______________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________________________________________________________
Form 20-F/A
|_| REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934
-OR-
|x| ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the fiscal year ended January 31, 2004
-OR-
|_| TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED) for the transition period
from ______ to ______
Commission File Number: 0-30906
______________________________________________________________
DataMirror Corporation
(Exact name of Registrant as specified in its charter)
Ontario
(Jurisdiction of Incorporation)
3100 Steeles Avenue East
Suite 1100
Markham, Ontario, Canada
L3R 8T3
(905) 415-0310
(Address of Registrant's principal executive offices)
_______________________________________________________________
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Shares,
no par value
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 class of the issuer's
classes of capital or common stock as of the close of the period covered by
the annual report.
As at January 31, 2004, 11,364,952 Common Shares were issued and outstanding.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes |x| No |_|
Indicate by check mark which financial statement item the registrant has
elected to follow.
Item 17 |x| Item 18 |_|
1
TABLE OF CONTENTS
ITEM 1. Identity of Directors, Senior Management and Advisors.............3
ITEM 2. Offer Statistics and Expected Timetable...........................3
ITEM 3. Key Information...................................................4
ITEM 4. Information on the Registrant....................................11
ITEM 5. Operating and Financial Review and Prospects.....................25
ITEM 6. Directors, Senior Management and Employees.......................40
ITEM 7. Major Shareholders and Related Party Transactions................51
ITEM 8. Financial Information............................................54
ITEM 9. The Offer and Listing............................................54
ITEM 10. Additional Information...........................................56
ITEM 11. Quantitative and Qualitative Disclosures about Market Risk.......62
ITEM 12. Description of Securities Other than Equity Securities...........62
ITEM 13. Defaults, Dividend Arrearages and Delinquencies..................63
ITEM 14. Material Modifications to the Rights of Security Holders
and Use of Proceeds..............................................63
ITEM 15. Controls and Procedures..........................................63
ITEM 16A. Audit Committee Financial Expert.................................63
ITEM 16B. Code of ethics...................................................63
ITEM 16C. Principal Accountant Fees and Services...........................63
ITEM 17. FINANCIAL STATEMENTS.............................................65
ITEM 18. FINANCIAL STATEMENTS............................................108
ITEM 19. EXHIBITS........................................................108
2
PART I
ITEM 1. Identity of Directors, Senior Management and Advisors
A. Directors and Senior Management.
Information not required for annual report.
B. Advisors.
Information not required for annual report.
C. Auditors.
Information not required for annual report.
ITEM 2. Offer Statistics and Expected Timetable
Information not required for annual report.
3
ITEM 3. Key Information
A. Selected Financial Data.
The following selected consolidated financial information is derived
from the audited Consolidated Financial Statements of DataMirror Corporation
(together with its subsidiaries "DataMirror" or the "Company") presented in
accordance with Canadian generally accepted accounting principles ("GAAP"),
and must be read in conjunction with such Consolidated Financial Statements
and related notes thereto. These principles conform in all material respects
with accounting principles generally accepted in the United States, except as
described in Note 20 to the Company's consolidated financial statements.
Historic results are not necessarily indicative of the results that you may
expect for any other future period or for a full year. Data is in thousands of
Canadian dollars, except share and per share data which are reported in
Canadian dollars per share.
Statement of Income (Loss)
For the Years Ended January 31,
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Revenue(1)
Licence $29,087 $33,223 $28,592 $35,040 $29,009
Maintenance 25,354 23,210 20,562 14,065 8,562
Services 5,551 6,057 7,222 8,353 4,836
---------- ------------ ------------ ----------- ----------
59,992 62,490 56,376 57,458 42,407
---------- ------------ ------------ ----------- ----------
Cost of revenue(1)
Licence 234 239 257 514 379
Maintenance and services 11,389 12,605 13,464 11,184 7,322
---------- ------------ ------------ ----------- ----------
11,623 12,844 13,721 11,698 7,701
---------- ------------ ------------ ----------- ----------
Gross Margin 48,369 49,646 42,655 45,760 34,706
---------- ------------ ------------ ----------- ----------
Operating Expenses
Selling and marketing 20,524 21,289 21,542 23,815 19,549
Research and development 9,753 10,459 10,895 7,742 6,619
General and administration 7,946 8,812 9,088 9,668 7,181
Amortization of intangibles 3,098 2,740 3,244 1,570 1,147
---------- ------------ ------------ ----------- ----------
41,321 43,300 44,769 42,795 34,496
---------- ------------ ------------ ----------- ----------
Operating income (loss) 7,048 6,346 (2,114) 2,965 210
Investment income, net 1,146 611 859 1,333 286
Gain (loss) from investment in
PointBase, Inc.
Other income 279 0 0 0 0
Dilution gain 0 (4,595) 0 6,186 2,327
Equity loss 0 (2,081) (4,112) (4,709) (3,620)
---------- ------------ ------------ ----------- ----------
Income (loss) before income taxes 8,473 281 (5,367) 5,775 (797)
---------- ------------ ------------ ----------- ----------
Provision for income taxes
Current 3,758 2,762 428 877 356
Future (970) (328) (131) 190 276
---------- ------------ ------------ ----------- ----------
2,788 2,434 297 1,067 632
---------- ------------ ------------ ----------- ----------
Net income (loss) 5,685 (2,153) (5,664) 4,708 (1,429)
---------- ------------ ------------ ----------- ----------
Earnings per share
Basic 0.50 (0.19) (0.49) 0.41 (0.14)
Diluted 0.49 (0.19) (0.49) 0.40 (0.14)
Weighted average number of shares
[000's]
Basic 11,364 11,411 11,500 11,362 10,191
Diluted 11,640 11,411 11,500 11,856 10,191
Amounts presented which differ under
U.S. GAAP
Net loss 5,685 (2,404) (5,643) (1,388) (3,718)
EPS 0.50 (0.21) (0.49) (0.12) (0.36)
4
Notes:
(1) During the year ended January 31, 2001, the Company began
retroactively reporting maintenance revenues and services revenues
separately. During the year ended January 31, 2000, the Company
changed the classification of certain expenses on its consolidated
statements of income (loss). In particular, expenses relating to
the provision of maintenance and services have been reclassified
from operating expenses to cost of revenue. In each case,
information presented for prior years has been reclassified to
conform to the described presentation.
Balance Sheet Data(1)(2)
As at January 31,
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Cash, cash equivalents
and short term investments $42,006 $38,827 $36,495 $28,205 $10,219
Working capital 31,946 31,139 32,826 35,606 15,356
Total assets 86,223 81,347 79,603 88,445 41,052
Long-term obligations 1,076 1,538 1,205 2,903 1,582
Share capital 64,625 64,637 64,740 65,583 30,773
Total shareholders' equity 58,947 55,470 58,359 65,218 27,239
Number of shares outstanding 11,365 11,461 11,472 11,624 10,207
[000's] (3)
Amounts presented which differ
under U.S. GAAP
Total assets 93,837 85,901 79,597 88,548 39,663
Shareholders' equity 65,144 59,158(4) 58,354 65,322 25,850
Notes:
(1) Effective February 1, 2000 the Company retroactively adopted new
recommendations of the Canadian Institute of Chartered Accountants
with respect to accounting for income taxes, for the years ended
January 31, 2001 and 2000. As permitted under the new rules, prior
years' financial statements have not been restated. The cumulative
effect on the opening deficit as of February 1, 2000 of adopting the
recommendation was not material on current or prior periods.
(2) Effective February 1, 2002 the Company adopted new recommendations of
the Canadian Institute of Chartered Accountants with respect to
accounting for goodwill. The new standards require that goodwill and
intangible assets with indefinite lives no longer be amortized but
instead be tested for impairment at least annually. As permitted
under the new rules, prior years' financial statements have not been
restated.
(3) The number of Common Shares outstanding as at the dates noted excludes
options and warrants to purchase Common Shares outstanding on such
dates.
(4) Shareholders equity for fiscal 2003 is restated from that in
previously reported financial statements. See Note 20(b) to the
Company's consolidated financial statements.
Dividends
The Company has not paid any dividends on its Common Shares in the
last six completed financial years. The payment of any future dividends will be
at the discretion of the Company's Board of Directors and will depend upon,
among other things, the Company's future earnings, operations, capital
requirements and financial condition, general business conditions and
contractual restrictions on payment of dividends, if any.
5
EXCHANGE RATE INFORMATION
The Company publishes its consolidated financial statements in
Canadian dollars. In this annual report, except where otherwise indicated, all
dollar amounts are expressed in Canadian dollars. References to $ or Cdn $ are
to Canadian dollars and references to U.S.$ are to United States dollars.
The following table sets forth the high and low exchange rates for
each of the previous six months, and the average rate for each of the five most
recently completed financial years, calculated by using the average of the
exchange rates on the last day of each month during the year, based on the
inverse of the noon buying rate in the city of New York for cable transfers in
Canadian dollars as certified for customs purposes by the Federal Reserve Bank
of New York (the "Noon Buying Rate"):
Monthly Data Annual Data
------------ -----------
High Low Average
------ ------ -------
May, 2004 0.7364 0.7158
April, 2004 0.7637 0.7293 2004 0.7289
March, 2004 0.7583 0.7418 2003 0.6390
February, 2004 0.7629 0.7439 2002 0.6412
January, 2004 0.7880 0.7496 2001 0.6707
December, 2003 0.7738 0.7460 2000 0.6766
On May 28, 2004, the inverse of the Noon Buying Rate was U.S.$0.7317 = $1.00.
B. Capitalization and indebtedness.
Information not required for annual report.
C. Reasons for the offer and use of proceeds.
Information not required for annual report.
D. Risk factors.
Forward-looking statements in this annual report, including statements
regarding the Company's business which are not historical facts, are made
pursuant to the "safe harbor" provisions of the United States Private
Securities Litigation Reform Act of 1995 and pursuant to National Instrument
51-102 as implemented in rules, regulations and policies of Canadian securities
regulatory authorities. Forward-looking statements include statements of
estimates, expectations, objectives and plans (financial and otherwise). The
words "anticipate", "believe", "estimate", "expect" and similar expressions are
intended to identify forward-looking statements. Such statements reflect the
current views of the Company with respect to future events and are subject to
certain risks, uncertainties and assumptions. Numerous factors affect the
Company's operating results and could cause the Company's actual results to
differ materially from the results indicated by this annual report or by any
forward-looking statements made by, or on behalf of, the Company, and there can
be no assurance that future results will meet expectations, estimates or
projections. These factors include, but are not limited to, the following:
variability of quarterly operating results; dependence upon the continued
growth and success of the Company's software products; competition; the ability
to develop, market, support and acquire new products in an environment of
rapidly changing technology; dependence upon continued growth in the database
and enterprise data integration markets; dependence upon relationships with
complementary vendors and distribution channels; pursuing, completing and
integrating acquisitions could divert resources and may not achieve the
intended business objectives; the ability to recruit and retain key personnel;
risks of international operations, currency exchange rate fluctuations and
global economic conditions; possible software errors or defects; possible
infringement claims by third parties; and other factors discussed herein, in
the Company's Management Discussion and Analysis of Financial Conditions and
Results of Operations and other periodic filings with the United States
Securities and Exchange Commission, the Ontario Securities Commission, other
Canadian securities commissions, and other regulatory authorities. Should one
or more of these risks or uncertainties materialize, or should assumptions
underlying the forward-looking statements prove incorrect, actual results may
vary materially from those described herein as anticipated, believed, estimated
or expected. The Company does not intend, and does not assume any obligation,
to update these forward-looking statements.
An investment in the Company's Common Shares involves certain risks
and uncertainties which should be carefully considered. The following risk
factors, each of which could have a material adverse effect on the Company's
business, results of operations and financial condition, and on the value or
market price of the Company's Common Shares, should be considered carefully in
addition to the other information contained in this Form (including information
incorporated by reference herein).
6
Limited Positive Operating History; Uncertainty of Future Operating
Results. The Company's predecessor was incorporated on November 19, 1993 and
did not earn revenue until 1995. While the Company earned operating income for
the years ended January 31, 2000, 2001, 2003, and 2004, it incurred an
operating loss for the year ended January 31, 2002. In addition, while the
Company earned net income for the years ended January 31, 2001 and 2004, it
recorded net losses for the years ended January 31, 2000, 2002 and 2003.
Due to the Company's limited positive operating history, the uncertainty of
continued acceptance of the Company's products, the rapid evolution of
competitive software products, and the other risk factors discussed herein,
there can be no assurance that the Company will be able to sustain its recent
revenue growth or to achieve or sustain profitability or positive cash flow
from operations in the future. See "Operating and Financial Review and
Prospects".
Variability of Quarterly Operating Results. The Company's revenue and
results of operations have fluctuated significantly on a quarterly basis and
the Company expects substantial variability of future quarterly operating
results due to a variety of factors. These factors include: (i) the timing of
the release of new software products and enhanced versions of existing products
by the Company; (ii) the introduction of new products and product enhancements
by the Company's competitors; (iii) market acceptance of and demand for the
Company's products; (iv) the strength or weakness of global markets for the
Company's products and for computer platforms and databases with which the
Company's products operate, in particular the IBM iSeries (AS/400) platform;
(v) changes in operating expenses, including possible increases related to the
introduction of new and enhanced products; (vi) the timing or receipt of orders
from major customers; (vii) general economic factors, including the potential
negative effect of actual or perceived weakening of global economic conditions
on the level of spending by the Company's customers and prospective customers;
(viii) concentration of revenues in the last month of each quarter and in the
fourth quarter of the fiscal year; (ix) the proportion of revenues attributable
to licence fees versus service revenues; (x) changes in pricing policies by the
Company or its competitors; and (xi) the proportion of licence revenue closed
in the final week and day of each quarter. Accordingly, the Company believes
that period to period comparisons of results of operations are not necessarily
meaningful and historical results should not be relied upon as indicative of
future performance. The Company's operating expenses are based in part on
anticipated short term revenue levels and are relatively fixed in the short
term. As a result, if revenues are not realized as expected, the Company's
operating results could be materially adversely affected. Variability of future
quarterly operating results may cause volatility in the market price of the
Common Shares. In addition, due to some or all of the foregoing factors, it is
possible that in some future quarter the Company's operating results will be
below the expectations of market analysts and investors. In such event, the
price of the Company's Common Shares would likely be materially adversely
affected. See "Operating and Financial Review and Prospects".
Product Markets and Product Acceptance. To date, the Company has
derived a large portion of its licence revenue from its Transformation Server
and iCluster (a successor to High Availability Suite) products, particularly
for the IBM iSeries (AS/400) platform. The Company expects that sales of
Transformation Server software, and particularly Transformation Server for the
iSeries, as well as iCluster, will continue to represent a substantial portion
of its revenue for the foreseeable future. With the acquisition of Constellar
Hub and the release of iReflect, the Company expects to derive increased
revenues from products that operate in conjunction with Oracle databases. A
decline in the market for IBM's iSeries (AS/400) or other hardware platforms on
which the Company's products operate, or for applications and data management
software for such platforms, may occur as a result of new competitive products,
price, technological changes or other factors. The Company's future results of
operations will depend, in part, on achieving broader market acceptance of its
software products, as well as on its ability to continue to enhance these
products to meet the evolving needs of customers. Future results may also
depend on the strength or weakness of global markets for computer platforms and
databases with which the Company's products operate, including the IBM iSeries
(AS/400) platform and Oracle databases. A decline in these markets, or the
inability of the Company to achieve broader acceptance of its products or to
enhance its products as required to meet market demand, could have a material
adverse effect on the Company's business, results of operations and financial
condition. The Company's PointBase products depend on the acceptance and use of
Java and the promotion and backing of Java by Sun Microsystems, Inc. Any
adverse change on the viability or support for Java or Sun would have an
adverse effect on the market for PointBase products. See "Business Overview --
Competition".
Product Development, Acquisition and Technological Change. The market
for integration software is characterized by rapid technological change and
frequent new product introductions and enhancements. The Company must continue
to develop, create or acquire new products and update existing products to
reflect technological changes and market developments in hardware platforms,
operating systems and database technology platforms in order to compete
effectively. Such product development or acquisition may require the Company to
invest substantial amounts in research and development on an ongoing basis.
Although the Company may seek to acquire businesses or technologies from time
to time, there can be no assurance that any such acquisition will be available
on acceptable terms or at all, or that the Company will be able to successfully
consummate or integrate any such potential acquisition. The development cycle
for new products may be significantly longer than development cycles
experienced by the Company for its prior products and upgrades. The
introduction of products embodying new technologies and the emergence of new
industry standards could render the Company's existing products, and products
currently under development, obsolete and unmarketable. Hardware, operating
system, and database vendors continually add integration and resiliency
features to their products which may negatively impact the market for the
Company's products. The Company's future success will depend on its ability to
enhance its current products and to develop and introduce new products that
keep pace with technological developments, respond to customer requirements and
achieve market acceptance. In addition to decreasing revenues as products reach
the end of their natural life cycles, if the Company were unable to develop
upgrades or new products in a timely manner due to resource constraints or
technological or other reasons, the Company could experience decreases in
future sales and revenues. There can be no assurance that the Company's future
products or enhancements will keep pace with technological change or satisfy
market needs or that the Company will successfully develop, acquire or market
any future products.
7
Competition. The market for integration software is continuously
evolving and highly competitive. Given the variety of uses for the Company's
products and the range of platforms, operating systems and databases on which
they operate, the Company faces competition from many competitors, including
other independent software vendors, database vendors and large hardware
manufacturers who also offer data integration tools. In the financial year
ended January 31, 2004, the Company faced increased pricing pressures from
competitors and a new competitor iTera in the iSeries High Availability
marketplace. These competitors have continued to put pricing pressure on the
Company's core High Availability suite of products which decreased margins for
these products. The Company also faces significant competition from in-house
development departments within businesses that may develop custom software for
the specific data movement or integration requirements of their enterprises.
Current and potential competitors may have or may in the future establish
alliances or cooperative relationships among themselves or with potential
customers and may rapidly acquire significant market share. In addition, many
of the Company's competitors and potential competitors are or may be
significantly larger than the Company and have significantly longer operating
histories, greater financial resources and more market and brand recognition
than the Company. The Company believes that its ability to compete depends on
many factors within and outside its control, including product functionality,
performance, price, reliability, vendor and product reputation, customer
service and support, sales and marketing efforts, product distribution and
product releases both by the Company and its competitors. As the markets for
the Company's products expand, additional competition may emerge and
competitors may commit more resources to competitive products. There can be no
assurance that the Company will be able to compete successfully in current or
future markets or that competitive pressures will not have a material adverse
effect on the Company's business, results of operations and financial
condition. See "Business Overview -- Competition".
Dependence on Continued Growth of the Database and Data Integration
Markets and the Internet. The Company believes key future uses of its software
will be for integration and data and application resiliency (high systems
availability) applications, such as e-commerce applications, data distribution
to and from data warehouses and other data stores, enterprise application
integration, workload balancing, and back-up protection against planned and
unplanned system outages. Consequently, the Company's future financial
performance will depend in part on the growth in the utilization of databases
and in the number of data warehouse installations. The database and data
warehouse markets are rapidly evolving, and there can be no assurance that such
markets will be sustained at their current size or continue to grow. In
addition, to the extent that the Company's products may be used in electronic
commerce and Internet-based applications, the Company's future financial
performance will depend in part on the reliability, growth in use and public
acceptance of the Internet, particularly for the conduct of
business-to-business and business-to-consumer commercial transactions. The
Internet is a relatively new communications and commercial infrastructure which
is rapidly evolving. There can be no assurance that the Internet infrastructure
will be able to support the communications demands placed on it. In addition,
there is no assurance that the Company's products will adequately address the
requirements of customers or keep pace with changes in any of these markets.
Dependence on Relationships with Complementary Vendors. The Company
believes that it is important to develop, maintain, and enhance close
associations with complementary hardware and software vendors. In particular,
it is important that the Company maintain its existing relationship with IBM
due to the Company's dependence on the IBM iSeries market. In the High
Availability market, the Company depends on IBM rebates and incentives offered
to IBM customers who purchase software from IBM High Availability Business
Partners to encourage customers to purchase the Company's software. There can
be no assurance that IBM won't terminate the Company's status as a High
Availability Business Partner. This would have a direct negative impact on
sales of the Company's High Availability software. The Company also depends on
IBM to market and promote the Company and its products to IBM sales employees,
IBM business and channel partners and end user customers. There can be no
assurance that IBM will continue to market and promote the Company and its
products. There can be no assurance that IBM will not enter the market for High
Availability or integration software directly. There can be no assurance that
the Company will be able to maintain its existing relationships or enter into
new relationships. The Company's failure to do so could adversely affect the
portability of the Company's products to, and compatibility and integration
with, existing and new platforms, software applications and databases and the
timing of the introduction of new and enhanced products by the Company. In
addition, failure to do so could affect the Company's ability to leverage third
party distribution channels and increase its market presence. See "Business
Overview -- Sales and Marketing".
Dependence on Distribution Channels. A portion of the Company's
revenue is derived from the sale of its products through third parties. There
can be no assurance that the direct sales model will continue to work
effectively for new products or that it will scale effectively as the Company
attempts to grow its revenue from existing products. In addition, the Company
may not be able to retain a sufficient number of its existing or future
re-marketers and distributors, such re-marketers and distributors may not give
higher priority to the sale of other products (which could include products of
competitors) or that these re-marketers and distributors devote sufficient
resources to marketing of the Company's products. The Company depends on IBM
business partners to remarket and distribute its products and there can be no
assurance that IBM will continue to promote the Company to its business
partners. The performance and financial strength of third party re-marketers
and distributors is outside the control of the Company and the Company is
unable to predict the extent to which these parties will be successful in
marketing and selling the Company's products. A reduction in sales efforts or
discontinuance of sales of the Company's products by its re-marketers and
distributors could lead to reduced sales and could, as a result, have a
material adverse effect on the Company's business, results of operations and
financial condition. In addition, other methods of product distribution may
become important in the future, such as Internet access to products and
services and other electronic distribution. The Company's success will depend,
in part, upon its ability to attract and retain sufficient direct sales
personnel, to maintain and expand access to existing channels of distribution
and to gain access to new channels if and when they develop. See "Business
Overview -- Sales and Marketing".
8
Dependence on Key Personnel. The success of the Company depends upon
the continued contributions of key personnel including members of its senior
management, including Nigel Stokes, Chairman, President and Chief Executive
Officer, the loss of one or more of whom could have a material adverse effect
on the Company. There can be no assurance that the Company will be able to
retain these individuals or recruit other qualified personnel. The Company
believes that its future success will also depend in large part on its ability
to attract and retain highly skilled technical, managerial and sales and
marketing personnel. Competition for such personnel is intense, and there can
be no assurance that the Company will be successful in attracting and retaining
the personnel required to continue to grow.
Risks Associated with International Operations. The Company intends to
continue to make efforts to increase international sales and anticipates that
international sales will continue to account for a significant portion of its
revenue. These sales are subject to certain risks and costs associated with
international operations, including the difficulty and expense of staffing and
administering business abroad, difficulties in accounts receivable collection,
complications in complying with foreign laws and domestic and international
import and export laws and regulations, and costs related to localizing
products for foreign markets and translating and distributing products in a
timely manner. Significant international sales may also expose the Company to
greater risk from political and economic instability, potential adverse tax
consequences, unexpected changes in Canadian or other governmental policies
concerning import and export of goods and technology, other regulatory
requirements and tariffs and other trade barriers. In addition, while U.S. and
Canadian copyright law, international conventions and international treaties
may provide meaningful protection against unauthorized duplication of software,
the laws of some foreign jurisdictions may not protect proprietary rights to
the same extent as the laws of the United States or Canada. Software piracy has
been, and can be expected to be, a persistent problem for the software
industry. See "Business Overview -- Intellectual Property". There can be no
assurance that these factors will not be experienced by the Company in the
future or that they will not have a material adverse effect on the Company's
business, results of operations and financial condition. In addition,
international earnings may be subject to taxation by more than one jurisdiction
or other adverse tax consequences, which could also materially adversely affect
the Company's results of operations.
Currency Exchange Risk. As the Company realizes a significant portion
of its revenue in U.S. dollars and European currencies and incurs a significant
portion of its operating expenses in Canadian dollars, changes in exchange
rates between the Canadian dollar and the U.S. dollar or other foreign
currencies could affect the Company's operating results. In fiscal 2004 the
Canadian dollar's appreciation against the U.S. dollar was more rapid than that
in fiscal 2003. The Company's policy of hedging a portion of its foreign
currency denominated accounts receivable can provide only a short-term
protection against a limited portion of the Company's foreign currency
exposure. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
Global Economic Conditions. The Company's operating results may vary
significantly based upon the impact of actual or perceived changes in global
economic conditions on its customers and their spending on information
technology related products. The global economic environment since 2001 is more
uncertain than in recent periods and has the potential to have a material
adverse effect on the Company and its operating results. The Company's revenue
and operating results depend in large part on the overall demand for
integration and resiliency solutions, and related computer software and
services. A reduction of demand for integration and resiliency solutions and
related computer software and services caused by actual or perceived weakening
in the global economy may result in decreased revenues and lower growth rates
for the Company. Customers may defer or reconsider purchasing products from the
Company if they experience a downturn in their business or if there is a
downturn in general economic conditions.
Management of Growth. In recent years, due to internal growth, the
PointBase acquisition, the acquisition of a German subsidiary, the Constellar
acquisition, and the expansion into the Asia Pacific region, the Company has
experienced rapid growth in the scope of its operations. This growth has
resulted in increased responsibilities for the Company's existing personnel,
the hiring of additional personnel and, in general, higher levels of operating
expenses. In addition, the Company may continue to experience rapid growth in
the future, due to continued internal expansion, acquisition or other factors.
In order to manage its current operations and any future growth effectively,
the Company will need to continue to implement and improve its operational,
financial and management information systems, to hire, manage and retain its
employees, to integrate acquired businesses, technologies and personnel, if
any, with existing operations and to maintain its corporate culture including
technical and customer service standards. There can be no assurance that the
Company will be able to manage such growth effectively or that its management,
personnel or systems will be adequate to support growth in the Company's
operations.
Software Defects. The Company's products are technically complex and
may contain undetected errors or performance problems. There can be no
assurance that such errors or performance problems will not be discovered in
the future, which may cause delays in product introduction and shipments,
require design modifications or result in damage to the Company's reputation,
loss of revenue, loss of market share, delay in market acceptance or product
liability or other claims against the Company. Furthermore, there can be no
assurance that the Company will be able to correct any such errors on a timely
basis, or at all. Correction of errors or other defects may require significant
expenditures by the Company. Provisions contained in the Company's licence
agreements that are designed to limit the Company's exposure to potential
claims, as well as any liabilities arising from such claims, may not
effectively protect the Company against some or all of such claims and the
liability and costs associated therewith. Any of these possible occurrences
could have a material adverse effect on the Company's business, results of
operations or financial condition. See "Business Overview -- Research and
Development".
9
Protection of Intellectual Property. The Company relies on contractual
restrictions, such as confidentiality agreements and licenses, to establish and
protect its proprietary rights. Despite any precautions that the Company takes
to protect its intellectual property: (a) laws and contractual restrictions may
be insufficient to prevent misappropriation of its technology or deter others
from developing similar technologies; (b) current laws that prohibit software
copying provide only limited protection from software "pirates," and effective
trademark, copyright and trade secret protection may be unavailable or limited
in foreign countries; (c) other companies may claim common law trademark rights
based upon state, provincial or foreign laws that precede any registrations the
Company may receive for its trademarks; and (d) policing unauthorized use of
the Company's products and trademarks is difficult, expensive and
time-consuming, and the Company may be unable to determine the extent of this
unauthorized use. It is possible that the Company's intellectual property
rights could be successfully challenged by one or more third parties, which
could result in its inability to exploit, or its loss of the right to prevent
others from exploiting, certain intellectual property. In addition, reverse
engineering, unauthorized copying or other misappropriation of the Company's
technology could enable third parties to benefit from the Company's technology
without paying the Company for it, which would significantly harm the Company's
business. See "Business Overview -- Intellectual Property".
Potential Infringement Liability. As the number of software products
in the industry increases and the functionality of these products further
overlaps, it is possible that software developers will become increasingly
subject to infringement claims. Moreover, there has been an increase in the
number of patents issued in Canada and the United States relating to computer
software, and, accordingly, the risk of patent infringements in the industry
can be expected to increase, potentially resulting in an increase in patent
infringement claims. There can be no assurance that third parties will not
assert infringement claims against the Company in the future. Such claims may
result in costly litigation, diversion of management time and resources,
financial liability or a requirement that the Company suspend licensing of its
products or redesign its products, or enter into royalty or licensing
agreements. Furthermore, there can be no assurance that the Company would be
able to successfully redesign its products, if required, or that any such
royalty or licensing agreements will be available on reasonable terms, or at
all. Any such claim or the results thereof could have a material adverse effect
on the Company's business, results of operations or financial condition. See
"Business Overview -- Intellectual Property".
Dependence on Maintenance Renewals. The Company realises a significant
portion of its revenue from maintenance and support services provided in
connection with the products that it licences. There can be no assurance that
licencees will continue to renew their maintenance and support services or that
the Company will be able to charge its current rates for maintenance and
support services in the future.
Risks Related to Acquisitions. Pursuing, completing, and integrating
recent and potential acquisitions could divert management's attention and
financial resources and may not produce the desired business results. In the
past the Company has made acquisitions of products and businesses. In the
future, the Company may engage in additional selective acquisitions of other
products or businesses. There can be no assurance that management will be able
to identify additional suitable acquisition candidates available for sale at
reasonable prices, consummate any acquisition, or successfully integrate any
acquired product or business into the Company's operations. Further,
acquisitions may involve a number of special risks, including: (a) diversion of
management's attention; (b) disruption to the Company's ongoing business; (c)
failure to retain key acquired personnel; (d) difficulties in assimilating
acquired operations, technologies, products, and personnel; (e) unanticipated
expenses, events, or circumstances; and (f) assumption of legal and other
undisclosed liabilities. If the Company does not successfully address these
risks or any other problems encountered in connection with an acquisition, the
acquisition could have a material adverse effect on the Company's business,
results of operations, and financial condition. In addition, if the Company
proceeds with an acquisition, available cash may be used to complete the
transaction, or shares may be issued which could cause a dilution to existing
shareholders.
Enforcement of Judgements. The enforcement by investors of civil
liabilities under the federal securities laws of the United States may be
affected adversely because: the Company is incorporated under the laws of
Ontario; all of its officers and directors, with the exception of Bryan E. Plug
and Rean Pretorius, are non-residents of the United States; some or all of the
experts named in this annual report, if any, are residents of Canada; and the
Company and a substantial portion of its assets are located outside the United
States.
Seasonality. The Company depends on both direct and indirect sales for
the revenue for its iCluster and HA Suite products. The sale of these products
is often linked to the sale of IBM hardware by IBM Business Partners.
Generally, sales of these products are strongest in the calendar quarter ending
December 31st and are reflected in the Company's fourth fiscal quarter of each
year. There can no assurance that the Company will continue to be successful
with the indirect sales model or will continue to partner with motivated
distributors as the Company tries to grow revenue from these products. A weak
calendar fourth quarter for IBM hardware and IBM Business Partners will
adversely affect revenue from these products. In uncertain economic times
customers may delay purchases until the end of their budgetary years which
usually occur in the calendar fourth quarter. This may adversely affect revenue
in other quarters or for the year in the event of economic disruption in the
calendar fourth quarter.
10
ITEM 4. Information on the Registrant
A. History and development of the Registrant
The Company's legal and commercial name is DataMirror Corporation. The
predecessor corporation to DataMirror Corporation was incorporated in Canada
under the Business Corporations Act (Ontario) on November 19, 1993. This
predecessor corporation amalgamated under the Business Corporations Act
(Ontario) on February 1, 1996 with four other corporations to form DataMirror
Corporation as it is currently constituted. The Company's articles of
amalgamation were amended on December 6, 1996 to effect a 1 for 2 share
consolidation of the Common Shares and to create a class of preferred shares
issuable in series. On December 16, 1996, the Company completed an initial
public offering of 2,000,000 Common Shares priced at $5.50 per share and began
trading on the Toronto Stock Exchange. On September 3, 1997 the Company
completed a special warrant offering, selling 1,600,000 Special Warrants of the
Company priced at $10.35 per Special Warrant. Each Special Warrant entitled the
holder thereof upon exercise to purchase one Common Share without any
additional payment. All of the Special Warrants were exercised. On April 6,
2000, the Company completed an offering of 1,305,000 Common Shares priced at
$27.00 per share. On January 18, 2001, the Company's Common Shares were
approved for listing and began trading on the Nasdaq National Market.
The head office and principal place of business of the Company is
located at 3100 Steeles Avenue East, Suite 1100, Markham, Ontario, Canada L3R
8T3. The Company's phone number is (905) 415-0310 and its fax number is (905)
415-0340.
The Company's agent in the United States is DataMirror, Inc., 1600
Golf Road, Suite 1200, Rolling Meadows, IL, U.S.A, 60008. The agent's telephone
number is (847) 981-5066.
The Company has grown substantially over the past seven years. By
expanding its indirect sales network, direct international presence and
products and services, it has achieved substantial growth in its customer base,
employees and revenues, going from 500 customers, 135 employees, and $10
million in revenue for fiscal 1997 to over 1,850 customers, 299 employees, and
$60.0 million in revenue for fiscal 2004.
In March 1998, the Company provided initial capital funding and
entered into a strategic development agreement with PointBase, Inc.
("PointBase"), a developer and marketer of computer software products and a
provider of Java data management and synchronization products for the embedded
database and data mobility markets. PointBase's products are used in Java
server applications and are also embedded within Java applications. Since that
time the Company participated in several rounds of PointBase financing. At
January 31, 2003, the Company owned approximately 25 percent of the outstanding
shares of PointBase. The investment was written off when it became apparent
that measures taken by the management of PointBase would not result in
profitable or break-even operations in the near future and the Company's
investment had become impaired and, accordingly, the investment was written
down to the estimated fair value of nil. In April 2003, the Company made an
offer to acquire all of the issued and outstanding shares of PointBase.
PointBase determined not to proceed with the transaction and, as a result,
PointBase agreed to pay the Company an amount of $279,000 [U.S.$200,000] as
consideration for the cancellation of the offer, which is included in other
income for fiscal 2004. The Company ceased its efforts at that time to purchase
PointBase as conditions at the time did not warrant further discussions. On
December 18, 2003, the Company completed an agreement and plan of merger and
acquired one hundred percent control of PointBase in a cash transaction valued
at approximately $3.3 million at closing, with certain additional amounts which
may become payable contingent on future revenue or proceeds that may be
received in connection with the acquired business. No contingent consideration
was due for the period ended January 31, 2004. The losses from the Company's
investment in PointBase was nil in fiscal 2004 compared to an equity loss of
$2,081,000 and an impairment charge of $4,595,000 in fiscal 2003. The decrease
was due to the investment in PointBase having been fully written off at October
31, 2002. See "Operating and Financial Review and Prospects -- Acquisitions and
Investments" section.
