WASHINGTON, D.C. 20549
FORM 20-F
(Mark one)
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR (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 October 31, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to _________
Commission File Number: _________________________
DSI DATOTECH SYSTEMS INC.
(Exact Name of Registrant as Specified in its Charter)
CANADA
(Jurisdiction of Incorporation or Organization)
300 - 905 WEST PENDER STREET, VANCOUVER, BC V6C 1L6
(Address of Principal Executive Offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
None
Securities registered or to be registered pursuant to Section 12(g) of the Act:
COMMON SHARES, WITHOUT PAR VALUE
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:
None
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of April 12, 2002.
23,435,224 Shares of common stock
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) for the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES NO X
--- ---
Indicate by check mark which financial statement item the registrant has elected
to follow.
ITEM 17 X ITEM 18
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(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST
FIVE YEARS)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS FILED ALL DOCUMENTS AND
REPORTS REQUIRED TO BE FILED BY SECTIONS 12, 13 OR 15(D) FOR THE SECURITIES
EXCHANGE ACT OF 1934 SUBSEQUENT TO THE DISTRIBUTION OF SECURITIES UNDER A PLAN
CONFIRMED BY A COURT.
NOT APPLICABLE
EXCEPT AS OTHERWISE NOTED, ALL DOLLAR AMOUNTS ARE PRESENTED IN CANADIAN DOLLARS.
EXCHANGE RATE: APRIL 12, 2002, THE EXCHANGE RATE OF CANADIAN DOLLARS INTO UNITED
STATES DOLLARS WAS 1.5892 CANADIAN TO $1.00 UNITED STATES.
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ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
A. DIRECTORS AND SENIOR MANAGEMENT
Mr. Edward C. Pardiak was appointed Director, Chairman of the Board and
Chief Financial Officer of DSI Datotech Systems Inc. (the "Company" or
"DSI") in 1997. During the year 2000 Mr. Pardiak was appointed Chief
Executive Officer of DSI. Mr. Pardiak is responsible for the management and
development of DSI including the day-to-day, financial and business
management of DSI. The business address for Mr. Pardiak is 455 Fenelon
Boulevard, Suite 100, Dorval, Quebec, Canada, H9S 5T8.
Mr. Robert M. Egery was appointed Officer of DSI in 1998. On December 1,
2000, Mr. Egery was appointed President and Chief Operating Officer of DSI.
Mr. Egery is responsible for the management and development of DSI
including the day-to-day, financial and business management of DSI. The
business address for Mr. Egery is 455 Fenelon Boulevard, Suite 100, Dorval,
Quebec, Canada, H9S 5T8.
Dr. Thomas Calvert was appointed Director in 1998 and appointed Secretary
for DSI during 2000. Dr. Calvert is responsible for the Corporate
Secretarial function of DSI and is a member of the Compensation Committee
and the Audit Committee of DSI. The business address for Dr. Calvert is
TechBC, 2400 Surrey Place, 10153 King George Highway, Surrey, BC, Canada,
V3W 2W1.
Mr. Allan S. Gibbins was appointed Director of DSI in 1998. Mr. Gibbins is
a member of the Compensation and the Audit Committee of DSI. The business
address for Mr. Gibbins is Hubbell Canada Inc., 870 Brock Road S.,
Pickering, ON, Canada, L1W 1Z8.
B. ADVISORS.
Not Applicable.
C. AUDITORS.
The Auditor for DSI is G. Ross McDonald, Chartered Accountants, located at
543 Granville Street, Suite 1402, Vancouver, Canada, BC V6C 1X8.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable
ITEM 3. KEY INFORMATION
A. SELECTED FINANCIAL DATA
Set forth below is selected financial information for the years ended
October 31, 1997 through October 31, 2001 derived from the Audited
Financial Statements of DSI, prepared in accordance with Canadian G.A.A.P.
These principles, as applied to DSI, do not differ materially from U.S.
G.A.A.P. except as disclosed in Note 12 to DSI's financial statements. All
figures presented are in Canadian dollars, unless otherwise noted. All
information should be read in conjunction with DSI's financial statements
included in this Registration Statement.
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Financial Statement Data - Canadian G.A.A.P
Statement of Loss and Deficit - Selected Data
Year Ended October 31
(In thousands, except per share data)
2001 2000 1999 1998 1997
------ ------ ------ ------ ------
Revenues $ 154 $ 628 $ 0 $ 0 $ 0
Net Loss $3,774 $ 755 $1,125 $ 852 $ 822
Total $3,928 $1,383 $1,125 $ 852 $ 822
Loss Per Share $ 0.17 $ 0.04 $ 0.07 $ 0.06 $ 0.08
Dividend Per Share $ 0 $ 0 $ 0 $ 0 $ 0
------ ------ ------ ------ ------
Balance Sheet - Selected Data
As at October 31
(In thousands)
2001 2000 1999 1998 1997
------ ------ ------ ------ ------
Total Assets $2,205 $5,263 $1,068 $1,710 $1,683
Long Term Debt $ 0 $ 0 $ 0 $ 0 $ 0
------ ------ ------ ------ ------
Financial Statement Data - U.S. G.A.A.P
Statement of Loss and Deficit - Selected Data
Year Ended October 31
(In thousands, except per share data)
2001 2000 1999 1998 1997
------ ------ ------ ------ ------
Revenues $ 154 $ 628 $ 0 $ 0 $ 0
Net Loss $3,048 $ 888 $1,076 $ 990 $1,044
Total $3,202 $1,516 $1,076 $ 990 $1,044
Loss Per Share $ 0.16 $ 0.06 $ 0.10 $ 0.07 $ 0.11
Dividend Per Share $ 0 $ 0 $ 0 $ 0 $ 0
------ ------ ------ ------ ------
Balance Sheet - Selected Data
As at October 31
(In thousands)
2001 2000 1999 1998 1997
------ ------ ------ ------ ------
Total Assets $2,205 $4,347 $ 137 $ 677 $ 788
Long Term Debt $ 0 $ 0 $ 0 $ 0 $ 0
------ ------ ------ ------ ------
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CURRENCY AND EXCHANGE RATES
All dollar amounts set forth in this Registration Statement are in Canadian
dollars, except where otherwise indicated. The following table sets forth
the rates of exchange for the Canadian dollar, expressed in United States
dollars, in effect at the end of each of fiscal years ending October 31 of
each year; and the average exchange rates reported at noon on the last day
of each month during such periods by Bank of Canada.
FISCAL YEAR ENDING
OCTOBER 31 2001 2000 1999 1998 1997
------------------ ------- ------- ------- ------- -------
Rate at End of Period $1.5867 $1.5225 $1.4713 $1.5429 $1.4084
Average Rate During Period $1.5395 $1.4768 $1.4941 $1.4717 $1.3781
The following chart shows the high and low exchange rates for each month
during the previous six months from May 2001 through October 2001:
May-01 JUN-01 Jul-01 Aug-01 Sep-01 Oct-01
------ ------ ------ ------ ------ ------
High Rate 1.5540 1.5357 1.5448 1.5488 1.5793 1.5867
Low Rate 1.5309 1.5145 1.5099 1.5290 1.5477 1.5579
------ ------ ------ ------ ------ ------
DIVIDEND POLICY
DSI has not paid any dividends during the past five years and does not
anticipate paying any dividends in the foreseeable future. The directors
of DSI will determine if and when any dividends should be declared and
paid if DSI's financial situation warrants such action at the time.
B. CAPITALIZATION AND INDEBTEDNESS
At October 31, 2001, DSI's working capital was $1.1 million and there were
no long-term debts. The shareholder's equity at October 31, 2001 amounted
to $1.7 million. The total share capital was $11 million (consisting of
21,683,184 outstanding shares of common stock) and an accumulated deficit
of $9.5 million.
C. RISK FACTORS
1. DSI has a limited operating history and has generated limited revenues and
may continue to operate at a loss. DSI has been primarily engaged in
product research and development. For the fiscal year ended October 31,
2001, DSI generated revenues of $345,626 of which $150,000 was from the
delivery of the prototype to NetFace LLC. DSI expects that operating
losses will continue, as total costs and expenses continue to increase due
to product development and product marketing and distribution. The ability
of DSI to achieve profitability will depend significantly on its ability
to fully develop its gesture recognition technology products, and to
develop the capacity to manufacture and market any of these products
either by itself or as part of a collaborative effort. There can be no
assurance that DSI will be able to achieve profitability. Therefore, the
extent of future losses and the time required to achieve profitability is
highly uncertain.
2. DSI has only one option agreement to license its technology. There can be
no assurance that NetFace LLC will exercise its option to license the
gesture recognition technology for personal computer games, console
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games and Internet television and pay DSI its license fee of $4,800,000
and an equity interest in NetFace. The option expires in December 2002. On
June 29, 2001, Securities Biometrics Inc.OTC:SBTI) acquired 100% of
NetFace LLC. On October 31, 2001 DSI terminated Securities Biometrics'
option to license technology for banking and financial transactions after
the optionee failed to exercise the option.
3. DSI is in the early stage the commercialization of the technology. DSI has
released the first generation product commercially in April, 2002. This
product features a multipoint touchpad ("MPT") capable of detecting the
position and force of up to ten fingers simultaneously and a gesture
recognition software system capable of identifying gestures on the MPT and
translating them into commands to be recognized by other software
applications. This technology has been sufficiently tested prior to the
commercial release. However, its performance has not been put through
extensive commercial use. Accordingly, there can be no assurances that DSI
can achieve the necessary technical objectives. In addition, there is no
guarantee that DSI will be able to adapt the system for mass-scale
production in the event that DSI's marketing initiatives are successful.
There can be no assurances if these or any of DSI's proposed products can
be successfully commercialized on a mass scale.
4. DSI will need future financing. DSI will require substantial additional
funds for the commercialization of the technology, including sales and
marketing support, distribution and operating expenses. Capital
requirements will depend on a variety of factors, including the rate of
progress of DSI's product development, product marketing and distribution,
and the cost of filing, prosecuting, defending and enforcing any patent
claims and other intellectual property rights, maintaining technological
and market competitiveness, licensing and other relationships and the
terms of any such licensing, collaborative or other relationships that DSI
may establish with other entities. In addition, the fixed commitments,
including salaries and fees for employees and consultants, rent, payments
with respect to licensing and other agreements are substantial, and will
most likely increase as DSI continues growth of its operations.
DSI plans to raise substantial additional capital to fund its future
operations through debt and equity financing, and possibly through
collaborative, licensing or other arrangements with other companies
engaged in similar field. At this time, DSI has no present commitments for
future financing. There can be no assurances that any additional financing
will be available when needed, or, if available, is on acceptable terms.
Insufficient funds may prevent DSI from implementing its business strategy
to the extent possible, and could result in delay, scale back, or
elimination of its only product development program, or granting a license
to third parties of DSI's rights to commercialize products or technologies
that DSI would otherwise seek to develop itself.
5. DSI is dependent upon its proprietary technology. DSI relies primarily on
a combination of patent, copyright, and trade secret laws, as well as
confidentiality arrangements and contractual provisions to protect its
technology and products from exploitation by competitors. DSI has three
patents filed with the United States Patent Office and one patent filed
with the Canadian Patent Office. DSI also has one patent pending in the
United States and one pending in Canada. While DSI believes that its
technology is adequately protected against infringement, there is no
assurance of effective protection against competition. Monitoring and
identifying the unauthorized use of DSI's technology may prove difficult.
There is a possibility of disclosure of confidential information related
to DSI's technology and the potential for infringement of intellectual
property rights of another party by DSI.
DSI also intends to apply for additional patents in the United States and
other countries. There can be no assurance that all of these patents will
be recognized in commercially relevant countries (e.g. countries in which
the product is sold) and even if recognized and filed will appropriately
protect DSI's products and
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technology. Further, copyright laws may not provide useful protection
against competitive software that is slightly different than DSI's
software but includes similar technology to that of DSI. The
non-establishment of effective patent, trade secret or copyright
protection could have a material adverse effect on DSI's business, results
of operations and financial condition.
6. DSI may face new competition. To the best of DSI's knowledge, it has no
direct competition today. Its indirect competitors, manufacturers of
current pointing, input and other interface products, may enter the race
for this market segment. Although DSI believes that its gesture
recognition technology products are protected by technology patents and
application advantages, other companies involved in the development of
products related to traditional point and click technology of mice and
keyboards, including Interlink Electronics Ltd., Kensington and Logitech,
have substantially greater technological, financial, research and
development, manufacturing, human and marketing resources and experience
than DSI. Such companies may, therefore, succeed in developing products
that are more effective or less costly than DSI's products, or may be more
successful in marketing and distributing their products. DSI's ability to
sell the gesture recognition technology based products will, in part,
depend on its ability to demonstrate these products to be substantially
better than the current point and click technology.
7. DSI may have difficulty achieving market acceptance because of the
significant change represented by its technology. DSI's gesture
recognition technology represents a significant technological advancement
from existing point and click technology and is a major shift in
paradigms. This may cause resistance to market acceptance and adoptation.
8. DSI intends to rely on third party manufacturers. DSI's strategy is to
outsource most of the required manufacturing. Reliance on third party
producers and manufacturers may delay the introduction of product to
market.
9. DSI has limited marketing and sales resources. In order to market the
gesture recognition technology based products and any other products it
may develop, DSI intends to form marketing and distribution agreements
with third parties, in addition to its own internal marketing and
distribution efforts. There can be no assurance that DSI will be able to
successfully enter into such arrangements with third parties on acceptable
terms, if at all. To the extent that DSI arranges with third parties to
market its products, the success of such products may depend on the
efforts of such third parties.
10. DSI relies on trade secrets and proprietary know-how. Although DSI does
not believe that its products infringe on the rights of third parties,
there can be no assurance that third parties will not assert infringement
claims against DSI in the future or that any such assertion will not
result in costly litigation or require DSI to obtain a license to
intellectual property rights of such third parties. In addition, there can
be no assurance that such licenses will be available on reasonable terms
or at all, which could have a material adverse effect on DSI's business,
results of operations and financial condition.
11. DSI is dependent on certain key personnel and does not maintain key man
life insurance. DSI's success will depend in large part upon the services
of a number of key employees and consultants, including Edward Pardiak,
DSI's Chairman of the Board of Directors and Chief Executive Officer, and
Robert Egery, DSI's President. The loss of the services of Mr. Pardiak,
Mr. Egery or other key employees or consultants could have a material
adverse effect on DSI's business, results of operations and financial
condition. DSI has not obtained keyperson life insurance with respect to
any employees, directors or consultants.
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Due to the highly specialized scientific nature of DSI's business, DSI is
highly dependent upon DSI's ability to attract and retain qualified
scientific, technical and managerial personnel. The loss of services of
existing personnel and/or the failure to recruit key scientific, technical
and managerial personnel in a timely manner would be detrimental to DSI,
DSI's product development programs, and to its overall business.
Competition for qualified personnel is intense and there can be no
assurance that DSI will be able to continue to attract and retain the
necessary qualified personnel.
12. DSI may experience difficulty in the management of growth. If successful,
DSI may experience rapid expansion of its business. A continuing period of
rapid growth could place a significant strain on DSI's management,
operations and other resources. DSI's ability to manage its growth would
require it to continue to invest in its operations, including its
financial and management information systems, and to retain, motivate and
effectively manage its employees. If DSI's management is unable to manage
growth effectively, the quality of its services and products, its ability
to retain key personnel and its results of operations could be materially
and adversely affected.
