-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, W11Eza5o02VrjO/91Gu1DaWT8gfTbM+5mgl714rzMlnifAIupUblYI6HVNtEetUy 2s4OWOlDYO9O326DgegmSQ== 0000891092-01-000557.txt : 20010417 0000891092-01-000557.hdr.sgml : 20010417 ACCESSION NUMBER: 0000891092-01-000557 CONFORMED SUBMISSION TYPE: 20FR12G PUBLIC DOCUMENT COUNT: 14 FILED AS OF DATE: 20010416 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DSI DATOTECH SYSTEMS INC CENTRAL INDEX KEY: 0001062434 STANDARD INDUSTRIAL CLASSIFICATION: [] FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 20FR12G SEC ACT: SEC FILE NUMBER: 000-32557 FILM NUMBER: 1603566 BUSINESS ADDRESS: STREET 1: 300 - 905 WEST PENDER STREET STREET 2: 604-685-9109 CITY: VANCOUVER B C STATE: A1 ZIP: V6B 3H7 BUSINESS PHONE: 6046859109 MAIL ADDRESS: STREET 1: 300 - 905 WEST PENDER STREET CITY: VANCOUVER BC STATE: A1 20FR12G 1 0001.txt FORM 20FR12G WASHINGTON, D.C. 20549 FORM 20-F (Mark one) |X| REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR (G) OF THE SECURITIES EXCHANGE ACT OF 1934 or |_| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended October 31, 2000 or |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to _________ Commission File Number: _________________________ DSI DATOTECH SYSTEMS INC. (Exact Name of Registrant as Specified in its Charter) Canada (Jurisdiction of Incorporation or Organization) 300 - 905 West Pender Street, Vancouver, BC V6C 1L6 (Address of Principal Executive Offices) Securities registered or to be registered pursuant to Section 12(b) of the Act: None Securities registered or to be registered pursuant to Section 12(g) of the Act: Common Shares, without par value (Title of Class) Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the date of this registration 21,652,334 Common Shares Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) for the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES |_| NO |X| Indicate by check mark which financial statement item the registrant has elected to follow. ITEM 17 |X| ITEM 18 |_| (Applicable only to issuers involved in bankruptcy proceedings during the past five years) Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) for the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Not Applicable Except as otherwise noted, all dollar amounts are presented in Canadian dollars. Exchange Rate: At October 31, 2000, the exchange rate of Canadian dollars into United States dollars was 1.5225 Canadian to $1.00 United States. Item 1. Identity of Directors, Senior Management and Advisors A. Directors and Senior Management Mr. Edward C. Pardiak was appointed Director, Chairman of the Board and Chief Financial Officer of DSI Datotech Systems Inc. (the "Company" or "DSI") in 1997. During the year 2000 Mr. Pardiak was appointed Chief Executive Officer of DSI. Mr. Pardiak is responsible for the management and development of DSI including the day-to-day management of DSI and the financial and business management of DSI. The business address for Mr. Pardiak is 300 - 905 West Pender Street, Vancouver, BC, Canada, V6C 1L6. Mr. Robert M. Egery was appointed Officer of DSI in 1998. On December 1, 2000, Mr. Egery was appointed President and Chief Operating Officer of DSI. Mr. Egery is responsible for the management and development of DSI including the day-to-day management of DSI and the financial and business management of DSI. The business address for Mr. Egery is 300 - 905 West Pender Street, Vancouver, BC Canada, V6C 1L6. Dr. Thomas Calvert was appointed Director in 1998 and appointed Secretary for DSI during 2000. Dr. Calvert is responsible for the Corporate Secretarial function of DSI and is a member of the Compensation Committee and the Audit Committee of DSI. The business address for Dr. Calvert is TechBC, Ste 1280, 13401 108 Avenue, Surrey, BC, Canada, V3T 5T3. Mr. Allan S. Gibbins was appointed Director of DSI in 1998. Mr. Gibbins is a member of the Compensation and the Audit Committee of DSI. The business address for Mr. Gibbins is Hubbell Canada Inc., 870 Brock Road S., Pickering, ON, Canada, L1W 1Z8. B. Advisors. Not Applicable. C. Auditors. The Auditor for DSI is G. Ross McDonald, Chartered Accountants, located at 543 Granville Street, Suite 1502, Vancouver, Canada, BC V6C 1X8. Item 2. Offer Statistics and Expected Timetable Not Applicable 3 Item 3. Key Information A. Selected Financial Data Set forth below is selected financial information for the years ended October 31, 1996 through October 31, 2000 derived from the Audited Financial Statements of DSI prepared in accordance with Canadian G.A.A.P. These principals, as applied to DSI, do not differ materially from U.S. G.A.A.P. except as disclosed in Note 10 to DSI's Financial Statements. All figures in this registration statement are in Canadian dollars, unless otherwise noted. This information should be read in conjunction with DSI's Financial Statements included in this Registration Statement. Financial Statement Data - Canadian G.A.A.P Statement of Loss and Deficit - Selected Data Year Ended October 31 (In thousands, except per share data)
-------------------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 -------------------------------------------------------------------------------------------- Revenues $628 $0 $0 $0 $0 -------------------------------------------------------------------------------------------- Net Loss $755 $1,125 $852 $822 $940 -------------------------------------------------------------------------------------------- Total $1,034 $1,125 $852 $822 $940 -------------------------------------------------------------------------------------------- Loss Per Share $0.04 $0.08 $0.07 $0.10 $0.14 -------------------------------------------------------------------------------------------- Dividend Per Share $0 $0 $0 $0 $0 --------------------------------------------------------------------------------------------
Balance Sheet - Selected Data As at October 31 (In thousands)
-------------------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 -------------------------------------------------------------------------------------------- Total Assets $5,263 $1,068 $1,710 $1,683 $905 -------------------------------------------------------------------------------------------- Long Term Debt $0 $0 $0 $0 $0 --------------------------------------------------------------------------------------------
4 Financial Statement Data - U.S. G.A.A.P Statement of Loss and Deficit - Selected Data Year Ended October 31 (In thousands, except per share data)
-------------------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 -------------------------------------------------------------------------------------------- Revenues $628 $0 $0 $0 $0 -------------------------------------------------------------------------------------------- Net Loss $737 $1,027 $990 $1,044 $983 -------------------------------------------------------------------------------------------- Total $1,034 $1,027 $990 $1,044 $983 -------------------------------------------------------------------------------------------- Loss Per Share $0.03 $0.07 $0.07 $0.11 $0.13 -------------------------------------------------------------------------------------------- Dividend Per Share $0 $0 $0 $0 $0 --------------------------------------------------------------------------------------------
Balance Sheet - Selected Data As at October 31 (In thousands)
-------------------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 -------------------------------------------------------------------------------------------- Total Assets $4,347 $137 $677 $788 $232 -------------------------------------------------------------------------------------------- Long Term Debt $0 $0 $0 $0 $0 --------------------------------------------------------------------------------------------
Currency and Exchange Rates All dollar amounts set forth in this Registration Statement are in Canadian dollars, except where otherwise indicated. The following table sets forth the rates of exchange for the Canadian dollar, expressed in United States dollars, in effect at the end of each of the October 31 fiscal year periods indicated; and the average exchange rates based on the last day of each month during such periods, in each case based on the noon rate as per the Bank of Canada.
Fiscal Year Ending 2000 1999 1998 1997 1996 October 31 Rate at End of Period $1.5225 $1.4713 $1.5429 $1.4084 $1.3383 Average Rate During Period $1.4768 $1.4941 $1.4717 $1.3781 $1.3647
The following chart shows the high and low exchange rates for each month during the previous six months from May through October 2000: 5
May June July August September October - --------------------------------------------------------------------------------------------------------- High Rate 1.5081 1.4911 1.4907 1.4888 1.5070 1.5271 - --------------------------------------------------------------------------------------------------------- Low Rate 1.4783 1.4653 1.4641 1.4722 1.4735 1.4954 - ---------------------------------------------------------------------------------------------------------
Dividend Policy DSI has not paid any dividends during the past five years and it has no plan to pay dividends at this time. The directors of DSI will determine if and when dividend should be declared and paid in the future based on DSI's financial position at the relevant time. B. Capitalization and Indebtedness At October 31, 2000, DSI's working capital was $3.9 million and had no long-term debts. The shareholder's equity at October 31, 2000 amounted to $5.1 million. The total share capital was $10.8 million (consisting of 21,109,370 outstanding common shares) and an accumulated deficit of $5.7 million. C. Risk Factors 1) DSI has a limited operating history and may continue to operate at a loss. DSI has a limited operating history and has generated limited revenues. DSI has been primarily engaged in product research and development. For the fiscal year ended October 31, 2000, DSI generated revenues of $777,200 of which $628,000 were from the signing of license-to-option agreements with two organizations, Netface LLC and Security Biometrics Inc. DSI expects that operating losses will continue, as total costs and expenses continue to increase due to product development and product marketing and distribution. The ability of DSI to achieve profitability will depend significantly on its ability to fully develop its gesture recognition technology products, and to develop the capacity to manufacture and market any of these products either by itself or as part of a collaboration. There can be no assurance that DSI will be able to achieve profitability. Therefore, the extent of future losses and the time required to achieve profitability is highly uncertain. 2) DSI is in the early stage of product development. A working prototype of the Gesture Input and Control System exists. However, the technology has not yet been fully commercially tested in a working environment. Accordingly, there can be no assurances that DSI can achieve the necessary technical objectives. There is further no guarantee that DSI will be able to adapt the system to mass-scale production in the event that DSI's marketing initiatives are successful. There can be no assurance that these or any of DSI's proposed products can be successfully commercialized. Therefore, there is substantial risk that DSI's product developments may not prove to be successful. 6 3) DSI will need future financing. DSI will require substantial additional funds for its product development programs, marketing and distribution and operating expenses. Capital requirements will depend on a variety of factors, including the rate of progress of DSI's product development, products distribution and marketing, and the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, maintaining technological and market competitiveness, licensing and other relationships and the terms of any such licensing, collaborative or other relationships that DSI may establish. Also, the fixed commitments, including salaries and fees for employees and consultants, rent, payments with respect to licensing and other agreements are substantial, and will most likely increase as DSI grows. DSI plans to raise substantial additional capital to fund its future operations through debt and equity financing, and possibly through collaborative, licensing or other arrangements with corporate partners. DSI has no present commitments for future financing. There can be no assurance that additional financing will be available when needed, or, if available, is so on acceptable terms. Insufficient funds may prevent DSI from implementing its business strategy to the extent planned, and could result in delay, scale back, or elimination of its sole product development program, or result in the license to third parties of the rights to commercialize products or technologies that DSI would otherwise seek to develop itself. There can be no assurance that additional financing will be available when needed, or, if available, is so on acceptable terms. Insufficient funds may prevent DSI from implementing its business strategy to the extent planned, and could result in delay, scale back, or elimination of its sole product development program, or result in the license to third parties of the rights to commercialize products or technologies that DSI would otherwise seek to develop itself. 4) DSI is dependent upon its proprietary technology. DSI relies primarily on a combination of patent, copyright, and trade secret laws, as well as confidentiality procedures and contractual provisions to protect its technology and products from exploitation by competitors. DSI has three United States patents, one Canadian patent and one patent pending in each of the United States and Canada. While DSI believes that its software technology is adequately protected against infringement, there is no assurance of effective protection against competition. Monitoring and identifying the unauthorized use of DSI's technology may prove difficult. There is a possibility of disclosure of confidential information related to DSI's technology and the potential for infringement of intellectual property rights of another party by DSI and liability on the part of DSI for infringement by one of its clients. DSI also intend s to apply for additional patents in the United States and other countries. There can be no assurance that all of these patents will issue in commercially relevant countries (e.g. countries in which the product is sold) and even if issued will appropriately protect DSI's products and technology. Further, copyright laws may not provide useful protection against competitive software that is different than DSI's software. The non-establishment of effective patent, trade secret or copyright 7 protection could have a material adverse effect on DSI's business, results of operations and financial condition. 5) DSI may face new competition. To the best of DSI's knowledge, it has no direct competition today, its indirect competitors, manufacturers of current pointing, input and other interface products, may enter the race for this market segment. Although DSI believes that its gesture recognition technology products will enjoy technology patent protection and application advantages, other companies involved in the development of products related to tradition point and click technology of mice and keyboards, including Interlink Electronics Ltd., Kensington and Logitech, have substantially greater technological, financial, research and development, manufacturing, human and marketing resources and experience than DSI. Such companies may therefore succeed in developing products that are more effective or less costly than DSI's products, or may be more successful in marketing and distributing their products. DSI's ability to sell the gesture recognition technology based products will, in part depend on its ability to demonstrate these products are substantially better than the current point and click technology 6) DSI may have difficulty achieving market acceptance because of the significant change represented by its technology. DSI's gesture recognition technology represents a significant technological change from existing point and click technology and is a major shift in paradigms. This may cause resistance in market acceptance and adaptation. 7) DSI intents to rely on third party manufacturers. DSI's strategy is to outsource most of the required manufacturing. Reliance on third party producers and manufacturers may delay the introduction of product to market. 8) DSI has limited marketing and sales capabilities. DSI does not have a large group of internal marketing and sales resources and personnel. In order to market the gesture recognition technology based products and any other products it may develop, DSI intends to form marketing and distribution agreements with third parties, in addition to its own internal marketing and distribution efforts. There can be no assurance that DSI will be able to successfully enter into such arrangements with third parties on acceptable terms, if at all. To the extent that DSI arranges with third parties to market its products, the success of such products may depend on the efforts of such third parties. There can be no assurance that any of DSI's proposed marketing schedules or plans can or will be met. 9) DSI relies on trade secrets and proprietary know-how. Although DSI does not believe that its products infringe on the rights of third parties, there can be no assurance that third parties will not assert infringement claims against us in the future or that any such assertion will not result in costly litigation or require us to obtain a license to intellectual property rights of such third parties. In addition, there can be no assurance that such licenses will be available on reasonable terms or at all, which could have a material adverse effect on DSI's business, results of operations and financial condition. 8 10) DSI is dependent on certain key personnel and does not maintain key man life insurance. DSI's success will depend in large part upon the services of a number of key employees and consultants, including Edward Pardiak, DSI's Chairman of the Board of Directors and Chief Executive Officer, and Robert Egery, DSI's President. DSI has not obtained keyperson life insurance with respect to any employees, directors or consultants. The loss of the services of Mr. Pardiak, Mr. Egery or other key employees or consultants could have a material adverse effect on DSI's business, results of operations and financial condition. Due to the highly specialized scientific nature of DSI's business, DSI is highly dependent upon DSI's ability to attract and retain qualified scientific, technical and managerial personnel. The loss of services of existing personnel and/or the failure to recruit key scientific, technical and managerial personnel in a timely manner would be detrimental to DSI, DSI's product development programs, and to its overall business. Competition for qualified engineering personnel is intense and there can be no assurance that DSI will be able to continue to attract and retain the necessary qualified personnel. 11) DSI may experience difficulty in the management of growth If successful, DSI may experience rapid expansion of its business. A continuing period of rapid growth could place a significant strain on DSI's management, operations and other resources. DSI's ability to manage its growth would require us to continue to invest in its operations, including its financial and management information systems, and to retain, motivate and effectively manage its employees. If DSI's management is unable to manage growth effectively, the quality of its services and products, its ability to retain key personnel and its results of operations could be materially and adversely affected. 12) No Dividends Anticipated. DSI has never declared or paid cash dividends on its Common Stock since its inception and does not intend to declare or pay dividends on its Common Stock in the foreseeable future. DSI intends to retain any earnings, if any, in order to finance future growth of its business. Consequently, dividends may or may not be paid in the near future. Item 4. Information on DSI A. History and Development of DSI DSI Datotech Systems Inc. was incorporated under the laws of the Province of British Columbia, Canada on May 7, 1987 under the name Rhino Resources Inc. Rhino Resources Inc. changed its name to DSI Datotech Systems Inc. on April 19, 1996. DSI trades under the commercial name of Datotech and has a registered business address located at 712-525 Seymour Street, Vancouver, B.C. V6B 3H7, telephone number (604) 685-9109. 9 DSI is a development stage company involved in the development of gesture recognition technology to facilitate the user's interface with computers and electronic devices to promote greater ease and efficiency in the input of data and information. Prior to October 1997, DSI was involved in resource exploration. In October 1997, DSI divested itself of all natural resource properties and ceased all activities within the natural resource sector. A. Business overview Introduction DSI's mission is to make human interaction with computers and electronic devices easy and simple using natural hand gestures. DSI's patented gesture recognition technology includes both proprietary software and touch pads that allow people to operate these devices in a natural manner by touching and sliding multiple fingers on a "DatoPad." DSI designs and develops gesture recognition software and intelligent touch pads. DSI believes that the ease of use and flexibility of gesture recognition technology are superior to the point and click technologies found in keyboards and mouse devices which are commonly used to input information into computers. DSI intends to be a key provider of human-machine interfaces, which will offer a wide array of "end-to end" solutions targeted towards specific market segments. DSI has three United States patents for its gesture recognition technology. DSI has applied for one patent in the United States and one patent in Canada for a multitouch interface. DSI's technology seeks to significantly boost user productively by allowing the user to fully focus on the task at hand rather than the details of interface, and accomplish their work objectives with greater speed in a simple and natural manner. Gesture recognition technology brings improved performance to gesture recognition technology enabled touch pads that are deemed mice replacements, and greatly enhances keyboard functionality. The touch pads may be of any size, shape or form depending on the nature of the application. The software design is of a flexible and open architecture class, with the potential to form a gesture recognition based human-machine operating system. Key developments in DSI's operations to date include: o Obtaining three patents applicable to gesture recognition technology and interface development; o Designing, developing and building proof of concept prototypes; o Performing a focused research market study through an independent research firm: Benchmark; o Developing its research and development staff; and o filing for additional patents pertaining to a new generation multi-touch gesture recognition algorithm. 10 o Executing two options to obtain exclusive licenses to DSI's technology for two industries. The pointing and input control systems market is a growing multi-billion dollar industry. Pointing and input control systems are found across numerous industries such as personal computers, personal digital assistants, games and entertainment, stationary and mobile communications, home appliances, security and access control systems and many others. According to a private study conducted for DSI in 1997 by Benchmark Research Inc., pointing and input control device sales in 1997 for the personal computer, gaming, and entertainment market segments represented were approximately US $3,000,000. The markets had projected sales of US$5,400,000 in 2001, with an approximate installed based of 315 million mice/trackball input and pointing devices. DSI's technology leverages the acceptance of the touch pad by enhancing it with gesture recognition technology, extending the functionality of the pad, and making the interface between the user and the machine more natural and intuitive. DSI is introducing higher levels of input device programmability to further adapt the interface to suit the natural characteristics and tendencies of the user. Dato Gesture Technology Overview Hand gestures are a universal, natural and effective form of communication and provide an accepted way for people to interact with new generations of information technology. DSI's gesture recognition technology interprets hand gestures performed with any combination of digits of the hand touching a proprietary "intelligent" touch pad. This technology integrates sensors, software and application programs into a unique, leading edge proprietary input system. The touch pad can be designed in various sizes and forms as required by different applications. Sensors in the pad track the position and force of multiple simultaneous finger contacts and process this information to interpret hand gestures performed by the user. Each multi-touch gesture is mapped to electronic codes and passed through an interface to control a computer or other electronic device. DSI's next generation design is reverse-compatible with existing touch pad pointing devices and also recognizes a useful set of default gestures, which can be mapped to perform many standard functions. Advanced product development will provide user-defined custom gestures in addition to the defaults. Gesture recognition technology provides a compact, general-purpose input system, which is a powerful alternative to more traditional human-machine interaction via knobs, keys and buttons, and pointing devices. Several characteristics of gesture recognition technology suggest advantages for particular applications, for example: o a small footprint for integration into a portable or hand-held devices; o eyes-free operation, a necessary characteristic for many applications like graphic design and games; o sliding, rather than striking buttons reduces physical effort and strain; and o programmability to replace repetitive complex input sequences with a single gesture 11 Future enhancements are planned to add character entry, user-defined custom gestures, security features and to integrate gesture recognition technology with voice recognition. DSI management has continued to focus on the development of gesture recognition technology including elements to support applications that will drive demand and acceptance of gesture recognition technology. Once DSI's gesture recognition technology application portfolio is fully interoperable, platform providers will be able to utilize DSI's gesture recognition technology enabled products. Product Development In 1997/1998 and 2000, DSI received approval for a market research grant in the Market Assessment of Research and Technology (MART) Program, which is jointly offered by the British Columbia Science and Technology Agency and the Canadian National Research Council. In 1997, DSI proceeded with a market research study (conducted by Benchmark Research Inc.) to develop its business strategy, focus its research and development activities and to assist DSI in commercializing its technology. Based on DSI's focused market research, an initial product version is aimed at professional and power user market segments including CAD specialists, graphics artists, multimedia developers and, information managers. The DatoPad Input and pointing devices have become a universal method in the way in which people operate and interface with computers. DSI's gesture recognition technology interprets hand gestures performed on a proprietary device called a DatoPad(TM). This technology leverages market acceptance of the touch pad by enhancing it with gesture recognition technology, extending the functionality of the pad and making the interface between the user and the machine more simple and natural. DSI's solution introduces higher levels of input device programmability. Each gesture is mapped to an electronic code and passed through an interface to control a computer or electronic appliance. In February 2001, DSI presented its first video gaming prototype using gesture recognition technology. The device will be programmed with defaults and have the capability to be customized by the user to perform specific functions for each gesture code. The patented technology thus provides a compact, general-purpose input system, which DSI believes is a more powerful alternative to current traditional input and pointing technologies such as mice and trackball. The DatoPad will be approximately the size and thickness of a conventional mouse pad. The initial product configuration is able to recognize up to ten digits of the hand. The pad communicates with a personal computer via a Universal Serial Bus, serial cable or wireless link. The surface of the device accommodates touching with all five digits of the hand in a comfortable posture. The pad is reverse compatible with existing pointing devices and functions as a standard pointing device when touched with a single finger or stylus. Touching with more than one finger activates the gesture recognition technology software allowing the user quick access to a large number of shortcuts to perform standard functions including 12 o Cut o Paste o Save o Move o Enlarge or shrink objects o Rotate objects Several characteristics of the DatoPad(TM) input system suggest advantages for particular applications: o The DatoPad(TM) is fully reverse compatible with current devices. o The DatoPad(TM) is scalable to various shapes and sizes to reflect a variety of applications. o Eyes-free operation provides a significant advantage in applications like computer aided design, graphics, and multimedia design which require the operator's visual attention. o Sliding fingers rather than striking buttons, allows input sequences to be performed quickly with minimal physical effort. o The user will be able to program their own gestures as they relate to specific applications thus personalizing their interaction with applications and devices. o Future enhancements will allow character entry and user-defined custom gestures such as signatures. Markets The commercialization of DSI's products will be driven by a three-pronged strategy of forming strategic alliances and partnerships; selling stand-alone products to address the installed market base and licensing agreements with major software/hardware original equipment manufacturers. DSI expects to focus its initial product introduction on the professional segment of the interface systems market. DSI will also seek to take advantage of growth in Internet-based technologies and e-commerce. DSI's market penetration strategy focuses on the traditional input and pointing device market segments. DSI will be focusing on three strategic computer segments. This includes initially developing and marketing its DatoPad(TM) for: o users of professional software; o gesture recognition technology integrated portable computers; and o gesture recognition technology integrated desktop keyboards. DSI intends to channel its products to market by forming strategic alliances and partnership with 13 established distribution channels, sale of stand alone product directly to the market, and through licensing agreements with major software/hardware OEMs. DSI will approach both horizontal and vertical markets. DSI's approach to horizontal markets is to grant an option to a third party to have exclusive rights to market the products to a particular industry. Under the agreements executed to date, DSI received a cash payment for the option and will receive an additional cash payment if the optionee elects to license the technology following the optionee's evaluation of the technology. As a condition for granting the license, DSI also receives an equity interest in the licensee and the opportunity to generate revenues from working with sublicenses in the development of specific applications for the products. DSI entered into an option agreement with NetFace LLC on June 28, 2000. NetFace has the right to evaluate the commercial value of DSI's intellectual property rights in technology, including the gesture recognition technology, for use in interfaces for personal computer games, console games and Internet television. In consideration for an option to enter into an exclusive license agreement with DSI for the purpose of utilizing DSI's intellectual property rights for such use, NetFace will pay DSI U.S. $200,000, of which U.S. $100,000 has been received. The balance is due upon delivery by DSI of a reasonably acceptable prototype to NetFace. DSI has completed a prototype of its Datopad for use in video games that it anticipates will be delivered to NetFace for evaluation in the spring of 2001. Should the option be exercised, DSI will enter into a license agreement with NetFace. In consideration of the license, DSI will receive U.S. $5,000,000, less the option fees of U.S. $200,000, and a 20% Class B membership interest in NetFace. The option period terminates eighteen months from the date a prototype reasonably acceptable to NetFace is made available by DSI to NetFace. DSI entered into an option agreement with Security Biometrics, Inc. on August 22, 2000. Biometrics has the right to evaluate the commercial value of DSI's technology for use in interfaces and software for banking and financial transactions. DSI and Biometrics believe that the gesture recognition technology can be used to eliminate identity fraud, thereby reducing transaction costs and losses. Biometrics paid DSI a fee of US$320,000 for an option to enter into an exclusive license agreement with DSI for the purpose of utilizing DSI's intellectual property rights for such use. Under the option agreement with Biometrics, an additional US $3,000,000 is due by July 22, 2001. The funds will be used exclusively toward the development of a prototype reasonably acceptable to Biometrics which prototype is to be made available to Biometrics within twelve months of receiving the US $3,000,000. Biometrics, upon receipt of the acceptable prototype, has three months in which to exercise the option, upon which a licensing agreement will be signed in consideration of US $8,000,000, less the above amount of US $3,320,000, and a perpetual non-dilutive 20% common share interest in Biometrics company or its assignee. In its approach to vertical markets, DSI seeks to sell its products and technology to the producers or users of products that can be used across industry segments, such as computer manufacturers and manufacturers of other products that use traditional point and click interfaces. DSI will 14 primarily seek to license its technology and products to others to be sold under their brand names but may also sell products under its brand names. DSI will initially attempt to outsource the manufacture of its components and assemble it products. DSI intends to then outsource the manufacture and assembly of its products. DSI also intends to license its gesture recognition technology directly to original equipment manufactures of computers and computer related equipment. Patents & Trademarks DSI has three United States patents for its gesture recognition technology and is extending these with additional international patents on a recently improved and advanced method of human-machine interaction based on hand gestures. DSI is preparing to file for additional patents specific to a multi-touch gesture recognition software. DSI owns the following patents: 1. US Patent 5,203,704 (1993), "Method of Communication Using Pointing Vector Gestures and Mnemonic Devices to Assist in Learning Pointing Vector Gestures"; Expiry December 21, 2010. 2. US Design Patent D354,735 (1995), "Switch Housing for Providing Various Different Functions to Keys of a Single Key Pad"; Expiry January 24, 2009. 3. US Patent 5,808,567 (1998), "Apparatus and Method of Communicating Using Three Digits of a Hand"; Expiry September 15, 2015. 4. Canadian Patent (2,098,179) 1998 "Pointing Gesture Method of Communication", with Japanese application on hold; expiry December 16, 2011. DSI has also applied for one patent in the United States and one patent in Canada for a multitouch interface. DSI holds the following U.S. trademarks in respect of its technology: 1. US Trademarks "DatO" (2,090,374) and "Spelsa" (2,007,836). 2. US Trademarks (pending) "Interfacing With the Future." Competition To the best of DSI's knowledge, there are no companies producing gesture recognition technology products or applications that are in direct competition with DSI's gesture recognition technology. Indirect competition may come from existing input and pointing device manufacturers, for example touchpads, integrated touchpads and keyboards. Such indirect competitors include Interlink Electronics Ltd., Kensington and Logitech. DSI's may seek to partner with an indirect competitors to enabler them to enhance their products using DSI's technology. Government Regulations 15 DSI does not believe that its products are materially affected by government regulation of its proposed products. DSI is a Canadian Corporation and is governed by the laws of Canada. The shares of DSI are listed on the Canadian Venture Exchange. C. Organizational Structure DSI has one wholly owned subsidiary that was incorporated as 3259722 Canada, Inc. on May 14, 1996 pursuant to the laws of Canada. The subsidiary subsequently changed its name to Interaction Technologies Ltd. on July 19, 2000. Reference to the "Company" or "DSI" include references to the subsidiary. D. Property Plant and Equipment DSI has its principal place of business located in Vancouver, British Columbia, Canada where it holds a lease its business premises with an office space of 5,721 square feet and an annual rent of $108,527.40.The term of this lease is due to expire November 30, 2005. Item 5. Operating and Financial Review and Prospects A. Operating Results To ensure the development of DSI, DSI's management will continue to diversify the source of revenues and pursue licensing and royalty agreements. DSI now concentrates its efforts in the improvement and commercialization of gesture recognition technology applications for the human-machine interface. Fiscal Year Ended October 31, 2000 compared to Fiscal Year Ended October 31, 1999 Revenue and Investment Income Option revenue of $627,730 was received during the fiscal year ended October 31, 2000 for two option agreements, one with Netface LLC and one with Security Biometrics Inc. Investment and interest income increased to $149,470 due to the investment of funds from the shares issued this year. Expenses Research and Development Total research and development expenditure increased from $465,897 for the year ended October 31, 1999 to $498,382 for the year ended October 31, 2000, an increase of 7%. 16 There will be a substantial increase in the research and development expenditure for the year ending October 31, 2001 for the further development of the acceptable prototype for the option agreements. General and Administrative General and administrative expenses increased from $670,143 for the year ended October 31, 1999 to $1,034,036 for the year ended October 31, 2000, and increase of $363,893 (54%). This increase is mainly due to: o Higher management and consulting fees (increase of $185,000) included fees for the market analysis and marketing plans. o Legal and accounting (increase of $33,000) which included fees for stating the financials in US GAAP and legal counsel for financing opportunities in the US. o Travel (increase of $38,000), which included travel to Europe and the US to pursue additional financing. Income Taxes DSI has accumulated non-capital losses for tax purposes, the potential benefits of which are not recorded in the financial statements. The losses may be carried forward to reduce taxable income in future years and, unless utilized, will expire as follows: Year Loss Amount 2001 $ 162,600 2002 227,100 2003 732,200 2004 881,800 2005 865,300 2006 966,600 2007 725,900 ------------------------------------------------------ TOTAL $ 4,561,500 ====================================================== In the fiscal year ended October 31, 2000, DSI's net operating loss decreased by 33% to $755,218 as compared to $1,125,451 in the fiscal year ended October 31, 1999. The loss per share decreased $0.04 to $0.04. DSI has accumulated non-capital losses of approximately $4.6 million, which can be carried forward to reduce taxable income in future years. These potential income tax benefits arising from the foregoing are not recorded in the financial statements. Fiscal Year Ended October 31, 1999 compared to Fiscal Year Ended October 31, 1998 Revenue and Investment Income There were no revenues reported for the fiscal years ending October 31, 1999 and 1998. Investment income for the fiscal year 1999 was $16,876 lower than the year 1998 as DSI had lower cash and investment during fiscal 1999 than during fiscal 1998. 17 General and Administrative There was a decrease in General and Administrative Expenses in the fiscal year ended October 31, 1999 to $670,143 from $689,157 for the fiscal year ended October 31, 1998. Loss per Share The loss per share increased from $0.07 per share in fiscal 1998 to $0.08 per share in fiscal 1999, an increase of $0.01 per share. This was mainly due to the increased research and development expenditure in fiscal 1999. B. Liquidity and Capital Resources In the fiscal year ended October 31, 2000, DSI's primary source of funds was from the issue of Common Shares. DSI considers its operating cash flows and ability to raise equity capital as principal indicators of its liquidity. During the fiscal year ended October 31, 2000, DSI had cash inflow of $5 million from private placement of share capital ($3.8 Million), exercise of warrants ($1.9 Million) and exercise of options ($437,000), leaving a cash balance at October 31, 2000 of $4,079,315 compared to $64,000 at October 31, 1999. Although working capital is not considered to be an indicator of DSI's liquidity, DSI's working capital at October 31, 2000 was $3,922,221, an increase of $4,088,777 from October 31, 1999. In the fiscal year ended October 31, 2000, cash resources were utilized in the investment in gesture recognition technology, including recruitment of additional employees the research and development of the gesture recognition technology. DSI relocated to its new premises in October 2000 to provide more space for the engineers and the laboratory. Cash resources were utilized in the purchase of capital equipment such as furniture and computers. DSI has no long-term debt. Current liabilities of $212,679 included accounts payable and accrued liabilities, which decreased by $23,000 from October 31, 1999. DSI has license-to-option agreements with Netface LLC and Security Biometrics Inc. DSI intends primarily to meet its commitment to Netface and Security Biometrics while continuing to develop other product applications. The funds required for this purpose will be derived from its current cash position and possibly the issuance of common shares. 18 During the year ended October 31, 2000, DSI completed private placements as follows: i. 2,456,140 units at $0.57 per unit for gross proceeds of $1,400,000 less finders' fees of 50,000 common shares and $56,759 paid in cash and other share issue costs of $8,399. Each unit consisted of one common share and one warrant to acquire one additional common share at $0.57 per share to January 26, 2001 and at $0.66 per share to January 26, 2002. ii. 912,000 units at $1.75 per unit for gross proceeds of $1,596,000 less commissions of $159,600, fees of $93,687 and other share issue costs of $44,508. Each unit consisted of one common share and one-half warrant, each full warrant exercisable to acquire one additional common share at $2.16 per share to April 10, 2002. The agent also received compensation warrants which may be exercised to acquire 91,200 units at $1.75 per unit to October 10, 2001, each unit consists of one common share and one-half warrant, each full warrant exercisable to acquire one additional common share at $2.16 per share to April 10, 2002. iii.357,854 units at $1.75 per unit for gross proceeds of $626,245 less commissions of $25,000, fees of $15,000 and other share issue costs of $1,499. Each unit consisted of one common share and one-half warrant, each full warrant exercisable to acquire one additional common share at $2.16 to April 20, 2002. The agent also received compensation warrants which may be exercised to acquire 35,785 units at $1.75 per unit to October 20, 2001, each unit consists of one common share and one-half warrant, each full warrant exercisable to acquire one additional common share at $2.16 per share to April 20, 2002. DSI believes that it has sufficient cash on hand to meet its anticipated requirements at least through October 31, 2002. The funds will be used to meet DSI's general operating expenses, capital needs for research and development and obligations to the optionees of its technology. DSI will require substantial additional funds for its product development programs, marketing and distribution and operating expenses. While management is pursuing additional financing, DSI currently has no commitments for additional financing. C. Research and Development, Patents and Licenses, etc. Research and Development As at October 31, 2000, research and development costs accrued (exclusive of accumulated amortization) were $1,549,748, including $61,765 accrued in the most current year. To support the market entry product, current research and development activities are focused on three areas: o High-resolution multi-touch sensors adapted from touchpad technology used in many notebook computers. o A sensor-independent proprietary gesture recognition algorithm, which can be used with a variety of sensor technologies. 19 o Application interfaces aimed at and designed for professional users of high-end software applications like Adobe Photoshop, etc. The gesture recognition algorithm forms an engine, similar to an operating system, for gesture based human-machine interaction, and is the foundation for DSI's technology. This software will be designed to reside in a custom microchip. This approach will facilitate technology transfer and licensing to third parties, and ensure DSI's intellectual property protection. In addition, a Canadian patent has been granted for "Pointing Gesture Method of Communication", based on US Patent 5,203,704. D. Trend Information DSI faces the general risk of technology. It received its first revenues in the fiscal year ended October 31, 2000 from signing two license-to-option agreements with Netface LLC and Security Biometrics Inc. DSI plans to market its product through forming strategic alliances and partnerships; stand-alone products to address the installed market base; and licensing agreements with major software/hardware original equipment manufacturers. Item 6. Directors, Senior Management and Employees A. Directors and Senior Management Directors are elected each year at the annual meeting of the shareholders of DSI. The most recent meeting of he shareholders was held on February 21, 2001. The following table sets out the names of the Management, their positions and offices in DSI, principal occupations, the period of time that they have been Directors of DSI. All of the directors are residents of Canada. The following table lists the directors and officers of DSI as at February 28, 2001: Name Age Position Edward C. Pardiak 48 Director, Chairman of the Board and Chief Financial Officer (1997), President and Chief Executive Officer Robert M. Egery 48 President, Chief Operating Officer and Director Thomas Calvert 64 Director and Secretary Allan S. Gibbins 51 Director Timothy Heaney 41 Vice President Marketing 20 Edward C. Pardiak Mr. Edward C. Pardiak was appointed Director, Chairman of the Board and Chief Financial Officer in April 1997. In October 2000, the Board of Directors elected Mr. Pardiak as President and Chief Executive Officer of DSI. He ceased being President in December 2000. Mr. Pardiak has extensive international experience in licensing, royalty agreements, finance and project management on the African, Asian, European and American continents. From 1976 to 1985 he held management positions with international Fortune 500 companies such as Seagram & Sons Ltd. Mr. Pardiak is a Director and the President of Augen Capital Corp., a public financial holding company with wholly owned merchant banking subsidiaries. He has a B.SC. from McGill University, a B.A. (Honors with Distinction) in Economics and a M.B.A. in finance and strategic management from Concordia University. He is currently completing his Doctorate in Strategic Management and has lectured at the graduate level at Concordia University. Robert M. Egery Mr. Robert M. Egery was appointed President and Chief Operating Officer of DSI Datotech effective December 1, 2000. Mr. Egery has more than 20 years of experience in high technology. During his career he has held senior management positions in sales and marketing, business development, contracts, engineering and program management and over 10 years at the vice-presidential level. At AlliedSignal (Honeywell), he gained invaluable experience in bringing new products to market, in electronics production and in international marketing and alliances. He developed a strong background in systems integration, software development and product diversification at Lockheed Martin and most recently he developed a global service delivery business at Bombardier. Mr. Egery holds bachelor degrees in Commerce and Electrical Engineering. Thomas Calvert Dr. Thomas Calvert was appointed Director of DSI in January 1998. In October 2000 the Board of Directors elected Dr. Calvert as Secretary of DSI. In 1997 Dr. Calvert founded Credo Interactive Inc. and is currently Board Chair of that company. Since 1996, Dr. Calvert has been the President and CEO of Credo Multimedia Software Inc. Dr. Calvert is Vice-President for Research and External Affairs at the Technical University of BC. He is currently on leave from his position at Simon Fraser University where he holds joint appointments as Professor in the Schools of Computing Science and Engineering Science. Since 1996, Dr. Calvert is Co-leader of the TeleLearning Network of Centers of Excellence, a national project sponsored by SFU. He joined Kinetic Effects Research Inc. as President from 1992 to 1996. Dr. Calvert served as President of the Science Council of BC between 1990 and 1992. In addition to his numerous honors and awards, Dr. Calvert has served on the Senate and Board of Governors of SFU, and on a number of external boards including Science World, BC Advanced Systems Institute, TRIUMF, Software Productivity Center, 21 Jumpstart Performance Society, and the Center for Image and Sound Research. Dr. Tom Calvert has published over 100 papers and book chapters. He received his Doctorate in Electrical Engineering from Carnegie Mellon University in the United States. Allan S. Gibbins Mr. Allan S. Gibbins was appointed Director of DSI in January 1998. Mr. Gibbins held increasing senior management positions over a period of 16 years with DuPont Canada Inc. In 1986 he was the Director of ITT Cannon Canada Ltd., and served between 1988 and 1992 as Vice-President and General Manager of Nutone Electrical Inc. Since 1992, Mr. Gibbins is the President and CEO of Hubbell (Canada) Inc. The sales are in excess of $85 million representing multi-divisional product lines. He is the Chairman of the Electrical, Electronic Manufacturers Association of Canada (EEMAC). Mr. Gibbins has a Bachelor of Science (Honors, Chemistry) from Concordia University in Montreal. He brings many years of sales and marketing experience in such diverse industries as electrical, electronic, plastics, textile fibers, paint and chemicals. He has outstanding skills in the areas of merger and acquisition negotiation, financial control systems, restructuring, training and team building. Timothy Heaney Mr. Timothy Heaney was appointed VP Marketing of DSI Datotech Systems Inc. effective February 19, 2001. From 1994 through 2001, he was the Director of Marketing for SR Telecom Inc., a manufacturer of microwave telecommunications systems. Mr. Heaney is a professional engineer with over 17 years experience in international business development, sales and marketing, product management and contracts and project execution. Mr. Heaney received his Bachelor of Engineering from Concordia University, Montreal, in 1983. Family Relationship Between any Director and Executive Officer Mr. Edward Pardiak, Director and Chairman of the Board, and Mr. Allan Gibbins, Director, are brothers-in-law. B. Compensation The following table sets forth the compensation paid to DSI's directors and members of its supervisory bodies for the last three fiscal years: 22
- ------------------------------------------------------------------------------------------------------------------------------------ Annual Compensation Long Term Compensation - ------------------------------------------------------------------------------------------------------------------------------------ Awards Payouts - ------------------------------------------------------------------------------------------------------------------------------------ Securities Restricted Other Under Options/ Shares or Annual SARs(1) Restricted LTIP(2) All Other Name and Principal Year Salary Bonus Compensation Granted Share Units Payouts Compensation Position ($) ($) ($) (#) ($) ($) ($) - ------------------------------------------------------------------------------------------------------------------------------------ Edward C. Pardiak, 1998 $120,000 $40,000 $4,379.60 70,000 Nil Nil $2,000 Chairman, President and Chief Executive Officer 1999 $120,000 Nil $3,600 50,000 Nil Nil $2,900 2000 $120,000 Nil $3,600 95,000 Nil Nil $2,900 - ------------------------------------------------------------------------------------------------------------------------------------ Elli Segev, 1998 $120,000 $40,000 $4,315.25 50,000 Nil Nil $1,500 Former President, Former Chief Executive Officer (Up to October 6, 2000) 1999 $120,000 Nil $3,600 50,000 Nil Nil $2,900 2000 $110,000 Nil $3,300 95,000 Nil Nil $2,900 - ------------------------------------------------------------------------------------------------------------------------------------
(1) "SAR" or "stock appreciation right" means a right granted by DSI, as compensation for services rendered, to receive a payment of cash or an issue or transfer of securities based wholly or in part on changes in the trading price of publicly traded securities of DSI. (2) "LTIP" or "long term incentive plan" means any plan that provides compensation intended to serve as incentive for performance to occur over a period longer than one financial year, but does not include option or stock appreciation right plans or plans for compensation through restricted shares or restricted share units. Employment Contracts DSI has entered into an agreement with Edward C. Pardiak Holding Limited (the "Pardiak Agreement"), which is controlled by Mr. Edward C. Pardiak, Chief Executive Officer and Chairman of the Board, effective November 1, 2000. The Pardiak Agreement provides for an initial term of two years and with successive renewal terms of one year. Renewal is at the discretion of DSI. Pursuant to the Pardiak Agreement, Mr. Pardiak is to be paid a fee of $12,500 per month together with a car allowance in the amount of $1,000 per month. DSI may terminate the Pardiak Agreement for cause. If the Pardiak Agreement is terminated by DSI for any reason other than cause, then DSI shall pay Mr. Pardiak a lump sum payment in an amount equal to the compensation per the agreement in full of not less than one year's compensation. 23 Additional compensation to be awarded to Mr. Pardiak under the Pardiak Agreement is 1,300,000 common shares that are held by an escrow agent as performance shares pursuant to the terms and provisions of an escrow agreement. DSI has entered into an escrow agreement by and among the Pacific Corporate Trust Company (the "Trustee"), DSI and Pardiak Management International Limited dated as of November 17, 1997. The Trustee holds 1,300,000 shares in escrow until directed to be released by the Canadian Venture Exchange. Under the escrow agreement, the shares will be released when DSI achieves earnings before taxes and depreciation of $250,000. DSI has entered into an agreement with Lemtra Management Inc. (the "Lemtra Agreement"), which is controlled by Mr. Robert M. Egery, President and Chief Operating Officer and Director of DSI effective December 1, 2000. The Lemtra Agreement provides for an initial term of two years and with successive renewal terms of one year. Renewal is at the discretion of DSI. Pursuant to the Lemtra Agreement, Mr. Egery is to be paid a fee of $12,500 per month together with a car allowance in the amount of $700 per month. DSI may terminate the Lemtra Agreement for cause. If the Lemtra Agreement is terminated by DSI for any reason other than cause, then DSI shall pay Mr. Egery a lump sum payment in an amount equal to the compensation per the agreement in full of not less than one year's compensation. DSI has entered into a Financial Consulting Agreement by and between DSI and Wayne Alan Taylor who is an Advisory Board member. Pursuant to the Financial Consulting Agreement, DSI has paid Mr. Taylor $38,000 through October 31, 2000. Board Committees Members of the Advisory Board are elected by the Directors of DSI. The advisors have in-depth knowledge of innovative technologies and financial experience that augments DSI's management capabilities and technology leadership in gesture recognition technology. The following table sets out the names of the Advisory Board members, their principal occupations and the period of time that they have been Advisory Board Directors of DSI. The Advisory Board has no formal authority. All of the Advisory Board members are residents of Canada.