In September 2000, the Company purchased certain assets and assumed
certain liabilities of Constellar Corporation. As a result of this acquisition,
DataMirror acquired the Constellar Hub EAI software technology as well as
certain related assets including computer equipment, office furniture and other
fixed assets, accounts receivable, customer contracts and alliance contracts,
and assumed certain related liabilities including accounts payable and deferred
revenue. The Constellar acquisition was valued at approximately $16,500,000
(including the full value of contingent consideration). The contingent
consideration consisted of up to U.S. $3,000,000 payable contingent on certain
revenue targets being generated from the acquired technology during the
three-year period ending August 31, 2003. In November 2001, a payment of
$724,000 was made in payment of contingent consideration of $856,000 for the
period ended August 31, 2001 less a holdback of $132,000 related to assets
purchased which are not realized. No payment of contingent consideration is due
for the periods ended August 31, 2002 and August 31, 2003.
On May 18, 2001, the Company purchased the technology and certain
related assets of saipx Inc. ("saipx"), a developer of pervasive mobile
computing and turnkey solutions for SAP for cash consideration of $293,000. The
Company's Pervasive Gateway, Synapse Agility and Synapse Mobility products are
based on saipx technology.
11
On June 8, 2001 the Company purchased the technology and certain
related assets of BDI Systems, Inc. ("BDI"). BDI developed bi-directional,
Java-based, data transformation software that exchanges data between XML
(eXtensible Markup Language), relational database and text formats, as well as
web-based reporting. The Company's Transformation Server for XML product
includes technology acquired from BDI and the Company's DB/XML Transform and
DB/XML Vision products are based on BDI technology. Total consideration for the
transaction was cash of $424,000 and 50,000 shares of common stock with a value
of $307,000 to be released from escrow over two years. The assets acquired have
been accounted for as acquired technology of $424,000 and deferred compensation
of $307,000. The technology was amortized over a period of three years. The
deferred compensation was amortized over two years.
On March 18, 2002, the Company announced its intention to make a
take-over bid for all of the shares of Idion Technology Holdings Limited
("Idion"), a South African company listed on the JSE Securities Exchange
("JSE") under the symbol IDI, in a cash bid valued at $9.8 million. On April
18, 2002, the bid was increased to $18.9 million, and subsequently, on May 8,
2002, the bid was further increased to $30.4 million. On July 4, 2002, the
Company closed its bid to acquire Idion, having not been successful in
completing the take-over. At January 31, 2004, the Company owned approximately
48,269,000 or 42.61% of Idion's outstanding common shares acquired at a cost of
$12,185,000. The Company announced on May 14, 2004 that it had sold all of its
shares of Idion in a market trade executed through the facilities of the JSE.
The Company sold 48,269,085 shares of Idion at a price of ZAR 2.10 per share.
Based on the exchange rates on settlement (ZAR1=CDN.2025), the Company received
net proceeds of CDN$19.9 million after brokerage and advisory fees, had a
pre-tax gain of approximately CDN$7.6 million, and an after tax gain of CDN$6.3
million. See the "Operating and Financial Review and Prospects -- Acquisitions
and Investments" section.
On January 7, 2003, the Company acquired the technology and certain
related assets of SmartSales Inc., a developer of CRM solutions, in a cash
transaction. The Company acquired current assets valued at $15,000, capital
assets valued at $22,000 and technology valued at $362,000 for cash
consideration of $399,000. The technology acquired was amortized over a term of
one year.
The Company will continue to pursue its strategy of developing and
marketing software solutions that allow companies to integrate, protect,
capture and audit their data. More enterprises are expected to recognize the
importance of managing data for business intelligence, enterprise application
integration and e-business applications in real-time. To establish and maintain
useful databases for these purposes, data must be captured, transformed and
flowed from the source databases that generate operational data to separate
databases such as data warehouses or web servers in real-time. Competitive
pressures are forcing more companies to be available to their customers 24
hours a day. Having key operational systems unavailable due to planned (system
maintenance, upgrade or backup) or unexpected (hardware or communications
failure) system outages is no longer acceptable. The U.S. Food and Drug
Administration ("FDA") is mandating that all FDA-regulated firms provide
electronic audit trails, also known as E-Records, for FDA examination. It is
expected that federal regulators in other industries will follow suit and
mandate similar E-Records requirements. The Company's LiveBusiness solutions
are designed to help companies address all these needs.
Some of the key growth issues the Company faces include building and
managing its direct and indirect distribution channels, increasing its
marketing efforts to enhance general market awareness of its products,
continuing to improve the efficiency and functionality of its existing
products, introducing new products, hiring quality people and maintaining
adequate management reporting and information systems. The Company continues to
invest in these areas in order to achieve its growth objectives.
During fiscal 2004 the Company continued to adjust its business model
to drive a significant improvement in operating profits. The Company believes
that these adjustments have positioned the Company to continue to drive
increased levels of profitability in the coming year. The Company's balance
sheet is strong and the Company remains confident that the LiveIntegration,
LiveResiliency, LiveAudit and LiveCapture solutions will continue to resonate
in the marketplace. The introduction of regulatory initiatives in the United
States and elsewhere in fiscal 2004 such as the Sarbanes-Oxley Act is expected
to continue to be a driver of demand for the Company's LiveAudit and other
products. The Company believes the near and long-term prospects for success
remain strong, but is aware of the uncertain economic and business conditions
that could cause fluctuations in operating results. Nevertheless, the Company
remains committed to its objective of generating significant value for its
shareholders, customers, business partners and employees.
12
B. Business overview
Description of Operations
The Company designs, develops and markets software solutions for
real-time data integration, resiliency and data monitoring. The Company's
comprehensive family of products allows companies to capture, transform and
flow data in real-time across multi-platform computing environments. The
Company's software products provide business data integration, giving its
customers the ability to keep corporate data integrated, distributed and
available within enterprises and across the Internet. The Company's resiliency
solutions provide disaster recovery and avoidance ensuring highly available
24/7 business operations under any circumstances. The Company's data monitoring
solution allows companies to monitor, track and report on critical information
stored in their databases to ensure the security of their data assets at all
times. The Company's products are suited to such business applications as
building and replenishing data warehouses, data distribution and workload
balancing, e-commerce and the integration of e-business applications with
operational and legacy systems, enterprise application integration ("EAI"),
monitoring and reporting on the integrity and security of data assets, mobile
and remote data capture for ERP systems, high availability and back-up and
recovery applications. The Company's PointBase solutions provide relational
database products and synchronization solutions designed to help lead the
industry's move toward software that delivers on the promise of Java.
Generally, the Company's sales are strongest in the calendar quarter
ending December 31st and are reflected in the Company's fourth fiscal quarter
of each year.
The Company derives its revenue from three main sources: sales of
software licences, software maintenance and support agreements, and consulting
and implementation services. Sales of software licences have historically been
primarily on a direct basis to the Company's customers in North America, Asia
Pacific and much of Europe, while also employing indirect sales channels, such
as distributors and remarketers in these territories. In Australia, South and
Central America and certain European countries the Company sells mainly on an
indirect basis through distributors or remarketers who may also provide
customer support and service to end users. The Company sells single and
multiple-year software maintenance and support agreements with the related
software licences. These agreements are generally renewed on an annual basis
after expiry of their initial term. Revenue from consulting and implementation
services is derived primarily on a time-and-materials basis under a services
agreement with the customer, which in some cases may be pre-billed with the
related software licences.
The Company's predecessor was incorporated in November 1993 as a
software research and development firm focused on the problem of
transformational data replication across various hardware and database
platforms. Since the introduction of the Company's Transformation Server
software in October 1994 as an IBM iSeries (AS/400) data replication product,
the Company has commercially released several new versions and extensions of
Transformation Server, extending its functionality to become a cross-platform
transformational integration solution. Transformation Server now offers
bi-directional data capture, transformation and flow to and from a variety of
mid-range servers, mainframe processors and software databases including:
DB2/UDB running on IBM iSeries (AS/400), UNIX (HP, AIX, SUN) and OS/390; Oracle
databases running on UNIX (HP, AIX, SUN), Linux and Windows NT/2000 platforms;
Sybase databases running on UNIX and Linux platforms; Microsoft SQL Server
databases; XML data sources; PointBase Java databases, and flat files.
The Company's major resiliency product, High Availability Suite for
IBM iSeries (AS/400) (also known as HA Suite), was first released in November
1998. HA Suite is an iSeries (AS/400) high availability solution that captures
objects and database transactions from primary systems, mirrors them to one or
more recovery systems, and invokes operational switching as required. HA Suite
was complemented and enhanced in mid 1999 with the introduction of DataMirror
iCluster software, an iSeries (AS/400) cluster management solution that
includes a GUI to define nodes in a cluster, determine what data and objects
are mirrored to specific nodes and monitor the entire cluster from a single
station.
The Company's major EAI product, DataMirror Constellar Hub, is an EAI
solution which enables data movement, transformation and integration between a
wide variety of mixed system environments. It supports over 40 data types
including real-time, batch and message-oriented systems.
The Company has also developed additional software products including
iDeliver, a data integration product that delivers data from Transformation
Server sources to Windows desktop data stores, Enterprise Administrator, an
enhanced Java based graphical user interface ("GUI") for administration of the
Transformation Server family of products.
The Company, through its wholly owned subsidiary, DataMirror Mobile
Solutions Inc. ("PointBase"), offers a series of Java relational database,
mobility and synchronization products. PointBase has three main offerings --
PointBase Embedded, PointBase Micro and PointBase UniSync. These provide
effective Java-based data storage, enterprise mobility and data synchronization
with corporate databases.
13
During the past three years the Company introduced the following
software products:
1. iReflect Version 1.5. Released in March 2004, this is a high
availability solution for Oracle databases, which can be used for
resiliency, disaster avoidance and recovery. iReflect is an extension
of the Company's High Availability Suite for IBM iSeries (AS/400).
2. iFederate. First released in November 2003, this product provides
unified access to data from heterogeneous data stores in mainframe
environments.
3. iDeliver Version 2.6. Released in November 2003, this client-server
product allows organizations to publish, filter, and replicate
business critical information securely to their employees, business
partners, and customers. It also allows businesses to update data
warehouses and data marts over the Internet in near real time.
iDeliver consists of two components: iDeliver Server and iDeliver
Client.
4. Pervasive Gateway Version 3.1. Released in November 2003, this
product is a client-server software solution that extends SAP
functionality to remote users by allowing them to execute ERP
transactions from mobile devices. Business applications of Pervasive
Gateway include warehouse and shop floor operations, time and
attendance, asset management, transportation management,
service/sales force automation and CRM. The solution can be deployed
on any DOS, Windows or Windows CE based computer or mobile device
including industry standard PCs, PDAs, handheld computers and rugged
portable computers for use in industrial settings. Transactions can
be executed in on-line mode in near real-time or in batch-mode to
support disconnected devices and network interruptions.
5. DB/XML Transform Version 2.8. Released in October 30, 2003, this
product is an engine for bi-directional data transformation between
XML, database and text formats.
6. iCluster for EMC Symmetrix Version 2.0. Released in June 2003, this
is resiliency software for the IBM iSeries (AS/400) that is closely
integrated with EMC Corporation's system and storage replication
solutions Symmetrix Remote Data Facility (SRDF(TM)) and
TimeFinder(TM). This product increases application availability and
workload distribution in EMC iSeries (AS/400) environments.
7. iCluster for IBM TotalStorage(TM) Enterprise Storage Server(TM).
DataMirror iCluster for IBM TotalStorage Enterprise Storage Server
(ESS) is a single integrated software solution for highly available
business operations in IBM eServer iSeries environments. iCluster for
IBM ESS enables high levels of data and application resiliency for
Storage Area Networks (SANs) running on IBM iSeries and ESS systems.
iCluster for IBM ESS integrates with IBM's Advanced Copy functions,
Peer-to-Peer Remote Copy (PPRC) and FlashCopy(R) to provide
availability at the storage level, system level and application
level.
8. Enterprise Administrator for Transformation Server Version 3.0.
Released in May 2003, this product allows companies to define and
manage configure and manage replication in the publication and
subscription environments.
9. Transformation Server for AS/400 Version 5.1. Released in May 2003,
this product is designed to replicate data seamlessly from any AS/400
file system to any supported subscriber system database. It also
supports replication from any supported publication database to
AS/400 file systems. It is intended for database administrators and
managers with organizational control over AS/400 data. No program
changes to the AS/400 applications that generate the original
publisher data are needed.
10. Transformation Server for Microsoft SQL Server Version 5.1. Released
in May 2003, this product allows companies to replicate Microsoft SQL
Server data to supported databases, and receive replicated data from
different publishers. This product also supports replication to ODBC
compliant subscription databases on Windows servers and is intended
for database administrators and managers with organizational control
over Windows data.
11. Transformation Server for Oracle Version 5.1. Released in May 2003,
this product is designed to replicate data seamlessly from any Oracle
database system to supported subscription databases. This product as
a publisher replicates data based on configuration settings specified
through Enterprise Administrator.
12. High Availability Suite Version 3.6. Released in October 2002, this
product is a high availability and replication tool intended
primarily for environments that want to replicate OS/400 files and
objects to other systems for high availability (using one of the
scenarios mentioned above), thereby ensuring data integrity.
13. Transformation Server for DB2/UDB Version 4.6. Released in August
2001, this is an extension of the Company's Transformation Server
software to extend native support for DB2/UDB on additional platforms
where data resides, including Linux and Microsoft Windows NT/2000.
14
14. Transformation Server for PointBase Version 4.6. Released in August
2001, this product replicates PointBase data to supported databases
and can also receive replicated data from supported databases. This
product can be installed and used on any platform that supports Java.
In the publication environment, this product's replication engine can
refresh and mirror selected data to supported databases. In the
subscription environment, companies can apply transformations to the
replicated data.
15. Transformation Server for OS/390 Version 4.6. Released in March 2001,
this product allows companies to replicate DB2 data on an OS/390 or
z/OS system to supported subscription databases. In addition, data
from supported publication databases can be replicated to DB2 on
OS/390 or z/OS systems. This product is intended for organizations
that want to replicate DB2 data to or from S/390 mainframes. More
specifically, this product is aimed at companies that want to
implement data distribution, data sharing, or data transformation.
16. Transformation Server for XML. This product is an addition to the
Company's Transformation Server software family, which enables
companies to capture, transform and flow data in real-time to and
from common database formats and XML.
17. Transformation Server for Teradata Relational Database Management
System. This product replicates data from supported databases to
Teradata databases. Teradata is a relational, SQL compatible
database, supported on Microsoft Windows and UNIX servers. In the
subscription environment, data transformations can be performed
before data is applied to Teradata.
18. Synapse Mobility. Allows mobile data collection devices to
communicate in real-time with the bar-code server and with the SAP
R/3 software suite. Synapse Mobility runs on a Windows NT/2000
workstation and economically extends SAP systems to mobile
environments.
19. Consteller Hub Version 3.7. Constellar Hub provides a centrally
managed, high-performance, scalable engine for data movement, data
transformation and interface management across all enterprise
applications. This product is a rule-based transformation engine that
provides a maintainable solution for data transformation, data
movement and interface management across enterprise applications.
This product can access, transform, integrate, and deliver data using
databases, messages queues, and flat files. Databases can be accessed
through ODBC or Oracle networking, and structured data can be read
from and written to MQ Series and Oracle AQ message queues, files
accessible through the local file system, and files on remote systems
accessible through FTP, HTTP, and other file transfer methods.
20. LiveAudit. An extension of DataMirror's Transformation Server
software that enables companies in regulated industries such as
pharmaceutical, health-care and food services to meet requirements to
provide electronic audit trails of changes to their operational
databases for regulatory examination.
21. Synapse Agility. An enhancement toolkit extending the capabilities of
SAP's Report Distribution and Job Scheduling functionality built to
work with SAP (R) R/3 (R).
22. DB/XML Vision. A cost-effective, scaled-down version of DB/XML
Transform for simple database to XML conversion projects. The
software automatically creates XML documents containing hierarchical
data from any database for B2B applications, EDI, database
integration and conversion.
23. LiveConnector. An integration solution that enables information flow
between CRM, ERP or packaged software applications. LiveConnector
uses application-specific adapters to capture, transform and flow
business transactions in real-time between various applications
within the organization. Previously incompatible applications can use
LiveConnector to integrate and share data, providing consistency in
the data available across the enterprise. The solution is comprised
of a set of pre-built adapters, including a Siebel 2000 validated
adapter, that support multiple business transactions, capture,
transform and flow data integration software, and expert
implementation services.
24. Outsmart. A simple CRM software solution for Sales Force Automation
and Pipeline Management. The solution works within Microsoft(R)
Outlook(R).
25. PointBase Embedded. This products is platform-independent,
full-featured relational database written entirely in Java. It can be
integrated directly within a Java application, making it transparent
to the end user from time of deployment. It has a small footprint,
provides comprehensive security and requires zero administration.
26. PointBase Micro. Is a platform-independent Java relational database
optimized to run on the Java 2 Micro Edition (J2ME CDC and CLDC/MIDP)
and J2SE platforms. It has an ultra-compact footprint and can be
easily embedded within a Java application, making it transparent to
users from the time of deployment. It supports a subset of standard
SQL 92.
27. PointBase UniSync. Is a Java API that allows developers to easily
synchronize data between databases residing on mobile platforms and
corporate back-end databases. It supports platform-independent,
bi-directional synchronization with Oracle(R), Microsoft SQL(R)
Server(TM) and other JDBC-compliant databases. Its powerful and
flexible publish-and-subscribe model supports either incremental
delta changes or full-snapshot changes.
15
Principal Markets
The Company operates in only one industry, the business of developing
and marketing computer software products. The Company has two reportable
segments, North America and Europe, based on the geographic location of its
operations. The Company's geographical revenue distribution has been as
follows:
FOR THE YEARS ENDED
January 31,
2004 2003 2002
------ ------ ------
Canada 7.8% 6.9% 5.2%
United States 53.2 53.6 50.7
United Kingdom 17.4 18.7 23.9
Germany 8.3 8.1 9.7
Other 13.4 12.7 10.5
------ ------ ------
100.0% 100.0% 100.0%
====== ====== ======
Additional information about the geographic segments of the Company's
business is available in "Management's Discussion and Analysis of Financial
Condition and Results of Operations", incorporated by reference herein, and in
the Consolidated Financial Statements of the Company for the year ended January
31, 2004, Note 17, Segmented Information.
Pricing and Licensing Practices
A typical licensing transaction for the Company's two primary software
products, Transformation Server and High Availability Suite, includes the
purchase of at least two licences, one licence to act as a source utility for
each of the computers from which the customer intends to replicate data, and
one or more licences to act as a target utility for each computer to which the
customer intends to replicate data. The Company often sells a customer
additional licences or increased use licences as the implementation of a
customer project proceeds or as a customer undertakes additional or expanded
projects that require additional data and application integration capability
across the enterprise.
Following mid-range software industry practice, the Company's licence
prices vary depending on a number of factors. The Company licences
Transformation Server and High Availability Suite using a pricing model that
considers the operating system and relative size and processing capability of
the computer hardware platform on which the software will operate and the
location of the purchaser. In general, licence prices are higher for multiple
processor and large-scale processor computer models than for small processors,
and for UNIX, iSeries (AS/400) and OS/390 platforms than for Windows NT
platforms. It is the Company's general practice to charge customers transfer or
upgrade fees if they want to move licenced software from one platform to
another.
Licences for the Company's Constellar Hub are typically priced based
on usage volume and whether the licence will be used on a production or
development system. As such, pricing may vary widely depending upon, among
other things, a customer's computing systems environment. iDeliver pricing is
similar to Transformation Server pricing, and is based on the number of
iDeliver Client concurrent users.
The standard U.S. dollar list pricing per licence for Transformation
Server, DB/XML Transform and iReflect, ranges from as low as $5,000 to almost
$223,000. Licences for LiveAudit are typically sold in conjunction with
licences for Transformation Server at a discount from the Transformation Server
pricing. The price for a licence for High Availability Suite and iCluster
ranges from U.S.$8,000 to almost U.S.$275,000. Production licences for
Constellar Hub generally range from $26,000 to $327,000. Pervasive Gateway is a
client-server solution. Pricing is based on the number of servers, the number
of clients and the number of customised ERP transactions that a customer
requires. The base price for a solution is approximately U.S.$75,000 and
increases depending on the number of customised ERP transactions and number of
client licences required.
Licences for the Company's PointBase products are generally sold
through resellers or incorporated into original-equipment manufacturers ("OEM")
products. Licence prices for the PointBase products are on a per copy basis
with discounts for larger numbers of copies or on a percentage royalty basis
for OEMs. Maintenance and support are offered on a pay-as-you go basis or on an
annual enterprise basis. PointBase products are also sold through requests for
licenced copies from PointBase's website.
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Sales and Marketing
The Company markets and sells licences for its software products
primarily through its direct sales force in North America, much of Europe and
Hong Kong. In addition to its direct sales activities, the Company also employs
indirect sales channels, such as distributors and resellers, in North America,
Europe, Asia and the Pacific rim. In Australia, Central and South America and
in certain European countries, the Company sells mainly on an indirect basis
through distributors and resellers, who may also provide customer support and
service to end users.
The Company's direct sales staff consists of technically trained
salespersons and engineers who serve customers' information systems and
business management staffs. Direct sales and related support personnel are
organized by designated regional sales territories and/or product line, each
reporting directly to head office, in the case of the Americas and the Asia
Pacific region, or DataMirror (Europe) head office in London, England, in the
case of European sales. The Company's sales staff covers the North American
market from its head office in Markham, Ontario and from branch offices in New
York, New York; Chicago, Illinois; and Newport Beach, California. The Company's
direct sales in Europe are conducted from the offices of DataMirror (UK)
Limited in London, England, and European branch offices in Antwerp, Frankfurt
and Paris. The Asia and Pacific rim office is located in Hong Kong.
The Company uses its website as a sales channel and customer service
centre. Customers and potential customers may download trial versions of
particular software products and obtain on-line access to product
demonstrations. The Company also offers certain product support assistance on
the Web, including the ability for customers to generate their own temporary
user authorization codes, download product upgrades and obtain product
information through the Company's on-line KnowledgeBase.
In addition to the activities described above, the Company's marketing
efforts include advertising, direct mail and public relations programs,
participation in industry trade shows and individual and joint organization of
seminars, Webcasts and conferences to promote its products.
Resellers
The Company has focused on establishing relationships with resellers
who are well established and financially stable industry leaders. The following
are some of the key resellers that the Company has entered into reseller
agreements with in the past three fiscal years.
Fiscal year 2004 saw the Company add to its executive bench strength
and enter into a number of reseller relationships that heightened the Company's
reach in various parts of the world.
In October 2003, the Company appointed Mr. Rean Pretorius as Senior
Vice President of Resiliency Sales (now Senior Vice President, Global Channels
and Alliances). Mr. Pretorius came to the Company with over 13 years experience
in information technology senior sales management. In the past, Mr. Pretorius
was Executive Vice President Worldwide Sales for Vision Solutions and helped
grow its customer base to over 1,800 customers in over 70 countries, with over
10,000 installations. Previous to his tenure at Vision Solutions, Pretorius
co-founded and served as Chief Executive Officer of Silverlake Technology
Solutions, a successful IBM Business Partner specializing in partitioning and
cluster management which signed a worldwide agreement with IBM Business
Recovery Services.
In September 2003, the Company signed a reseller agreement with
Logical, an international IT integration solutions provider and one of the
largest Hewlett-Packard resellers in the world to market, sell and support the
Company's products to customers throughout North America. The Company also
entered into a reseller agreement for Australia with Classic Blue Computers Pty
Ltd., a leading Australian solution provider.
In 2002, the Company entered into a global DataWorld Partner agreement
with Cap Gemini & Ernst & Young. In Mexico, the Company has signed a
Value-Added Remarketer agreement with IBM Mexico, a subsidiary of IBM, for IBM
Mexico to resell a number of the Company's products.
The Company also signed a reseller agreement with Nissay Information
Technology Co., Ltd. of Japan, a leading provider of systems integration,
network-related and outsourcing services to clients in the insurance, financial
services, health care and medical services industries.
To further strengthen the Company's position in the U.S. government
sector, the Company signed a reseller agreement with Science Applications
International Corporation (SAIC), the largest employee-owned research and
engineering firm in the United States. SAIC brings a concentration of customers
in the U.S. federal government sector and telecommunications industry, and
holds major contracts with the U.S. Department of Energy and Department of
Defense.
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Alliances
The Company has also developed distribution and marketing channels
through alliances with vendors that offer products that are complementary to
the Company's products. The details of these arrangements vary, but they are
generally co-operative arrangements in which alliance partners may recommend
DataMirror's products directly to their customers as part of a larger systems
solution.
Included among the key alliances that the Company entered into in the
past three years are BEA Systems, where the Company joined the BEA Star Program
to provide a BEA-READY (TM) XML Solution, and Business Objects to help position
the Company in the data integration marketplace.
The Company has joined the Siebel Alliance Program and has
successfully validated the integration of the software portion of the
LiveConnector version 2.0 packaged service with Siebel 2000. Siebel Systems,
Inc. (Nasdaq: SEBL) is a leading provider of multichannel eBusiness
applications software.
The Company's iCluster software has successfully completed
interoperability testing with IBM's TotalStorage Enterprise Storage Server
(ESS) products and has earned IBM TotalStorage Proven status. DataMirror
iCluster for IBM ESS extends the capabilities of iCluster to enable the highest
levels of data and application availability for Storage Area Networks (SANs)
running on IBM iSeries and ESS systems.
In April 2002, the Company joined EMC's Developer's Program. The
Company's application-aware iCluster for EMC Symmetrix is integrated with EMC's
system and storage replication solutions. iCluster for EMC Symmetrix will help
customers achieve a higher level of availability and resiliency on IBM iSeries
(AS/400) systems.
The Company signed a strategic alliance with SSA Global Technologies,
a worldwide provider of enterprise solutions and services with 6,500 client
implementations, to provide DataMirror's LiveAudit solution as the preferred
E-Records audit trail solution for its global customer base.
Customer Service and Support
The Company offers annual maintenance and support contracts for its
software products. Customers may obtain support either (i) on business days
during certain standard business hours (depending on location), or (ii) 24
hours a day, 7 days a week for an additional charge. Product support is
delivered by a combination of telephone, fax, electronic mail and materials
available on the Company's website. If purchased, product maintenance and
support includes product revisions and updates that are commercially released
within the support period. The Company also offers its on-line knowledge base
in a variety of languages including French, German and Spanish to better serve
its worldwide customer base.
The Company also supports its customers with a range of professional
services including education, consulting, training and implementation services.
The Company offers systems engineering expertise to assist customers with the
initial implementation of the Company's software on customers' systems. Longer
term consulting services, which generally occur less frequently than
implementation services, consist of a range of on-site engagements that are
custom designed to assist individual customers through successive phases of
their business data integration efforts. Professional services are generally
priced based on a time and materials basis depending on the customer's
requirements.
Products
The Company designs, develops and markets software solutions for
real-time data integration, resiliency and data monitoring. The Company's
products include:
Transformation Server
DataMirror Transformation Server software is a flexible, high
performance, peer-to-peer data integration solution that enables users to
capture, transform and flow data in real-time throughout the enterprise and
across the Internet. Transformation Server simplifies the process of working in
a heterogeneous world. It enables users to easily and seamlessly move and share
data in real-time among mixed system environments. For organizations with
homogeneous computing environments, Transformation Server provides high
performance, cost effective data integration between like databases.
Transformation Server provides bi-directional data integration among
DB2/UDB running on IBM iSeries (AS/400), UNIX (HP, AIX, SUN) and OS/390; Oracle
databases running on UNIX (HP, AIX, SUN), Linux and Windows NT/2000 platforms;
Sybase databases running on UNIX and Linux platforms; Microsoft SQL Server
databases; XML data sources; and PointBase Java databases. Flat file
integration is also supported. The product's web-enabled Enterprise
Administrator interface enables administration and monitoring of a complex
integration network from a single location. It also provides metadata
management capabilities. With an open Application Programming Interface (API),
Enterprise Administrator enables customers and application providers to take
control of Transformation Server's real-time, multi-platform data integration
capabilities and incorporate these functions directly into their own solutions.
Wireless administration is supported via DataMirror's iTransmit product.
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With flexible data selection and filtering, built-in transformation
and enhancement capabilities, and extended support for ODBC compliant
subscriber systems, Transformation Server enables DataMirror's customers to
employ a wide range of business applications including e-Business, business
intelligence, enterprise application integration, CRM and a host of other
distributed data applications.
Transformation Server licensing and related fees historically account
for approximately 60% of the Company's overall revenue. The Company depends
mainly on direct sales for revenue for its Transformation Server product as
such the sale of this product is not dependent on indirect sales channels and
calendar quarter seasonality to the same extent as the Company's HA Suite and
iCluster products. See "Risk Factors -- Dependence on Distribution Channels"
and "Risk Factors - Seasonality".
High Availability Suite and iCluster
The Company's major resiliency product, High Availability Suite for
IBM iSeries (AS/400) (also known as HA Suite), was released in November 1998.
HA Suite is an iSeries (AS/400) high availability solution that captures
objects and database transactions from primary systems, mirrors them to one or
more recovery systems, and invokes operational switching as required. High
Availability Suite was complemented and enhanced in mid 1999 with the
introduction of DataMirror iCluster software, a high availability cluster
management solution for a `cluster' or integrated network of IBM iSeries
(AS/400) systems. High Availability Suite is comprised of the following four
integrated components:
(i) data mirroring functionality which captures database transactions
on primary systems and mirrors them, on a continuous or periodic basis, to one
or more secondary or back-up iSeries computers;
(ii) object mirroring functionality that provides continuous or
periodic, on-demand mirroring of non-data objects, such as user id's and
security profiles, from primary systems to one or more secondary or back-up
computers;
(iii) role switching capability to detect primary system failure and
invoke operational switching from primary iSeries (AS/400) systems to secondary
or back-up computers in the event of planned or unplanned system outages; and
(iv) administration, monitoring and inquiry functions, allowing system
administrators to monitor and analyse both current and historical information
regarding the status of the HA Suite mirroring process.
In mid-1999, DataMirror released its iCluster cluster management
product for IBM iSeries (AS/400). iCluster is a solution for ensuring the
continuous availability of business-critical applications such as e-Business,
ERP and customer-facing applications. iCluster can be installed on distributed
systems to maintain around-the-clock system availability.
A 'cluster' consists of an integrated network of iSeries (AS/400)
systems (or nodes) that work together to provide seamless iSeries (AS/400)
operations. If the node in a cluster that provides a service can no longer
perform this role, operations are automatically switched to a designated backup
node. To achieve this objective, objects and data must be replicated from the
primary system to the backup node so that operations can be easily moved to
this node. DataMirror iCluster software complements High Availability Suite for
clustered iSeries servers. iCluster enables users to define nodes in a cluster,
determine what data and other critical objects are mirrored to specific nodes
and monitor the entire cluster from a single station. It also handles the data
and object mirroring requirements of clustered high availability environments.
In 2000, DataMirror released XtremeCache, a technology exclusive to
DataMirror iCluster and High Availability Suite that optimizes the flow of data
into and out of a high speed software cache. XtremeCache enhances the business
availability and system back-up and recovery capabilities of HA Suite and
iCluster.
The Company depends on both direct and indirect sales for the revenue
for its iCluster and HA Suite products. The sale of these products is often
linked to the sale of IBM hardware by IBM Business Partners. Generally, sales
of these products are strongest in the calendar quarter ending December 31st
and are reflected in the Company's fourth fiscal quarter of each year. There
can no assurance that the Company will continue to be successful with the
indirect sales model or will continue to partner with motivated distributors as
the Company tries to grow revenue from these products. A weak calendar fourth
quarter for IBM hardware and IBM Business Partners will adversely affect
revenue from these products
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iReflect
DataMirror iReflect is a resiliency product designed for Oracle
databases. iReflect is designed to reduce system downtime for Oracle
environments. The software is used for data distribution, disaster avoidance
and recovery. iReflect uses intelligent database-level mirroring to provide a
cost-effective solution to help businesses running Oracle achieve superior
uptime and availability for their valuable data assets. It mirrors Oracle
database transactions from the primary system to the recovery system in
real-time. The software also has the ability to detect primary system failure
and invoke operational switching to enable highly available business operations
in Oracle environments. iReflect supports log-based replication of Oracle
databases.
iReflect enhances the inherent availability features of Oracle
databases to provide thorough protection against failures. Whereas tape backups
may result in loss of data and require considerable time and effort to restore
data since the last backup, iReflect provides a resiliency solution in the
event of planned or unplanned downtime. iReflect's flexible architecture
supports one-to-many, many-to-one and two-way replication scenarios.
Customers generally can use DataMirror resiliency products for 24/7
access to key databases, data distribution, disaster avoidance and recovery,
minimizing the costs of both planned and unplanned downtime, enhancing service
levels and promoting customer retention and loyalty, efficient distribution of
data processing and workload balancing and ensuring the continuity of supply
chains and e-Business environments.
The licensing and other related fees for High Availability Suite,
iReflect and the Company's other resiliency products historically account for
approximately 35% of the Company's overall revenue.
Constellar Hub
DataMirror Constellar Hub is an Oracle-based enterprise application
integration tool that enables the movement, transformation and integration of
data between heterogeneous system environments from a central point of control.
With DataMirror Constellar Hub, organisations can integrate a wide variety of
applications. It supports over 40 data types including real-time, batch and
message-oriented systems. DataMirror Constellar Hub options include interfaces
for Oracle Applications and PeopleSoft and connectors to MQSeries and SAP. The
solution incorporates support for XML, HTTP and FTP to allow e-business
transactions to be readily integrated with a company's other core systems
including ERP and CRM applications.
LiveAudit
LiveAudit is a software solution based on Transformation Server
technology that allows organisations to monitor the security of their data
assets and meet electronic records requirements imposed by regulators. For
example, the electronic records regulations of the U.S. FDA require all FDA
regulated companies to use computer-generated, time stamped audit trails to
ensure the integrity of systems storing FDA-related records. LiveAudit captures
historical database information and transactional details that would otherwise
be overwritten. LiveAudit can track any changes made to an application database
as well as the time the change was made and the identity of the user. LiveAudit
can be deployed across a wide range of industries including financial services,
government, e-Business and retail to combat fraud, enhance security and
accountability, and improve customer service levels.