13. No Dividends Anticipated. DSI has never declared or paid cash dividends
on shares of its Common Stock since its inception and does not intend to
declare or pay dividends on shares of its Common Stock in the foreseeable
future. DSI intends to retain any earnings, if any, in order to finance
future growth of its business.
ITEM 4. INFORMATION ON DSI
A. HISTORY AND DEVELOPMENT OF DSI
DSI Datotech Systems Inc. was incorporated under the laws of the Province
of British Columbia, Canada on May 7, 1987 under the name Rhino Resources
Inc. Rhino Resources Inc. changed its name to DSI Datotech Systems Inc. on
April 19, 1996. On May 14, 2001, DSI received the Certificate of
Continuance under the Canada Business Corporation Act. As a Federally
chartered Canadian corporation, DSI trades under the commercial name of
Datotech and has a registered business address located at 300-905 West
Pender Street, Vancouver, BC, V6C 1L6, telephone number (604) 685-9109.
DSI is involved in the research, design, development and commercialization
of gesture recognition technology products. Prior to August 1997, DSI was
involved in resource exploration. In October 22, 1997, DSI divested itself
of all natural resource properties and ceased all activities within the
natural resource sector.
Since 1997, DSI's business activities have been mainly involved with the
research & development of unique gesture recognition technologies that
enable human-machine communication using hand gestures. Since its
inception, the Company has been successful in developing the technology,
conducting technical evaluations and patenting the technology in United
States and Canada.
B. BUSINESS OVERVIEW
INTRODUCTION
DSI has developed Gesture Recognition (GR) Technology that enables users to
interact freely with computers and machines using natural hand gestures.
The Company plans to roll out products - initially using hand gestures on a
proprietary, multi-point, pressure sensitive touch pad - across a wide
range of markets in order to establish a GR standard and a pervasive
presence in the marketplace.
From 1997 to 2000, DSI developed its core technology: GR software and the
Multi-Point Touchpad (MPT). DSI obtained three patents applicable to
Gesture Recognition Technology and was positioned to file an
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important patent for the MPT. At the end of 2000, the Company believed that
the technology was mature and ready for commercial launch.
2001 was a significant year for DSI. The Company changed from an
organization with an R&D orientation to one with a market driven, business
focus. Prime focus shifted to engaging the marketplace, developing the core
technology into products adapted to specific market requirements, and
building the management team required to take the Company to profitability.
Over the past year the Company has:
1. Designed, developed and built prototypes, including demonstration
software incorporating basic application programming interfaces for the
Multimedia, CAD/CAM (Computer Aided Design/Computer Aided Manufacturing)
and Computer Gaming markets.
2. Obtained user and market feedback for the Multimedia and CAD/CAM markets
through independent Focus Group and alpha testing sessions.
3. Established partnerships with key Multimedia and CAD/CAM software OEMs
(Softimage, Discreet, AutoDesk) to accelerate product acceptance and
time to revenue.
4. Successfully built and delivered a functional prototype for a licensee,
Netface LLC.
Completed design and released to market in April, 2002 the initial product
offering which will be branded HandGear(TM), and is a Gesture Recognition
(GR) enabled Multi-Point Touchpad targeted at professional Multimedia and
CAD/CAM.
TECHNOLOGY OVERVIEW
System Architecture
DSI has developed proprietary technology to improve human/computer
interaction. The Company's technology comprises three core components:
o Gesture Recognition Software, hosted on the Multi-Point Touchpad,
identifies finger movements made by the user on the touchpad as user
commands;
o Multi-Point Touchpad (MPT), an innovative pressure sensitive device
capable of tracking multiple fingers simultaneously, contains a unique
mix of hardware, electronics and software specifically developed to form
a GR user interface platform; and
o Application Programming Interface (API) Plug-ins are the software
modules used to implement the interface and are specific to the users'
software application. The resulting product is a compact,
general-purpose input system that provides a powerful and flexible
platform for more effective human-machine interaction.
System Flexibility
The flexibility of the system architecture is the key to addressing a large
number of applications across a broad range of markets. The system is
capable of commanding anything from manipulation of 3D graphic imagery for
animators, to navigating in 3D websites and architectural designs, to
precisely controlling industrial machines, to managing office applications
and word processing, and to providing dynamic biometric security for
security and web-transactions.
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The sensor of the Multi-Point Touchpad (MPT) can be designed and formed
into various shapes and sizes as required by different applications. The
active surface area can also be segmented to accept a mixture of specific
commands and gestures, and it can support a broad range of resolutions and
sampling rates. All of these factors allow the technology to be tailored to
meet the requirements of customers and their applications.
The Gesture Recognition (GR) software is generic and broadly applicable to
a large number of applications. For each market or domain, the gesture set
- the specific set of finger movements - can be tailored to enhance the
productivity of specific features of the users' software.
The Application Programming Interface (API) Plug-ins provide for
straightforward development of custom applications for the widest range of
customer requirements.
Principle of Operation
The system operating flow is as follows:
1) Sensors in the Multi-Point Touchpad track the position and force of
the multiple finger contacts;
2) The finger movements are interpreted by the gesture recognition
algorithm;
3) The GR Software interprets user intent and transfers the signal to the
API module;
4) The API Plug-in translates the GR Software signals into commands that
are understood by the user's software application; and
5) User commands are executed in real-time in support of the user's
software application.
Customer Benefits
As DSI's products and technology enter computer and electronic appliance
markets, customer acceptance is expected to be high based upon its ease of
use and broad utility. The two major benefits of the DSI technology are the
enhanced degree of freedom it provides to users interacting with a machine
and the promise of significantly improved productivity.
Additional benefits are seen as:
o Hand gestures are intuitive (easily learned and remembered);
o Eyes-free operation, a must for many applications such as graphic design
and video games;
o Ability to read and track multiple points independently;
o 3-dimensional XYZ sensing (force, position and speed);
o Sliding, rather than striking buttons to reduce physical effort and
strain; and
o Programmability to replace repetitive complex input sequences with a
single gesture.
Overall, DSI's technology allows the user to fully focus on the task at
hand rather than the details of interface, while working with greater speed
in a simple and natural manner.
MARKETS AND PRODUCTS
The Company has selected four specific initial target markets. These
markets are:
o Multimedia
o CAD/CAM
o Mass Computer
o Computer Gaming
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DSI will partner with established software OEMs in each market to achieve
early market acceptance and accelerate time to revenue. Implementation of
this strategy is already well under way; DSI has already announced
membership in the Softimage, Discreet and Autodesk developer programs and
is well on its way to developing the application program interfaces (APIs)
plug-ins for these OEM products.
DSI has developed a product rollout strategy in order to introduce the GR
technology, establish market leadership, grow revenue and minimize risk.
o HandGear is a high value product aimed at selected professional users
and early adopters in the Multimedia and CAD/CAM markets. This product
was released on schedule in first quarter 2002.
o Mark 1 product family is a high-value product family to address
professional users and high-end mass-market users in the Multimedia and
CAD/CAM markets and is scheduled for introduction in 2003.
o Mark 2 product family is a lower cost, lower value product family to
address mass-market users in Multimedia and CAD/CAM, and the Mass
Computer and Computer Gaming markets, and is scheduled for introduction
in 2004.
Licensing to other (Horizontal) Markets
DSI's approach to certain other (horizontal) markets is to grant an option
to a third party to have exclusive rights to market the products to a
particular industry. Under the agreements executed to date, DSI received a
cash payment for the option and will receive an additional cash payment if
the optionee elects to license the technology following the optionee's
evaluation of the technology. As a condition for granting the license, DSI
also receives an equity interest in the licensee and the opportunity to
generate revenues from working with sublicenses in the development of
specific applications for the products.
DSI entered into an option agreement with NetFace LLC on June 28, 2000.
NetFace has the right to evaluate the commercial value of DSI's
intellectual property rights in technology, including the gesture
recognition technology, for use in interfaces for personal computer games,
console games and Internet television. In consideration for an option to
enter into an exclusive license agreement with DSI for the purpose of
utilizing DSI's intellectual property rights for such use, NetFace has paid
DSI U.S. $200,000.The prototype was delivered to NetFace as planned in June
2001. Should the option be exercised, DSI will enter into a license
agreement with NetFace. In consideration of the license, DSI will receive
U.S. $5,000,000, less the option fees of U.S. $200,000, and a 20% Class B
membership interest in NetFace. The option period terminates December 2002.
On June 29, 2001, Securities Biometrics Inc. acquired 100% of NetFace LLC.
DSI entered into an option agreement with Security Biometrics, Inc. on
August 22, 2000. Biometrics had the right to evaluate the commercial value
of DSI's technology for use in interfaces and software for banking and
financial transactions. Biometrics paid DSI a fee of US$320,000 for an
option to enter into an exclusive license agreement with DSI for the
purpose of utilizing DSI's intellectual property rights for such use. An
additional US$3,000,000 was due under the option by July 22, 2001 in order
to obtain the license. Biometrics elected not to make such payment and the
option was terminated by DSI.
RESEARCH AND DEVELOPMENT
To support the Company's business objectives, current research and
development activities are focused on:
1. Gesture Recognition software development;
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2. Maturation of the Multi-Point Touchpad, including its adaptation to
different user requirements;
3. Development of applications and interfaces for target market segments;
4. Design for cost-effective manufacturing strategies;
5. Human factors engineering (based upon user studies, focus groups and
market feedback);
6. Supporting existing and future licensees and partners; and
7. Advanced capability development, including the integration of adjacent
technologies (voice recognition, biometrics), non-touchpad gesture
recognition technologies, and alternative architectures.
PATENTS & TRADEMARKS
DSI holds four patents on its technology, has applied for another patent,
and is preparing to file for additional patents specific to multi-touch
gesture recognition software. The Company owns the following patents:
1. US Patent 5,203,704 (1993), "Method of Communication Using Pointing
Vector Gestures and Mnemonic Devices to Assist in Learning Pointing
Vector Gestures"; Expiry December 21, 2010.
2. US Design Patent D354,735 (1995), "Switch Housing for Providing
Various Different Functions to Keys of a Single Key Pad"; Expiry
January 24, 2009.
3. US Patent 5,808,567 (1998), "Apparatus and Method of Communicating
Using Three Digits of a Hand"; Expiry September 15, 2015.
4. Canadian Patent 2,098,179 (1998) "Pointing Gesture Method of
Communication", with Japanese application on hold; expiry December 16,
2011.
DSI has applied for Canadian Patent No. 2,355,434, "Multi-Touch Touchpad"
and has filed a U.S. Patent Application No. 09/931,175 entitled
"Multi-Touch Touchpad".
The Company holds certain U.S. and international trademarks in respect of
its technology, and has applied for additional trademarks. The following is
the status of the Company's trademarks as of January 2002:
1. Registered Trademarks
a. "DATO", U.S. 2,007,836, registered October 15, 1996.
b. "SPELSA", U.S. 2,090,374, registered August 26, 1997.
c. POINTING FINGERS DESIGN, Chile 589.212, registered January
31, 2001.
2. Applications
a. "Touch the Future", "Interfacing With the Future", and
"Datotech", POINTING FINGERS DESIGN, US and Canada.
b. POINTING FINGERS DESIGN, Argentina, Brazil, Korea, Taiwan.
COMPETITION
To the best of its knowledge, the Company faces no direct competition in
its target markets today. However, it is anticipated that competition may
arise from several fronts:
o From manufacturers and marketers of traditional devices/technologies
(keyboard, mice, trackballs, and similar devices) such as Logitech,
Kensington, Cirque, Alps;
o From human-computer interface experts, usually suppliers of specialized
device for specific markets or applications such as Wacom and Interlink;
o From emerging technologies; and
o From new entrants with multi-point touchpads.
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The Company's challenge will be to displace legacy technologies, such as
keyboards, mice, trackballs, and specialized variants of these and
emerging technologies based upon similar approaches, and to compete
against new entrants with multi-point touchpads.
DSI will seek to displace legacy technologies and emerging variants, by
focusing upon the advantages and benefits of its Gesture Recognition
technology. The two major benefits of the DSI technology are the enhanced
degree of freedom it provides to users interacting with a machine and the
promise of significantly improved productivity. DSI may also seek to
partner with such indirect competitors since the Company's technology has
the capability to enhance that of theses existing and emerging devices.
The Company believes that direct competition will arise only from
competitors with multi-point touchpad technology, gesture recognition
technology and the capability to identify the high value features in a
customer's application software and then develop the required software to
access these parameters using the multipoint touchpad and gesture
recognition software. Without multipoint touchpad technology, that is
technology that allows the simultaneous tracking of multiple individual
fingers, the Company does not believe that competitors will be able to
implement gesture recognition solutions based upon natural finger and hand
movements. DSI believes its technology and expertise gives it a
significant competitive advantage compared to existing and new multipoint
touchpad entrants.
GOVERNMENT REGULATIONS
DSI does not believe that its products are materially affected by
government regulation of its proposed products.
DSI is a Canadian Corporation and is governed by the laws of Canada. The
shares of DSI are listed on the Canadian Venture Exchange.
C. ORGANIZATIONAL STRUCTURE
DSI has one wholly owned subsidiary that was incorporated as 3259722
Canada, Inc. on May 14, 1996 pursuant to the laws of Canada. The subsidiary
subsequently changed its name to Interaction Technologies Ltd. on July 19,
2000. Reference to the "Company" or "DSI" include references to the
subsidiary. Interaction Technologies Ltd. is an inactive entity with no
revenue, expenses or capital. There are currently no plans to activate this
subsidiary.
D. PROPERTY PLANT AND EQUIPMENT
DSI initially established its principal place of business in Vancouver,
British Columbia, Canada where it holds a lease for the business premises
with an office space of 5,721 square feet and an annual rent of
$108,527.40. The term of this lease is due to expire November 30, 2005.
Additionally, in June 2001, DSI established its presence in eastern North
America with offices in Montreal (Dorval), Quebec, where it leases office
space of 4,000 square feet for annual rent of $66,000. The Lease expires
November 29, 2004.
13
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. OVERVIEW
DSI Datotech Systems Inc. (DSI), is a public federally incorporated,
Canadian Corporation, which trades on the Canadian Venture Exchange (CDNX)
under the symbol DSI. The Company is dedicated to the development of a
proprietary input technology for computers and electronic devices based on
Gesture Recognition (GR).
This technology enables users to interact freely with computers and
machines using hand gestures on a multi-point, pressure sensitive touch
pad. Its revolutionary capability provides a dramatic leap forward in terms
of ease-of-use and productivity for users across a variety of market
applications such as multimedia, computer games, 3D-enabled personal
computers, and biometrics.
The company plans to roll out products across a wide range of markets in
order to establish a GR standard and a pervasive presence in the
marketplace. In the fiscal 2001, DSI's focus was to finalize the technology
for its commercial launch in April 2002..
The company plans to channel its products to market by forming strategic
alliances and partnerships with established distribution channels, and
major customers, leading to ultimate licensing agreements with major
FISCAL YEAR ENDED OCTOBER 31, 2001 ("FISCAL 2001") COMPARED TO FISCAL YEAR
ENDED OCTOBER 31, 2000 ("FISCAL 2000")
OPERATIONS
In February 2001, at the Annual General Meeting, DSI's first video gaming
prototype was demonstrated using the Company's Gesture Recognition
technology. This prototype featured three game simulations that
demonstrated the value and utility of Gesture Recognition for the computer
gaming industry.