- ---------------------------------------------------------------------------------------------- Name Principal Occupation Period as Advisory Board Member - ---------------------------------------------------------------------------------------------- Kenneth P. Barr President and CEO, Combined Telecom Since December 13, 1999 Inc. - ---------------------------------------------------------------------------------------------- Wayne A. Taylor President, FGH Insurance Agencies Ltd. Since December 13, 1999 - ----------------------------------------------------------------------------------------------
24 Dr. Calvert and Mr. Gibbins are members of DSI's Audit Committee and DSI's Compensation Committee. D. Employees As at February 28, 2001, DSI had 19 full-time employees and 1 part-time employee, including Mr. Edward C. Pardiak, the Chairman, Chief Financial Officer and Chief Executive Officer, Mr. Robert Egery, President and Chief Operating Officer, Mr. Timothy Heaney, Vice President of Marketing, 11 engineers, scientists and technicians and 6 administrative, marketing and support staff. E. Share Ownership The following table sets forth certain information concerning the beneficial ownership of DSI's Common Shares or options to purchase common shares as at February 28, 2001 for each officer and director of DSI at that date:
- ----------------------------------------------------------------------------------------------- Name of Beneficial Shareholder Number of Common Shares (1) Percentage of Common Shares - ----------------------------------------------------------------------------------------------- Edward C. Pardiak 2,196,184(2) 9.8% - ----------------------------------------------------------------------------------------------- Robert M. Egery 175,000 (3) -- - ----------------------------------------------------------------------------------------------- Allan S. Gibbins 252,100 (4) 1.2% - ----------------------------------------------------------------------------------------------- Thomas Calvert 164,000 (5) -- - ----------------------------------------------------------------------------------------------- Timothy Heaney 31,250 (6) -- - -----------------------------------------------------------------------------------------------
1) As at February 28, 2001, the number of common shares outstanding was 21,652,334. 2) Includes 1,536,842 shares owned by Pardiak Management International Limited, a corporation controlled by Edward Pardiak, including 1,300,000 being held in escrow, and warrants to purchase 236,842 common shares at an exercise price of $0.66 per share. Also includes options issued to Mr. Pardiak to purchase (i) 230,000 common shares at an exercise price of $0.75 per share, (ii) 70,000 common shares at an exercise price of $0.80 per share, (iii) 50,000 common shares at an exercise price of $0.40 per share, (iv) 33,750 common shares at an exercise price of $1.12 per share, (v) 25,000 common shares at an exercise price of $0.80 per share and (vi) 13,750 common shares at an exercise price of $0.50 per share. Does not include unvested options issued to Mr. Pardiak to purchase (i) 11,250 common shares at an exercise price of $1.12 per share, (ii) 25,000 common shares at an exercise price of $0.80 per share and (iii) 31,250 common shares at an exercise price of $0.50 per share. 3) Includes options to purchase 175,000 common shares at an exercise price of $0.50 per share. Does not include unvested options to purchase 125,000 common shares at an exercise price of $0.50 per share. 25 4) Includes options to purchase (i) 100,000 common shares at an exercise price of $0.40 per share, (ii) 50,000 common shares at an exercise price of $0.40 per share, (iii) 9,000 common shares at an exercise price of $1.12 per share, (iv) 12,500 common shares at an exercise price of $1.00 per share and (v) 25,000 common shares at an exercise price of $0.50 per share. Does not include unvested options to purchase (i) 3,000 common shares at an exercise price of $1.12 per share, (ii) 12,500 common shares at an exercise price of $1.00 per share and (iii) 25,000 common shares at an exercise price of $0.50 per share. 5) Includes options to purchase (i) 100,000 common shares at an exercise price of $0.80 per share, (ii) 12,500 common shares at an exercise price of $0.40 per share, (iii) 9,000 common shares at an exercise price of $1.12 per share, (iv) 12,500 common shares at an exercise price of $1.00 per share and (v) 25,000 common shares at an exercise price of $0.50 per share. Does not include unvested options to purchase (i) 3,000 common shares at an exercise price of $1.12 per share, (ii) 12,500 common shares at an exercise price of $1.12 per share and (iii) 25,000 common shares at an exercise price of $0.50 per share. 6) Includes options to purchase 31,500 common shares at an exercise price of $0.50 per share. Does not include unvested options to purchase 93,250 common shares at an exercise price of $0.50. The Directors and Officers of DSI, as a whole, are the beneficial owners of 2,818,534 shares, including options to purchase 1,221,091 common share, representing 12.3% of the issued and outstanding capital of DSI as at February 28, 2001, assuming exercise of their vested options. The following table lists the stock options granted to the Directors and Employees of DSI during the fiscal year ended October 31, 2000.
Name of Optionee Number of Percentage of Exercise Market Value Expiration Securities Total Options Or Base of Securities Date Under Granted to Price Underlying (yy/mm/dd) Options Employees in ($/Security) Options on the Granted Fiscal 2000 Date of Grant ($/Security) -------------------------------------------------------------------------------------------------------------- Wayne Taylor 30,000 3.07% $0.40 $0.43 11/18/02 -------------------------------------------------------------------------------------------------------------- Kenneth P. Barr 30,000 3.07% $0.40 $0.43 11/18/02 -------------------------------------------------------------------------------------------------------------- Evan Graham 64,000 6.55% $0.40 $0.43 11/18/04 -------------------------------------------------------------------------------------------------------------- Betsy Shimokura 45,000 4.61% $0.40 $0.43 11/18/04 -------------------------------------------------------------------------------------------------------------- David Fernandes 24,000 2.46% $0.40 $0.43 11/18/04 -------------------------------------------------------------------------------------------------------------- Paul Rada 22,000 2.25% $0.40 $0.43 11/18/04 -------------------------------------------------------------------------------------------------------------- Shyan Ku 22,000 2.25% $0.40 $0.43 11/18/04 -------------------------------------------------------------------------------------------------------------- Robert Wiebe 12,000 1.23% $0.40 $0.43 11/18/04 -------------------------------------------------------------------------------------------------------------- Shyan Ku 30,000 3.07% $1.12 $1.40 04/12/05 -------------------------------------------------------------------------------------------------------------- Paul Rada 30,000 3.07% $1.12 $1.40 04/12/05 --------------------------------------------------------------------------------------------------------------
26
-------------------------------------------------------------------------------------------------------------- Robert Wiebe 10,000 1.02% $1.12 $1.40 04/12/05 -------------------------------------------------------------------------------------------------------------- Evan Graham 37,000 3.79% $1.12 $1.40 04/12/05 -------------------------------------------------------------------------------------------------------------- Betsy Shimokura 27,000 2.76% $1.12 $1.40 04/12/05 -------------------------------------------------------------------------------------------------------------- Elli Segev 45,000 4.61% $1.12 $1.40 04/12/05 -------------------------------------------------------------------------------------------------------------- Edward C. Pardiak 45,000 4.61% $1.12 $1.40 04/12/05 -------------------------------------------------------------------------------------------------------------- Tom Calvert 12,000 1.23% $1.12 $1.40 04/12/05 -------------------------------------------------------------------------------------------------------------- Allan S. Gibbins 12,000 1.23% $1.12 $1.40 04/12/05 -------------------------------------------------------------------------------------------------------------- Alison J. Taylor 20,000 2.05% $1.12 $1.40 04/12/05 -------------------------------------------------------------------------------------------------------------- Wayne Taylor 150,000 15.35% $1.00 $1.00 06/02/03 -------------------------------------------------------------------------------------------------------------- Kenneth P. Barr 70,000 7.16% $1.00 $1.00 06/02/03 -------------------------------------------------------------------------------------------------------------- Tom Calvert 25,000 2.56% $1.00 $1.00 06/02/03 -------------------------------------------------------------------------------------------------------------- Allan S. Gibbins 25,000 2.56% $1.00 $1.00 06/02/03 -------------------------------------------------------------------------------------------------------------- Debbie Bortolussi 30,000 3.07% $0.80 $1.00 06/02/03 -------------------------------------------------------------------------------------------------------------- Elli Segev 50,000 5.12% $0.80 $1.00 06/02/05 -------------------------------------------------------------------------------------------------------------- Edward C. Pardiak 50,000 5.12% $0.80 $1.00 06/02/05 -------------------------------------------------------------------------------------------------------------- Betsy Shimokura 20,000 2.05% $0.80 $1.00 06/02/03 -------------------------------------------------------------------------------------------------------------- Martin Livesey 20,000 2.05% $1.12 $1.20 06/28/05 -------------------------------------------------------------------------------------------------------------- Jeffrey Sketchley 20,000 2.05% $1.12 $0.92 09/25/05 -------------------------------------------------------------------------------------------------------------- TOTAL 977,000 100.00% --------------------------------------------------------------------------------------------------------------
Item 7. Major Shareholders and Related Party Transactions A. Major Shareholders The following table sets forth certain information regarding the beneficial ownership of the Common Shares of DSI, as of February 28, 2001, by each person, who is known by DSI to own beneficially more than five percent of the outstanding Common Shares.
--------------------------------------------------------------------------------------------- Name of Beneficial Shareholder Number of Common Shares(1) Percentage of Common Shares --------------------------------------------------------------------------------------------- Edward C. Pardiak 2,196,184(2) 9.8% --------------------------------------------------------------------------------------------- Elli Segev 1,300,000 6.0% ---------------------------------------------------------------------------------------------
1) As at February 28, 2001, the number of common shares outstanding was 21,652,334. 2) Includes 1,536,842 shares owned by Pardiak Management International Limited, a corporation controlled by Edward Pardiak, including 1,300,000 being held in escrow, and warrants to purchase 236,842 common shares at an exercise price of $0.66 per 27 share. Also includes options issued to Mr. Pardiak to purchase (i) 230,000 common shares at an exercise price of $0.75 per share, (ii) 70,000 common shares at an exercise price of $0.80 per share, (iii) 50,000 common shares at an exercise price of $0.40 per share, (iv) 33,750 common shares at an exercise price of $1.12 per share, (v) 25,000 common shares at an exercise price of $0.80 per share and (vi) 13,750 common shares at an exercise price of $0.50 per share. Does not include unvested options issued to Mr. Pardiak to purchase (i) 11,250 common shares at an exercise price of $1.12 per share, (ii) 25,000 common shares at an exercise price of $0.80 per share and (iii) 31,250 common shares at an exercise price of $0.50 per share. 3) 1,300,000 shares are held by an escrow agent for Elli Segev Holdings Limited, a corporation controlled by Elli Segev. B. Related Party Transactions DSI has entered into an agreement with Edward C. Pardiak Holding Limited (the "Pardiak Agreement"), which is controlled by Mr. Edward C. Pardiak, Chief Executive Officer and Chairman of the Board, effective November 1, 2000. The Pardiak Agreement provides for an initial term of two years and with successive renewal terms of one year. Renewal is at the discretion of DSI. Pursuant to the Pardiak Agreement, Mr. Pardiak is to be paid a fee of $12,500 per month together with a car allowance in the amount of $1,000 per month. DSI may terminate the Pardiak Agreement for cause. If the Pardiak Agreement is terminated by DSI for any reason other than cause, then DSI shall pay Mr. Pardiak a lump sum payment in an amount equal to the compensation per the agreement in full of not less than one year's compensation. The share of compensation to be awarded to Mr. Pardiak under the Pardiak Agreement is 1,300,000 common shares that are to be held by an escrow agent as performance shares pursuant to the terms and provisions of an escrow agreement. DSI has entered into an escrow agreement by and among the Pacific Corporate Trust Company (the "Trustee"), DSI and Pardiak Management International Limited dated as of November 17, 1997 whereby the Trustee is holding 1,300,000 shares in escrow until directed to be released by the Vancouver Stock Exchange. So long as the shares are held in escrow, Pardiak Management International Limited may exercise all voting rights attached to the shares but waived the right to receive dividends or any distributions in the event of a winding up or dissolution of DSI. One escrow share will be released for each $0.25 in operating revenue each year. C. Interest of Experts and Counsel None Item 8. Financial Information A. Consolidated Statements and Other Financial Information 28 Refer to Item 17 B. Significant Changes None Item 9. Listing Markets DSI's shares are listed and posted for trading on the CDNX (symbol DSI). The 12-month high-low stock range has been between $0.40 and $2.25 Canadian. The following table sets forth the reported low and high bid prices for the Common Shares of DSI as quoted on the CDNX on a quarterly basis for the fiscal years 1999 and 2000, and on monthly basis from November 1, 2000 to February 28, 2001. All figures are in Canadian Dollars. Quarter High Low ------- ---- --- 11/01/98 to 01/31/99 $0.57 $0.27 02/01/99 to 04/30/99 $0.60 $0.28 05/01/99 to 07/31/99 $0.43 $0.25 08/01/99 to 10/31/99 $0.40 $0.22 11/01/99 to 01/31/00 $1.30 $0.20 02/01/00 to 04/30/00 $2.65 $0.80 05/01/00 to 07/31/00 $1.75 $1.00 08/01/00 to 10/31/00 $1.20 $0.62 Month High Low ------ ---- --- 11/01/00 to 11/30/00 $0.70 $0.50 12/01/00 to 12/31/00 $0.67 $0.40 01/01/01 to 01/31/01 $0.92 $0.40 02/01/01 to 02/28/01 $0.80 $0.50 At February 28, 2001, DSI had 21,652,334 common shares issued and outstanding and estimated 1,564 record owners. Item 10. Additional Information 29 A. Share Capital (a) The authorized share capital consists of 100,000,000 common shares without par value. Issued:
2000 1999 - --------------------------------------------------------------------------------------------------------------- No. of No. of Shares Amount Shares Amount - --------------------------------------------------------------------------------------------------------------- Balance, beginning of year 15,057,940 $ 5,834,305 13,953,940 $ 5,569,546 - --------------------------------------------------------------------------------------------------------------- Issued during the year For cash - private placements, net 3,775,994 3,217,792 1,104,000 264,759 of share issue costs - exercise of options 437,250 220,200 -- -- - exercise of warrants 1,895,786 1,535,313 -- -- - --------------------------------------------------------------------------------------------------------------- 6,109,030 4,973,305 1,104,000 264,759 - --------------------------------------------------------------------------------------------------------------- 21,166,970 10,807,610 15,057,940 5,834,305 Less: Company shares held, net (57,600) (46,833) (57,600) (46,833) of shares resold - --------------------------------------------------------------------------------------------------------------- Balance, end of year 21,109,370 $ 10,760,777 15,000,340 $ 5,787,472 ===============================================================================================================
B. Memorandum and Articles of Association DSI's Certificate of Incorporation was ordinarily filed with the Ministry of Finance and Corporate Relations, Registrar of Companies in the Province of British Columbia, Canada on May 7, 1987 under the name Rhino Resources Inc. with the entry number 326273. DSI changed its name by filing of a Certificate of Change of Name to DSI Datotech Systems Inc. on April 19, 1996. DSI was incorporated to conduct all lawful business pursuant to the laws of British Columbia and DSI's Certificate of Incorporation and Articles do not describe a business object or purpose. Pursuant to Part 11 of DSI's Articles (the "Articles") a director will disclose his interest in and not vote in respect of any proposed contract or transaction with DSI in which he is in any way directly or indirectly interested, but such director will be counted in the quorum at the meeting of the directors at which the proposed contract or transaction is approved. Pursuant to Part 13 of the Articles, DSI has established a Compensation Committee whose members consist of Dr. Thomas Calvert and Mr. Alan S. Gibbins. The Compensation Committee may meet and adjourn, as the members deem appropriate. Questions to be determined at a meeting shall be determined by a majority of votes. The Committee follows strict voting procedures. Each resolution has to be voted by a majority of the Directors. This is usually done by a unanimous vote. The Chairman has no additional power for voting. 30 Pursuant to Part 10 of the Articles, the directors may borrow money in such amounts and upon such security and on such terms and conditions as they deem fit, for and on behalf of DSI. The Articles may be amended by special resolution or at the shareholders annual general meeting and by filing thereafter with Registrar of Companies in the Province of British Columbia, that is, they must disclose how borrowing provisions may be varied. DSI has one class of shares, common shares, which gives the shareholders one vote for each common share held. C. Material Contracts DSI has entered into an option agreement with NetFace LLC dated as of June 28, 2000. Pursuant to the terms of the option agreement, NetFace has the right to evaluate the commercial value of DSI's intellectual property rights in technology, including the gesture recognition technology, for use in interfaces for personal computer games, console games and Internet television. NetFace paid DSI a fee for an option to enter into an exclusive license agreement with DSI for the purpose of utilizing DSI's intellectual property rights for such use. Upon exercise of such option, NetFace shall pay DSI additional consideration in cash and securities of NetFace. DSI has entered into an option agreement with Security Biometrics Inc. ("Biometrics") dated as of August 22, 2000. Pursuant to the terms of the option agreement, Biometrics shall evaluate the commercial value of DSI's intellectual property rights in technology, including the gesture recognition technology, for use in the interface and software for banking and financial transactions. Further Biometrics paid DSI a fee for an option to enter into an exclusive license agreement with DSI for the purpose of utilizing DSI's intellectual property rights for such use. Upon the exercise of such option, Biometrics shall pay DSI additional consideration in cash and securities of Biometrics. D. Exchange Controls There is no law or government decree of regulation in Canada that restricts the export or import of capital, or that affects the remittance of dividends, interest or other payments to a non-resident holder of Common Shares, other than withholding tax requirements. There is no limitation imposed by Canadian law or by the articles or other charter documents of DSI on the right of a non-resident to hold or vote Common Shares of DSI, other than as provided in the Investment Canada Act, as amended (the "Investment Act"). The Investment Act generally prohibits implementation of a reviewable investment by an individual, government or agency thereof, corporation, partnership, trust or joint venture 31 that is not a "Canadian" as defined in the Investment Act (a "non-Canadian"), unless, after review the Minister responsible for the Investment Act is satisfied that the investment is likely to be of net benefit to Canada. If an investment by a non-Canadian is not a reviewable investment, it nevertheless requires the filing of a short notice, which may be given at any time up to 30 days after the implementation of the investment. An investment in Common Shares of DSI by a non-Canadian that is a "WTO Investor" (an individual or other entity that is a national of, or has the right of permanent residence in, a member of the World Trade Organization, current members of which include the European Community, Germany, Japan, Mexico, the United Kingdom and the United States, or a WTO investor-controlled entity, as defined in the Investment Act) would be reviewable under the Investment Act if it were an investment to acquire direct control, through a purchase of assets or voting interests, of DSI and the value of the assets of DSI equaled or exceeded $192 million, the threshold established for 2000, as indicated on the financial statements of DSI for its fiscal year immediately preceding the implementation of the investment. In subsequent years, such threshold amount may be increased or decreased in accordance with the provisions of the Investment Act. An investment in Common Shares of DSI by a non-Canadian, other than a WTO Investor, would be reviewable under the Investment Act if it were an investment to acquire direct control of DSI and the value of the assets were $5.0 million or more, as indicated on the financial statements of DSI for its fiscal year immediately preceding the implementation of the investment. A non-Canadian, whether a WTO investor or otherwise, would acquire control of DSI for the purposes of the Investment Act if he, she or it acquired a majority of the Common Shares of DSI or acquired all or substantially all of the assets used in conjunction with DSI's business. The acquisition of less than a majority, but one-third or more of the Common Shares of DSI, would be presumed to be an acquisition of control of DSI unless it could be established that DSI was not controlled in fact by the acquirer through the ownership of the Common Shares. The Investment Act would not apply to certain transactions in relation to Common Shares of DSI, including: a. an acquisition of Common Shares of DSI by any person if the acquisition were made in the ordinary course of that person's business as a trader or dealer in securities; b. an acquisition of control of DSI in connection with the realization of security granted for a loan or other financial assistance and not for any purpose related to the provisions of the Investment Act; and c. an acquisition of control of DSI by reason of an amalgamation, merger, consolidation or corporate reorganization following which the ultimate direct or indirect control in fact of DSI, through the ownership of voting interests, remains unchanged. 32 E. Taxation The following is a summary of the material Canadian federal income tax considerations, as of the date hereof, generally applicable to security holders who deal at arm's length with DSI, who, for purposes of the Income Tax Act (Canada) (the "Canadian Tax Act") and any applicable tax treaty or convention, have not been and will not be resident or deemed to be resident in Canada at any time while they have held shares of DSI, to whom such shares are capital property, and to whom such shares are not "taxable Canadian property" (as defined in the Canadian Tax Act). This summary does not apply to a non-resident insurer. Generally, shares of DSI will be considered to be capital property to a holder thereof provided that the holder does not use such shares in the course of carrying on a business and has not acquired them in one or more transactions considered to be an adventure in the nature of trade. All security holders should consult their own tax advisors as to whether, as a matter of fact, they hold shares of DSI as capital property for the purposes of the Canadian Tax Act. This discussion is based on the current provisions of the Canadian Tax Act and the regulations thereunder, the current provisions of the Canada-United States Income Tax Convention (the "Tax Treaty") and current published administrative practices of the Canada Customs and Revenue Agency. This discussion takes into account specific proposals to amend the Canadian Tax Act and the regulations thereunder publicly announced by or on behalf of the Minister of Finance (Canada) prior to the date hereof (the "Proposed Amendments") and assumes that all such Proposed Amendments will be enacted in their present form. No assurances can be given that the Proposed Amendments will be enacted in the form proposed, if at all; however the Canadian federal income tax considerations generally applicable to security holders described herein will not be different in a material adverse way if the Proposed Amendments are not enacted. Except for the foregoing, this discussion does not take into account or anticipate any changes in law, whether by legislative, administrative or judicial decision or action, nor does it take into account provincial, territorial or foreign income tax legislation or considerations, which may differ from the Canadian federal income tax considerations described herein. WHILE INTENDED TO ADDRESS ALL MATERIAL CANADIAN FEDERAL INCOME TAX CONSIDERATIONS, THIS SUMMARY IS OF A GENERAL NATURE ONLY. THEREFORE, SECURITY HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THEIR PARTICULAR CIRCUMSTANCES. Generally, shares of DSI will not be taxable Canadian property at a particular time provided that such shares are listed on a prescribed stock exchange (which exchanges currently include the Toronto Stock Exchange), the holder does not use or hold, and is not deemed to use or hold, the shares of DSI in connection with carrying on a business in Canada and the holder, persons with whom such holder does not deal at arm's length, or the holder and such persons, has not owned (or had under option) 25% or more of the issued shares of any class or series of the capital stock of DSI at any time within five years preceding the 33 particular time. A holder of shares of DSI that are not taxable Canadian property will not be subject to tax under the Canadian Tax Act on the sale or other disposition of shares. Dividends paid or deemed to be paid on the shares of DSI are subject to non-resident withholding tax under the Canadian Tax Act at the rate of 25%, although such rate may be reduced under the provisions of an applicable income tax treaty or convention. For example, under the Tax Treaty, the rate is reduced to 5% in respect of dividends paid to a company that is the beneficial owner thereof, that is resident in the United States for purposes of the Tax Treaty and that owns at least 10% of the voting stock of DSI. In all other cases, the rate is reduced to 15% in respect of dividends paid to the beneficial owner thereof that is resident in the United States for purposes of the Tax Treaty. F. Dividends and Paying Agents Not Applicable G. Statements by Experts Not Applicable H. Documents on Display Not Applicable I. Subsidiary Information DSI has one wholly owned subsidiary, Interaction Technology Ltd., which was incorporated on May 14, 1996 pursuant to the laws of Canada. Its business address is 300 - 905 West Pender Street, Vancouver, BC, Canada, V6C 1L6. Item 12. Description of Securities Other than Equity Securities A. Debt Securities Not Applicable B. Warrants and Rights Not Applicable C. Other Securities Not Applicable 34 D. American Depositary Receipts Not Applicable Common Shares DSI's authorized share capital consists of 100,000,000 Common Shares without par value and as at October 31, 2000, DSI had 21,109,370 Common Shares issued and outstanding. Holders of DSI's Common Shares: o Have equal ratable rights to dividends from funds legally available for payment of dividends when, as and if declared by the board of directors; o Are entitled to share ratably in all of the assets available for distribution to holders of Common Shares upon liquidation, dissolution or winding up of our affairs; and o Do not have preemptive, subscription or conversion rights, or redemption or access to any sinking fund. PART III Item 13. Defaults, Dividend Arrearages and Delinquencies None Item 14. Material Modifications to the Rights of Security Holders and the Use of Proceeds Not Applicable Item 15. Reserved Item 16. Reserved Item 17. Financial Statements Index to Financial Statements of DSI Datotech Systems Inc. 35 Page No. -------- Fiscal Years Ended October 31, 2000 and 1999 Auditors Report F-1 Balance Sheet F-2 Statement of Loss and Deficit F-3 Statement of Cash Flows F-4 Notes to Financial Statements F-5 Fiscal Years Ended October 31, 2000 and 1999 Auditors Report F-15 Balance Sheet F-16 Statement of Loss and Deficit F-17 Statement of Cash Flows F-18 Notes to Financial Statements F-19 Item 19. Exhibits 1.1 Certificate of Incorporation of Rhino Resources Inc. dated May 7, 1987 1.2 Certificate of Change of Name from Rhino Resources Inc. to DSI Datotech Systems Inc. dated April 19, 1996 1.3 Articles (Bylaws) of DSI Datotech Systems Inc. filed as of January 28, 1998 1.4 Certificate of Incorporation of 3259722 Canada Inc. dated May 14, 1996. 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 Interaction Technology Ltd. dated July 21, 2000. 4.1 Gross Lease between CT Management Corp. and DSI Datotech Systems Inc., dated as of July 25, 2000. 4.2 DSI Datotech Systems Inc. 1996 Stock Option Plan dated as of November 15, 1996. 4.3 Agreement between DSI Datotech Systems Inc. and Edward C. Pardiak Holdings Limited, dated as of August 1, 1997. 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. 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. 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. 8.1 List of Subsidiaries 36 SIGNATURES Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the Registrant certifies that it meets all of the requirements for filing on Form 20-F and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized. DSI Datotech Systems Inc. By: /s/ Edward C. Pardiak --------------------- Edward C. Pardiak Chief Executive Officer and Chief Financial Officer Date: April 12, 2001 20F41201.DOC 37 G. Ross McDonald* Chartered Accountant - -------------------------------------------------------------------------------- * Denotes incorporated professional Suite 1502, 543 Granville Street Vancouver, B.C. V6C 1X8 Tel: (604) 685-8646 Fax: (604) 684-6334 AUDITOR'S REPORT TO THE SHAREHOLDERS OF DSI DATOTECH SYSTEMS INC. I have audited the consolidated balance sheets of DSI Datotech Systems Inc. as at October 31, 2000 and 1999 and the consolidated statements of loss and deficit and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. My responsibility is to express an opinion on these financial statements based on my audits. I conducted my audit in accordance with generally accepted auditing standards in 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 consolidated financial statements present fairly, in all material respects, the financial position of the Company as at October 31, 2000 and 1999 and the results of its operations and the cash flows for the years then ended in accordance with generally accepted accounting principles in Canada. As required by the Company Act of British Columbia, I report that, in my opinion, these principles have been applied on a consistent basis. "G. Ross McDonald" (signed) G. Ross McDonald Chartered Accountant Vancouver, British Columbia December 13, 2000 F-1 DSI DATOTECH SYSTEMS INC. CONSOLIDATED BALANCE SHEETS October 31
- ----------------------------------------------------------------------------------------------- 2000 1999 - ----------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS Cash and short term deposits $ 4,079,315 $ 64,009 Accounts receivable and advances 25,389 2,140 Prepaid expense 30,196 2,660 - ----------------------------------------------------------------------------------------------- 4,134,900 68,809 INVESTMENT IN GESTURE RECOGNITION TECHNOLOGY (Notes 1(b)(i) and 2) 915,803 934,237 CAPITAL ASSETS (Note 1 (b)(ii) and 3) 212,564 64,820 - ----------------------------------------------------------------------------------------------- $ 5,263,267 $ 1,067,866 =============================================================================================== LIABILITIES CURRENT LIABILITIES Accounts payable and accrued liabilities $ 212,679 $ 235,365 - ----------------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY SHARE CAPITAL (Note 4) 10,760,777 5,787,472 DEFICIT (5,710,189) (4,954,971) - ----------------------------------------------------------------------------------------------- 5,050,588 832,501 - ----------------------------------------------------------------------------------------------- $ 5,263,267 $ 1,067,866 ===============================================================================================
CONTINGENT LIABILITIES AND COMMITMENTS (Note 7) APPROVED BY THE DIRECTORS "Edward C. Pardiak" - ------------------------------ Director - Edward C. Pardiak "Robert M. Egery" - ------------------------------ Director - Robert M. Egery F-2 DSI DATOTECH SYSTEMS INC. CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT For the Years Ended October 31
- ----------------------------------------------------------------------------------------------- 2000 1999 - ----------------------------------------------------------------------------------------------- REVENUE Option income $ 627,730 $ -- Investment income and recoveries 149,470 9,589 - ----------------------------------------------------------------------------------------------- 777,200 9,589 - ----------------------------------------------------------------------------------------------- EXPENSES RESEARCH AND DEVELOPMENT Salaries and benefits 377,691 279,813 Amortization 80,199 135,872 Prototype development 37,653 41,315 Reports 2,839 -- Consultants -- 7,897 - ----------------------------------------------------------------------------------------------- 498,382 464,897 - ----------------------------------------------------------------------------------------------- GENERAL AND ADMINISTRATIVE Management fees 350,000 48,200 Investor relations and promotion 117,010 97,290 Consulting fees 104,946 19,500 Legal, audit and accounting 80,319 47,049 Salaries and benefits 65,190 56,623 Travel and accommodation 59,969 21,543 Office and miscellaneous 44,096 26,288 Rent 38,904 34,975 Recruitment 32,813 - Printing and shareholders information 32,012 26,770 Telephone 30,458 18,773 Amortization 27,346 19,554 Insurance 19,573 19,446 Transfer agent 14,142 13,932 Equipment rental 9,628 15,960 Regulatory fees 7,630 4,240 - ----------------------------------------------------------------------------------------------- 1,034,036 670,143 - ----------------------------------------------------------------------------------------------- NET LOSS FOR THE YEAR 755,218 1,125,451 DEFICIT, BEGINNING OF YEAR 4,954,971 3,829,520 - ----------------------------------------------------------------------------------------------- DEFICIT, END OF YEAR $ 5,710,189 $ 4,954,971 =============================================================================================== LOSS PER SHARE $ 0.04 $ 0.08 ===============================================================================================
F-3 DSI DATOTECH SYSTEMS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended October 31
- ----------------------------------------------------------------------------------------------- 2000 1999 - ----------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net loss for the year $ (755,218) $ (1,125,451) Less item not requiring cash Amortization 107,545 155,426 - ----------------------------------------------------------------------------------------------- (647,673) (970,025) Net change in non-cash working capital items Accounts receivable and advances (23,249) 5,688 Loan receivable -- 25,000 Prepaid expense (27,536) 16,567 Accounts payable and accrued liabilities (22,686) 219,000 - ----------------------------------------------------------------------------------------------- Cash applied to operating activities (721,144) (703,770) - ----------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Investment in Gesture Recognition Technology (61,765) (37,353) Capital assets (175,090) (24,316) - ----------------------------------------------------------------------------------------------- Cash applied to investing activities (236,855) (61,669) - ----------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Shares issued for cash, net of share issue costs 4,973,305 264,759 - ----------------------------------------------------------------------------------------------- Cash from financing activities 4,973,305 264,759 - ----------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND SHORT TERM DEPOSITS 4,015,306 (500,680) CASH AND SHORT TERM DEPOSITS, BEGINNING OF YEAR 64,009 564,689 - ----------------------------------------------------------------------------------------------- CASH AND SHORT TERM DEPOSITS, END OF YEAR $ 4,079,315 $ 64,009 ===============================================================================================
F-4 DSI DATOTECH SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED OCTOBER 31, 2000 AND 1999 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES (a) Basis of Presentation These consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Interaction Technology Ltd., which is inactive as at October 31, 2000. (b) Amortization (i) Investment in Gesture Recognition Technology Costs related to the acquisition and development of the Gesture Recognition Technology are stated at cost less accumulated amortization. Amortization is recorded on a straight line basis over seventeen years. Additional amortization may be recorded for items deemed to be obsolete or no longer valid to the development of the technology. (ii) Capital Assets Capital assets are stated at cost less accumulated amortization. Amortization is provided on a declining balance basis on office furniture and equipment at 20% per annum and on computer equipment at 30% per annum. Leasehold improvements are amortized on a straight line basis over five years. (c) Foreign Currency Translation Amounts stated in foreign currency are translated into Canadian dollars as follows: Current assets and liabilities at the rates of exchange prevailing at balance sheet date. Non-monetary assets and liabilities at the rates of exchange in effect on the dates of the transactions; and revenue and expenses at average rates of exchange for the period. (d) Loss per share Loss per share is calculated using the weighted average number of shares outstanding during the year. Fully diluted loss per share has not been calculated since the exercise of outstanding options and warrants would have the effect of reducing loss per share. (e) Financial Instruments The carrying value of current assets and current liabilities at October 31, 2000 approximates their fair values due to the relatively short periods to maturity of these instruments. (f) Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant areas requiring the use of management estimates relate to the determination of environmental obligations, impairment of assets and rate for amortization. Actual results could differ from those estimates. F-5 DSI DATOTECH SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED OCTOBER 31, 2000 AND 1999 - -------------------------------------------------------------------------------- 1. significant accounting policies (continued) (g) Stock-based compensation plans The Company has a fixed stock option plan. No compensation expense is recognized when stock or stock options are issued to directors and employees. Any consideration paid by directors and employees on exercise of stock options or purchase of shares is credited to share capital. (h) Research and development Research and development costs are recorded as an expense of the period in which they are incurred. Certain development costs may be deferred where the product is technically or commercially feasible. The recoverability of these deferred costs is dependent upon the Company's ability to obtain necessary financing to complete development and to successfully commercialize the use of the product. (i) Comparative amounts Certain amounts in the prior year have been restated to confirm with the current year's presentation. 2. INVESTMENT IN GESTURE RECOGNITION TECHNOLOGY (a) Pursuant to four agreements entered into in November 1990, March 1991, May 1995 and August 1996, the Company acquired a patented invention known as the Gesture Recognition Technology, a new gesture based input technology for computerized communications, in consideration of acquisition costs in the aggregate of $246,830 (paid), 1,000,000 common shares to be issued based on cumulative cash flows generated from operations of the Company and a 5.5% royalty on revenues received from the commercialization of the technology and from the sale of products incorporating the technology. A minimum semi-annual advance royalty of $30,000 was payable commencing on May 1, 1996. These agreements, and all commitments made under the terms of these agreements, were cancelled pursuant to a new agreement entered into on November 4, 1999. On November 4, 1999, the Company entered into an agreement which superceded the afore-mentioned agreements. The Company granted a licence to the original inventor of the technology to commercialize the technology based on certain patents held by the Company. In consideration, the Company will receive a royalty of 3% of gross sales from sales realized by the licencee of products made using the technology. The Company will pay a royalty of 0.5% of gross sales realized by the Company and any of its other licencees from the sales of products made using the licensed intellectual property to the licencee. In satisfaction of all amounts owed to the licencee under the previous agreements, the Company paid a total of $35,000 over a ten month period commencing on the execution of this agreement. (b) Pursuant to an agreement dated June 28, 2000, the Company granted an option to a company to acquire the exclusive rights to exploit the technology and proprietary property related to the technology for the video gaming and internet/interactive television market segments. In consideration for the option, the optionee will pay the Company U.S. $200,000, of which U.S. $100,000 has been received. The balance is due upon delivery by the Company of a reasonably acceptable prototype to the optionee. F-6 DSI DATOTECH SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED OCTOBER 31, 2000 AND 1999 - -------------------------------------------------------------------------------- 2. INVESTMENT IN GESTURE RECOGNITION TECHNOLOGY (continued) Should the option be exercised, the Company will enter into a licence agreement with the optionee. In consideration of the licence, the Company will receive U.S. $5,000,000, less the afore-mentioned option fees of U.S. $200,000, and a 20% Class B membership interest in the optionee. The option period commences upon the date of the agreement and terminates eighteen months from the date a prototype reasonably acceptable to the optionee is made available by the Company to the optionee. (c) Pursuant to an agreement dated August 22, 2000, the Company granted an option to a company to acquire the exclusive licensing rights for the exploitation of the Company's developed technology relating to interfaces and software for executing banking and financial transactions in consideration of US $320,000 (received). An additional US $3,000,000 is due within eleven months of the signing of this agreement. The funds will be used exclusively toward the development of a prototype reasonably acceptable to the optionee which prototype is to be made available to the optionee within twelve months of receiving the US $3,000,000. The optionee, upon receipt of the acceptable prototype, has three months in which to exercise the option, upon which a licensing agreement will be signed in consideration of US $8,000,000, less the above amount of US $3,320,000, and a perpetual non-dilutive 20% common share interest in the optionee company or its assignee. Acquisition and development costs to date:
2000 1999 ---------------------------------------------------------------------------- Acquisition costs $ 246,830 $ 246,830 ---------------------------------------------------------------------------- Development costs Balance, beginning of year 1,241,153 1,203,800 ---------------------------------------------------------------------------- Additions Royalties 35,000 30,000 Patent costs and fees 26,765 7,249 Materials -- 104 ---------------------------------------------------------------------------- 61,765 37,353 ---------------------------------------------------------------------------- Balance, end of year 1,302,918 1,241,153 ---------------------------------------------------------------------------- 1,549,748 1,487,983 Less: accumulated amortization (633,945) (553,746) ---------------------------------------------------------------------------- $ 915,803 $ 934,237 ============================================================================
F-7 DSI DATOTECH SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED OCTOBER 31, 2000 AND 1999 - -------------------------------------------------------------------------------- 3. CAPITAL ASSETS
2000 1999 --------------------------------------------------------------------------------------------- Accumulated Net Book Net Book Cost Amortization Value Value --------------------------------------------------------------------------------------------- Furniture and equipment $ 68,779 $ 27,004 $ 41,775 $ 21,013 Computer equipment 132,879 61,256 71,623 43,807 Leasehold improvements 99,166 -- 99,166 -- --------------------------------------------------------------------------------------------- $ 300,824 $ 88,260 $ 212,564 $ 64,820 =============================================================================================
No amortization has been recorded on leasehold improvements during the year ended October 31, 2000 as all costs pertain to the Company's new office premises to which the Company relocated on October 23, 2000. Amortization will be recorded commencing in the next fiscal period. 4. SHARE CAPITAL (a) The authorized share capital consists of 100,000,000 common shares without par value. Issued:
2000 1999 ------------------------------------------------------------------------------------------------------ No. of No. of Shares Amount Shares Amount ------------------------------------------------------------------------------------------------------ Balance, beginning of year 15,057,940 $ 5,834,305 13,953,940 $ 5,569,546 ------------------------------------------------------------------------------------------------------ Issued during the year For cash - private placements, net of share issue costs 3,775,994 3,217,792 1,104,000 264,759 - exercise of options 437,250 220,200 -- -- - exercise of warrants 1,895,786 1,535,313 -- -- ------------------------------------------------------------------------------------------------------- 6,109,030 4,973,305 1,104,000 264,759 ------------------------------------------------------------------------------------------------------- 21,166,970 10,807,610 15,057,940 5,834,305 Less: Company shares held, net of shares resold (57,600) (46,833) (57,600) (46,833) ------------------------------------------------------------------------------------------------------ Balance, end of year 21,109,370 $ 10,760,777 15,000,340 $ 5,787,472 ======================================================================================================
F-8 DSI DATOTECH SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED OCTOBER 31, 2000 AND 1999 - -------------------------------------------------------------------------------- 4. SHARE CAPITAL (continued) During the year ended October 31, 2000, the Company completed private placements as follows: (i) for 2,456,140 units at $0.57 per unit for gross proceeds of $1,400,000 less finders fees of 50,000 common shares and $56,759 paid in cash and other share issue costs of $8,399. Each unit consisted of one common share and one warrant to acquire one additional common share at $0.57 per share to January 26, 2001 and at $0.66 per share to January 26, 2002. (ii)for 912,000 units at $1.75 per unit for gross proceeds of $1,596,000 less commissions of $159,600, fees of $93,687 and other share issue costs of $44,508. Each unit consisted of one common share and one-half warrant, each full warrant exercisable to acquire one additional common share at $2.16 per share to April 10, 2002. The agent also received compensation warrants which may be exercised to acquire 91,200 units at $1.75 per unit to October 10, 2001, each unit consists of one common share and one-half warrant, each full warrant exercisable to acquire one additional common share at $2.16 per share to April 10, 2002. (iii)for 357,854 units at $1.75 per unit for gross proceeds of $626,245 less commissions of $25,000, fees of $15,000 and other share issue costs of $1,499. Each unit consisted of one common share and one-half warrant, each full warrant exercisable to acquire one additional common share at $2.16 to April 20, 2002. The agent also received compensation warrants which may be exercised to acquire 35,785 units at $1.75 per unit to October 20, 2001, each unit consists of one common share and one-half warrant, each full warrant exercisable to acquire one additional common share at $2.16 per share to April 20, 2002. (b) A total of 3,068,750 common shares issued at $0.01 per share are subject to escrow restrictions, release of the shares is subject to the approval of regulatory authorities. (c) The Company has granted options to directors, officers and employees to purchase common shares at exercise prices determined by reference to the market value on the date of the grant. Under the Company's stock option plan, options may be granted for up to 4,150,000 common shares. F-9 DSI DATOTECH SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED OCTOBER 31, 2000 AND 1999 - -------------------------------------------------------------------------------- 4. SHARE CAPITAL (continued) The following summarizes information about stock options granted and outstanding at October 31, 2000 and 1999, and changes during the years then ended:
Year Ended Year Ended October 31, 2000 October 31, 1999 - --------------------------------------------------------------------------------------------------------- Weighted Weighted Average Average No. of Exercise No. of Exercise Options Price Options Price - --------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 1,710,000 $ 0.65 1,400,000 $ 0.72 Granted 1,557,000 0.94 360,000 0.40 Exercised 437,250 0.50 -- -- Cancelled/expired 421,250 1.29 50,000 0.80 - --------------------------------------------------------------------------------------------------------- Outstanding at end of year 2,408,500 $ 0.75 1,710,000 $ 0.65 ========================================================================================================= Options exercisable at end of year 1,654,000 $ 0.75 1,710,000 $ 0.65 =========================================================================================================
The options expire on various dates commencing on September 1, 2001 to September 25, 2005. (d) As at October 31, 2000, outstanding warrants to purchase 3,667,045 common shares are exercisable as follows: No. of Exercise Expiry Shares Price Date --------- -------- ---------------- 360,000 $0.29 July 19, 2001 2,317,640 0.57 January 26, 2001 or 0.66 January 26, 2002 91,200 * 1.75 October 10, 2001 35,785 * 1.75 October 20, 2001 456,000 2.16 April 10, 2002 185,637 2.16 April 20, 2002 --------- 3,446,262 ========= * agent's compensation warrants exercisable for units consisting of common shares and share purchase warrants (see notes 4(a)(i) and (ii)). 5. DIRECTORS' REMUNERATION AND RELATED PARTY TRANSACTIONS A total of $350,000 (1999 - $248,200) was paid or accrued to two companies controlled by directors during the year for management and consulting services. F-10 DSI DATOTECH SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED OCTOBER 31, 2000 AND 1999 - -------------------------------------------------------------------------------- 6. INCOME TAXES The company has accumulated non-capital losses for tax purposes, the potential benefits of which are not recorded in the financial statements. The losses may be carried forward to reduce taxable income in future years and, unless utilized, will expire as follows: 2001 $ 162,600 2002 227,100 2003 732,200 2004 881,800 2005 865,300 2006 966,600 2007 725,900 ------------------------------------------------------- $ 4,561,500 ======================================================= 7. CONTINGENT LIABILITIES AND COMMITMENTS (a) During 1998, a petition was made against the Company with respect to certain allegations of non-compliance with the Company Act by a former employee. No damages have been sought. The Company is of the opinion that the petition is without merit. The Company commenced a suit against the above-mentioned former employee and certain other persons, including some former directors of the Company. The Company is seeking damages for misappropriation, injurious falsehoods and other wrongs. There has been no further action on either the petition or the suit as at October 31, 2000. The company is of the opinion that the petition is without merit and, subsequent to the period end, has instructed its legal counsel to file a dismissal of action. (b) During 1997, a claim was made against the Company in the amount of $130,727 by the purchasers of a mineral property sold in a prior year, for the return of the purchase price plus additional costs. The Company is of the opinion that the claim is without merit and has filed a Statement of Defence in response to this action. No further action has been taken on the claim as at October 31, 2000. (c) The Company entered into two separate agreements with two companies controlled by two directors for management services in consideration of $10,000 per month each plus certain health benefits. The agreements are for a two year term ending July 31, 1999 and are renewable, upon expiry, for future one year terms at rates of consideration which may be renegotiated. Should the agreements not be renewed, sixty days notice must be given by the Company and one year's compensation paid on the date of termination. The agreements were renewed for a one year term on August 1, 1999 with no change in consideration. Subsequent to the year end, new agreements were completed effective November 1, 2000 and December 1, 2000 respectively with two directors for management services in consideration of $12,500 per month each plus performance bonuses and benefits. The agreements are for two year terms and if terminated by the Company during the term, one year's compensation will be payable in a lump sum. Renewal and signing bonuses in the aggregate of $150,000 are payable pursuant to the terms of these agreements. An aggregate 1,300,000 performance shares will also be issued to the two directors, subject to regulatory approval. 7. CONTINGENT LIABILITIES AND COMMITMENTS (continued) F-11 DSI DATOTECH SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED OCTOBER 31, 2000 AND 1999 - -------------------------------------------------------------------------------- (d) The Company conducts certain activities related to marketing, financial development and human resources through companies or individuals contracted on short term bases in consideration of monthly fees, finders fees or commissions for the arrangement of financing for the Company, and stock options to acquire common shares of the Company. The terms of the contracts are generally for one year periods and expire during 2001. (e) The Company entered into an agreement for the rental of office premises for the period March 1, 2000 to January 31, 2001 at a cost of $37,000 per year. On July 25, 2000, the Company entered into an agreement for the rental of new office premises for a five year term commencing on December 1, 2000. Gross annual rents of approximately $109,000 are payable plus additional charges for expenses. (f) The Company has arranged for a line of credit of up to $600,000 with a financial institution to be secured by certain money market investments held by the Company at the institution. Interest is payable at the prime rate on Canadian dollar loans and overdrafts and at the U.S. base rate on U.S. dollar loans and overdrafts. 8. SUBSEQUENT EVENTS (a) The Company is preparing documentation for the application of the listing of the Company's shares on a United States securities exchange. (b) Options to acquire 144,250 common shares were exercised for proceeds of $57,700. (c) Options to acquire 360,000 common shares were granted. The options are exercisable at $0.60 per share to November 1, 2005 as to 10,000 shares and at $0.50 per share to November 14, 2005 as to 350,000 shares. The options to acquire the 350,000 shares are subject to regulatory approval. (d) Options to acquire 10,000 common shares at $0.40 per share and 10,000 common shares at $1.12 per share have been cancelled. 9. ADDITIONAL DISCLOSURE F-12 DSI DATOTECH SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED OCTOBER 31, 2000 AND 1999 - -------------------------------------------------------------------------------- In order to comply with generally accepted accounting principles in the United States of America, the following additional information is provided: (a) Income taxes The Company's provision for income taxes (recovery) is made up as follows:
Year Ended Year Ended October 31, October 31, 2000 1999 ------------------------------------------------------------------------------------- Loss before income taxes $ 755,218 $ 1,125,451 Combined basic Canadian federal and provincial income tax rate 46% 46% ------------------------------------------------------------------------------------- Provision for taxes (recovery) on basic rate 347,400 517,707 Increase (decrease) in taxes resulting from: Benefit of tax loss carried forward not recognized in accounts (347,400) (517,707) ------------------------------------------------------------------------------------- Actual tax provision (recovery) $ -- $ -- =====================================================================================
(b) Loss per share The calculation of loss per share in accordance with generally accepted accounting principles in the United States corresponds with that in Canada for the following reasons: - the inclusion of stock options as common stock equivalents is antidilutive for each period presented and therefore is not included in the calculation of loss per share. (c) Difference in accounting policy The company has capitalized certain acquisition and development costs related to the Investment in Gesture Recognition Technology. Generally accepted accounting principles in the United States of America require that these expenditures be charged to operations as incurred. 9. ADDITIONAL DISCLOSURE (continued) (d) Reconciliation F-13 DSI DATOTECH SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED OCTOBER 31, 2000 AND 1999 - -------------------------------------------------------------------------------- The effect on the financial statements of compliance with generally accepted accounting standards in the United States would be as follows: Income Statement
Year Ended Year Ended October 31, 2000 October 31, 1999 ----------------------------------------------------------------------------------------- Net loss as shown in the financial statements $ (755,218) $ (1,125,451) ----------------------------------------------------------------------------------------- Decrease in amortization of Investment in gesture recognition technology 80,199 135,871 ----------------------------------------------------------------------------------------- Increase in research and development And expense (61,765) (37,353) ----------------------------------------------------------------------------------------- Net loss according to generally accepted accounting principles in the United States $ (736,784) $ (1,026,933) ----------------------------------------------------------------------------------------- Loss per common share according to generally accepted accounting principles in the United States: Primary $ (0.04) $ (0.07) ========================================================================================
Balance Sheet Increase (decrease) in account to comply with generally accepted accounting standards in the United States: October 31, October 31, 2000 1999 ------------------------------------------------------------------------ Investment in Gesture Recognition Technology $(915,803) $ (934,237) ------------------------------------------------------------------------ Deficit $ 915,803 $ 934,237 ======================================================================== F-14 G. Ross McDonald* Chartered Accountant - ------------------------------------------------------------------------------- * Denotes incorporated professional Suite 1502, 543 Granville Street Vancouver, B.C. V6C 1X8 Tel: (604) 685-8646 Fax: (604) 684-6334 AUDITOR'S REPORT TO THE SHAREHOLDERS OF DSI DATOTECH SYSTEMS INC. I have audited the balance sheets of DSI Datotech Systems Inc. as at October 31, 1999 and 1998 and the statements of loss and deficit and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. My responsibility is to express an opinion on these financial statements based on my audits. I conducted my audit in accordance with Canadian generally accepted auditing standards. 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, 1999 and 1998 and the results of its operations and the cash flows for the years then ended in accordance with Canadian generally accepted accounting principles. As required by the Company Act of British Columbia, I report that, in my opinion, these principles have been applied on a consistent basis. G. Ross McDonald Chartered Accountant Vancouver, British Columbia February 9, 2000, except Note 10 which is at November 3, 2000 F-15 DSI DATOTECH SYSTEMS INC. BALANCE SHEETS October 31
1999 1998 ------------ ----------- ASSETS CURRENT ASSETS Cash and short term deposits $ 64,009 $ 564,689 Accounts receivable and advances 2,140 7,829 Loan receivable -- 25,000 Prepaid expense 2,660 19,227 ------------ ----------- 68,809 616,745 INVESTMENT IN GESTURE RECOGNITION TECHNOLOGY (Notes 1(a)(i) and 2) 934,237 1,032,755 CAPITAL ASSETS (Note 1 (a)(ii) and 3) 64,820 60,058 ------------ ----------- $ 1,067,866 $ 1,709,558 ============ =========== LIABILITIES CURRENT LIABILITIES Accounts payable and accrued liabilities $ 235,365 $ 16,365 ------------ ----------- SHAREHOLDERS' EQUITY SHARE CAPITAL (Note 4) 5,787,472 5,522,713 DEFICIT (4,954,971) (3,829,520) ------------ ----------- 832,501 1,693,193 ------------ ----------- $ 1,067,866 $ 1,709,558 ============ ===========
CONTINGENT LIABILITIES AND COMMITMENTS (Note 7) APPROVED BY THE DIRECTORS "Elli Segev" - -------------------------- Director - Elli Segev "Edward C. Pardiak" - -------------------------- Director - Edward C. Pardiak F-16 DSI DATOTECH SYSTEMS INC. STATEMENTS OF LOSS AND DEFICIT For the Years Ended October 31
1999 1998 ------------ ----------- EXPENSES Research and development $ 329,025 $ 98,441 Management fees 248,200 295,000 Amortization and depreciation 155,426 106,389 Investor relations and promotion 124,060 113,596 Salaries and benefits 56,623 53,815 Legal, audit and accounting 47,049 50,441 Rent 34,975 46,127 Consulting fees 19,500 5,682 Office and miscellaneous 26,288 26,380 Travel and accommodation 21,543 9,933 Insurance 19,446 9,210 Telephone 18,773 19,564 Equipment rental 15,960 27,950 Transfer agent 13,932 8,655 Regulatory fees 4,240 6,850 ------------ ----------- 1,135,040 878,033 Less: interest income (9,589) (26,465) ------------ ----------- NET LOSS FOR THE YEAR 1,125,451 851,568 DEFICIT, BEGINNING OF YEAR 3,829,520 2,974,035 EXCESS COST OF ACQUIRED SHARE CAPITAL OVER PROCEEDS -- 3,917 ------------ ----------- DEFICIT, END OF YEAR $ 4,954,971 $ 3,829,520 ============ =========== LOSS PER SHARE $ 0.08 $ 0.07 ============ ===========
F-17 DSI DATOTECH SYSTEMS INC. STATEMENTS OF CASH FLOWS For the Years Ended October 31
1999 1998 ------------ ----------- OPERATING ACTIVITIES Net loss for the year $ (1,125,452) $ (851,568) Less items not requiring cash Amortization and depreciation 155,426 106,389 ------------ ----------- (970,026) (745,179) Net change in non-cash working capital items Accounts receivable and advances 5,689 22,866 Loan receivable 25,000 (25,000) Prepaid expense 16,567 (16,567) Accounts payable and accrued liabilities 219,000 (71,801) ------------ ----------- Cash applied to operating activities (703,770) (835,681) ------------ ----------- INVESTING ACTIVITIES Investment in Gesture Recognition Technology (37,353) (228,450) Capital assets (24,316) (32,097) ------------ ----------- Cash applied to investing activities (61,669) (260,547) ------------ ----------- FINANCING ACTIVITIES Shares issued for cash, net of share issue costs 264,759 1,000,711 Shares purchased for cash -- (94,433) Shares resold for cash -- 43,682 ------------ ----------- Cash from financing activities 264,759 949,960 ------------ ----------- DECREASE IN CASH (500,680) (146,268) CASH, BEGINNING OF YEAR 564,689 710,957 ------------ ----------- CASH, END OF YEAR $ 64,009 $ 564,689 ============ ===========
F-18 DSI DATOTECH SYSTEMS INC. NOTES TO FINANCIAL STATEMENTS For the Years Ended October 31, 1999 and 1998 1. SIGNIFICANT ACCOUNTING POLICIES (a) Depreciation and Amortization (i) Investment in Gesture Recognition Technology All costs related to the acquisition and development of the Gesture Recognition Technology are stated at cost less accumulated amortization. Amortization is provided on hardware, software and materials costs on a declining balance basis at 30% per annum and on all other costs on a straight line basis over seventeen years. Additional amortization may be recorded for items deemed to be obsolete or no longer valid to the development of the technology. (ii) Capital Assets Capital assets are stated at cost less accumulated depreciation. Depreciation is provided on a declining balance basis on office furniture and equipment at 20% per annum and on computer equipment at 30% per annum. (b) Foreign Currency Translation Amounts stated in foreign currency are translated into Canadian dollars as follows: Current assets and liabilities at the rates of exchange prevailing at balance sheet date. Non-monetary assets and liabilities at the rates of exchange in effect on the dates of the transactions; and revenue and expenses at average rates of exchange for the year. (c) Loss per share Loss per share is calculated using the weighted average number of shares outstanding during the year. Fully diluted loss per share has not been calculated since the exercise of outstanding options and warrants would have the effect of reducing loss per share. (d) Financial Instruments The carrying value of current assets and current liabilities at October 31, 1999 and 1998 approximates their fair values due to the relatively short periods to maturity of these instruments. (e) Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant areas requiring the use of management estimates relate to the determination of environmental obligations, impairment of mineral claims and deferred exploration expenditures and rate for depletion and amortization. Actual results could differ from those estimates. (f) Stock-based compensation plans The Company has a fixed stock option plan. No compensation expense is recognized when stock or stock options are issued to directors and employees. Any consideration paid by directors and employees on exercise of stock options or purchase of stock is credited to share capital. F-19 DSI DATOTECH SYSTEMS INC. NOTES TO FINANCIAL STATEMENTS For the Years Ended October 31, 1999 and 1998 1. SIGNIFICANT ACCOUNTING POLICIES (continued) (g) Research and development Research and development costs are recorded as an expense of the period in which they are incurred. Certain development costs may be deferred where the product is technically or commercially feasible. The recoverability of these deferred costs is dependent upon the Company's ability to obtain necessary financing to complete development and to successfully commercialize the use of the product. 2. INVESTMENT IN GESTURE RECOGNITION TECHNOLOGY Pursuant to agreements dated November 30, 1990 and March 20, 1991, the Company acquired from Seth McCloud ("McCloud") an exclusive licence to manufacture and market a patent invention known as the Gesture Alphabet, a new technology for computerized communications, in consideration of U.S. $8,500 (paid), research and development expenditure of U.S. $150,000 (expended), 100,000 shares of the Company to earn the North American rights to the invention (issued), and, at a subsequent date, subject to third party valuation and regulatory approval, the maximum number of shares allowable to attain the rights to the technology for the rest of the world, and annual royalties calculated at 6% of gross profit. Pursuant to agreements dated May 1, 1995 and August 29, 1996, which replaced the previous agreements, the Company acquired the world-wide licence to commercialize the Gesture Recognition Technology in consideration of 100,000 common shares to terminate the previous agreements (issued), 1,000,000 common shares to be issued based on cumulative cash flow generated by the Company, and royalty fees of 5.5% of revenues received from the commercialization of the technology and 5.5% of the gross profit from the sale of products which incorporate the technology. A minimum semi-annual advance royalty fee of $30,000 is payable commencing on May 1, 1996. On November 4, 1999, the Company entered into an agreement, subject to regulatory approval, which supercedes all previous agreements. The Company granted a licence to McCloud to commercialize technology based on the patents held by the Company. In consideration, the Company will receive a royalty of 3% of gross sales from sales realized by McCloud of products made using the technology. The Company will pay a royalty of 0.5% of gross sales realized by the Company and any of its other licencees from the sales of products made using the licensed intellectual property to McCloud. In satisfaction of all amounts owed to McCloud under the previous agreements, the Company will pay a total of $35,000 to McCloud over a ten month period commencing on the execution of this agreement. F-20 DSI DATOTECH SYSTEMS INC. NOTES TO FINANCIAL STATEMENTS For the Years Ended October 31, 1999 and 1998 2. INVESTMENT IN GESTURE RECOGNITION TECHNOLOGY (continued) Acquisition and development costs to date:
1999 1998 ------------ ----------- Acquisition costs $ 246,830 $ 246,830 ------------ ----------- Development costs Balance, beginning of year 1,203,800 975,350 ------------ ----------- Additions Salaries, benefits and consulting fees - 125,354 Hardware, software and materials 104 7,346 Patent costs and fees 7,249 8,319 Prototype development -- 27,431 Royalties 30,000 60,000 ------------ ----------- 37,353 228,450 ------------ ----------- Balance, end of year 1,241,153 1,203,800 ------------ ----------- 1,487,983 1,450,630 Less: accumulated amortization (553,746) (417,875) ------------ ----------- $ 934,237 $ 1,032,755 ============ ===========
3. CAPITAL ASSETS 1999 1998 --------------------------------------------------- Accumulated Net Book Net Book Cost Depreciation Value Value --------------------------------------- --------- Furniture and equipment $ 41,040 $ 20,027 $ 21,013 $ 16,990 Computer equipment 84,693 40,886 43,807 43,068 ---------- -- --------- -------- --------- $ 125,733 $ 60,913 $ 64,820 $ 60,058 ========== ========= ======== ========= F-21 DSI DATOTECH SYSTEMS INC. NOTES TO FINANCIAL STATEMENTS For the Years Ended October 31, 1999 and 1998 4. SHARE CAPITAL (a) The authorized share capital consists of 100,000,000 common shares without par value. Issued:
1999 1998 -------------------------- --------------------------- No. of No. of Shares Amount Shares Amount ---------- ------------ ---------- ------------ Balance, beginning of year 13,953,940 $ 5,569,546 9,875,340 $ 4,568,835 ---------- ------------ ---------- ------------- Issued during the year For cash - private placements, net of share issue costs 1,104,000 264,759 1,418,600 938,711 - escrowed shares -- -- 2,600,000 26,000 - exercise of warrants -- -- 60,000 36,000 ---------- ------------ ---------- ------------- 1,104,000 264,759 4,078,600 1,000,711 ---------- ------------ ---------- ------------- 15,057,940 5,834,305 13,953,940 5,569,546 Less: Company shares held, net of shares resold (57,600) (46,833) (57,600) (46,833) ---------- ------------ ---------- ------------- Balance, end of year 15,000,340 $ 5,787,472 13,896,340 $ 5,522,713 ========== ============ ========== =============
(b) A total of 3,068,750 common shares issued at $0.01 per share are subject to escrow restrictions, release of the shares is subject to the approval of regulatory authorities. Of these shares, a total of 2,600,000 were issued during the year ended October 31, 1998 to two directors. (c) The Company has granted options to directors, officers and employees to purchase common shares at exercise prices determined by reference to the market value on the date of the grant. Under the Company's stock option plan, options may be granted for up to 2,800,000 common shares. F-22 DSI DATOTECH SYSTEMS INC. NOTES TO FINANCIAL STATEMENTS For the Years Ended October 31, 1999 and 1998 4. SHARE CAPITAL (continued) As at October 31, 1999, outstanding options granted to directors and employees are as follows: No. of Exercise Expiry Shares Price Date ---------------- ------------- ------------------------ 75,000 $0.75 December 3, 1999 300,000 0.75 December 3, 2001 150,000 0.50 September 1, 2001 50,000 0.50 September 15, 2001 50,000 0.50 September 22, 2001 50,000 0.75 March 15, 2002 230,000 0.75 May 9, 2002 425,000 0.80 January 13, 2003 10,000 0.53 May 25, 2003 10,000 0.40 September 22, 2003 320,000 0.40 December 11, 2003 20,000 0.40 January 4, 2004 20,000 0.40 April 6, 2004 --------- 1,710,000 ========= (d) As at October 31, 1999, outstanding warrants to purchase 2,522,600 common shares are exercisable as follows: - 1,418,600 common shares at a price of $1.25 per share to April 29, 2000. - 744,000 common shares at a price of $0.25 per share to June 14, 2000 or at $0.29 per share to June 14, 2001. - 360,000 common shares at a price of $0.25 per share to July 19, 2000 or at $0.29 per share to July 19, 2001. 5. DIRECTORS' REMUNERATION AND RELATED PARTY TRANSACTIONS (a) A total of $248,200 (1998 - $332,000) was paid or is owing to directors and two companies controlled by directors during the year for management and consulting services. (b) Included in accounts payable is an amount of $185,400 owing to two companies controlled by directors of the Company for management and consulting fees. 6. INCOME TAXES The company has accumulated non-capital losses for tax purposes of approximately $4,025,000 which may be carried forward to reduce taxable income in future years expiring at various dates to the year 2006. The potential income tax benefits arising from the foregoing are not recorded in the financial statements. 7. CONTINGENT LIABILITIES AND COMMITMENTS (a) During the year ended October 31, 1998, a petition was made against the Company with respect to certain allegations of non-compliance with the Company Act by a former employee. No damages have been sought. The Company is of the opinion that the petition is without merit. F-23 DSI DATOTECH SYSTEMS INC. NOTES TO FINANCIAL STATEMENTS For the Years Ended October 31, 1999 and 1998 7. CONTINGENT LIABILITies AND COMMITMENTS (continued) The Company commenced a suit against the above-mentioned former employee and certain other persons, including some former directors of the Company. The Company is seeking damages for misappropriation, injurious falsehoods and other wrongs. There has been no further action on either the petition or the suit during the fiscal year ended October 31, 1999. (b) On August 21, 1997, a claim was made against the Company in the amount of $130,727 by the purchasers of the Ned Property, a mineral property which was sold in a prior year, for the return of the purchase price plus additional costs. The Company is of the opinion that the claim is without merit and has filed a Statement of Defence in response to this action. No further action has been taken on the claim during the fiscal year ended October 31, 1999. (c) The Company has entered into two separate agreements with two companies controlled by two directors of the Company for management services in consideration of $10,000 per month each plus certain health benefits. The agreements are for a two year term ending July 31, 1999 and are renewable, upon expiry, for future one year terms at rates of consideration which may be renegotiated. Should the agreements not be renewed, sixty days notice must be given by the Company and one year's compensation paid on the date of termination. The agreements were renewed for a one year term on August 1, 1999. (d) The Company entered into an agreement for the rental of office premises for the period March 1, 2000 to January 31, 2001 at a cost of $37,000 per year. 8. SUBSEQUENT EVENTS (a) Private Placement The Company completed a private placement for the issue of 2,456,140 units at a price of $0.57 per unit for gross proceeds of $1,400,000 less commissions of $86,798. Each unit consists of one common share and one non-transferable share purchase warrant exercisable to acquire one additional common share at a price of $0.57 per share to January 26, 2001 and at $0.66 per share to January 26, 2002. The commission is payable in cash and shares of the Company. (b) Options Granted The Company granted stock options to directors and employees to acquire a total of 449,000 common shares at a price of $0.40 per share and expiring on various dates from November 4, 2002 to November 18, 2004. (c) Exercise of Warrants The Company issued a total of 556,000 common shares for gross proceeds of $139,000 pursuant to the exercise of warrants at a price of $0.25 per share. F-24 DSI DATOTECH SYSTEMS INC. NOTES TO FINANCIAL STATEMENTS For the Years Ended October 31, 1999 and 1998 8. SUBSEQUENT EVENTS (continued) (d) Financial Consulting Agreement Pursuant to an agreement dated January 28, 2000 and subject to regulatory approval, the Company entered into an agreement with a consultant to obtain sources of long-term financing for the Company in consideration of commissions based on the amount of financing arranged by the consultant. The Company also granted an option to the consultant to acquire the exclusive right to commercialize the Gesture Technology for the banking and financial transaction industry in consideration of the Company receiving a 20% equity interest in any partnership or corporation that would acquire the subject licence for the amount of US$8,000,000. 9. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE The Year 2000 Issue arises because many computerized systems use two digits rather than four to identify a year. Date-sensitive systems may recognize the year 2000 as 1900 or some other date, resulting in errors when information using year 2000 dates is processed. In addition, similar problems may arise in some systems which use certain dates in 1999 to represent something other than a date. Although the change in date has occurred, it is not possible to conclude that all aspects of the Year 2000 Issue that may affect the entity, including those related to customers, suppliers, or other third parties, have been fully resolved. 10. ADDITIONAL DISCLOSURE In order to comply with generally accepted accounting principles in the United States of America, the following additional information is provided: (a) Income taxes The Company's provision for income taxes (recovery) is made up as follows:
1999 1998 1997 -------------------------------------------------------------------------------------------- Loss before income taxes $ 1,125,451 $ 851,568 $ 822,449 Combined basic Canadian federal and provincial income tax rate 46% 46% 46% -------------------------------------------------------------------------------------------- Provision for taxes (recovery) on basic rate 517,707 391,721 378,327 Increase (decrease) in taxes resulting from: Benefit of tax loss carried forward not recognized in accounts (517,707) (391,721) (378,327) -------------------------------------------------------------------------------------------- Actual tax provision (recovery) $ -- $ -- $ -- ============================================================================================
(b) Earnings per share The calculation of earnings per share in accordance with generally accepted accounting principles in the United States corresponds with that in Canada for the following reasons: - the inclusion of stock options as common stock equivalents is antidilutive for each period presented and therefore is not included in the calculation of earnings per share. F-25 DSI DATOTECH SYSTEMS INC. NOTES TO FINANCIAL STATEMENTS For the Years Ended October 31, 1999 and 1998 10. ADDITIONAL DISCLOSURE (continued) (c) Difference in accounting policy The company has capitalized certain acquisition and development costs related to the Investment in Gesture Recognition Technology. Generally accepted accounting principles in the United States of America require that these expenditures be charged to operations as incurred. (d) The following summarizes information about stock options granted and outstanding at October 31, 1999 and 1998, and changes during the years then ended:
Year Ended Year Ended October 31, 1999 October 31, 1998 -------------------------------------------------------------------------------------- Weighted Weighted Average Average No. of Exercise No. of Exercise Options Price Options Price -------------------------------------------------------------------------------------- Outstanding at beginning of year 1,400,000 $ 0.72 1,190,000 $ 0.75 Granted 360,000 0.40 865,000 0.73 Exercised - -- -- -- Expired/Cancelled (50,000) 0.80 (655,000) 0.54 -------------------------------------------------------------------------------------- Outstanding at end of year 1,710,000 $ 0.65 1,400,000 $ 0.72 ====================================================================================== Options exercisable at end of year 1,710,000 $ 0.65 1,400,000 $ 0.72 ======================================================================================