Pervasive Gateway
DataMirror Pervasive Gateway is a client-server software solution that
extends SAP functionality to remote users by allowing them to execute ERP
transactions from mobile devices. Business applications of Pervasive Gateway
include warehouse and shop floor operations, time and attendance, asset
management, transportation management, service/sales force automation and CRM.
The solution can be deployed on any DOS, Windows or Windows CE based computer
or mobile device including industry standard PCs, PDAs, handheld computers and
rugged portable computers for use in industrial settings. Transactions can be
executed in on-line mode in near real-time or in batch-mode to support
disconnected devices and network interruptions.
PointBase
PointBase Embedded is a platform-independent, full-featured relational
database written entirely in Java. It can be integrated directly within a Java
application, making it transparent to the end user from time of deployment. It
has a small footprint, provides comprehensive security and requires zero
administration. PointBase Micro is a platform-independent Java relational
database optimized to run on the Java 2 Micro Edition (J2ME CDC and CLDC/MIDP)
and J2SE platforms. It has an ultra-compact footprint and can be easily
embedded within a Java application, making it transparent to users from the
time of deployment. It supports a subset of standard SQL 92. PointBase UniSync
is a Java API that allows developers to easily synchronize data between
databases residing on mobile platforms and corporate back-end databases. It
supports platform-independent, bi-directional synchronization with Oracle(R),
Microsoft SQL(R) Server(TM) and other JDBC-compliant databases. Its powerful
and flexible publish-and-subscribe model supports either incremental delta
changes or full-snapshot changes.
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Other Products
The Company's other software products include:
(i) iDeliver. A data integration product that delivers data from
Transformation Server sources to Windows desktop data stores;
(ii) Transformation Server for XML. An addition to DataMirror's
Transformation Server software family, which enables
companies to capture, transform and flow data in real-time to
and from common database formats and XML;
(iii) iCluster for EMC Symmetrix. An application-aware technology
that is closely integrated with EMC Corporation's system and
storage replication solutions Symmetrix Remote Data Facility
(SRDF(TM)) and TimeFinder(TM). iCluster for EMC Symmetrix
provides higher levels of application availability and
workload distribution in EMC iSeries environments;
(iv) Synapse Agility. An enhancement toolkit extending the
capabilities of SAP's Report Distribution and Job Scheduling
functionality, built to seamlessly bolt-on to SAP (R) R/3
(R);
(v) Synapse Mobility. Allows mobile data collection devices to
communicate in real-time with the bar-code server and with
the SAP R/3 software suite. Synapse Mobility runs on a
Windows NT/2000 workstation and extends customers' SAP
systems to mobile environments;
(vi) DB/XML Transform. An engine for bi-directional data
transformation between XML, database and text formats;
(vii) DB/XML Vision. A cost-effective, scaled-down version of
DB/XML Transform for simple database to XML conversion
projects. The software automatically creates XML documents
containing hierarchical data from any database for B2B
applications, EDI, database integration and conversion;
(viii) LiveConnector. An integration solution that enables
information flow between CRM, ERP or packaged software
applications. LiveConnector uses application-specific
adapters to capture, transform and flow business transactions
in real-time between various applications within the
organization;
(ix) iCluster for IBM TotalStorage(TM) Enterprise Storage
Server(TM). A single integrated software solution for highly
available business operations in IBM eServer iSeries
environments. iCluster for IBM ESS enables high levels of
data and application resiliency for Storage Area Networks
(SANs) running on IBM iSeries and ESS systems; and
(x) Outsmart. A simple CRM software solution for Sales Force
Automation and Pipeline Management that works within
Microsoft(R) Outlook(R).
(xi) iFederate. Provides unified access to data from heterogeneous
data stores in mainframe environments. iFederate reduces
companies' reliance on such specialized skills by allowing
customers to define queries against a virtual database that
consolidates common data storage formats including DB2, VSAM,
ISAM, IMS and SAM. By providing quick and economical unified
access to mainframe data stores.
Competition
Overview
The Company competes in markets that are competitive, subject to and
affected by changes in technology, product innovations and the actions of its
competitors. Based on the variety of operating systems, databases and hardware
platforms upon which the Company's products operate, the Company can expect a
number of sources of competition. The primary sources of competition are:
o Hardware and Database Vendors. Many hardware and database vendors,
including IBM, Microsoft, Oracle and Sybase, also offer integration,
resiliency and capture software products, either as stand-alone
products or as a technological component of their hardware, operating
system, database or other software products. Such products tend to be
focused on the vendors' core hardware or database offerings, and
generally do not offer the full range of functionality and
cross-platform compatibility of the Company's products. Nevertheless,
such products can and do pose significant competition for the
Company's products. Many of these vendors are significantly larger
than the Company and have significantly longer operating histories,
greater financial resources and more market and brand recognition than
the Company. If IBM, Microsoft, Oracle, Sybase or other leading
vendors were to introduce, enhance or expand cross-platform data
integration tools designed to move or integrate data rapidly and
seamlessly among a wide variety of different databases and computer
platforms, such tools could represent even more significant
competition to the Company and to a wider range of the Company's
products. Although the Company has participated in product alliance,
joint marketing, product referral and other co-operative arrangements
with such vendors, there is no guarantee that any such arrangements
will be available or will continue in the future.
o Independent Software Vendors. A number of independent software vendors
have developed integration, resiliency and capture software products
for a variety of databases and computer platforms, including platforms
supported by the Company's products such as IBM DB2 on various
platforms, Oracle, Sybase and SQL Server. These products may offer
varying degrees of bi-directional replication capability, platform
compatibility and continuous or periodic replication ability, and
offer significant direct competition with the Company products
including in particular Transformation Server, HA Suite, iCluster,
Constellar Hub and iFederate. As with hardware and database vendors
described above, many of these independent software vendors are
significantly larger than the Company and have significantly longer
operating histories, greater financial resources and more market and
brand recognition than the Company.
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o In-house Development. Many large business organisations have sizeable
information systems departments and software development and
programming staff. These organisations may choose to develop their own
custom software for their internal integration, resiliency and capture
requirements. The Company has encountered, and expects to continue to
face, competition for the sale of its products from such in-house
development efforts.
Integration Software Market
In the market for integration software, the Company's Transformation
Server and Constellar Hub products face competition from specific data
replication software products, designed for use on many of the platforms
between which Transformation Server and Constellar Hub function, including the
following products from the following vendors:
Data Propagator, DB2 Information Integrator, and MQSeries from IBM;
Oracle Replication from Oracle; Sybase Replication Server from Sybase;
SQL Replication (DTS) from Microsoft; Symbiator from Vision Solutions (a
subsidiary of Idion Technology Holdings Inc.); OmniReplicator from
Lakeview Technology; GoldenGate Global Synchronization from GoldenGate;
DB2Motion from Hit Software; DataStage from Ascential; Distributed
Enterprise from PeerDirect; SharePlex from Quest; PowerCenter and Detail
from Informatica/Striva; ETI-Extract from ETI; webMethods Integration
Platform from webMethods; integration solutions from SeeBeyond
Technology and Mercator; and Businessware Integration Platform from
Vitria.
The Company tries to differentiate Transformation Server from
competitive products by promoting the following product features and
capabilities: (i) unique "Capture, Transform and Flow" architecture which
provides the ability to deliver real-time, transaction based data integration
solutions (ii) single Java - enabled GUI (Enterprise Administrator) which
enables administration, and operational control of Transformation Server across
platforms and databases within the enterprise from a single point (iii)
sophisticated Enterprise Administrator Monitor which provides "Visualization"
of complex integration networks and allows the creation of user-defined network
diagrams to monitor operations status and performance; (iv) rapid deployment
with minimum requirement for programming or professional services; (v) diverse
heterogeneous platform and database support; and (vi) peer-to-peer architecture
(as opposed to hub-and-spoke or staging) facilitating high speed, high
transaction throughput.
The Company tries to differentiate its Constellar Hub product from the
competitors by promoting the following features: (i) an advanced hub and spoke
architecture that provides a single point of contact for all data sources; (ii)
real-time data flows and full integration with Transformation Server; (iii)
pre-built application interface support for leading ERP and CRM applications;
(iv) ease of use; and (v) use of PL/SQL as its transformation language.
There can be no assurance that competitors won't add these or similar
features to their products or that the Company will be successful in selling
its products by promoting these features and differentiators.
Resiliency Software Market
In the IBM iSeries (AS/400) market for resiliency software, the
Company's HA Suite and iCluster products compete against other system mirroring
software products that are generally designed to move data and maintain a
current back-up of an entire iSeries (AS/400) system on a second iSeries
(AS/400), perform operational switchover in the event of system failure, and
mirror all database activity as well as all non-database file and object
activity. This market space has fewer, more readily identifiable direct
competitors. The primary competitors are Lakeview Technology who sell Mimix
Suite and Vision Solutions -who sell Vision Suite. Both of these competitors
have greater market share than the Company and have longer operating histories
in the iSeries (AS/400) resiliency market. Recent products to enter this market
include Echo2 from iTera and NOMAX from Maximum Availability. New entrants
offer simple resiliency solutions at lower prices and on preferred terms that
has created pressure on pricing and margins.
The Company tries to differentiate HA Suite and iCluster from
competitive products by promoting the following features and capabilities: (i)
single code based for data replication, object replication, monitoring and
switching capabilities; (ii) unique Match/Merge technology for synchronisation
on the recovery server; (iii) real-time auto registration; (iv) object type
support; and (iv) implementation methodology.
The Company also tries to differentiate itself from its competitors in
terms of: (i) the Company's publicly disclosed financial position; (ii) the
Company's partnerships and alliances; (iii) the quality of the Company's
support and professional services offerings; and (iv) the responsiveness and
innovation of the Company's development team.
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There can be no assurance that competitors won't improve their
products and services to respond to these differentiators or that the Company
will be successful in selling its products by promoting these differentiators.
IBM continues to add features to its database and operating systems that may
make it easier for new entrants or customers to develop their own resiliency
solutions. IBM may also choose to offer its own resiliency solution in the
future.
In the Oracle market for resiliency software, the Company's iReflect
product competes against other database replication software products that are
generally designed to move data and maintain a current back-up of an entire
Oracle database on a second system. The main competitor in this market space is
Quest Software which sells its SharePlex product. The Company tries to
differentiate the iReflect product from competitive products by promoting the
following features and capabilities: (i) real-time log-based replication; (ii)
DDL (Data Definition Language) Refresh and Mirroring support; (iii) Synch Check
support; (iv) Master to Master support; and (v) high speed operational
switching. There can be no assurance that the Company will be successful in
selling into this market. In addition, Oracle may add features to its database
or the Oracle 10gAS platform that make it easier for new entrants or customers
to develop their own resiliency solutions. Oracle may also choose to offer a
resiliency solution that competes directly with iReflect in the future.
Audit Software
The Company's LiveAudit software was developed as an out-of-the-box
solution to meet the electronic records requirements of the FDA. The Company
tries to differentiate the LiveAudit product in terms of its out-of-the-box,
non-intrusive integration with existing systems and databases. The Company
expects that competitors will also develop solutions for electronic records
compliance. The Company also expects that existing providers of ERP solutions
to regulated companies will add electronic records compliance features to their
existing solutions.
Capture Software
There are a number of competitors in the market for SAP mobile
connectivity solutions including SAP. The Company tries to differentiate its
Pervasive Gateway software in terms of: (i) its ability to function in both
batch and on-line modes; (ii) its easy to use GUI interface; and (iii) its
platform independence and the fact that it can be installed on common industry
operating systems and mobile devices. There can be no assurance that
competitors won't improve their products and services to respond to these
differentiators or that the Company will be successful in selling its products
by promoting these differentiators.
XML Software
There are a large number of competitors in the market for XML
transformation software. Many of these competitors are larger than the Company.
Many of these competitors provide their software free of charge. The Company
tries to differentiate its DB/XML Transform product in terms of: (i) its
advanced structured query technology; (ii) its built-in support for back-end
database functionality; and (iii) its portability and platform independence.
There can be no assurance that competitors won't improve their products and
services to respond to these differentiators or that the Company will be
successful in selling its products by promoting these differentiators.
PointBase Software
There are a number of competitors to the Company's PointBase products
in the Company's two main PointBase markets. Many of these competitors such as
Oracle, Sybase, Microsoft and IBM are significantly larger than the Company.
The competitors are different for each market as few competing product sets
have the breadth of device support offered by PointBase. In the first market
(the "Embedded Market"), customers build products with PointBase Micro and
PointBase Embedded (including the server option) products as the database
engines in those products. The main competitors in this market include IBM
Cloudscape, DB2 UDB Express and Everyplace Editions; Microsoft Access and SQL
Server; and Borland JDataStore. Some of these competing products are not 100%
Java product and those vendors have a more complex manufacturing process as
they produce different packages for each platform. In the second market (the
"Mobile Market"), mobile professionals use PointBase Micro, PointBase Embedded,
and PointBase UniSync to occasionally access corporate database or
applications. The main competitors in this market are Sybase SQL Anywhere
Studio, Oracle 9i Lite, and IBM DB2 Everyplace. The Company tries to
differentiate its PointBase database software in terms of (i) its 100% Java
composition and (ii) its ability to support the Embedded Market and the Mobile
Market with a single product set. There can be no assurance that competitors
won't improve their products and services to respond to these differentiators
or that the Company will be successful in selling its products by promoting
these differentiators.
23
Intellectual Property
The Company regards its software as proprietary and attempts to
protect it using copyright, trademark and trade secret laws, contractual
provisions regarding confidentiality, non-disclosure and ownership of
proprietary information and embedded software authorization routines. Despite
these precautions, it may be possible for unauthorized third parties to copy
certain portions of the Company's products and obtain and use information the
Company regards as proprietary. In addition, there is a risk that third parties
may assert infringement claims against the Company or its products. See "Risk
Factors -- Potential Infringement Liability".
The Company licences its software products pursuant to either mutually
negotiated software licence and maintenance agreements, by having customers
sign an order form agreeing to the Company's standard terms and conditions, or
by using "shrink wrap" licences (that is, licences included as part of the
product packaging) and/or "click wrap" licences (that is, licences which appear
on a user's computer screen prior to the user being able to effectively use the
software). "Shrink wrap" or "click wrap" licences are not negotiated with or
signed by individual licencees and purport to take effect upon the opening of
the product package or upon download or an indication of acceptance by
"clicking" on an acceptance indicator or button on a web page or computer
screen. Certain provisions of such licences, including provisions protecting
against unauthorized use, copying, transfer and disclosure of the licenced
program, may be unenforceable under the laws of certain jurisdictions.
While the Company is unable to determine the extent of software piracy
of its products, software piracy can be expected to be a persistent problem in
the software industry. The Company utilises software authorization routines to
provide copy protection on all platforms where hardware serial numbers are
available for this purpose. In addition, the Company uses other authorization
schemes where possible. Policing unauthorized use of the Company's products is
difficult and it may not be possible to detect an unauthorized use. In
addition, the laws of some foreign countries do not protect the Company's
proprietary rights to the same extent as do the laws of Canada and the United
States. Accordingly, it may be possible for unauthorized parties to copy or
reverse engineer the Company's products or otherwise obtain and use information
that the Company regards as proprietary.
Government Regulations
A number of government regulatory issues will continue to influence
the Company's products. Newer government regulations, such as Sarbanes-Oxley
(SOX), Basel II and the Patriot Act, are driving the need for live data stores
that enable a real-time view of critical business operations.
The Company's LiveAudit product was developed to assist organisations
regulated by the Food and Drug Administration ("FDA") to comply with 21 CFR
Part 11, the Final Rule of the FDA with respect to electronic records and
electronic signatures. There can be no assurance that the FDA will not amend or
repeal this Rule which could adversely affect sales of the LiveAudit product or
result in increased costs associated with the development, maintenance or
support of the product.
The LiveAudit product is also a key tool for companies looking to
comply with the requirements of the SOX. LiveAudit enables companies to monitor
all adds, updates, and deletes made to corporate information at the database
level, and record these changes in a chronological event log, allowing CEOs and
CFOs to provide sufficient audit trail evidence to stakeholders and auditors.
By allowing companies to track all activities that take place within their
enterprise systems, organizations can achieve an added degree of system
security which is a core requirement for SOX compliance.
24
A. Organizational Structure
As at January 31, 2004, the Company had the following direct and
indirect subsidiaries:
SUBSIDIARY(1) JURISDICTION OF INCORPORATION
DataMirror Europe (Holdings) Limited England
DataMirror (UK) Limited England
DataMirror Hub Company (UK) Limited England
DMC Holdings, Inc. Delaware
DataMirror, Inc. Delaware
DataMirror Benelux NV Belgium
DataMirror France SARL France
DataMirror Germany(2) A partnership under the laws of Germany
DM Nordic AB Sweden
DataMirror (Asia Pacific) Limited Hong Kong
DataMirror Hub Company (Canada) Inc. Ontario
1512630 Ontario Inc. Ontario
DataMirror Mobile Solutions, Inc. California
(1) Except as otherwise noted, each subsidiary is wholly owned by
DataMirror Corporation and/or one or more wholly-owned subsidiaries
of DataMirror Corporation.
(2) DataMirror Germany is a partnership between two wholly-owned
subsidiaries of DataMirror Corporation, DataMirror Deutschland GmbH,
as limited partner, and DataMirror Deutschland Verwaltungs-GmbH, as
general partner.
B. Property, plants and equipment
The Company's head office is located in a leased facility in Markham,
Ontario, where the Company currently occupies approximately 67,222 sq. ft. of
office space. The term for the leased premises was renewed on May 1, 2004 for
an additional 5 year period. The Company leases private office space, generally
on a short-term basis, for its sales and technical operations in Chicago,
Illinois and Newport Beach, California. The Company's UK subsidiary occupies
leased office space in London, England (expiry March 2006) and additional
office space is leased for European branch offices in Antwerp, Belgium;
Frankfurt, Germany; and Paris, France. Leases for the European offices are
generally terminable on short-term notice, except for the Frankfurt location
which has a lease expiring in November 2004. The Company's Asia Pacific
operations are housed in leased office facilities in Hong Kong on a
month-to-month leasing basis. The Company believes that its existing facilities
and offices are adequate to meet its immediate requirements and that additional
space in similar facilities will be available to satisfy its requirements in
the foreseeable future.
ITEM 5. Operating and Financial Review and Prospects
A. Operating results
COMPARISON OF FISCAL 2004 TO FISCAL 2003 AND FISCAL 2003 TO FISCAL 2002
The following information should be read in conjunction with the
audited Consolidated Financial Statements of the Company for the years ended
January 31, 2004 ("Fiscal 2004"), January 31, 2003 ("Fiscal 2003") and January
31, 2002 ("Fiscal 2002") presented in accordance with Canadian generally
accepted accounting principles ("Canadian GAAP") which are in all material
respects in accordance with accounting principles generally accepted in the
United States ("U.S. GAAP"), except as disclosed in Note 20 of the audited
Consolidated Financial Statements. All amounts are stated in Canadian dollars
unless otherwise noted.
OVERVIEW
The Company designs, develops and markets software solutions that
enable over 1,850 companies to integrate, protect, capture and audit their
data.
SOURCES OF REVENUE
The Company derives its revenue from three main sources: sales of
software licences, software maintenance and support agreements and consulting
and implementation services.
25
The sales of software licences have historically been on a direct
basis to the Company's customers in North America, Asia Pacific and most of
Europe, while also employing indirect sales channels, such as distributors and
remarketers in these territories. In Australia, South and Central America and
certain European countries, the Company sells mainly on an indirect basis
through distributors or remarketers who may also provide customer support and
service to end users. During fiscal 2004, licence sales through indirect sales
channels accounted for 21% of revenue, down slightly from 24% in fiscal 2003
and 26% in fiscal 2002.
The Company sells single and multiple year software maintenance and
support agreements with the related software licences. These agreements are
generally renewed on an annual basis after expiry of their initial term.
Revenue from consulting and implementation services is derived
primarily on a time-and-materials basis under a services agreement with the
customer, which in some cases may be prebilled with the related software
licences.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's consolidated financial statements are prepared in
accordance with Canadian GAAP which are in all material respects in accordance
with U.S. GAAP, except as disclosed in note 20 of the audited consolidated
financial statements. The preparation of the Company's financial statements is
based on the selection and application of significant accounting policies, some
of which require management to make significant estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. On an on-going basis,
the Company evaluates its estimates, including those related to revenue, bad
debts, investment tax credits, investments, intangible assets, goodwill and
income taxes. The Company bases its estimates on historical experience and on
various other assumptions that are believed at the time to be reasonable under
the circumstances. Under different assumptions or conditions, the actual
results will differ, potentially materially, from those previously estimated.
Many of the conditions impacting these assumptions and estimates are outside of
the Company's control.
The Company believes that the following critical accounting policies
affect its more significant judgments and estimates used in the preparation of
its consolidated financial statements.
Revenue Recognition. The Company's revenues are generated from the
sale of software licences, software maintenance and support fees and services.
Revenue is recognized in accordance with Statement of Position ["SOP"] 97-2,
"Software Revenue Recognition" issued by the American Institute of Certified
Public Accountants ["AICPA"] in October 1997 and amended by SOP 98-4, "Deferral
of the Effective Date of a Provision of SOP 97-2", issued in March 1998.
Software licence revenue is recognized when persuasive evidence of an
arrangement exists, the related products are shipped, there are no significant
uncertainties surrounding product acceptance, the fees are fixed and
determinable and collection is considered probable. Revenue from software
maintenance and support agreements is recognized on a straight-line basis over
the term of the related agreements. Revenue from services is comprised of
consulting, training and installation fees and is recognized at the time the
services are performed.
Allowance for Doubtful Accounts. The Company maintains an allowance
for doubtful accounts for the estimated losses resulting from the inability of
its customers to make required payments. The Company performs ongoing credit
evaluations of its customers' financial condition and if the financial
condition of the Company's customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances would
likely be required. Actual collections could materially differ from our
estimates.
Investment Tax Credits. The Company applies for investment tax credits
from both the Canadian federal and provincial tax authorities relating to
amounts expended on scientific research and development. The amount of
investment tax credits recorded represents management's best estimate based on
its interpretation of current legislation. However, the Canada Revenue Agency
has not yet assessed all the federal claims and, therefore, the amount
ultimately received could be materially different from the amount recorded.
Investments. From time to time the Company may hold minority interests
in companies having operations or technology in areas within its strategic
focus, some of which are publicly traded and have highly volatile share prices.
The Company records an investment impairment charge when a decline in the value
of an investment occurs which is considered to be other than a temporary
impairment. Future adverse changes in market conditions or poor operating
results of the companies in which the Company has invested could result in
losses or an inability to recover the carrying value of the investments and may
possibly require an impairment charge in the future.
Intangible Assets. The Company has intangible assets related to
acquired technology and customer lists and trademarks. The determination of the
related estimated useful lives and whether or not these assets are impaired
involves significant judgments. In assessing the recoverability of these
intangible assets, the Company must make assumptions regarding estimated future
cash flows, market conditions and other factors to determine the fair value of
the asset. If these estimates or their related assumptions change in the
future, the Company may be required to record impairment charges for these
assets not previously recorded. In fiscals 2004, 2003, and 2002, the Company
did not record an impairment charge related to intangible assets.
26
Goodwill. The Company has goodwill assets arising from business
acquisitions which are comprised of the excess of amounts paid over the fair
value of net identifiable assets acquired. The Company performs an annual
assessment of the fair value of the businesses to which this goodwill relates.
In assessing the fair value of these businesses, the Company must make
assumptions regarding estimated future cash flows, market conditions and other
factors to determine the fair value of the business. If these estimates or
their related assumptions change in the future, the Company may be required to
record impairment charges for these assets not previously recorded. In fiscal
2004, 2003, and 2002, the Company did not record an impairment charge related
to goodwill.
Future Income Taxes. The Company has future tax assets, which are
subject to periodic recoverability assessments. Realization of the Company's
future tax assets is principally dependent upon its achievement of projected
future taxable income. The Company's judgements regarding future profitability
may change due to future market and other factors. These changes, if any, may
require possible material adjustments to these future tax asset balances by
recording a valuation allowance to reduce the future tax asset to the amount
that is considered or estimated to be more likely to be realized. While the
Company has considered projected future taxable income and ongoing tax planning
strategies in assessing the need for valuation allowances, in the event the
Company were to determine that it would be more likely than not to be able to
realize future tax assets in excess of the recorded amount, an adjustment to
the future tax assets would increase income in the period such a determination
were made. Likewise, in the event the Company were to determine that it would
not be able to realize all or part of its future tax assets, an adjustment to
the future tax assets would reduce income in the period such a determination
were made.
27
RESULTS OF OPERATIONS
The following selected consolidated financial information is derived
from the audited consolidated financial statements of the Company presented in
accordance with Canadian GAAP, and must be read in conjunction with such
consolidated financial statements and related notes thereto. Historic results
are not necessarily indicative of the results that may be expected for any
future period.
For the Years Ended January 31,
(In thousands of CDN $)
2004 2003 2002
---- ---- ----
Revenue:
Licence $29,087 $ 33,223 $ 28,592
Maintenance 25,354 23,210 20,562
Services 5,551 6,057 7,222
------- -------- --------
59,992 62,490 56,376
------- -------- --------
Cost of revenue:
Licence 234 239 257
Maintenance and services 11,389 12,605 13,464
------- -------- --------
11,623 12,844 13,721
------- -------- --------
Gross margin 48,369 49,646 42,655
------- -------- --------
Operating expenses:
Selling and marketing 20,524 21,289 21,542
Research and development 9,753 10,459 10,895
General and administration 7,946 8,812 9,088
Amortization of intangibles 3,098 2,740 3,244
------- -------- --------
Total operating expenses 41,321 43,300 44,769
------- -------- --------
Operating income (loss) 7,048 6,346 (2,114)
Investment income, net 1,146 611 859
Other income 279 0 0
Gain (loss) from investment in PointBase, Inc.
Impairment of equity investment 0 (4,595) 0
Equity loss 0 (2,081) (4,112)
------- -------- --------
Income (loss) before income taxes 8,473 281 (5,367)
Provision for income taxes 2,788 2,434 297
------- -------- --------
Net income (loss) $ 5,685 $ (2,153) $ (5,664)
======= ======== ========
FISCAL YEAR ENDED JANUARY 31, 2004
COMPARED TO FISCAL YEAR ENDED JANUARY 31, 2003
REVENUE
The Company's revenue is derived primarily from sales of licences for
its software products. Licence sales accounted for 48.5% of total revenue in
fiscal 2004 as compared to 53.2% in fiscal 2003. The Company expects that
software licence revenues will continue to account for a substantial portion of
its revenues for the foreseeable future. Licence revenue has historically been
heavily dependent on sales of Transformation Server and iCluster (a successor
to High Availability Suite) software for use in connection with IBM iSeries
(AS/400) platforms, and this trend continued in fiscal 2004, accounting for
54.8% of licence revenue, a drop compared to 66.5% in fiscal 2003. The Company
expects that its future success will continue to depend on its relationship
with IBM and the success of the AS/400 platform. The Company's sales of
software relating to Unix platforms in fiscal 2004 was 16.9% of licence
revenue, relatively unchanged as a percent of licence revenue from the 16.5% of
licence revenue in fiscal 2003. There was a significant increase in the
Company's sales of software relating to MVS platforms in fiscal 2004 which
accounted for 11.5% of fiscal 2004 licence revenue and which as a category grew
3.2% from fiscal 2003 licence revenue. Growth also occurred in sales of
software relating to Intel platforms which increased moderately from 13.8% of
fiscal 2003 licence revenue to 16.8% of fiscal 2004 licence revenue.
28
The Company sells single and multiple year software maintenance and
support agreements with the related software licences. These agreements are
generally renewed on an annual basis after expiry of their initial term. During
fiscal 2004, 42.3% of the Company's revenue was derived from customer software
maintenance and support contracts, compared to 37.1% of revenue in fiscal 2003.
Revenue from consulting and implementation services is derived
primarily on a time-and-materials basis under a services agreement with the
customer, which in some cases may be prebilled with the related software
licences. During fiscal 2004, revenue from services, which includes consulting,
training and other services, accounted for 9.3% of revenue, compared to 9.7% in
fiscal 2003.
Licence. Licence revenue in fiscal 2004 was $29,087,000 compared to
$33,223,000 in fiscal 2003, a decrease of 12.4% from fiscal 2003. The decrease
in licence revenue in fiscal 2004 from fiscal 2003 was attributable to several
offsetting factors, with the increased revenue from new products such as
iReflect and LiveAudit and increased demand for the Company's mainframe data
integration solutions being more than offset by such factors as the
strengthening of the Canadian currency, increased price pressure from
competitors in the iSeries High Availability marketplace and the effects of
global political events on the North American, European and Middle East
markets.
Maintenance. Maintenance revenue in fiscal 2004 was $25,354,000
compared to $23,210,000 in fiscal 2003, an increase of 9.2% from fiscal 2003.
This increase was a result of maintenance revenue generated by additional
licence sales since the end of fiscal 2003 and the renewal of maintenance and
support contracts for licence sales completed in prior periods, partially
offset by the effects of the stronger Canadian currency.
Services. Services revenue in fiscal 2004 was $5,551,000 compared to
$6,057,000 in fiscal 2003, a decrease of 8.4% from fiscal 2003. This decrease
was primarily due to the effects of the stronger Canadian currency.
Geographical Distribution. The Company derives most of its sales
revenue from international customers, with sales outside Canada usually
denominated in U.S. dollars or European currencies including pounds sterling
and Euros. For fiscal 2004, sales denominated in U.S. dollars and European
currencies represented 58.8% and 33.5% respectively (for fiscal 2003, these
were 58.9% and 34.2% respectively of the Company's revenues), while a
significant portion of the Company's operating expenses are incurred in
Canadian dollars and the Company reports its financial results in Canadian
dollars. Accordingly, changes in exchange rates between the Canadian dollar and
these foreign currencies can positively or negatively affect the Company's
operating results. The Company has a policy of hedging a portion of its foreign
currency denominated accounts receivable. Management recognizes that this
policy can provide only a short-term protection against a limited portion of
the Company's currency exposure.
The Company's geographical revenue distribution based on the
customers' country of residence has been as follows:
FOR THE YEARS ENDED
January 31,
2004 2003
------- -------
Canada 7.8% 6.9%
United States 53.2 53.6
United Kingdom 17.4 18.7
Germany 8.3 8.1
Other 13.4 12.7
------- -------
100.0% 100.0%
======= =======
Transaction values in fiscal 2004 for sales of the Company's products
have been as large as U.S. $2,440,000 (2003 - U.S. $1,400,000), although a
typical sale ranges from U.S. $70,000 to U.S. $100,000. No single customer
accounted for more than 3.4% of revenue in fiscal 2004 (1.8% of revenue for
fiscal 2003), and no single industry accounted for more than 24.7% of licence
revenue in fiscal 2004 (23.3% of licence revenue for fiscal 2003).
COST OF REVENUE
Licence. Cost of licence revenue consists primarily of duplication,
media, packaging and shipping expenses. For fiscal 2004, costs of licence
revenue were $234,000 (0.8% of licence revenue), relatively unchanged from
$239,000 (0.7% of licence revenue) for fiscal 2003.
29
Maintenance and Services. Costs of maintenance and services revenue
consist primarily of the salary and related costs of providing those services.
For fiscal 2004, costs of maintenance and services revenue were $11,389,000
(36.9% of maintenance and service revenue) compared to $12,605,000 (43.1% of
maintenance and services revenue) for fiscal 2003. The gross margin on
maintenance and services revenue improved significantly, as the Company
realized economies of scale in the cost of providing support to its growing
customer base.
OPERATING EXPENSES
Due to the nature of the Company's business, salary and other
headcount related costs comprise a large portion of the Company's operating
expenses. To assist the reader to properly understand the Company's operating
expense trends, a summary of the ending and average headcount by department for
fiscal 2003 and fiscal 2004 follows (See "Fiscal Year Ended January 31, 2003
Compared to Fiscal Year Ended January 31, 2002" for a comparison of fiscal 2003
and fiscal 2002). The headcount increase from the end of fiscal 2003 to fiscal
2004 occurred late in the 2004 fiscal year, mainly through the additional
employees taken on as a result of the acquisition of PointBase in mid-December
2003, and had a limited impact on fiscal 2004's operating expenses.
-------------------------------------------------------------------
Ending Headcount
at January 31,
2004 2003
------------------------------------
Selling and Marketing 168 151
Research & Development 91 82
General & Administrative 40 43
-------------------------------------------------------------------
Total 299 276
===================================================================
Average Headcount for the
Fiscal Year Ended January 31,
2004 2003
------------------------------------
Selling and Marketing 155 166
Research & Development 84 92
General & Administrative 40 45
-------------------------------------------------------------------
Total 279 303
===================================================================
Selling and Marketing. Selling and marketing expenses include expenses
for sales commissions, salaries, advertising, tradeshows, promotional materials
and other selling and marketing related activities. For fiscal 2004, these
expenses totaled $20,524,000 (34.2% of revenue), down slightly in dollar amount
from $21,289,000 (34.1% of revenue) for fiscal 2003. The decrease is due
primarily to reduced travel and the effect of a reduction of average headcount
in this area, as well as a decrease caused by the impact of the stronger
Canadian currency on the Company's U.S. and European expenses. Management
expects selling and marketing expenses to increase in fiscal 2005 as the
Company expands its sales and marketing activities.
Research and Development. Research and development expenses include
only salaries and other direct costs associated with the development of new
products and are net of related investment tax credits. Research and
development expenses were $9,753,000 (16.3% of revenue) for fiscal 2004, down
slightly from $10,459,000 (16.7% of revenue) for fiscal 2003 due mainly to a
reduction in average headcount in research and development from fiscal 2003 to
fiscal 2004 and an increase in the amount of investment tax credits recognized
during the year. The Company applies for investment tax credits from both the
Canadian federal and provincial tax authorities relating to amounts expended on
scientific research and development. During fiscal 2004, $806,000 (fiscal 2003
- - $590,000) in investment tax credits were applied to reduce operating
expenses. The amount of investment tax credits recorded represents management's
best estimate based on its interpretation of current legislation. However, the
Canada Revenue Agency has not yet assessed all the federal claims and,
therefore, the amount ultimately received could be materially different than
the amount recorded.
General and Administration. General and administration expenses
consist primarily of administrative salaries, rent, recruiting costs and
professional fees. For fiscal 2004, general and administration expenses were
$7,946,000 (13.2% of revenue) compared to $8,812,000 (14.1% of revenue) for
fiscal 2003, a decrease of 9.8% from fiscal 2003. The Company initiated a
series of cost saving measures during fiscal 2004 with the goal of increasing
operating profitability which, combined with a reduction in overhead expenses
as a result of the headcount reductions and the impact of the stronger Canadian
currency on the Company's U.S. and European expenses, resulted in this
reduction.