To facilitate the commercialization of its technology, DSI built a
Management team based in the Montreal office, which opened in June 2001. As
of January 2002, DSI had 29 employees, consisting of eleven (11) in
Montreal and eighteen (18) in Vancouver where the core research and
development is centered.
On May 14, 2001, DSI received the Certificate of Continuance under the
Canada Business Corporation Act.
RESOURCES
DSI's cash balance at October 31, 2001 was $1,397,000, a decrease of $
2,682,000 from the previous year-end when the balance was $4,079,000. Funds
totaling $2,614,000 were utilized primarily for research, development,
marketing and general operations. Separately, capital purchases for the
year amounted to $478,000.
During the fiscal year 2001, financing from the exercise of warrants and
options amounted to $409,000.
The Company has subsequently received $380,986 from warrants, which were
exercised in January 2002. In addition, the Company will raise funds
through a series of private placements this spring.
On August 31, 2001, the Company elected not to renew its one-year contract
with Renmark Financial Communications Inc., which assisted the Company in
the area of Investor Relations. During this fiscal period the amount of
$75,000 was paid to Renmark.
14
REVENUE AND INVESTMENT INCOME
The Company has one option to license agreement in place in favor of
Netface LLC covering the applications of Gesture Recognition technology for
Computer Gaming and WebTV. During 2001, Netface LLC became a wholly owned
subsidiary of Security Biometrics Inc.
To date, Netface has maintained its option. Specifically, a prototype for
the computer gaming industry was delivered on schedule to Netface in June
2001 in exchange for $150,000, which was duly recorded as Option Income.
Investment and other income of $ 147,000 was slightly higher in fiscal 2001
as compared to $138,000 the previous year, as interest generated from the
private placement of June 2000, impacted fiscal 2001 for a longer period of
time.
As reference, in October 2001, DSI cancelled an option to license agreement
with Security Biometrics (OTC:SBTI) covering banking and financial
transactions. SBTI was not able to proceed under the terms of the
agreement.
RESEARCH AND DEVELOPMENT
Total Research and Development expenditures increased to $1,826,085 from $
498,382 the previous year. This includes the non-cash write down of the
Investment in Gesture Recognition Technology in the amount of $916,000.
This was appropriate since this aspect of the technology was no longer
relevant although the acquisition was a stepping stone in the evolution to
its current, higher levels.
During fiscal 2001, DSI hired a VP Engineering & Research and eight (8)
additional engineers to accelerate the development process of the
technology to be commercial ready in early 2002. This resulted in a
$495,000 increase in salaries and benefits for R&D.
The Company has filed Scientific Reports for the fiscal years 2000 and 2001
to qualify for Federal and Quebec Provincial R&D tax credits as part of the
SR&ED program. Tax credits relating to fiscal 2000 could amount to
$186,031. Federal tax credits for 2001 project to $339,790, while the
Quebec Provincial tax credit in the form of a payment to the Company
projects to $123,531.
GENERAL AND ADMINISTRATIVE
General and Administrative expenses increased to $2,292,000 from
$1,034,000. This increase relates to the following factors:
o Over seven new positions, including a full senior management team, were
created during the year resulting in increased salary and benefits of
$268,000 and higher management fees of $200,000;
o Correspondingly, recruitment and staffing costs increased by $133,000;
o Corporate Marketing activities intensified as the strategic positioning
of the technology was clarified. Corporate marketing costs increased by
$115,000;
o Travel and accommodation increased by $111,000 as the result of
increased business activities, including travel between the offices in
Montreal and Vancouver;
o Rent expense increased by $86,000 as the result of larger space in
Vancouver, and the new office in Montreal;
o Investor Relations and promotions increased by $89,000 including payment
to an outside consultant to handle DSI's Investor Relations;
15
o Market Research of $31,000 was spent for market studies required for
strategic planning.
INCOME TAXES
DSI has accumulated non-capital losses for tax purposes, the potential
benefits of which are not recorded in the financial statements. The losses
may be carried forward to reduce taxable income in future years and, unless
utilized, will expire as follows:
Year Loss Amount
---- -----------
2002 227,100
2003 732,200
2004 881,800
2005 865,300
2006 966,600
2007 725,900
2008 1.372.000
----------
TOTAL $5.203.000
==========
FISCAL YEAR ENDED OCTOBER 31, 2001 ("FISCAL 2001) COMPARED TO FISCAL
YEAR ENDED OCTOBER 31, 2000 ("FISCAL 2000")
REVENUE AND INVESTMENT INCOME
Option revenue of $627,730 was received during the fiscal 2000 for two
option agreements, one with Netface LLC and one with Security Biometrics
Inc. Investment and interest income increased to $149,470 due to the
investment of funds from the shares issued this year.
EXPENSES
RESEARCH AND DEVELOPMENT
Total research and development expenditure increased from $465,897 for
fiscal 1999 to $498,382 for fiscal 2000, an increase of 7%. There will be a
substantial increase in the research and development expenditure for the
year ending October 31, 2001 ("Fiscal 2001")for the further development of
the acceptable prototype for the option agreements.
The major increase was in salaries which increased by $97,878 from fiscal
1999 ($279,813) to fiscal 2000 ($377,691) as there were additional
engineers hired in the 2000 fiscal year.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased from $670,143 for fiscal 1999
to $1,034,036 for fiscal 2000, an increase of $363,893 (54%). This increase
is mainly due to:
o Management Fee - increase of $101,800 was partially due to the change in
management during the fiscal 2000.
o Investor Relations and Promo - increase of $19,720 due to fees paid for
identifying investors in Europe.
o Consulting Fees - increase of $85,446. The increase was mostly due to
hiring of consultant for recruitment and office plan for the new
location.
o Legal and accounting - increase of $33,270 which included fees for
stating the financials in US GAAP and legal counsel for financing
opportunities in the United States.
16
o Travel and accommodation increased by $38,426 which was mainly due to
travel to Europe and the US to pursue additional financing.
o Recruitment - $32,813. This was for advertising positions on the web and
payment to recruiting agencies for hiring of employees.
o Telephone - $11,685 increase primarily due to an increase in the cell
phone usage.
INCOME TAXES
DSI has accumulated non-capital losses for tax purposes, the potential
benefits of which are not recorded in the financial statements. The losses
may be carried forward to reduce taxable income in future years and, unless
utilized, will expire as follows:
Year Loss Amount
---- -----------
2001 $ 162,600
2002 227,100
2003 732,200
2004 881,800
2005 865,300
2006 966,600
2007 725,900
----------
TOTAL $4,561,500
==========
In the fiscal 2000, DSI's net operating loss decreased by 33% to $755,218
as compared to $1,125,451 in the fiscal year ended October 31, 1999. The
loss per share decreased $0.04 to $0.04. DSI has accumulated non-capital
losses of approximately $4.6 million, which can be carried forward to
reduce taxable income in future years. These potential income tax benefits
arising from the foregoing are not recorded in the financial statements.
B. LIQUIDITY AND CAPITAL RESOURCES
There was a cash and short-term deposits balance of $2,167,401 at October
31, 2001. These funds have been, and will continue to be utilized to
conclude the development of GRT, the development of the prototypes and
related expenses.
No funds were raised in 2001 as the private placement from 2000 provided
the resources to cover the requirements of 2001. In Fiscal 2000, DSI's
primary source of funds was from the issue of shares of common stock. DSI
considers its operating cash flows and ability to raise equity capital as
principal indicators of its liquidity. During Fiscal 2000, DSI had cash
inflow of $5 million from private placement of share capital ($3.8
Million), exercise of warrants ($1.9 Million) and exercise of options
($437,000), leaving a cash balance at October 31, 2000 of $4,079,315
compared to $64,000 at Fiscal 1999. Although working capital is not
considered to be an indicator of DSI's liquidity, DSI's working capital at
end of Fiscal 2000 was $3,922,221, an increase of $4,088,777 from Fiscal
1999 as of July 31. In Fiscal 2000, cash resources were utilized in the
investment in gesture recognition technology, including recruitment of
additional employees the research and development of the gesture
recognition technology.
DSI has no long-term debt. Current liabilities of $212,679 included
accounts payable and accrued liabilities, which decreased by $23,000 from
Fiscal 1999. DSI has license-to-option agreements with Netface LLC. DSI
intends primarily to meet its commitment to Netface while continuing to
develop other product applications.
17
The funds required for this purpose will be derived from its current cash
position and possibly the issuance of shares of equity.
DSI believes that it has sufficient cash on hand to meet its anticipated
requirements through the Spring of 2002. DSI will require substantial
additional funds for its product development programs, marketing and
distribution and operating expenses. While management is pursuing
additional financing, DSI currently has no commitments for additional
financing and there are no assurances that any further financing will be
available. On March 18, 2002, DSI announced a private placement offering of
$1.8 Million for 3.6 Million shares at $0.50 per share. Each share will
have one full warrant which can be exercised into one common share for
$0.50 within one year from the date of issue. There can be no assurance
that the private placement will be successful.
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
RESEARCH AND DEVELOPMENT
As at October 31, 2001, research and development costs accrued (exclusive
of accumulated amortization) were $910,283. To support the market entry
product, current research and development activities are focused on three
areas:
X High-resolution multi-touch sensors adapted from touchpad
technology used in many notebook computers.
X A sensor-independent proprietary gesture recognition algorithm,
which can be used with a variety of sensor technologies.
X Application interfaces aimed at and designed for professional
users of high-end software applications like Adobe Photoshop,
etc.
The gesture recognition algorithm forms an engine, similar to an operating
system, for gesture based human-machine interaction, and is the foundation
for DSI's technology. This software will be designed to reside in a custom
microchip. This approach will facilitate technology transfer and licensing
to third parties, and ensure DSI's intellectual property protection.
D. TREND INFORMATION
The first commercial product was introduced in April 2002 and will generate
a regular stream of revenue. This will include sales to distributors in the
United States and Canada, as well as direct sales to major customers.
Company sales representatives will be responsible for all sales. The
Company will also participate at major trade shows which will be supported
by other trade activities and publicity.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT
Directors are elected each year at the annual meeting of the shareholders
of DSI. The most recent meeting of he shareholders was held on February 21,
2001. The following table sets out the names of the Management, their
positions and offices in DSI, principal occupations, the period of time
that they have been Directors of DSI. All of the directors are residents of
Canada.
18
The following table lists the directors and officers of DSI as at April 12,
2002:
Name Age Position
---- --- --------
Edward C. Pardiak 49 Director, Chairman of the
Board, Chief Financial
Officer, and Chief
Executive Officer
Robert M. Egery 49 President, Chief Operating
Officer and Director
Thomas Calvert 66 Director and Secretary
Allan S. Gibbins 51 Director
Timothy Heaney 42 Vice President Marketing
Michel Lavallee 40 Vice President
Engineering and R&D
Gary Chamandy-Cook 45 Vice President Finance and
Administrator
John Paul Higgins 43 Vice President Corporate
Development
EDWARD C. PARDIAK
Mr. Edward C. Pardiak was appointed Director, Chairman of the Board and
Chief Financial Officer in April 1997. In October 2000, the Board of
Directors elected Mr. Pardiak as President and Chief Executive Officer
of DSI. He ceased being President in December 2000. Mr. Pardiak has
extensive international experience in licensing, royalty agreements,
finance and project management on the African, Asian, European and
American continents. From 1976 to 1985 he held management positions with
international Fortune 500 companies such as Seagram & Sons Ltd. Mr.
Pardiak was a director and co-founder of Augen Capital Corp., a public
financial holding company with wholly owned merchant banking
subsidiaries. He has a B.SC. from McGill University, a B.A. (Honors with
Distinction) in Economics and a M.B.A. in finance and strategic
management from Concordia University. He is currently completing his
Doctorate in Strategic Management and has lectured at the graduate level
at Concordia University.
ROBERT M. EGERY
Mr. Robert M. Egery was appointed President and Chief Operating Officer of
DSI Datotech effective December 1, 2000. Mr. Egery has more than 20 years
of experience in high technology. During his career he has held senior
management positions in sales and marketing, business development,
contracts, engineering and program management and over 10 years at the
vice-presidential level. At AlliedSignal (Honeywell), he gained invaluable
experience in bringing new products to market, in electronics production
and in international marketing and alliances. He developed a strong
background in systems integration, software development and product
diversification at Lockheed Martin and most recently he developed a global
service delivery business at Bombardier. Mr. Egery holds bachelor degrees
in Commerce and Electrical Engineering.
DR. THOMAS CALVERT
Dr. Thomas Calvert was appointed Director of DSI in January 1998. In
October 2000 the Board of Directors elected Dr. Calvert as Secretary of
DSI. In 1997 Dr. Calvert founded Credo Interactive Inc. and is
currently Board Chair of that company. Since 1996, Dr. Calvert has been
the President and CEO of Credo Multimedia Software Inc. Dr. Calvert is
Vice-President for Research and External Affairs at the Technical
University of BC. He is currently on leave from his position at Simon
Fraser University where he holds joint appointments as Professor in the
Schools of Computing Science and Engineering Science. Since 1996, Dr.
Calvert is Co-leader of the TeleLearning Network of Centers of
Excellence, a national project sponsored by SFU. He joined Kinetic
Effects Research Inc. as President from 1992 to 1996. Dr. Calvert
served as President of the Science Council of BC between 1990 and 1992.
In addition to his numerous honors and awards, Dr. Calvert has served
19
on the Senate and Board of Governors of SFU, and on a number of external
boards including Science World, BC Advanced Systems Institute, TRIUMF,
Software Productivity Center, Jumpstart Performance Society, and the Center
for Image and Sound Research. Dr. Tom Calvert has published over 100 papers
and book chapters. He received his Doctorate in Electrical Engineering from
Carnegie Mellon University in the United States.
ALLAN S. GIBBINS
Mr. Allan S. Gibbins was appointed Director of DSI in January 1998. Mr.
Gibbins held increasing senior management positions over a period of 16
years with DuPont Canada Inc. In 1986 he was the Director of ITT Cannon
Canada Ltd., and served between 1988 and 1992 as Vice-President and General
Manager of Nutone Electrical Inc. Since 1992, Mr. Gibbins is the President
and CEO of Hubbell (Canada) Inc. The sales are in excess of $85 million
representing multi-divisional product lines. He is the Chairman of the
Electrical, Electronic Manufacturers Association of Canada (EEMAC). Mr.
Gibbins has a Bachelor of Science (Honors, Chemistry) from Concordia
University in Montreal. He brings many years of sales and marketing
experience in such diverse industries as electrical, electronic, plastics,
textile fibers, paint and chemicals. He has outstanding skills in the areas
of merger and acquisition negotiation, financial control systems,
restructuring, training and team building.
TIMOTHY HEANEY
Mr. Timothy Heaney was appointed VP Marketing of DSI Datotech Systems Inc.
effective February 19, 2001. From 1994 through 2001, he was the Director of
Marketing for SR Telecom Inc., a manufacturer of microwave
telecommunications systems. Mr. Heaney is a professional engineer with over
17 years experience in international business development, sales and
marketing, product management and contracts and project execution. Mr.
Heaney received his Bachelor of Engineering from Concordia University,
Montreal, in 1983.
MICHEL LAVALLEE
Mr. Michel Lavallee was appointed VP Engineering & RD of DSI Datotech
Systems Inc. effective June 25, 2001. From June 2000 to June 2001 Mr.