The weighted average fair value of the stock options granted during the year ended October 31, 1998 was $0.23. Summary information about the 1,710,000 options outstanding at October 31, 1999 follows: Options Weighted Outstanding Average October 31, 1999 Remaining Life ----------------------------------------------------------------------- Range of Exercise Price $0.40 to $0.53 630,000 2.9 years $0.75 to $0.80 1,080,000 2.5 years ----------------------------------------------------------------------- 1,710,000 2.6 years ======================================================================= Pro-forma information regarding net loss and loss per share is required by Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123) and has been determined as if the Company has accounted for its employee stock options under the fair value method. F-26 DSI DATOTECH SYSTEMS INC. NOTES TO FINANCIAL STATEMENTS For the Years Ended October 31, 1999 and 1998 10. ADDITIONAL DISCLOSURE (continued) The Black-Scholes option valuation model was developed for use in estimating for the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially effect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. The fair value for these options at the date of grant was estimated using the Black-Scholes option pricing model with the following weighted average assumptions for the fiscal years ended October 31, 1999 and 1998. 1999 1998 -------------------------------------------------------- Risk-free interest rate 5.11% 5.22% Expected dividend yield -- -- Expected stock price volatility 1.15 1.15 Expected life in years 3.36 5.00 For the purposes of pro-forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting periods. The pro-forma effect on net loss for fiscal year 1999 and 1998 may not be representative of the actual results had the Company accounted for the stock options using the fair value method. The Company's pro-forma information follows: 1999 1998 --------------------------------------------------------------------- Net loss, as reported $ 1,125,451 $ 851,568 --------------------------------------------------------------------- Pro-forma net loss $ 1,279,351 $ 1,285,568 --------------------------------------------------------------------- Basic and diluted loss per share $ 0.08 $ 0.07 --------------------------------------------------------------------- Pro-forma basic and diluted Loss per share $ 0.09 $ 0.11 --------------------------------------------------------------------- Because SFAS No. 123 applies only to stock-based compensation awards for the fiscal year ended February 29, 1996 and future years, the pro-forma disclosures under SFAS No. 123 are not likely to be indicative of future disclosures until the disclosures reflect all outstanding, nonvested awards. F-27 DSI DATOTECH SYSTEMS INC. NOTES TO FINANCIAL STATEMENTS For the Years Ended October 31, 1999 and 1998 10. ADDITIONAL DISCLOSURE (continued) (e) Reconciliation The effect on the financial statements of compliance with generally accepted accounting standards in the United States would be as follows: Income Statement
Year Ended Year Ended Year Ended October 31, October 31, October 31, 1999 1998 1997 ------------------------------------------------------------------------------------------------------- Net loss as shown in the financial statements $ (1,125,451) $ (851,568) $ (822,449) ------------------------------------------------------------------------------------------------------- Decrease in amortization of Investment in gesture recognition technology 135,871 90,435 91,890 ------------------------------------------------------------------------------------------------------- Increase in research and development and expense (37,353) (228,450) (313,698) ------------------------------------------------------------------------------------------------------- Net loss according to generally accepted accounting principles in the United States $ (1,026,933) $ (989,583) $ (1,044,257) ======================================================================================================= Loss per common share according to generally accepted accounting principles in the United States: Primary $ 0.07 $ 0.08 0.12 =======================================================================================================
Balance Sheet Increase (decrease) in account to comply with generally accepted accounting standards in the United States: October 31, October 31, 1999 1998 ------------------------------------------------------------------------ Investment in Gesture Recognition Technology $ (934,237) $ (1,032,755) ------------------------------------------------------------------------ Deficit $ (934,237) $ (1,032,755) ======================================================================== F-28 EX-1.1 2 0002.txt EX-1.1 CERTIFICATE OF INCORPORATION OF RHINO CANADA PROVINCE OF BRITISH COLUMBIA Exhibit 1.1 NUMBER 326273 Province of British Columbia Ministry of Finance and Corporate Relations REGISTRAR OF COMPANIES COMPANY ACT Certificate of Incorporation I HEREBY CERTIFY THAT RHINO RESOURCES INC. HAS THIS DAY BEEN INCORPORATED UNDER THE COMPANY ACT GIVEN UNDER MY HAND AND SEAL OF OFFICE AT VICTORIA, BRITISH COLUMBIA, THIS 7TH DAY OF MAY, 1987 /s/Roberta J. Lowdon RUBERTA J. LOWDON DEPUTY REGISTRAR OF COMPANIES EX-1.2 3 0003.txt EX-1.2 CERTIFICATE OF CHANGE OF NAME Exhibit 1.2 NUMBER: 326273 CERTIFICATE OF CHANGE OF NAME COMPANY ACT CANADA PROVINCE OF BRITISH COLUMBIA I Hereby Certify that RHINO RESOURCES INC. has this day changed its name to DSI DATOTECH SYSTEMS INC. Issued under my hand at Victoria, British Columbia on April 19, 1996 /s/John S. Powell JOHN S. POWELL Registrar of Companies EX-1.3 4 0004.txt EX-1.3 ARTICLES (BYLAWS)-DSI DATOTECH SYSTEMS INC. Exhibit 1.3 I CERTIFY THIS IS A COPY OF A DOCUMENT FILED ON MAR 11 1998 JOHN S. POWELL REGISTRAR OF COMPANIES PROVINCE OF BRITISH COLUMBIA FORM 19 (Section 348) COMPANY ACT SPECIAL RESOLUTION Certificate of Incorporation No. 326273 The following special resolution was passed by the company referred to below on the date stated: Name of company: DSI DATOTECH SYSTEMS INC. Date resolution passed: January 9, 1998 Resolution: "RESOLVED as a Special Resolution that the existing Articles of the Company be canceled, and that the new form of Articles approved by the Directors of the Company and presented to members at the Annual General Meeting be adopted as the Articles of the Company in substitution for and to the exclusion of the existing Articles of the Company." Certified a true copy January 28, 1998. (Signature) /s/_________________________________ (Relationship to Company) Solicitor ------------------------------- *A copy of the new form of Articles approved by the Directors of the Company is attached as Schedule "A" to this Resolution. ARTICLES of DSI DATOTECH SYSTEMS INC. PART 1- TABLE OF CONTENTS Page PART 1 - TABLE OF CONTENTS 1 PART 2- INTERPRETATION 2 PART 3- SHARES 2 PART 4- BRANCH REGISTERS 3 PART 5- TRANSFER AND TRANSMISSION OF SHARES 3 PART 6- PURCHASE AND REDEMPTION OF SHARES 4 PART 7- GENERAL MEETINGS 4 PART 8- VOTING OF MEMBERS 6 PART 9- DIRECTORS 8 PART 10- POWERS AND DUTIES OF DIRECTORS 9 PART 11- DISCLOSURE OF INTEREST OF DIRECTORS 10 PART 12- PROCEEDINGS OF DIRECTORS 10 PART 13- EXECUTIVE AND OTHER COMMITTEES 11 PART 14- OFFICERS 12 PART 15 - INDEMNITY AND PROTECTION OF DIRECTORS, OFFICERS AND EMPLOYEES 12 PART 16- DIVIDENDS AND RESERVE 13 PART 17- DOCUMENTS, RECORDS AND REPORTS 14 PART 18 -NOTICES 14 PART 19- EXECUTION OF DOCUMENTS 15 PART 20-SEAL 15 -2- PART 2- INTERPRETATION 2.1 These Articles are subject to the provisions of the "Company Act". 2.2 In these Articles, unless there is something in the subject or context inconsistent herewith: "Board" and "Directors" or "directors" mean the directors or sole director of the Company for the time being. "Company Act" means the Company Act of the Province of British Columbia from time to time in force and includes the regulations made pursuant thereto. "registered owner", "registered holder", "owner", or "holder" when used with respect to a share in the authorized capital of the Company means the person registered in the register of members in respect of such share. "Securities Act" means the Securities Act of the Province of British Columbia from time to time in force and includes the regulations and policies made pursuant thereto. 2.3 A reference to writing includes any visible form of representing or reproducing words. 2.4 Words importing the singular or plural, a person or corporation, or the masculine, feminine or neuter gender will include the other or others of them respectively as the context requires. 2.5 The meaning of any words or phases defined in the Company Act will, if not inconsistent with the subject or context, bear the same meaning in these Articles. PART 3- SHARES 3.1 The shares in the Company will be under the control of the directors who may, subject to the tights of the holders of any shares, allot, issue, or otherwise deal with them, at such times, to such persons (including directors) in such manner, at such price or consideration, upon such terms and conditions, as they, in their discretion, may determine. 3.2 The directors on behalf of the Company may pay a commission or allow a discount to any person in consideration of his subscribing or agreeing to subscribe, whether absolutely or conditionally, for any shares in the Company or procuring or agreeing to procure subscriptions, whether absolutely or conditionally, for any such shares. 3.3 Except as required by law or these Articles, no person will be recognized by the Company as having any interest whatsoever in any share except the registered holder thereof. 3.4 If a share is registered in the names of two or more persons they will be joint holders. -3- 3.5 Neither the Company nor any transfer agent will be liable for any loss occasioned to the member owing to any share certificate being lost in the mail or stolen. 3.6 A share certificate or debt obligation bearing the printed or mechanically reproduced signature of a person will not be invalid at its date of issue by reason of the fact that such person will have ceased to hold the office he is stated to hold on such certificate or debt obligation. PART 4- BRANCH REGISTERS 4.1 Unless prohibited by the Company Act, the Company may keep or cause to be kept one or more branch registers of members or debenture holders at such place or places as the directors may from time to time determine. PART 5- TRANSFER AND TRANSMISSION OF SHARES 5.1 Subject to the provisions of the Memorandum and of these Articles, a member may transfer any of his shares by instrument in writing executed by or on behalf of such member and delivered to the Company or its transfer agent. The instrument of transfer may be in the form, if any, on the back of the share certificate representing the shares, or in such other form as the directors may from time to time approve. Except to the extent that the Company Act may otherwise provide, the transferor will be deemed to remain the holder of the shares until the name of the transferee is entered in the register of members or a branch register of members in respect thereof. 5.2 The signature of the registered owner of any shares, or of his duly authorized attorney, upon the instrument of transfer will constitute a complete and sufficient authority to the Company, its directors, officers and agents to register in the name of the transferee as named in the instrument of transfer or, if no transferee is named in the instrument of transfer, in the name of the person on whose behalf any certificate for the shares to be transferred is deposited with the Company for the purpose of having the transfer registered, the number of shares specified in the instrument of transfer or, if no number is specified, all the shares represented by all share certificates deposited with the instrument of transfer. 5.3 Neither the Company nor any director, officer or agent thereof will be bound to inquire into the title of the person named in the instrument of transfer as transferee, or, if no person is so named, of the person on whose behalf the certificate is deposited for the purpose of having the transfer registered, or be liable to any person for registering or not registering the transfer, and the transfer when registered will confer upon the person in whose name the shares have been registered a valid title to the shares. 5.4 Every instrument of transfer will be executed by the transferor and left for registration at the registered office of the Company or at the office of its transfer agent or registrar together with the share certificate for the shares to be transferred and such other evidence, if any, as the directors or the transfer agent or registrar may require to prove the title of the transferor to, or his right to transfer, the shares and the right of the transferee to have the transfer registered. If the transfer is registered all instruments of transfer and evidence will be retained by the Company or its transfer agent -4- or registrar and, if the transfer is not registered, they together with the share certificate will be returned to the person depositing them. 5.5 There will be paid to the Company in respect of the registration of any transfer such sum, if any, as the directors may from time to time determine. 5.6 In the case of the death of a member, his legal personal representative, or if he was a joint holder the surviving joint holder, will be the only person recognized by the Company as having any title to his interest in the shares. Before recognizing a person as a legal personal representative the directors may require him to obtain from a court of competent jurisdiction a grant of letters probate or letters of administration. PART 6- PURCHASE AND REDEMPTION OF SHARES 6.1 The Company may purchase any of its shares unless the special rights and restrictions attached thereto otherwise provide. 6.2 If the Company proposes to redeem some but not all of the shares of any class, the directors may, subject to the special rights and restrictions attached to such class of shares, decide the manner in which the shares to be redeemed are to be selected. PART 7- GENERAL MEETINGS 7.1 The date, time and place of all general meetings of the Company within the Province of British Columbia will be fixed by the directors. 7.2 All business that is transacted at a general meeting will be special except in the case of an annual general meeting the conduct of and voting at such meeting, the consideration of the financial statements and the reports of the directors and the auditor, a resolution to elect two or more directors by a single resolution, the election of directors, the appointment of the auditor, the fixing of the remuneration of the auditor, such other business as by these Articles or the Company Act may be transacted at a general meeting without prior notice thereof being given to the members, and any business which is brought under consideration by the report of the directors; and in the case of any other general meeting, such business as relates to the conduct of or voting at that meeting. 7.3 Except as otherwise provided by the Company Act, where any special business to be considered at a general meeting includes considering, approving, ratifying, adopting or authorizing any document or the execution thereof or the giving of effect thereto, the notice convening the meeting will be sufficient if, with respect to such document, it states that a copy of the document is or will be available for inspection by members at the registered office or records office of the Company or at such other place in British Columbia designated in the notice during usual business hours up to the date of such general meeting. -5- 7.4 No business, other than the election of the chairman or the adjournment of the meeting, will be transacted at any general meeting unless there is a quorum at the commencement of the meeting, but the quorum need not continue throughout the meeting. 7.5 A quorum for a general meeting is two persons entitled to vote except that a quorum for a general meeting will be one person entitled to vote if the Company has only one member. 7.6 If within half an hour from the time appointed for a general meeting there is no quorum, the meeting, if convened upon the requisition of members, will terminate. In any other case it will be adjourned to the same day in the next week, at the same time and place, and, if at the adjourned meeting there is no quorum within half an hour from the time appointed for the meeting, the member or members entitled to attend and vote at the meeting who are present or represented by proxy or other proper authority will be the quorum. 7.7 The Chairman of the Board, if any, or in his absence the President of the Company or in his absence a Vice- President of the Company, if any, will be entitled to preside as chairman at every general meeting of the Company. 7.8 If at any general meeting neither the Chairman of the Board nor the President nor a Vice-President is present within fifteen minutes after the time appointed for holding the meeting or if present is not willing to act as chairman, the directors present will choose a chairman; but if all the directors present decline to take the chair or fail so to choose or if no director is present, the members present will choose a chairman. 7.9 The chairman may, and will if so directed by the meeting, adjourn the meeting from time to time and from place to place, but no business will be transacted at any adjourned meeting other than the business left unfinished at the meeting from which the adjournment took place. It will not be necessary to give any notice of an adjourned meeting or of the business to be transacted at an adjourned meeting. 7.10 The directors and any other person permitted by the chairman of the meeting will be entitled to attend any general meeting. 7.11 No motion proposed at a general meeting need be seconded and the chairman may propose a motion. 7.12 Unless the Company Act otherwise provides, any action to be taken by a resolution of the members may be taken by an ordinary resolution. PART 8- VOTING OF MEMBERS 8.1 Subject to any special voting rights or restrictions attached to any class of shares and the restrictions on joint holders of shares, on a show of hands every member who is present in person and entitled to vote thereat will have one vote and on a poll every member present m person or represented by proxy or other proper authority will have one vote for each share of which he is the registered holder. 8.2 A member, being a corporation, may appoint a proxyholder and may also appoint a representative to act for -6- it by delivering to the Company a copy of a resolution of its directors or other governing body naming a person as its representative. Such representative, subject to any restrictions contained in the resolution, will be entitled to exercise the same powers on behalf of the corporation as the corporation could exercise if it were an individual member. If the corporation is a subsidiary of the Company its shares may not be voted and its proxyholder or representative or the proxyholder of the representative may not be counted to make a quorum. 8.3 In the case of joint registered holders of a share the vote of the senior who exercises a vote, whether in person or by proxyholder, will be accepted to the exclusion of the votes of the other joint registered holders; and for this purpose seniority will be determined by the order in which the names stand in the register of members. Two or more legal personal representatives of a deceased member whose shares are registered in his sole name will for the purpose of this Article be deemed joint registered holders. 8.4 A member of unsound mind entitled to attend and vote in respect of whom an order has been made by any court having jurisdiction may vote, whether on a show of hands or on a poll, by his committee, curator bonis, or other person in the nature of a committee or curator bonis appointed by that court, and any such committee, curator bonis, or other person may appoint a proxyholder. 8.5 A member may by proxy appoint a proxyholder to vote for him on a poll. 8.6 In the case of an equality of votes, whether on a show of hands or on a poll, the chairman of the meeting at which the show of hands takes place or at which the poll is demanded will not be entitled to a second or casting vote. 8.7 If a poll is demanded it will be taken either at the meeting and of the members present in person or represented by proxy or other proper authority at the time the poll is taken, or at such other time and in such manner as the chairman may direct. Any business other than that upon which the poll has been demanded may be proceeded with pending the taking of the poll. A demand for a poll may be withdrawn. 8.8 In any dispute as to the admission or rejection of a vote the decision of the chairman made in good faith will be final and conclusive. 8.9 On a poll a person entitled to cast more than one vote need not, if he votes, use all his votes or cast all the votes he uses in the same way. 8.10 A member holding more than one share in respect of which he is entitled to vote will be entitled to appoint one or more (but not more than two) proxyholders to attend, act and vote for him on the same occasion. If such a member should appoint more than one proxyholder for the same occasion he will specify the number of shares each proxyholder will be entitled to vote. A member may also appoint one or more alternate proxyholders to act in the place and stead of an absent proxyholder. 8.11 A form of proxy will be in writing under the hand of the appointor or his attorney duly authorized in writing, or, if the appointor is a corporation, either under the seal of the corporation or under the hand of a duly authorized officer or representative of or attorney for the corporation. A proxyholder will be a member of the Company unless -7- (a) the Company is at the time a reporting company, (b) the member appointing the proxyholder is a corporation, (c) the Company will have at the time only one member, or (d) all the members present otherwise agree. 8.12 Unless otherwise provided by the directors, a form of proxy and the power of attorney or other authority, if any, under which it is signed or a notarially certified copy thereof will be deposited at the registered office of the Company or at such other place as is specified for that purpose in the notice convening the meeting, or in the information circular relating thereto not less than 48 hours, excluding Saturdays and holidays, before the time of the meeting. 8.13 Except as otherwise provided by law or these Articles, a proxy may be in any form the directors or the chairman of the meeting approve. 8.14 A vote given in accordance with the terms of a proxy will be valid notwithstanding the previous death or incapacity of the member giving the proxy or the revocation of the proxy or of the authority under which the form of proxy was executed or the transfer of the share in respect of which the proxy is given, provided that no notification in writing of such death, incapacity, revocation or transfer will have been received at the registered office of the Company or by the chairman of the meeting or adjourned meeting for which the proxy was given before the vote is taken. PART 9- DIRECTORS 9.1 The members, except as otherwise restricted by the Memorandum or Articles, will be entitled to elect directors, but the number to be elected will be determined by the directors. 9.2 The directors may, from time to time, appoint additional directors. 9.3 A casual vacancy occurring in the Board of directors may be filled by the remaining directors or director. 9.4 A director's term of office will expire on the date fixed at the time of his appointment or election and in the absence thereof on the election of directors either at the annual general meeting next following his appointment or election or by the consent in writing in lieu of such meeting, as the case may be. 9.5 A retiring director will be eligible for re-election. 9.6 Any director may by written notice to the Company appoint any person to be his alternate to act in his place at meetings of the directors at which he is not present or by these Articles deemed to be present unless the directors will have reasonably disapproved the appointment of such person and given notice to that effect to the director within a reasonable time. Every alternate will be entitled to attend and vote at meetings at which the person who appointed him -8- is not present or deemed to be present, and, if he is a director, to have a separate vote on behalf of the director he is representing in addition to his own vote. A director may at any time by written notice to the Company revoke the appointment of an alternate appointed by him. The remuneration payable to such an alternate will be payable out of the remuneration of the director appointing him. 9.7 The directors may remove from office a director who is convicted of an indictable offence. 9.8 The remuneration of the directors as such may from time to time be determined by the directors. Such remuneration may be in addition to any salary or other remuneration paid to any officer or employee of the Company who is a director. The directors will be repaid such reasonable travelling, hotel and other expenses as they incur in and about the business of the Company and if any director will perform any professional or other services for the Company that in the opinion of the directors are outside the ordinary duties of a director or will otherwise be specially occupied in or about the Company's business, he may be paid a remuneration to be fixed by the Board, or, at the option of such director, by resolution of the members and such remuneration may be either in addition to, or in substitution for, any other remuneration that he may be entitled to receive. The directors may pay a gratuity or pension or allowance on retirement to any director who has held any salaried office or place of profit with the Company or to his spouse or dependents and may make contributions to any fund and pay premiums for the purchase or provision of any such gratuity, pension or allowance. PART 10- POWERS AND DUTIES OF DIRECTORS 10.1 The powers of the Company will be exercised only by the directors, except those which by the Company Act or these Articles are required to be exercised by a resolution of the members and those referred to the members by the directors . 10.2 The directors may from time to time (a) borrow money in such manner and amount, on such security, from such sources and upon such terms and conditions as they think fit, (b) issue bonds, debentures and other debt obligations either outright or as security for any liability or obligation of the Company or any other person, and (c) mortgage or charge, whether by way of specific or floating charge, or give other security on the undertaking and the whole or any part of the property and assets (both present and future) of the Company. 10.3 The directors may from time to time by power of attorney or other instrument appoint any person to be the attorney of the Company for such purposes, and with such powers, authorities and discretions (not exceeding those vested in or exercisable by the directors under these Articles and excepting the powers of the directors relating to the constitution of the Board and of any of its committees and the appointment or removal of officers and the power to declare dividends), for such period, with such remuneration and subject to such conditions as the directors may think -9- fit, and any such power of attorney may contain such provisions for the protection or convenience of persons dealing with such attorney as the directors think fit. Any such attorney may be authorized by the directors to sub-delegate all or any of the powers, authorities and discretions for the time being vested in him. PART 11- DISCLOSURE OF INTEREST OF DIRECTORS 11.1 A director will disclose his interest in and not vote in respect of any proposed contract or transaction with the Company 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. 11.2 A director may hold any office or place of profit with the Company in addition to his office of director for such period and on such terms (as to remuneration or otherwise) as the directors may determine and no director or intended director will be disqualified by his office from contracting with the Company either with regard to his tenure of any such other office or place of profit or as vendor, purchaser or otherwise, and no contract or transaction entered into by or on behalf of the Company An which a director is in any way interested will be voided by reason thereof 11.3 A director or his firm may act in a professional capacity for the Company and he or his firm will be entitled to remuneration for professional services as if he were not a director. 11.4 A director may be or become a director, officer or employee of, or otherwise interested in, any corporation or firm in which the Company may be interested as a shareholder or otherwise, and such director will not, except as provided by the Company Act or these Articles, be accountable to the Company for any remuneration or other benefit received by him as director, officer or employee of, or from his interest in, such other corporation or firm, unless the directors otherwise direct. PART 12- PROCEEDINGS OF DIRECTORS 12.1 Unless otherwise determined by the directors the President will be the Chairman of the Board. 12.2 A director may, and the Secretary will on the request of a director, call a meeting of the directors . 12.3 The Chairman of the Board, or in his absence the President, will preside as chairman at every meeting of the directors, or if there is no Chairman of the Board or neither the Chairman of the Board nor the President is present within fifteen minutes of the time appointed for holding the meeting or is willing to act as chairman, or if the Chairman of the Board and the President have advised the Secretary that they will not be present at the meeting, the directors present will choose one of their number to be chairman of the meeting. 12.4 The directors may meet for the dispatch of business, adjourn and otherwise regulate their meetings as they think fit. Questions arising at any meeting will be decided by a majority of votes and -10- in case of an equality of votes the chairman will not have a second or casting vote. 12.5 A meeting of the Board, or of any committee of the Board, may be held in any of the following ways: (a) all of the participants meeting in person; (b) some of the participants meeting in person and others communicating with them, by telephone or other means of communication, so that each participant can hear each of the others; or (c) all of the participants communicating with each other, by telephone or other means of communication, so that each participant can hear each of the others. 12.6 The quorum necessary for the transaction of business by the directors may be fixed by the directors and if not so fixed will be a majority of the Board. 12.7 The directors may if there is a quorum act notwithstanding any vacancy. 12.8 Every act of a director is valid notwithstanding any defect that may afterwards be discovered in his election or appointment. 12.9 Any resolution of the directors or of a committee thereof may be passed with the consent in writing to the resolution of all the directors or the members of that committee. The consent may be in counterparts. PART 13- EXECUTIVE AND OTHER COMMITTEES 13.1 The directors may appoint an Executive Committee to consist of such member or members of the Board as they think fit. The Executive Committee will have all the powers vested in the Board except the power to fill vacancies in the Board, the power to change the membership of, or fill vacancies in the Executive Committee or any other committee of the Board and such other powers, if any, as are specified. 13.2 The directors may appoint one or more committees consisting of such member or members of the Board as they think fit and may delegate to any such committee any powers of the Board; except, the power to fill vacancies in the Board, the power to change the membership of or fill vacancies in any committee of the Board, and the power to appoint or remove officers appointed by the Board. 13.3 All committees may meet and adjourn as they think fit. Questions arising at any meeting will be determined by a majority of votes of the members of the committee, and in case of an equality of votes the chairman will not have a second or casting vote. 13.4 All committees will keep minutes of their actions and will cause them to be recorded in books kept for that purpose and will report the same to the Board at such times as the Board requires. The directors will also have power -11- at any time to revoke or override any authority given to or acts to be done by any such committees except as to acts done before such revocation or ovemding and to terminate the appointment or change the membership of a committee and to fill vacancies in it. Committees may make rules for the conduct of their business and may appoint such assistants as they may deem necessary. PART 14-OFFICERS 14.1 The directors may decide what functions and duties each officer will perform and may entrust to and confer upon him any of the powers exercisable by them upon such terms and conditions as they think fit and may from time to time revoke, withdraw, alter or vary any of such functions, duties and powers . PART 15-INDEMNITY AND PROTECTION OF DIRECTORS, OFFICERS AND EMPLOYEES 15.1 Subject to the provisions of the Company Act, the Company will indemnify a director or former director of the Company and the Company may indemnify a director or former director of a corporation of which the Company is or was a shareholder and the heirs and personal representatives of any such person against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, actually and reasonably incurred by him or them in a civil, criminal or administrative action or proceeding to which he is or they are made a party by reason of his being or having been a director of the Company or a director of such corporation, including any action brought by the Company or any such corporation. Each person who acts or has acted at the Company's request as a director and each director on being elected or appointed will be deemed to have contracted with the Company on the terms of the foregoing indemnity. 15.2 Subject to the provisions of the Company Act, the directors may cause the Company to indemnify any officer, employee or agent of the Company or of a corporation of which the Company is or was a shareholder (notwithstanding that he may also be a director) and his heirs and personal representatives against all costs, charges and expenses whatsoever incurred by him or them and resulting from his acting as an officer, employee or agent of the Company or such corporation. In addition the Company will indemnify the Secretary and any Assistant Secretary of the Company if he is not a full time employee of the Company and notwithstanding that he may also be a director and his respective heirs and legal representatives against all costs, charges and expenses whatsoever incurred by him or them and arising out of the functions assigned to the Secretary by the Company Act or these Articles and the Secretary and Assistant Secretary will on being appointed be deemed to have contracted with the Company on the terms of the foregoing indemnity. 15.3 The failure of a director or officer of the Company to comply with the provisions of the Company Act, the -12- Memorandum or these Articles will not invalidate any indemnity to which he is entitled under this Part. 15.4 The directors may cause the Company to purchase and maintain insurance for the benefit of any person who is or was serving as a director, officer, employee or agent of the Company or as a director, officer, employee or agent of any corporation of which the Company is or was a shareholder and his heirs or personal representatives against any liability incurred by him as such director, officer, employee or agent. PART 16- DIVIDENDS AND RESERVE 16.1 The directors may from time to time declare and authorize payment of such dividends, if any, as they deem advisable and need not give notice of such declaration to any member. No dividend will be paid otherwise than out of funds or assets properly available for the payment of dividends and a declaration by the directors as to the amount of such funds or assets available for dividends will be conclusive. Any dividend may be paid wholly or in part by the distribution of specific assets and in particular by shares, bonds, debentures or other securities of the Company or any other corporation or in any one or more such ways as may be authorized by the directors. Where any difficulty arises with regard to such a distribution the directors may settle the same as they see fit, and in particular may fix the value for distribution of such specific assets or any part thereof, and may determine that cash payment in substitution for all or any part of the specific assets to which any member is entitled will be made to the member on the basis of the value so fixed in order to adjust the rights of all parties and may vest any specific assets in trustees for the persons entitled to the dividend. 16.2 Any dividend declared on shares of any class may be made payable on such date as is fixed by the directors. 16.3 If persons are registered as joint holders of any share, any one of them may give an effective receipt for any dividend, bonus or other monies payable in respect of the share. 16.4 Unless otherwise determined by the directors, no dividend will be paid on any share which has been purchased or redeemed by the Company while the share is held by the Company. 16.5 Any dividend, bonus or other monies payable in cash in respect of shares may be paid by cheque. The mailing of such cheque will, to the extent of the sum represented thereby (plus the amount of any tax required by law to be deducted), discharge all liability for the dividend unless the cheque is not paid on presentation or the amount of tax so deducted is not paid to the appropriate taxing authority. 16.6 Notwithstanding anything contained in these Articles the directors may from time to time capitalize any undistiibuted surplus on hand of the Company and may from time to time issue shares, bonds, debentures or debt obligations of the Company as a dividend representing such undistributed surplus on hand or any part thereof -13- PART 17- DOCUMENTS, RECORDS AND REPORTS 17.1 No member of the Company will be entitled to inspect the accounting records of the Company unless the directors determine otherwise. PART 18- NOTICES 18.1 Any notice required to be given by these Articles or the Company Act unless the form is otherwise specified may be given orally or in writing. 18.2 A notice in writing, statement, report or other document will have been effectively sent or given if posted prepaid, delivered, telegraphed or cabled to the person entitled thereto at his address recorded on a register maintained by the Company; and a certificate signed by the Secretary or other officer of the Company or of any other corporation acting on behalf of the Company that the notice, statement, report or other document was so sent or given will be conclusive evidence thereof. 18.3 A notice, statement, report or other document may be given by the Company to the joint holders of a share by giving it to any of them. 18.4 A notice, statement, report or other document may be given by the Company to the persons entitled to a share in consequence of the death, bankruptcy or incapacity of a member in the same manner as the same might have been given if the death, bankruptcy or incapacity had not occurred. 18.5 Notice of each directors' meeting, except a directors' meeting held immediately following an annual general meeting of which no notice will be required, will be given to every director and alternate director except a director or alternate director who has waived notice or is absent from the Province of British Columbia. 18.6 The accidental omission to give notice of a meeting to, or the non-receipt thereof by, any person entitled to receive notice will not invalidate the proceedings at that meeting. 18.7 Every notice of a meeting will specify the place, day and time of the meeting and if for a general meeting the general nature of all special business intended to be conducted thereat, unless specified in an information circular relating thereto. 18.8 A director may waive his entitlement to receive a notice of any past, present or future meeting or meetings of directors and may at any time withdraw such waiver. After the waiver is received by the Company and until it is withdrawn no notice need be given to such director or, unless the director otherwise requires in writing to the Company, to his altemate. Meetings held without such notice being given will not have been improperly called by reason thereof -14- 18.9 Not less than two hours' notice of a directors' meeting requiring notice will be given. 18.10 Where in these Articles any period of time dating from a given day, act or event is prescribed the time will be reckoned exclusive of such day, act or event. PART 19- EXECUTION OF DOCUMENTS 19.1 Any document may be executed by the Company, under seal or not under seal: (a) by any one director or any one of the Chairman of the Board, the President, a Vice-President or the Secretary; (b) in any manner directed by the Board, either generally or in relation to a particular document; or (c) in any other manner permitted by law. PART 20-SEAL 20.1 The Company may have a seal, but need not. 20.2 The Company may have a seal for use in any place or places other than British Columbia. 20.3 Any seal of the Company may, as directed by the Board, be reproduced on any document in any form or by any means rather than by an impression of it.