30
Amortization of Intangibles. For fiscal 2004, amortization of
intangibles was $3,098,000 compared to $2,740,000 for fiscal 2003. The
increase of $358,000 from fiscal 2003 is due to additional amortization of
technology acquired late in fiscal 2003.
INVESTMENT INCOME, NET
Investment income, net includes interest on cash equivalents,
short-term investments and other investment income net of interest expense on
long-term liabilities and lease obligations. In fiscal 2004, net investment
income was $1,146,000 compared to $611,000 in fiscal 2003. This increase is
primarily due to an increase in average invested cash balances resulting from
positive cash flow from operations over the course of fiscal 2004.
OTHER INCOME
In April 2003, DataMirror made an offer to acquire all of the issued
and outstanding shares of PointBase. PointBase determined not to proceed with
the transaction and, as a result, PointBase agreed to pay DataMirror an amount
of $279,000 (U.S.$200,000) as consideration for the cancellation of the offer.
The Company at that time ceased its efforts to purchase PointBase as conditions
at the time did not warrant further discussions. The Company subsequently
purchased the remaining shares of PointBase in late fiscal 2003. For further
discussions of the Company's eventual acquisition of PointBase in December 2003
please refer to the "Acquisition and Investments" section of this document.
LOSSES FROM INVESTMENT IN POINTBASE, INC.
In June 2002, PointBase started a downsizing of its business, with the
intent of achieving break-even operations in the short term. In October 2002 it
became apparent that these measures would not result in profitable or
break-even operations in the near future and the Company's investment had
become impaired and, accordingly, the investment was written down to the
estimated value of nil. The losses from the Company's investment in PointBase
was nil in fiscal 2004 compared to an equity loss of $2,081,000 and an
impairment charge of $4,595,000 in fiscal 2003. The decrease was due to the
investment in PointBase having been fully written off at October 31, 2002. The
Company acquired the remaining shares of PointBase in December 2003 as outlined
in the "Acquisition and Investments" section of this document.
INCOME TAX EXPENSE
During fiscal 2004, the Company recorded an income tax provision of
$2,788,000 as compared to a provision of $2,434,000 in fiscal 2003.
The combined basic Canadian federal and provincial tax rate used in
determining the income tax provision for fiscal 2004 was 36.6% as compared to
38.6% for fiscal 2003. The decrease in the combined rate is due to the
announced reduction in the federal and provincial tax rates coming into effect
during the year.
The income tax provision is different from the amount that would be
obtained by multiplying the Company's income before income taxes by this tax
rate due to a combination of factors including: the equity loss and impairment
charge of PointBase being non-deductible for tax purposes, certain expenses
being non-deductible for tax purposes, the inability to benefit from certain
foreign tax losses incurred during the year, the effect of foreign tax rates,
the manufacturing and processing tax deduction and the effect of the rate
changes on future taxes.
As at January 31, 2004, the Company had foreign non-capital loss
carryforwards of approximately $3,285,000 which have no expiry date and
$3,100,000 which expire at various times over 20 years. A valuation allowance
has been recognized for all but $167,000 of the losses.
NET INCOME (LOSS)
In fiscal 2004, the Company recorded net income of $5,685,000 ($0.50
per share) as compared to a loss of $2,153,000 ($(0.19) per share) in fiscal
2003. This marked improvement in profitability was achieved despite pressures
on revenue caused by the stronger Canadian currency and generally weaker global
economic conditions, by increasing the gross margin on maintenance and services
through operating efficiencies in providing those services, by reducing
operating expenses through headcount reductions and by continued focus on
controlling non-headcount operating costs, together with an increase in
investment income due to higher invested cash balances and the elimination of
losses from the investment in PointBase.
31
FISCAL YEAR ENDED JANUARY 31, 2003
COMPARED TO FISCAL YEAR ENDED JANUARY 31, 2002
REVENUE
The Company's revenue is derived primarily from sales of licences for
its software products. Licence revenue has historically been heavily dependent
on sales of Transformation Server and iCluster ( a successor to High
Availability Suite) software for use in connection with IBM iSeries (AS/400)
platforms, and this trend continued in fiscal 2003, accounting for 66.5% of
licence revenue as compared to 66.9% in fiscal 2002. It is expected that the
Company's future success will continue to depend on its relationship with IBM
and the success of the AS/400 platform.
Licence sales accounted for 53.2% of total revenue in fiscal 2003 as
compared to 50.7% in fiscal 2002. The Company expects that software licence
revenues will continue to account for a substantial portion of its revenues for
the foreseeable future. During fiscal 2003, 37.1% of the Company's revenue was
derived from customer software maintenance and support contracts, compared to
36.5% of revenue in fiscal 2002. Revenue from services, which includes
consulting, training and other services, accounted for 9.7% of revenue during
fiscal 2003, compared to 12.8% in fiscal 2002. Revenue from services, which
includes consulting, training and other services, accounted for 9.7% of revenue
during fiscal 2003, compared to 12.8% in fiscal 2002.
Licence. Licence revenue in fiscal 2003 was $33,223,000 compared to
$28,592,000 for fiscal 2002, an increase of 16.2%. The increase in licence
revenue was largely attributable to revenue derived from new products such as
LiveAudit, Pervasive Gateway and iReflect, as well as increased penetration
into the High Availability for IBM iSeries market.
Maintenance. Maintenance revenue in fiscal 2003 was $23,210,000
compared to $20,562,000 in fiscal 2002, an increase of 12.9%. This increase was
a result of maintenance revenue generated by additional licence sales since the
end of fiscal 2002 and the renewal of maintenance and support contracts for
licence sales completed in prior periods.
Services. Services revenue in fiscal 2003 was $6,057,000 compared to
$7,222,000 in fiscal 2002, a decrease of 16.1%. This decrease was due to lower
rates of new customer adoption, which caused a reduction in demand for
implementation services.
The Company derives most of its sales revenue from international
customers, with sales outside Canada usually denominated in U.S. dollars or
European currencies including pounds sterling and Euros. For fiscal 2003, sales
denominated in U.S. dollars and European currencies represented 58.9% and 34.2%
respectively of the Company's revenues, while a significant portion of the
Company's operating expenses are incurred in Canadian dollars. Accordingly,
changes in exchange rates between the Canadian dollar and these foreign
currencies can positively or negatively affect the Company's operating results.
The Company has a policy of hedging a portion of its foreign currency
denominated accounts receivable. Management recognizes that this policy can
provide only a short-term protection against a limited portion of the Company's
currency exposure.
The Company's geographical revenue distribution based on the
customers' country of residence has been as follows:
FOR THE YEARS ENDED
January 31,
2003 2002
------ ------
Canada 6.9% 5.2%
United States 53.6 50.7
United Kingdom 18.7 23.9
Germany 8.1 9.7
Other 12.7 10.5
------ ------
100.0% 100.0%
====== ======
Transaction values for sales of the Company's products have been as
large as $1,400,000, although a typical sale ranges from $70,000 to $100,000.
No single customer accounted for more than 1.8% of revenue in fiscal 2003 (1.2%
of revenue for fiscal 2002), and no single industry accounted for more than
23.3% of licence revenue in fiscal 2003 (20.5% of licence revenue for fiscal
2002).
32
COST OF REVENUE
Licence. Cost of licence revenue consists primarily of duplication,
media, packaging and shipping expenses. For fiscal 2003, costs of licence
revenue were $239,000 (0.7% of licence revenue) relatively unchanged from
$257,000 (0.9% of licence revenue) for fiscal 2002.
Maintenance and Services. Costs of maintenance and service revenue
consist primarily of the salary and related costs of providing those services.
For fiscal 2003, costs of maintenance and service revenue were $12,605,000
(43.1% of maintenance and service revenue) compared to $13,464,000 (48.5% of
maintenance and service revenue) for fiscal 2002. The gross margin on
maintenance and service revenue improved slightly, as the Company realized
economies of scale in the cost of providing support to its growing customer
base.
OPERATING EXPENSES
Due to the nature of the Company's business, salary and other
headcount related costs comprise a large portion of the Company's operating
expenses. In order to properly understand the Company's operating expense
trends, a summary of the ending and average headcount by department for fiscal
2003 and fiscal 2002 follows (See "Fiscal Year Ended January 31, 2004 Compared
to Fiscal Year Ended January 31, 2003" for a comparison of fiscal 2004 and
fiscal 2003). . Please note that the headcount decrease from the end of fiscal
2002 to fiscal 2003 occurred late in the 2003 fiscal year and therefore had a
limited impact on that year's operating expenses.
----------------------------------------------------------------
Ending Headcount
at January 31,
2003 2002
----------- --------------
Selling and Marketing 151 170
Research & Development 82 96
General & Administrative 43 39
----------------------------------------------------------------
Total 276 305
================================================================
Average Headcount for the
Fiscal Year Ended January 31,
2003 2002
----------- --------------
Selling and Marketing 166 183
Research & Development 92 94
General & Administrative 45 42
----------------------------------------------------------------
Total 303 319
================================================================
Selling and Marketing. Selling and marketing expenses include expenses
for sales commissions, salaries, advertising, tradeshows, promotional materials
and other selling and marketing related expenses. For fiscal 2003, these
expenses totaled $21,289,000 (34.1% of revenue) down slightly from $21,542,000
(38.2% of revenue) for fiscal 2002 as the Company reduced travel and trade show
related expenditures and had a reduction of headcount in this area. Management
expects selling and marketing expenses to increase as the Company expands its
sales and marketing activities.
Research and Development. Research and development expenses include
only salaries and other direct costs associated with the development of new
products and are net of related investment tax credits. Research and
development expenses were $10,459,000 (16.7% of revenue) for fiscal 2003 down
slightly from $10,895,000 (19.3% of revenue) for fiscal 2002. The overall
headcount in research and development was reduced from 96 at the end of fiscal
2002 to 82 at the end of fiscal 2003, however the bulk of these reductions were
made late in the third quarter and did not impact the annual expense
significantly.
General and Administration. General and administration expenses
consist primarily of administrative salaries, rent, recruiting costs and
professional fees. For fiscal 2003, general and administration expenses were
$8,812,000 (14.1% of revenue) compared to $9,088,000 (16.1% of revenue) for
fiscal 2002, a decrease of 3.0%. The Company initiated a series of cost saving
measures during fiscal 2003 with the goal of increasing operating profitability
which, combined with a reduction in overhead expenses as a result of the
headcount reductions, resulted in this reduction in costs.
Amortization of Intangibles. Effective February 1, 2002, amortization
of intangibles consists of the amortization of acquired technology. In fiscal
2002, amortization of intangibles also included the amortization of goodwill,
as explained in note 2 to the fiscal 2002 financial statements. For fiscal
2003, amortization of intangibles was $2,740,000 compared to $3,244,000 for
fiscal 2002. The decrease of $504,000 is due to the elimination of goodwill
amortization.
33
INVESTMENT INCOME, NET
Investment income, net includes interest on short-term investments and
other investment income net of interest expense on long-term liabilities and
lease obligations. In fiscal 2003, net investment income was $611,000 compared
to $859,000 in fiscal 2002. This decrease of $248,000 over the prior year is
primarily a result of earning a lower rate of interest on invested cash
balances in Canada during the year as well as a further reduction in interest
rates received on cash balances set aside during the second quarter in support
of the Company's bid to acquire Idion Technology Holdings Limited.
The Company invests its cash in a variety of short-term Canadian
dollar denominated financial instruments, including government bonds,
commercial paper and bankers acceptances. The portfolio is diversified and
consists primarily of investment grade securities to minimize credit risk. Cash
balances in foreign operations are generally invested in term deposits in the
local operating banks. The investment in short-term financial instruments
carries a degree of interest rate risk, and consequently our future investment
income may fall short of expectations due to changes in short-term interest
rates.
LOSSES FROM INVESTMENT IN POINTBASE
PointBase has had a history of operating losses and, while the level
of operating losses has decreased in the current year, there is little prospect
of short-term profitability. In June of 2002, PointBase started a downsizing of
their business, with the intent of achieving break-even operations in the
short-term. In October 2002 it became apparent that these measures would not
result in profitable or break-even operations in the near future and the
Company's investment had become impaired and, accordingly, the investment was
written down to the estimated fair value of nil.
The equity loss from the Company's investment in PointBase was
$2,081,000 in fiscal 2003 compared to $4,112,000 in fiscal 2002. The decrease
was the result of several factors, including the change in accounting policy
with respect to goodwill amortization, as the equity loss in fiscal 2002
included $1,000,000 in amortization of the goodwill recorded on the Company's
investment in PointBase as well as reduced operating losses incurred by
PointBase over the nine months ended October 31, 2002. Also, the Company's
decision to write the investment in PointBase off at October 31, 2002 resulted
in only nine month's of equity losses being recorded in fiscal 2003 compared to
twelve months in fiscal 2002.
INCOME TAX EXPENSE
During fiscal 2003, the Company recorded an income tax provision of
$2,434,000 as compared to a provision of $297,000 in fiscal 2002.
The combined basic Canadian federal and provincial tax rate used in
determining the income tax provision for fiscal 2003 was 38.6% [2002 - 41.7%].
The decrease in the combined rate is due to the announced reduction in the
federal and provincial tax rates coming into effect during the year. The
announced federal and provincial tax rates cuts for the coming year will
further reduce the combined rate to approximately 36.6%.
The income tax provision is different than expected due to a
combination of factors including: the equity loss and write-off of PointBase
being non-deductible for tax purposes, other non-deductible expenses, the
inability to benefit from certain foreign tax losses incurred during the year,
the effect of foreign tax rates, the effect of the rate changes on future taxes
and the manufacturing and processing tax deduction.
Certain of the Company's foreign subsidiaries have carry-forwards for
income tax purposes of approximately $3,952,000 that are not recognized in
these financial statements. These losses are available to claim against future
taxable income in the applicable tax jurisdictions.
NET INCOME (LOSS)
The Company recorded a net loss of $2,153,000 ($(0.19) per share) in
fiscal 2003 and $5,664,000 ($(0.49) per share) in fiscal 2002. This improvement
was achieved by increasing the gross margin on maintenance and services through
operating efficiencies in providing those services and by reducing operating
expenses through headcount reductions and continued focus on controlling
non-headcount operating costs.
34
OPERATING SEGMENTS AND CURRENCY FLUCTUATIONS
The Company operates in only one industry, that being the business of
developing and marketing computer software products. The Company operates in
two reportable segments, North America, which includes the Company's Asia
Pacific operations, and Europe, based on the geographic location of its
operations. The accounting policies followed by these segments are the same as
those described in the summary of significant accounting policies in Note 1 of
the Company's consolidated financial statements. The Company accounts for
intersegment sales at fair value.
The Company's reportable segments are strategic business units. They
are managed separately because each reportable segment operates in different
economic marketplaces and, therefore, requires different investing and
marketing strategies. The Company evaluates segment performance based on profit
or loss from operations before investment income and income taxes.
In fiscal 2004, the North American segment (which includes the
Company's Asia Pacific operations, which are currently not significant) had
total revenue of $39,918,000 compared to $41,107,000 in fiscal 2003, a decrease
of $1,189,000. The effect on revenue of the stronger Canadian dollar impacted
dramatically the Company's U.S. dollar denominated North American revenue and
which more than offset increased revenue from newer products such as iReflect
and LiveAudit. During that same period, the North American segment had an
operating income of $4,244,000 compared to $4,580,000 in fiscal 2003, a
decrease of $336,000. The overall reduction in average headcount and continued
vigilance in non-salary cost containment reduced operating costs enough to
offset the impact of the reduction in revenue and limit the decrease in
operating income to approximately the amount of the increase in amortization of
intangibles.
Revenues from the European segment were $20,074,000 in fiscal 2004
compared to $21,383,000 in fiscal 2003, a decrease of $1,309,000 due mainly to
the weakening of the U.K. Pound versus the Canadian dollar. During that same
period, European segment operating income was $2,804,000 compared with
$1,766,000 in fiscal 2003, an increase of $1,038,000. European operating income
increased despite the drop in revenue as the currency impact on the segment's
revenue was mostly offset by a similar impact on operating expenses, allowing
the reduction in headcount and other cost containment measures to positively
impact operating income.
35
ACQUISITIONS AND INVESTMENTS
As at June 1, 2004, there are no proposed asset or business
acquisitions or dispositions that the Company's board of directors, or senior
management who believe that confirmation of the decision by the board is
probable, have made a decision to proceed with. The following is a description
of certain completed acquisitions by the Company since February 1, 2000 and
their impact on the Company in fiscal 2003 and 2004.
On December 18, 2003, the Company completed an agreement and plan of
merger and acquired one hundred percent control of PointBase in a cash
transaction valued at approximately $3,300,000 at closing, with certain
additional amounts which may become payable contingent on future revenue or
proceeds that may be received in connection with the acquired business. The
Company is accounting for the acquisition under the purchase method. Under
terms of the agreement and plan of merger, future payments of a portion of the
funds received from an identified current customer of PointBase will become due
to the former shareholders of PointBase contingent upon the Company either
securing additional revenue from or selling the business or a portion thereof
to this customer. No contingent consideration is due for the year ended January
31, 2004.
On January 7, 2003, the Company acquired the technology and certain
related assets of SmartSales Inc., a developer of CRM solutions, in a cash
transaction. The Company acquired current assets valued at $15,000, capital
assets valued at $22,000 and technology valued at $362,000 for cash
consideration of $399,000. The technology acquired is being amortized over a
term of one year.
On March 18, 2002, the Company announced its intention to make a
take-over bid for all of the shares of Idion, a South African company listed on
the JSE Securities Exchange ("JSE") under the symbol IDI, in a cash bid valued
at $9,800,000. On April 18, 2002, the bid was increased to $18,900,000, and
subsequently, on May 8, 2002, the bid was further increased to $30,400,000. On
July 4, 2002, the Company closed its bid to acquire Idion, having not been
successful in completing the take-over. At January 31, 2004, the Company owned
approximately 48,269,000 or 42.61% of Idion's outstanding common shares
acquired at a cost of $12,185,000. On January 31, 2004, shares of Idion were
trading at approximately Cdn. $0.41 per share, which would indicate a market
value of $19,927,000 for the Company's investment at that date. The ownership
of 1,119,000 shares of Idion had been subject to a dispute between the Company
and a broker acting on behalf of persons related to the CEO of Idion. In May
2003 this dispute was settled in favour of the plaintiff and as a result the
Company returned the disputed shares to the broker for the original
consideration of approximately $312,000. The cost of these shares had
previously been included in the investment on the Company's balance sheet at
January 31, 2003. The investment in Idion was accounted for using the cost
method, as the Company does not have significant influence over the affairs of
Idion and cannot obtain adequate financial information from Idion to enable the
Company to account for its investment in Idion using the equity method. During
its latest fiscal period, the twelve months ended December 31, 2003, Idion
incurred a net loss of approximately U.S. $554,000. The Company announced on
May 14, 2004 that it had sold all of its shares of Idion in a market trade
executed through the facilities of the JSE. The Company sold 48,269,085 shares
of Idion at a price of ZAR 2.10 per share. Based on the exchange rates on
settlement (ZAR1=CDN.2025), the Company received net proceeds of CDN$19.9
million after brokerage and advisory fees, had a pre-tax gain of approximately
CDN$7.6 million, and an after tax gain of CDN$6.3 million. The Company believes
that the sale of the Company's shares in Idion will allow both companies to
move forward and concentrate on executing their respective business plans.
Effective September 1, 2000, the Company acquired certain assets and
liabilities of Constellar Corporation, a company engaged in the business of
developing and marketing computer software products. The acquisition has been
accounted for under the purchase method of accounting. As part of the purchase
agreement, further cash payments of up to U.S. $3,000,000 are payable
contingent on certain revenue targets being generated from the acquired
technology during the three-year period ending August 31, 2003. In November
2001, a payment of $724,000 was made in payment of contingent consideration of
$856,000 for the period ended August 31, 2001 less a holdback of $132,000
related to assets purchased which were not realized. The additional contingent
payment has been added to the value of the technology acquired, bringing the
total value of technology acquired to $12,382,000. No payment of contingent
consideration is due for the periods ended August 31, 2002 and August 31, 2003.
The Company expects to continue to explore and pursue acquisitions as
a strategy to build its distribution channels, enhance its product offerings,
increase its market share in its existing markets, and achieve revenue growth.
The consideration and completion of possible acquisitions may divert
significant management time and other resources, including financial resources,
of the Company. It is not certain that future acquisitions will achieve their
business objectives.
B. Liquidity and capital resources
Since its inception, the Company has financed its cash requirements
from the sale of equity securities, funds provided by shareholders, bank lines
of credit, long-term debt and capital lease financing. In December 1996 the
Company completed an initial public offering of 2,000,000 common shares for net
proceeds of $9,377,000, and in September 1997 raised net proceeds of
$15,721,000 through the issue of 1,600,000 special warrants (subsequently
converted into 1,600,000 common shares). In April 2000, the Company raised net
proceeds of $34,151,000 through the issuance of 1,305,000 common shares.
36
As at January 31, 2004 the Company had cash, cash equivalents and
short-term investments of $42,006,000, compared to $38,827,000 at the end of
fiscal 2003. The increase in cash, cash equivalents and short-term investments
was primarily due to increased cash flow from operations. For the year ended
January 31, 2004, cash flow from operations was $10,163,000, a decrease of
$5,745,000 over cash flow from operations of $15,908,000 in fiscal 2003.
Despite a significant increase in operating income, cash flow from operations
decreased due to less cash being generated from changes in other working
capital components. The Company's investing activities consisted primarily of
purchases of capital assets, additional purchases of shares of Idion Technology
Holdings Limited ("Idion") and the acquisition of PointBase. During fiscal
2004, capital expenditures of $1,190,000 ($1,859,000 in fiscal 2003) were
financed internally and none were financed under capital lease facilities in
fiscals 2003 or 2004. Capital assets acquired were primarily computer hardware
and software utilized in research and development activities and leasehold
improvements to the Company's head office facilities. The Company expects that
its capital expenditures will increase in support of higher levels of research
and development activities and as its sales and administration employee base
grows. Financing activities during the year consisted of capital lease payments
and share capital transactions. During fiscal 2004 the Company used $3,987,000
(2003 - $1,557,000) in cash to repurchase 317,500 (2003 - 163,600) of its
common shares under a normal course issuer bid and raised an additional
$1,779,000 (2003 - $821,000) through the issuance of 221,310 (2003 - 152,715)
common shares pursuant to the Company's stock option plans.
The Company has available short-term bank credit facilities of
$3,000,000 bearing interest at the prime rate plus 0.5% and (pound)150,000
($362,000) bearing interest at the prime rate in the United Kingdom plus 3.00%.
Under a general security agreement and a source code escrow agreement, all of
the Company's assets, including the source code for the Company's software, are
pledged as collateral for these credit facilities. As at January 31, 2004 there
was no outstanding indebtedness under these credit facilities other than
letters of credit of $181,000 (2003 - $206,000). Management believes that its
current cash, cash equivalents and short-term investments together with
continued positive cash flow from operations will be adequate to fund the
Company's short-term financial requirements with the exception of acquisition
related cash requirements. The Company's short-term financial requirements may
increase substantially if the Company is successful in its take-over bid for
Idion or in the event the Company makes other significant acquisitions.
Short-term financial requirements related to acquisitions may include direct
and indirect costs including restructuring and other expenses related to
integrating and refinancing the acquired business. In the short-term, the
Company does not plan on making any acquisitions that would result in
short-term financial requirements exceeding the sources of cash described
above. In the long-term, the Company may finance its long-term requirements
from the sale of equity securities, by borrowing under bank lines of credit, by
issuing long-term debt or by entering into capital lease financing
arrangements.
NEW ACCOUNTING RECOMMENDATIONS
[i] U.S. GAAP
In December 2002, the Financial Accounting Standards Board ["FASB"]
issued SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure" ["SFAS 148"]. SFAS 148 amends SFAS No. 123
to provide alternative methods of transition to SFAS No. 123's fair
value method of accounting for stock-based compensation. Under U.S.
GAAP, the Company has not adopted the fair value-based method for
accounting for stock options granted to employees and thus this
standard did not have an impact on its U.S. GAAP financial information
as at January 31, 2004 and 2003 and for the years then ended.
In December 2003, FASB amended Interpretation No. 46, "Consolidation
of Variable Interest Entities" ["FIN 46R"]. FIN 46R requires that a variable
interest entity ["VIE"] be consolidated by a company if that company is subject
to a majority of the risk of loss from the VIE's activities and/or is entitled
to receive a majority of the VIE's residual returns. For the Company, the
requirements of FIN 46R apply to VIEs created after January 31, 2003. For VIEs
created before January 31, 2003, the requirements of FIN 46R apply as of
February 1, 2004. The adoption of FIN 46R did not have an impact to the
Company's consolidated financial statements as at and for the year ended
January 31, 2004 and as at February 1, 2004.
[ii] Canadian GAAP
In November 2001, the CICA approved Accounting Guideline No. 13,
"Hedging Relationships", an accounting guideline establishing
conditions which must be satisfied in order to apply hedge accounting.
These guidelines will not affect the Company until the fiscal year
starting February 1, 2004. There will be no impact to the Company upon
adoption of this guideline.
In November 2003, the CICA made changes to Section 3870, "Stock-Based
Compensation and Other Stock-Based Payments", requiring equity
instruments awarded to employees be measured and expensed using the
fair value method. The main impact for the Company will be to record
compensation expense relating to the award of stock options to
employees that the Company had previously chosen to disclose. See Note
12 to the Company's consolidated financial statements.
The Company will adopt these changes effective February 1, 2004 on a
retroactive basis with restatement of prior periods. This change will
result in a decrease to net income of $512,000 for the year ended
January 31, 2004 and an increase to deficit of $286,000 as at
January 31, 2003.
In June 2003, the CICA issued Accounting Guideline AcG-15,
"Consolidation of Variable Interest Entities", to provide guidance for
applying the principles in Handbook Section 1590, "Subsidiaries", to
certain entities. Although the CICA is contemplating amendments to the
guideline, it is expected to be effective for the Company's fiscal
year beginning February 1, 2005. The Company will review the impact of
the amended guideline, if any, on the Company's consolidated financial
statements when the CICA issues the amended guideline.
37
C. Research and Development
The Company has made significant investments in product development
over the past few years, including introducing several new internally-developed
software products and adding features and integrating acquired technologies
into existing products. The Company incurred research and development expenses
(before investment tax credits) of $9,753,000 for the twelve months ended
January 31, 2004, $10,459,000 for the twelve months ended January 31, 2003, and
$10,895,000 for the twelve months ended January 31, 2002. Such expenditures
constituted approximately 16.3%, 16.7%, and 19.3% of the Company's revenue for
fiscals 2004, 2003, and 2002, respectively. Research and development expenses
are comprised of salaries and other direct costs associated with the
development of new products and existing products.
The Company has historically improved on its products and on the value
it has been able to deliver to customers through its ongoing efforts to
continually improve its software products through new versions and increased
functionality that responds to the needs of its customers and helps it retain
its competitive advantage in its market spaces. The Company intends to continue
to make substantial investments in research and development to enhance existing
products, develop new products and to respond to technological change and
competitive products and services. The main focus of the Company's planned
research and development activities for fiscal 2005 will be to continue to
develop and devote resources to its integration, resiliency and audit solutions
and to continue to make general enhancements to its existing products. For
further detail on the Company's planned research and development activities for
fiscal 2005, see "Operating and Financial Review and Prospects -- Outlook".
D. Trend Information
Over the last two fiscal years the Company has adjusted its business
model to drive a significant improvement in operating profits. During fiscal
2004, factors such as the strengthening of the Canadian dollar and global
political and economic events put significant pressure on the business model,
but the Company still delivered record levels of profitability. The Company
believes that the business model is solid and provides the foundation to
leverage increased revenue to new record levels of profitability. The Company's
balance sheet is strong and the Company believes that the LiveIntegration,
LiveResiliency, LiveAudit and LiveCapture solutions will continue to resonate
in the marketplace. The Company is however, aware of the uncertain economic and
business conditions that could cause fluctuations in operating results.
Nevertheless, the Company remains committed to its objective of generating
significant value for its shareholders, customers, business partners and
employees.
The Company expects to continue to pursue its strategy of developing
and marketing software solutions that allow companies to integrate, protect,
capture and audit their data. More enterprises are expected to recognize the
importance of managing data for business intelligence, enterprise application
integration and e-business applications in real-time. To establish and maintain
useful databases for these purposes, data must be captured, transformed and
flowed from the source databases that generate operational data to separate
databases such as data warehouses or web servers in real-time. Competitive
pressures are forcing more companies to be available to their customers 24
hours a day. Having key operational systems unavailable due to planned (system
38
maintenance, upgrade or backup) or unexpected (hardware or communications
failure) system outages is no longer acceptable. The U.S. Food and Drug
Administration ("FDA") is mandating that all FDA-regulated firms provide
electronic audit trails, also known as E-Records, for FDA examination. It is
expected that federal regulators in other industries will follow suit and
mandate similar E-Records requirements. The Sarbanes-Oxley Act requires that
CEOs and CFOs certify the adequacy of internal processes and controls that
affect financial reporting. The Company's LiveAudit solution can create the
real-time audit trail from any database necessary to ensure adequate controls
for Sarbanes-Oxley or FDA E-Records compliance. The Company's LiveBusiness
solutions are designed to help companies address all these needs.
In December 2003, the Company acquired the remaining shares of
PointBase, making it a wholly-owned subsidiary. It is expected that PointBase
will be slightly dilutive to earnings in the first half of fiscal 2005, but
will break even over the full fiscal year. Beyond adding stability and
enhancing service levels for the existing PointBase customers, the Company
expects to continue to focus on PointBase technology to expand its existing
wireless data capture solutions for barcode and RFID applications and also on
new data synchronization solutions for the handheld marketplace.
E. Off-balance sheet arrangements.
The Company does not enter into off-balance sheet financing as a
matter of practice except for operating leases as disclosed below. In
accordance with GAAP, neither the lease liability nor the underlying asset is
carried on the balance sheet, as the terms of the leases do not meet the
criteria for capitalization.
F. Tabular disclosure of contractual obligations.
As of January 31, 2004, the Company had future commitments and
contractual obligations as summarized in the following table. These commitments
are principally comprised of operating leases for the Company's leased premises
and capital leases for computer equipment.
- ----------------------------------------------------------------------------------------------------------------------
(Canadian $) Payments Due by Period
Contractual Obligations Total Less than 1 year 1 - 3 years 4- 5 years After 5 years
----------------------------------------------------------------------------------------
Capital Lease Obligations $32,000 $32,000 $0 $0 $0
Operating Leases 8,205,000 2,519,000 3,388,000 2,054,000 244,000
--------- --------- --------- --------- -------
Total Contractual Obligations 8,237,000 2,551,000 3,388,000 2,054,000 244,000
- ----------------------------------------------------------------------------------------------------------------------
39
ITEM 6. Directors, Senior Management and Employees
A. Directors and Senior Management
The following table sets forth the name, municipality of residence,
principal occupation and month of election of each of the directors of the
Company on the date of this form:
Name and
Municipality of Residence Principal Occupation Elected Director
- ------------------------- -------------------- ----------------
P. KIRK DIXON.................... Secretary and Executive Vice November 1997
Midhurst, Ontario President, Business Development of
the Company
DONALD L. LENZ(1)(3)............. Managing Director of Newport Partners September 1999
Toronto, Ontario Inc.
BRYAN E. PLUG(1)(2) ............. President and Chief Executive Officer October 1996
Saratoga, California of Kontiki, Inc.
KEITH POWELL(2)(3)............... Principal, Keith Powell Consulting May 2001
Mississauga, Ontario Inc.
NIGEL W. STOKES (3).............. Chairman, President and Chief December 1995
Toronto, Ontario Executive Officer of the Company
E. HERMAN WALLENBURG............. Chief Scientist of the Company November 1997
Toronto, Ontario
DONALD WOODLEY(1)(2)............. President of The Fifth Line Enterprise May 2001
Town of Mono, Ontario
- --------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Corporate Governance Committee.
The term of office for all directors expires at the time of the
election of their successors at the close of the next annual meeting of
shareholders of the Company.
40
Senior Management
The following table sets forth the name, municipality of residence,
position with the Company and principal occupation of each of the senior
managers of the Company on the date of this form:
Name and Position with the Company
Municipality of Residence and Principal Occupation
- ------------------------- -------------------------
PETER F. CAULEY ................. Vice President, Finance and Chief
Toronto, Ontario Financial Officer
P. KIRK DIXON.................... Secretary and Executive Vice
Midhurst, Ontario President, Business Development
JUDY PARKES...................... Vice President of Technical Services
Toronto, Ontario
REAN PRETORIUS................... Senior Vice President, Global
Irvine, California Channel and Alliances
STEWART A. RITCHIE............... Senior Vice President, Sales,
Newmarket, Ontario Americas and EMEA
NIGEL W. STOKES.................. Chairman, President and Chief
Toronto, Ontario Executive Officer
DONALD G. SYMONDS................ Vice President, Sales, EMEA
London, United Kingdom
E. HERMAN WALLENBURG............. Chief Scientist
Toronto, Ontario
As a group, as at January 31, 2004 directors and senior officers
owned, directly or indirectly, or exercised control or direction over 3,117,174
(approximately 27.33% of the total outstanding on such date) Common Shares of
the Company. The information as to shares owned directly or over which control
or direction is exercised by the directors and officers, but which are not
registered in their names, not being within the knowledge of the Company, has
been furnished by such directors and officers.
The principal occupations of each of the directors and officers of the
Company for the five years preceding the date of this Form and additional
biographical information is set forth below:
Peter F. Cauley joined the Company in November 1996 as the Company's
Corporate Controller and also served as Interim CFO from December 1999 to
August 2000. In January 2001 Mr. Cauley was appointed Vice President, Finance
and Chief Financial Officer.
P. Kirk Dixon co-founded the Company with Mr. Wallenburg in November
1993, and was Secretary and Treasurer of the Company until appointed as
Executive Vice President, Implementation in December 1995. Mr. Dixon was
appointed as Executive Vice President, Development and Support of the Company
on March 16, 2000, Executive Vice President, Global Operations and Secretary of
the Company on March 12, 2001, and to his current position as Executive Vice
President, Business Development and Secretary of the Company on January 14,
2004. Mr. Dixon has been a director of the Company since November 1997.
Donald L. Lenz is a founding partner of Newport Partners Inc., an
independent investment bank based in Toronto, Canada. Mr. Lenz also sits on
several boards including those of Mad Catz Interactive Inc., Trizec Canada
Inc., Cancer Care Ontario, Ontario Genomics Institute and The Laidlaw
Foundation. He is also Vice Chairman of the Ontario Research and Development
Challenge Fund and Chair of Cancer Care Ontario Central East Region. From 1986
to 1999, Mr. Lenz was a senior partner with the Investment Banking Division of
RBC Dominion Securities Inc. Mr. Lenz has been a director of the Company since
September 1999.