Lavallee was the VP Technology and Chief Technology Officer for
DTI-Infogrames (division of Infogrames Europe) a company producing and
distributing gaming software for the In-Flight Entertainment (IFE) and
Interactive Television (iTV) markets. From 1994 to 2000 he was Director of
R&D, Software Engineering and Director of Business Development for the
Centre de Research Informatique de Montreal (CRIM). CRIM specializes in
offering technology learning courses and leading edge research and
development services across the various information technology fields. Mr.
Lavallee brings over 17 years experience with complex computerized systems,
most of which was spent in various management positions for small, medium
and large companies. Mr. Lavallee has a B. Sc. Computer Science (Systems)
from Canada's Royal Military College in St-Jean sur Richelieu.
GARY CHAMANDY-COOK
Mr. Gary Chamandy-Cook was appointed the position of VP, Finance and
Administration effective June 10, 2001. From 2000 to June 2001 Mr.
Chamandy-Cook was Chief Financial Officer for VDO Road Digital Inc., a
company offering high-speed terminals that access email and the internet
from public locations. From 1990 to 1999 he was the President and CFO of
Radius Maple Leaf Footwear Inc., a leading injection moulding footwear
producer. He has a strong financial and business background with over 20
years experience at senior management levels for various businesses. Mr.
Chamandy-Cook was most recently Chief Financial Officer for VDO Road
Digital Inc., a company offering high-speed terminals that access e-mail
and the Internet from public locations. Mr. Chamandy-Cook has a B.Comm from
McGill University where he majored in Finance and Marketing.
20
JOHN PAUL HIGGINS
Mr. Paul Higgins was appointed Vice-President, Corporate Development in
2001. Mr. Higgins, over a 17 year period, has held increasingly senior
positions in systems engineering, product and channel management,
communications and business development with Lockheed Martin Canada, Nortel
APS, Astec APS (an Emerson company) and most recently Lumenon Innovative
Lightwave Technology. Mr. Higgins has a B.E.Sc. (Electrical Engineering)
from University of Western Ontario.
FAMILY RELATIONSHIP BETWEEN ANY DIRECTOR AND EXECUTIVE OFFICER
Mr. Edward Pardiak, Director and Chairman of the Board, and Mr. Allan
Gibbins, Director, are brothers-in-law.
B. COMPENSATION
The following table sets forth the compensation paid to DSI's directors and
members of its supervisory bodies for the last three fiscal years:
Annual Compensation Long Term Compensation
------------------------------------ --------------------------------
Awards Payouts
---------- --------
SECURITIES RESTRICTED
OTHER UNDER SHARES OR
ANNUAL OPTIONS/ RESTRICTED ALL
COMPEN- SARS(1) SHARE LTIP(2) OTHER
NAME AND YEAR SALARY BONUS SATION GRANTED UNITS PAYOUTS COMPENSATION
PRINCIPAL POSITION ($) ($) ($) (#) ($) ($) ($)
- ----------------------- ---- -------- -------- -------- --------- ---------- ------- ------------
Edward C. Pardiak,
Chairman, President and 1999 $120,000 Nil $3,600 50,000 Nil Nil $2,000
Chief Executive Officer 2000 $120,000 Nil $3,600 95,000 Nil Nil $2,900
2001 $162,000 $155,000 Nil 105,000 Nil Nil $2,400
- ----------------------- ---- -------- -------- -------- --------- ---------- ------- ------------
Rebert M. Egery,
President and 1999 N/A N/A N/A N/A N/A N/A N/A
Chief Operating Officer 2000 N/A N/A N/A N/A N/A N/A N/A
2001 $145,200 $100,000 Nil 300,000 Nil Nil $2,200
- ----------------------- ---- -------- -------- -------- --------- ---------- ------- ------------
(1) "SAR" or "stock appreciation right" means a right granted by DSI, as
compensation for services rendered, to receive a payment of cash or an
issue or transfer of securities based wholly or in part on changes in
the trading price of publicly traded securities of DSI.
(2) "LTIP" or "long term incentive plan" means any plan that provides
compensation intended to serve as incentive for performance to occur
over a period longer than one financial year, but does not include
option or stock appreciation right plans or plans for compensation
through restricted shares or restricted share units.
EMPLOYMENT CONTRACTS
DSI has entered into an agreement with Edward C. Pardiak Holding Limited
(the "Pardiak Agreement"), which is controlled by Mr. Edward C. Pardiak,
Chief Executive Officer and Chairman of the Board, effective November 1,
2000. The Pardiak Agreement provides for an initial term of two years and
with successive renewal terms of one year. Renewal is at the discretion of
DSI. Pursuant to the Pardiak Agreement, Mr. Pardiak is to be paid a fee of
$12,500 per month together with a car allowance in the amount of $1,000 per
month. DSI may terminate the Pardiak Agreement for cause. If the Pardiak
Agreement is terminated by DSI for any reason other than cause, then DSI
shall pay Mr. Pardiak a lump sum payment in an amount equal to the
compensation per the agreement in full of not less than one year's
compensation.
21
Additional compensation to be awarded to Mr. Pardiak under the Pardiak
Agreement is 1,300,000 shares of common stock that are held by an escrow
agent as performance shares pursuant to the terms and provisions of an
escrow agreement. DSI has entered into an escrow agreement by and among the
Pacific Corporate Trust Company (the "Trustee"), DSI and Pardiak Management
International Limited dated as of November 17, 1997. The Trustee holds
1,300,000 shares in escrow until directed to be released by the Canadian
Venture Exchange. Under the escrow agreement, the shares will be released
when DSI achieves earnings before taxes and depreciation of $250,000.
DSI has entered into an agreement with Lemtra Management Inc. (the "Lemtra
Agreement"), which is controlled by Mr. Robert M. Egery, President and
Chief Operating Officer and Director of DSI effective December 1, 2000. The
Lemtra Agreement provides for an initial term of two years and with
successive renewal terms of one year. Renewal is at the discretion of DSI.
Pursuant to the Lemtra Agreement, Mr. Egery is to be paid a fee of $12,500
per month together with a car allowance in the amount of $700 per month.
DSI may terminate the Lemtra Agreement for cause. If the Lemtra Agreement
is terminated by DSI for any reason other than cause, then DSI shall pay
Mr. Egery a lump sum payment in an amount equal to the compensation per the
agreement in full of not less than one year's compensation.
BOARD COMMITTEES
Members of the Advisory Board are elected by the Directors of DSI. The
advisors have in-depth knowledge of innovative technologies and financial
experience that augments DSI's management capabilities and technology
leadership in gesture recognition technology. The following table sets out
the names of the Advisory Board members, their principal occupations and
the period of time that they have been Advisory Board Directors of DSI. The
Advisory Board has no formal authority. All of the Advisory Board members
are residents of Canada. The Advisory Board will be dissolved by the May
21,2002 annual general meeting.
Name Principal Occupation Period as Advisory Board
Member
--------------- ------------------------ ------------------------
Kenneth P. Barr Chairman & CEO Security Since December 13, 1999
Biometrics Inc (OTC:SBTI)
Wayne A. Taylor President, FGH Insurance Since December 13, 1999
Agencies Ltd. Principal of
Security Biometrics Inc
(OTC:SBTI)
Dr. Calvert and Mr. Gibbins are members of DSI's Audit Committee and DSI's
Compensation Committee.
D. EMPLOYEES
As at April 12, 2002, DSI had 28 full-time employees including 18
engineers, scientists and technicians and 7 administrative, marketing and
support staff.
E. SHARE OWNERSHIP
The following table sets forth certain information concerning the
beneficial ownership of DSI's shares of common stock or options to purchase
shares of common stock as at April 12, 2002 for each officer and director
of DSI at that date:
22
NAME OF BENEFICIAL NUMBER OF SHARES OF PERCENTAGE OF
SHAREHOLDER COMMON STOCK (1) SHARES OF COMMON STOCK
- ------------------ ------------------- ----------------------
Edward C. Pardiak 1,836,250 (2) 7.84%
Robert M. Egery 269,500 (3) 1.15%
Allan S. Gibbins 303,424 (4) 1.29%
Thomas Calvert 217,000 (5) 0.93%
Timothy Heaney 103,750 (6) 0.44%
Michel Lavallee 72,500 (7) 0.31%
Gary Chamandy-Cook 133,500 (8) 0.57%
John Paul Higgins 73,500 (9) 0.31%
1) As at April 12, 2002, the number of shares of common stock outstanding
was 23,435,224.
2) Includes 1,325,000 shares owned by Pardiak Management International
Limited, a corporation controlled by Edward Pardiak, including
1,300,000 being held in escrow. Also includes options issued to Mr.
Pardiak to purchase (i) 230,000 shares of common stock at an exercise
price of $0.75 per share, (ii) 120,000 shares of common stock at an
exercise price of $0.80 per share, (iii) 50,000 shares of common stock
at an exercise price of $0.40 per share, (iv) 45,000 shares of common
stock at an exercise price of $1.12 per share, and (v) 66,250 shares of
common stock at an exercise price of $0.50 per share. Does not include
unvested options issued to Mr. Pardiak to purchase 38,750 shares of
common stock at an exercise price of $0.50 per share and warrants to
purchase 25,000 shares of common stock at an exercise price of $0.50
which cannot be traded before August 12, 2002.
3) Includes options to purchase 262,500 shares of common stock at an
exercise price of $0.50 per share. Does not include unvested options to
purchase 87,500 shares of common stock at an exercise price of $0.50
per share.
4) Includes options to purchase (i) 100,000 shares of common stock at an
exercise price of $0.80 per share, (ii) 50,000 shares of common stocks
at an exercise price of $0.40 per share, (iii) 12,000 shares of common
stock at an exercise price of $1.12 per share, (iv) 25,000 shares of
common stock at an exercise price of $1.00 per share and (v) 62,500
shares of common stock at an exercise price of $0.50 per share. Does
not include unvested options to purchase 37,500 shares of common stock
at an exercise price of $0.50 per share.
5) Includes options to purchase (i) 100,000 shares of common stock at an
exercise price of $0.80 per share, (ii) 12,500 shares of common stock
at an exercise price of $0.40 per share, (iii) 12,000 shares of common
stock at an exercise price of $1.12 per share, (iv) 25,000 shares of
common stock at an exercise price of $1.00 per share and (v) 62,500
shares of common stock at an exercise price of $0.50 per share. Does
not include unvested options to purchase 37,500 shares of common stock
at an exercise price of $0.50 per share.
6) Includes options to purchase 103,750 shares of common stock at an
exercise price of $0.50 per share. Does not include unvested options to
purchase 61,250 shares of common stock at an exercise price of $0.50.
7) Includes options to purchase 72,500 shares of common stock at an
exercise price of $0.50 per share. Does not include unvested options to
purchase 92,500 shares of common stock at an exercise price of $0.50.
23
8) Includes options to purchase 72,500 shares of common stock at an
exercise price of $0.50 per share. Does not include unvested options to
purchase 92,500 shares of common stock at an exercise price of $0.50.
9) Includes options to purchase 72,500 shares of common stock at an
exercise price of $0.50 per share. Does not include unvested options to
purchase 92,500 shares of common stock at an exercise price of $0.50.
The Directors and Officers of DSI, as a whole, are the beneficial
owners of 3,009,424 shares of common stock, including options to
purchase 1,556,500 shares of common stock, representing 12.04% of the
issued and outstanding capital of DSI as at April 12, 2002, assuming
exercise of their vested options.
The following table lists the stock options granted to the Directors
and Employees of DSI during the fiscal year ended October 31, 2001.
24
MARKET VALUE
NUMBER OF PERCENTAGE OF OF SECURITIES
SECURITIES TOTAL OPTIONS UNDERLYING
UNDER GRANTED TO EXERCISE OR OPTIONS ON THE EXPIRATION
OPTIONS EMPLOYEES IN BASE PRICE DATE OF GRANT DATE
NAME OF OPTIONEE GRANTED FISCAL 2001 ($/SECURITY) ($/SECURITY) (YY/MM/DD)
------------------- ---------- ------------- ------------ -------------- ----------
Robert Egery 250,000 15.06% $0.50 $0.64 05/11/14
Tom Calvert 50,000 3.01% $0.50 $0.64 05/11/14
Allan S. Gibbins 50,000 3.01% $0.50 $0.64 05/11/14
Martin Livesey 30,000 1.81% $0.50 $0.55 06/02/22
Jeffrey Sketchley 10,000 0.60% $0.50 $0.55 06/02/22
Shabira Rajan 50,000 3.01% $0.50 $0.55 06/02/22
Rhona Charron 20,000 1.20% $0.50 $0.55 06/02/22
Dani Knezevic 50,000 3.01% $0.50 $0.55 06/02/22
Timothy Heaney 125,000 7.53% $0.50 $0.55 06/02/22
Edward C. Pardiak 55,000 3.31% $0.50 $0.55 06/02/22
Narayan Krishnamoorthy 25,000 1.51% $0.50 $0.50 06/04/25
Michael Felzcak 20,000 1.20% $0.50 $0.50 06/04/25
Robert Cropp 20,000 1.20% $0.50 $0.50 06/04/25
Sergey Baslyk 30,000 1.81% $0.50 $0.50 06/04/25
Wayne Taylor 25,000 1.51% $0.50 $0.50 06/04/25
Kenneth P. Barr 25,000 1.51% $0.50 $0.50 06/04/25
Michel Lavallee 125,000 7.53% $0.50 $0.58 06/06/25
Gary Chamandy-Cook 125,000 7.53% $0.50 $0.58 06/06/25
Edward C. Pardiak 50,000 3.01% $0.50 $0.58 06/06/25
Robert M. Egery 50,000 3.01% $0.50 $0.58 06/06/25
Thomas Calvert 50,000 3.01% $0.50 $0.58 06/06/25
Allan S. Gibbins 50,000 3.01% $0.50 $0.58 06/06/25
Antonio Orozco 12,000 0.72% $0.50 $0.58 06/06/25
Lisa Wheatley 8,000 0.48% $0.50 $0.58 06/06/25
Dani Knezevic 15,000 0.90% $0.50 $0.58 06/06/25
Shabira Rajan 15,000 0.90% $0.50 $0.58 06/06/25
Daniel Zatkovic 80,000 4.82% $0.50 $0.60 06/08/15
Miroslav Kuzmanovic 30,000 1.81% $0.50 $0.60 06/08/15
Dani Knezevic 5,000 0.30% $0.50 $0.60 06/08/15
Shabira Rajan 5,000 0.30% $0.50 $0.60 06/08/15
Michel Leroux 75,000 4.52% $0.50 $0.50 06/10/01
John Paul Higgins 125,000 7.53% $0.50 $0.50 06/10/01
Daniel Zatkovic 5,000 0.30% $0.50 $0.50 06/10/01
--------- -------
TOTAL 1,660,000 100.00%
========= =======
25
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the shares of common stock of DSI, as of April 12, 2002, by
each person, who is known by DSI to own beneficially more than five percent
of the outstanding shares of common stock.
NAME OF BENEFICIAL SHAREHOLDER NUMBER OF SHARES PERCENTAGE OF
OF COMMON STOCK(1) SHARES OF COMMON STOCK
------------------------------ ------------------ ----------------------
Pardiak Management 1,836,250 (2) 7.84%
International Limited
Segev Management International 1,300,000 (3) 5.55%
Limited
1) As at April 12, 2002, the number of shares of common stock outstanding
was 23,435,224.
2) Includes 1,325,000 shares owned by Pardiak Management International
Limited, a corporation controlled by Edward Pardiak, including
1,300,000 being held in escrow. Also includes options issued to Mr.
