEN CANADIAN AND UNITED STATED GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (GAAP) (continued)
(f) Reconciliation
The effect of the differences between Canadian GAAP and U.S. GAAP on
the consolidated balance sheets and consolidated statements of loss
and deficit and cash flows is summarized as follows:
Consolidated Balance Sheets
Increase (decrease) in accounts to comply with U.S. GAAP:
--------------------------------------------------------------------------
October 31, October 31,
2000 1999
--------------------------------------------------------------------------
Total assets under Canadian GAAP $5,263,267 $1,067,866
Decrease in Investment in Gesture
Recognition Technology (915,803) (934,237)
--------------------------------------------------------------------------
Total assets under U.S. GAAP $4,347,464 $ 133,629
==========================================================================
Shareholders' equity under Canadian GAAP $5,050,588 $ 832,501
Increase in deficit due to the write-off
of the Investment in Gesture
Recognition Technology (915,803) (934,237)
--------------------------------------------------------------------------
Total shareholder's equity (deficiency)
under U.S. GAAP $4,134,785 $ (101,736)
==========================================================================
F-32
DSI DATOTECH SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 2000 AND 1999
- --------------------------------------------------------------------------------
10. DIFFERENCES BETWEEN CANADIAN AND UNITED STATED GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (GAAP) (continued)
Consolidated Statements of Loss and Deficit
- ---------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended
October 31, October 31, October 31,
2000 1999 1998
- ---------------------------------------------------------------------------------------
Net loss under Canadian GAAP $ (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 under U.S. GAAP $ (736,784) $(1,026,933) $ (989,583)
=======================================================================================
Basic and diluted net loss per share,
under U.S. GAAP $ 0.05 $ 0.09 $ 0.10
=======================================================================================
Weighed average number of shares
outstanding 15,924,146 11,219,480 10,127,277
=======================================================================================
Consolidated Statements of Cash Flows
- ---------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended
October 31, October 31, October 31,
2000 1999 1998
- ---------------------------------------------------------------------------------------
Cash applied to operating activities
under Canadian GAAP $ (721,144) $ (703,770) $ (835,681)
Increase in research and development
expenses (61,765) (37,353) (228,450)
- ---------------------------------------------------------------------------------------
Cash applied to operating activities
under U.S. GAAP $ (782,909) $ (741,123) $(1,064,131)
- ---------------------------------------------------------------------------------------
Cash applied to investing activities
under Canadian GAAP $ (236,855) $ (61,669) $ (260,547)
Decrease in Investment in Gesture
Recognition Technology 61,765 37,353 228,450
- ---------------------------------------------------------------------------------------
Cash applied to investing activities
under U.S. GAAP $ (175,090) $ (24,316) $ (32,097)
=======================================================================================
F-33
FORM 61
Quarterly Report
Incorporated as part of: |X| Schedule A
|_| Schedules B & C
ISSUER DETAILS:
For Quarter Ended: October 31, 1999
--------------------------------------------------
Date of Report: February 9, 2000
--------------------------------------------------
Name of Issuer: DSI Datotech Systems Inc.
--------------------------------------------------
Issuer's Address: 712 - 525 Seymour Street
--------------------------------------------------
Vancouver, B.C. V6B 3H7
--------------------------------------------------
Issuer's Fax Number: (604) 685-9159
--------------------------------------------------
Issuer's Phone Number: (604) 685-9109
--------------------------------------------------
Contact Person: Elli Segev
--------------------------------------------------
Contact Position: President
--------------------------------------------------
Contact Telephone Number: (604) 685-9109
--------------------------------------------------
CERTIFICATE
The Schedule(s) required to complete this Quarterly Report are attached and the
disclosure contained therein has been approved by the Board of Directors. A copy
of this Quarterly Report will be provided to any shareholder who requests it.
Please note this form is incorporated as part of both the required filing of
Schedule A and Schedules B & C.