Bryan E. Plug was President of SAP Canada Inc., an integrated business
applications software vendor, from 1991 until July 1997. Mr. Plug was the first
President and Chief Executive Officer of Pandesic LLC (the Internet company
from SAP and Intel) from July 1997 to May 1998. Mr. Plug was President, Chief
Executive Officer and Chairman of the Board of SMART Technologies, Inc., a
developer and supplier of customer-driven Enterprise Relationship Management
software, from June 1998 to July 1999. Mr. Plug was formerly Chief Executive
Officer of Kintana, Inc. (formerly Chain Link Technologies, Inc.), a leading
41
provider of e-Business applications management software based in Sunnyvale,
California. Mr. Plug led Kintana to its successful sale to Mercury Interactive
which was completed August 15, 2003. Mr. Plug currently is President and Chief
Executive Officer of Kontiki, Inc., a provider of on demand business video
solutions that improves the business processes and results of corporate
communications, training and sales enablement, and customer support. Mr. Plug
has been a director of the Company since October 1996.
Keith Powell is currently the principal of Keith Powell Consulting
Inc., an information technology consulting firm and a Partner in XPV Capital
Corp., a venture capital company investing in early stage communications
companies. Mr. Powell also sits on several other boards including DMTI Spatial
Inc., electroBusiness.com Inc., ClientLogic Corporation, Diversinet
Corporation, Selkirk Financial Technologies Inc., Sumitomo Mitsui Banking
Corporation of Canada and the Arthritis and Autoimmunity Research Center
Foundation. From 1980 to 2000, Mr. Powell held a number of positions with
Nortel Networks, including Senior Vice President, Information Services & Chief
Information Officer from 1996 to 2000. Mr. Powell was appointed as a director
of the Company in May 2001.
Judy Parkes is currently Vice President of Technical Services. Ms.
Parkes has more than 20 years of information technology experience and has a
proven track record of delivering services and support on time and within
budget. She is responsible for overseeing the Company's global Product Support,
Training and Professional Services teams in the Americas and EMEA. Since
joining DataMirror in 1996, Ms. Parkes has worked at both the head office in
Markham, Ontario, and at the EMEA headquarters in London, England, where she
has served as Pre-sales Engineer, Support Manager, Professional Services
Manager and Technical Director, EMEA. She has also held Programmer/Analyst,
Consultant and Project Manager positions at other companies including TriEx
Computer Solutions, where she worked on several large-scale customer
development projects.
Rean Pretorius is currently Senior Vice President, Global Channel and
Alliances. Mr. Pretorius joined the Company in 2003 and has over 20 years of
sales experience including over 13 years of senior sales management experience,
Mr. Pretorius oversees the Company's global channel and alliance relationships.
Prior to joining DataMirror, Mr. Pretorius was Executive Vice President of
Worldwide Sales at Vision Solutions, where he led the growth of Vision's
customer base. He also co-founded and served as Chief Executive Officer at
Silverlake Technology Solutions. Under his leadership, Silverlake signed a
worldwide agreement with IBM Business Recovery Services. He currently serves on
the Discovery Science Centre Board.
Stewart A. Ritchie commenced employment with the Company on November
16, 1998 as Channels Manager, Americas, and was appointed as Vice President,
Sales, Americas in March 2000. Mr. Ritchie was appointed as Senior Vice
President, Sales, Americas and EMEA in November, 2003. Prior to joining the
Company, Mr. Ritchie managed channel sales and enterprise accounts for Network
Associates (Canada) from February 1995 to October 1998.
Nigel W. Stokes founded Nidak Associates Inc. ("Nidak"), a
client/server and database consulting firm, in 1986. Mr. Stokes was President
of Nidak until the firm was sold to SHL Systemhouse Inc., a worldwide systems
integration and computer consulting firm, in 1993 at which time Mr. Stokes
became a Managing Director of that organisation. Mr. Stokes joined the Company
in October 1994 and became Chairman and Chief Executive Officer in December
1995. Mr. Stokes assumed the role of President of the Company in August 1998.
Donald G. Symonds was named Vice President, Sales, EMEA of the Company
in September 1999. From April 1996 to September 1999 Mr. Symonds held other
positions with the Company including Director, Business Planning, EMEA,
Director, Channel Operations (EMEA) and Channel Consultant. Prior to joining
the Company, Mr. Symonds held a variety of professional and senior management
positions with IBM Canada and also was employed independently as a marketing
consultant.
E. Herman Wallenburg co-founded the Company with Mr. Dixon in November
1993, and was President of the Company until appointed as Executive Vice
President, Research and Development in December 1995. Mr. Wallenburg was
appointed to his current position as Chief Scientist of the Company in March
2000. Mr. Wallenburg has been a director of the Company since November 1997.
Donald Woodley is currently the President of The Fifth Line
Enterprise, a consulting firm engaged in providing strategic advisory services
to the Canadian information technology industry. From February 1997 to October
1999, Mr. Woodley was President of Oracle Corporation Canada Inc. From
September 1987 to January 1997, Mr. Woodley was President of Compaq Canada Inc.
Mr. Woodley was appointed as a director of the Company in May 2001. Mr. Woodley
also sits on several boards including those of TELU.S. Corporation, Steam
Whistle Brewing, and OnX Enterprise Solutions Inc. Mr. Woodley is the immediate
past Chair of the Board of Governors of The Stratford Festival of Canada.
42
B. Compensation
1. Summary Compensation Table
The following table sets forth information concerning the compensation
earned during the financial years ended January 31, 2004, 2003, and 2002 by the
three directors who are employed by the Company.
Summary Compensation Table
==================================================================================================================================
Annual Compensation Long Term Compensation
- ----------------------------------------------------------------------------------------------------------------------------------
Awards Payouts
- ----------------------------------------------------------------------------------------------------------------------------------
Securities Restricted
Other Annual Under Shares or Long Term All Other
Name and Financial Salary(1) Bonus(2) Compensation Options Restricted Incentive Compensation
Principal Position Year ($) ($) ($) Granted Share Units Plan Payouts ($)
(# of ($) ($)
Common
Shares)
- ----------------------------------------------------------------------------------------------------------------------------------
Nigel W. Stokes 2004 390,000 453,000 Nil Nil Nil Nil Nil
Chairman, President and
Chief Executive Officer 2003 375,000 150,000 Nil 40,000 Nil Nil Nil
2002 275,000 Nil Nil Nil Nil Nil Nil
- ----------------------------------------------------------------------------------------------------------------------------------
P. Kirk Dixon 2004 249,600 188,750 Nil Nil Nil Nil Nil
Secretary and Executive
Vice President, Business 2003 240,000 50,000 Nil 10,000 Nil Nil Nil
Development
2002 200,000 Nil Nil Nil Nil Nil Nil
- ----------------------------------------------------------------------------------------------------------------------------------
Herman Wallenburg 2004 176,800 Nil Nil Nil Nil Nil Nil
Chief Scientist
2003 170,000 Nil Nil 5,000 Nil Nil Nil
2002 150,000 Nil Nil Nil Nil Nil Nil
==================================================================================================================================
(1) Salary payments are reported on the basis of the fiscal year in which the salary was earned and paid.
(2) Bonus payments are reported on the basis of the fiscal year in which the bonus, if any, was paid. Bonuses paid in
a fiscal year include bonuses that were only determinable by the compensation committee after the end of the
previous fiscal year as those bonuses were pegged to previous fiscal year performance. Bonuses paid in a fiscal
year may also include a quarterly performance bonus which is paid in the quarter immediately after the preceding
quarter. Bonus payments earned in respect of the fiscal years 2004, 2003, and 2002 were respectively for Mr.
Stokes: $261,300, $453,000, and $150,000, Mr. Dixon: $108,875, $188,750, and $50,000 and Mr. Wallenburg: nil, nil,
and nil.
43
2. Stock Options
Option Grants During the Most Recently Completed Financial Year
The following table sets out the number of options granted during the
year ended January 31, 2004 to the three directors employed by the Company.
==========================================================================================================================
% of Total Market Value of Common
Securities Under Options Exercise Price Shares on Date of Grant(1)
Name and Options Granted Granted to
Principal Position (# Common Shares) Employees in ($/Common Share) ($/Common Share) Expiration Date
Fiscal Year
- --------------------------------------------------------------------------------------------------------------------------
Nigel W. Stokes
Chairman, President and Nil Nil Not applicable Not applicable Not applicable
Chief Executive Officer
- --------------------------------------------------------------------------------------------------------------------------
P. Kirk Dixon
Secretary and Executive Nil Nil Not applicable Not applicable Not applicable
Vice President, Business
Development
- --------------------------------------------------------------------------------------------------------------------------
Herman Wallenburg
Chief Scientist Nil Nil Not applicable Not applicable Not applicable
- --------------------------------------------------------------------------------------------------------------------------
Notes:
(1) The market value of the Common Shares on the date of the grant is
determined by taking the average of the closing price of the Common Shares
on the Toronto Stock Exchange for the 5 immediately preceding trading days.
Aggregated Option Exercised During the Most Recently Completed Financial Year
and Financial Year-End Option Values
The following table sets out the number of options exercised during
the year ended January 31, 2004 and the number of exercisable/unexercisable
options held as at January 31, 2004 by the three directors employed by the
Company.
=============================================================================================================================
Securities Aggregate
Acquired on Value Number of Unexercised Options at Value of Unexercised in-the-Money
Name and Exercise Realised January 31, 2004(1) Options at January 31, 2004(2)
Principal Position (#) ($) ----------------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
(#) (#) ($) ($)
- -----------------------------------------------------------------------------------------------------------------------------
Nigel W. Stokes
Chairman, President and Nil Nil 159,625(3) 43,875(4) 694,460(5) 202,830(6)
Chief Executive Officer
- -----------------------------------------------------------------------------------------------------------------------------
P. Kirk Dixon
Secretary and Executive Nil Nil 55,000 5,000 201,250 27,250
Vice President, Business
Development
- -----------------------------------------------------------------------------------------------------------------------------
Herman Wallenburg
Chief Scientist Nil Nil 2,500 2,500 13,625 13,625
=============================================================================================================================
Notes:
(1) Includes options that become exercisable within 60 days of January 31, 2004.
(2) Based on the closing trading price of the Common Shares on The Toronto Stock Exchange on January 30, 2004 of $16.99.
(3) Includes 39,625 options exercisable of Mr. Stoke's spouse.
(4) Includes 23,875 options unexercisable of Mr. Stoke's spouse.
(5) Includes $237,460 value of exercisable options of Mr. Stoke's spouse.
(6) Includes $93,830 value of unexercisable options of Mr. Stoke's spouse.
44
The Company's directors, executive officers and senior officers are
eligible to participate in the Company's Share Purchase Plan. The purpose of
the Share Purchase Plan is to provide long-term incentives to attract, motivate
and retain key employees, officers, directors and consultants providing
services to the Company. Shares issued under the Share Purchase Plan are issued
for market consideration determined by taking the average of the closing price
of the Shares on the Toronto Stock Exchange for the five immediately preceding
trading days prior to the date of issuance. The Share Purchase Plan provides
that the Company may loan money to participants to purchase Common Shares of
the Company. The Company has not loaned money to participants since the
provisions of the Sarbanes-Oxley Act prohibiting such loans came into effect.
There was no indebtedness in favour of the Company for all officers, directors,
employees and former officers, directors and employees in respect of the Share
Purchase Plan as at January 31, 2004.
During the fiscal year ending on January 31, 2004, directors of the
Company who were not employees of the Company were entitled to be paid a fee of
$2,500 for each quarterly meeting of the Board of Directors attended. Directors
are also eligible to participate in the Company's Executive Stock Compensation
Plan and Share Purchase Plan.
The Company maintains liability insurance for its directors and
officers acting in their respective capacities. During the fiscal year ended
January 31, 2004, the Company maintained directors and officers insurance
coverage in an aggregate amount of U.S. $20 million, subject to a U.S. $100,000
loss payable by the Company. The annual premium for this coverage is U.S.
$217,528.
C. BOARD PRACTICES
EMPLOYMENT AND SERVICE AGREEMENTS
The Company entered into an employment agreement of indefinite
duration with Mr. Nigel Stokes, Chairman, President and Chief Executive Officer
dated as of March 25, 2002. This employment agreement provided for an annual
salary of $375,000 effective February 1, 2002 and also provided for a
retroactive salary and bonus adjustment payment of $150,000 covering the period
from September 30, 2000 to January 31, 2002 during which Mr. Stokes had
continued his employment with the Company under the terms of a previous
employment agreement that had expired on September 30, 2000. The Compensation
Committee approved an increase in annual base salary to $390,000 for fiscal
2004 and to $400,000 for fiscal 2005. Mr. Stokes' agreement also provides that
he may receive an annual performance bonus of up to $300,000, the amount to be
determined by the Board of Directors on the recommendation of the Compensation
Committee based upon consideration of the financial performance of the Company
in respect of each fiscal period. The Compensation Committee approved an
increase in the amount of annual performance bonus that Mr. Stokes may receive
to $325,000 for fiscal 2005. In addition, Mr. Stokes is eligible to receive an
additional annual performance bonus of up to $300,000, the amount to be
determined by the Board of Directors on the recommendation of the Compensation
Committee based upon consideration of over-achievement of the financial
performance of the Company in respect of each fiscal period. Mr. Stokes is also
eligible to participate in the Company's group benefit plans and Executive
Stock Compensation Plan. The employment agreement also provides that in the
event of termination of the executive's employment, he will not compete with
the Company for a period of eighteen months following that date. The employment
agreement provides that the Company may terminate Mr. Stokes' employment
without cause by making a lump sum payment of an amount equal to two times his
annual salary thereunder. The employment agreement automatically renews each
year and is subject to annual compensation review.
The Company has entered into an employment agreement of indefinite
duration with Mr. Kirk Dixon, Executive Vice President, Business Development
(then Executive Vice President, Development and Global Operations) dated April
23, 2002. This employment agreement provided for an annual salary of $240,000
effective February 1, 2002 and also provided for a retroactive bonus payment of
$50,000 covering the period from May 8, 2001 to January 31, 2002 during which
Mr. Dixon had continued his employment with the Company under the terms of a
previous employment agreement that had expired on May 8, 2001. The Company
approved an increase in annual base salary to $249,600 for fiscal 2004 and to
$250,000 for fiscal 2005. Mr. Dixon's agreement also provides that he may
receive an annual performance bonus of up to $125,000, the amount to be
determined by the Board of Directors on the recommendation of the Compensation
Committee based upon consideration of the financial performance of the Company
in respect of each fiscal period. The Company set the amount of annual
performance bonus that Mr. Dixon may receive to $80,000 for fiscal 2005. Mr.
Dixon is also eligible to participate in the Company's group benefit plans and
Executive Stock Compensation Plan. The agreement also provides that in the
event of termination of the executive's employment, he will not compete with
the Company for a period of eighteen months following that date. The employment
agreement provides that the Company may terminate Mr. Dixon's employment
without cause by making a lump sum payment of an amount equal to one times his
annual salary thereunder. The employment agreement automatically renews each
year and is subject to annual compensation review.
The Company has entered into an employment agreement dated as of June
14, 2002 with Mr. Herman Wallenburg, Chief Scientist. This employment agreement
provides for an annual salary of $170,000, retroactive to February 1, 2002. The
Company approved an increase in annual base salary to $176,800 for fiscal 2004
and to $180,000 for fiscal 2005. Mr. Wallenburg's agreement also provides that
45
he may receive an annual performance bonus of up to $20,000, the amount to be
determined by the Board of Directors on the recommendation of the Compensation
Committee based upon consideration of the financial performance of the Company
in respect of each fiscal period during the duration of the employment
agreement and any extension or renewal thereof. Mr. Wallenburg is also eligible
to participate in the Company's group benefit plans and Executive Stock
Compensation Plan. This agreement also provides that in the event of
termination of the executive's employment, he will not compete with the Company
for a period of eighteen months following that date. The employment agreement
provides that the Company may terminate Mr. Wallenburg's employment without
cause by making a lump sum payment of an amount equal to one half his annual
salary thereunder.
There are no other agreements with directors providing for benefits
upon termination of employment.
AUDIT AND REMUNERATION COMMITTEES
The Board of Directors adopted a new charter for the Audit Committee
and a formal charter for the Compensation Committee at its meeting on March 3,
2003. The Audit Committee Charter is attached to the Form 20-F for fiscal 2003
filed June 5, 2003 ("2003 Form") as Exhibit 6.1. The Compensation Committee
Charter is attached to the 2003 Form as Exhibit 6.2. The Audit Committee
provides assistance to the Board of Directors in fulfilling its oversight
responsibility to the shareholders, potential shareholders, the investment
community, and others relating to the Company's financial statements and the
financial reporting process, the systems of internal accounting and financial
controls, the internal audit function, the annual independent audit of the
Company's financial statements, and the legal compliance and ethics programs as
established by management and the Board and as required by applicable law. The
Audit Committee is currently composed of Mr. Lenz, Mr. Plug and Mr. Woodley.
The Board of Directors has determined that Mr. Lenz, Mr. Plug and Mr Woodley
are independent of management under applicable laws, rules and listing
standards. The Compensation Committee reviews and approves the compensation of
the directors and the CEO and advises the Board and management on compensation
and incentive policy. The Compensation Committee is currently composed of Mr.
Plug, Mr. Powell and Mr. Woodley. The Board of Directors has determined that
Mr. Plug, Mr. Powell and Mr. Woodley are independent of management under
applicable laws, rules and listing standards.
D. Employees
- ---------------------------------------------------------------------------------------------------------------
Number of Employees
- ---------------------------------------------------------------------------------------------------------------
As at January 31, 2004 As at January 31, 2003 As at January 31, 2002
- ---------------------------------------------------------------------------------------------------------------
North America 236 212 245
- ---------------------------------------------------------------------------------------------------------------
Europe 59 59 61
- ---------------------------------------------------------------------------------------------------------------
Other 4 5 5
- ---------------------------------------------------------------------------------------------------------------
Total 299 276 311
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
Research & Development 91 82 96
- ---------------------------------------------------------------------------------------------------------------
Sales & Marketing 168 151 167
- ---------------------------------------------------------------------------------------------------------------
Other 40 43 48
- ---------------------------------------------------------------------------------------------------------------
Total 299 276 311
- ---------------------------------------------------------------------------------------------------------------
46
E. Share Ownership
The following table sets forth with respect to each director the
number of Common Shares of the Company owned beneficially, or over which
control or direction was exercised, by such person at the date of this form. No
special voting rights attach to any of the following Common Shares. Percentages
are calculated based on the Common Shares of the Company outstanding on April
30, 2004.
Director Common Shares Percentage of Class
- -------- ------------- -------------------
P. Kirk Dixon 527,340(1) 4.62%
Donald L. Lenz 27,433(2) 0.24%
Bryan E. Plug 35,000(3) 0.31%
Keith Powell 10,000(4) 0.09%
Nigel W. Stokes 2,114,438(5) 18.54%
E. Herman Wallenburg 457,740(6) 4.01%
Donald Woodley 16,663(7) 0.15%
__________
(1) Includes 55,000 Options exercisable either currently or within 60 days.
(2) Includes 20,000 Options exercisable either currently or within 60 days.
(3) Includes 15,000 Options exercisable either currently or within 60 days.
(4) Includes 7,015 Options exercisable either currently or within 60 days.
(5) Includes 36,000 common shares held by his spouse, 120,000 Options
exercisable either currently or within 60 days and 14,625 Options
exercisable either currently or within 60 days granted to his spouse.
(6) Includes 2,500 Options exercisable either currently or within 60 days.
(7) Includes 10,000 Options exercisable either currently or within 60 days.
The following table sets forth the outstanding options to acquire
Common Shares granted to each director as at the date of this Form. Each option
was granted at an exercise price equal to the market value of the Common Shares
on the date of the grant which was determined by taking the average of the
closing price of the Common Shares on the Toronto Stock Exchange for the 5
immediately preceding trading days. There was no purchase price in respect of
any of the options.
- --------------------------------------------------------------------------------------------------------------
Director Number of Common Shares Exercise Price Expiration Date
- --------------------------------------------------------------------------------------------------------------
P. Kirk Dixon 50,000 $13.51 May 29, 2005
- --------------------------------------------------------------------------------------------------------------
10,000 $11.54 March 18, 2007
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Nigel W. Stokes 100,000 $13.51 May 29, 2005
- --------------------------------------------------------------------------------------------------------------
40,000 $11.54 March 18, 2007
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Herman Wallenburg 5,000 $11.54 March 18, 2007
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Donald L. Lenz 20,000 $6.44 September 14, 2004
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Keith Powell 20,000 $6.28 June 30, 2006
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Bryan E. Plug 20,000 $9.06 December 31, 2005
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Donald Woodley 20,000 $6.28 June 30, 2006
- --------------------------------------------------------------------------------------------------------------
47
EMPLOYEE STOCK OPTION PLAN
The Company has adopted an employee stock option ("Option") plan (the
"Plan"). All bona fide full-time employees of and all others who provide
services to the Company or any of its subsidiaries and who are designated by
the Company as being eligible to participate in the Plan will be eligible to
participate in the Plan ("Eligible Participants", and actual participants
"Participants"). The Plan was originally approved by the Board and the
Company's shareholders on December 5, 1996 and November 20, 1996 respectively.
The Board and shareholders approved amendments to the Plan which were effective
on May 25, 1999 and June 14, 2000 which increased the number of shares under
the Plan to 2,000,000 and removed directors and officers as Eligible
Participants under the Plan, respectively. The Board may, in its absolute
discretion, add to, amend, vary, cancel, discontinue or terminate the Plan or
any Options granted thereunder, at any time without notice. Any such amendment,
will, if required, be subject to the prior approval of, or acceptance by, any
stock exchange or regulatory body having jurisdiction over the Company's
securities. The Plan is not subject to the provisions of the Employee
Retirement Income Security Act of 1974, as amended, and is not qualified under
Section 401(a) of the United States Internal Revenue Code of 1986, as amended
(the "Code").
The purpose of the Plan is to provide long-term incentives to attract,
motivate and retain key employees and consultants providing services to the
Company. The Plan will be administered by the Board or a committee of the Board
to which such administrative authority is delegated by the Board. The Board has
the power to make rules and regulations to administer the Plan, and to
interpret the provisions and rules of the Plan. The Board's determination of
all questions arising under the Plan are final and binding on all Participants.
The Company maintains detailed records of each Option granted, including number
of options granted, date of grant, earliest and latest exercise dates, vesting
dates and exercise price.
The maximum number of Common Shares reserved for issuance upon the
exercise of all Options granted under the Plan may not exceed 2,000,000,
provided however, that pursuant to Section 6 of the Plan, the number of Shares
subject to Options granted will be adjusted by the Board to reflect adjustments
in the number of Common Shares arising as a result of subdivisions or
consolidation of Common Shares, capital reorganization, reclassification or
change of outstanding equity shares, mergers, consolidations, or amalgamation.
If any Option is terminated, cancelled or has expired without being fully
exercised, any unissued Common Shares which have been reserved to be issued
upon the exercise of the Option will become available to be issued upon the
exercise of Options subsequently granted under the Plan, provided that any such
termination or cancellation of Options will be conducted in accordance with the
applicable rules of any stock exchange in Canada upon which the Common Shares
of the Company are listed.
The Board will determine, in its sole discretion, which Eligible
Participants will be granted Options pursuant to the Plan. Participation in the
Plan is entirely voluntary. An Option granted under the Plan may not be
assigned, encumbered or otherwise disposed of by the Participant, otherwise
than by will or by the laws of succession. The Board will designate the number,
price, earliest and latest exercise dates and vesting period of Common Shares
that a Participant is entitled to purchase under the Plan, as well as whether
an option granted to a U.S. holder may be an incentive stock option ("ISO").
The number of Common Shares reserved for issuance under the Plan to any one
person may not exceed 5% of the Outstanding Issue and the number of Common
Shares reserved for issuance to Insiders under the Plan may not exceed 10% of
the Outstanding Issue. The option price per Common Share will be determined by
the Board, but may not be less than the weighted average trading price for the
Common Shares on The Toronto Stock Exchange for the five (5) business days
immediately preceding the date of the Option grant. The Board may designate the
earliest and latest dates upon which an Option may be exercised, provided
however, that such dates may be as early as the grant date, but no later than
ten years following the grant date. Unless specified otherwise, 20% of a
Participant's Options will vest each year over a five year period.
Unless otherwise determined by the Board, if a Participant ceases to
be an Eligible Participant for any reason other than death, any Options held by
such Participant which have not been exercised will immediately cease and
terminate and be of no further force or effect whatsoever regardless of whether
the Options have vested or not. If a Participant ceases to be an Eligible
Participant on account of death, and at the time of death that person has not
previously had his or her rights under the Plan terminated, any Options which
at the time of death have vested and were exercisable, may be exercised for up
to 180 days following the death (or the expiry date of the Option, if earlier).
Any Options which at the time of death have not vested may, at the discretion
of the Company and upon its written consent, be exercised for up to 90 days
following the death (or the expiry date of the Option, if earlier). In the
event of a take-over bid, the Board may, in its discretion, give its express
consent to the immediate exercise of any Options held by Participants,
regardless of whether such Options have vested.
A Participant's Options will terminate and may not be exercised after
the latest exercise date, as determined by the Board, which may not be later
than 10 years after the Option was granted. A Participant must provide the
Company with written notice of any intention to exercise Options. Upon
satisfactory payment of the Option, the Participant will be entitled to a
certificate representing that number of Common Shares being exercised. No
Participant will have any rights as a shareholder until the Common Shares have
been paid for in full. Subject to applicable law, the Company may, in its
discretion, make loans, or provide guarantees for loans, on terms approved of
by the Company, to assist Participants in the purchase of Common Shares upon
the exercise of Options.
48
EXECUTIVE STOCK OPTION PLAN
The Company has adopted an executive stock option plan (the "Executive
Plan"). The Executive Plan was approved by the Board and the Company's
shareholders on April 28 and May 30, 2000, and June 14, 2000, respectively. All
members of the board of directors and all bona fide full-time officers of the
Company or any of its subsidiaries who are designated by the Company as being
eligible to participate in the Plan will be eligible to participate in the
Executive Plan ("Eligible Executives", and those actually participating "Plan
Executives"). The Company may, in its absolute discretion, add to, amend, vary,
cancel, discontinue or terminate the Executive Plan or any Options granted
thereunder, at any time without notice. Any such amendment, will, if required,
be subject to the prior approval of, or acceptance by, any stock exchange or
regulatory body having jurisdiction over the Company's securities. The
Executive Plan is not subject to the provisions of the Employee Retirement
Income Security Act of 1974, as amended, and is not qualified under Section
401(a) of the United States Internal Revenue Code of 1986, as amended (the
"Code").
The purpose of the Executive Plan is to provide long-term incentives
to attract, motivate and retain key executive officers and directors of
Company. The Executive Plan will be administered by or under the authority of
the Board or a person or committee to which such administrative authority is
delegated by the Board. The Company has the power to make rules and regulations
to administer the Executive Plan, and to interpret the provisions and rules of
the Executive Plan. The Company's determination of all questions arising under
the Executive Plan are final and binding on all Plan Executives. The Company
maintains detailed records of each Option granted, including number of options
granted, date of grant, earliest and latest exercise dates, vesting dates and
exercise price. The maximum number of Common Shares reserved for issuance upon
the exercise of all Options granted under the Executive Plan is currently
500,000, provided however, that pursuant to Section 7 of the Executive Plan,
the number of Common Shares subject to Options granted will be adjusted to
reflect adjustments in the number of Common Shares arising as a result of any
subdivisions or consolidation of Common Shares, capital reorganization,
reclassification or change of outstanding equity shares, merger, consolidation,
or amalgamation. On March 3, 2003, the Board of Directors, subject to approval
of shareholders and the Toronto Stock Exchange, adopted an amendment to the
Executive Plan to increase the maximum number of Common Shares issuable upon
exercise of options under the Executive Plan to 800,000. The Company's
shareholders approved the amendment at the Annual and Special Meeting of the
shareholders held on June 12, 2003.
The Company will determine, in its sole discretion, which Eligible
Executives will be granted Options pursuant to the Executive Plan.
Participation in the Executive Plan is entirely voluntary. An Option granted
under the Executive Plan may not be assigned, encumbered or otherwise disposed
of by the Plan Executive, otherwise than by will or by the laws of succession.
The Company will designate the number, price, earliest and latest exercise
dates and vesting periods of Common Shares that a Plan Executive is granted
under the Executive Plan, as well as whether an option granted to a U.S. holder
may be an incentive stock option ("ISO").
The number of Common Shares reserved for issuance under the Executive
Plan to any one person may not exceed 5% of the Outstanding Issue and the
number of Common Shares reserved for issuance to Insiders under the Executive
Plan may not exceed 10% of the Outstanding Issue. The option price per Common
Share will be determined by the Company, but may not be less than the weighted
average trading price for the Common Shares on The Toronto Stock Exchange for
the five (5) business days immediately preceding the date of the Option grant.
The Company may designate the earliest and latest dates upon which an Option
may be exercised, provided however, that such dates may be as early as the
grant date, but no later than ten years following the grant date. Unless
specified otherwise, 25% of a Plan Executive's Option will vest each year over
a four year period.
Unless otherwise determined by the Company, if a Plan Executive ceases
to be an Eligible Executive for any reason other than death, any Options held
by such Plan Executive which have not been exercised will immediately cease and
terminate and be of no further force or effect whatsoever regardless of whether
the Options have vested or not. If a Plan Executive ceases to be an Eligible
Executive on account of death, and at the time of death that person has not
previously had his or her rights under the Executive Plan terminated, any
Options which at the time of death have vested and were exercisable, may be
exercised for up to 180 days following the death (or the expiry date of the
Option, if earlier). Any Options which at the time of death have not vested
may, at the discretion of the Company and upon its written consent, be
exercised for up to 90 days following the death (or the expiry date of the
Option, if earlier). In the event of a take-over bid, the Board may, in its
discretion, give its express consent to the immediate exercise of any Options
held by Plan Executives, regardless of whether such Options have vested.
A Plan Executives Options will terminate and may not be exercised
after the latest exercise date for such options. A Plan Executive must provide
the Company with written notice of any intention to exercise Options. Upon
satisfactory payment of the Option exercise price, the Plan Executive will be
entitled to a certificate representing that number of Common Shares being
purchased upon exercise of the Option. No Plan Executive will have any rights
as a shareholder until the Common Shares have been paid for in full. Subject to
applicable law, the Company may, in its discretion, make loans, or provide
guarantees for loans, on terms approved of by the Company, to assist Plan
Executive's in the purchase of Common Shares upon the exercise of Options.
49
SHARE PURCHASE PLAN
The Company has adopted a share purchase plan (the "Purchase Plan").
The Purchase Plan was originally approved by the Board and the Company's
shareholders on December 5, 1996 and November 20, 1996 respectively. On August
27, 2001, the Directors approved amendments to the Purchase Plan effective as
of July 24, 2001. All directors, officers and employees of the Company or of
any of its subsidiaries or affiliates and others who provide services to the
Company or any of its subsidiaries or affiliates may be eligible to participate
in the Purchase Plan ("EPPP", and those participating "PPP"). Generally, the
Company may, in its absolute discretion, amend, suspend, discontinue or
terminate the Purchase Plan at any time without notice. However, any such
amendment, will, if required, be subject to the prior approval of, or
acceptance by, any stock exchange or regulatory body having jurisdiction over
the Company's securities and no such amendment or termination may be made at
any time which has a material adverse effect upon the existing rights of a PPP
in respect of Common Shares which have been acquired under the Purchase Plan,
prior to the date of such amendment or termination without his or her consent
in writing. Upon termination of the Purchase Plan, all Loans to PPPs will
either (i) continue until their termination or maturity on the terms and
conditions thereof, or (ii) at the discretion of each PPP, be paid in full. The
Purchase Plan is not subject to the provisions of the Employee Retirement
Income Security Act of 1974, as amended, and is not qualified under Section
401(a) of the United States Internal Revenue Code of 1986, as amended (the
"Code").
The purpose of the Purchase Plan is to provide long-term incentives to
attract, motivate and retain key employees, officers, directors and consultants
providing services to the Company. The Purchase Plan will be administered by or
under the authority of the Board or a person or committee to which such
administrative authority is delegated by the Board. The Company has the power
to make rules and regulations to administer the Purchase Plan, and to interpret
the provisions and rules of the Purchase Plan. The Company undertakes to
provide each PPP with (i) a written explanation of the pertinent provisions of
the Purchase Plan (including amendments thereto applicable to the PPP),
together with a written explanation of the rights and obligations of a PPP;
(ii) any other information regarding the Purchase Plan required to be provided,
and in a manner prescribed, under any applicable laws; and (iii) a statement of
the PPP's account setting out the outstanding balance under all Loans each
fiscal year. The Company will maintain such account for each PPP in such manner
that the outstanding balance of any Loan of each PPP and/or any contribution
made on behalf of PPPs may be audited and ascertained. Such individual accounts
will be posted monthly.
The Company will appoint a custodian (the "Custodian") to serve as the
Custodian under the Purchase Plan. The Company may not appoint itself, or any
of its directors or employees as the Custodian. The Custodian will hold the
full amount of all Loans as custodian for the respective PPPs, purchase with
such amounts Common Shares under the Purchase Plan and hold those Common Shares
pledged to the Company. The Company has the right to appoint a new Custodian.
The maximum number of Common Shares reserved for issuance from
treasury under the Purchase Plan is currently 250,000. The number of Common
Shares issued under all Share Compensation Arrangements to any Insider may not
exceed 5% of the Outstanding Issue in any one year period and the number of
Common Shares issued to Insiders under all Share Compensation Arrangements may
not exceed 10% of the Outstanding Issue in any one year period. To become a
PPP, an EPPP must (i) be granted a Loan (as described below in "Loans to
PPPs"), (ii) execute any and all documents determined by the Company, in its
sole discretion, to be necessary or desirable to evidence the Loan and (iii)
borrow the Loan amount, and authorize the Company in writing to regularly
deduct amounts from his or her salary in repayment of the Loan. The Company has
not loaned money to PPPs since the provisions of the Sarbanes-Oxley Act
prohibiting such loans came into effect. As at January 31, 2004, the Company
had no such outstanding loans to PPPs. Prior to the coming into effect of the
Sarbanes-Oxley Act, the Company granted interest free loans to certain of its
directors under the Purchase Plan. Loans made prior to the coming into effect
of the Sarbanes-Oxley Act are grandfathered. If consented to by the Company, an
EPPP may purchase shares through a Consultant Entity, a Personal Holding
Company, an RRSP or an RRIF.