Pardiak to purchase (i) 230,000 shares of common stock at an exercise
price of $0.75 per share, (ii) 120,000 shares of common stock at an
exercise price of $0.80 per share, (iii) 50,000 shares of common stock
at an exercise price of $0.40 per share, (iv) 45,000 shares of common
stock at an exercise price of $1.12 per share, and (v) 66,250 shares of
common stock at an exercise price of $0.50 per share. Does not include
unvested options issued to Mr. Pardiak to purchase 38,750 shares of
common stock at an exercise price of $0.50 per share and warrants to
purchase 25,000 shares of common stock at an exercise price of $0.50
which cannot be traded before August 12, 2002.
3) 1,300,000 shares of common stock are held by an escrow agent for Elli
Segev Holdings Limited, a corporation controlled by Elli Segev.
B. RELATED PARTY TRANSACTIONS
DSI has entered into an agreement with Edward C. Pardiak Holding Limited
(the "Pardiak Agreement"), which is controlled by Mr. Edward C. Pardiak,
Chief Executive Officer and Chairman of the Board, effective November 1,
2000. The Pardiak Agreement provides for an initial term of two years and
with successive renewal terms of one year. Renewal is at the discretion of
DSI. Pursuant to the Pardiak Agreement, Mr. Pardiak is to be paid a fee of
$12,500 per month together with a car allowance in the amount of $1,000 per
month. DSI may terminate the Pardiak Agreement for cause. If the Pardiak
Agreement is terminated by DSI for any reason other than cause, then DSI
shall pay Mr. Pardiak a lump sum payment in an amount equal to the
compensation per the agreement in full of not less than one year's
compensation.
The share of compensation to be awarded to Mr. Pardiak under the Pardiak
Agreement is 1,300,000 common shares that are to be held by an escrow agent
as performance shares pursuant to the terms and provisions of an escrow
agreement.
DSI has entered into an escrow agreement by and among the Pacific Corporate
Trust Company (the "Trustee"), DSI and Pardiak Management International
Limited dated as of November 17, 1997 whereby the Trustee is holding
1,300,000 shares of common stock in escrow until directed to be released by
the Vancouver Stock Exchange. So long as the shares are held in escrow,
Pardiak Management International Limited may exercise all voting rights
attached to the shares but waived the right to receive dividends or any
distributions in the event of a winding up or dissolution of DSI. One
escrow share will be released for each $0.25 in operating revenue each
year.
26
DSI entered into a consulting agreement (the "Consulting Agreement") dated
December 1, 2000 with Lemtra Management Inc, a company wholly owned by
Robert M. Egery under which Mr. Egery agreed to perform management services
as required by the Company's Board or Directors in exchange for an annual
fee of $158,400 (or such greater amount as agreed upon from time to time)
and bonuses in such amounts as may be set by the directors from time to
time. The initial term of the contract is two years with successive renewal
terms of one year. Renewal is at the discretion of DSI.
C. INTEREST OF EXPERTS AND COUNSEL
None
ITEM 8. FINANCIAL INFORMATION
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
Refer to Item 17
B. SIGNIFICANT CHANGES
None
ITEM 9. LISTING
MARKETS
DSI's shares are listed and posted for trading on the CDNX (symbol DSI). The
12-month high-low stock range has been between $0.28 and $1.11 Canadian.
The following table sets forth the reported low and high bid prices for the
shares of common stock of DSI as quoted on the CDNX on a quarterly basis for the
fiscal years 2000 and 2001 and for the first quarter of fiscal 2002, and on
monthly basis for February and March 2002. All figures are in Canadian Dollars.
Quarter High Low
------- ---- ---
11/01/99 to 01/31/00 $1.30 $0.20
02/01/00 to 04/30/00 $2.65 $0.80
05/01/00 to 07/31/00 $1.75 $1.00
08/01/00 to 10/31/00 $1.20 $0.62
11/01/00 to 01/31/01 $0.92 $0.40
02/01/01 to 04/30/01 $0.80 $0.50
05/01/01 to 07/31/01 $1.11 $0.35
08/01/01 to 10/31/01 $0.78 $0.42
11/01/01 to 01/31/02 $0.58 $0.28
Month High Low
----- ---- ---
02/01/02 to 02/28/02 $0.48 $0.40
03/01/02 to 03/31/02 $0.54 $0.43
27
At April 12, 2002, DSI had 23,435,224 shares of common stock issued and
outstanding and estimated 1,366 record owners.
ITEM 10. ADDITIONAL INFORMATION
A. SHARE CAPITAL
(a) The authorized share capital consists of 100,000,000 shares of common
stock without par value.
Issued:
2001 2000
---------------------------------- ---------------------------
NO. OF NO. OF
SHARES AMOUNT SHARES AMOUNT
---------- ------------- ---------- -------------
Balance, beginning
of year 21,166,970 $ 10,807,610 15,057,940 $ 5,834,305
---------- ------------- ---------- -------------
Issued during the year
For cash
- private placements,
net of share issue
costs -- -- 3,775,994 3,217,792
- exercise of options 330,750 132,300 437,250 220,200
- exercise of warrants 654,214 277,070 1,895,786 1,535,313
---------- ------------- ---------- -------------
984,964 409,370 6,109,030 4,973,305
---------- ------------- ---------- -------------
22,151,934 11,216,980 21,166,970 10,807,610
Less:
Cancellation of
escrow shares
(Note 5(b)) (468,750) (239,073) -- --
Less:
Company shares held (57,600) (46,833) (57,600) (46,833)
---------- ------------- ---------- -------------
Balance, end of year 21,625,584 $ 10,931,074 21,109,370 $ 10,760,777
---------- ------------- ---------- -------------
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
DSI's Certificate of Incorporation was ordinarily filed with the Ministry
of Finance and Corporate Relations, Registrar of Companies in the Province
of British Columbia, Canada on May 7, 1987 under the name Rhino Resources
Inc. with the entry number 326273. DSI changed its name by filing of a
Certificate of Change of Name to DSI Datotech Systems Inc. on April 19,
1996. DSI was incorporated to conduct all lawful business pursuant to the
laws of British Columbia and DSI's Certificate of Incorporation and
Articles do not describe a business object or purpose. On May 14, 2001, DSI
received the Certificate of Continuance under the Canada Business
Corporation Act.
Pursuant to Part 11 of DSI's Articles (the "Articles") a director will
disclose his interest in and not vote in respect of any proposed contract
or transaction with DSI in which he is in any way directly or indirectly
interested, but such director will be counted in the quorum at the meeting
of the directors at which the proposed contract or transaction is approved.
Pursuant to Part 13 of the Articles, DSI has established a Compensation
Committee whose members consist of Dr. Thomas Calvert and Mr. Alan S.
Gibbins. The Compensation Committee may meet and adjourn, as the members
deem appropriate. Questions to be determined at a meeting shall be
determined by a majority of votes. The Committee follows strict voting
procedures. Each resolution has to be voted by a majority of
28
the Directors. This is usually done by a unanimous vote. The Chairman has
no additional power for voting.
Pursuant to Part 10 of the Articles, the directors may borrow money in such
amounts and upon such security and on such terms and conditions as they
deem fit, for and on behalf of DSI. The Articles may be amended by special
resolution or at the shareholders annual general meeting and by filing
thereafter with Registrar of Companies in the Province of British Columbia,
that is, they must disclose how borrowing provisions may be varied.
DSI has one class of shares, common shares, which gives the shareholders
one vote for each common share held.
C. MATERIAL CONTRACTS
DSI has entered into an option agreement with NetFace LLC dated as of June
28, 2000. Pursuant to the terms of the option agreement, NetFace has the
right to evaluate the commercial value of DSI's intellectual property
rights in technology, including the gesture recognition technology, for use
in interfaces for personal computer games, console games and Internet
television. NetFace paid DSI a fee for an option exercisable through
December 2002 to enter into an exclusive license agreement with DSI for the
purpose of utilizing DSI's intellectual property rights for such use. Upon
exercise of such option, NetFace shall pay DSI additional consideration in
cash and securities of NetFace.
DSI entered into an option agreement with Security Biometrics Inc.
("Biometrics") dated as of August 22, 2000. Pursuant to the terms of the
option agreement, Biometrics had the right to evaluate the commercial value
of DSI's intellectual property rights in technology, including the gesture
recognition technology, for use in the interface and software for banking
and financial transactions. Further Biometrics paid DSI a fee for an option
to enter into an exclusive license agreement with DSI for the purpose of
utilizing DSI's intellectual property rights for such use. Upon the
exercise of such option, Biometrics was to pay DSI additional consideration
in cash and securities of Biometrics on or before July 22, 2001. The option
to license agreement was terminated on October 31, 2001 after Biometrics
did not exercise the option.
D. EXCHANGE CONTROLS
There is no law or government decree of regulation in Canada that restricts
the export or import of capital, or that affects the remittance of
dividends, interest or other payments to a non-resident holder of shares of
common stock, other than withholding tax requirements.
There is no limitation imposed by Canadian law or by the articles or other
charter documents of DSI on the right of a non-resident to hold or vote
shares of common stock of DSI, other than as provided in the Investment
Canada Act, as amended (the "Investment Act").
The Investment Act generally prohibits implementation of a reviewable
investment by an individual, government or agency thereof, corporation,
partnership, trust or joint venture that is not a "Canadian" as defined in
the Investment Act (a "non-Canadian"), unless, after review the Minister
responsible for the Investment Act is satisfied that the investment is
likely to be of net benefit to Canada. If an investment by a non-Canadian
is not a reviewable investment, it nevertheless requires the filing of a
short notice, which may be given at any time up to 30 days after the
implementation of the investment.
An investment in shares of common stock of DSI by a non-Canadian that is a
"WTO Investor" (an individual or other entity that is a national of, or has
the right of permanent residence in, a member of the World Trade
Organization, current members of which include the European Community,
Germany, Japan, Mexico, the United Kingdom and the United States, or a WTO
investor-controlled entity, as defined in the Investment Act) would be
reviewable under the Investment Act if it were an investment to acquire
direct control, through a purchase of assets or voting interests, of DSI
and the value of the assets of DSI equaled or exceeded $192 million, the
threshold established for 2000, as indicated on the financial statements of
DSI for its fiscal year immediately preceding the implementation of the
investment. In subsequent years, such threshold amount may be increased or
decreased in accordance with the provisions of the Investment Act.
29
An investment in shares of common stock of DSI by a non-Canadian, other
than a WTO Investor, would be reviewable under the Investment Act if it
were an investment to acquire direct control of DSI and the value of the
assets were $5.0 million or more, as indicated on the financial statements
of DSI for its fiscal year immediately preceding the implementation of the
investment.
A non-Canadian, whether a WTO investor or otherwise, would acquire control
of DSI for the purposes of the Investment Act if he, she or it acquired a
majority of the shares of common stock of DSI or acquired all or
substantially all of the assets used in conjunction with DSI's business.
The acquisition of less than a majority, but one-third or more of the
shares of common stock of DSI, would be presumed to be an acquisition of
control of DSI unless it could be established that DSI was not controlled
in fact by the acquirer through the ownership of the shares of common
stock.
The Investment Act would not apply to certain transactions in relation to
shares of common stock of DSI, including:
o an acquisition of shares of common stock of DSI by any person if the
acquisition were made in the ordinary course of that person's business
as a trader or dealer in securities;
o an acquisition of control of DSI in connection with the realization of
security granted for a loan or other financial assistance and not for
any purpose related to the provisions of the Investment Act; and
o an acquisition of control of DSI by reason of an amalgamation, merger,
consolidation or corporate reorganization following which the ultimate
direct or indirect control in fact of DSI, through the ownership of
voting interests, remains unchanged.
E. TAXATION
The following is a summary of the material Canadian federal income tax
considerations, as of the date hereof, generally applicable to security
holders who deal at arm's length with DSI, who, for purposes of the Income
Tax Act (Canada) (the "Canadian Tax Act") and any applicable tax treaty or
convention, have not been and will not be resident or deemed to be resident
in Canada at any time while they have held shares of DSI, to whom such
shares are capital property, and to whom such shares are not "taxable
Canadian property" (as defined in the Canadian Tax Act). This summary does
not apply to a non-resident insurer.
Generally, shares of DSI will be considered to be capital property to a
holder thereof provided that the holder does not use such shares in the
course of carrying on a business and has not acquired them in one or more
transactions considered to be an adventure in the nature of trade. All
security holders should consult their own tax advisors as to whether, as a
matter of fact, they hold shares of DSI as capital property for the
purposes of the Canadian Tax Act.
This discussion is based on the current provisions of the Canadian Tax Act
and the regulations thereunder, the current provisions of the Canada-United
States Income Tax Convention (the "Tax Treaty") and current published
administrative practices of the Canada Customs and Revenue Agency. This
discussion takes into account specific proposals to amend the Canadian Tax
Act and the regulations thereunder publicly announced by or on behalf of
the Minister of Finance (Canada) prior to the date hereof (the "Proposed
Amendments") and assumes that all such Proposed Amendments will be enacted
in their present form. No assurances can be given that the Proposed
Amendments will be enacted in the form proposed, if at all; however the
Canadian federal income tax considerations generally applicable to security
holders described herein will not be different in a material adverse way if
the Proposed Amendments are not enacted.
30
Except for the foregoing, this discussion does not take into account or
anticipate any changes in law, whether by legislative, administrative or
judicial decision or action, nor does it take into account provincial,
territorial or foreign income tax legislation or considerations, which may
differ from the Canadian federal income tax considerations described
herein.
WHILE INTENDED TO ADDRESS ALL MATERIAL CANADIAN FEDERAL INCOME TAX
CONSIDERATIONS, THIS SUMMARY IS OF A GENERAL NATURE ONLY. THEREFORE,
SECURITY HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO
THEIR PARTICULAR CIRCUMSTANCES.
Generally, shares of DSI will not be taxable Canadian property at a
particular time provided that such shares are listed on a prescribed stock
exchange (which exchanges currently include the Toronto Stock Exchange),
the holder does not use or hold, and is not deemed to use or hold, the
shares of DSI in connection with carrying on a business in Canada and the
holder, persons with whom such holder does not deal at arm's length, or the
holder and such persons, has not owned (or had under option) 25% or more of
the issued shares of any class or series of the capital stock of DSI at any
time within five years preceding the particular time.
A holder of shares of DSI that are not taxable Canadian property will not
be subject to tax under the Canadian Tax Act on the sale or other
disposition of shares.
Dividends paid or deemed to be paid on the shares of DSI are subject to
non-resident withholding tax under the Canadian Tax Act at the rate of 25%,
although such rate may be reduced under the provisions of an applicable
income tax treaty or convention. For example, under the Tax Treaty, the
rate is reduced to 5% in respect of dividends paid to a company that is the
beneficial owner thereof, that is resident in the United States for
purposes of the Tax Treaty and that owns at least 10% of the voting stock
of DSI. In all other cases, the rate is reduced to 15% in respect of
dividends paid to the beneficial owner thereof that is resident in the
United States for purposes of the Tax Treaty.
F. DIVIDENDS AND PAYING AGENTS
Not Applicable
G. STATEMENTS BY EXPERTS
The consolidated financial statements of DSI at October 31, 2000 and for
the three years then ended included in this Registration Statement have
been audited by H. Ross McDonald, Chartered Accountants and independent
auditors, as stated in their reports appearing herein, and are included in
reliance upon the reports of such firm given upon their authority as
experts in accounting and auditing and their consent and authorization.