Elli Segev "Elli Segev" 99/02/09
- --------------------------------------------------------------------------------
Name of Director Signed (typed) Date Signed (YY/MM/DD)
Edward C. Pardiak "Edward C. Pardiak" 99/02/09
- --------------------------------------------------------------------------------
Name of Director Signed (typed) Date Signed (YY/MM/DD)
F-34
DSI DATOTECH SYSTEMS INC.
FINANCIAL STATEMENTS
OCTOBER 31, 1999 AND 1998
F-35
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The financial statements of DSI Datotech Systems Inc. are the responsibility of
the Company's management. The financial statements are prepared in accordance
with accounting principles generally accepted in Canada and reflect management's
best current estimates.
Management has developed and maintains a system of internal control to ensure
that the Company's assets are protected from loss or improper use, transactions
are authorized and properly recorded and financial records are reliable.
The Board of Directors carries out its responsibilities for these financial
statements through its Audit Committee. The Audit Committee meets periodically
with management and the auditor to review the financial statements and the
results of audit examinations.
G. Ross McDonald, C.A. has audited the financial statements and his report
outlines the scope of his examination and gives his opinion on the financial
statements.
"Elli Segev"
------------------------------------
Elli Segev
President
F-36
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 audits 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 9 to the
consolidated financial statements.
/s/ G. Ross McDonald
- --------------------
G. Ross McDonald
Chartered Accountant
Vancouver, British Columbia, Canada
February 9, 2000
F-37
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-38
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-39
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
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-40
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-41
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-42
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-43
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 Shares Amount No. of 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-44
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-45
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-46
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. DIFFERENCES BETWEEN CANADIAN AND UNITED STATED GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (GAAP)
These consolidated financial statements have been prepared in accordance
with Canadian GAAP which differs in some respects from U.S. GAAP. The
differences between Canadian and U.S. GAAP are summarized below:
(a) Income Tax
Under Canadian GAAP, corporate income taxes are accounted for using
the deferral method of income tax allocation whereby deferred taxes
are provided on differences between accounting and taxable income
due to the difference in the timing of recognition of items in
income for accounting and tax purposes ("timing differences"). Under
U.S. GAAP, corporate income taxes are accounted for using the
liability method of income tax allocation, whereby future taxes
are provided on "temporary differences" which is a broader concept
than "timing differences" and future tax liabilities and assets are
not offset against each other, as under Canadian GAAP. Under U.S.
GAAP, future tax assets are reduced by a valuation allowance if,
based on the weight of available evidence, it is more likely than
not that some portion or all of the deferred tax assets will not be
realized.
F-47
DSI DATOTECH SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS
For the Years Ended October 31, 1999 and 1998
10. DIFFERENCES BETWEEN CANADIAN AND UNITED STATED GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (GAAP) (continued)
The Company's provision for income taxes (recovery) is made up as
follows:
- ------------------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------
Net loss under Canadian GAAP $(1,125,451) $ (851,568) $ (822,449)
Adjustments under U.S. GAAP
Decrease in amortization of Investment
in Gesture Technology 135,871 90,435 91,890
Increase in research and development
expenses (37,353) (228,450) (313,698)
- ------------------------------------------------------------------------------------
Net loss under U.S. GAAP (1,026,933) (989,583) (1,044,257)
- ------------------------------------------------------------------------------------
Income tax benefit computed at Canadian
statutory rate of 46% 472,389 455,208 480,358
Unrecognized tax losses (472,389) (455,208) (480,358)
- ------------------------------------------------------------------------------------
Actual tax provision (recovery) -- -- --
====================================================================================
Future income tax assets
Net tax losses carried forward (1,837,834) (1,475,322) (1,217,281)
Temporary differences on assets 105,803 272,320 233,871
Valuation allowance for future income
tax assets 1,732,031 1,203,002 983,410
- ------------------------------------------------------------------------------------
Net future income tax assets -- -- --
Future income tax liabilities -- -- --
- ------------------------------------------------------------------------------------
Future income tax assets, net $ -- $ -- $ --
====================================================================================
(b) Comprehensive Income
Under U.S. GAAP, Statement of Financial Accounting Standards No. 130
(SFAS 130), "Reporting Comprehensive Income", establishes standards
for the reporting and display of comprehensive income and its
components in general-purpose financial statements. Items defined as
other comprehensive income are separately classified in the
financial statements and the accumulated balance of other
comprehensive income (loss) is reported separately in shareholders'
equity on the balance sheet. For fiscal years 1999, 1998 and 1997,
the Company's comprehensive loss was the same as its net loss.