Common Shares may be acquired, at the option of the Company, by (i)
subscription to the Company or (ii) market transactions. If acquired by
subscription, the price per Common Share will be the weighted average trading
price for the Common Shares on The Toronto Stock Exchange for the five (5)
business days immediately preceding the date of the subscription. Any
appreciation in the value of Common Shares will inure to the benefit of, and
any dividends payable in respect of the Common Shares will be paid to, the PPPs
and any depreciation in the value of the Common Shares will be borne by the
PPPs. Subject to applicable law, the Company may, in its discretion, grant
Loans to PPPs to be used exclusively for the purchase of Common Shares in
accordance with Section 5 of the Purchase Plan. In granting a Loan, the Company
will determine: (i) the amount of the Loan, (ii) the term of the Loan, which
may not exceed ten years; (iii) the interest rate of the Loan; and (iv) the
amount and frequency of the payments, which will be made by regular payroll
deduction and applied to accrued interest and outstanding principal. The
Purchase Plan provides that the Company may from time to time, at its sole
discretion, establish procedures, terms and conditions upon which it will
contribute, on behalf of a PPP, an amount of up to 15% of any Loan provided to
such PPP to be used for the purchase of Common Shares under the Purchase Plan.
Repayment of Loans is to be secured by the Common Shares purchased with the
proceeds of the Loans, which Common Shares are to be deposited with and held by
a Custodian in accordance with the terms of the Purchase Plan until the Loan
has been repaid in full, provided however, that pursuant to Section 7.2 of the
Purchase Plan, if, on each six month anniversary of the date that the Loan was
granted, all amounts due and payable under the Loan have been paid in full,
then upon direction from the Company, the Custodian will deliver to the PPP
certificates representing the portion of the Common Shares originally purchased
for which the Loan has been repaid.
50
The full principal amount payable together with all accrued and unpaid
interest in respect of all Loans made to a PPP will become due and immediately
payable on the date that the PPP ceases to be a bona fide full-time employee,
director or consultant of the Company, or a date which is ninety (90) days
after (i) the death of the PPP, (ii) the date on which the Company determines
that the PPP is totally and permanently disabled and unable to return to his or
her position with the Company; or (iii) the PPP has defaulted on his or her
Loan and such amount remains unpaid.
ITEM 7. Major Shareholders and Related Party Transactions
A. Major Shareholders
The following table sets forth certain information regarding the beneficial
ownership of the Company's outstanding Common Shares as of the date of this
Form. The information in this table is based on the Company's records,
information provided to the Company by directors and executive officers, a
review of any reports filed under the early warning reporting system with
Canadian securities regulators and delivered to the Company, and a review of
any Schedules 13D and 13G filed by shareholders with the Securities and
Exchange Commission and delivered to the Company in accordance with applicable
law. Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission and includes shares over which the
indicated beneficial owner exercises voting and/or investment power. Common
shares subject to options currently exercisable or exercisable within 60 days
are deemed outstanding for computing the percentage ownership of the person
holding the options but are not deemed outstanding for computing the
percentage ownership of any other person. This information is based on
11,404,827 Common Shares outstanding as of April 30, 2004. Under applicable
Canadian regulatory rules, shareholders are not required to disclose an
ownership interest unless it exceeds 10% of the voting rights attached to the
Common Shares of the Company. As a result, Canadian shareholders who did not
file a Schedule 13D or 13G will not be shown in this table unless their
ownership interest exceeds 10% of the voting rights attached to their Common
Shares, or unless they are otherwise known to the Company. None of the
Company's major shareholders have any special voting rights attached to their
Common Shares.
Aggregate Percentage of
Number of Outstanding
Name Common Shares Common Shares
Nigel W. Stokes 2,114,438(1) 18.5%
AGF Funds Inc. 1,784,950 15.7%
TAL Global Asset Management Inc. 1,095,625 9.6%
8.1%
Guardian Capital Inc. 925,200
Notes:
(1) Includes 36,000 Common Shares held by his spouse, 120,000 Options
exercisable either currently or within 60 days and 14,625 Options
exercisable either currently or within 60 days granted to his spouse.
Significant changes in ownership
The following table sets forth significant changes in ownership by the
Company's Major Shareholders over the previous 3 fiscal years, based on
information available to the Company.
------------------------------------------------------------------------------------------------
Major Shareholder Date Transaction
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
TAL Global Asset Management Inc. Period from March 31, Holdings increased from
2002 to March 31, 2003 approximately 7.7% to 13.0%
------------------------------------------------------------------------------------------------
TAL Global Asset Management Inc. Period from October 31, Holdings decreased from
2003 to March 31, 2004 approximately 11.44% to 9.70%
------------------------------------------------------------------------------------------------
Information available to the Company indicates that, as at May 20,
2004, there were three record holders in the U.S. holding 1,375,438 common
shares of the Company.
Based on the information available to the Company, the Company is not
directly or indirectly owned or controlled by any other corporation, foreign
government or person. To the best of the Company's knowledge there are no
arrangements in existence that could lead to a subsequent change in control of
the Company.
51
B. Related Party Transactions
In the normal course of operations during fiscal 2003, the Company
entered into several different transactions with SmartSales Inc. (see further
discussion in the "Operating and Financial Review and Prospects - Acquisitions
and Investments" section of this document), a company with a common Chairman of
the Board of Directors and significant shareholder as the Company's CEO and
significant shareholder, Nigel Stokes. In fiscal 2004, there were no
transactions with SmartSales Inc. In fiscal 2003, the related party
transactions with SmartSales Inc. consisted of rental income of $51,000. These
transactions in fiscal 2003 were made at market prices under normal trade terms
and conditions. During fiscal 2003, SmartSales Inc. entered into receivership
and the Company wrote off its rent receivable of $77,000.
During fiscal 2003, the Company purchased certain assets of SmartSales
from the trustee in bankruptcy of the estate of SmartSales in a cash
transaction accounted for under the purchase method. The assets acquired
consisted of computer equipment, office furniture, customer lists, accounts
receivable, and software and related technology and intellectual property. The
Company did not assume any liabilities or obligations of SmartSales pursuant to
the transaction. The Company expects the purchase to be of benefit to it, but
does not expect the transaction to have a material impact on its financial
results or on its business and affairs. The transaction was approved by the
court under the Bankruptcy and Insolvency Act (Canada). The President, CEO and
Chairman of the Company, Mr. Nigel Stokes, is a former director and Chairman of
SmartSales and he held approximately 20% of the common shares of SmartSales.
Mr. Stokes did not receive any of the proceeds of the sale from the Trustee as
a result of his shareholding in SmartSales. The former directors of SmartSales
including Mr. Stokes may benefit indirectly from the transaction because the
Trustee's use of the proceeds of the sale reduced certain potential liabilities
of the former directors with respect to unpaid taxes. At the request of Mr.
Stokes, the nature and extent of his interest in SmartSales was disclosed and
recorded in the minutes of the proceedings of the directors of the Company. The
terms of the transaction were reviewed and approved unanimously by the board of
directors of the Company. The board of directors was of the view that the
assets to be acquired and the immediate potential for collecting accounts
receivable and generating revenue would benefit the Company.
The Company's directors, executive officers and senior officers are
eligible to participate in the Company's Share Purchase Plan. The purpose of
the Share Purchase Plan is to provide long-term incentives to attract, motivate
and retain key employees, officers, directors and consultants providing
services to the Company. Under the Share Purchase Plan the Company may loan
money to participants to purchase Common Shares of the Company. Repayment of
these loans is secured by a pledge of the Common Shares purchased with the
proceeds of the loan and such Common Shares are deposited with and held by a
custodian until the loan has been repaid. The Company has granted interest free
loans to certain of its directors to purchase Common Shares under the Share
Purchase Plan. The loans are to be repaid from quarterly directors' fees due to
such persons as they are earned, and may also be repaid in whole or in part at
any time without penalty. The full principal amount of a director's loan is
immediately due and payable on the date a director ceases to be a director of
the Company. The aggregate indebtedness to the Company of all participants in
the Share Purchase Plan as at April 30, 2004 was nil. The Company has not
loaned money to directors since the provisions of the Sarbanes-Oxley Act
prohibiting such loans came into effect. Loans made prior to the coming into
effect of the Sarbanes-Oxley Act are grandfathered. See Directors, Senior
Management and Employees -- Share Ownership. The following table sets out the
indebtedness of the officers and directors of the Company to the Company in
connection with the purchase of Common Shares under the Share Purchase Plan:
====================================================================================================================
Name and Principal Involvement of Largest Amount Amount Financially Security for
Position the Company Outstanding Outstanding as at Assisted Indebtedness
During the Fiscal April 30, 2004 Purchases of
Year Ended Common Shares
January 31, 2004 During the Fiscal
Year Ended
January 31, 2004
- --------------------------------------------------------------------------------------------------------------------
Donald L. Lenz, Lender $5,000 0 0 Pledge of
director Common Shares
- --------------------------------------------------------------------------------------------------------------------
Donald Woodley, Lender $2,500 0 0 Pledge of
director Common Shares
====================================================================================================================
52
C. Interests of experts and counsel
Information not required for annual report.
53
ITEM 8. Financial Information
A. Consolidated Statements and Other Financial Information
See item 17.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings. Mr.
Stokes was a director of SmartSales Inc. which went bankrupt in fiscal 2003.
See Item 7.b - Related Party Transactions.
DIVIDENDS
The Company has not paid any dividends on its Common Shares in the
last six completed financial years. The payment of any future dividends will be
at the discretion of the Company's Board of Directors and will depend upon,
among other things, the Company's future earnings, operations, capital
requirements and financial condition, general business conditions and
contractual restrictions on payment of dividends, if any.
B. Significant Changes
No significant change has occurred since the date of the annual
financial statements.
ITEM 9. The Offer and Listing
A. Offer and Listing Details
NATURE OF TRADING MARKET
The Company's Common Shares are traded on the Nasdaq National Market
under the symbol "DMCX" and on the Toronto Stock Exchange under the symbol
"DMC". The following tables set forth, for the periods indicated, high and low
closing prices of the Company's Common Shares as reported on the Nasdaq
National Market and on the Toronto Stock Exchange. Prices on the Toronto Stock
Exchange are shown in Canadian dollars. Prices on the Nasdaq National Market
are shown in U.S. dollars. The Company's shares began trading on the Nasdaq
National Market on January 18, 2001.
- --------------------------------------------------------------------------------
Annual Market Prices on the Toronto Stock Exchange
- --------------------------------------------------------------------------------
High Low
- --------------------------------------------------------------------------------
Fiscal year ended January 31, 2004 $18.00 $9.00
- --------------------------------------------------------------------------------
Fiscal year ended January 31, 2003 $13.50 $7.50
- --------------------------------------------------------------------------------
Fiscal year ended January 31, 2002 $15.49 $4.52
- --------------------------------------------------------------------------------
Fiscal year ended January 31, 2001 $29.90 $11.75
- --------------------------------------------------------------------------------
Fiscal year ended January 31, 2000 $15.25 $3.75
- --------------------------------------------------------------------------------
54
- --------------------------------------------------------------------------------
Annual Market Prices on the Nasdaq National Market
- --------------------------------------------------------------------------------
High Low
- --------------------------------------------------------------------------------
Fiscal year ended January 31, 2004 $13.96 $6.63
- --------------------------------------------------------------------------------
Fiscal year ended January 31, 2003 $8.56 $4.61
- --------------------------------------------------------------------------------
Fiscal year ended January 31, 2002 $10.19 $2.70
- --------------------------------------------------------------------------------
Fiscal year ended January 31, 2001 $12.50 $10.06
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Quarterly Market Prices on the Toronto Stock Exchange
- --------------------------------------------------------------------------------
High Low
- --------------------------------------------------------------------------------
Fiscal year ended January 31, 2005
- --------------------------------------------------------------------------------
First Quarter $19.11 $14.40
- --------------------------------------------------------------------------------
Fiscal year ended January 31, 2004
- --------------------------------------------------------------------------------
Fourth Quarter $18.00 $14.50
- --------------------------------------------------------------------------------
Third Quarter $14.48 $11.42
- --------------------------------------------------------------------------------
Second Quarter $12.30 $9.00
- --------------------------------------------------------------------------------
First Quarter $12.75 $10.75
- --------------------------------------------------------------------------------
Fiscal year ended January 31, 2003
- --------------------------------------------------------------------------------
Fourth Quarter $12.40 $7.95
- --------------------------------------------------------------------------------
Third Quarter $9.25 $7.50
- --------------------------------------------------------------------------------
Second Quarter $10.75 $8.50
- --------------------------------------------------------------------------------
First Quarter $13.50 $9.23
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Quarterly Market Prices on the Nasdaq National Market
- --------------------------------------------------------------------------------
High Low
- --------------------------------------------------------------------------------
Fiscal year ended January 31, 2005
- --------------------------------------------------------------------------------
First Quarter $14.40 $10.46
- --------------------------------------------------------------------------------
Fiscal year ended January 31, 2004
- --------------------------------------------------------------------------------
Fourth Quarter $13.96 $11.15
- --------------------------------------------------------------------------------
Third Quarter $10.65 $8.15
- --------------------------------------------------------------------------------
Second Quarter $8.65 $6.63
- --------------------------------------------------------------------------------
First Quarter $8.77 $7.00
- --------------------------------------------------------------------------------
Fiscal year ended January 31, 2003
- --------------------------------------------------------------------------------
Fourth Quarter $8.02 $5.13
- --------------------------------------------------------------------------------
Third Quarter $6.00 $4.61
- --------------------------------------------------------------------------------
Second Quarter $6.78 $5.21
- --------------------------------------------------------------------------------
First Quarter $8.56 $6.00
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Monthly Market Prices on the Toronto Stock Exchange
- --------------------------------------------------------------------------------
High Low
- --------------------------------------------------------------------------------
May 2004 $16.35 $10.22
- --------------------------------------------------------------------------------
April 2004 $16.10 $14.40
- --------------------------------------------------------------------------------
March 2004 $17.50 $15.90
- --------------------------------------------------------------------------------
February 2004 $19.11 $16.90
- --------------------------------------------------------------------------------
January 2004 $17.80 $16.25
- --------------------------------------------------------------------------------
December 2003 $16.60 $15.75
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Monthly Market Prices on the Nasdaq National Market
- --------------------------------------------------------------------------------
High Low
- --------------------------------------------------------------------------------
May 2004 $11.65 $ 7.27
- --------------------------------------------------------------------------------
April 2004 $12.35 $10.46
- --------------------------------------------------------------------------------
March 2004 $13.27 $11.98
- --------------------------------------------------------------------------------
February 2004 $14.40 $12.39
- --------------------------------------------------------------------------------
January 2004 $13.75 $12.44
- --------------------------------------------------------------------------------
December 2003 $12.75 $11.75
- --------------------------------------------------------------------------------
55
ITEM 10. Additional Information
A. Share capital
Information not required for annual report.
B. Memorandum and Articles
BY-LAWS AND ARTICLES OF INCORPORATION
The predecessor corporation to the Company was incorporated under the
Business Corporations Act (Ontario) on November 19, 1993. This predecessor
corporation amalgamated on February 1, 1996 with four other corporations to
form the Company as it is currently constituted. The Company's articles of
amalgamation were amended on December 6, 1996 to effect a 1 - for - 2 share
consolidation of the Common Shares and to create a class of preferred shares
issuable in series. The Company's articles are on file with the Ontario
Ministry of Consumer and Business Services under the Ontario Corporation Number
1166680. The Company's articles do not include a stated purpose.
DIRECTORS
In accordance with the Business Corporations Act (Ontario), a director
who is a party to a material contract or transaction or proposed material
contract or transaction with the Company, or is a director or officer of, or
has a material interest in, any person who is a party to a material contract or
transaction or proposed material contract or transaction with the Company,
shall disclose in writing to the Company or request to have entered in the
minutes of meetings of directors the nature and extent of his or her interest.
In such circumstances, a director shall not vote on any resolution to approve
the contract or transaction unless the contract or transaction is: (a) an
arrangement by way of security for money lent to or obligations undertaken by
the director for the benefit of the Company or an affiliate; (b) one relating
primarily to his remuneration as a director, officer, employee or agent of the
Company or an affiliate; (c) one for indemnity or insurance; or (d) one with an
affiliate.
In accordance with the Business Corporations Act (Ontario), the
directors of the Company may fix the remuneration of the directors, officers
and employees of the Company. Where a material contract or a material
transaction (including a contract involving director remuneration) is entered
into between the Company and a director, or between the Company and another
person of which a director of the Company is a director or officer or in which
he or she has a material interest, the director is not accountable to the
Company or its shareholders for any profit or gain realised from the contract
or transaction and the contract or transaction is neither void nor voidable, by
reason only of the relationship or by reason only that the director is present
at or is counted to determine the presence of quorum at a meeting of directors
that authorized the contract or transaction, if the director disclosed his
interest in accordance with the Business Corporation Act (Ontario) and the
contract or transaction was reasonable and fair to the Company at the time it
was so approved.
The directors may from time to time, in such amounts and on such terms
as they deem expedient: (a) borrow money on the credit of the Company; (b)
issue, sell or pledge debt obligations (including bonds, debentures, notes or
other similar obligations, secured or unsecured) of the Company; (c) charge,
mortgage, hypothecate or pledge all or any of the currently owned or
subsequently acquired real or personal, movable or immovable, property of the
Company, including book debts, rights, powers, franchises and undertaking, to
secure any debt obligations or any money borrowed or other debt or liability of
the Company. The directors may from time to time delegate to such one or more
of the directors and officers of the Company as may be designated by the
directors all or any of the powers conferred on the directors above to such
extent and in such manner as the directors shall determine with respect to each
such delegation.
Under the Business Corporations Act (Ontario), the following persons
are disqualified from being a director of the Company: (i) a person who is less
than eighteen years of age; (ii) a person who is of unsound mind and has been
so found by a court in Canada or elsewhere; (iii) a person who is not an
individual; and (iv) a person who has the status of bankrupt. Except for the
foregoing restrictions, there is no age limit requirement for directors of the
Company. Directors are not required to own shares in the Company.
Directors of the Company are elected annually at an annual meeting of
the shareholders of the Company. Each director holds office until the close of
the next annual meeting or until the successor of such director is elected or
appointed in accordance with the By-Laws of the Company and the Business
Corporations Act (Ontario). Each Common Share of the Company entitles the
holder thereof to one vote at a meeting of shareholders.
56
COMMON SHARES
The Company is authorized to issue an unlimited number of Common
Shares. The rights, privileges, restrictions and conditions of the Common
Shares include the rights to vote at all meetings of shareholders and to
receive the remaining property of the Company upon dissolution.
Subject to the prior rights of the holders of Preferred Shares, the
holders of Common Shares are entitled to receive dividends, as and when
declared by the Board of Directors, out of monies properly applicable to the
payment of dividends, in such amount and in such form as the Board of Directors
may from time to time determine, and all dividends which the Board of Directors
may declare on the Common Shares shall be declared and paid in equal amounts
per share on all Common Shares outstanding as of the applicable record date.
In the event of the dissolution, liquidation or winding-up of the
Company, whether voluntary or involuntary, or any other distribution of assets
of the Company among its shareholders for the purpose of winding up its
affairs, subject to the prior rights of the holders of Preferred Shares, the
holders of Common Shares will be entitled to receive the remaining property and
assets of the Company.
PREFERRED SHARES
The Company is authorized to issue an unlimited number of Preferred
Shares issuable in series. Subject to the Business Corporations Act (Ontario),
the directors may fix, before the issue thereof, the number of Preferred Shares
of each series, the designation, rights, privileges, restrictions and
conditions attaching to the shares of each series, including, without
limitation, any voting rights, any right to receive dividends (which may be
cumulative or non-cumulative and variable or fixed) or the means of determining
such dividends, the dates of payment thereof, any terms and conditions of
redemption or purchase, any conversion rights, and any rights on liquidation,
dissolution or winding-up of the Company, any sinking fund or other provisions,
the whole to be subject to the issuance of a certificate of amendment setting
forth the designation, rights, privileges, restrictions and conditions
attaching to the Preferred Shares.
Subject to the Business Corporations Act (Ontario), the holders of
Preferred Shares shall not, as such, be entitled to receive notice of or to
attend any meeting of the shareholders of the Company or to vote at any such
meeting, but shall be entitled to receive notice of and to attend, but not to
vote at, any meeting of the shareholders called for the purpose of authorizing
the dissolution of the Company or the sale, lease or exchange of all or
substantially all the property of the Company other than in the ordinary course
of business, unless the Company shall fail, for a period of eighteen
consecutive months, to pay dividends at the prescribed rate, if any, on the
Preferred Shares, whereupon and so long as any such dividends shall remain in
arrears, the holders of the Preferred Shares shall be entitled to receive
notice of, to attend and vote at all meetings of the shareholders, except
meetings at which only holders of a specified class of shares are entitled to
attend.
The Preferred Shares shall be entitled to preference over the Common
Shares of the Company and over any other shares ranking junior to the Preferred
Shares with respect to priority in the payment of dividends and in the
distribution of assets in the event of the liquidation, dissolution or
winding-up of the Company, whether voluntary or involuntary, or any other
distribution of the assets of the Company among its shareholders for the
purpose of winding-up its affairs.
The Preferred Shares of each series shall, with respect to the payment
of dividends and the distribution of assets in the event of liquidation,
dissolution or winding-up of the Company, whether voluntary or involuntary,
rank on a parity with the Preferred Shares of every other series and be
entitled to preference over the Common Shares. If any amount of cumulative
dividends (whether or not declared) or declared non-cumulative dividends or any
amount payable on any such distribution of assets constituting a return of
capital in respect of the Preferred Shares of any series is not paid in full,
the Preferred Shares of such series shall participate ratably with the
Preferred Shares of every other series in respect of all such dividends and
amounts.
ACTION NECESSARY TO CHANGE RIGHTS OF SHAREHOLDERS
In order to add to, change or remove any of the rights, privileges,
restrictions or conditions of any of the Company's shares, the articles would
need to be amended to effect the change. Such an amendment would require
approval by special resolution, which is a resolution that is submitted to a
special meeting of shareholders of the Company duly called for the purpose of
considering the resolution and passed by at least two-thirds of the votes cast,
or consented to in writing be each shareholder entitled to vote at such a
meeting. To add to, remove or change the rights, privileges, restrictions or
conditions attached to the shares of a particular class or series, the
amendment is required to be approved by special resolution of the holders of a
class or series of shares voting separately as a class or series. A shareholder
who is entitled to vote on such a resolution is entitled to dissent in respect
of such a resolution and, if the resolution is adopted and the Company
implements such changes, demand payment of the fair value of its shares in
accordance with the Business Corporations Act (Ontario).
57
MEETINGS OF SHAREHOLDERS
An annual meeting of shareholders is held each year for the purpose of
considering the Company's financial statements and auditor's report, electing
directors, appointing auditors and for the transaction of other business as may
be brought before the meeting. The Board of Directors has the power to call a
special meeting of shareholders at any time. Subject to the Business
Corporations Act (Ontario), the holders of not less than 5 per cent of the
Common Shares of the Company may requisition the Board of Directors to call a
meeting of shareholders for the purposes stated in the requisition.
Notice of the time and place of each meeting of shareholders must be
given not less than 21 days, nor more than 50 days, before the date of each
meeting to each director, to the auditor and to each shareholder entitled to
vote at the meeting. Notice of a meeting of shareholders called for any other
purpose other than consideration of the minutes of an earlier meeting,
financial statements and auditor's report, election of directors and
reappointment of the incumbent auditor, must state the nature of the business
in sufficient detail to permit the shareholder to form a reasoned judgment
thereon and must state the text of any special resolution or by-law to be
submitted to the meeting.
The only persons entitled to be present at a meeting of shareholders
are those entitled to vote, the directors of the Company and the auditor of the
Company. Any other person may be admitted only on the invitation of the
chairman of the meeting or with the consent of the meeting. If a corporation is
winding-up, the Business Corporations Act (Ontario) permits a liquidator
appointed by the shareholders, during the continuance of a voluntary
winding-up, to call and attend meetings of the shareholders. In circumstances
where a court orders a meeting of shareholders, the court may direct how the
meeting may be held, including the parties entitled, or required, to attend the
meeting.
LIMITATIONS ON RIGHT TO OWN SECURITIES
There are no limitations on the rights to own Common Shares, including
the rights of non-resident or foreign shareholders to hold or exercise voting
rights on the Common Shares imposed by the laws of Canada or the laws of the
Province of Ontario or by the articles or By-Laws of the Company except as
follows:
(a) foreign investors who acquire control of the Company must
comply with the Investment Canada Act; and
(b) the majority of directors of the Company must be resident
Canadians, as defined in the Business Corporations Act
(Ontario).
CHANGE IN CONTROL PROVISIONS
The Company and CIBC Mellon Trust Company (the "Rights Agent") entered
into an agreement dated as of May 7, 2002 (the "Rights Agreement") to implement
a shareholder rights plan for the Company (the "Shareholder Rights Plan"). A
shareholder rights plan creates a right (which can only be exercised when a
person acquires control of 20% or more of the Company's Common Shares) for each
shareholder, other than the 20% buyer, to acquire additional Common Shares of
the Company at one-half of the market price at the time of exercise. This
significantly dilutes the share position of the 20% buyer and practically
prevents that person from acquiring control of 20% or greater of the Company's
Common Shares unless the rights plan has been withdrawn or the buyer makes a
Permitted Bid, as that term is defined in the Shareholder Rights Plan. The
easiest way for the buyer to have a rights plan withdrawn is for it to
negotiate with the Board of Directors to have the rights plan waived or to
apply to a securities commission to order withdrawal of the rights plan if the
Company cannot develop an auction. Both of these approaches will give the Board
of Directors more time and control over any sale process and increase the
likelihood of a better offer to the Company's shareholders. The primary
objectives of the Shareholder Rights Plan are to ensure that, in the context of
a bid for control of the Company through an acquisition of the Company's Common
Shares, the Board of Directors has sufficient time to explore and develop
alternatives for maximizing shareholder value, to provide adequate time for
competing bids to emerge, to ensure that shareholders have an equal opportunity
to participate in such a bid and to give them adequate time to properly assess
the bid and lessen the pressure to tender typically encountered by a
securityholder of an issuer that is subject to a bid.
C. Material contracts
For the two years preceding the date of this Form 20-F, the Company
has not entered into any material contracts, other than contracts entered into
in the ordinary course of business, the purchase of shares in Idion in fiscals
2003 and 2004 and the subsequent sale in fiscal 2005 of those shares in Idion,
and the purchase of all of the shares of PointBase Inc. which is now a wholly
owned subsidiary of the Company. See "Operating and Financial Review and
Prospects -- Acquisitions and Investments".
D. Exchange Controls
The Investment Canada 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 Canada Act (a "non-Canadian"), unless after review,
the minister responsible for the Investment Canada Act is satisfied that the
investment is likely to be of net benefit to Canada. An investment in Common
Shares of the Company by a non-Canadian (other than a "WTO investor" as defined
58
in the Investment Canada Act) would be reviewable under the Investment Canada
Act if it was an investment to acquire direct control of the Company and the
value of the assets of the Company was $5,000,000 or more.
An investment in Common Shares of the Company by a WTO Investor,
assuming the Company is not involved in a "cultural business", "financial
service" business or "transportation service" business, each as defined in the
Investment Canada Act, would be reviewable under the Investment Canada Act if
it was an investment to acquire direct control of the Company and the value of
the assets of the Company equals or exceeds a specified amount (the "Review
Threshold"), which is adjusted for inflation in each year. The Review Threshold
is $223 million for investments completed in 2003 and $237 million for
investments completed in 2004 and is indexed as of the first of January every
year.
A non-Canadian, whether a WTO Investor or otherwise, would acquire
control of the Company for the purposes of the Investment Canada Act if he
acquired a majority of the Common Shares of the Company. The acquisition of
less than a majority but one-third or more of the Common Shares of the Company
would be presumed to be an acquisition of control of the Company unless it
could be established the Company was not controlled in fact by the acquirer
through the ownership of Common Shares.
Certain transactions in relation to the Common Shares would be exempt
from the Investment Act, including:
o an acquisition of Common Shares by a person in the ordinary course of
that person's business as a trader or dealer in securities;
o an acquisition of control of the Company in connection with the
realization of a security interest granted for a loan or other
financial assistance and not for any purpose related to the provision
of the Investment Canada Act; and
o an acquisition of control of the Company by reason of an amalgamation,
merger, consolidation or corporate reorganization following which the
ultimate direct or indirect control in fact of the Company, though the
ownership of voting interests, remains unchanged.
E. Taxation
Canadian Federal Income Tax Considerations
The following is a summary of certain material Canadian federal income
tax considerations under the Income Tax Act (Canada) (the "Tax Act") generally
applicable to a holder of Common Shares of the Company who at all times: (i)
for purposes of the Tax Act, is not and is not deemed to be resident in Canada,
deals at arm's length with and is not affiliated with the Company, holds Common
Shares as capital property, does not use or hold and is not deemed to use or
hold Common Shares in the course of carrying on a business in Canada, and is
not a "financial institution", and (ii) for purposes of the Canada-United
States Income Tax Convention (1980), as amended (the "Convention"), is a
resident of the U.S. and not a resident of Canada and does not hold and has not
held Common Shares as part of the business property of a permanent
establishment in Canada or in connection with a fixed base in Canada
(hereinafter, a "U.S. Holder").
This summary is based upon the current provisions of the Tax Act, the
regulations thereunder, the Convention, all proposed amendments to the Tax Act,
the regulations thereunder and the Convention publicly announced by the
Department of Finance, Canada prior to the date hereof, and the administrative
policies and assessing practices of the Canada Revenue Agency made publicly
available prior to the date hereof. Except for the foregoing, this summary does
not take into account or anticipate any changes in the law or the Convention or
the administrative policies or assessing practices of the Canada Revenue Agency
whether by legislative, governmental or judicial action or decision. This
summary does not take into account provincial, territorial or foreign tax
legislation or considerations, which may differ significantly from the Canadian
federal income tax considerations described herein.
Amounts in respect of Common Shares paid or credited or deemed to be
paid or credited as, on account or in lieu of payment of, or in satisfaction
of, dividends to a U.S. Holder will generally be subject to Canadian
non-resident withholding tax. Under the Tax Act such withholding tax is levied
at a rate of 25%, which may be reduced pursuant to the terms of the Convention.
Under the Convention, the rate of Canadian non-resident withholding tax on the
gross amount of dividends beneficially owned by a U.S. Holder is generally 15%.
However, where such beneficial owner is a company which owns at least 10% of
the voting stock of the Company, the rate of such withholding is 5%.
A U.S. Holder will not be subject to tax under the Tax Act in respect
of any disposition of Common Shares (other than a disposition to the Company)
unless at the time of such disposition such Common Shares constitute "taxable
Canadian property" of the holder for purposes of the Tax Act. If the Common
Shares are listed on a prescribed stock exchange for the purposes of the Tax
Act (which currently includes the TSX and NASDAQ) at the time they are disposed
of, they will generally not constitute "taxable Canadian property" of the U.S.
Holder at the time of such disposition unless at any time during the 60-month
period immediately preceding the disposition, 25% or more of the issued shares
of any class or series of the Company was owned by the U.S. Holder, by persons
59
with whom the U.S. Holder did not deal at arm's length or by the U.S. Holder
and persons with whom the U.S. Holder did not deal at arm's length. The Common
Shares may also be taxable Canadian property in certain other circumstances.
Under the Convention, gains derived by a U.S. Holder from the disposition of
Common Shares that constitute "taxable Canadian property" will generally not be
taxable in Canada unless the value of the Common Shares is derived principally
from real property situated in Canada. If the Common Shares are listed on a
prescribed stock exchange for the purposes of the Tax Act at the time they are
disposed of by a U.S. Holder or they do not constitute "taxable Canadian
property", the U.S. Holder will not be required to comply with the provisions
of section 116 of the Tax Act, which requires a certificate to be obtained from
the Canada Revenue Agency when certain property is disposed of.
The foregoing summary of certain material Canadian federal income tax
considerations is of a general nature only and is not intended to be, nor
should it be construed to be, legal or tax advice to any particular holder of
Common Shares. Holders should consult their own tax advisors with respect to
their particular circumstances.
United States Tax Consequences
The following is a general discussion of certain material anticipated
United States federal income tax considerations relevant to holders of the
Company's Common Shares who hold such shares as capital assets (as defined in
Section 1221 of the United States Internal Revenue Code of 1986, as amended
(the "Code")). This discussion is intended to be a general description of the
United States federal income tax considerations material to a purchase of
Common Shares. Readers are cautioned that this discussion does not address all
relevant tax consequences relating to an investment in the Common Shares, nor
does it take into account tax consequences peculiar to persons subject to
special provisions of United States federal income tax law, such as financial
institutions, persons owning 10% or more (by vote or value) of the Common
Shares of the Company, persons that hold Common Shares through a partnership or
other pass through entity, or persons that hold Common Shares that are a hedge
against, or that are hedged against, currency risk or that are part of a
straddle or conversion transaction, or persons whose functional currency is not
the United States dollar. Therefore, investors should consult a tax advisor
regarding the particular consequences of purchasing Common Shares.
Except as otherwise described in this form, this discussion applies to
investors that are (i) citizens or residents of the United States, (ii)
corporations (or other entities taxable as corporations), that are created or
organised in or under the laws of the United States, any State of the United
States or the District of Columbia, (iii) estates, the income of which is
subject to federal income taxation, regardless of its source or (iv) trusts, if
a court within the United States is able to exercise primary supervision over
the administration of such trust and one or more United States persons as
described in Section 7701(a)(30) of the Code has the authority to control all
substantial decisions of such trust (a "U.S. Holder"). Holders that are not
described in the definition of a U.S. Holder are advised to consult their own
tax advisors regarding the tax considerations incident to the acquisition,
ownership and disposition of Common Shares.
Except as described below if the Company is treated as a passive
foreign investment company, investors that are U.S. Holders will be required to
include the gross amount of any distribution on Common Shares (without
reduction for Canadian tax withheld) in their gross income as a taxable
dividend, to the extent such distribution is paid from the Company's current or
accumulated earnings and profits as determined under United States federal
income tax principles. U.S. Holders must include in income an amount equal to
the United States dollar value of such dividends on the date of receipt, based
on the exchange rate on such date. Provided that the Company is not treated as
a passive foreign investment company, described below, a foreign personal
holding company, or a foreign investment company, in the case of an individual
U.S. Holder, such dividends will be eligible for a maximum rate of tax of 15%
for dividends received before January 1, 2009, provided certain conditions are
satisfied. To the extent that dividend distributions paid by the Company exceed
the Company's current or accumulated earnings and profits, they will be treated
first as a return of capital up to the U.S. Holder's adjusted tax basis in the
shares, and then as a gain from the sale or exchange of the shares.