Such firm's address is 543 Granville Street, Suite 1402, Vancouver, Canada,
BC V6C 1X8.
H. DOCUMENTS ON DISPLAY
Not Applicable
I. SUBSIDIARY INFORMATION
DSI has one wholly owned subsidiary, Interaction Technology Ltd., which was
incorporated on May 14, 1996 pursuant to the laws of Canada. Its business
address is 300 - 905 West Pender Street, Vancouver, BC, Canada, V6C 1L6.
This subsidiary is currently inactive.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
A. DEBT SECURITIES
Not Applicable
B. WARRANTS AND RIGHTS
Not Applicable
31
C. OTHER SECURITIES
Not Applicable
D. AMERICAN DEPOSITARY RECEIPTS
Not Applicable
SHARES OF COMMON STOCK
DSI's authorized share capital consists of 100,000,000 shares of common stock
without par value and as at April 12, 2002 DSI had 23,435,224 shares of common
stock issued and outstanding.
Holders of DSI's shares of common stock:
o Have equal ratable rights to dividends from funds legally available for
payment of dividends when, as and if declared by the board of directors;
o Are entitled to share ratably in all of the assets available for
distribution to holders of shares of Common stock upon liquidation,
dissolution or winding up of our affairs; and
o Do not have preemptive, subscription or conversion rights, or redemption or
access to any sinking fund.
PART III
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND THE
USE OF PROCEEDS
Not Applicable
ITEM 15. RESERVED
ITEM 16. RESERVED
ITEM 17. FINANCIAL STATEMENTS
Index to Financial Statements of DSI Datotech Systems Inc.
Page No.
--------
Fiscal Years Ended October 31, 2001 and October 31, 2000
Certificate filed with British Columbia Securities Commission F-1
Management's Responsibility F-2
Auditors's Report F-3
Consolidated Balance Sheets F-4
Consolidated Statements of Loss and Deficit F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
32
23.1 Consent of G. Ross McDonald.(3)
1.1 Certificate of Incorporation of Rhino Resources Inc. dated May 7,
1987(1)
1.2 Certificate of Change of Name from Rhino Resources Inc. to DSI
Datotech Systems Inc. dated April 19, 1996(1)
1.3 Articles (Bylaws) of DSI Datotech Systems Inc. filed as of January
28, 1998(1)
1.4 Certificate of Incorporation of 3259722 Canada Inc. dated May 14,
1996.(1)
1.5 Bylaws of 3259722 Canada Inc. dated November 1, 1998.
1.6 Certificate of Amendment for change of name from 3259722 Canada Inc.
to Interactive Technology Ltd. dated July 21, 2000.(1)
4.1 Gross Lease between CT Management Corp. and DSI Datotech Systems
Inc., dated as of July 25, 2000.(1)
4.2 DSI Datotech Systems Inc. 1996 Stock Option Plan dated as of
November 15, 1996.(1)
4.3 Consulting Agreement between DSI Datotech Systems Inc. and Edward C.
Pardiak Holdings Limited, dated as of August 1, 1997.(1)
4.4 Escrow Agreement by and among Pacific Corporate Trust Company, DSI
Datotech Systems Inc., Pardiak Management International Limited
dated as of November 17, 1997.(1)
4.5 Option Agreement by and between DSI Datotech Systems Inc. and
Security Biometrics Inc. dated August 22, 2000, with form of license
agreement attached as exhibit. (1)
4.6 Option Agreement by and between DSI Datotech Systems Inc. and
NetFace LLC dated June 2000, with form of license agreement attached
as exhibit. (1)
4.7 Consulting Agreement between DSI Datotech Systems Inc. and Pardiak
Management International Ltd. dated November 1, 2000 (2).
4.8 Consulting Agreement between DSI Datotech Systems Inc. and Robert
Egery dated December 1, 2000 (2).
4.9 CIBC Letter of Credit dated July 21, 2000(2).
8.1 List of Subsidiaries(1)
(1) Previously filed with the registration statement on April 16,
2001 and incorporated herein by reference.
(2) Previously filed with the SEC along with amendment No.2 on
October 2, 2001
(3) Filed herewith.
33
SIGNATURES
The Registrant hereby certifies that it meets all of the requirements for filing
on Form 20-F and that it has duly caused and authorized the undersigned to sign
this registration statement on its behalf.
DSI DATOTECH SYSTEMS INC.
By: /s/ Edward C. Pardiak
Edward C. Pardiak
Chairman and Chief Executive Officer
Date: April 17, 2002
34
DSI DATOTECH SYSTEMS INC.
FINANCIAL STATEMENTS
OCTOBER 31, 2001 AND 2000
35
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING --
The financial statements of DSI Datotech Systems Inc. are the responsibility of
the Company's management. The financial statements are prepared in accordance
with accounting principles generally accepted in Canada and reflect management's
best estimates and judgment based on information currently available.
Management has developed and maintains a system of internal controls to ensure
that the Company's assets are safeguarded, transactions are authorized and
properly recorded and financial information is reliable.
The Board of Directors is responsible for ensuring management fulfills is
responsibilities. The Audit Committee meets periodically with management and the
auditor to review the results of audit examinations and to review the annual
financial statements.
The financial statements have been audited by G. Ross McDonald, C.A. and his
report outlines the scope of his examination and gives his opinion on the
financial statements.
"Robert M. Egery"
------------------------------------
Robert M. Egery
President and Chief Operating Officer
36
G. Ross McDonald*
Chartered Accountant
- --------------------------------------------------------------------------------
*Denotes incorporated professional Suite 1502, 543 Granville Street
Vancouver, B.C. V6C 1X8
Tel: (604) 685-8646
Fax: (604) 684-6334
AUDITOR'S REPORT
TO THE SHAREHOLDERS OF DSI DATOTECH SYSTEMS INC.
I have audited the balance sheets of DSI Datotech Systems Inc. as at October 31,
2001 and 2000 and the statements of operations and deficit and cash flows for
the three years then ended. These financial statements are the responsibility of
the Company's management. My responsibility is to express an opinion on these
financial statements based on my audits.
I conducted my audits in accordance with generally accepted auditing standards
in Canada. Those standards require that I plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In my opinion, these financial statements present fairly, in all material
respects, the financial position of the Company as at October 31, 2001 and 2000
and the results of its operations and the cash flows for each of the years in
the three year period ended October 31, 2001, in accordance with generally
accepted accounting principles in Canada applied, after giving retroactive
effect to the change in the method of accounting for income taxes as explained
in Note 2(j) to the financial statements, on a consistent basis.
Canadian generally accepted accounting principles vary in certain significant
respects from accounting principles generally accepted in the United States.
Application of accounting principles generally accepted in the United States
would have affected results of operations and cash flows for each of the years
in the three year period ended October 31, 2001 and assets and shareholders'
equity as at October 31, 2001 and 2000 to the extent summarized in Note 12 to
the financial statements.
"G. Ross McDonald" (signed)
G. Ross McDonald
Chartered Accountant
Vancouver, British Columbia
December 3, 2001, except Note 11
which is as at December 20, 2001
COMMENTS BY AUDITORS FOR U.S. READERS ON CANADA-U.S. REPORTING DIFFERENCE
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when the financial
statements are affected by conditions and events that cast substantial doubt on
the Company's ability to continue as a going concern, such as those described in
Note 1 to the financial statements. Our report to the shareholders dated
December 3, 2001 is expressed in accordance with Canadian reporting standards
which do not permit a reference to such events and conditions in the auditor's
report when these are adequately disclosed in the financial statements.
"G. Ross McDonald" (signed)
G. Ross McDonald
Chartered Accountant
Vancouver, British Columbia
December 3, 2001, except Note 11
which is as at December 20, 2001
37
DSI DATOTECH SYSTEMS INC.
BALANCE SHEETS
OCTOBER 31
2001 2000
------------ ------------
ASSETS
CURRENT ASSETS
Cash and short term deposits $ 1,397,496 $ 4,079,315
Accounts receivable and advances 225,370 25,389
Prepaid expense 33,429 30,196
------------ ------------
1,656,295 4,134,900
INVESTMENT IN GESTURE RECOGNITION
TECHNOLOGY (Notes 2(b)(i) and 3(a)) 1 915,803
CAPITAL ASSETS (Note 2 (b)(ii) and 4) 548,298 212,564
------------ ------------
$ 2,204,594 $ 5,263,267
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 518,427 $ 212,679
------------ ------------
SHAREHOLDERS' EQUITY
SHARE CAPITAL (Note 5) 10,931,074 10,760,777
CONTRIBUTED SURPLUS (Note 5(b)) 239,073 --
DEFICIT (9,483,980) (5,710,189)
------------ ------------
1,686,167 5,050,588
------------ ------------
$ 2,204,594 $ 5,263,267
============ ============
CONTINUING OPERATIONS (Note 1)
CONTINGENT LIABILITIES AND COMMITMENTS (Note 8)
SUBSEQUENT EVENTS (Note 11)
APPROVED BY THE DIRECTORS
"Edward C. Pardiak"
- -------------------------------
Director - Edward C. Pardiak
"Robert M. Egery"
- -------------------------------
Director - Robert M. Egery
38
DSI DATOTECH SYSTEMS INC.
STATEMENTS OF OPERATIONS AND DEFICIT
FOR THE YEARS ENDED OCTOBER 31
2001 2000 1999
------------ ------------ ------------
REVENUE
Option income $ 150,000 $ 627,730 $ --
Investment and other income 147,364 137,962 9,589
Foreign exchange gain 48,262 11,508 --
------------ ------------ ------------
345,626 777,200 9,589
------------ ------------ ------------
EXPENSES
RESEARCH AND DEVELOPMENT
Amortization (Note 3) 915,802 80,199 135,872
Salaries and benefits 872,690 377,691 279,813
Prototype development 37,593 37,653 41,315
Reports -- 2,839 --
Consultants -- -- 7,897
------------ ------------ ------------
1,826,085 498,382 464,897
------------ ------------ ------------
GENERAL AND ADMINISTRATIVE
Management fees 550,250 350,000 248,200
Salaries and benefits 332,830 65,190 56,623
Corporate marketing 202,366 87,140 68,012
Travel and accommodation 170,616 59,969 21,543
Recruitment and staff training 166,274 32,813 --
Amortization 141,664 27,346 19,554
Rent 124,717 38,904 34,975
Investor relations and promotion 118,850 29,870 29,278
Legal, audit and accounting 115,727 80,319 47,049
Consulting fees 104,297 104,946 19,500
Office and miscellaneous 86,366 44,096 26,288
Telephone and communications 39,061 30,458 18,773
Printing and shareholders information 37,313 32,012 26,770
Market research 31,258 -- --
Insurance 23,065 19,573 19,446
Corporation capital tax 12,725 -- --
Repairs and maintenance 10,596 -- --
Transfer agent 9,755 14,142 13,932
Regulatory fees 8,927 7,630 4,240
Equipment rental 5,796 9,628 15,960
------------ ------------ ------------
2,292,453 1,034,036 670,143
------------ ------------ ------------
NET LOSS BEFORE THE FOLLOWING 3,772,912 755,218 1,125,451
Refundable tax credits (154,259) -- --
Restructuring costs 155,138 -- --
------------ ------------ ------------
NET LOSS FOR THE YEAR 3,773,791 755,218 1,125,451
DEFICIT, BEGINNING OF YEAR 5,710,189 4,954,971 3,829,520
------------ ------------ ------------
DEFICIT, END OF YEAR $ 9,483,980 $ 5,710,189 $ 4,954,971
============ ============ ============
LOSS PER SHARE $ 0.17 $ 0.04 $ 0.08
============ ============ ============
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 21,677,162 18,992,896 14,288,230
============ ============ ============
39
DSI DATOTECH SYSTEMS INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31
2001 2000 1999
----------- ----------- -----------
OPERATING ACTIVITIES
Net loss for the year $(3,773,791) $ (755,218) $(1,125,451)
Less item not requiring cash
Amortization 1,057,466 107,545 155,426
Net change in non-cash working items
Accounts receivable and advances (199,981) (23,249) 5,688
Loan receivable -- -- 25,000
Prepaid expense (3,233) (27,536) 16,567
Accounts payable and accrued
liabilities 305,748 (22,686) 219,000
----------- ----------- -----------
Cash applied to operating activities (2,613,791) (721,144) (703,770)
----------- ----------- -----------
INVESTING ACTIVITIES
Investment in Gesture Recognition Technology -- (61,765) (37,353)
Capital assets
- acquisition (477,588) (175,090) (24,316)
- proceeds of disposal 190 -- --
----------- ----------- -----------
Cash applied to investing activities (477,398) (236,855) (61,669)
----------- ----------- -----------
FINANCING ACTIVITIES
Shares issued for cash, net of
share issue costs 409,370 4,973,305 264,759
----------- ----------- -----------
Cash from financing activities 409,370 4,973,305 264,759
----------- ----------- -----------
INCREASE (DECREASE) IN CASH
AND SHORT TERM DEPOSITS (2,681,819) 4,015,306 (500,680)
CASH AND SHORT TERM DEPOSITS,
BEGINNING OF YEAR 4,079,315 64,009 564,689
----------- ----------- -----------
CASH AND SHORT TERM DEPOSITS,
END OF YEAR $ 1,397,496 $ 4,079,315 $ 64,009
=========== =========== ===========
Supplemental cash flow information (Note 10)
40
DSI DATOTECH SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 2001 AND 2000
- --------------------------------------------------------------------------------
1. CONTINUING OPERATIONS
The Company is a development stage company involved in the development of
gesture recognition technology to facilitate a user's interface with
computers and electronic devices. The Company was incorporated in 1987 under
the Company Act (British Columbia). On May 14, 2001 it was continued under
the Canada Business Corporations Act.
As at October 31, 2001, the Company had working capital of $1,137,868 (2000
- $3,922,221) and an accumulated deficit of $9,483,980 (2000 - $5,710,189).
These financial statements have been prepared on a going concern basis,
which assumes the realization of assets and liquidation of liabilities in
the normal course of business. The Company's ability to continue as a going
concern is dependent on continued financial support from its shareholders,
the ability of the Company to raise equity financing, and the attainment of
profitable operations, external financings and further share issuances to
meet the Company's liabilities as they become payable. These financial
statements do not include any adjustments to the recoverability and
classification of recorded asset amounts and classification of liabilities
that might be necessary, should the Company be unable to continue as a going
concern.
2. SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF PRESENTATION
The Company's wholly-owned subsidiary, Interactive Technologies Ltd.
("Interactive") has been inactive since its incorporation.
(b) AMORTIZATION
(i) INVESTMENT IN GESTURE RECOGNITION TECHNOLOGY
Costs related to the acquisition and development of the Gesture
Recognition Technology are stated at cost less accumulated
amortization. Amortization was recorded on a straight line basis
over seventeen years, this period being the length of patents which
are held by the Company. Additional amortization may be recorded
for items deemed to be obsolete or no longer valid to the
development of the technology.
(ii) CAPITAL ASSETS
Capital assets are stated at cost less accumulated amortization.
Amortization is provided on a declining balance basis on office
furniture and equipment at 20% per annum, on computer equipment at
30% per annum and on computer software at 100% per annum. Leasehold
improvements are amortized on a straight line basis over five
years. In the year of acquisition, the rates are reduced by
one-half.