British Ministry of Finance 2nd Floor - 940 Blanshard Street ANNUAL REPORT Columbia and Corporate Relations P. O. Box 9432 Stn Prov Govt Form 16 Corporate and Personal Victoria BC V8W 9V3 Sections 333 and 334 Property Registries Telephone: (250) 35608626 COMPANY ACT Please check this form for any errors or omissions Filing Fee $35.00 Page 1 of 2 (Instructions on reverse) A NAME OF COMPANY B REGISTERED OFFICE ADDRESS C CERTIFICATE OF INCORPORATION NUMBER 326273 DSI DATOTECH SYSTEMS INC. D DATE OF INCORPORATION, AMALGAMATION OR 1100 1055 WEST HASTINGS STREET CONTINUATION VANCOUVER BC V6E 2E9 1987 MAY 07 E IS THIS A REPORTING COMPANY? YES F DATE OF ANNUAL REPORT (ANNIVERSARY DATE) 1999 MAY 07 G Has there been a change of registered H Has there been a change of or records office address? If YES, a directors? If YES, a Notice Notice to Change Office (Form 4) must of Directors (Form 8/9) must be filed. See instructions on reverse. be filed. See instructions on reverse. I DIRECTORS LAST NAME FIRST NAME AND INITIALS (IF ANY) RESIDENTIAL ADDRESS CITY PROVINCE POSTAL CODE CALVERT, THOMAS 4612 STRATHCONA RD. V7G1G3 NORTH VANCOUVER BC GIBBINS, ALLAN S. 212 WESTRIDGE DR L0J1C0 KLEINBERG ON PARDIAK, EDWARD C. 4278 SHERBROOKE ST W, SUITE 7 H3Z1C7 WESTMOUNT PQ SEGEV, ELLI STE 501 738 BROUGHTON STREET V6G 3A7 VANCOUVER BC J OFFICERS PARDIAK EDWARD C. 4278 SHERBROOKE ST W, SUITE 7, H3Z1C7 CHAIRMAN WESTMOUNT PQ
Page 2 of 2 J OFFICERS CONTINUED LAST NAME FIRST NAME AND INITIALS (IF ANY) RESIDENTIAL ADDRESS CITY PROVINCE POSTAL CODE SEGEV, ELLI STE 501 - 738 BROUGHTON STREET V6G 3A7 PRESIDENT VANCOUVER BC SHIMOKURA, BETSY STE 3001 867 HAMILTON STREET V6B6B7 SECRETARY VANCOUVER BC EGERY, ROBERT 480 ELIZABETH DRIVE H9W1H1 DIRECTOR OF BEACONSFIELD, PQ BUSINESS DEVELOPMENT
K CERTIFIED CORRECT - I have read this form and found DATE SIGNED it to be correct. Signature of a current Director, Officer, 99/05/27 or Company Solicitor X /s/ ---------------------------------------------------------------------- EX-1.4 5 0005.txt EX-1.4 CERT. OF INCORPORATION Industry Canada Industrie Canada Exhibit 1.4 Certificate Certificat of Incorporation De constitution Canada Business Loi canadienne sur Corporations Act les societes par actions 3259722 CANADA INC. 325972-2 - -------------------------------- ------------------------------------ Name of corporation-Denomination de La societe Corporation number-Numero de la societe de la societe I hereby certify that the above-named je certifie que la societe corporation, the articles of incorporation susmentionee, dont les statuts of which are attached, was incorporated constitutifs sont joints, a ete under the Canada Business Corporations Act. constituee en societe en vertu de la Loi canadienne sur les societes par actions. May 14, 1996/le Mai 1996 /s/ Director - Directeur Date of Incorporation - Date de constitution Canada Corporate Affairs Canada et Corporations Canada FORM 1 ARTICLES OF INCORPORATION Canada Business Loi regissant les societes (SECTION 6) Corporations Act par actions de regime federal. 1 - Name of Corporation 3259722 CANADA LTD. Amended July 21, 2000 2 - The place in Canada where the registered office is to be situated VANCOUVER, BRITISH COLUMBIA 3 - The classes and any maximum number of shares that the corporation Is authorized to issue AN UNLIMITED NUMBER OF COMMON SHARES 4 - Restrictions if any on share transfers PLEASE SEE SCHEDULE "A" ATTACHED 5 - Number (or minimum and maximum number) of directors A MINIMUM OF ONE TO A MAXIMUM OF TWELVE 6 - Restrictions if any on business the corporation may carry on NONE 7 - Other provisions if any NOT APPLICABLE 7 - Incorporators Names Address (include postal code) Signature MCCULLOUGH O'CONNOR 1100 - 888 DUNSMUIR STREET /s/ IRWIN VANCOUVER, B.C. V6C 3K4 FOR DEPARTMENTAL USE ONLY Filed CORPORATION NO. 3259722 SCHEDULE "A" 4. Restrictions if any on share transfers If the Corporation: (a) is not a reporting issuer or mutual fund, within the meaning of the Securities Act (British Columbia); and (b) has not distributed to the public any of its shares or securities convertible into or exchangeable for any of its shares; then no shares shall be transferred without the previous consent of the directors expressed by a resolution of the board of directors and the directors shall not be required to give any reason for refusing to consent to any proposed transfer The consent of the board of directors may be in respect of a specific proposed trade or trades or trading generally, whether or not over a specified period of time, or by specific person or with such other restrictions or requirements as the directors may determine. EX-1.5 6 0006.txt EX-1.5 BY-LAW NO. 1 OF 3259722 CANADA INC. Exhibit 1.5 BY-LAW NO. 1 OF 3259722 Canada Inc. TABLE OF CONTENTS Part Page ---- ---- 1. INTERPRETATION 1 2. DIRECTORS 2 3. MEETING OF DIRECTORS 4 4. REMUNERATION OF DIRECTORS 5 5. SUBMISSION OF CONTRACTS OR TRANSACTIONS TO SHAREHOLDERS FOR APPROVAL 6 6. FOR THE PROTECTION OF DIRECTORS AND OFFICERS 6 7. INDEMNITIES TO DIRECTORS ANT) OFFICERS 6 8. OFFICERS 7 9. SHAREHOLDERS' MEETINGS 9 10. SHARES 14 11. TRANSFER OF SECURITIES 16 12. DIVIDENDS 18 13. VOTING SHARES AND SECURITIES IN OTHER COMPANIES 19 14. INFORMATION AVAILABLE TO SHAREHOLDERS 19 15. NOTICES 20 16. CHEQUES, DRAFTS AND NOTES 21 17. CUSTODY OF SECURITIES 21 18. EXECUTION OF INSTRUMENTS 22 19. FINANCIAL YEAR 23 20. BORROWING 23 21. DISCLOSURE OF INTEREST OF DIRECTORS 24 BY-LAW NO. 1 A by-law relating generally to the conduct of the affairs of 3259722 Canada Inc. - BE IT ENACTED AND IT IS HEREBY ENACTED as a by-law of 3259722 Canada Inc. (hereinafter called the "Corporation") as follows: 1. INTERPRETATION 1.1 Definitions: In this by-law and all other by-laws of the Corporation, unless the context otherwise specifies or requires: (a) "Act" means the Canada Business Corporations Act, RS.C. 1985, c. C-44 as from time to time amended and every statute that may be substituted therefor and, in the case of such substitution, any references in the by-laws of the Corporation to provisions of the Act shall be read as references to the substituted provisions therefor in the new statute or statutes; (b) "Regulations" means the Regulations under the Act as published or from time to time amended and every regulation that may be substituted therefor and, in the case of such substitution, any references in the by-laws of the Corporation to provisions of the Regulations shall be read as references to the substituted provisions therefor in the new regulations; (c) "by-law" means any by-law of the Corporation from time to time in force and effect; (d) "registered owner" or "registered holder" when used with respect to a share in the authorized capital of the Corporation means the person registered in the register of shareholders or a branch register of shareholders in respect of such share; (e) "shareholder" means those persons defined as such in the Act and includes any person who owns shares in the capital of the Corporation and whose name is entered in the register of shareholders or a branch register of shareholders; (f) "writing", "in writing" and like expressions include all modes of representing, or reproducing and recording words in visible form, including: printing; lithographing; typewriting; and photostatic. electrostatic and mechanical copying; (g) all terms which are contained in the by-laws of the Corporation and which are defined in the Act or the Regulations shall have the meanings given to such terms in the Act or the Regulations; and (h) the singular shall include the plural and the plural shall include the singular; the masculine shall include the feminine; and the word "person" shall include bodies corporate, corporations, companies, partnerships, syndicates, trusts and any number or aggregate of persons. 2. DIRECTORS 2.1 Number: The number of directors shall, subject to the articles of the Corporation and any unanimous shareholder agreement, be fixed by the directors or if not so fixed, shall be the number of directors elected or continued as directors at the immediately preceding annual meeting of the Corporation. The business and affairs of the Corporation shall be managed by a board of directors of whom a majority shall be resident Canadians and of whom, if any of the issued securities of the Corporation are or were a part of a distribution to the public, at least two shall not be officers or employees of the Corporation or any affiliate of the Corporation. 2.2 Election and Removal: At each annual meeting of the Corporation, all the directors shall retire and the shareholders entitled to vote thereat shall elect a board of directors consisting of the number of directors for the time being fixed pursuant to the by-laws. 2.3 Retiring: A retiring director shall be eligible for re- election. 2.4 No Meeting: Where the Corporation fails to hold an annual meeting in accordance with the Act, the directors then in office shall be deemed to have been elected or appointed as directors on the last day on which the annual meeting could have been held pursuant to the Act and the by-laws and they may hold office until other directors are appointed or elected or until the day on which the next annual meeting is held, whichever shall first occur. 2.5 Continued: If at any meeting at which there should be an election of directors the places of any of the retiring directors are not filled by such election, such of the retiring directors who are not reelected as may be requested by the newly-elected directors shall, if willing to do so, continue in office to complete the number of directors for the time being fixed pursuant to the by-laws until further new directors are elected at a general meeting convened for the purpose. If any such election or continuance of directors does not result in the election or continuance of the number of directors for the time being fixed pursuant to the by-laws, such number shall be fixed at the number of directors actually elected or continued in office. 2.6 Casual Vacancy: The remaining directors or director shall have the power from time to time to appoint any person as a director to fill any casual vacancy occurring in the board of directors. 2.7 Additional Directors: Between successive annual meetings the directors shall have power to appoint one or more additional directors but the number of additional directors shall not be more than one-third of the number of directors elected or appointed at the last annual meeting. Any director so appointed shall hold office only until the next following annual meeting of the Corporation, but shall be eligible for election at such meeting and, so long as he is an additional director, the number of directors shall be increased accordingly. 2.8 Alternate Directors: Any director may by instrument in writing delivered to the Corporation appoint any person to be his alternate to act in his place at meetings of the directors at which he is not present unless the directors shall have reasonably disapproved the appointment of such person as an alternate director and shall have given notice to that effect to the director appointing the alternate director within a reasonable time after delivery of such instrument to the Corporation. Every such alternate shall be entitled to notice of meetings of the directors and to attend and vote as a director at a meeting at which the person appointing him is not personally present, and, if he is a director, to have a separate vote on behalf of the director he is representing in addition to his own vote. A person may be appointed as an alternate for more than one director and shall have a separate vote for each director so represented. A director may at any time in writing by instrument, telegram, telex, facsimile or any method of transmitting legibly recorded messages delivered to the Corporation revoke the appointment of an alternate appointed by him. The remuneration payable to such an alternate shall be payable out of the remuneration of the director appointing him. 2.9 Vacation of Office: The office of a director shall ipso facto be vacated: (a) if he becomes bankrupt or suspends -2- payments of his debts generally or compromises with his creditors or makes an authorized assignment or is declared insolvent; (b) if he is found to be a mentally incompetent person; or (c) if by notice in writing to the Corporation he resigns his office. 2.10 Ceasing: A director ceases to hold office when he: (a) dies; (b) resigns his office by notice in writing delivered to the Corporation; (c) is convicted of an indictable offence and the other directors shall have resolved to remove him; (d) ceases to be qualified to act as a director pursuant to the Act; or (e) is removed in accordance with the Act and this by-law. 2.11 Resignation: Every resignation of a director becomes effective at the time a written resignation is delivered to the Corporation or at the time specified in the resignation, whichever is later. 2.12 Removal: Subject to the Act, the Corporation may by ordinary resolution remove any director before the expiration of his period of office and may by an ordinary resolution appoint another person in his stead. 2.13 Powers: The directors shall manage or supervise the management of the affairs and business of the Corporation and shall have the authority to exercise all such powers of the Corporation as are not, by the Act or by the articles or by-laws, required to be exercised by the Corporation in general meeting. 2.14 Attorney: The directors may from time to time by power o attorney or other instrument under seal appoint any person to be the attorney of the Corporation for such purposes, and with such powers, authorities and discretions (not exceeding those vested in or exercisable by the directors under this by-law and excepting the powers of the directors relating to the constitution of the Board and of any of its committees and the appointment or removal of officers and the power to declare dividends) and for such period, with such remuneration and subject to such conditions as the directors may think fit, and any such appointment may be made in favour of any of the directors or any of the shareholders of the Corporation or in favour of any corporation, or of any of the shareholders, directors, nominees or managers of any corporation, firm or joint venture and any such power of attorney may contain such provisions for the protection or convenience of persons dealing with such attorney as the directors think fit. Any such attorney may be authorized by the directors to sub-delegate all or any of the powers, authorities and discretions for the time being vested in him. 2.15 Committee of Directors: The directors may appoint from among their number a committee of directors and subject to the Act may delegate to such committee any of the powers of the directors. A majority of the directors of any such committee must be resident Canadians. -3- 2.16 Shareholder Qualification: A director shall not be required to hold a share in the capital of the Corporation as qualification for his office but shall be qualified as required by the Act to become or act as a director. Any director who is not a shareholder shall be deemed to have agreed to be bound by the provisions of the articles and by-laws of the Corporation to the same extent as if he were a shareholder of the Corporation 3. MEETING OF DIRECTORS 3.1 Place of Meeting: Meetings of the board of directors and of a committee of directors (if any) may beheld within or outside of Canada. 3.2 Call: A director may, and the Secretary or an Assistant Secretary upon request of a director shall, call a meeting of the board at any time. Reasonable notice shall be given for any meeting specifying the place, day and hour of such meeting and shall be given by mail, postage prepaid, addressed to each of the directors and alternate directors at his address as it appears on the books of the Corporation or by leaving it at his usual business or residential address or by telephone, telex, facsimile, email or any method of transmitting legibly recorded messages. Accidental omission to give notice of a meeting of directors to, or by the non-receipt of notice by, any director shall not invalidate the proceedings at that meeting. 3.3 Waive Notice: Any director of the Corporation may file with the Secretary a document executed by him waiving notice of any past, present or future meeting or meetings of the directors being, or required to have been, sent to him and may at any time withdraw such waiver with respect to meetings held thereafter. After the filing of such waiver with respect to future meetings, and until such waiver is withdrawn, no notice of any meeting of the directors need be given to such director or, unless the director otherwise requires in writing to the Secretary, to his alternate director, and all meetings of the directors so held shall be deemed not to be improperly called or constituted by reason of notice not having been given to such director or alternate director. 3.4 No Notice: It shall not be necessary to give notice of a meeting of directors to any director or alternate director if such meeting is to be held immediately following a general meeting at which such director shall have been elected or is the meeting of directors at which such director is appointed. 3.5 Chair: The Chairman of the Board, if any, or in his absence the President, shall preside as chairman at every meeting of the directors, or if neither the Chairman of the Board nor the President is present within fifteen minutes of the time appointed for holding the meeting or is willing to act as chairman, or, if the Chairman of the Board, if any, and the President have advised the Secretary that they will not be present at the meeting, the directors present shall choose one of their number to be chairman of the meeting. With the consent of the meeting, the solicitor of the Corporation may act as chairman of a meeting of the directors. 3.6 Vacancy: The directors may act notwithstanding any vacancy in their body, but, if and so long as their number is reduced below the number fixed pursuant to the by-laws of the Corporation as the necessary quorum of directors, the directors may act for the purpose of increasing the number of directors to that number, or to summon a special meeting of the Corporation, but for no other purpose. If the directors fail to call a meeting or if there are no directors then in office, the meeting may be called by any shareholder. -4- 3.7 Defect: Subject to the provisions of the Act, all acts done at any meeting of the directors or of a committee of directors, or by any person acting as a director, shall, notwithstanding that it be afterwards discovered that there was some defect in the qualification, election or appointment of any such directors or of the members of such committee or person acting as aforesaid, or that they or any of them were disqualified, be as valid as if every such person had been duly elected or appointed and was qualified to he a director. 3.8 Quorum: The board of directors may from time to time fix the quorum required for the transaction of business at a meeting of the board of directors and until so fixed the quorum will be a majority of the then current number of directors, or if the number of directors is fixed at one, shall be one director. 3.9 Teleconference: A director may participate in a meeting of the board or of any committee of the directors by means of conference telephones or other communications facilities by means of which all directors participating in the meeting can hear each other. A director participating in a meeting in accordance with this by-law shall be deemed to be present at the meeting and to have so agreed and shall be counted in the quorum therefor and be entitled to speak and vote thereat. 3.10 Voting: The directors may meet together for the dispatch of business, adjourn and otherwise regulate their meetings, as they think fit. Questions arising at any meeting shall be decided by a majority of votes. In case of an equality of votes the chairman shall not have a second or casting vote. Meetings of the board held at regular intervals may be held at such place, at such time and upon such notice (if any) as the board may by resolution from time to time determine. 3.11 Resolution in Lieu of Meeting: Notwithstanding any of th foregoing provisions of this by-law, a resolution consented to in writing, whether by document, telegram, telex, facsimile or any method of transmitting legibly recorded messages, by all of the directors or their alternates shall be as valid and effectual as if it had been passed at a meeting of the directors duly called and held. Such resolution may be in two or more counterparts which together shall be deemed to constitute one resolution in writing. Such resolution shall be filed with the minutes of the proceedings of the directors and shall be effective on the date stated thereon or on the latest day stated on any counterpart. A resolution may be consented to by a director or alternate director who has an interest in the subject matter of the resolution provided that he has otherwise complied with the provisions of the articles, by-laws and the Act. 3.12 Seconds: No resolution proposed at a meeting of director need be seconded, and the chairman of any meeting may move or propose a resolution. 4. REMUNERATION OF DIRECTORS 4.1 Remuneration: The remuneration of the directors may from time to time be determined by the directors or, if the directors so decide, by ordinary resolution of the shareholders. Such remuneration may be in addition to any salary or other remuneration paid to any director in his capacity as officer or employee of the Corporation. The directors shall be reimbursed for reasonable travelling, hotel and other expenses they incur in and about the business of the Corporation and if any director shall perform any professional or other services for the Corporation that in the opinion of the directors are outside the ordinary duties of a director or shall otherwise be specially occupied in or about the Corporation's business, he may be paid a remuneration to be fixed by the board, or, at the option of such director, by the Corporation in general meeting, and such remuneration may be either in addition to, or in substitution for any other remuneration that he may be entitled to receive. The directors on behalf of the Corporation, unless otherwise determined by ordinary resolution, may pay a gratuity or pension or allowance on retirement to any director who has held any office or position with the Corporation or to his spouse or dependants and may make contributions to any fund and pay premiums for the purchase or provision of any such gratuity, pension or allowance. -5- 5. SUBMISSION OF CONTRACTS OR TRANSACTIONS TO SHAREHOLDERS FOR APPROVAL 5.1 Ratification: The board of directors in its discretion may submit any contract, act or transaction for approval or ratification at any annual meeting of the shareholders or at any special meeting of the shareholders called for the purpose of considering the same and, subject to the Act, any such contract, act or transaction that shall he approved or ratified or confirmed by a resolution passed by a majority of the votes cast at any such meeting (unless any different or additional requirement is imposed by the Act or by the Corporation's articles or any other by-law) shall be as valid and as binding upon the Corporation and upon all the shareholders as though it had been approved, ratified or confirmed by every shareholder of the Corporation. 6. FOR THE PROTECTION OF DIRECTORS AND OFFICERS 6.1 Conflicts: In supplement of and not by way of limitation upon any rights conferred upon directors by the Act, it is declared that no director shall be disqualified from his office or vacate his office by reason of holding any office or place of profit under the Corporation or under any body corporate in which the Corporation shall be a shareholder or by reason of being otherwise in any way directly or indirectly interested or contracting with the Corporation either as vendor, purchaser or otherwise or being concerned in a contract or arrangement made or proposed to be entered into with the Corporation in which he is in any way directly or indirectly interested either as vendor, purchaser or otherwise, nor shall any director be liable to account to the Corporation or any of its shareholders or creditors for any profit arising from any such office or place of profit; and, subject to the Act, no contract or arrangement entered into by or on behalf of the Corporation in which any director shall be in any way directly or indirectly interested shall be avoided or voidable and no director shall be liable to account to the Corporation or any of its shareholders or creditors for any profit realized by or from any such contract or arrangement by reason of any fiduciary relationship. Subject to the Act, no director or officer shall be obliged to make any declaration of interest in respect of a contract or proposed contract with the Corporation in which such director or officer is in any way directly or indirectly interested nor shall any director be obliged to refrain from voting in respect of any such contract. 7. INDEMNITIES TO DIRECTORS ANT) OFFICERS 7.1 Indemnity: Subject to the Act, the Corporation may indemnify a director or officer or former director or officer of the- Corporation or of a corporation of which the Corporation is or was a shareholder or creditor and the heirs and legal representatives of any such person against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by him or them in respect of any civil, criminal or administrative action or proceeding to which he is or they are made a party by reason of his being or having been a director or officer of the Corporation or a director of officer of such corporation, including any action brought by the Corporation or any such corporation. Each director or officer of the Corporation on being elected or appointed shall be deemed to have contracted with the Corporation on the terms of the foregoing indemnity. 7.2 Failure: The failure of a director or officer of the Corporation to comply with the provisions of the Act or of the articles or the by-laws shall not invalidate any indemnity to which he is entitled under the by-laws. 7.3 Insurance: The directors may cause the Corporation to purchase and maintain insurance for the benefit of any person who is or was serving as a director, officer, employee or agent of the Corporation or as a director, officer, employee or agent of any corporation of which the Corporation is or was a shareholder and his heirs or personal representatives, against any liability incurred by him as such director, officer, employee or agent. 8. OFFICERS 8.1 Appointment: The board of directors shall annually or as often as may be required appoint a President and a -6- Secretary and, if deemed advisable, may annually or as often as may be required appoint a Chairman of the Board, a Vice-Chairman of the Board, a Managing Director, one or more Vice-Presidents, a Treasurer, one or more Assistant Secretaries and/or one or more Assistant Treasurers. A director may be appointed to any office of the Corporation but none of the officers except the Chairman of the Board, the Vice-Chairman of the Board and the Managing Director need be a member of the board of directors. Two or more of the aforesaid offices may be held by the same person. In case and whenever the same person holds the offices of Secretary and Treasurer he may, but need not be, known as the Secretary-Treasurer. The board of directors may from time to time appoint such other officers and agents as it shall deem necessary who shall have such authority and shall perform such duties as may from time to time be prescribed by the board of directors. 8.2 Vacancies: If the office of any officer of the Corporation shall be or become vacant by reason of death, resignation, disqualification or otherwise, the directors by resolution shall, in the case of the President, and may, in the case of any other office, appoint a person to fill such vacancy. 8.3 Remuneration and Removal: The remuneration of all officers appointed by the board of directors shall be determined from time to time by resolution of the board of directors. The fact that any officer or employee is a director or shareholder of the Corporation shall not disqualify him from receiving such remuneration as may be determined. All officers, in the absence of agreement to the contrary, shall be subject to removal by resolution of the hoard of directors at any time, with or without cause. 8.4 Powers and Duties: All officers shall sign such contracts, documents or instruments in writing as require their respective signatures and shall respectively have and perform all powers and duties incident to their respective offices and such other powers and duties respectively as may from time to time be assigned to them by the board of directors. 8.5 Duties May be Delegated: In case of the absence or inability to act of any officer of the Corporation, or for any other reason that the board of directors may deem sufficient, the board of directors may delegate all or any of the powers of such officer to any other officer or to any director for the time being. 8.6 Chairman of the Board: If the Chairman of the Board is absent or is unable or refuses to act, the Vice-Chairman of the Board (if any) shall, when present, preside at all meetings of the board of directors, the executive committee of directors (if any) and the shareholders . 8.7 Vice-Chairman of the Board: If the Chairman of the Board is absent or is unable or refuses to act, the Vice- Chairman of the Board (if any) shall, when present, preside at all meetings of the board of directors, the executive committee of directors (if any) and the shareholders. 8.8 Managing Director: The Managing Director shall be a resident Canadian and shall exercise such powers and have such authority as may be delegated to him by the board of directors in accordance with the Act. 8.9 President: The President shall be the Chief Executive Officer of the Corporation. He shall be vested with and may exercise all the powers and shall perform all the duties of the Chairman of the Board and/or Vice-Chairman of the Board if none be appointed or if the Chairman of the Board and the Vice-Chairman of the Board are absent or are unable or refuse to act; provided, however, that unless he is a director he shall not preside as chairman at any meeting of directors or of the executive committee of directors (if any) or, subject to paragraph 9.8 of this by- law, at any meeting of shareholders. 8.10 Vice-President: The Vice-President or, if more than one, the Vice-Presidents, in order of seniority, shall be vested with all the powers and shall perform all the duties of the President in the absence or inability or refusal to act of the President; provided, however, that a Vice-President who is not a director shall not preside as chairman at any meeting of directors or of the executive committee of directors (if any) or, subject to paragraph 9.8 of this -7- by-law, at any meeting of shareholders. 8.11 Secretary: The Secretary shall give or cause to be given notices for all meetings of the board of directors, the executive committee of directors (if any) and the shareholders when directed to do so and shall have charge of the minute books of the Corporation and, subject to the provisions of this by-law, of the records (other than accounting records) referred to in the Act. 8.12 Treasurer: Subject to the provisions of any resolution o the board of directors, the Treasurer shall have the care and custody of all the funds and securities of the Corporation and shall deposit the same in the name of the Corporation in such bank or banks or with such other depositary or depositaries as the board of directors may direct. He shall keep or cause to be kept the accounting records referred to in the Act. He may be required to give such bond for the faithful performance of his duties as the board of directors in its uncontrolled discretion may require but no director shall be liable for failure to require any such bond or for the insufficiency of any such bond or for any loss by reason of the failure of the Corporation to receive any indemnity thereby provided. 8.13 Assistant Secretary and Assistant Treasurer: The Assistant Secretary or, if more than one, the Assistant Secretaries in order of seniority, and the Assistant Treasurer or, if more than one, the Assistant Treasurers in order of seniority, shall respectively perform all the duties of the Secretary and the Treasurer, respectively, in the absence or inability or refusal to act of the Secretary or the Treasurer, as the case may be. 8.14 General Manager or Manager: The board of directors may from time to time appoint one or more General Managers or Managers and may delegate to him or them full powers to manage such matters and duties as by law must be transacted or performed by the board of directors and/or by the shareholders and to employ and discharge agents and employees of the Corporation or may delegate to him or them any lesser authority. A General Manager or Manager shall conform to all lawful orders given to him by the board of directors of the Corporation and shall at all reasonable times give to the directors or any of them all information they may require regarding the affairs of the Corporation. Any agent or employee appointed by a General Manager or Manager shall be subject to discharge by the board of directors. 8.15 Conflicts: Every officer of the Corporation who holds any office or possesses any property whereby, whether directly or indirectly, duties or interests might be created in conflict with his duties or interests as an officer of the Corporation shall, in writing, disclose to the President the fact and the nature, character and extent of the conflict in accordance with the provisions of the Act. 9. SHAREHOLDERS' MEETINGS 9.1 Annual Meeting: Subject to the Act, the annual meeting o the shareholders shall be held on such day in each year and at such time as the directors may by resolution determine at any place within Canada or, if all the shareholders entitled to vote at such meeting so agree, outside Canada. 9.2 Special Meetings: Special meetings of the shareholders may be convened by order of the board of directors at any date and time and at any place within Canada or, if all the shareholders entitled to vote at such meeting so agree, outside Canada. 9.3 Notice: A notice stating the day, hour and place of meeting shall he given by serving such notice on such persons as are entitled by law or under this by-law to receive such notice from the Corporation in the manner specified in paragraph 15.1 of this by-law or in such manner as maybe prescribed by the directors, not less than twenty-one days or more than fifty days (in each case exclusive of the day on which the notice is delivered or sent and of the day for which notice is given) before the day of the meeting. Notice of a meeting at which special business is to be transacted shall state: (a) the nature of that business in sufficient detail to permit the -8- shareholder to form a reasoned judgment thereon; and (b) the text of any special resolution to be submitted to the meeting. Except as otherwise provided by the Act, where any special business at a general meeting includes considering, approving, ratifying, adopting or authorizing any document or the execution thereof or the giving of effect thereto, the notice convening the meeting shall, with respect to such document, be sufficient if it states that a copy of the document or proposed document is or will be available for inspection by shareholders at the registered office or records office of the Corporation or at some other place designated in the notice during usual business hours up to the date of such general meeting. 9.4 Waiver of Notice: A shareholder and any other person entitled to attend a meeting of shareholders may in any manner waive notice or reduce the period of notice of a meeting of shareholders and attendance of any such person at a meeting of shareholders shall constitute a waiver of notice of the meeting except where such person attends a meeting for the express purpose of objecting to the transaction of any business on the grounds that the meeting is not lawfully called. 9.5 Omission of Notice: The accidental omission to give notice of any meeting or any irregularity in the notice of any meeting or the non-receipt of any notice by any shareholder or shareholders, director or directors or the auditor of the Corporation shall not invalidate any resolution passed or any proceedings taken at any meeting of shareholders. 9.6 Votes: Subject to the Act, every question submitted to any meeting of shareholders shall be decided in the first instance by a show of hands unless (before or on the declaration of the result of the show of hands) a poll is directed by the Chairman or a shareholder or proxyholder entitled to vote at the meeting has demanded a ballot and in the case of an equality of votes the chairman of the meeting shall on a show of hands or on a ballot not have a second or casting vote in addition to the vote or votes to which he may be otherwise entitled as a member or proxyholder and this provision shall apply notwithstanding the Chairman is interested in the subject matter of the resolution. 9.7 Declaration: At any meeting, unless a ballot is demanded a declaration by the chairman of the meeting that a resolution has been carried or carried unanimously or by a particular majority or lost or not carried by a particular majority shall be conclusive evidence of the fact. 9.8 Chair: The Chairman of the Board, if any, or in his absence the President of the Corporation or in his absence a Vice-President of the Corporation, if any, shall be entitled to preside as chairman at every meeting of shareholders of the Corporation. Notwithstanding the foregoing, with the consent of the meeting, which consent may be expressed by the failure to object of any person present and entitled to vote, the solicitor of the Corporation may act as chairman of the meeting of shareholders. If at any meeting of shareholders neither the Chairman of the Board nor President nor a Vice-President is present within fifteen minutes after the time appointed for holding the meeting or is willing to act as chairman, the Directors present, shall choose someone of their number, or the solicitor of the Corporation, to be chairman. If all the Directors present, and -9- the solicitor of the Corporation, decline to take the chair or fail to so choose or if no Director be present, the persons present and entitled to vote shall choose some person in attendance, who need not be a shareholder, to be chairman. 9.9 Ballot: A ballot may be demanded either before or after any vote by a show of hands by any person entitled to vote at the meeting. No poll may be demanded on the election of the chairman. If at any meeting a ballot is demanded on the question of adjournment it shall be taken forthwith without adjournment. If at any meeting a ballot is demanded on any other question or as to the election of directors, the vote shall be taken by ballot in such manner and either at once, later in the meeting or after adjournment as the chairman of the meeting directs but in no event later than seven days after the meeting. The result of a ballot shall be deemed to be the resolution of the meeting at which the ballot was demanded. Any business other than that upon which the poll has been demanded may be proceeded with pending the taking of the poll. A demand for a ballot may be withdrawn. 9.10 Determination: In the case of any dispute as to the admission or rejection of a vote, whether by show of hands or on a poll, the chairman shall determine the same, and his determination made in good faith is final and conclusive. 9.11 Action: Unless the Act, the articles or the by-laws otherwise provide, any action to be taken by a resolution of the shareholders may be taken by an ordinary resolution. 9.12 Votes: Subject to any special voting rights or restrictions attached to any class of shares and the restrictions on joint registered holders of shares: (a) on a show of hands: (i) every shareholder who is present in person and entitled to vote shall have one vote; and (ii) a proxyholder duly appointed by a holder of a share who would have been entitled to vote shall have one vote; and (b) on a poll, every shareholder shall have one vot for each share of which he is the registered holder and may exercise such vote either in person or by proxy. 9.13 Not Registered: Any person who is not registered as a shareholder but is entitled to vote at any meeting in respect of a share, may vote the share in the same manner as if he were a shareholder; but, unless the directors have previously admitted his right to vote at that meeting in respect of the share, he shall satisfy the directors of his right to vote the share before the time for holding the meeting, or adjourned meeting, as the case may be, at which he proposes to vote. 9.14 Corporate Representative: Any corporation riot being a subsidiary which is a shareholder of the Corporation may by resolution of its directors or other governing body authorize such person as it thinks fit to act as its representative at any general meeting or class meeting. The person so authorized shall be entitled to exercise in respect of and at such meeting the same powers on behalf of the corporation which he represents as that corporation could exercise if it were an individual shareholder of the Corporation personally present, including, without limitation, the right, unless restricted by such resolution, to appoint a proxyholder to represent such corporation, and shall be counted for the purpose of forming a quorum if present at the meeting. Evidence of the appointment of any such representative may be sent to the Corporation in writing by written instrument, telegram, telex, facsimile or any method of transmitting legibly recorded messages. Notwithstanding the foregoing, a corporation being a shareholder may appoint a proxyholder. 