F-48
DSI DATOTECH SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS
For the Years Ended October 31, 1999 and 1998
10. DIFFERENCES BETWEEN CANADIAN AND UNITED STATED GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (GAAP) (continued)
(c) Loss Per Share
The calculation of loss per share in accordance with U.S. GAAP
corresponds with that in Canada, except as follows:
- Pursuant to the requirements of SFAS No. 128, shares issued on
a contingent basis are excluded from the calculation of loss
per share.
- Loss per share under U.S. GAAP has been restated to exclude a
total of 3,068,750 common shares issued at $0.01 per share in
prior years. The shares were issued pursuant to the policies
of the Canadian Venture Exchange (the "Exchange") whereby
shares may be issued to senior directors at a discount under
an incentive program. The shares are held in escrow and may be
released from escrow only upon the fulfillment of performance
criteria as set out under the rules of the Exchange and the
attainment of Exchange approval for such release.
Consideration received for the shares is credited to share
capital upon the issuance of the shares. Compensation expense
will be recognized upon the release of the shares from escrow
and measured using the intrinsic value on the date the
performance criteria is satisfied.
(d) Compensatory Options
i) Employees
The following summarizes information about employee 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 250,000 $0.75 135,000 $0.75
Granted 160,000 0.40 170,000 0.68
Exercised -- -- -- --
Expired/Cancelled -- -- (55,000) 0.54
- --------------------------------------------------------------------------------
Outstanding at end of year 410,000 $0.61 250,000 $0.75
================================================================================
Options exercisable at
end of year 410,000 $0.61 250,000 $0.75
================================================================================
The weighted average fair value of the stock options granted during
the year ended October 31, 1999 was $0.25. Summary information about
the 410,000 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 20,000 4.7 years
$0.75 to $0.80 390,000 1.5 years
- --------------------------------------------------------------------------------
410,000 1.6 years
================================================================================
F-49
DSI DATOTECH SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS
For the Years Ended October 31, 1999 and 1998
10. DIFFERENCES BETWEEN CANADIAN AND UNITED STATED GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (GAAP) (continued)
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,
1999 and 1998.
-----------------------------------------------------------------------
1999 1998
-----------------------------------------------------------------------
Risk-free interest rate 5.11% 5.22%
Expected dividend yield -- --
Expected stock price volatility 78% 87%
Expected life in years 2.66 2.69
-----------------------------------------------------------------------
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, under U.S. GAAP $ 1,026,933 $ 989,583
Pro-forma net loss $ 1,066,489 1,052,116
-----------------------------------------------------------------------
Basic and diluted loss per share $ 0.09 $ 0.10
Pro-forma basic and diluted
loss per share $ 0.10 $ 0.10
-----------------------------------------------------------------------
Weighted average number of shares
outstanding 11,219,480 10,127,277
-----------------------------------------------------------------------
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
The following summarizes information about non-employee 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 1,150,000 $0.71 1,055,000 $0.80
Granted 200,000 0.40 745,000 0.70
Exercised -- -- -- --
Expired (50,000) 0.80 (650,000) 0.84
- --------------------------------------------------------------------------------
Outstanding at end of year 1,300,000 0.66 1,150,000 $0.71
================================================================================
Options exercisable at
end of year 1,300,000 $0.66 1,150,000 $0.71
================================================================================
Stock options granted to non-employees are accounted for using the
fair value method, in accordance with SFAS No. 123. The fair values
of the options were estimated using the Black-Scholes Option
Pricing Model, with the following weighted average assumptions for
the grants made in 1999 and 1998.