U.S. Holders will generally be entitled to a foreign tax credit, or
deduction for United States federal income tax purposes, in an amount equal to
the Canadian tax withheld from a distribution on Common Shares. Dividends paid
by the Company generally will constitute foreign source "passive income" for
foreign tax credit purposes, which could reduce the amount of foreign tax
credit that a U.S. Holder may claim. The United States Internal Revenue Code
applies various limitations on the amount of foreign tax credit that may be
claimed by a United States taxpayer. Because of the complexity of those
limitations, U.S. Holders should consult their own tax advisors with respect to
the amount of the foreign taxes they may claim as a credit. Dividends paid by
the Company on the Common Shares will not generally be eligible for the
"dividends received" deductions.
A U.S. Holder that sells Common Shares will generally recognise a gain
or loss in an amount equal to the difference, if any between the amount
realised on the sale and the U.S. Holder's adjusted tax basis in the shares.
Unless the Company is treated as a passive foreign investment company
(described below), any gain or loss recognised upon the sale of shares held as
capital assets will be a long-term or short-term capital gain or loss,
depending on whether the Common Shares have been held for more than one year.
Such gain or loss generally will be treated as United States source income or
loss for United States foreign tax credit purposes.
60
The rules governing "passive foreign investment companies" can have
significant tax effects on U.S. Holders. The Company could be classified as a
passive foreign investment company if, for any taxable year, either:
(a) 75% or more of the Company's gross income is "passive
income", which generally includes interest, dividends,
certain gains from the sale or exchange of shares or
securities and some types of rents and royalties, or
(b) on average, 50% or more of the Company's assets, by fair
market value, or, in some cases, by adjusted tax basis,
produce or are held for the production of "passive income."
Distributions constituting "excess distributions", as defined in
Section 1291 of the Code, from a passive foreign investment company and
dispositions of shares of a passive foreign investment company are subject to
the highest rate of tax on ordinary income in effect and to an interest charge
based on the value of the tax deferred during the period during which the
shares are owned.
The Company does not believe that it is currently a foreign investment
company for U.S. federal income tax purposes, although it may have been a
passive foreign investment company in prior years. No assurance can be provided
that the Company will not be characterized as a passive foreign investment
company in the current, or any future year. U.S. Holders who hold shares should
be aware that the Company does not intend to provide U.S. Holders with
information as to its status as a passive foreign investment company or to
comply with any record keeping, reporting or other requirements of the Code.
U.S. Holders should consult with their own tax advisors as to the tax
consequences to them of holding stock of a passive foreign investment company.
United States backup withholding tax and information reporting
requirements generally apply to certain payments to certain non-corporate
holders of the Common Shares. Information reporting generally will apply to
payments of dividends on, and to proceeds from the sale or disposition of,
Common Shares by a payor within the United States to a U.S. Holder (if that
person is other than an exempt recipient, including a corporation, not a United
States person that provides an appropriate certification and certain other
persons).
A payor within the United States will be required to withhold tax
currently at a rate of 28% on any payments made to a Common Share holder (if
that Common Share holder is other than an exempt recipient) consisting of
dividends on, or proceeds from the sale or disposition of, the Common Shares,
if the selling Common Share holder fails to furnish a correct taxpayer
identification number on United States Internal Revenue Service Form W-9 or
otherwise fails to comply with, or establish an exemption from, such backup
withholding tax requirements. Moreover, a payor or middleman may rely on a
certification provided by a payee that is not a United States person only if
such payor or middleman does not have actual knowledge or a reason to know that
any information or certification stated in such certificate is incorrect.
Investors will be allowed a refund or a credit equal to any amounts withheld
under the United States backup withholding tax rules against their United
States federal income tax liability, provided that they furnish the required
information to the United States Internal Revenue Service.
F. Dividends and paying agents
Information not required for annual report.
G. Statements by experts
Information not required for annual report.
H. Documents on display
Any documents referred to in this Form 20-F shall be available for
review at the registered office of the Company located at 3100 Steeles Avenue
East, Suite 1100, Markham, Ontario, Canada, L3R 8T3. The Company is subject to
certain of the informational requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and in accordance therewith, files
reports and other information with the Securities and Exchange Commission (the
"SEC"). As a foreign private issuer, the Company is exempt from the rules under
the Exchange Act prescribing the furnishing and content of proxy statements,
and its officers, directors and principal shareholders are exempt from the
reporting and short-swing profit recovery provisions contained in Section 16 of
the Exchange Act. Under the Exchange Act, as a foreign private issuer, the
Company is not required to publish financial statements as frequently or as
promptly as United States companies. Such reports and other information filed
with the SEC may be inspected and copied at the public reference facilities
maintained by the SEC at Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549. Copies of such material can also be obtained from the principal
office of the SEC at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates or by visiting the SEC's website at www.sec.gov.
I. Subsidiary information
Information not required.
61
ITEM 11. Quantitative and Qualitative Disclosures about Market Risk
INTEREST RATE RISK.
The Company's exposure to interest rate fluctuations relates primarily
to its investment portfolio, since the Company has no borrowings outstanding
under its line of credit at January 31, 2004.
The Company invests its cash in a variety of short-term Canadian
dollar denominated financial instruments, including government bonds,
commercial paper and banker's acceptances. The portfolio is diversified and
consists primarily of investment grade securities to minimize credit risk. Cash
balances in foreign operations are generally invested in term deposits in the
local operating banks. The investment in short-term financial instruments
carries a degree of interest rate risk, and consequently the Company's future
investment income may fall short of expectations due to changes in short-term
interest rates. The investment in short-term financial instruments is not for
trading purposes. Management estimates that average invested cash, cash
equivalents, and short-term investments balances should be approximately
$60,000,000, therefore a 1% change in interest rates could affect interest
income by as much as $600,000 for the year.
FOREIGN CURRENCY RATE FLUCTUATIONS.
In addition to Canada and the United States, the Company also operates
in the United Kingdom, Germany and other European countries and is therefore
exposed to market risks related to foreign currency fluctuations. The Company
derives most of its sales revenue from international customers, with sales
outside Canada usually denominated in U.S. dollars or European currencies
including Pounds Sterling and Euros. Accordingly, changes in exchange rates
between the Canadian dollar and these foreign currencies can positively or
negatively affect the Company's operating results. The Company has a policy of
hedging a portion of its foreign currency denominated accounts receivable.
However, management recognizes that this policy can provide only a short-term
protection against a limited portion of the Company's currency exposure. The
financial instruments utilized by the Company pursuant to its hedging policy
are not purchased for trading purposes and the Company does not enter into
foreign exchange contracts for speculative purposes.
During fiscal 2004, the Company entered into forward currency
contracts to sell U.S. dollars for Canadian dollars to hedge the future
collection of its accounts receivable denominated in U.S. dollars. At January
31, 2004, no U.S. dollar forward currency contracts were outstanding.
Subsequent to year-end, U.S. $6,000,000 of forward currency contracts were
purchased at exchange rates of approximately 1.34, maturing within sixty days
of the financial year end. These contracts hedge substantially all of the
Company's U.S. dollar based accounts receivable. During fiscal 2004, the
Company incurred a foreign exchange loss of $85,000 compared to a loss of
$326,000 in fiscal 2003.
The following table provides a sensitivity analysis on the Company's
exposure to changes in foreign exchange rates. For foreign currencies where the
Company engages in material transactions, the following table quantifies the
impact that a 10% decrease against the Canadian dollar would have had on the
Company's total revenues, operating expenses and pre-tax net income for the
year ended January 31, 2004.
=================================================================
(in thousands of Total Operating Pre-tax
Canadian $) Revenue Expenses Net Income
----------------------------------------
United States Dollar $(3,526) $(511) $(3,015)
British Pound (1,041) (639) (402)
Euro (966) (571) (395)
=================================================================
See note 16, Financial Instruments and Hedging Activities, to the
audited consolidated financial statements.
ITEM 12. Description of Securities Other than Equity Securities
Information not required for annual report
62
PART II
ITEM 13. Defaults, Dividend Arrearages and Delinquencies
None.
ITEM 14. Material Modifications to the Rights of Security Holders and Use
of Proceeds
None.
ITEM 15. Controls and Procedures
DISCLOSURE CONTROLS AND PROCEDURES
The Chief Executive Officer and the Chief Financial Officer (the
"Executive Officers") met with the General Counsel of the Company on May 20,
2004 to review the effectiveness of the Company's disclosure controls and
procedures. The Company's disclosure controls and procedures are documented in
the Company's Disclosure Policy that has been approved by the Board of
Directors. The Disclosure Policy provides that the Executive Officers and the
General Counsel are responsible for the disclosure of material information. The
Executive Officers reviewed the terms of the Disclosure Policy and considered
how effectively its controls and procedures functioned in practice. The
Executive Officers determined that these controls and procedures were adequate
for the Company and in compliance with all applicable, laws, regulations, rules
and listing standards.
On May 20, 2004, the Executive Officers evaluated the effectiveness of
the Company's disclosure controls and procedures as set out in the Disclosure
Policy and concluded that there have been no significant changes to these
controls or other factors that could significantly affect these controls.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have been no changes to the Company's internal control over
financial reporting identified in connection with the evaluation required by
paragraph (d) of 17 CFR 240.13a-15 or 240.15d-15 that occurred during the
period covered by this Form 20-F that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
ITEM 16A. Audit Committee Financial Expert
The Company's Board of Directors has determined that Mr. Bryan Plug,
an independent director of the Company, is an audit committee financial expert
serving on its Audit Committee.
ITEM 16B. Code of ethics
Management of the Company implemented an Employee Conduct Policy in
April 2002. The Employee Conduct Policy was amended in the past year to add a
section relating to the anonymous accounting complaints process adopted by the
Company. The Board of Directors formally adopted the amended Employee Conduct
Policy at its meeting on March 3, 2003. The Employee Conduct Policy applies to
all officers and employees of the Company. The Employee Conduct Policy is
attached as Exhibit 16.1 of the Company's Form 20-F filed June 5, 2003 with the
Securities and Exchange Commission. Any person may request a copy of the
Employee Conduct Policy from the General Counsel of the Company by contacting
the General Counsel at the address or telephone number of the Company's
principal executive offices set out on the first page of this Form 20-F.
ITEM 16C. Principal Accountant Fees and Services
(a) AUDIT FEES
Aggregate audit fees of $323,054 for fiscal 2004 and $321,759 for
fiscal 2003 were billed by the Company's principal accountant Ernst & Young to
the Company's for professional services normally provided for the audit of the
Company's annual financial statements or services in connection with statutory
and regulatory filings or engagements.
63
(b) AUDIT-RELATED FEES
No fees were billed for fiscal 2004 and $27,875 were billed for fiscal
2003 for assurance and related services by the principal accountant Ernst &
Young reasonably related to the performance of the audit or review of the
Company's financial statements.
(c) TAX FEES
$285,636 in fees were billed for fiscal 2004 and $479,846 in fees
were billed for fiscal 2003 for professional services rendered by the principal
accountant Ernst & Young for Canadian tax compliance, tax advice, and tax
planning for the Company, the Company's Canadian federal and provincial tax
returns, the Company's U.S. federal income tax returns, and the Company's Q1,
Q2 and Q3 fiscal 2004 tax provisions.
(d) ALL OTHER FEES
Other than the services reported under the subparagraphs (a) through
(c) above of the Item 16C, $2,230 in fees were billed for fiscal 2004 and no
fees were billed for fiscal 2003 for services related to product documentation
provided by the principal accountant, Ernst & Young.
(e) AUDIT COMMITTEE PRE-APPROVAL
The Company's Audit Committee adopted on August 26, 2003 a
pre-approval process as described in paragraph (c)(7)(i) of Rule 2-01 of
Regulation S-X. That pre-approval process requires the pre-approval from the
Audit Committee for audit fees and non-audit services by Ernst & Young. All
services provided after August 26, 2003 from Ernst & Young were pre-approved by
the Audit Committee.
64
PART III
ITEM 17. FINANCIAL STATEMENTS
65
Consolidated Financial Statements
DATAMIRROR CORPORATION
January 31, 2004
66
AUDITORS' REPORT
To the Directors of
DataMirror Corporation
We have audited the consolidated balance sheets of DataMirror Corporation as
at January 31, 2004 and 2003 and the consolidated statements of income (loss),
shareholders' equity and cash flows for each of the years in the three-year
period ended January 31, 2004. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian and generally
accepted auditing standards and the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we 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 our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at January 31,
2004 and 2003 and the results of its operations and its cash flows for each of
the years in the three-year period ended January 31, 2004 in accordance with
Canadian generally accepted accounting principles.
As described in note 2 to the consolidated financial statements, the Company
changed its accounting policy for goodwill effective February 1, 2002.
Toronto, Canada,
March 5, 2004 [except as to note 21 /s/ Ernst & Young LLP
which is as of May 14, 2004]. Chartered Accountants
67
DataMirror Corporation
CONSOLIDATED BALANCE SHEETS
[in thousands of Canadian dollars]
As at January 31
2004 2003
$ $
- ----------------------------------------------------------------------------------------------------
ASSETS
Current
Cash and cash equivalents [note 4] 9,286 13,025
Short-term investments [note 5] 32,720 25,802
Accounts receivable 11,797 12,455
Prepaid expenses 1,803 1,618
Future tax assets [note 14] 2,540 2,578
- ----------------------------------------------------------------------------------------------------
Total current assets 58,146 55,478
- ----------------------------------------------------------------------------------------------------
Capital assets, net [note 6] 3,845 3,931
Investment tax credits recoverable 1,019 1,664
Investments [note 7] 12,185 9,768
Intangibles [note 8] 5,853 7,388
Goodwill 5,175 3,118
- ----------------------------------------------------------------------------------------------------
86,223 81,347
====================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities 5,544 5,120
Deferred revenue 18,839 18,137
Current portion of capital lease obligations [note 10] 32 89
Income taxes payable 1,785 993
- ----------------------------------------------------------------------------------------------------
Total current liabilities 26,200 24,339
- ----------------------------------------------------------------------------------------------------
Future tax liabilities [note 14] 1,076 1,505
Capital lease obligations [note 10] -- 33
- ----------------------------------------------------------------------------------------------------
Total liabilities 27,276 25,877
- ----------------------------------------------------------------------------------------------------
Commitments and contingencies [notes 3, 15, 16 and 18]
Shareholders' equity
Share capital [note 11] 64,625 64,637
Deficit (5,180) (8,669)
Cumulative translation adjustment (498) (498)
- ----------------------------------------------------------------------------------------------------
Total shareholders' equity 58,947 55,470
- ----------------------------------------------------------------------------------------------------
86,223 81,347
====================================================================================================
See accompanying notes
68
DataMirror Corporation
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
[in thousands of Canadian dollars, except per share data]
Years ended January 31
2004 2003 2002
$ $ $
- -----------------------------------------------------------------------------------------------------
REVENUE
Licence 29,087 33,223 28,592
Maintenance 25,354 23,210 20,562
Services 5,551 6,057 7,222
- -----------------------------------------------------------------------------------------------------
59,992 62,490 56,376
- -----------------------------------------------------------------------------------------------------
Cost of revenue
Licence 234 239 257
Maintenance and services 11,389 12,605 13,464
- -----------------------------------------------------------------------------------------------------
11,623 12,844 13,721
- -----------------------------------------------------------------------------------------------------
Gross margin 48,369 49,646 42,655
- -----------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Selling and marketing 20,524 21,289 21,542
Research and development [note 13] 9,753 10,459 10,895
General and administration 7,946 8,812 9,088
Amortization of intangibles 3,098 2,740 3,244
- -----------------------------------------------------------------------------------------------------
41,321 43,300 44,769
- -----------------------------------------------------------------------------------------------------
Operating income (loss) 7,048 6,346 (2,114)
Investment income, net [note 10] 1,146 611 859
Other income [note 3] 279 -- --
Losses from investment in PointBase, Inc. [note 3]
Impairment of equity investment -- (4,595) --
Equity loss -- (2,081) (4,112)
- -----------------------------------------------------------------------------------------------------
Income (loss) before income taxes 8,473 281 (5,367)
- -----------------------------------------------------------------------------------------------------
Provision for (recovery of) income taxes [note 14]
Current 3,758 2,762 428
Future (970) (328) (131)
- -----------------------------------------------------------------------------------------------------
2,788 2,434 297
- -----------------------------------------------------------------------------------------------------
Net income (loss) for the year 5,685 (2,153) (5,664)
=====================================================================================================
Earnings per share
Basic $0.50 $(0.19) $(0.49)
Diluted $0.49 $(0.19) $(0.49)
=====================================================================================================
Weighted average number of shares [000's] [note 11[c]]
Basic 11,364 11,411 11,500
Diluted 11,640 11,411 11,500
=====================================================================================================
See accompanying notes
69
DataMirror Corporation
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
[in thousands of Canadian dollars]
Years ended January 31
Common shares Retained Cumulative Total
------------------ earnings translation shareholders'
Shares Amount (deficit) adjustment equity
# $ $ $ $
- -----------------------------------------------------------------------------------------------------
[000's]
Balance, January 31, 2001 11,624 65,583 133 (498) 65,218
Net loss for the year -- -- (5,664) -- (5,664)
Issuance of share capital
[notes 11[d] and 18] 72 435 -- -- 435
Exercise of stock options [note 12] 112 619 -- -- 619
Repurchase of common shares
[note 11[b]] (336) (1,897) (352) -- (2,249)
- -----------------------------------------------------------------------------------------------------
Balance, January 31, 2002 11,472 64,740 (5,883) (498) 58,359
- -----------------------------------------------------------------------------------------------------
Net loss for the year -- -- (2,153) -- (2,153)
Exercise of stock options [note 12] 153 821 -- -- 821
Repurchase of common shares
[note 11[b]] (164) (924) (633) -- (1,557)
- -----------------------------------------------------------------------------------------------------
Balance, January 31, 2003 11,461 64,637 (8,669) (498) 55,470
- -----------------------------------------------------------------------------------------------------
Net income for the year -- -- 5,685 -- 5,685
Exercise of stock options [note 12] 221 1,779 -- -- 1,779
Repurchase of common shares
[note 11[b]] (317) (1,791) (2,196) -- (3,987)
- -----------------------------------------------------------------------------------------------------
Balance, January 31, 2004 11,365 64,625 (5,180) (498) 58,947
=====================================================================================================
See accompanying notes
70
DataMirror Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
[in thousands of Canadian dollars]
Years ended January 31
2004 2003 2002
$ $ $
- ---------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income (loss) for the year 5,685 (2,153) (5,664)
Add (deduct) items not affecting cash
Amortization of capital assets 1,410 1,630 1,876
Amortization of intangibles 3,098 2,740 3,244
Future income taxes (970) (328) (131)
Other income [note 3] (279) -- --
Impairment of investment in PointBase, Inc. -- 4,595 --
Equity loss from investment in PointBase, Inc. -- 2,081 4,112
Investment tax credits recoverable 645 776 --
Non-cash interest expense -- 63 215
Non-cash foreign exchange loss -- 59 97
Non-cash operating expense 32 186 90
- ---------------------------------------------------------------------------------------------------
9,621 9,649 3,839
Net change in non-cash working capital balances
related to operations 542 6,259 11,474
- ---------------------------------------------------------------------------------------------------
Cash provided by operating activities 10,163 15,908 15,313
- ---------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Additions to capital assets (1,190) (1,859) (1,460)
Purchase of short-term investments (32,720) (25,802) (27,422)
Maturity of short-term investments 25,802 27,422 --
Investment in Idion Technology Holdings Limited (2,417) (8,949) (820)
Acquisition of intangibles (30) (332) (676)
Acquisition of business, net of cash [notes 3 and 18] (1,328) -- (724)
Other income [note 3] 279 -- --
- ---------------------------------------------------------------------------------------------------
Cash used in investing activities (11,604) (9,520) (31,102)
- ---------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Repayment of long-term debt -- (1,586) (1,566)
Payments of capital lease obligations (90) (114) (275)
Issuance of share capital 1,779 821 747
Repurchase of share capital (3,987) (1,557) (2,249)
- ---------------------------------------------------------------------------------------------------
Cash used in financing activities (2,298) (2,436) (3,343)
- ---------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and equivalents
during the year (3,739) 3,952 (19,132)
Cash and cash equivalents, beginning of year 13,025 9,073 28,205
- ---------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year 9,286 13,025 9,073
===================================================================================================
Supplemental cash flow information
Interest paid 16 119 53
Income taxes paid 1,354 238 1,080
===================================================================================================
See accompanying notes
71
DataMirror Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Tabular amounts in thousands of Canadian dollars, except per share data]
January 31, 2004
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Generally accepted accounting principles
The consolidated financial statements of DataMirror Corporation [the
"Company"] have been prepared in accordance with Canadian generally accepted
accounting principles ["Canadian GAAP"], which are in all material respects in
accordance with accounting principles generally accepted in the United States
["U.S. GAAP"], except as disclosed in note 20. The Company is incorporated
under the laws of Ontario.
Basis of consolidation
The consolidated financial statements include the accounts of the Company
together with its wholly-owned subsidiary companies. All significant
inter-company transactions and balances have been eliminated upon
consolidation. The purchase method is used to account for acquisitions and the
results of operations of subsidiaries are included from the dates of their
respective acquisitions.
Use of estimates
The preparation of these consolidated financial statements in conformity with
Canadian GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of these consolidated financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual amounts may vary from the current estimates.
Cash and cash equivalents
Cash and cash equivalents include highly liquid investments having maturity
dates of up to three months when purchased and are valued at cost, which
approximates their fair value.
Short-term investments
Short-term investments include highly liquid investments with maturity dates
of over three months and less than one year when purchased and are valued at
the lower of cost and market, which approximates their fair value.
72
DataMirror Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Tabular amounts in thousands of Canadian dollars, except per share data]
January 31, 2004
Capital assets
Capital assets are recorded at cost less accumulated amortization and related
investment tax credits. Amortization is provided over the estimated useful
life of the related asset. Computer equipment and software are amortized on a
declining balance basis at rates varying from 30% to 50%. Furniture and
equipment are amortized on a declining balance basis at 20%. Leasehold
improvements are amortized on a straight-line basis over the term of the
related lease.
Leases
Leases are classified as either capital or operating. Those leases which
transfer substantially all the benefits and risks of ownership of property to
the Company are accounted for as capital leases. The capitalized lease
obligation reflects the present value of future lease payments, discounted at
the appropriate interest rate, and is reduced by rental payments net of
imputed interest. Assets under capital leases are amortized based on the
useful life of the asset. All other leases are accounted for as operating with
rental payments being expensed as incurred.
Investments
The Company's investment in Idion Technology Holdings Limited ["Idion"] is
recorded at cost as the Company does not have significant influence over the
affairs of Idion and was not able to obtain adequate financial information
from Idion to enable it to account for its investment using the equity method.
A decline in the value of an investment which is considered to be other than a
temporary impairment in value is charged against income in the period that
such determination is made.
Intangibles
Intangibles are comprised of acquired technology, customer lists and
trademarks which are recorded at cost. Amortization is provided for on a
straight-line basis over one to five years. Intangible assets are assessed for
future recoverability or impairment on an annual basis by estimating future
undiscounted cash flows. When the net carrying value of an intangible asset
exceeds the estimated net recoverable amount, the asset is written down to its
fair value with a charge against income in the period that such determination
is made.
Goodwill
Goodwill arises on business acquisitions and comprises the excess of amounts
paid over the fair value of net identifiable assets acquired.
The carrying value of goodwill is assessed at least annually to determine if
impairment exists. This assessment is based on the estimated fair value of the
business to which the goodwill relates.
Earnings per share
Basic earnings per share are calculated on net income (loss) for the year
using the weighted average number of shares outstanding. Diluted earnings per
share reflect the dilution that would occur if outstanding stock options were
exercised into common shares using the treasury stock method. The computation
of diluted earnings per share does not include stock options with dilutive
potential that would have an anti-dilutive effect on earnings per share.
Stock-based compensation plans
The Company has two stock-based compensation plans, which are described in
note 12. No compensation expense is recognized for these plans when stock
options are issued to directors, officers and employees. Any consideration
paid on the exercise of stock options is credited to share capital.
Research and development costs
Research costs are expensed as incurred. Development costs are expensed as
incurred unless a project meets the criteria under Canadian GAAP for deferral
and amortization. The Company has not deferred any such development costs to
date. Research and development costs are reduced by related investment tax
credits.
Government assistance
Government assistance, consisting of investment and other tax credits, is
recorded using the cost reduction method. Such government assistance is
recorded when the qualifying expenditure is made and where there is reasonable
assurance that investment and other tax credits will be realized.
74
DataMirror Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Tabular amounts in thousands of Canadian dollars, except per share data]
January 31, 2004
Foreign currency translation
The Company's subsidiaries are considered to be integrated operations.
Accordingly, the temporal method is used to translate the foreign operations
of the subsidiary companies. The temporal method is also used to translate
foreign currency denominated transactions and balances. Under this method,
monetary assets and liabilities denominated in foreign currencies are
translated at exchange rates prevailing at the consolidated balance sheet
dates. Non-monetary assets and liabilities are translated at historical
exchange rates. Revenue and expenses, excluding amortization, are translated
at average rates prevailing during the year. Amortization is translated at
weighted average historical rates. The resulting net gain or loss on
translation is included in the consolidated statements of income (loss) in the
year incurred.
Foreign exchange gains and losses on transactions during the year are
reflected in income, except for gains and losses on foreign exchange forward
contracts used to hedge the collection of accounts receivable denominated in
foreign currencies [note 16]. Gains or losses on these contracts are accounted
for as a component of the related hedged transaction. Unrealized foreign
exchange gains or losses on foreign denominated long-term debt are charged to
income in the period in which the gain or loss arises.
The Company enters into foreign exchange contracts to minimize its exposure to
fluctuations in foreign currency exchange rates. These derivative contracts do
not qualify for hedge accounting and therefore the contracts are recorded at
fair value at each consolidated balance sheet date with the corresponding
gains and/or losses recorded in the consolidated statements of income (loss).
Revenue recognition and deferred revenue
The Company's revenues are generated from the sale of software licences,
software maintenance and support fees and services.
Revenue is recognized in accordance with Statement of Position ["SOP"] 97-2,
"Software Revenue Recognition" issued by the American Institute of Certified
Public Accountants ["AICPA"] in October 1997 and amended by SOP 98-4 issued in
March 1998. Software licence revenue is recognized when persuasive evidence of
an arrangement exists, the related products are shipped, there are no
significant uncertainties surrounding product acceptance, the fees are fixed
and determinable and collection is considered probable. Revenue from software
maintenance and support agreements is recognized on a straight-line basis over
the term of the related agreements. Revenue from services is comprised of
consulting, training and installation fees and is recognized at the time the
services are performed.
Deferred revenue is comprised of software maintenance and support fees and
consulting revenue for which services have yet to be provided.
75
DataMirror Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Tabular amounts in thousands of Canadian dollars, except per share data]
January 31, 2004
Income taxes
The Company accounts for income taxes using the liability method of tax
allocation. Under the liability method of tax allocation, future tax assets
and liabilities are determined based on the differences between financial
reporting and tax bases of assets and liabilities and are measured using the
substantively enacted tax rates and laws that are expected to be in effect
when the differences are expected to reverse. The Company provides a valuation
allowance on future tax assets when it is more likely than not that such
assets will not be realized.
2. NEW ACCOUNTING PRONOUNCEMENTS
Business combinations, goodwill and other intangible assets
In September 2001, the CICA issued Handbook Sections 1581, "Business
Combinations", and 3062, "Goodwill and Other Intangible Assets". The new
standards require that the purchase method of accounting must be used for
business combinations initiated after June 30, 2001 and require that goodwill
and intangible assets with indefinite lives no longer be amortized but instead
be tested for impairment at least annually. The standards also specify
criteria that intangible assets must meet to be recognized and reported apart
from goodwill. The standards require that the value of the shares issued in a
business combination be measured using the average price for a reasonable
period before and after the date the terms of the acquisition are agreed to
and announced.
The Company has adopted these new standards as of February 1, 2002 and has
discontinued amortization of all existing goodwill. In connection with Section
3062's transitional goodwill impairment evaluation, the Company is required to
assess whether goodwill is impaired at February 1, 2002 using a two step test.
The Company had six months to complete step one of the test, which is to
determine the fair value of its reporting units and compare that to the
carrying value of its reporting units. The Company has completed step one of
the test, and has determined that there is no potential impairment to goodwill
as at February 1, 2002. As a result, the Company is not required to perform
step two of the transitional impairment test.
On November 1, 2002, the Company performed its annual impairment test, and
determined that there was no potential impairment to goodwill at that date. In
addition to the annual impairment test, the Company will perform an impairment
test if an event occurs or circumstances change that would more likely than
not reduce the value of a reporting unit below its carrying value. Any
resulting impairment will be charged to operating income in the period it is
discovered.
On February 1, 2002, the Company had unamortized goodwill of $3,118,000, which
is no longer being amortized. The Company's investment in PointBase, Inc.
("PointBase") included $2,710,000 of unamortized goodwill as of February 1,
2002 which is no longer being amortized. The investment in PointBase was
written off in October 2002 as disclosed in note 3.
76
DataMirror Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Tabular amounts in thousands of Canadian dollars, except per share data]
January 31, 2004
This change in accounting policy has not been applied retroactively and the
amounts presented for prior periods have not been restated for this change.
The impact of this change is as follows:
Years ended January 31, 2003 2002
$ $
- -------------------------------------------------------------------------------
Net income (loss) for the year (2,153) (5,664)
Add amortization of goodwill -- 1,520
- -------------------------------------------------------------------------------
Income loss before amortization of goodwill (2,153) (4,144)
===============================================================================
Basic earnings per share
Loss per share
Net loss for the year (0.19) (0.49)
Loss before amortization of goodwill (0.19) (0.36)
===============================================================================
Diluted earnings per share
Net loss for the year (0.19) (0.49)
Loss before amortization of goodwill (0.19) (0.36)
===============================================================================
Of the amortization of goodwill of $1,520,000 for the year ended January 31,
2002, $520,000 is included in amortization of intangibles and $1,000,000
related to the amortization of the goodwill associated with the Company's
investment in PointBase is included in the equity loss from investment in
PointBase.
3. ACQUISITION OF POINTBASE, INC.
At January 31, 2003, the Company owned approximately 25% of the outstanding
shares of PointBase, a developer and marketer of computer software products
which has developed an embedded, scaleable relational database written
completely in Java. The investment was written off in the fiscal year ended
January 31, 2003 when it became apparent that measures taken by the management
of PointBase would not result in profitable or break-even operations in the
near future.
In April 2003, the Company made an offer to acquire all of the issued and
outstanding shares of PointBase. PointBase determined not to proceed with the
transaction and, as a result, PointBase agreed to pay the Company an amount of
$279,000 [U.S.$200,000] as consideration for the cancellation of the offer,
which is included in other income. The Company ceased its efforts to purchase
PointBase as conditions at the time did not warrant further discussions.
77
DataMirror Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Tabular amounts in thousands of Canadian dollars, except per share data]
January 31, 2004
Pursuant to an agreement and plan of merger effective December 12, 2003, the
Company acquired control of the remaining shares of PointBase for
consideration of approximately U.S.$2.5 million. The acquisition has been
accounted for under the purchase method of accounting. Consequently, the
results of operations of PointBase are included in these consolidated
financial statements from that date forward.
The purchase transaction is summarized as follows:
$
- ----------------------------------------------------------------------------
Assets acquired
Cash 1,684
Other current assets 426
Capital assets 134
Intangibles 1,565
Goodwill 2,057
- ----------------------------------------------------------------------------
5,866
Current liabilities assumed (1,966)
Future tax liability (579)
- ----------------------------------------------------------------------------
Net assets acquired 3,321
============================================================================
Consideration
Cash 3,012
Amounts payable 309
- ----------------------------------------------------------------------------
3,321
============================================================================
Intangibles consist of $500,000 of acquired technology and $1,065,000 of
customer lists and trademarks.
None of the goodwill acquired is deductible for tax purposes.
As part of the acquisition, the Company also acquired foreign non-capital loss
carryforwards of approximately $3,100,000 which expire over 20 years but for
which no value has been assigned. The valuation allowance recorded as of
January 31, 2004 of $1,150,000 is attributable to future tax assets for which
any subsequently recognized tax benefits will be allocated to reduce goodwill
related to the acquisition of PointBase.
78
DataMirror Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Tabular amounts in thousands of Canadian dollars, except per share data]
January 31, 2004
Under terms of the agreement and plan of merger, future payments of a portion
of the funds received from an identified current customer of PointBase will
become due to the former shareholders of PointBase contingent upon the Company
either securing additional revenue from or selling the business or a portion
thereof to this customer. No contingent consideration is due for the year
ended January 31, 2004.
4. CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of the following:
As at January 31, 2004 2003
$ $
- -----------------------------------------------------------------------------
Cash 6,689 5,959
Bankers' acceptances 2,597 7,066
- -----------------------------------------------------------------------------
9,286 13,025
=============================================================================
The bankers' acceptances for 2004 bear interest at rates of approximately 2.6%
[2003 - 2.8%] with expiry dates extending up to one month [2003 - one month]
from January 31, 2004.
5. SHORT-TERM INVESTMENTS
Short-term investments consist of the following:
As at January 31, 2004 2003
$ $
- -----------------------------------------------------------------------------
Commercial paper 32,720 25,802
=============================================================================
Short-term investments consist of commercial paper bearing interest at a rate
of approximately 2.5% [2003 - 3.0%] and maturity dates of up to one month
[2003 - one month] from January 31, 2004.
79
DataMirror Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Tabular amounts in thousands of Canadian dollars, except per share data]
January 31, 2004
6. CAPITAL ASSETS
Capital assets consist of the following:
As at January 31, 2004 2003
$ $
- -------------------------------------------------------------------------------
Computer equipment and software 10,337 9,347
Furniture and equipment 2,212 2,155
Leasehold improvements 1,523 1,371
- -------------------------------------------------------------------------------
14,072 12,873
Less accumulated amortization 10,227 8,942
- -------------------------------------------------------------------------------
3,845 3,931
===============================================================================
Capital assets include assets under capital leases of approximately $165,000
[accumulated amortization of $128,000] as at January 31, 2004 and $350,000
[accumulated amortization of $245,000] as at January 31, 2003.