9.15 Unsound Mind: A shareholder of unsound mind entitled to attend and vote, in respect of whom an order has been made by any court having jurisdiction, may vote, whether on a show of hands or on a poll, by his committee or -10- curator bonis or other person in the nature of a committee or curator bonis appointed by that court, and any such committee or curator bonis, or other person may appoint a proxyholder. The chairman may require such proof of such appointment as he sees fit. 9.16 Joint Registered Holders: In the case of joint registere holders of a share, the vote of the senior who exercises a vote, whether in person or by proxyholder, shall be accepted to the exclusion of the votes of the other joint registered holders; and for this purpose, seniority shall be determined by the order in which the names stand in the register of shareholders. Several legal personal representatives of a deceased shareholder whose shares are registered in his sole name shall, for the purpose of this by-law, be deemed joint registered holders. 9.17 Proxyholders: A shareholder holding more than one share in respect of which he is entitled to vote shall be entitled to appoint one or more (but not more than five) proxyholder s to attend, act and vote for him on the same occasion. If such a shareholder should appoint more than one proxyholder for the same occasion he shall specify the number of shares each proxyholder shall be entitled to vote. A shareholder may also appoint one or more alternate proxyholders to act in the place and stead of an absent proxyholder. 9.18 Proxyholders: Any person, having attained the age of majority, may act as proxyholder whether or not he is entitled on his own behalf to be present and to vote at the meeting at which he acts as proxyholder. The proxy may authorize the person so appointed to act as proxyholder for the appointor for the period, at any meeting or meetings, and to the extent permitted by the Act. 9.19 Proxyholder: A person appointed by proxy need not be a shareholder. 9.20 Proxies: A proxy shall be in writing under the hand of the appointor or of his attorney duly authorized in writing, or, if the appointor is a corporation, either under the seal of the corporation or under the hand of a duly authorized officer or attorney of that corporation. 9.21 Deposit of Proxies: Unless the directors fix some other time by which proxies must be deposited, a proxy and the power of attorney or other authority, if any, under which it is signed, or a notarially certified copy thereof, shall be deposited at the registered office of the Corporation or at such other place as is specified for that purpose in the notice convening the meeting or form of proxy, not less than 48 hours (excluding Saturdays and holidays) before the time for holding the meeting in respect of which the person named in the instrument is appointed. 9.22 Deposit of Proxies: In addition to any other method of depositing proxies provided for in the bylaws, the directors may by resolution make regulations relating to the depositing of proxies at any place or places and fixing the time for depositing the proxies. If the Corporation is or becomes a reporting company, the time so fixed shall not exceed 48 hours (excluding Saturdays and holidays) preceding the meeting or adjourned meeting specified in the notice calling a meeting of shareholders and providing for particulars of such proxies to be sent to the Corporation or any agent of the Corporation in writing or by letter, telegram, telex, facsimile or any method of transmitting legibly recorded messages so as to arrive before the commencement of the meeting or adjourned meeting at the office of the Corporation or of any agent of the Corporation appointed for the purpose of receiving such particulars and providing that proxies so deposited may be acted upon as though the proxies themselves were deposited as required by this Part. 9.23 Death or Incapacity: A vote given in accordance with the terms of a proxy is valid notwithstanding the previous death or incapacity of the shareholder giving the proxy or the revocation of the proxy or of the authority under which the form of proxy was executed or the transfer of the share in respect of which the proxy is given, provided that no notification in writing of such death, incapacity, revocation or transfer shall have been received at the registered office of the Corporation or by the chairman of the meeting or adjourned meeting for which the proxy was given before the vote was taken. -11- 9.24 Retain Ballots: Every ballot cast upon a poll and every proxy appointing a proxyholder who casts a ballot upon a poll shall be retained by the Secretary for such period and be subject to such inspection as the Act may provide. 9.25 Votes on Poll: On a poll a person entitled to cast more than one vote need not, if he votes, use all his votes or cast all the votes he uses in the same way. 9.26 Determinations: The chairman of the meeting may determine whether or not a proxy, deposited for use at such meeting, which may not strictly comply with the requirements of this Part as to form, execution, accompanying documentation, time of filing, or otherwise, shall be valid for use at such meeting and any such determination made in good faith shall be final, conclusive and binding upon such meeting. 9.27 Form of Proxy: Subject to the provisions of Part IV of the Regulations, a proxy may be in the following form or in any other form that the directors or the chairman of the meeting shall approve or accept: "The undersigned shareholder of _____________________________ hereby appoints, --------------------------------------------- or failing him, of ___________________________________ as the nominee of the undersigned to attend, act and vote for the undersigned and on behalf of the undersigned of the ____________ meeting of the shareholders of the said corporation to be held on the ________ day of __________, and at any adjournment or adjournments thereof in the same manner, to the same extent and with the same powers as if the undersigned were present at the said meeting or such adjournment or adjournments thereof DATED this ______ day of, . Signature of Shareholder 9.28 Revocation: Every proxy may be revoked by an instrument in writing: (a) executed by the shareholder giving the same or by his attorney authorized in writing or, where the shareholder is a corporation, by a duly authorized officer or attorney of the corporation; and (b) delivered either at the registered office of th Corporation at any time up to and including the last business day preceding the day of the meeting, or any adjournment thereof at which the proxy is to be used, or to the chairman of the meeting on the day of the meeting or any adjournment thereof before any vote in respect of which the proxy is to be used shall have been taken, or in any other manner provided by law. 9.29 Adjournment: The chairman of any meeting may and shall, if so directed by the meeting, adjourn the same from time to time to a fixed time and place and no notice of such adjournment need to be given to the shareholders unless the meeting is adjourned by one or more adjournments for an aggregate of thirty days or more in which case notice of the adjourned meeting shall be given as for an original meeting. Any business may be brought before or dealt with at any adjourned meeting for which no notice is required which might have been brought before or dealt with at the original meeting in accordance with the notice calling the same. 9.30 Seconds: No motion proposed at a general meeting need be seconded and the chairman may propose a motion. 9.31 Quorum: Save as herein otherwise provided, a quorum for meeting of shareholders shall be two shareholders, or two proxyholders representing shareholders, or any combination thereof, holding not less than one-twentieth of -12- the issued shares entitled to be voted at the meeting.. If there is only one shareholder the quorum is one person present and being, or representing by proxy, such shareholder. The directors, the Secretary or, in his absence, an Assistant Secretary, and the solicitor of the Corporation shall be entitled to attend at any meeting of shareholders but no such person shall be counted in the quorum or be entitled to vote at any meeting of shareholders unless he shall be a shareholder or proxyholder entitled to vote thereat. 9.32 Quorum: If within half an hour from the time appointed for a meeting of shareholders a quorum is not present, the meeting, if convened upon requisition by the shareholders shall be dissolved. In any other case, it shall stand adjourned to the same day in the next week, at the same time and place but may not transact any other business. If at the adjourned meeting a quorum is not present within half an hour from the time appointed for the meeting, the person or persons present and being, or representing by proxy, a shareholder or shareholders entitled to attend and vote at the meeting shall be a quorum. 9.33 Opening Quorum: No business other than the election of the chairman or the adjournment of the meeting shall be transacted at any general meeting unless a quorum of shareholders entitled to attend and vote is present at the commencement of the meeting, but the quorum need not be present throughout the meeting. 9.34 Resolution in lieu of meeting: Notwithstanding any of the foregoing provisions of this by-law, a resolution in writing signed by all the shareholders entitled to vote on that resolution at a meeting of the shareholders is, subject to the Act, as valid as if it had been passed at a meeting of the shareholders. Such resolution may be in two or more counterparts which together shall be deemed to constitute one resolution in writing. Such resolution shall be filed with the minutes of the proceedings of the shareholders and shall be effective on the date stated thereon or on the latest day stated on any counterpart. 9.35 Class Meetings: Unless the Act, the articles or by-laws otherwise provide, the provisions of this by-law relating to meetings shall apply with the necessary changes, and so far as they are applicable, to a class meeting of shareholders holding a particular class of shares. 10. SHARES 10.1 Allotment and Issuance: Subject to the provisions of the Act, the shares shall be under the control of the directors who may, subject to the rights of the holders of the shares of the Corporation for the time being outstanding, issue, allot, sell or otherwise dispose of, and/or grant options on or otherwise deal in, shares authorized but not outstanding, and outstanding shares held by the Corporation, at such times, to such persons (including directors), in such manner, upon such terms and conditions and at such price or for such consideration, as the directors, in their absolute discretion, may determine. 10.2 Fully Paid: No share may be issued until it is fully pai and the Corporation shall have received the full consideration therefor in cash, property or past services actually performed for the Corporation. The value of property or services for the purposes of this by-law shall be the value determined by the directors by resolution to be, in all circumstances of the transaction, the fair market value thereof, and the full consideration received for a share issued by way of dividend shall be the amount declared by the directors to be the amount of the dividend. 10.3 Discounts: Subject to the Act, the Corporation or the directors on behalf of the Corporation, may pay a commission or allow a discount to any person in consideration of his subscribing or agreeing to subscribe, whether absolutely or conditionally, for any shares, debentures, share rights, warrants or debenture stock in the Corporation, or procuring or agreeing to procure subscriptions, whether absolutely or conditionally, for any such shares, debentures, share rights, warrants or debenture stock, provided that the rate of the commission and discount shall not in the aggregate exceed 25 per cent of the amount of the subscription price of such shares. The Corporation may also pay such brokerage fees as may be lawful. -13- 10.4 Certificates: Every shareholder is entitled, without charge, to one certificate representing the share or shares of each class or series held by him; provided that in respect of a share or shares held jointly by several persons, the Corporation shall not be bound to issue more than one certificate, and delivery of a certificate for a share to one of several joint registered holders or to his duly authorized agent shall be sufficient delivery to all; and provided further that the Corporation shall not be bound to issue certificates representing redeemable shares, if such shares are to be redeemed within one month of the date on which they were allotted. Any share certificate may be sent through the mail by prepaid mail to the shareholder entitled thereto, and neither the Corporation nor any transfer agent shall be liable for any loss occasioned to the shareholder owing to any such share certificate so sent being lost in the mail or stolen. 10.5 Certificates: Every share certificate issued by the Corporation shall be in such form as the directors approve and shall comply with the Act. 10.6 Replacement Certificates: If a share certificate: (a) is worn or defaced, the directors shall, upon production to them of the said certificate and upon such other terms, if any, as they may think fit, order the said certificate to be cancelled and shall issue a new certificate in lieu thereof; (b) is lost, stolen or destroyed, then, upon proof thereof to the satisfaction of the directors and upon such indemnity, if any, as the directors deem adequate being given, a new share certificate in lieu thereof shall be issued to the person entitled to such lost, stolen or destroyed certificate; or (c) represents more than one share and the registered owner thereof surrenders it to the Corporation with a written request that the Corporation issue in his name two or more certificates each representing a specified number of shares and in the aggregate representing the same number of shares as the certificate so surrendered, the Corporation shall cancel the certificate so surrendered and issue in lieu thereof certificates in accordance with such request. There shall be paid to the Corporation such sum as the directors may from time to time fix, for each certificate to be issued under this by-law. 10.7 Trust: Except as required by law, statute or the by-laws no person shall be recognized by the Corporation as holding any share upon any trust, and the Corporation shall not be bound by or compelled in any way to recognize (even when having notice thereof) any equitable, contingent, future or partial interest in any share or in any fractional part of a share or (except only as by law, statute or the by-laws provided or as ordered by a court of competent jurisdiction) any other fights in respect of any share except an absolute right to the entirety thereof in its registered holder. 10.8 Two Names: The certificate representing shares registere in the name of two or more persons shall be delivered to the person first named on the register of shareholders. 10.9 Redemption of Shares: Subject to the Act, the articles and the special rights and restrictions attached to any class of shares of the Corporation, the Corporation may, by a resolution of the directors and in compliance with the Act, purchase any of its shares in accordance with the special rights and restrictions attaching thereto. No such purchase or redemption shall be made if the Corporation is insolvent at the time of the proposed purchase or redemption or if the proposed purchase or redemption would render the Corporation insolvent. Subject to the Act, any shares purchased or redeemed by the Corporation may be sold or, if cancelled, reissued by it, but while such shares are held by the Corporation, it shall not exercise any vote in respect of such shares and no dividend or other distribution shall be paid or made thereon. If the Corporation proposes at its option to redeem some but not all of the shares of any class or series, the directors may, subject to the special rights and restrictions attached to such shares, decide the manner in which the shares to be redeemed shall be selected and such redemption may or may not be made pro rata among every shareholder holding any such shares as the directors may determine. -14- 10.10 Signatures; Subject to the Act, the signature of the Chairman of the Board, the Vice-Chairman of the Board, the Managing Director, the President, a Vice-President or any other director or officer of the Corporation may be printed, engraved, lithographed or otherwise mechanically reproduced upon certificates for shares of the Corporation. Certificates so signed shall be deemed to have been manually signed by the Chairman of the Board, the Vice-Chairman of the Board, the Managing Director, the President, the Vice-President, the director or the officer whose signature is so printed, engraved, lithographed or otherwise mechanically reproduced thereon and shall be as valid to all intents and purposes as if they have been signed manually. Where the Corporation has appointed a registrar, transfer agent, branch registrar or branch transfer agent for the shares (or for the shares of any class or classes) of the Corporation, the signature of the Secretary or Assistant Secretary may also be printed, engraved, lithographed or otherwise mechanically reproduced on certificates representing the shares (or the shares of the class or classes in respect of which any such appointment has been made) of the Corporation and when countersigned by or on behalf of a registrar, transfer agent, branch registrar or branch transfer agent, such certificates so signed shall be as valid to all intents and purposes as if they had been signed manually. A share certificate containing the signature of a person which is printed, engraved, lithographed or otherwise mechanically reproduced thereon may be issued notwithstanding that the person has ceased to be an officer of the Corporation and shall be as valid as if he were an officer at the date of its issue. 11. TRANSFER OF SECURITIES 11.1 Transfer of Shares: Subject to the restrictions, if any, set forth in the articles and the by-laws, any shareholder may transfer any of his shares by instrument in writing executed by or on behalf of such shareholder and delivered to the Corporation or its transfer agent. The instrument of transfer of any share of the Corporation shall be in the form, if any, on the back of the Corporation's share certificates or in such other form as the directors may from time to time approve or accept. If the directors so determine, each instrument of transfer shall be in respect of only one class of share. Except to the extent that the Act may otherwise provide, the transferor shall be deemed to remain the holder of the shares until the name of the transferee is entered in the register of shareholders or a branch register of shareholders in respect thereof. -15- 11.2 Signature: The signature of the registered owner of any shares, or of his duly authorized attorney, upon an authorized instrument of transfer shall constitute a complete and sufficient authority to the Corporation, its directors, officers and agents to register, in the name of the transferee as named in the instrument of transfer, the number of shares specified therein or, if no number is specified, all the shares of the registered owner represented by share certificates deposited with the instrument of transfer. If no transferee is named in the instrument of transfer, the instrument of transfer shall constitute a complete and sufficient authority to the Corporation, its directors, officers and agents to register, in the name of the person on whose behalf any certificate for the shares to be transferred is deposited with the Corporation for the purpose of having the transfer registered, the number of shares if specified in the instrument of transfer or, if no number is specified, all the shares represented by all share certificates deposited with the instrument of transfer. 11.3 Transferee: Neither the Corporation nor any director, officer or agent thereof shall be bound to enquire into the title of the person named in the form of transfer as transferee, or, if no person is named therein as transferee, of the person on whose behalf the certificate is deposited with the Corporation for the purpose of having the transfer registered or be liable to any claim by such registered owner or by any intermediate owner or holder of the certificate or of any of the shares represented thereby or any interest therein for registering the transfer, and the transfer, when registered, shall confer upon the person in whose name the shares have been registered a valid title to such shares. 11.4 Instrument of Transfer: Every instrument of transfer shall be executed by the transferor and left at the registered office of the Corporation or at the office of its transfer agent or registrar for registration together with the share certificate for the shares to be transferred and such other evidence, if any, as the directors or the transfer agent or registrar may require to prove the title of the transferor or his right to transfer the shares and the right of the transferee to have the transfer registered. All instruments of transfer, where the transfer is registered, shall be retained by the Corporation or its transfer agent or registrar and any instrument of transfer, where the transfer is not registered, shall be returned to the person depositing the same together with the share certificate which accompanied the same when tendered for registration. 11.5 Fees: There shall be paid to the Corporation in respect of the registration of any transfer such sum, if any, as the directors may from time to time determine. 11.6 Restriction on Transfers: Notwithstanding any other provision of the by-laws, while the Corporation is, or becomes a company which is not a reporting issuer as defined in the Securities Act (British Columbia), then no shares shall be transferred and entered on the register of shareholders without the previous consent of the directors expressed by a resolution of the board and the directors shall not be required to give any reason for refusing to consent to any such proposed transfer. The consent of the board required by this by-law may be in respect of a specific proposed trade or trades or trading generally, whether or not over a specified period of time, or by specific persons or with such other restrictions or requirements as the directors may determine. 11.7 Transmission of Shares: In the case of the death of a shareholder, the survivor or survivors, where the deceased was a joint registered holder, and the legal personal representative of the deceased, where he was the sole holder, shall be the only persons recognized by the Corporation as having any title to his interest in the shares. Before recognizing any legal personal representative the directors may require him to deliver to the Corporation the original or a court-certified copy of a grant of probate or letters of administration in British Columbia or such other evidence and documents as the directors consider appropriate to establish the right of the personal representative to such title to the interest in the shares of the deceased shareholder. -16- 11.8 Death or Bankruptcy; Upon the death or bankruptcy of a shareholder, his personal representative or trustee in bankruptcy, although not a shareholder, shall have the same rights, privileges and obligations that attach to the shares formerly held by the deceased or bankrupt shareholder if the documents required by the Act shall have been deposited with the Corporation. This by-law does not apply on the death of a shareholder with respect to shares registered in his name and the name of another person in joint tenancy. 11.9 Death or Bankruptcy: Any person becoming entitled to a share in consequence of the death or bankruptcy of a shareholder shall, upon such documents and evidence being produced to the Corporation as the Act requires, or who becomes entitled to a share as a result of an order of a Court of competent jurisdiction or a statute, has the right either to be registered as a shareholder in his representative capacity in respect of such share, or, if he is a personal representative, instead of being registered himself, to make such transfer of the shares as the deceased or bankrupt person could have made; but the directors shall, as regards a transfer by a personal representative or trustee in bankruptcy, have the same right, if any, to decline or suspend registration of a transferee as they would have in the case of a transfer of a share by the deceased or bankrupt person before the death or bankruptcy. 11.10 Transfer Agent and Registrar: The directors may from tim to time by resolution appoint or remove one or more transfer agents and/or branch transfer agents and/or registrars and/or branch registrars (which may or may not be the same individual or body corporate) for the securities issued by the Corporation in registered form (or for such securities of any class or classes) and may provide for the registration of transfers of such securities (or such securities of any class or classes) in one or more places and such transfer agents and/or branch transfer agents and/or registrars and/or branch registrars shall keep all necessary books and registers of the Corporation for the registering of such securities (or such securities of the class or classes in respect of which any such appointment has been made). In the event of any such appointment in respect of the shares (or the shares of any class or classes) of the Corporation, all share certificates issued by the Corporation in respect of the shares (or the shares of the class or classes in respect of which such appointment has been made) of the Corporation shall be countersigned by or on behalf of one of the said transfer agents and/or branch transfer agents or by or on behalf of one of the said registrars and/or branch registrars, if any. 11.11 Securities Registrars: A central securities register of the Corporation shall be kept at the registered office of the Corporation or at such other office or place in Canada as may from time to time be designated by resolution of the board of directors and a branch securities register or registers may be kept at such office or offices of the Corporation or other place or places, either in or outside Canada, as may from time to time be designated by resolution of the directors. 11.12 Shareholder Indebted to the Corporation: If so provided in the articles or by-laws of the Corporation, the Corporation has a lien on a share registered in the name of a shareholder or his legal representative for a debt of that shareholder to the Corporation. By way of enforcement of such lien the directors may refuse to permit the registration of a transfer of such share. 12. DIVIDENDS 12.1 Dividends: The directors may from time to time declare and authorize payment of such dividends, if any, as they may deem advisable and need not give notice of such declaration to any shareholder. No dividend shall be paid otherwise than out of funds and/or assets properly available for the payment of dividends and a declaration by the directors as to the amount of such funds or assets available for dividends shall be conclusive. The Corporation may pay any such dividend wholly or in part by the distribution of specific assets, and in particular by paid up shares, bonds, debentures or other securities of the Corporation or any other corporation, or in any one or more such ways as may be authorized by the Corporation or the directors, and where any difficulty arises with regard to such a distribution the directors may settle the same as they think expedient, and in particular may fix the value for distribution of such specific assets or any part thereof, and may determine that cash payments in substitution -17- for all or any part of the specific assets to which any shareholders are entitled shall be made to any shareholders on the basis of the value so fixed to adjust the rights of all parties, and may vest any such specific assets in trustees for the persons entitled to the dividend as may seem expedient to the directors. 12.2 Payment Date: Any dividend declared on shares of any class by the directors may be made payable on such date as is fixed by the directors. 12.3 Declaration: Subject to the rights of shareholders (if any) holding shares with specific rights as to dividends, all dividends on shares of any class shall be declared and paid according to the number of such shares held. 12.4 Funds: The directors may, before declaring any dividend, set aside out of the funds properly available for the payment of dividends such sums as they think proper as a reserve or reserves, which shall, at the discretion of the directors, be applicable for meeting contingencies, or for equalizing dividends, or for any other purpose to which such funds of the Corporation may be properly applied, and pending such application may, at the like discretion, either be employed in the business of the Corporation or be invested in such investments as the directors may from time to time think fit. The directors may also, without placing the same in reserve, carry forward such funds which they think prudent not to divide. 12.5 Joint Holders: If several persons are registered as join holders of any share, any one of them may give an effective receipt fur any dividend, bonus or other moneys payable in respect of the share. 12.6 No Interest: No dividend shall bear interest against the Corporation. Where the dividend to which a shareholder is entitled includes a fraction of a cent, such fraction shall be disregarded in making payment thereof and such payment shall be deemed to be payment in full. 12.7 Delivery: Any dividend, bonus or other moneys payable in cash in respect of shares maybe paid by cheque or warrant sent through the post directed to the registered address of the holder, or in the case of joint holders, to the registered address of that one of the joint holders who is first named on the register, or to such person and to such address as the holder or joint holders may direct in writing. Every such cheque or warrant shall be made payable to the order of the person to whom it is sent. The mailing of such cheque or warrant shall, to the extent of the sum represented thereby (plus the amount of any tax required by law to be deducted) discharge all liability for the dividend, unless such cheque or warrant shall not be paid on presentation or the amount of tax so deducted shall not be paid to the appropriate taxing authority. 12.8 Surplus: Notwithstanding anything contained in the by- laws, the directors may from time to time capitalize any undistributed surplus on hand of the Corporation and may from time to time issue as filly paid and non-assessable any unissued shares, or any bonds, debentures or debt obligations of the Corporation as a dividend representing such undistributed surplus on hand or any part thereof 12.9 Fractions: Notwithstanding any other provisions of the b laws, should any dividend result in any shareholders being entitled to a fractional part of a share of die Corporation, the directors shall have the right to pay such shareholders in place of that fractional share, the cash equivalent thereof calculated on the par value thereof or, in the case of shares without par value, calculated on the price or consideration for which such shares were or were deemed to be issued, and shall have the further right and complete discretion to carry out such distribution and to adjust the rights of the shareholders with respect thereon on as practical and equitable a basis as possible including the right to arrange through a fiscal agent or otherwise for the sale, consolidation or other disposition of those fractional shares on behalf of those shareholders of the Corporation. 13. VOTING SHARES AND SECURITIES IN OTHER COMPANIES 13.1 Voting Other Securities: All of the shares or other securities carrying voting rights of any other body corporate -18- held from time to time by the Corporation may be voted at any and all meetings of shareholders, bondholders, debenture holders or holders of other securities (as the case may be) of such other body corporate and in such manner and by such person or persons as the board of directors of the Corporation shall from time to time determine. The proper signing officers of the Corporation may also from time to time execute and deliver for and on behalf of the Corporation proxies and/or arrange for the issuance of voting certificates and/or other evidence of the right to vote in such names as they may determine without the necessity of a resolution or other action by the board of directors. 14. INFORMATION AVAILABLE TO SHAREHOLDERS 14.1 Information: Except as provided by the Act, no shareholder shall be entitled to discovery of any information respecting any details or conduct of the Corporation's business which in the opinion of the directors it would be inexpedient in the interests of the Corporation to communicate to the public. 14.2 Inspection: The directors may from time to time, subject to rights conferred by the Act, determine whether and to what extent and at what time and place and under what conditions or regulations the documents, books and registers and accounting records of the Corporation or any of them shall be open to the inspection of shareholders and no shareholder shall have any right to inspect any document or book or register or accounting record of the Corporation except as conferred by statute or authorized by the board of directors or by a resolution of the shareholders. 15. NOTICES 15.1 Service: Any notice or other document required by the Act, the Regulations, the articles or the by-laws to be sent to any shareholder or director or to the auditor shall be delivered personally or sent by prepaid mail, fax, email, cable, telegram or telex to any such shareholder at his latest address as shown in the records of the Corporation or its transfer agent and to any such director at his latest address as shown in the records of the Corporation or in the last notice filed under section 106 or 113 of the Act, and to the auditor at his business address; provided always that notice may be waived or the time for the notice may be waived or abridged at any time with the consent in writing of the person entitled thereto. If a notice or document is sent to a shareholder by prepaid mail in accordance with this paragraph and the notice or document is returned on three consecutive occasions because the shareholder cannot be found, it shall not be necessary to send any further notices or documents to the shareholder until he informs the Corporation in writing of his new address. 15.2 Shares Registered In More Than One Name: All notices or other documents with respect to any shares registered in more than one name shall be given to whichever of such persons is named first in the records of the Corporation and any notice or other document so given shall be sufficient notice or delivery to all the holders of such shares. 15.3 Persons Becoming Entitled By Operation of Law: Subject to the Act, every person who by operation of law, transfer or by any other means whatsoever shall become entitled to any share or shares shall be bound by every notice or other document in respect of such share or shares which, previous to his name and address being entered in the records of the Corporation, shall be duly given to the person or person from who he derives his title to such share or shares. 15.4 Deceased Shareholders: Subject to the Act, any notice or other document delivered or sent by post, fax, email, cable, telegram or telex or left at the address of any shareholder as the same appears in the records of the Corporation shall, notwithstanding that such shareholder be then deceased, and whether or not the Corporation has notice of his decease, be deemed to have been duly served in respect of the shares held by such shareholder (whether held solely or with any other person or person) until some other person be entered in his stead in the records of the Corporation as the holder or one of the holders thereof and such service shall for all purposes be -19- deemed a sufficient service of such notice or document on his heirs, executors or administrators and on all persons, if any, interested with him in such shares. 15.5 Signature to notices: The signature of any director or officer of the Corporation to any notice or document to be given by the Corporation may be written, stamped, typewritten or printed or partly written, stamped, typewritten or printed. 15.6 Computation of Time: Where a given number of days' notice or notice extending over a period is required to be given under any provisions of the articles or by-laws of the Corporation the day of service or posting of the notice or document shall, unless it is otherwise provided, be counted in such number of days or other period. . - 15.7 Proof of Service: With respect to every notice or other document sent by post it shall be sufficient to prove that the envelope or wrapper containing the notice or other document was properly addressed as provided in paragraph 15.1 of this by-law and put into a post office or into a letter box. A certificate of an officer of the Corporation in office at the time of the making of the certificate or of a transfer officer of any transfer agent or branch transfer agent of shares of any class of the Corporation as to facts in relation to the sending or delivery of any notice or other document to any shareholder, director, officer or auditor or publication of any notice or other document shall be conclusive evidence thereof and shall be binding on every shareholder, director, officer or auditor of the Corporation as the case may be. 15.8 Record Dates: The directors may fix in advance a date, which shall not be more than the maximum number of days permitted by the Act, preceding the date of any meeting of shareholders, including class and series meetings, or of the payment of any dividend or to participate in a liquidation distribution or of the proposed taking of any other proper action requiring the determination of shareholders, as the record date for the determination of the shareholders entitled to notice of or to attend and vote at, any such meeting and any adjournment thereof, or entitled to receive payment of any such dividend or for any other proper purpose and, in such case, notwithstanding anything elsewhere contained in the by-laws, only shareholders of record on the date so fixed shall be deemed to be shareholders for the purposes aforesaid. 15.9 Record Date: Where no record date is so fixed for the determination of shareholders as provided in the preceding by-law, the record date of the determination of shareholders entitled to receive notice of a meeting of shareholders shall be: (a) at the close of business on the day immediately preceding the day on which the notice is given; or (b) if no notice is given, the day on which the meeting is held; and the record date for the determination of shareholders for any purpose other than to establish a shareholders' right to receive notice of a meeting or to vote shall be at the close of business on the day on which the directors pass the resolution relating thereto. 16. CHEQUES, DRAFTS AND NOTES 16.1 Cheques: All cheques, drafts or orders for the payment of money and all notes and acceptances and bills of exchange shall be signed by such officer or officers or person or person, whether or not officers of the Corporation, and in such manner as the board of directors may from time to time designate by resolution. 17. CUSTODY OF SECURITIES 17.1 Custody: All shares and securities owned by the Corporation may be lodged (in the name of the Corporation) with a chartered bank or trust company or in a safety deposit box or, if so authorized by resolution of the board of directors, with such other depositaries or in such other manner as may be determined from time to time by the board of directors. 17.2 Nominees: All share certificates, bonds, debentures, notes or other obligations belonging to the Corporation may -20- he issued or held in the name of a nominee or nominees of the Corporation (and if issued or held in the name of more than one nominee shall be held in the names of the nominees jointly with the right of survivorship) and shall be endorsed in blank with endorsement guaranteed in order to enable transfer to be completed and registration to be effected. 