(c) RESEARCH AND DEVELOPMENT
Research and development costs are recorded as an expense of the period
in which they are incurred until technical feasibility has been
established. Thereafter, all software production costs shall be
capitalized and subsequently reported at the lower of unamortized cost
or net realizable value. Capitalized costs will be amortized based on
current and future revenue for the product with an annual minimum equal
to the straight-line amortization over the remaining estimated economic
life of the product.
41
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(d) REVENUE RECOGNITION
Revenue from the licensing of technology is recognized when the Company
has completed or fulfilled the terms of the licencing agreement
including delivery, acceptance and any elements essential pursuant to
the terms of the licensing agreement.
Revenue from the granting of options to acquire the rights to exploit
the technology is recognized upon fulfillment of terms pursuant to the
option agreements and when collectibility is assured.
(e) FOREIGN CURRENCY TRANSLATION
Amounts stated in foreign currency are translated into Canadian dollars
as follows:
Current assets and liabilities at the rates of exchange prevailing at
balance sheet date. Non-monetary assets and liabilities at the rates of
exchange in effect on the dates of the transactions; and revenue and
expenses at average rates of exchange for the period.
(f) LOSS PER SHARE
Loss per share is calculated using the weighted average number of shares
outstanding during the year. Fully diluted loss per share has not been
calculated since the exercise of outstanding options and warrants would
have the effect of reducing loss per share.
(g) FINANCIAL INSTRUMENTS
The carrying value of current assets and current liabilities at October
31, 2001 and 2000 approximates their fair values due to the relatively
short periods to maturity of these instruments.
(h) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of the assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Significant areas requiring
the use of management estimates relate to the determination of
environmental obligations, impairment of assets and rate for
amortization. Actual results could differ from those estimates.
(i) STOCK-BASED COMPENSATION PLANS
The Company has a fixed stock option plan. No compensation expense is
recognized when stock or stock options are issued to directors and
employees. Any consideration paid by directors and employees on exercise
of stock options or purchase of shares is credited to share capital.
42
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(j) INCOME TAX
During fiscal 2001, the Company retroactively adopted the new
Recommendations of the Canadian Institute of Chartered Accountants for
accounting for income taxes, which requires the use of the asset and
liability method. This change has been applied retroactively without
restatement of prior periods. Under this method of tax allocation,
future income tax assets and liabilities are determined based on
differences between the financial statement carrying values and their
respective income tax basis (temporary differences). Future income tax
assets and liabilities are measured using the tax rates expected to be
in effect when the temporary differences are likely to reverse. The
effect on future income tax assets and liabilities of a change in tax
rates is included in operations in the period in which the change is
enacted or substantially assured. The amount of future income tax assets
recognized is limited to the amount of the benefit that is likely to be
realized.
Prior to adoption of the new recommendations, income tax expense was
determined using the deferral method of tax allocation. Under this
method, future income tax expense was based on differences in the
recognition of revenues and expenses for income tax and financial
reporting purposes.
(k) COMPARATIVE AMOUNTS
Certain amounts from the prior year have been restated to conform to the
current year's presentation.
3. INVESTMENT IN GESTURE RECOGNITION TECHNOLOGY
(a) Pursuant to four agreements entered into in November 1990, March 1991,
May 1995 and August 1996, the Company acquired a patented invention
known as the Gesture Recognition Technology, a new gesture based input
technology for computerized communications, in consideration of
acquisition costs in the aggregate of $246,830 (paid), 1,000,000 common
shares to be issued based on cumulative cash flows generated from
operations of the Company and a 5.5% royalty on revenues received from
the commercialization of the technology and from the sale of products
incorporating the technology. A minimum semi-annual advance royalty of
$30,000 was payable commencing on May 1, 1996. These agreements, and all
commitments made under the terms of these agreements, were cancelled
pursuant to a new agreement entered into on November 4, 1999.
On November 4, 1999, the Company entered into an agreement which
superceded the afore-mentioned agreements. The Company granted a licence
to the original inventor of the technology to commercialize the
technology based on certain patents held by the Company. In
consideration, the Company will receive a royalty of 3% of gross sales
from sales realized by the licencee of products made using the
technology. The Company will pay a royalty of 0.5% of gross sales
realized by the Company and any of its other licencees from the sales of
products made using the licensed intellectual property to the licencee.
In satisfaction of all amounts owed to the licencee under the previous
agreements, the Company paid a total of $35,000 over a ten month period
commencing on the execution of this agreement.
43
3. INVESTMENT IN GESTURE RECOGNITION TECHNOLOGY (CONTINUED)
As at October 31, 2001 the Company determined that the unamortized
balance of capitalized costs were no longer valid to the current state
of the technology and, accordingly, has written down the remaining
balance to $1.
Acquisition and development costs to date:
2001 2000
----------- -----------
Acquisition costs $ 246,830 $ 246,830
----------- -----------
Development costs
Balance, beginning of year 1,302,918 1,241,153
----------- -----------
Additions
Royalties -- 35,000
Patent costs and fees -- 26,765
----------- -----------
-- 61,765
----------- -----------
Balance, end of year 1,302,918 1,302,918
----------- -----------
1,549,748 1,549,748
Less: accumulated amortization (1,549,747) (633,945)
----------- -----------
$ 1 $ 915,803
=========== ===========
(b) Pursuant to an agreement dated June 28, 2000, the Company granted an
option to a company to acquire the exclusive rights to exploit the
technology and proprietary property related to the technology for the
video gaming and internet/interactive television market segments. In
consideration of the option, the optionee paid the Company U.S.
$200,000, of which U.S. $100,000 was received in 2000. The remaining US
$100,000 was received in June 2001 upon delivery by the Company of a
prototype to the optionee.
The optionee has until December 8, 2002 to exercise the option and enter
into a licence agreement with the Company. Should a licence agreement be
entered into, the Company will receive U.S. $5,000,000, less the
afore-mentioned option fees of U.S. $200,000, and a 20% Class B
membership interest in the optionee.
(c) Pursuant to an agreement dated August 22, 2000, the Company granted an
option to a company to acquire the exclusive licensing rights for the
exploitation of the Company's developed technology relating to
interfaces and software for executing banking and financial transactions
in consideration of U.S. $320,000 (received).
An additional U.S. $3,000,000, due within eleven months of the signing
of this agreement was not received. The agreement has been terminated by
the Company.
44
4. CAPITAL ASSETS
2001
-------------------------------------
Accumulated Net Book
Cost Amortization Value
--------- ------------ ---------
Furniture and equipment $ 270,129 $ 60,164 $ 209,965
Computer equipment and software 302,401 128,501 173,900
Leasehold improvements 205,691 41,258 164,433
--------- --------- ---------
$ 778,221 $ 229,923 $ 548,298
========= ========= =========
2000
Accumulated Net Book
Cost Amortization Value
--------- ------------ ---------
Furniture and equipment $ 68,779 $ 27,004 $ 41,775
Computer equipment and software 132,879 61,256 71,623
Leasehold improvements 99,166 -- 99,166
--------- -------- --------
$ 300,824 $ 88,260 $212,564
========= ======== ========
5. SHARE CAPITAL
(a) The authorized share capital consists of 100,000,000 common shares
without par value.
Issued:
2001 2000 1999
-------------------------- ---------------------------- ---------------------------
NO. OF NO. OF NO. OF
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------------ ----------- ------------ ---------- ------------
Balance, beginning
of year 21,166,970 $ 10,807,610 15,0057,940 $ 5,834,305 13,953,940 $ 5,569,546
---------- ------------ ----------- ------------ ---------- ------------
Issued during the year
For cash
- private
placements,
net of share
issue costs -- -- 3,775,994 3,217,792 1,104,000 264,759
- exercise of options 330,750 132,300 437,250 220,200 -- --
- exercise of warrants 654,214 277,070 1,895,786 1,535,313 -- --
---------- ------------ ----------- ------------ ---------- ------------
984,964 409,370 6,109,030 4,973,305 1,104,000 264,759
---------- ------------ ----------- ------------ ---------- ------------
22,151,934 11,216,980 21,166,970 10,807,610 15,057,940 5,834,305
Less:
Cancellation of
escrow shares
(Note 5(b)) (468,750) (239,073) -- -- -- --
Less:
Company shares held (57,600) (46,833) (57,600) (46,833) (57,600) (46,833)
---------- ------------ ----------- ------------ ---------- ------------
Balance, end of year 21,625,584 $ 10,931,074 21,109,370 $ 10,760,777 15,000,340 $ 5,787,472
========== ============ ========== ============ ========== ============
45
5. SHARE CAPITAL (CONTINUED)
During the year ended October 31, 2000, the Company completed private
placements as follows:
(i) for 2,456,140 units at $0.57 per unit for gross proceeds of
$1,400,000 less finders fees of 50,000 common shares and $56,759 paid
in cash and other share issue costs of $8,399. Each unit consisted of
one common share and one warrant to acquire one additional common
share at $0.57 per share to January 26, 2001 and at $0.66 per share
to January 26, 2002.
(ii) for 912,000 units at $1.75 per unit for gross proceeds of $1,596,000
less commissions of $159,600, fees of $93,687 and other share issue
costs of $44,508. Each unit consisted of one common share and
one-half warrant, each full warrant exercisable to acquire one
additional common share at $2.16 per share to April 10, 2002. The
agent also received compensation warrants which may be exercised to
acquire 91,200 units at $1.75 per unit to October 10, 2001, each unit
consists of one common share and one-half warrant, each full warrant
exercisable to acquire one additional common share at $2.16 per share
to April 10, 2002.
(iii) for 357,854 units at $1.75 per unit for gross proceeds of $626,245
less commissions of $25,000, fees of $15,000 and other share issue
costs of $1,499. Each unit consisted of one common share and one-half
warrant, each full warrant exercisable to acquire one additional
common share at $2.16 to April 20, 2002. The agent also received
compensation warrants which may be exercised to acquire 35,785 units
at $1.75 per unit to October 20, 2001, each unit consists of one
common share and one-half warrant, each full warrant exercisable to
acquire one additional common share at $2.16 per share to April 20,
2002.
(b) A total of 2,600,000 (2000 and 1999 - 3,068,750) common shares issued at
$0.01 per share in prior years are subject to escrow restrictions,
release of the shares is subject to the approval of regulatory
authorities.
During the year ended October 31, 2001 an aggregate of 468,750 common
shares which were subject to escrow restrictions expired and were
accordingly cancelled. The assigned value of the cancelled shares in the
amount of $239,073 has been credited to contributed surplus.
(c) TheCompany has granted options to directors, officers and employees to
purchase common shares at exercise prices determined by reference to the
market value on the date of the grant. Under the Company's stock option
plan, options may be granted for up to 4,275,000 common shares. Options
granted under the plan vest over a period of up to 18 months.
The following summarizes information about stock options granted and
outstanding at October 31, 2001, 2000 and 1999, and changes during the
years then ended:
YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, 2001 OCTOBER 31, 2000 OCTOBER 31, 1999
----------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NO. OF EXERCISE NO. OF EXERCISE NO. OF EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- -------- --------- -------- --------- --------
Outstanding at
beginning of year 2,408,500 $ 0.75 1,710,000 $ 0.65 1,400,000 $ 0.72
Granted 1,795,000 0.50 1,557,000 0.94 360,000 0.40
Exercised (330,750) 0.40 437,250 0.50 -- --
Cancelled/expired (791,750) 0.80 421,250 1.29 50,000 0.80
--------- -------- --------- -------- --------- --------
Outstanding at end of year 3,081,000 $ 0.63 2,408,500 $ 0.75 1,710,000 $ 0.65
========= ======== ========= ======== ========= ========
Options exercisable at
end of year 1,873,500 $ 0.68 1,654,000 $ 0.75 1,710,000 $ 0.65
========= ======== ========= ======== ========= ========
46
5. SHARE CAPITAL (CONTINUED)
The following summarizes information about stock options outstanding at
October 31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- -------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES EXPIRY DATE PRICE SHARES PRICE
---------- ----------------- ---------- --------- ---------
230,000 May 9, 2002 $ 0.75 230,000 $ 0.75
37,500 November 4, 2002 0.40 37,500 0.40
45,000 November 18, 2002 0.40 45,000 0.40
270,000 January 13, 2003 0.80 270,000 0.80
370,000 June 2, 2003 1.00 277,500 1.00
50,000 September 22, 2003 0.50 50,000 0.50
112,500 December 11, 2003 0.40 112,500 0.40
20,000 January 4, 2004 0.40 20,000 0.40
22,000 November 18, 2004 0.40 22,000 0.40
99,000 April 12, 2005 1.12 99,000 1.12
50,000 June 2, 2005 0.80 37,500 0.80
20,000 June 28, 2005 1.12 15,000 1.12
20,000 September 25, 2005 1.12 15,000 1.12
350,000 November 14, 2005 0.50 175,000 0.50
340,000 February 22, 2006 0.50 170,000 0.50
145,000 April 25, 2006 0.50 72,500 0.50
500,000 June 25, 2006 0.50 125,000 0.50
120,000 August 15, 2006 0.50 30,000 0.50
280,000 October 1, 2006 0.50 70,000 0.50
---------- ----------------- ---------- --------- ---------
3,081,000 1,873,500
========== =========
(d) As at October 31, 2001, outstanding warrants to purchase 2,665,063
common shares are exercisable as follows:
Outstanding Outstanding
at at
Exercise October 31, Expired/ October 31,
Price Expiry Date 2000 Issued Exercised Cancelled 2001
--------- ---------------- ------------- ------- ---------- ---------- ------------
$ 0.29 July 19, 2001 360,000 (360,000) --
0.57 or January 26, 2001
0.66 January 26, 2002 2,317,640 (294,214) 2,023,426
1.75 October 10, 2001 91,200 (i) (91,200) --
1.75 October 20, 2001 35,785 (i) (35,785) --
2.16 April 10, 2002 456,000 456,000
2.16 April 20, 2002 185,637 185,637
--------- ---------------- ------------- ------- ---------- ---------- ------------
3,446,262 -- (654,214) (126,985) 2,665,063
============= ======= ========== ========== ===========
(i) agent's compensation warrants exercisable for units consisting of
common shares and share purchase warrants (see Notes 5(a)(ii) and
(iii)).
47
6. DIRECTORS' REMUNERATION AND RELATED PARTY TRANSACTIONS
A total of $711,772 (2000 - $350,000, 1999 - $248,200) was paid or accrued
to officers and directors or companies controlled by directors during the
year for management, consulting services and restructuring fees.
7. INCOME TAXES
The Company has accumulated non-capital losses for Canadian income tax
purposes in the amount of $5,203,000. The losses may be carried forward to
reduce taxable income in future years and, unless utilized, will expire as
follows:
2002 $ 227,000
2003 732,000
2004 882,000
2005 865,000
2006 967,000
2007 158,000
2008 1,372,000
----------
$5,203,000
==========
Future income tax assets and liabilities are recognized for temporary
differences between the carrying amount of the balance sheet items and their
corresponding tax values as well as for the benefit of losses available to
be carried forward to future years for tax purposes that are likely to be
realized.