1999 1998
---- ----
Risk-free interest rate 5.11% 5.22%
Expected dividend yield -- --
Expected stock price volatility 78% 87%
Expected life in years 3.4 2.7
Summary information about the Company's non-employee options
outstanding at October 31, 1999 is as follows:
- --------------------------------------------------------------------------------
Options Weighted
Summary of Outstanding Average
Exercise Prices October 31, 1999 Remaining Life
- --------------------------------------------------------------------------------
$0.40 200,000 4.1
0.50 250,000 1.8
0.75 530,000 2.3
0.80 320,000 3.2
- --------------------------------------------------------------------------------
1,300,000 2.7
================================================================================
F-50
DSI DATOTECH SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS
For the Years Ended October 31, 1999 and 1998
10. DIFFERENCES BETWEEN CANADIAN AND UNITED STATED GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (GAAP) (continued)
(e) Difference in Accounting Policy
Under Canadian GAAP, the Company has capitalized certain acquisition
and development costs related to the investment in Gesture
Recognition Technology. Under U.S. GAAP, pursuant to the
requirements under SFAS No. 86, all costs are charged to research
and development expenses when incurred until technical feasibility
has been established for the product. Thereafter, all software
production costs shall be capitalized and subsequently reported at
the lower of unamortized cost or net realizable value. Capitalized
costs will be amortized based on current and future revenue for the
product with an annual minimum equal to the straight-line
amortization over the remaining estimated economic life of the
product.
(f) Reconciliation
The effect of the differences between Canadian GAAP and U.S. GAAP on
the consolidated balance sheets and consolidated statements of loss
and deficit and cash flows is summarized as follows:
Consolidated Balance Sheets
Increase (decrease) in accounts to comply with U.S. GAAP:
---------------------------------------------------------------------
October 31, October 31,
1999 1998
---------------------------------------------------------------------
Total assets under Canadian GAAP $1,067,866 $ 1,709,558
Decrease in Investment in Gesture
Recognition Technology (934,237) (1,032,755)
---------------------------------------------------------------------
Total assets under U.S. GAAP $ 133,629 $ 676,803
=====================================================================
Shareholders' equity under Canadian GAAP $ 832,501 $ 1,693,193
Increase in deficit due to the write-off
of the Investment in Gesture
Recognition Technology (934,237) (1,032,755)
---------------------------------------------------------------------
Total shareholder's equity (deficiency)
under U.S. GAAP $ (101,736) $ 660,438
=====================================================================
F-51
DSI DATOTECH SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS
For the Years Ended October 31, 1999 and 1998
10. DIFFERENCES BETWEEN CANADIAN AND UNITED STATED GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (GAAP) (continued)
Consolidated Statements of Loss and Deficit
- ----------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended
October 31, October 31, October 31,
1999 1998 1997
- ----------------------------------------------------------------------------------------
Net loss under Canadian GAAP $(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 under U.S. GAAP $(1,026,933) $ (989,583) $ (1,044,257)
========================================================================================
Basic and diluted net loss per share,
under U.S. GAAP $ 0.09 $ 0.10 $ 0.13
========================================================================================
Weighed average number of shares
outstanding 11,219,480 10,127,277 7,882,179
========================================================================================
Consolidated Statements of Cash Flows
- ----------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended
October 31, October 31, October 31,
1999 1998 1997
- ----------------------------------------------------------------------------------------
Cash applied to operating activities
under Canadian GAAP $ (703,770) $ (835,681) $ (629,098)
Increase in research and development
expenses (37,353) (228,450) (313,698)
- ----------------------------------------------------------------------------------------
Cash applied to operating activities
under U.S. GAAP $ (741,123) $(1,064,131) $ (942,796)
- ----------------------------------------------------------------------------------------
Cash applied to investing activities
under Canadian GAAP $ (61,669) $ (260,547) $ (310,911)
Decrease in Investment in Gesture
Recognition Technology 37,353 228,450 313,698
- ----------------------------------------------------------------------------------------
Cash applied to investing activities
under U.S. GAAP $ (24,316) $ (32,097) $ 2,787
========================================================================================
F-52