18. EXECUTION OF INSTRUMENTS 18.1 Execution: Contracts, documents or instruments in writing requiring the signature of the Corporation may be signed by. (a) the Chairman of the Board, the Vice-Chairman of the Board, the Managing Director, the President or a Vice-President together with the Secretary or the Treasurer, or (b) any two directors and all contracts, documents and instruments in writing so signed shall be binding upon the Corporation without any further authorization or formality. The board of directors shall have power from time to time by resolution to appoint any director or directors, officer or officers, or any person or person, on behalf of the Corporation either to sign contracts, documents and instruments in writing generally or to sign specific contracts, documents or instruments in writing. 18.2 Seal: The corporate seal (if any) of the Corporation may be affixed to contracts, documents and instruments in writing signed as aforesaid or by any officer or officers, person or persons, appointed as aforesaid by resolution of the board of directors, but any such contract, document or instrument is not invalid merely because the corporate seal is not affixed thereto. 18.3 Definition: The term "contracts, documents or instrument in writing" as used in this by-law shall include deeds, mortgages, hypothecs, charges, conveyances, transfers and assignments of property real or personal, immovable or movable, agreements, releases, receipts and discharges for the payment of money or other obligations, conveyances, transfers and assignments of shares, share warrants, stocks, bonds, debentures or other securities and all paper writings. 18.4 Securities: In particular without limiting the generality of the foregoing: (a) the Chairman of the Board, the Vice-Chairman of the Board, the Managing Director, the President or a Vice-President together with the Secretary or the Treasurer, or (b) any two directors; or (c) any director or directors, officer or officers, or any person or person, on behalf of the Corporation appointed from time to time by resolution of the board of directors; shall have authority to sell, assign, transfer, exchange, convert or convey any and all shares, stocks, bonds, debentures, rights, warrants or other securities owned by or registered in the name of the Corporation and to sign and execute (under the seal of the Corporation or otherwise) all assignments, transfers, conveyances, powers of attorney and other instruments that may be necessary for the purpose of selling, assigning, transferring, exchanging, converting or conveying any such shares, stocks, bonds, debentures, rights, warrants or other securities. 18.5 Signatures: The signature or signatures of the Chairman of the Board, the Vice-Chairman of the Board, the Managing Director, the President, a Vice-President, the Secretary, the Treasurer, an Assistant Secretary or an Assistant Treasurer or any director of the Corporation and/or of any other officer or officers, person or person, appointed as -21- aforesaid by resolution of the board of directors may, if specifically authorized by resolution of the directors, "be printed, engraved, lithographed or otherwise mechanically reproduced upon any contracts, documents or instruments in writing or bonds, debentures or other securities of the Corporation executed or issued by or on behalf of the Corporation and all contracts, documents or instruments in writing or bonds, debentures or other securities of the Corporation on which the signature or signatures of any of the foregoing officers or persons authorized as aforesaid shall be so reproduced pursuant to special authorization by resolution of the directors shall be deemed to have been manually signed by such officers or persons whose signature or signatures is or are so reproduced and shell be as valid to all intents and purposes as if they had been signed manually and notwithstanding that the officers or persons whose signature or signatures is or are so reproduced may have ceased to hold office at the date of the delivery or issue of such contracts, documents or instruments in writing or bonds, debentures or other securities of the Corporation. 19. FINANCIAL YEAR 19.1 Year End: The financial year of the Corporation shall terminate on such date in each year as the directors may from time to time by resolutions determine. 20. BORROWING 20.1 Borrowing: Subject to the provisions of the Act, the directors may from time to time authorize the Corporation to: (a) borrow money on the credit of the Corporation; (b) issue, resell, sell or pledge debt obligations of the Corporation; (c) subject to section 44 of the Act give a guarantee on behalf of the Corporation to secure performance of an obligation of any person; (d) mortgage, charge, hypothecate, pledge or otherwise create a security interest on all or any property of the Corporation, owned or subsequently acquired to secure any obligation of the Corporation; and (e) give financial assistance to any person, directly or indirectly, by way of loan, guarantee, the provision of security or otherwise. 20.2 The directors may make any bonds, debentures or other debt obligations issued by the Corporation by their terms assignable free from any equities between the Corporation and the person to whom they may be issued or any other person who lawfully acquires them by assignment, purchase or otherwise. 20.3 The directors may authorize the issue of any bonds, debentures or other debt obligations of the Corporation at a discount, premium or otherwise and with special or other rights or privileges as to redemption, surrender, drawings, allotment of or conversion into or exchange for shares, attending and voting at general meetings of the Corporation and otherwise as the directors may determine at or before the time of issue. 20.4 The Corporation shall keep or cause to be kept at its registered office in accordance with the Act a register of its debentures and a register of debenture holders, which registers may be combined, and, subject to the provisions of the Act, may keep or cause to be kept one or more branch registers of its debenture holders at such place or places as the directors may from time to time determine and the directors may by resolution, regulation or otherwise make such provisions a&they think fit respecting the keeping of such branch registers. 20.5 Every bond, debenture or other debt obligation of the Corporation shall be signed manually by at least one director or officer of the Corporation or by or on behalf of a trustee, registrar, branch registrar, transfer agent or branch transfer agent for the bond, debenture or other debt obligations appointed by the Corporation or under -22- any instrument under which the bond, debenture or other debt obligation is issued and any additional signatures may be printed or otherwise mechanically reproduced thereon and, in such event, a bond, debenture or other debt obligation so signed is as valid as if signed manually notwithstanding that any person whose signature is so printed or mechanically reproduced shall have ceased to hold the office that he is stated on such bond, debenture or other debt obligation to hold at the date of the issue thereof 20.6 The Corporation shall keep or cause to be kept a register of its indebtedness to every director or officer of the Corporation or an associate of any of them in accordance with the provisions of the Act. 21. DISCLOSURE OF INTEREST OF DIRECTORS 21.1 Conflicts; A director who is in any way, directly or indirectly, interested in an existing or proposed contract or transaction with the Corporation or who holds any office or possesses any property whereby, directly or indirectly, a duty or interest might be created to conflict with his duty or interest as a director shall declare the nature and extent of his interest in such contract or transaction or of the conflict or potential conflict with his duty and interest as a director, as the case may be, in accordance with the provisions of the Act. 21.2 A director shall not vote in respect of any such contract or transaction with the Corporation in which he is interested and if he shall do so his vote shall not be counted, but he shall be counted in the quorum present at the meeting at which such vote is taken. Subject to the provisions of the Act, the prohibitions contained in this by-law shall not apply to: (a) any contract or transaction relating to a loan to the Corporation, the repayment of all or part of which a director or a specified corporation or a specified firm in which he has an interest has guaranteed or joined in guaranteeing; (b) any contract or transaction made, or to be made with or for the benefit of an affiliated corporation of which a director is a director or officer; (c) any contract by a director to subscribe for or underwrite shares or debentures to be issued by the Corporation or a subsidiary of the Corporation, or any contract, arrangement or transaction in which a director is, directly or indirectly interested if all the other directors are also, directly or indirectly interested in the contract, arrangement or transaction; (d) determining the remuneration of the directors in that capacity; (e) purchasing and maintaining insurance to cover directors against liability incurred by them as directors; or (f) the indemnification of any director by the Corporation. These exceptions may from time to time be suspended or amended to any extent approved by the Corporation in general meeting and permitted by the Act, either generally or in respect of any particular contract or transaction or for any particular period. 21.3 The interest of a director in any matter described in this by-law or otherwise shall not affect such director's alternate director and such alternate director may he counted in a quorum and may vote upon such matter notwithstanding disqualification of the director, nor shall a disqualification of an alternate director affect the ability of a director to be counted in a quorum or to vote on a matter in which such director's alternate director shall be disqualified. 21.4 A director may hold any office or position with the Corporation, other than the office of auditor of the Corporation, in conjunction with his office of director for such period and on such terms, as to remuneration or otherwise, as the directors may determine and no director or intended director shall be disqualified by his office from contracting with the Corporation either with regard to his tenure of any such other office or position or as -23- vendor, purchaser or otherwise, and, subject to compliance with the provisions of the Act, no contract or transaction entered into by or on behalf of the Corporation in which a director is in any way interested shall be liable to be voided by reason thereof. 21.5 Subject to compliance with the provisions of the Act, a director or his firm may act in a professional capacity for the Corporation and he or his firm shall be entitled to remuneration for professional services as if he were not a director. 21.6 A director may be or become a director or other officer or employee of, or otherwise interested in, any corporation or firm in which the Corporation may be interested as a shareholder or otherwise, and, subject to compliance with the provisions of the Act, such director shall not be accountable to the Corporation for any remuneration or other benefits received by him as director, officer or employee of, or from his interest in, such other corporation or firm. MADE by resolution of the Board of Directors on the lst day of November, 1998. -------------------------------------- President -------------------------------------- Secretary CONFIRMED by the Shareholders in accordance with the Canada Business Corporations Act on the 1st day of November, 1998. -------------------------------------- Secretary -24- EX-1.6 7 0007.txt EX-1.6 CERTIFICATE OF AMENDMENT-CHANGE OF NAME Exhibit 1.6 Industry Canada Industrie Canada Certificate of Amendment Certificate de modification Canada Business Corporations Act Loi Canadienne sur les societes par actions Interaction Technologies Ltd. 325972-2 Name of corporation-Denomination de la societe. I hereby certify that the articles of the above-named corporation were amended: a) under section 13 of the Canada Business Corporations Act in accordance with the attached notice; b) under section 27 of the Canada Business Corporations Act as set out in the attached articles of amendment designating a series of shares; c) under section 179 of the Canada Business Corporations Act as set out in the attached articles of amendment; d) under section 191 of the Canada Business Corporations Act as set out in the attached articles of reorganization; /s/ Director - Directeur Corporation number-Numero de la societe Je certifie que les statuts de la societe susmentionnee ont ete modifies: a) en vertu de Particle 13 de la Loi canadienne sur les societes par actions, conformement a l avis ci-joint; b) en vertu de Particle 27 de la Loi canadienne sur les societes par actions, tel qui il est indique dans les clauses modificatrices ci-jointes designant une serie d'actions; c) en vertu de Particle 179 de la Loi canadienne sur les societes par actions, tel quil est indique dans les clauses modificatrices ci-jointes: d) en vertu de Particle 191 de la Loi canadienne stir les societes par actions, tel qu'il est indique dans les clauses de reorganisation ci-jointes; July 21, 200/ le 21 juillet 2000 Date of Amendment - Date de modification Canada Industry Canada Canada Business Corporations Act Industrie Canada Loi canadienne sur les societes par actions FORM 4 ARTICLES of AMENDMENT (SECTION 27 OR 177) FORMULE 4 CLAUSES MODIFICATRICES (ARTICLES 27 OU 177) 1 -- Name of the Corporation - Denomination sociale de la societe 3259722 CANADA INC. 2 -- Corporation No. - N' de la societe 325972-2 3 The articles of the above-named corporation are amended as follows: Les statuts de la societes mentionee ci-dessus sont modifies de la facon suivante: The name of the Corporation has been changed from 3259722 Canada Inc. to "Interaction Technologies Ltd.". Article 1- Name of the Corporation is. Interaction Technologies Ltd. Signature July 27, 2000 /s/ Title - Title DIRECTOR For Departmental Use Only - A l'usage ministere seulement Filed JUL 27, 2000 EX-4.1 8 0008.txt EX-4.1 - GROSS LEASE - CT MANAGEMENT CORP. W/DSI Exhibit 4.1 905 WEST PENDER Vancouver, B.C. GROSS LEASE Between: CT. MANAGEMENT CORPORATION as Landlord and DSI DATOTECH SYSTEMS INC. as Tenant -2- 905 WEST PENDER STREET Office Lease Index ARTICLE ONE DEFINITIONS 5 1.01 DEFINITIONS 5 ARTICLE TWO PREMISES 5 2.01 GRANT OF LEASE 5 2.02 COMMON AREA 5 2.03 LIMITS OF PREMISES 5 2.04 AREA OF PREMISES 5 ARTICLE THREE TERM 6 3.01 COMMENCEMENT AND TERMINATION 6 3.02 TENANTS POSSESSION 6 3.03 RENTAL ADJUSTMENTS 6 3.04 CONDITION OF PREMISES 6 3.05 STATEMENT OF LEASE COMMENCEMENT 6 ARTICLE FOUR RENT 6 4.01 GROSS ANNUAL RENT 6 4.02 PLACE OF PAYMENT 7 4.03 TIME OF PAYMENT 7 4.04 PAYMENT OF ADDITIONAL CHARGES 7 4.05 PRO-RATING OF ADDITIONAL CHARGES 7 4.06 DETERMINATION OF DISPUTES 7 ARTICLE FIVE USE AND OCCUPATION 8 5.01 USE OF PREMISES 8 5.02 PROHIBITIONS 8 5.03 ADVERTISING 8 5.04 COMPLIANCE WITH LAWS 8 5.05 NUISANCE 8 5.06 ADVERTISING IN COMMON AREAS 8 ARTICLE SIX REGISTRATION 9 6.01 REGISTRATION 9 ARTICLE SEVEN RULES AND REGULATIONS 9 7.01 PRESENT AND FUTURE 9 7.02 DELIVERIES 9 7.03 REMEDIES OF LANDLORD 9 ARTICLE EIGHT ADDITIONAL CHARGES 9 8.01 INSURANCE 9 8.02 TENANTS TAXES 9 8.03 FAILURE TO PAY TAXES 10 8.04 GOODS AND SERVICES TAX 10 ARTICLE NINE MAINTENANCE AND REPAIR 10 9.01 MAINTENANCE 10 9.02 MAINTENANCE AND INSURANCE 10 9.03 COMMON FACILITIES 10 9.04 PROHIBITION 11 9.05 PAINTING AND REDECORATING 11 9.06 WINDOWS AND DOORS 11 9.07 LANDLORD'S REMEDY 11 -3- 9.08 ENTRY TO LANDLORD 11 9.09 PERMITTED ALTERATIONS 11 9.10 LANDLORD'S REPAIRS 12 ARTICLE TEN SURRENDER AND TERMINATION 12 10.01 SURRENDER 12 10.02 LEASING SIGNS 12 10.03 TENANT'S IMPROVEMENTS 12 10.04 TRADE FIXTURES 12 ARTICLE ELEVEN INDEMNITY AND LIABILITY 12 11.01 INDEMNIFICATION 12 11.02 PUBLIC LIABILITY AND PROPERTY DAMAGE 13 ARTICLE TWELVE LANDLORD'S OBLIGATIONS 13 12.01 HEAT AND VENTILATION 13 12.02 COMMON AREA MAINTENANCE 13 12.03 LANDLORD'S TAXES 14 12.04 CLEANING AND JANITORIAL SERVICES 14 12.05 EXPENSE APPORTIONED 14 12.06 STRUCTURAL REPAIRS 14 12.07 QUIET POSSESSION 14 ARTICLE THIRTEEN INSURANCE 14 13.01 FIRE AND EXTENDED COVERAGE 14 13.02 PLATE GLASS 14 13.03 LIABILITY 15 13.04 LEASE INSURANCE 15 13.05 INCREASE IN PREMIUMS 15 13.06 WAIVER OF SUBROGATION 15 13.07 LANDLORD'S INSURANCE 15 13.08 CANCELLATION 15 13.09 LANDLORD'S REMEDIES 16 ARTICLE FOURTEEN PARTIAL AND TOTAL DESTRUCTION 16 14.01 PARTIAL DESTRUCTION 16 14.02 TOTAL DESTRUCTION 16 14.03 DAMAGE TO BUILDING 17 14.04 DAMAGES OF TENANT 17 ARTICLE FIFTEEN ASSIGNMENT AND SUB-LETTING 17 15.01 CONSENT REQUIRED 17 15.02 UNAUTHORIZED ASSIGNMENT OR SUB-LEASE 17 15.03 CHANGE OF CORPORATE CONTROL 18 ARTICLE SIXTEEN SALE OR MORTGAGE 18 16.01 LANDLORD RELIEVED 18 16.02 POSTPONEMENT AND SUBORDINATION 18 16.03 ESTOPPEL CERTIFICATE 19 ARTICLE SEVENTEEN LANDLORD'S REMEDIES 19 17.01 SEVERABILITY 19 17.02 WAIVER 19 17.03 INTEREST 19 17.04 PERFORMANCE BY LANDLORD 20 17.05 EVENTS OF DEFAULT AND CONSEQUENCES 20 17.06 DISTRESS 20 17.07 RE-ENTRY AND DAMAGES 21 17.08 REMEDIES CUMULATIVE 21 17.09 LANDLORD'S EXPENSES ENFORCING LEASE 22 -4- ARTICLE EIGHTEEN EXPROPRIATION 22 18.01 EXPROPRIATION 22 ARTICLE NINETEEN COMMON AREAS 22 19.01 CONTROL OF COMMON AREAS 22 19.02 LICENSE 23 ARTICLE TWENTY GUARANTEE 23 ARTICLE TWENTY-ONE OVER-HOLDING 23 21.01 OVER-HOLDING 23 ARTICLE TWENTY-TWO NOTICE 23 22.01 TO LANDLORD 23 22.02 TO TENANT 24 22.03 DEEMED RECEIPT 24 22.04 CHANGE OF ADDRESS 24 ARTICLE TWENTY-THREE FORCE MAJEURE 24 23.01 FORCE MAJEURE 24 ARTICLE TWENTY-FOUR PREPAID RENTAL AND SECURITY DEPOSIT 24 24.01 PREPAID RENT 24 24.02 SECURITY DEPOSIT 25 ARTICLE TWENTY-FIVE MISCELLANEOUS 25 26.01 TIME OF ESSENCE 25 26.02 AMENDMENT 25 26.03 ENTIRE AGREEMENT 25 26.04 CAPTIONS AND HEADINGS 25 26.05 INTERPRETATION 25 26.06 ACCEPTANCE 26 26.07 INUREMENT 26 26.08 SPECIAL CLAUSES 26 SCHEDULES 28 SCHEDULE A DEFINITIONS 28 SCHEDULE B PLAN. 31 SCHEDULE C STATEMENT OF LEASE COMMENCEMENT 32 SCHEDULE D RULES AND REGULATIONS 34 SCHEDULE E TERMINATION IN THE EVENT OF DEMOLITION 36 This agreement made this 25th day of July, 2000 BETWEEN: C.T. MANAGEMENT CORPORATION, a company incorporated under the Laws of the Province of British Columbia, having an office at Suite 300, 905 West Pender Street, in the City of Vancouver, in the Province of British Columbia. (hereinafter called the "Landlord") OF THE FIRST PART AND: DSI DATOTECH SYSTEMS INC., a company duly incorporated under the laws of the Province of British Columbia, having an office at Suite 712, 525 Seymour Street, in the City of Vancouver, in the Province of British Columbia. (hereinafter called the "Tenant") OF THE SECOND PART IN CONSIDERATION of the mutual covenants and agreements hereinafter set forth the parties do hereby covenant and agree as follows: ARTICLE ONE Definitions 1.01 Definitions In this Agreement, including the schedules hereto, which are incorporated in and form part of this Agreement, unless the context otherwise requires, the words, phrases and expressions defined in Schedule "A" shall have the meanings attributed to them in Schedule "A". ARTICLE TWO Premises 2.01 Grant of Lease The Landlord does hereby demise and lease unto the Tenant that portion of the floor of the Building outlined in red on Schedule "B" hereto as (the "Premises") comprising an area of five thousand seven hundred twenty one (5,721) square feet of floor area, more or less, the precise floor area of the Premises to be determined by reference to Article 2.04, reserving and excluding from the Premises those portions of the Building referred to in Article 2.03. 2.02 Common Area During the term of the Lease the Tenant, in common with the Landlord and all other tenants, occupants or users of the Building will have the right to use and enjoy the Common Areas of the Building in such manner and subject to such reasonable regulations and restrictions as the Landlord may from time to time designate. 2.03 Limits of Premises The Premises do not comprise any air rights or other right, title or interest in any space above a height of ten (10) feet from the floor of the Premises, save as required for installation of the Tenant's light fixtures, nor any right, title or interest in the subsurface or other area below the floor of the Premises. 2.04 Area of Premises The precise floor area of the Premises and the Building, or any part or parts thereof shall be conclusively determined for the purposes of the Lease upon completion of construction of the Building or any expansions, alterations, additions or relocations thereto by measurement of the Landlord's Architect who will measure from the exterior window glass line (as extended by a straight line where the glass line is interrupted by columns or other structural members) and from the center -6- line of all interior walls separating the Premises from adjoining premises; provided that if the exterior window glass line of such premises (including the Premises) are recessed from the outside line of the main exterior wall or walls of the Building, the area of such recess shall be included in determining the precise floor area of such premises. In the determination of the total floor area there shall be included columns, projections, interior construction supports and equipment and a pro rata share of corridors, lobbies, entrances, washroom, electrical rooms and other common areas on the floor but there shall be deductions for shafts, stairs and elevators. ARTICLE THREE Term 3.01 Commencement and Termination The term of the Lease shall be five (5) years, commencing on the first day of October, 2000 (the "Commencement Date"). The Landlord shall not be liable for any loss, injury, damage or inconvenience which the Tenant may sustain by reason of the inability of the Landlord to deliver the Premises ready for occupancy on the Commencement Date. 3.02 Tenants Possession Upon receipt of notice from the Landlord that the Landlord's Work has progressed to the stage where the Tenant's Work must commence forthwith, notwithstanding that some portion of the Landlord's Work remains to be completed the Tenant will immediately take possession of the Premises for the purpose of preparing same for the commencement of business, and the Tenant shall be obliged to commence business as soon as possible thereafter, but in any event, not later than thirty days after receipt of such notice. 3.03 Rental Adjustments The Rent payable by the Tenant pursuant to the terms hereof, shall be calculated pro rata on a per diem basis from the date on which the Tenant actually commences or is obliged pursuant to Article 3.02 to commence business in the Premises until the Commencement Date, and shall be payable by the Tenant on demand therefore or on the date on which the first payment of Gross Annual Rent becomes payable by the Tenant, whichever is earlier. 3.04 Condition of Premises The taking of possession of the Premises by the Tenant shall be conclusive evidence as against the Tenant that at the time thereof the Premises were in good and satisfactory condition, except only for deficiencies of which notice may be given by the Tenant to the Landlord within ten (10) days of the date on which the Tenant took possession, or is obliged pursuant to Article 3.0210 take possession, of the Premises. No promise, representation or undertaking relating to any alteration, remodeling or decorating of, or installation of equipment or fixtures in the Premises shall be binding upon the Landlord unless expressly set forth herein or in any collateral written agreement between the parties hereto. 3.05 Statement of Lease Commencement When the Tenant's obligation to pay Rent has been determined pursuant to Article 3.03 the Tenant will promptly execute, acknowledge and deliver to the Landlord a written statement in the form annexed as Schedule "C" specifying the Commencement Date and the precise floor area of the Premises (determined in accordance with the provisions of Article 2.04). Such statement will also state that the Tenant is in possession of the Premises and is paying the Rent and all Additional Charges hereunder, and that the Tenant has no claims, defenses, set-offs or counter-claims against the Landlord, or, if such exist, specifying the nature and amount thereof. Such statement, when so executed, shall be deemed to be incorporated in and become part of the Lease. ARTICLE FOUR Rent 4.01 Gross Annual Rent -7- (a) The Tenant will pay to the Landlord in each year of the term of the Lease a Gross Annual Rent as specified below. In addition, the Tenant shall pay all other amounts payable by the Tenant pursuant to the provisions hereof; all of which shall be deemed to be Rent and shall be recoverable by the Landlord by the remedies available to the Landlord for the recovery of rent in arrears. (b) The term of the Lease shall be divided into five (5) parts of twelve (12) months each. The first of such parts shall commence on the Commencement Date. (c) The Tenant will pay to the Landlord during the first (3) three parts of the term a Gross Annual Rent of approximately One Hundred Eight Thousand Five Hundred Twenty Seven Dollars ($108,527.37) the exact Gross Annual Rent to be calculated by multiplying the total floor area of the Premises (determined in accordance with the provisions of Article 2.04) by a rental rate of Eighteen and 97/100 Dollars ($18.97) per square foot of the Premises. The Gross Annual Rent payable by the Tenant to the Landlord for each of the remaining parts of the term shall be determined by multiplying the total floor area of the Premises (determined as specified above) by a rental rate of Nineteen and 97/100 Dollars ($19.97) per square foot of for the fourth (4th) part of the term; by a rental rate of Twenty and 97/100 Dollars ($20.97) per square foot for the fifth (5th) part of the term: 4.02 Place of Payment The Tenant will make all payments from time to time due herein without set-off, compensation or deduction whatsoever to the Landlord at the address set forth in Article 22 or to such other person or persons at such other place or places as the Landlord may from time to time designate in writing. 4.03 Time of Payment The Gross Annual Rent shall be paid in 12 equal consecutive monthly installments commencing on the Commencement Date and payable thereafter during the term of the Lease on the first day of each and every month. The Tenant will, at the request of the Landlord, provide the Landlord with post-dated cheques to be deposited by the Landlord in payment of Gross Annual Rent. 4.04 Payment of Additional Charges The Tenant will pay all Additional Charges payable by it including those set out in Article 8, or any portion thereof; on or before the expiration of 15 days after receipt by the Tenant of a Statement requesting payment from the Tenant of such Additional Charges or portion thereof; but nothing herein will limit the rights of the Landlord or the obligations of the Tenant under Article 4.05. 4.05 Pro-Rating of Additional Charges The Landlord may at any time and from time to time during the term hereof (but not oftener than twice in a calendar year) compute a bona fide estimate of the Additional Charges payable by the Tenant during the forthcoming year or portion thereof From and after the date upon which notice of such estimate is given by the Landlord to the Tenant the Tenant will pay the amount of such estimated costs by equal consecutive monthly installments payable in advance on the first day of each and every month during the year or portion thereof for which such estimate was computed. The Tenant will, at the request of the Landlord, provide the Landlord with post-dated cheques to be deposited by the Landlord and applied in payment of such monthly installments. 4.06 Determination of Disputes In the event of disagreement between the Landlord and the Tenant in regard to the manner of calculation or amount payable as Additional Charges, the Tenant will make payment in accordance with any notice given by the Landlord, but the disagreement shall immediately be referred by the Landlord for determination by one or more of the Landlord's auditors, architect, insurance broker or other professional consultant (such as may be, in the reasonable opinion of the Landlord, best -8- informed and qualified to determine the difference on a basis equitable to both parties) who shall be deemed to be acting as experts and not arbitrators, and a determination signed by the selected expert(s) shall be final and binding upon the Landlord and Tenant. Any adjustment required to any previous payment made by the Tenant by reason of any such determination shall be made within 14 days thereof. ARTICLE FIVE Use and Occupation 5.01 Use of Premises The Tenant will carry on business in the Premises only under the firm name and style of DSI Datotech Systems Inc. and only for the purpose of a business office. 5.02 Prohibitions Without the prior written approval of the Landlord, the Tenant, or anyone acting through, for, or in the place of the Tenant, will not conduct or advertise on or from or pertaining to the Premises any auction or closing out or bankruptcy or other similar bulk sale or conduct wholesale or discount businesses; nor will the Tenant grant any concession, license or permission to any third party to sell or take orders for merchandise or services in the Premises; nor will the Tenant use promotional or advertising media such as loudspeakers, phonographs, signs, posters, broadcasts or telecasts in a manner seen or heard outside of the Premises. 5.03 Advertising The Tenant will not, without the previous written consent of the Landlord in each instance, erect, install, or maintain any exterior sign of whatsoever nature, or any window or door sign, lettering, placard or other advertising matter of whatsoever nature if all or any part of such sign, lettering, placard or other advertising matter is painted upon or posted or otherwise affixed to the exterior of the Buildings or the Premises or to the interior or exterior of or is visible through any window or door. The Landlord will provide a uniform pattern of identification signs for tenants to be placed on the outside of doors leading into premises of tenants on part floors, and other than such identification sign the Tenant shall not paint, display, place or affix any sign, picture, advertisement, logo, notice, lettering or direction on the Premises without the prior written consent of the Landlord. 5.04 Compliance with Laws The Tenant will not place, leave or permit or suffer to be placed, left in or upon the Premises or Common Areas, washrooms, elevators, hallways, stairways. driveways, sidewalks, parking or delivery areas any debris, garbage or refuse, except as deposited in areas indicated by the Landlord in adequate and proper receptacles supplied and placed for that purpose by the Landlord or the Tenant. The Premises shall be kept in a clean and sanitary condition in accordance with all directions, rules and regulations of the health officer, fire marshall, building inspector or other proper officers of the government, municipal or other agencies having jurisdiction, all at the sole cost and expense of the Tenant. The Tenant will comply with all laws, by-laws, regulations and ordinances relating or pertaining to its business, the operating thereof upon the Premises, and the occupation by the Tenant of the Premises. 5.05 Nuisance The Tenant will not use, keep or permit in or about any part of the Premises any goods, provisions, equipment or materials of an offensive odour or combustible or noxious nature or anything which would create a fire hazard or undue load on electrical circuits or cause vibration or undue heat or noise and will not cause or maintain any nuisance in or about the -9- Premises. 5.06 Advertising in Common Areas Neither the Tenant nor the Tenant's agents or employees will either solicit business or distribute handbills or other advertising material in the Common Areas of the Building. ARTICLE SIX Registration 6.01 Registration The Tenant acknowledges and agrees that notwithstanding any rights which the Tenant might. otherwise have under any laws of the Province of British Columbia or otherwise the Lease shall not be registered and any attempt to do so by the Tenant shall be deemed a default hereunder. The Landlord shall not be required to provide this Lease in registrable form, unless the Landlord first consents in writing to permit the Tenant to register this Lease. The Tenant shall bear all costs of providing this Lease in registrable form, if necessary so to do. ARTICLE SEVEN Rules and Regulations 7.01 Present and Future For purposes of the common good and welfare of all tenants of the Building, the Tenant will observe and perform the rules and regulations set forth in Schedule "E". The Landlord will for the said purposes have the right to promulgate and from time to time amend, vary or add further reasonable rules and regulations not repugnant to the conditions of the Lease and relating to the operation of the Building and the use of all Common Areas. Any amendment, variation of or addition to the said rules and regulations shall be binding upon the Tenant upon the Landlord giving notice thereof to the Tenant 7.02 Deliveries The ingress, egress and parking of vehicles, and the receiving and deliveries of goods and merchandise to and from the Premises shall be made only at such times and at such locations as the Landlord may approve and only subject to such conditions as the Landlord may from time to time prescribe. In all such matters and to the extent pertinent thereto the Landlord will have absolute discretion to amend the aforementioned rules or regulations, or to make Or substitute new rules and regulations. 7.03 Remedies of Landlord For the enforcement of any rules and regulations above mentioned, the Landlord will have available to it all remedies in the Lease provided for a breach hereof; and all legal rights and remedies, including injunction, whether or not provided for in the Lease, either at law or in equity. The Landlord shall not be responsible to the Tenant for the non-observance or violation by any other tenant or person of any such rules or regulations. ARTICLE EIGHT Additional Charges 8.01 Insurance The Tenant will pay for the insurance required to Article 13 to be maintained by the Tenant. -10- 8.02 Tenants Taxes The Tenant will pay all taxes, rates, duties, charges, assessments, fees and licenses whatsoever imposed by any governmental authority in respect of the Tenant's goods, chattels or equipment in the Premises, or upon or in respect of any business or other activity carried on, upon, or in connection with the Premises, or upon the Tenant on account of the Premises or such goods, business or other activity. 8.03 Failure to Pay Taxes Should the Tenant fail to pay any taxes, rates, duties, charges or assessments which it is required or has herein covenanted to pay and which could constitute a lien, charge or encumbrance upon the Lands or the Premises, the Landlord, after the expiration often (10) days' notice to the Tenant within which such default has not been cured, may pay all or any of the same and all of such payments so made will constitute Rent forthwith payable by the Tenant to the Landlord, PROVIDED, HOWEVER, that the Tenant will have the right to contest the validity or amount of any such taxes, rates, duties, charges or assessments so long as such contestation could not involve or impend forfeiture, sale or disturbance of the Landlord's interest in the Premises, but upon the final determination of any contest, the Tenant will immediately pay and satisfy the amount thereof found to be due, if any, together with all costs, penalties or interest, and during the bona fide period of such contest the Tenant shall not be deemed in default hereunder. The Tenant may designate that taxes attributable to the Premises be or accrue for the support of separate schools, but the Tenant will thereupon reimburse the Landlord any increase in taxes that would otherwise be payable by the Landlord. 8.04 Goods and Services Tax Despite any other section or clause of this Lease, the Tenant shall pay to the Landlord upon demand an amount equal to any and all Goods and Services Tax, it being the intention of the parties that the Landlord shall be fully reimbursed by the Tenant with respect to any and all Goods and Services Tax at the full tax rate applicable from time to time in respect of the Rent payable for the lease of the Premises pursuant to this Lease. The amount of the Goods and Services Tax so payable by the Tenant shall be calculated by the Landlord in accordance with the applicable legislation and shall be paid to the Landlord at the same time as the amounts to which such Goods and Services Tax apply and is payable to the Landlord under the terms of this Lease or upon demand at such other time or times as the Landlord from time to time determines. Despite any other section or clause in this Lease, the amount payable by the Tenant under this paragraph shall be deemed not to be Rent, but the Landlord shall have all of the same remedies for and rights of recovery of such amount as it has for recovery of Rent under this Lease. As referred to herein "Goods and Services Tax" means the tax imposed under part IX of the Excise Tax Act (Canada) or any similar tax hereafter imposed in substitution therefore or in addition thereto. ARTICLE NINE Maintenance and Repair 9.01 Maintenance The Tenant will maintain the Premises and the windows, doors and interior of the Premises in a neat, clean and well-repaired condition at all times, and in the event that the Tenant fails to clean upon notice so to do from the Landlord, the Landlord may clean the same and the Tenant will pay to the Landlord the costs thereof forthwith upon demand. 9.02 Maintenance and Insurance The Tenant will at all times keep the Premises in such condition as to comply with federal, provincial, governmental and municipal laws and regulations and will not do or permit to be done, committed or omitted upon the Premises anything which will cause the rate of Insurance upon the Building or any part thereof to be increased. If the insurance rate should be thereby increased, the Tenant will pay to the Landlord on demand therefore, the amount by which the insurance premium shall be so increased. -11- 9.03 Common Facilities The sinks, toilets and urinals in the Premises or elsewhere in the Buildings shall not be used for any other purpose than that for which they were intended and the expense of any breakage, stoppages or any damage resulting from a violation of this provision shall be borne by the Tenant, who or whose employees, agents, customers, licensees or invitees have caused the breakage, stoppage or damage. The Tenant will pay for any structural Repairs and repairs to the Buildings required as a result of the use or occupation of the Premises or the Buildings by the Tenant or its employees, agents, customers, licensees or invitees. 9.04 Prohibition Save as provided for in this Lease, the Tenant, its employees, agents and licensees will not mark, paint, drill or in any way deface any walls, ceilings, partitions, floors, wood, stone, glass or other part of the Buildings or the Premises. 9.05 Painting and Redecorating The Tenant will paint and redecorate as required, and maintain in good condition the interior of the Premises and any appurtenances thereto and any improvements now or hereafter erected or installed therein and will make all needed repairs and replacements for which the Landlord is not responsible hereunder, and damage by fire or the elements only excluded; PROVIDED that the Landlord will make available to the Tenant the benefits of all warranties and guarantees given or to be given to it which affect the obligation of the Tenant to repair the Premises. The Tenant will repair in accordance with the Landlord's notice so to do. 9.06 Windows and Doors Without restricting the generality of the foregoing, the Tenant's obligation to repair will include any damage to or breakage of glass, plate glass, office windows, mouldings, signs, doors, hardware, partitions, walls, fixtures, lighting, heating, air conditioning, and plumbing fixtures, wiring and piping, ceilings, floors and thresholds forming part of the Premises or providing services exclusively to the Premises. 9.07 Landlord's Remedy In the event the Tenant fails to maintain or repair as aforesaid the Landlord on not less than ten (10) days notice to the Tenant may make the repairs without liability to the Tenant for any loss or damage that may occur to the Tenant's merchandise, fixtures or other property or to the Tenant's business, and the Tenant will on demand reimburse the Landlord the cost thereof plus 20% of such cost for overhead and supervision. 9.08 Entry to Landlord The Tenant covenants to permit the Landlord entry to the Premises at reasonable times during working hours, and at any time in the event of a situation considered by the Landlord to be an emergency, to inspect the state of repair of the Premises, to effect repairs to the Premises, to effect repairs or alterations pursuant to Article 9.10, or for any other purpose considered necessary by the Landlord. 