Significant components of the Company's future tax assets and liabilities,
after applying enacted corporate income tax rates, are as follows:
2001 2000 1999
--------- --------- ---------
Future income tax assets
Temporary differences in assets $ 405,768 $ (67,554) $ (105,803)
Net tax losses carried forward 2,201,614 1,822,182 1,837,834
Scientific research and
experimental development
expenditures 1,003,796 462,720 --
----------- ----------- -----------
3,611,178 2,217,348 1,732,031
Valuation allowance for future
income tax assets (3,611,178) (2,217,348) (1,732,031
----------- ----------- -----------
Net future income tax assets -- -- --
Future income tax liabilities -- -- --
----------- ----------- -----------
Future income tax assets, net $ -- $ -- $ --
=========== =========== ===========
48
8. CONTINGENT LIABILITIES AND COMMITMENTS
(a) During 1998, a petition was made against the Company with respect to
certain allegations of non-compliance with the Company Act by a former
employee. No damages were sought. The Company commenced a suit against
the above-mentioned former employee and certain other persons,
including some former directors of the Company, seeking damages for
misappropriation, injurious falsehoods and other wrongs.
Subsequent to the year end, a mutual general release was executed
which resolved, without liability to the Company, both of the above
actions.
(b) During 2001, the former president of the Company commenced an action
against the Company for which the amount of the claim has not been
specified. The Company has filed a statement of defense against the
action.
(c) During 1997, a claim was made against the Company in the amount of
$130,727 by the purchasers of a mineral property sold in a prior year,
for the return of the purchase price plus additional costs. The claim
was dismissed without liability to the Company on April 30, 2001.
(d) The Company entered into two agreements, effective November 1, 2000
and December 1, 2000 respectively, with two directors for management
services in consideration of $12,500 per month each plus performance
bonuses and benefits. The agreements are for two year terms and if
terminated by the Company during the term, one year's compensation
will be payable in a lump sum. Renewal and signing bonuses in the
aggregate of $150,000 are payable pursuant to the terms of these
agreements. An aggregate 1,300,000 performance shares will also be
issued to the two directors, subject to regulatory approval.
(e) The Company conducts certain activities related to marketing,
financial development and human resources through companies or
individuals contracted on short term bases in consideration of monthly
fees, finders fees or commissions for the arrangement of financing for
the Company, and stock options to acquire common shares of the
Company. The terms of the contracts are generally for one year periods
and expire during 2002.
(f) On July 25, 2000 the Company entered into an agreement for the rental
of office premises in Vancouver, B.C. for a five year term expiring on
November 30, 2005. Gross annual rents of approximately $109,000 are
payable plus additional charges for expenses.
On May 31, 2001 the Company entered into an agreement for the rental
of office premises in Montreal, P.Q. for a term expiring on November
29, 2004. Gross annual rents of approximately $66,000 are payable plus
additional charges for expenses.
(g) The Company has arranged for a line of credit of up to $600,000 with a
financial institution to be secured by certain money market
investments held by the Company at the institution. Interest is
payable at the prime rate on Canadian dollar loans and overdrafts and
at the U.S. base rate on U.S. dollar loans and overdrafts. The line of
credit has not been utilized.
49
9. SEGMENT DISCLOSURES
The Company is organized and managed as a single reportable business
segment. The Company's operations are substantially all related to the
research, development and sales of its Gesture Recognition Technology.
Financial information on the Company's geographic areas is as follows:
2001 2000 1999
---------- ---------- --------
Revenue
Canada $ 195,626 $ 145,720 $ 9,589
United States 150,000 631,480 --
---------- ---------- --------
$ 345,626 $ 777,200 $ 9,589
========== ========== ========
All of the Company's assets and operations are located in Canada.
10. SUPPLEMENTAL CASH FLOW INFORMATION
There were no non-cash transactions during the years ended October 31, 2001,
2000 and 1999.
Other cash flow information:
2001 2000 1999
---------- ---------- --------
Interest received $ 145,823 $ 137,962 $ 9,589
========== ========== ========
11. SUBSEQUENT EVENTS
(a) The Company has granted stock options to certain employees to acquire
an aggregate of 140,000 common shares at an exercise price of $0.50
per share on or before December 13, 2006, subject to regulatory
approval.
(b) The Company has made an application to amend the exercise price of
outstanding warrants to acquire 2,023,426 common shares (see Note
5(d)) from $0.66 per share to $0.40 per share, subject to regulatory
approval.
12. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (GAAP)
These financial statements have been prepared in accordance with
Canadian GAAP which differs in some respects from U.S. GAAP. The
differences between Canadian and U.S. GAAP are summarized below.
50
12. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (GAAP) (CONTINUED)
(a) COMPREHENSIVE INCOME
Under U.S. GAAP, Statement of Financial Accounting Standards No. 130 (SFAS
130), "Reporting Comprehensive Income", establishes standards for the
reporting and display of comprehensive income and its components in
general-purpose financial statements. Items defined as other comprehensive
income are separately classified in the financial statements and the
accumulated balance of other comprehensive income (loss) is reported
separately in shareholders' equity on the balance sheet. For fiscal years
2001, 2000 and 1999, the Company's comprehensive loss was the same as its
net loss.
(b) LOSS PER SHARE
The calculation of loss per share in accordance with U.S. GAAP corresponds
with that in Canada, except as follows:
- pursuant to the requirements of SFAS No. 128, shares issued on a
contingent basis are excluded from the calculation of loss per share.
Loss per share under U.S. GAAP has been restated to exclude a total of
2,600,000 (2000 and 1999 - 3,068,750) common shares issued at $0.01 per
share in prior years. The shares were issued pursuant to the policies
of the Canadian Venture Exchange ("the Exchange") whereby shares may be
issued to senior directors at a discount under an incentive program.
The shares are held in escrow and may be released from escrow only upon
the fulfillment of performance criteria as set out under the rules of
the Exchange and the attainment of Exchange approval for such release.
Consideration received for the shares is credited to share capital upon
the issuance of the shares. Compensation expense will be recognized
upon the release of the shares from escrow and measured using the
intrinsic value on the date the performance criteria is satisfied.
(c) COMPENSATORY OPTIONS
(i) Employees
The following summarizes information about employee stock options
granted and outstanding at October 31, 2001, 2000, and 1999 and changes
during the years then ended:
YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, 2001 OCTOBER 31, 2000 OCTOBER 31, 1999
-------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGED AVERAGE
NO. OF EXERCISE NO. OF EXERCISE NO. OF EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- --------- -------- -------- ------- --------
Outstanding a
beginning of year 599,500 $ 0.72 410,000 $ 0.61 250,00 $ 0.75
Granted 940,000 0.50 428,000 0.77 160,000 0.40
Exercised (180,750) 0.40 (109,750) 0.56 -- --
Cancelled/expired (366,750) 0.81 (128,750) 0.66 -- --
Outstanding at end of year 992,000 0.54 599,500 $ 0.72 410,000 $ 0.61
-------- -------- ------- -------- ------- -------
Options exercisable at end of year 417,000 $ 0.48 401,000 $ 0.67 410,00 $ 0.61
======== ======== ======= ======== ======== =======
51
12. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (GAAP) (CONTINUED)
The weighted average fair value of the stock options granted during the year
ended October 31, 2001 was $0.28. Summary information about the 992,000
options outstanding at October 31, 2001 is as follows:
OPTIONS OPTIONS WEIGHTED
EXERCISABLE OUTSTANDING AVERAGE
OCTOBER 31, OCTOBER 31, REMAINING
2001 2001 LIFE (YEARS)
----------- ------------ ------------
Range of Exercise Price
$0.40 42,000 42,000 2.62
$0.50 315,000 880,000 4.60
$1.12 60,000 70,000 3.65
------- ------- ----
417,000 992,000 4.46
======= ======= ====
Under both Canadian and U.S. GAAP, stock-based compensation on options
granted to employees is not recorded as an expense. However, under U.S.
GAAP, pro-forma information regarding net loss and loss per share is
required by SFAS 123, Accounting for Stock-Based Compensation, and has
been determined as if the Company has accounted for its employee stock
options under the fair value method.
The Black-Scholes option valuation model was developed for use in
estimating for the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require highly subjective assumptions including the expected stock
price volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially effect
the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
The fair value for these options at the date of grant was estimated using
the Black-Scholes option pricing model with the following weighted average
assumptions for the fiscal years ended October 31, 2001, 2000 and 1999.
2001 2000 1999
---- ---- ----
Risk-free interest rate 2.50% 6.22% 5.11%
Expected dividend yield -- -- --
Expected stock price 69% 126% 78%
---- ---- ----
Expected life in years 4.5 3.1 2.7
---- ---- ----
52
12. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (GAAP) (CONTINUED)
For the purposes of pro-forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The
pro-forma effect on net loss for fiscal year 2001, 2000 and 1999 may not
be representative of the actual results had the Company accounted for the
stock options using the fair value method. The Company's pro-forma
information follows:
2001 2000 1999
------------ ------------ ------------
Net loss, under U.S. GAAP $ (3,047,867) $ (888,290) $ (1,076,225)
Pro-forma net loss $ (3,159,254) $ (986,622) (1,115,731)
------------ ------------ ------------
Basic and diluted loss per $ (0.16) $ (0.06) $ (0.10)
share
Pro-forma basic and diluted
loss per share loss per share $ (0.17) $ (0.06) $ (0.10)
------------ ------------ ------------
Weighted average number of
shares outstanding 18,608,412 15,924,146 11,219,480
------------ ------------ ------------
Because SFAS No. 123 applies only to stock-based compensation awards for
the fiscal year ended February 29, 1996 and future years, the pro-forma
disclosures under SFAS No. 123 are not likely to be indicative of future
disclosures until the disclosures reflect all outstanding, non-vested
awards.
(ii) Non-Employees
The following summarizes information about non-employee stock options
granted and outstanding at October 31, 2001, 2000 and 1999, and
changes during the years then ended:
YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, 2001 OCTOBER 31, 2000 OCTOBER 31, 1999
-------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGED AVERAGE
NO. OF EXERCISE NO. OF EXERCISE NO. OF EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- --------- -------- -------- ------- --------
Outstanding at beginning
of year 1,809,000 $ 0.71 1,300,000 $ 0.66 1,150,000 $ 0.71
Granted 855,000 0.50 1,129,000 1.01 200,000 0.40
Exercised (150,000) 0.40 (327,500) 0.48 -- --
Cancelled/expired (425,000) 0.80 (292,500) 1.57 (50,000) 0.80
--------- ------ --------- ------ --------- ------
Outstanding at end of year 2,089,000 0.67 1,809,000 $ 0.76 1,300,000 $ 0.66
========= ==== ========= ====== ========= ======
Options exercisable at
end of year 1,456,500 $ 0.71 1,253,000 $ 0.71 1,300,000 $ 0.66
========= ==== ========= ====== ========= ======
Under Canadian GAAP, compensation expense on stock options granted to
non-employees is not recorded. Under U.S. GAAP, compensation expense on
options granted to non-employees is recorded as an expense in the period
the options are vested.
53
12. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (GAAP) (CONTINUED)
Stock options granted to non-employees are accounted for using the fair
value method, in accordance with SFAS No. 123. The fair values of the
options were estimated using the Black-Scholes Option Pricing Model with
the following weighted average assumptions for the grants made in 2001,
2000 and 1999:
2001 2000 1999
---- ---- ----
Risk-free interest rate 2.50% 6.22% 5.11%
Expected dividend yield -- -- --
Expected stock price 69% 126% 78%
Expected life in years 2.7 2.6 3.4
---- ---- ----
Summary information about the Company's non-employee options outstanding
at October 31, 2001 is as follows:
OPTIONS OPTIONS WEIGHTED
EXERCISABLE OUTSTANDING AVERAGE
SUMMARY OF OCTOBER 31, OCTOBER 31, REMAINING
EXERCISE PRICES 2001 2001 LIFE (YEARS)
--------------- ----------- ------------ ------------
$0.40 195,000 195,000 1.67
$0.50 377,500 905,000 4.25
$0.75 230,000 230,000 0.53
$0.80 307,500 320,000 1.58
$1.00 277,500 370,000 1.58
$1.12 69,000 69,000 3.46
--------------- ----------- ------------ ------------
1,456,500 2,089,000 2.69
=========== ============ ============
(d) DIFFERENCE IN ACCOUNTING POLICY
Under Canadian GAAP, the Company has capitalized certain acquisition
and development costs related to the Investment in Gesture Recognition
Technology. Under U.S. GAAP, pursuant to the requirements under SFAS
No. 86, all costs are charged to research and development expenses
when incurred until technical feasibility has been established for the
product. Thereafter, all software production costs shall be
capitalized and subsequently reported at the lower of unamortized cost
or net realizable value. Capitalized costs will be amortized based on
current and future revenue for the product with an annual minimum
equal to the straight-line amortization over the remaining estimated
economic life of the product.
(e) RECONCILIATION
The effect of the differences between Canadian GAAP and U.S. GAAP on
the balance sheets and statements of operations and deficit and cash
flows is summarized as follows:
54
12. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (GAAP) (CONTINUED)
Balance Sheets
Increase (decrease) in accounts to comply with U.S. GAAP:
OCTOBER 31, OCTOBER 31,
2001 2000
----------- -----------
Total assets under Canadian
GAAP $ 2,204,594 $ 5,263,267
Decrease in Investment in
Gesture Recognition
Technology (1) (915,803)
----------- -----------
Total assets under U.S. GAAP $ 2,204,593 $ 4,347,464
=========== ===========
Shareholders' equity under
Canadian GAAP $ 1,686,167 $ 5,050,588
Increase in deficit due to
non-employee stock-based
compensation expense (189,878) (151,506)
Increase in deficit due to
non-employee stock-based
compensation expense
from prior years (705,814) (554,308)
Increase in deficit due
to the write-off of
the Investment in
Gesture Recognition
Technology (1) (915,803)
----------- -----------
Total shareholder's equity under
U.S. GAAP $ 790,474 $ 3,428,971
=========== ===========
55
12. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (GAAP) (CONTINUED)
Statements of Operations and Deficit
Year Ended Year Ended Year Ended
OCTOBER 31, OCTOBER 31, OCTOBER 31,
2001 2000 1999
----------- ----------- -----------
Net loss under Canadian GAAP $(3,773,791) $ (755,218) $(1,125,451)
Increase in stock-based
compensation expense (189,878) (151,506) (49,292)
Decrease in amortization of
Investment in gesture
recognition technology 915,802 80,199 135,871
Increase in research and
development and expense -- (61,765) (37,353)
----------- ----------- -----------
Net loss under U.S. GAAP $(3,047,867) $ (888,290) $(1,076,225)
=========== =========== ===========
Basic and diluted net loss per share,
under U.S. GAAP $ (0.16) $ (0.06) $ (0.10)
=========== =========== ===========
Weighed average number of
shares outstanding 18,608,412 15,924,146 11,219,480
=========== =========== ===========
Statements of Cash Flows
Year Ended Year Ended Year Ended
OCTOBER 31, OCTOBER 31, OCTOBER 31,
2001 2000 1999
----------- ----------- -----------
Cash applied to operating
activities under Canadian GAAP $(2,613,791) $ (721,144) $ (703,770)
Increase in research and
development expenses -- (61,765) (37,353)
----------- ----------- -----------
Cash applied to operating activities under
U.S. GAAP $(2,613,791) $ (782,909) $ (741,123)
----------- ----------- -----------
Cash applied to investing activities under
Canadian GAAP $ (477,398) $ (236,855) $ (61,669)
Decrease in Investment in
Gesture Recognition Technology -- 61,765 37,353
----------- ----------- -----------
Cash applied to investing activities under
U.S. GAAP $ (477,398) $ (175,090) $ (24,316)
=========== =========== ===========
56