7. INVESTMENTS
The investments are as follows:
As at January 31, 2004 2003
$ $
- -------------------------------------------------------------------------------
Idion 12,185 9,768
===============================================================================
On March 18, 2002, the Company announced its intention to make a take-over bid
for all of the shares of Idion, a South African company listed on the
Johannesburg Stock Exchange, in a cash bid valued at $9.8 million. On April
18, 2002, the bid was increased to $18.9 million, and subsequently, on May 8,
2002, the bid was further increased to $30.4 million. On July 4, 2002, the
Company closed its bid to acquire Idion, having not been successful in
completing the take-over. At January 31, 2004, the Company owned approximately
48,269,000 or 42.61% [2003 - 44,523,000 or 39.36%] of Idion's outstanding
common shares acquired at a cost of $12,185,000 [2003 - $9,768,000]. The
ownership of 1,119,000 common shares of Idion had been subject to a dispute
between the Company and a broker acting on behalf of persons related to the
CEO of Idion. In May 2003 this dispute was settled in favour of the plaintiff
and as a result the Company returned the disputed shares to the broker for the
original consideration of approximately $312,000. The cost of these shares had
been included in the investment on the Company's consolidated balance sheet at
January 31, 2003.
80
DataMirror Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Tabular amounts in thousands of Canadian dollars, except per share data]
January 31, 2004
The investment in Idion has been accounted for at cost, as the Company does
not have significant influence over the affairs of Idion and was not able to
obtain adequate financial information from Idion to enable it to account for
its investment using the equity method.
8. INTANGIBLES
Intangibles consist of the following:
As at January 31, 2004 2003
-------------------------------------- ------
Net Net
Accumulated book book
Cost amortization value value
$ $ $ $
- ------------------------------------------------------------------------------------------------
Acquired technology 8,607 5,564 3,043 4,523
- ------------------------------------------------------------------------------------------------
Customer lists and trademarks 6,377 3,567 2,810 2,833
Deferred compensation [note 18] 307 307 -- 32
- ------------------------------------------------------------------------------------------------
15,291 9,438 5,853 7,388
================================================================================================
9. BANK CREDIT FACILITIES
At January 31, 2004 and 2003, the Company had available credit facilities of
$3,000,000 bearing interest at the prime rate plus 0.5% and (pound)150,000
[$362,000] bearing interest at the prime rate in the United Kingdom plus 3.0%.
Under a general security agreement and a source code escrow agreement, all of
the Company's assets, including the source code for the Company's software,
are pledged as collateral for these credit facilities. As at January 31, 2004
and 2003, no amounts have been drawn against these facilities other than
letters of credit of $181,000 [2003 - $206,000].
81
DataMirror Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Tabular amounts in thousands of Canadian dollars, except per share data]
January 31, 2004
10. CAPITAL LEASE OBLIGATIONS
Future minimum annual lease payments with imputed interest rates ranging from
7.3% to 8.4% and expiry dates to June 21, 2004 are as follows:
As at January 31, 2004 2003
$ $
- -----------------------------------------------------------------------------
2004 -- 105
2005 36 32
- -----------------------------------------------------------------------------
36 137
Less amount representing imputed interest (4) (15)
- -----------------------------------------------------------------------------
32 122
Less current portion 32 89
- -----------------------------------------------------------------------------
-- 33
=============================================================================
Included in investment income, net is interest expense relating to capital
lease obligations of $8,000 [2003 - $13,000; 2002 - $18,000].
11. SHARE CAPITAL
[a] Authorized and outstanding
The Company has authorized an unlimited number of common and preferred
shares. As at January 31, 2004, the Company has 11,365,000 common and nil
preferred shares outstanding [2003 - 11,461,000 and nil, respectively].
[b] Shares purchased for cancellation
Under a normal course issuer bid ["Bid"] effective September 21, 2002 and
2001, the Company indicated its intention to purchase up to 569,912 and
576,222 respectively of its outstanding common shares. The Bid expired on
September 20, 2003. Under a new bid ["New Bid"], effective September 21,
2003, the Company indicated its further intention to additionally
purchase up to 565,623 of its outstanding common shares. The New Bid
expires on September 20, 2004. During the year ended January 31, 2004,
the Company purchased for cancellation 317,500 common shares [2003 -
163,600; 2002 - 336,300] for cash consideration of $3,987,000 [2003 -
$1,557,000; 2002 - $2,249,000]. As a result, stated capital was reduced
by $1,791,000 [2003 - $924,000; 2002 - $1,897,000] and deficit was
increased by $2,196,000 [2003 - $633,000; 2002 - $352,000].
82
DataMirror Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Tabular amounts in thousands of Canadian dollars, except per share data]
January 31, 2004
[c] Earnings per share
The reconciliation of the denominator in calculating diluted per share
amounts is as follows:
As at January 31, 2004 2003 2002
# # #
- --------------------------------------------------------------------------------
Weighted average number of shares outstanding, basic 11,364 11,411 11,500
Effect of dilutive stock options 276 -- --
- --------------------------------------------------------------------------------
Weighted average number of shares outstanding, diluted 11,640 11,411 11,500
- --------------------------------------------------------------------------------
[d] Share purchase plan
Under a share purchase plan the Company issued nil shares [2003 - nil;
2002 - 22,215] for consideration of nil [2003 - nil; 2002 - $128,000].
12. STOCK-BASED COMPENSATION PLANS
At January 31, 2004, the Company has two stock-based compensation plans for
the purpose of providing shares to directors, officers and employees. The
first plan was established on December 12, 1996. Options under this plan
generally vest over four years from the date of grant and expire five years
from the date of grant. The second plan was established on June 14, 2000 with
similar attributes. The number of common shares reserved for issuance under
the first and second plan are 1,275,000 and 793,000, respectively.
83
DataMirror Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Tabular amounts in thousands of Canadian dollars, except per share data]
January 31, 2004
A summary of the status of the Company's stock-based compensation plans as at
January 31, 2004, 2003 and 2002 and changes during the years then ended is
presented below:
2004 2003 2002
------------------------ --------------------- -----------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Options price Options price Options price
# $ # $ # $
- -----------------------------------------------------------------------------------------------------
Outstanding,
beginning of year 1,118,496 11.32 1,267,661 10.89 1,169,546 11.89
Granted 438,985 13.62 273,792 10.98 482,655 8.53
Exercised (221,310) 8.04 (152,715) 5.38 (112,422) 5.51
Expired (104,937) 11.55 (270,242) 12.33 (272,118) 13.24
- -----------------------------------------------------------------------------------------------------
Outstanding,
end of year 1,231,234 12.71 1,118,496 11.32 1,267,661 10.89
=====================================================================================================
Options exercisable
at year end 594,153 506,400 462,684
=====================================================================================================
Options outstanding Options exercisable
----------------------------------------- -------------------------------
Weighted
Outstanding average Weighted Vested and Weighted
at remaining average exercisable at average
Range of exercise January 31, contractual exercise January 31, exercise
prices 2004 life price 2004 price
$ # [in years] $ # $
- -----------------------------------------------------------------------------------------------------
5.63 - 8.45 190,399 2.2 6.54 96,114 6.44
8.46 - 12.68 409,935 2.6 11.07 172,351 10.98
12.69 - 19.02 562,065 2.5 14.90 274,064 14.48
19.03 - 27.97 68,835 1.7 21.61 51,624 21.61
5.63 - 27.97 1,231,234 2.4 12.71 594,153 12.78
=====================================================================================================
The Company applies the intrinsic value based method of accounting for
stock-based compensation awards granted to employees. Accordingly, no
compensation cost has been recognized for its stock purchase plans.
84
DataMirror Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Tabular amounts in thousands of Canadian dollars, except per share data]
January 31, 2004
Companies are required to calculate and disclose, on a pro forma basis,
compensation expense related to the fair value of stock options at the grant
date in the notes to the consolidated financial statements. Under the
transitional rules, The Canadian Institute of Chartered Accountants' ["CICA"]
Handbook Section 3870, "Stock-based Compensation and Other Stock-based
Payments" allows companies to only include options issued subsequent to
January 31, 2002 in the pro forma calculation of net income (loss) for the
year. Based on stock options issued subsequent to January 31, 2002,
stock-based compensation expense for 2004 would have been $512,000 [2003 -
$286,000] and the pro forma net income for 2004 would have been $5,173,000 or
$0.46 and $0.44 per share on a basic and diluted basis respectively [2003 -
loss of $2,439,000 or $0.21 per share, basic and diluted].
The Company has utilized the Black-Scholes option valuation model to estimate
the fair value of options granted based on the following assumptions:
Years ended January 31, 2004 2003
- -----------------------------------------------------------------------------
Risk free interest rate 3.3% 4.3%
Expected dividend yield 0% 0%
Expected volatility 0.453 0.742
Expected option life [in years] 2.1 2.2
Weighted average fair values of options granted $3.96 $4.92
=============================================================================
The Black-Scholes option valuation method used by the Company to determine
fair values was developed for use in estimating the fair value of freely
traded options that are fully transferable and have no vesting restrictions.
This model requires the use of highly subjective assumptions, including future
stock price volatility and expected time until exercise. Because the Company's
outstanding stock options have characteristics that are significantly
different from those of traded options, and because changes in any of these
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models may not provide a reliable single measure of the
fair value of its stock options.
13. GOVERNMENT ASSISTANCE
The Company applies for investment tax credits from both the Canadian federal
and provincial tax authorities relating to amounts expended on scientific
research and development. During the year, $806,000 [2003 - $590,000; 2002 -
nil] in investment tax credits were applied to reduce operating expenses. The
amount of investment tax credits recorded represents management's best
estimate based on its interpretation of current legislation. However, the
Canada Revenue Agency has not yet assessed all the federal claims and,
therefore, the amount ultimately received could be materially different than
the amount recorded.
85
DataMirror Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Tabular amounts in thousands of Canadian dollars, except per share data]
January 31, 2004
14. INCOME TAXES
Significant components of the Company's future tax assets and liabilities are
as follows:
As at January 31, 2004 2003
$ $
- -------------------------------------------------------------------------------
FUTURE TAX ASSETS
Current
Deferred revenue 2,451 2,413
Other 89 165
- -------------------------------------------------------------------------------
2,540 2,578
Less valuation allowance -- --
- -------------------------------------------------------------------------------
2,540 2,578
===============================================================================
FUTURE TAX ASSETS
Long-term
Tax benefit of loss carryforwards and tax credits 2,480 1,637
Share issue costs 155 282
Equity investment in PointBase, Inc. -- 1,812
Other -- 53
- -------------------------------------------------------------------------------
2,635 3,784
Less valuation allowance (2,387) (3,339)
- -------------------------------------------------------------------------------
248 445
- -------------------------------------------------------------------------------
FUTURE TAX LIABILITIES
Long-term
Tax depreciation in excess of book depreciation (809) (941)
Scientific research investment tax credits (513) (666)
Other (2) (343)
- -------------------------------------------------------------------------------
(1,324) (1,950)
- -------------------------------------------------------------------------------
(1,076) (1,505)
===============================================================================
Of the above valuation allowances recorded as at January 31, 2004 and 2003,
$1,150,000 and nil, respectively, are attributable to future tax assets for
which any subsequently recognized tax benefits will be allocated to reduce
goodwill related to the acquisition of PointBase.
86
DataMirror Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Tabular amounts in thousands of Canadian dollars, except per share data]
January 31, 2004
The following table reconciles the income tax expense computed at the rates
specified in Canadian tax statutes to the reported income tax expense:
Years ended January 31, 2004 2003 2002
$ $ $
- ----------------------------------------------------------------------------------------------------
Income tax expense (recovery) at combined
Canadian federal and provincial income tax
rate of 36.6% [2003 - 38.6%; 2002 - 41.70%] 3,104 107 (2,240)
Effect of foreign tax rate differences (183) (141) (95)
Benefit of foreign tax losses not previously recognized -- (282) (101)
Items not deductible for income tax purposes 37 268 244
Non-taxable loss from investment in PointBase, Inc. -- 2,578 1,556
Foreign tax losses not tax benefited 150 137 448
Manufacturing and processing profits deduction (81) (283) 198
Effect of rate changes on future income taxes (11) (315) 88
Other (228) 365 199
- ----------------------------------------------------------------------------------------------------
Income tax expense 2,788 2,434 297
====================================================================================================
Significant components of the provision for income taxes are as follows:
Years ended January 31, 2004 2003 2002
$ $ $
- ----------------------------------------------------------------------------------------------------
Current tax expense 3,758 2,762 428
Future income tax benefit relating to origination
and reversal of temporary differences (959) (13) (177)
Future income tax benefit resulting from
recognition of loss carryforwards -- -- (42)
Future income tax expense (recovery) resulting
from rate change (11) (315) 88
- ----------------------------------------------------------------------------------------------------
Income tax expense 2,788 2,434 297
====================================================================================================
The Company has foreign non-capital loss carryforwards of approximately
$3,285,000 which have no expiry date and $3,100,000 which expire over 20
years. A valuation allowance has been recognized for all but $167,000 of the
losses.
87
DataMirror Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Tabular amounts in thousands of Canadian dollars, except per share data]
January 31, 2004
15. LEASE COMMITMENTS
The Company has entered into agreements to lease office facilities and
equipment for which the future annual lease payments are approximately as
follows:
$
- -------------------------------------------------------------------------------
2005 2,519
2006 2,164
2007 1,224
2008 1,079
2009 975
Thereafter 244
===============================================================================
16. FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
Foreign currency risk
The Company is exposed to foreign currency risk from fluctuation in foreign
currency rates. Increases and decreases in foreign currency rates could impact
the Company's income (loss).
During the year ended January 31, 2004, the Company incurred a foreign
exchange loss of $85,000 [2003 - loss of $326,000; 2002 - gain of $149,000].
Credit risk
At January 31, 2004, one [2003 - nil] customer represented 10% of the accounts
receivable balance.
Hedging activities
During the year, the Company entered into forward currency contracts to sell
U.S. dollars for Canadian dollars to hedge the future collection of its
accounts receivable denominated in U.S. dollars. At January 31, 2004, no U.S.
dollar forward currency contracts were outstanding. Subsequent to year end,
U.S.$6,000,000 of forward currency contracts were purchased at exchange rates
of approximately 1.34, maturing within 60 days of the financial year end. These
contracts hedge substantially all of the Company's U.S. dollar based accounts
receivable. The Company does not enter into foreign exchange contracts for
speculative purposes.
88
DataMirror Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Tabular amounts in thousands of Canadian dollars, except per share data]
January 31, 2004
Current financial assets and liabilities
Due to the short period to maturity of these financial instruments, the
carrying values as presented in the consolidated balance sheets are reasonable
estimates of their fair values.
Investments
The fair value of the investment in Idion as at January 31, 2004 is $19,927,000
[2003 - $14,450,000], determined by using the closing price of Idion common
shares on the Johannesburg Stock Exchange on the last trading day on or prior
to the balance sheet date.
Should the Company not ultimately be successful in taking over Idion, the sale
of these shares could result in a gain or loss depending on the circumstances
in which they are sold and is subject to foreign exchange and other risks.
Risk management
Short-term investments are placed exclusively with entities having ratings of
at least R1-low by a recognized Canadian debt-rating agency.
Credit risk related to the Company's trade receivables is minimized due to its
large customer base, geographical distribution and diversification of
operations.
In addition to Canada and the United States, the Company also operates in the
United Kingdom, Germany and other European countries and is therefore exposed
to market risks related to foreign currency fluctuations between these
currencies.
89
DataMirror Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Tabular amounts in thousands of Canadian dollars, except per share data]
January 31, 2004
17. SEGMENTED INFORMATION
The Company operates in only one industry, that being the business of
developing and marketing computer software products. The Company has two
reportable segments, North America, which includes the Company's Asia Pacific
operations, and Europe, based on the geographic location of its operations. The
accounting policies followed by these segments are the same as those described
in the summary of significant accounting policies. The Company accounts for
intersegment sales at fair value.
The Company's reportable segments are strategic business units. They are
managed separately because each reportable segment operates in different
economic marketplaces and therefore, requires different investing and marketing
strategies. The Company evaluates segment performance based on profit or loss
from operations before investment income and income taxes.
The following table presents certain information with respect to the reportable
segments described above:
Years ended January 31, 2004 2003 2002
$ $ $
- --------------------------------------------------------------------------------
REVENUE
North American customers 39,918 41,107 34,610
Intersegment 5,077 5,100 5,320
- --------------------------------------------------------------------------------
44,995 46,207 39,930
European customers 20,074 21,383 21,766
Elimination of intersegment revenue (5,077) (5,100) (5,320)
- --------------------------------------------------------------------------------
59,992 62,490 56,376
================================================================================
OPERATING INCOME (LOSS)
North America 4,244 4,580 (2,455)
Europe 2,804 1,766 341
- --------------------------------------------------------------------------------
7,048 6,346 (2,114)
================================================================================
AMORTIZATION
North America 4,228 3,949 4,127
Europe 280 421 993
- --------------------------------------------------------------------------------
4,508 4,370 5,120
================================================================================
CAPITAL ASSET ADDITIONS
North America 1,100 1,696 996
Europe 90 163 629
- -------------------------------------------------------------------------------
1,190 1,859 1,625
===============================================================================
90
DataMirror Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Tabular amounts in thousands of Canadian dollars, except per share data]
January 31, 2004
As at January 31, 2004 2003
$ $
- -------------------------------------------------------------------------------
IDENTIFIABLE ASSETS
North America 66,184 60,861
Europe 9,011 9,980
- -------------------------------------------------------------------------------
75,195 70,841
Intangibles 5,853 7,388
Goodwill 5,175 3,118
- -------------------------------------------------------------------------------
86,223 81,347
===============================================================================
GOODWILL
North America 2,532 50
Europe 2,643 3,068
- -------------------------------------------------------------------------------
5,175 3,118
===============================================================================
Summaries of revenue, segmented according to the customers' country of
residence, and of capital assets, intangibles and goodwill, segmented according
to the country in which the assets are located, are as follows:
Years ended January 31, 2004 2003 2002
$ $ $
- --------------------------------------------------------------------------------
REVENUE
Canada 4,662 4,285 2,936
United States 31,918 33,498 28,606
United Kingdom 10,414 11,675 13,476
Germany 4,977 5,092 5,454
Other 8,021 7,940 5,904
- --------------------------------------------------------------------------------
59,992 62,490 56,376
===============================================================================
As at January 31, 2004 2003
$ $
- --------------------------------------------------------------------------------
CAPITAL ASSETS, INTANGIBLES AND GOODWILL
Canada 11,575 10,950
Germany 2,711 2,717
Other 587 770
- --------------------------------------------------------------------------------
14,873 14,437
================================================================================
91
DataMirror Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Tabular amounts in thousands of Canadian dollars, except per share data]
January 31, 2004
18. PRIOR YEAR ACQUISITIONS
On January 7, 2003, the Company acquired the technology and certain related
assets of SmartSales Inc. [note 19], a developer of CRM solutions, in a cash
transaction. The Company acquired current assets valued at $15,000, capital
assets valued at $22,000 and technology valued at $332,000 for cash
consideration of $369,000. The technology acquired will be amortized over a
term of one year. The Company recorded $30,000 of additional expenses related
to the acquisition during the year ended January 31, 2004, bringing the total
value of the technology to $362,000 and cash consideration to $399,000.
On May 18, 2001, the Company acquired the technology and certain related assets
of saipx Inc., a developer of pervasive mobile computing and turnkey solutions
for SAP, in a cash transaction. The Company acquired current assets valued at
$9,000, capital assets valued at $65,000 and technology valued at $219,000 for
cash consideration of $293,000. The technology acquired is being amortized over
a term of three years.
On June 8, 2001, the Company acquired the technology and certain related assets
of BDI Systems Inc., a developer of XML-based data transformation software
products, in a cash and stock transaction. Total consideration for the
transaction was cash of $424,000 and 50,000 shares of common stock with a value
of $307,000 to be released from escrow over two years. The assets acquired have
been accounted for as acquired technology of $424,000 and deferred compensation
of $307,000. The technology will be amortized over a period of three years. The
deferred compensation will be amortized over two years.
Effective September 1, 2000, the Company acquired certain assets and
liabilities of Constellar, a company engaged in the business of developing and
marketing computer software products. The acquisition has been accounted for
under the purchase method of accounting.
As part of the purchase agreement, further cash payments of up to U.S.
$3,000,000 were payable contingent on certain revenue targets being generated
from the acquired technology during the three-year period ending August 31,
2003. In November 2001, a payment of $724,000 was made in payment of contingent
consideration of $856,000 for the period ended August 31, 2001 less a holdback
of $132,000 related to assets purchased which were not realized. The additional
contingent payment has been added to the value of the technology acquired,
bringing the total value of technology acquired to $12,382,000. No payment of
contingent consideration is due for the periods ended August 31, 2002 and
August 31, 2003.
92
DataMirror Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Tabular amounts in thousands of Canadian dollars, except per share data]
January 31, 2004
19. RELATED PARTY TRANSACTIONS
In the normal course of operations during the year ended January 31, 2003, the
Company entered into several transactions with SmartSales Inc., a company with
a common Chairman of the Board of Directors and significant shareholder. The
transactions consisted of purchases of nil [2003 - nil; 2002 - $100,000] and
rental income of $51,000 [2003 - $51,000; 2002 - $102,000]. These transactions
were made at market prices under normal trade terms and conditions. During
fiscal 2003, SmartSales Inc. entered into receivership and the Company wrote
off its rent receivable of $77,000. As at January 31, 2004, the Company did not
have any loans receivable from directors [2003 - $8,000].
20. RECONCILIATION OF CANADIAN GAAP TO U.S. GAAP
The consolidated financial statements of the Company have been prepared in
accordance with Canadian GAAP which differ in certain material respects from
U.S. GAAP.
The material differences as they apply to the Company's consolidated financial
statements are as follows:
[a] Balance sheet adjustments
As at January 31, 2004 2003
$ $
- ---------------------------------------------------------------------------------------------------
[restated
- [a][i]]
INVESTMENTS
Balance under Canadian GAAP 12,185 9,768
Unrealized gain on investment [i] 7,742 4,682
- ---------------------------------------------------------------------------------------------------
Balance under U.S. GAAP 19,927 14,450
===================================================================================================
GOODWILL
Balance under Canadian GAAP 5,175 3,118
Adjustment for recognition of tax loss carryforwards [ii] (128) (128)
- ---------------------------------------------------------------------------------------------------
Balance under U.S. GAAP 5,047 2,990
===================================================================================================
FUTURE TAX LIABILITIES
Balance under Canadian GAAP 1,076 1,505
Adjustment for future tax liability on unrealized gain [i] 1,417 866
- ---------------------------------------------------------------------------------------------------
Balance under U.S. GAAP 2,493 2,371
===================================================================================================
DEFICIT
Balance under Canadian GAAP (5,180) (8,669)
Adjustment for recognition of tax loss carryforwards [ii] (128) (128)
- ---------------------------------------------------------------------------------------------------
Balance under U.S. GAAP (5,308) (8,797)
===================================================================================================
93
DataMirror Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Tabular amounts in thousands of Canadian dollars, except per share data]
January 31, 2004
[i] Under U.S. GAAP, investments classified as available for sale are
carried at market values with unrealized gains or losses, net of
tax, reflected as a component of other comprehensive income.
Previously reported consolidated financial statements did not record
the tax effect of this adjustment and thus the comparative amounts
have been restated to reflect this adjustment. The effect of this
change was to decrease accumulated other comprehensive income and
increase future tax liabilities as at January 31, 2003 under U.S.
GAAP by $866,000 and to decrease other comprehensive income under
U.S. GAAP for the year ended January 31, 2003 by $866,000. [2002-no
effect]. The Company's investment in Idion is classified as available
for sale.
[ii] Under U.S. GAAP, the realization of the benefit associated with
utilizing tax losses which existed at the time of an acquisition but
which were not recognized at that time is reflected as a reduction
of goodwill relating to the acquisition in the period upon which the
Company determines that such realization is more likely than not.
Under Canadian GAAP, prior to the adoption of the liability method
in fiscal 2001, such benefit was recorded as a reduction of the
income tax provision in the period of utilization.
[b] The components of shareholders' equity under U.S. GAAP are as follows:
As at January 31, 2004 2003
$ $
- --------------------------------------------------------------------------------
[restated
- [a][i]]
Share capital 64,625 64,637
Accumulated other comprehensive income (loss) 5,827 3,318
Deficit (5,308) (8,797)
- --------------------------------------------------------------------------------
Balance under U.S. GAAP 65,144 59,158
================================================================================
94
DataMirror Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Tabular amounts in thousands of Canadian dollars, except per share data]
January 31, 2004
[c] Reconciliation of net income (loss) under Canadian and U.S. GAAP:
Years ended January 31, 2004 2003 2002
$ $ $
- ----------------------------------------------------------------------------------------------
[restated
- [a][i]]
Net income (loss) under Canadian GAAP 5,685 (2,153) (5,664)
Equity loss recorded for Canadian GAAP
purposes -- 2,081 4,112
Equity loss recorded for U.S. GAAP
purposes [i] -- (2,081) (4,091)
Impairment charge recorded for Canadian
GAAP purposes -- 4,595 --
Impairment charge recorded for U.S.
GAAP purposes [i] -- (4,846) --
- ----------------------------------------------------------------------------------------------
Net income (loss) under U.S. GAAP 5,685 (2,404) (5,643)
Unrealized gain (loss) on investments 2,509 3,946 (130)
- ----------------------------------------------------------------------------------------------
Comprehensive income (loss) under
U.S. GAAP 8,194 1,542 (5,773)
==============================================================================================
Net income (loss) per share under U.S. GAAP
- ----------------------------------------------------------------------------------------------
Basic 0.50 (0.21) (0.49)
Diluted 0.49 (0.21) (0.49)
==============================================================================================
[i] Included in the equity loss recorded for U.S. GAAP purposes is an amount
for acquired in-process research and development. Under U.S. GAAP,
specifically Statement of Financial Accounting Standard ["SFAS"] No. 2,
"Accounting for Research and Development Costs", acquired in-process
research and development having no alternative future use must be written
off at the time of acquisition. The adjustment represents the value of the
acquired in-process research and development capitalized under Canadian
GAAP.
95
DataMirror Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Tabular amounts in thousands of Canadian dollars, except per share data]
January 31, 2004
[d] Other disclosures required under U.S. GAAP
[i] Under U.S. GAAP, the Company measures compensation costs related to
stock options granted to employees using the intrinsic value method
as prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees", as permitted by SFAS No. 123, "Accounting for Stock-Based
Compensation". However, SFAS No. 123 does require the disclosure of
pro forma net earnings (loss) and earnings (loss) per share
information as if the Company had accounted for its employee stock
options under the fair value method prescribed by SFAS No. 123:
Years ended January 31, 2004 2003 2002
$ $ $
- ----------------------------------------------------------------------------------------------------
Net income (loss) for the year in accordance
with U.S. GAAP 5,685 (2,404) (5,643)
Stock-based compensation expense (775) (826) (917)
- ----------------------------------------------------------------------------------------------------
Pro forma net income (loss) for the year 4,910 (3,230) (6,560)
====================================================================================================
Basic income (loss) per share, as reported 0.50 (0.21) (0.49)
Diluted income (loss) per share, as reported 0.49 (0.21) (0.49)
Effect of stock-based compensation expense (0.07) (0.07) (0.08)
Pro forma basic income (loss) per share 0.43 (0.28) (0.57)
Pro forma diluted income (loss) per share 0.42 (0.28) (0.57)
====================================================================================================
The Company has utilized the Black-Scholes option valuation model to estimate
the fair value of options granted based on the following assumptions:
Years ended January 31, 2004 2003 2002
- ----------------------------------------------------------------------------------------------------
Risk free interest rate 3.3% 4.3% 4.6%
Expected dividend yield 0% 0% 0%
Expected volatility 0.453 0.742 0.759
Expected option life [in years] 2.1 2.2 2.1
Weighted average fair values of options granted $3.96 $4.92 $3.70
====================================================================================================
96
DataMirror Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Tabular amounts in thousands of Canadian dollars, except per share data]
January 31, 2004
[e] Recent accounting developments
[i] U.S. GAAP
In December 2002, the Financial Accounting Standards Board ["FASB"]
issued SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure" ["SFAS 148"]. SFAS 148 amends SFAS No. 123
to provide alternative methods of transition to SFAS No. 123's fair
value method of accounting for stock-based compensation. Under U.S.
GAAP, the Company has not adopted the fair value-based method for
accounting for stock options granted to employees and thus this
standard did not have an impact on its U.S. GAAP financial
information as at January 31, 2004 and 2003 and for the years then
ended.
In December 2003, FASB amended Interpretation No. 46, "Consolidation
of Variable Interest Entities" ["FIN 46R"]. FIN 46R requires that a
variable interest entity ["VIE"] be consolidated by a company if that
company is subject to a majority of the risk of loss from the VIE's
activities and/or is entitled to receive a majority of the VIE's
residual returns. For the Company, the requirements of FIN 46R apply
to VIEs created after January 31, 2003. For VIEs created before
January 31, 2003, the requirements of FIN 46R apply as of February 1,
2004. The adoption of FIN 46R did not have an impact to the Company's
consolidated financial statements as at and for the year ended
January 31, 2004 and as at February 1, 2004.
[ii] Canadian GAAP
In November 2001, the CICA approved Accounting Guideline No. 13,
"Hedging Relationships", an accounting guideline establishing
conditions which must be satisfied in order to apply hedge
accounting. These guidelines will not affect the Company until the
fiscal year starting February 1, 2004. There will be no impact to the
Company upon adoption of this guideline.
In November 2003, the CICA made changes to Section 3870, "Stock-Based
Compensation and Other Stock-Based Payments", requiring equity
instruments awarded to employees be measured and expensed using the
fair value method. The main impact for the Company will be to record
compensation expense relating to the award of stock options to
employees that the Company had previously chosen to disclose [note
12].
The Company will adopt these changes effective February 1, 2004 on a
retroactive basis with restatement of prior periods. This change will
result in a decrease to net income of $512,000 for the year ended
January 31, 2004 and an increase to deficit of $286,000 as at January
31, 2003.
97
DataMirror Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Tabular amounts in thousands of Canadian dollars, except per share data]
January 31, 2004
In June 2003, the CICA issued Accounting Guideline AcG-15,
"Consolidation of Variable Interest Entities", to provide guidance
for applying the principles in Handbook Section 1590, "Subsidiaries",
to certain entities. Although the CICA is contemplating amendments to
the guideline, it is expected to be effective for the Company's
fiscal year beginning February 1, 2005. The Company will review the
impact of the amended guideline, if any, on the Company's
consolidated financial statements when the CICA issues the amended
guideline.
21. SUBSEQUENT EVENT
On May 14, 2004, the Company sold its investment in Idion [note 7] for net
proceeds of approximately $19.9 million.
98
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
[in thousands of Canadian dollars]
Write-offs
Balance, Charged of Balance,
beginning to accounts end
Description of year expenses receivable of year
$ $ $ $
- ---------------------------------------------------------------------------------------------------
Allowance for doubtful accounts,
deducted from accounts receivable
Year ended January 31, 2004 263 135 (175) 223
Year ended January 31, 2003 612 (48) (301) 263
Year ended January 31, 2002 1,226 1,320 (1,934) 612
===================================================================================================
99
ITEM 18. FINANCIAL STATEMENTS
The Company has responded to Item 17 in lieu of responding to this Item.
ITEM 19. EXHIBITS
Exhibit No. Description
----------- ------------------------------------------------------------
1.1** Articles of Amalgamation of DataMirror Corporation, as
currently in effect.
1.2** By-laws of DataMirror Corporation, as currently in effect.
2.1** Specimen DataMirror Corporation share certificate.
2.2** DataMirror Shareholder Rights Plan, dated as of May 7, 2002.
4.1** Lease pursuant to which DataMirror Corporation's UK
subsidiary acquired rental space in London, England on
November 31, 2001.
4.2** DataMirror Corporation Share Purchase Plan, as currently in
effect.
4.3** DataMirror Corporation Executive Stock Compensation Plan, as
currently in effect.
4.4** Employment agreement between DataMirror Corporation and Mr.
Nigel Stokes.
4.5** Employment agreement between DataMirror Corporation and Mr.
Kirk Dixon.
4.6** Employment agreement between DataMirror Corporation and Mr.
Herman Wallenburg.
4.7** Pointbase, Inc. Series E Preferred Stock Purchase Agreement,
dated June 14, 2000.
6.1*** Audit Committee Charter
6.2*** Compensation Committee Charter
8.1 List of Significant Subsidiaries Contained in Item 4.1
hereof
11.1*** Employee Conduct Policy
12.1 Certification of CEO and CFO Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
12.2 Certification of CEO and CFO Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
13.1 Consent of Ernst & Young LLP
** Incorporated by reference to the Company's Annual Report on Form 20F, filed
on June 20, 2002.
*** Incorporated by reference to the Company's Annual Report on Form 20F,
filed on June 5, 2003.
100
SIGNATURES
The registrant certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized this the
undersigned to sign this annual report on its behalf.
DATAMIRROR CORPORATION
By: /s/ Peter Cauley
--------------------
Name: Peter Cauley
Title: Chief Financial Officer
June 1, 2004
101
EXHIBIT INDEX
Exhibit No. Description
----------- ------------------------------------------------------------
1.1** Articles of Amalgamation of DataMirror Corporation, as
currently in effect.
1.2** By-laws of DataMirror Corporation, as currently in effect.
2.1** Specimen DataMirror Corporation share certificate.
2.2** DataMirror Shareholder Rights Plan, dated as of May 7, 2002.
4.1** Lease pursuant to which DataMirror Corporation's UK
subsidiary acquired rental space in London, England on
November 31, 2001.
4.2** DataMirror Corporation Share Purchase Plan, as currently in
effect.
4.3** DataMirror Corporation Executive Stock Compensation Plan, as
currently in effect.
4.4** Employment agreement between DataMirror Corporation and Mr.
Nigel Stokes.
4.5** Employment agreement between DataMirror Corporation and Mr.
Kirk Dixon.
4.6** Employment agreement between DataMirror Corporation and Mr.
Herman Wallenburg.
4.7** Pointbase, Inc. Series E Preferred Stock Purchase Agreement,
dated June 14, 2000.
6.1*** Audit Committee Charter
6.2*** Compensation Committee Charter
8.1 List of Significant Subsidiaries Contained in Item 4.1
hereof
11.1*** Employee Conduct Policy
12.1 Certification of CEO and CFO Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
12.2 Certification of CEO and CFO Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
13.1 Consent of Ernst & Young LLP
** Incorporated by reference to the Company's Annual Report on Form 20F, filed
on June 20, 2002.
*** Incorporated by reference to the Company's Annual Report on Form 20F,
filed on June 5, 2003.
102