9.09 Permitted Alterations The Tenant may at any time at its expense paint and decorate the interior of the Premises and appurtenances -12- thereof and make such changes, alterations, additions and improvements in and to the Premises, the appurtenances thereof and the facilities thereof as will in the judgement of the Tenant better adapt the same for the purpose of its business except that no structural changes and no alterations to the mechanical, heating, electrical, water or air conditioning systems or to Common Areas or to the exterior of the Premises shall be made without the written consent of the Landlord; PROVIDED that: (a) All such changes, alterations, additions and improvements will be subject to the approval of the Landlord, such approval not to be unreasonably withheld. (b) All such changes, alterations, additions and improvements will comply with all laws or regulations of any governmental authority; and (c) The Tenant will pay to the Landlord an increase in any insurance premium on any policy covering the building and appurtenances thereto and any increase in taxes payable by the Landlord to the extent that such increases are directly attributable to any action by the Tenant under this paragraph. 9.10 Landlord's Repairs The Landlord will have the right to make repairs, replacements, changes or additions to the equipment, appliances, pipes, conduits, ducts, or structures of any kind in the Premises where necessary to serve adjoining premises or other parts of the Building but in so doing will not disturb or interfere with the Tenant's operation of its business more than is reasonably necessary in the circumstances and in .so doing, the Landlord will make good any damage to the Premises so caused. The Landlord may make alterations, changes, additions or extensions to any part or component of the Building not in or forming part of the Premises in its unfettered discretion. - 10.01 Surrender Upon the surrender of possession of the Premises to the Landlord at the termination hereof by affluxion of time or otherwise, the Tenant will restore and deliver the same in the condition in which the Tenant is required to maintain the same, subject to damage by perils in respect to which the Landlord maintains insurance to the extent such insurance compensates the Landlord for such damage. 10.02 .Leasing Signs The Landlord may, during the last 90 days of the term of this Lease, display on the Premises, in such manner as not to unreasonably interfere with the Tenant's business, signs that the Premises are available for lease and the Tenant agrees that such signs will remain unmolested upon the Premises. 10.03 Tenant's Improvements Upon the termination of this Lease, all alterations, additions or improvements which may have been made or installed by the Tenant upon the Premises whether with or without the Landlord's consent and which are attached to the floors, walls, or ceilings including carpeting and light fixtures will remain upon and be surrendered with the Premises as a part thereof without disturbance, molestation or injury and the same and any trade fixtures not removed by the Tenant shall be and become the property of the Landlord absolutely. The Tenant will at the expiration of the Term, to the extent requested by the Landlord, remove the alterations, additions, improvements or fixtures made or installed by the Tenant upon the Premises. 10.04 Trade Fixtures -13- Notwithstanding anything herein contained, the Tenant may install its usual trade fixtures in the usual manner, provided such installation does not damage the structure of the Buildings and, provided the Tenant has paid the Rent hereby reserved and performed and observed all the covenants and conditions herein contained, the Tenant will at the expiration or other determination of this Lease have the right to remove such trade fixtures, but will make good the damage caused to the Premises by such installation and removal. ARTICLE ELEVEN Indemnity and Liability 11.01 Indemnification The Tenant will indemnify and save the Landlord harmless of; from and against any and all claims, demands, actions, loss, costs, damages or expenses whatsoever for which the Landlord shall or may become liable or incur or suffer by reason of any breach, violation or non-performance by the Tenant of any covenant, term or provision hereof or by reason of any mechanics' or other liens for any work done or materials provided or services rendered for improvements, alterations or repairs made by the Tenant to the Premises, or .by reason of any injury occasioned to or suffered by any person or damage to any property arising by reason of any wrongful act, neglect or default on the part of the Tenant or any of its employees, agents, contractors, customers, licensees invitees, or any other person permitted by the Tenant to be on the Premises. The Tenant will forthwith upon demand of the Landlord remove or cause to be removed any mechanics', builders' or other lien aforesaid noted or filed against or otherwise constituting an encumbrance on any title of the Landlord. 11.02 Public Liability and Property Damage Notwithstanding anything to the contrary herein contained, the Landlord shall not be liable nor responsible in any way for any personal or consequential injury of any nature whatsoever that may be suffered or sustained by the Tenant or by any employees, agent, customer, licensee or invitees of the Tenant or any other person who may be upon the Premises, or for any loss or damage howsoever caused to any property belonging to the Tenant or to its employees, agents, customers, licensees, invitees or any other person while such property is in or about the Building, save such as is caused by the gross negligence of the Landlord or its servants, or agents. For greater certainty, but without restricting the generality of the foregoing, the Landlord shall not be liable for (a) any damage or damages of any nature whatsoever to any property caused by failure, by reason of breakdown or other cause, to supply adequate drainage, snow or ice removal, or by interruption or failure of any service or utility or elevator or escalator or other service, or by steam, water, rain, snow, or other substances leaking into, issuing or flowing into any part of the Premises, or from the water, steam, sprinkler or drainage, pipes or plumbing of the Building or from any other place or quarter, or for any damage caused by anything done or omitted to be done by any tenant; (b) any act, omission, theft, malfeasance or negligence on the part of any agent, contractor or person from time to time employed by the Landlord to perform janitor services security services, supervision or any other work in or about the Premises or the Building; or (c) loss or damage, however caused, to books, records, files, money, securities, negotiable instruments, papers or other valuables of the Tenant; and the Tenant will indemnify the Landlord against and from all loss, costs, claims or demands in respect of any injury, loss or damage referred to above. ARTICLE TWELVE Landlord's Obligations 12.01 Heat and Ventilation -14- The Landlord will, during normal business hours designated from time to time by the Landlord, provide in the Building heat and ventilation, and air conditioning where required, in such manner as to maintain comfortable conditions and will maintain an adequate supply of hot and cold water to any common washrooms in the Building for the normal use of the occupants thereof; PROVIDED that in the event the apparatus or equipment used for these purposes or any part thereof damaged, destroyed or impaired, the Landlord will have a reasonable time within which to repair or replace the apparatus or equipment and during that time shall only be required to maintain the most reasonable services and temperatures possible having regard to the circumstances. 12.02 Common Area Maintenance The Landlord will make such repairs or replacements, and perform such maintenance to any elevator or escalator services in the Building, the heating, mechanical, electrical, plumbing and air conditioning apparatus and facilities therein (other than such apparatus and facilities as may form part of the Premises or may be the property of or installed by the Tenant), the parking, driveway and Common Areas of the Building, and damage to the Building caused by perils against which the Landlord maintains insurance. All of the foregoing shall be done by the Landlord as expeditiously as reasonably possible in the circumstances, provided that the Landlord shall not be liable for any direct or consequential damage to any person or property for any failure so to do, unless such loss or damage is caused by the willful act or neglect of the Landlord. 12.03 Landlord's Taxes The Landlord will pay the Landlord's Taxes saving and excepting any business tax, tax on personal property or income, licenses, fees or other taxes imposed upon the property, business or income of the Tenant. 12.04 Cleaning and Janitorial Services The Landlord will provide cleaning and janitorial services, but the Landlord shall not be responsible for the negligent or dishonest acts on the part of the person or persons employed by the Landlord or its contractors to perform such work. 12.05 Expense Apportioned Nothing in Articles 12.01, 12.02, 12.03 and 12.04 will derogate from the liability of the Tenant for maintenance and repair of the Premises as set forth in Article Nine. 12.06 Structural Repairs The Landlord will make all Structural Repairs required to maintain the Buildings in such condition as to ensure the Tenant that it will be able to carry out the purpose for which this Lease is granted, such Structural Repairs to be carried out by the Landlord as expeditiously as reasonably possible in the circumstances, provided that the Landlord shall not be liable for any direct or consequential damage to any person or property for any failure so to do. 12.07 Quiet Possession If the Tenant pays the rent hereby reserved and performs the covenants and obligations on its part, to be performed and observed pursuant to the provisions hereof; the Tenant may peaceably possess and enjoy the Premises for the term hereby granted without any interruption or disturbance from the Landlord or any other Person or persons lawfully claiming by, from or under it; PROVIDED that in no event will any alteration of Common Areas of the conduct of repairs or renovations or re-development by the Landlord of the exterior or interior of the Building, or the construction of additions to the Building, or the exercise by the Landlord of any of the rights provided to the Landlord hereby, constitute a breach of this covenant for quiet enjoyment or in any way relieve the Tenant of its obligations hereunder. -15- ARTICLE THIRTEEN Insurance 13.01 Fire and Extended Coverage The Tenant will maintain in respect of its property on the Premises fire insurance with extended coverage and water damage insurance, including sprinkler leakage or discharge, and, where applicable, boiler and pressure vessel insurance Such insurance will cover all of the Tenant's improvements (including loss to those improvements to the Premises), furniture, fittings, fixtures, stock-in-trade and personal property in amounts equal to full replacement value without deduction for depreciation. 13.02 Plate Glass Unless other provision satisfactory to the Landlord is made to cover loss in regard thereto, the Tenant will maintain insurance upon all glass and plate glass in or forming part of the Premises against breakage or damage from any cause including the elements, war and riots and civil commotion. Notwithstanding anything to the contrary in this Lease contained, the Tenant will repair or replace any damaged or broken glass or plate glass in or forming part of the Premises, regardless of the cause of the damage or breakage. 13.03 Liability The Tenant will maintain for the mutual benefit of the Landlord and the Tenant comprehensive general liability insurance providing insurance coverage against claims for personal injury, death, property damage, products liability, contractual liability, non-owned automobile liability, and tenant's legal liability with respect to the occupancy by Tenant of the Premises. Such insurance will provide coverage to the limit of not less than $2,000,000.00 inclusive per occurrence. 13.04 Lease Insurance The Landlord reserves the right at any time to require the Tenant to forthwith apply to the Mortgage Insurance Company of Canada or similar company for a policy of lease guarantee insurance for the term of the Lease and any extensions thereof in an amount sufficient to insure the Gross Annual Rent for the time being in force and any escalation of Gross Annual Rent which may be set out in the Lease, the cost of such insurance to be borne by the Tenant. If the Tenant is unable to obtain lease guarantee insurance then the Landlord may terminate the Lease. If the Landlord shall exercise its right pursuant to this Article and the Tenant shall obtain and maintain such Lease guarantee insurance, the Landlord shall apply to the cost of such insurance, upon receipt from the Tenant, an amount equal to 5% of Gross Annual Rent payable hereunder by the Tenant to the Landlord in accordance with Article 8.04. 13.05 Increase in Premiums The Tenant will pay to the Landlord on demand therefore any increase in the cost to the Landlord of maintaining or placing insurance upon on in respect of the Building if such increase in cost relates directly or indirectly to the use or occupation by the Tenant or its servants or agents of the Premises. 13.06 Waiver of Subrogation The policies of insurance to be maintained by the Tenant pursuant to the provisions of this Article Thirteen will name the Landlord and the Tenant as insured parties with a cross-liability clause and will contain a clause that the insurer will not cancel or change or refuse to renew the insurance without first giving the Landlord 30 days prior written notice. The Tenant will, upon the request of the Landlord, provide the Landlord with proof of the placement and maintenance of the insurance -16- hereinbefore referred to, and due payment of the premiums for such insurance. 13.07 Landlord's Insurance The Landlord will take out and maintain insurance of such types and in such amounts as may reasonably be carried by a prudent owner including, but not limited to, insurance against loss by fire, extended coverage and supplemental risk insurance, boiler and pressure vessel insurance, general liability insurance, and insurance upon the Landlord's total income from the Building including total Gross Annual Rents, contingent rent and Additional Charges. 13.08 Cancellation If any insurance policy upon the Building, or the Premises or any part thereof shall be cancelled or shall be threatened by the insurer to be cancelled, or the coverage thereunder reduced in any way by the insurer by reason of the use and occupation of the Premises or any part thereof by the Tenant or by any sub-tenant or anyone permitted by the Tenant to be upon the Premises, and if the Tenant fails to remedy the condition giving rise to cancellation, threatened cancellation, or reduction of coverage within 24 hours after notice thereof by the Landlord, the Landlord may, at its option, either: (a) terminate this Lease forthwith by notice in writing to the Tenant of its intention so to do, in which case the Rent for which the Tenant is liable under this Lease to the date of such termination, together with the Gross Annual Rent which would otherwise have been payable by the Tenant for the 12 months next following the date of such termination, shall be paid in full by the Tenant to the Landlord, and the Tenant will immediately deliver up vacant possession of the Premises to the Landlord; or (b) enter upon the Premises and remedy the condition giving rise to such cancellation, threatened cancellation, or reduction (entry for such purposes being hereby authorized), in which case the Tenant will forthwith upon demand therefore pay the cost thereof; plus 20% for overhead and administration, to the Landlord and the Tenant will indemnify and save harmless the Landlord from all claims, demands, loss or damage to any person or property arising out of such action of the Landlord. 13.09 Landlord's Remedies The policies of insurance to be maintained by the Tenant pursuant to the provisions of this Article Thirteen shall be in a form, and with insurers, acceptable to the Landlord, and if the Tenant fails to take out or maintain any insurance required to be maintained by the Tenant pursuant to this Article, or should any such insurance not be approved as to form or insurer by the Landlord, or should the Tenant fail, upon the request of the Landlord, to provide to the Landlord proof of the placement and maintenance of the insurance hereinbefore referred to, the Landlord will have the right without assuming any obligation in connection therewith, to effect such insurance at the sole cost of the Tenant and all expenses incurred by the Landlord in effecting such insurance shall be payable by the Tenant to the Landlord on the first day of the month next following the date of payment thereof by the Landlord without prejudice to any other rights or remedies of the Landlord under this Lease. ARTICLE FOURTEEN Partial and Total Destruction 14.01 Partial Destruction In the event of Partial Destruction of the Premises by fire, the elements or other cause or casualty, then in such event if the Partial Destruction is such in the opinion of the Landlord's Architect that the Premises cannot be used for the Tenant's business until repairs, all Rent payable by the Tenant hereunder will abate until the repair has been made. If such Partial Destruction is such that in the opinion of the Landlord's Architect the Premises may be partially used for the Tenant's business -17- while the repairs are being made, then the Rent will abate in the proportion that the part of the Premises rendered unusable bears to the whole of the Premises provided that if the part rendered unusable exceeds one-half of the area of the Premises there shall be a total abatement of Rent until the repairs have been made unless the Tenant with the permission of the Landlord, in fact uses the undamaged part, in which case the Tenant will pay proportionate Rent for the part so used. The certificate of the Landlord's Architect as to whether the whole of a part of the Premises is rendered unusable, certifying to the extent of the part rendered unusable shall be binding and conclusive upon both Landlord and Tenant for the purposes hereof. Notwithstanding anything in this paragraph contained, if in fact the Partial Destruction is repaired within 14 days of the date of Partial Destruction, there shall be no abatement of Rent. In the event of Partial Destruction, the Landlord and Tenant each covenant that they will forthwith repair and restore the Premises to the extent of their respective obligations to repair the same, to substantially the condition the same were prior to such Partial Destruction and to complete its repairs diligently. The abatement of Rent will not extend beyond the date by which the Landlord reasonably believes the Tenant should have completed its repairs. Provided further that the Landlord shall not in any such event be liable to the Tenant by reason of inconvenience of annoyance arising from the necessity of repairing, altering or improving any portion of the said Premises however the necessity may occur. It is expressly understood and agreed that the obligation of the Landlord to rebuild and restore the Premises shall extend to or be deemed to include the rebuilding or restoring of any alterations, partitions, additions, extensions, equipment or installations made by the Tenant upon the Premises. 14.02 Total Destruction In the event of the Total Destruction of the Premises by fire, the elements or other cause or casualty, then in such event this Lease will terminate with effect from the date when such Total Destruction occurs. Thereupon the Tenant will immediately surrender the Premises and all its interest therein to the Landlord and the Tenant will pay Rent only to the time of such Total Destruction and the Landlord may re-enter and repossess the Premises discharged to this Lease. Upon such termination, the Tenant will remain liable to the Landlord for all sums accrued due to the Landlord pursuant to the terms hereof to the date of such Total Destruction. The certificates of the Landlord's Architect certifying that Total Destruction has occurred shall be binding and conclusive upon both Landlord and Tenant for the purposes hereof. 14.03 Damage to Building Notwithstanding the foregoing provisions concerning Total or Partial Destruction of the Premises, in the event of destruction of the Building (and whether or not the Premises are destroyed) to such a material extent or of such a nature that, for whatever reason, in the opinion of the Landlord the Building must be or should be totally or partially demolished, whether to be reconstructed in whole or in part or not, then the Landlord may at its option (to be exercised within 90 days from the date of such destruction) give notice to the Tenant that this Lease is terminated with effect from the date stated in the notice. If the Tenant is able to effectively use the Premises after the destruction, such date shall be not less than 30 days from the date of notice. If the Tenant is unable to effectively use the Premises after the destruction, the date given in the notice shall be the date of destruction. Upon such termination, the Tenant will immediately surrender the Premises and all its interest therein to the Landlord and the Rent will abate (if not already abated) and be apportioned to the date of termination and the Tenant will remain liable to the Landlord for all sums accrued due pursuant to the terms hereof to the date of termination. The Landlord will determine whether the Premises can or cannot be effectively used by the Tenant and its certificates thereon shall be binding and conclusive upon both Landlord and Tenant for the purposes hereof. 14.04 Damages of Tenant in none of the situations contemplated by Articles 14.01, 14.02, or 14.03 will the Tenant have any claim upon the Landlord for any damages sustained by the Tenant. ARTICLE FIFTEEN Assignment and Sub-Letting 15.01 Consent Required -18- The Tenant will not assign this Lease, nor sub-let the whole or any part of the Premises save for the purposes herein permitted and then only with leave of the Landlord, which leave shall not be unreasonably withheld; PROVIDED that no such assignment or sub-letting shall: (a) in any manner or extent release or relieve the Tenant from the performance or observance of any of its covenants or obligations hereunder; (b) be made other than to responsible persons, firms, partnerships or bodies corporate who undertake to perform and observe the obligations of the Tenant hereunder; (c) be made to any person, firm, partnership or body corporate who intend to or do use the Premises for any business or use which the Landlord is obliged to restrict or prohibit by reason of any other lease or contract; The Tenant acknowledges that the Landlord's consent to an assignment or sub-letting may be reasonably withheld by reason of the financial background or status or the business history of the proposed assignee or sub-tenant. If the Landlord shall agree to consent to an assignment or sub-letting by the Tenant, then the Tenant's solicitors will prepare the required documentation to submit to the Landlord for formal written consent, the Tenant to bear all costs of the preparation of such documentation. 15.02 Unauthorized Assignment or Sub-Lease In the event the Tenant assigns, or purports or attempts to assign, this Lease or any part thereof; or sub-let the whole or any part of the Premises, without the prior consent of the Landlord, then at the option of the Landlord all Gross Annual Rent reserved in this Lease from the date of such act or purported or attempted act to the expiration date of this Lease will immediately become due and payable to the Landlord, or this Lease my be terminated by the Landlord by notice of termination to the Tenant, either of which notices may be given at any time prior to 60 days of the later of the date of the Landlord ascertaining or being advised by notice that such sale or other disposition or change of control or management has occurred. Notice of termination will state the date on which the Lease will terminate, which date shall be not less than 30 nor more than 90 days following delivery of the notice, and on the date so stated the Tenant will pay all Rent due hereunder to the stated date, and deliver up vacant possession of the Premises. The Landlord may as a condition precedent to any consent it may give to an assignment hereof or sub-letting of the Premises, require the said balance of Gross Annual Rent for the remainder of the term to be immediately paid, unless security to the satisfaction of the Landlord for due payment thereof is provided by the Tenant or by the assignee or sub-tenant. 15.03 Change of Corporate Control If the Tenant is a corporation, other than a corporation whose shares are listed on any recognized exchange, effective management or control of the corporation shall not be changed directly or indirectly by any sale, encumbrances or other disposition of shares or otherwise howsoever, without first obtaining the leave of the Landlord; PROVIDED that the Landlord's leave shall not be required: (a) for any sale or other disposition of shares by the present shareholders of the Tenant to and between themselves; (b) for any transmission of shares on death or by operation of law; (c) where control of the Tenant corporation is to pass to persons, firms, partnerships or corporations who would not be precluded from accepting an assignment of this Lease under the conditions set forth in Article 15.01. -19- If such management or control changes without leave being obtained (save as herein provided) then at the option of the Landlord all Gross Annual Rent reserved in the Lease from the date of notice by the Landlord to the expiration of this Lease shall immediately become due and payable to the Landlord, or this Lease may be terminated by the Landlord by notice of termination to the Tenant, either of which notices may be given at any time prior to 60 days of the later of the date of the Landlord ascertaining or being advised by notice that such sale or other disposition or change of control or management has occurred. Notice of termination will state the date on which the Lease will terminate, which date shall be not less than 30 or more than 90 days following delivery of the notice, and on the date so stated the Tenant will pay all Rent due hereunder to the stated date, and deliver up vacant possession of the Premises. ARTICLE SIXTEEN Sale or Mortgage 16.01 Landlord Relieved In the event of a sale or transfer or lease or mortgage of; or the raising of funds charged upon the interest of the Landlord in the lands or the Buildings by the Landlord, this Lease may be assigned by the Landlord to an Encumbrancer. In the event of any such sale, transfer or lease, or the assignment of this Lease or any interest of the Landlord therein, and to the extent the Encumbrancer may agree with the Landlord or the Tenant to be bound by the covenants and obligations of the Landlord hereunder, the Landlord shall, without further written agreement, be relieved and released from any and all liability subsequent to the date of the transaction in respect of such covenants and obligations. In the event of any Encumbrancer going into possession of the Lands or the Buildings, the Tenant will, at the request of such Encumbrancer, attorn to and become the Tenant of such Encumbrancer. 16.02 Postponement and Subordination On request from the Landlord or any Encumbrancer, at any time and from time to time, the Tenant will promptly execute and deliver any instrument or further assurance reasonably required to: (a) postpone and subordinate this Lease to such Encumbrancer to the intent and effect that this Lease and all the rights of the Tenant shall be subject to the rights of such Encumbrancer as though the same existed prior to the making of this Lease; and (b) attorn to the Encumbrancer and become bound to the Encumbrancer as Tenant of the Premises for the then unexpired term of this Lease, and upon the conditions herein set forth. No attornment or subordination aforesaid by the Tenant will have the effect of disturbing the Tenant's occupation and possession of the Premises if the Tenant is not in default hereunder and complies and continues to comply with all the covenants, terms and conditions hereof. 16.03 Estoppel Certificate Within five (5) days after request therefore by the Landlord or an Encumbrancer, the Tenant will promptly execute and deliver a certificate or acknowledgment certifying or acknowledging (if such be the case) that this Lease is in full force and effect and unamended, that Rent is paid currently without any defenses or offsets thereto, that the Tenant is in possession, that there are no prepaid rents or security deposits other than those set out therein, that there are no uncured defaults by the Landlord and providing such other information as may reasonably be required, including a copy of the Tenant's most recent audited financial statements or such other financial information as may reasonably be required by an Encumbrancer to enable the Encumbrancer to make investment decisions on the basis of good business practice provided that no information need be provided which the Tenant reasonably believes would provide undue disclosure concerning its business operations to the possible benefit of a competitor. The Tenant hereby irrevocably appoints the Landlord as attorney-in-fact for the Tenant with full power and authority to execute and deliver in the name of the Tenant any of the above certificates or acknowledgments. If ten (10) days after the date of a request by the Landlord to execute such certificates or acknowledgments the Tenant has not executed the same, the Landlord may, at its option, cancel this Lease without incurring any liability on account thereof and the term hereby granted is expressly limited accordingly. -20- ARTICLE SEVENTEEN Landlord's Remedies 17.01 Severability Should any provision of this Lease be or become illegal or not enforceable it shall be considered separate and severable from the Lease and the remaining provisions will remain in force and be binding upon the parties hereto as though the said provision had not been included. 17.02 Waiver No act or omission of a party, nor any condonment , excusing or overlooking by a party of any default, breach or non-observance by the other at any time or times in respect of any covenant, proviso or condition herein contained, will operate as a precedent nor as a waiver of that party's rights hereunder in respect of any subsequent default, breach or non-observance, nor so as to defeat or affect in any way the rights of the party in respect of any subsequent default, breach or non-observance 17.03 Interest The Tenant will pay to the Landlord interest at a rate of 2% per month upon all Rent required to be paid hereunder from the due date for payment thereof until the same is fully paid and satisfied, and the Tenant will pay and indemnify the Landlord for and against all costs and charges (including legal fees on a solicitor-client basis, and disbursements) lawfully and reasonably incurred in enforcing payment thereof or in obtaining possession of the Premises after default of the Tenant or upon expiration or earlier termination of the term of this Lease, or in enforcing any covenant, proviso or agreement of the Tenant herein contained 17.04 Performance by Landlord If the Tenant should fail to perform any of the covenants or obligations of the Tenant under this Lease, the Landlord may at its option and discretion, from time to time perform or cause to be performed the covenant or obligation or an part thereof in respect of which the Tenant is in breach, and for such purpose the Landlord may make any payment or may do or cause to be done such things as may be required to fulfill the Tenant's covenant or obligation, and for the purposes aforesaid the Landlord shall be entitled to enter upon the Premises. All expenses, costs and expenditures (including legal fees on a solicitor- client basis and disbursements) incurred by the Landlord in performance of any of the covenants or obligations of the Tenant hereunder shall forthwith on demand therefore be paid by the Tenant, and may be recovered by all remedies available to a landlord for recovery of rent in arrears, and the Landlord shall not be liable for any loss or damage to the Tenant's property or business caused by reasonable and responsible acts of the Landlord in performing any of the covenants or obligations of the Tenant. 17.05 Events of Default and Consequences If and whenever: (a) The rent hereby reserved, or any part thereof; be not paid when due; or (b) The term hereby granted, or any goods, chattels or equipment of the Tenant, be taken or exigible in execution or in attachment or if a writ of execution issues against the Tenant; or (c) The Tenant becomes insolvent or commit and act of bankruptcy or takes the benefit of any Act that may be in force for bankrupt or insolvent debtors or becomes involved in voluntary or involuntary winding-up proceedings or if a receiver be appointed for the business, property, affairs or revenues of the Tenant; or (d) The Tenant makes a bulk sale of its goods or moves or commences, attempts or threatens to move its -21- good, chattels and equipment out of the Premises (other than in the routine course of its business) or ceases to conduct business from the Premises, or (e) The Tenant does not observe, perform and keep each and every of the covenants, agreements, provisions, stipulations and conditions herein contained to be observed, performed and kept by the Tenant and persists in such failure after seven (7) days notice by the Landlord requiring that the Tenant remedy, correct, desist, or comply (or in the case of any such breach ~which reasonably would require more than seven (7) day notice period and thereafter promptly and diligently and continuously proceeds with the rectification of the breach); then and in any of such cases, at the option of the Landlord, the full amount of the current month's and next ensuing three months' Gross Monthly Rent and all other Additional Charges for the current month, shall immediately become due and payable and the Landlord may immediately distrain from the same and any arrears of Gross Monthly Rent or Additional Charges then unpaid, and the Landlord may without notice or any form of legal process forthwith re-enter upon and take possession of the Premises or any part thereof and remove and sell the Tenant's goods, chattels and equipment therefrom, any rule of law or equity to the contrary notwithstanding; and the Landlord may seize and sell such goods, chattels and equipment of the Tenant as are in the Premises or at any place to which the Tenant or any other person may have removed them in the same manner as if they had remained and been distrained upon the Premises; and such sale may be effected in the discretion of the Landlord either by public auction or by private agreement, and either in bulk or by individual item, or partly by one means and partly by another, all as the Landlord in its entire discretion may decide. 17.06 Distress The Tenant hereby agrees with the Landlord that notwithstanding anything in any statute in force limiting or abrogating the right of distress or in any other statute in that regard which may hereafter be passed, none of the Tenant's goods or chattels on the Premises at any time during the continuance of the term shall be exempt from levy by distress for Rent in arrears and that upon any claim being made for such exemption by the Tenant or on distress being made by the Landlord this Lease may be pleaded as an estoppel against the Tenant in any action brought to test the right to the levying upon any such goods as are named as exempted in any such statute, the Tenant waiving as it hereby does, all and every benefit that could or might have accrued to the Tenant under and by virtue of any such statute, but for this Lease. The Tenant hereby expressly waives any and all rights of redemption granted by or under any present or future laws in the event of the Tenant being evicted or dispossessed for any cause or in the event of the Landlord obtaining possession of the Premises, by reason of the violation by the Tenant of any of the covenants or conditions of this Lease or otherwise. 17.07 Re-Entry and Damages If and whenever the Landlord is entitled to re-enter the Premises, or does re-enter the Premises, the Landlord may either terminate this Lease by giving written notice of termination to the Tenant, or by posting notice of termination in the Premises, and in Such event the Tenant will forthwith vacate and surrender the Premises or alternatively, the Landlord may from time to time without terminating the Tenant's obligations under this Lease, make alterations and repairs considered by the Landlord necessary to facilitate a sub-letting, and sub-let the Premises or any part thereof as agent of the Tenant for Such term or terms and at such rental or rentals and upon such other terms and conditions as the Landlord in its reasonable discretion considers advisable. Upon each sub-letting all rent and other moneys received by the Landlord from the sub-letting will be applied, first to the payment of indebtedness other than Rent due hereunder from the Tenant to the Landlord, second to the payment of costs and expenses of the sub-letting including brokerage fees and solicitors' fees and costs of the alterations and repairs, and third to the payment of Rent due and unpaid hereunder. The residue, if any, will be held by the Landlord and applied in payment of future Rent as it becomes due and payable. If the Rent received from the sub-letting during a month is less than the Rent to be paid during that month by the Tenant, the Tenant will pay the deficiency to the Landlord. The deficiency will be calculated and paid monthly. No re-entry by the Landlord will be construed as an election on its part to terminate this Lease unless a written notice of that intention is given to the Tenant. Despite a sub-letting without termination, the Landlord may elect any time to terminate this Lease for a previous breach. If the Landlord terminates this Lease for any breach, the Tenant will pay to the Landlord on demand therefore: (a) Gross Monthly Rent up to the time of re entry or termination, whichever is later, plus accelerated Rent -22- as provided for in Article 17.05; (b) all Additional Charges payable by the Tenant pursuant to the provisions hereof up until the date of re- entry or termination whichever is later; (c) such expenses as the Landlord may incur or have incurred in connection with reentering or terminating and reletting, or collecting sums due or payable by the Tenant or realizing upon assets seized including brokerage expense, legal fees and disbursements determined on a solicitor-client basis, and including the expense of keeping the Premises in good order and repairing or maintaining the same or preparing the Premises for re-letting; and (d) as liquidated damages for the loss of Rent and other income of the Landlord expected to be derived from this Lease during the period which would have constituted the unexpired portion of the term had it not been terminated, the amount, if any, by which the rental value of the Premises for such period established by reference to the terms and provisions of this Lease, exceeds the rental value of the Premises for such period established by reference to the terms and provisions upon which the Landlord re-lets them, if such re-letting is accomplished within a reasonable time after termination of this Lease and otherwise with reference to all market and other relevant circumstances. Rental value is to be computed in each case by reducing to present worth at an assumed interest rate of 10% per annum all Rent and other amounts to become payable for such period and where the ascertainment of amounts to become payable requires it, the Landlord may make estimates and assumptions of fact which will govern unless shown to be unreasonable or erroneous. 17.08 Remedies Cumulative No reference to nor exercise of any specific right or remedy by the Landlord will prejudice or preclude the Landlord from exercising any other remedy provided by this Lease or allowed at law or in equity. No remedy provided to the Landlord by this Lease or at law or in equity shall be exclusive or dependent upon any other such remedy, and the Landlord may, from time to time, exercise anyone or more such remedies independently or in combination. 17.09 Landlord's Expenses Enforcing Lease If it shall be necessary for the Landlord to retain the services of a solicitor or any other proper person for the purpose of assisting the Landlord in enforcing any of its rights hereunder in the event of default on the part of the Tenant, it shall be entitled to collect from the Tenant the cost of all such services including all necessary Court proceedings to trial and on appeal on a solicitor and own client basis as if the same were rent reserved and in arrears hereunder. ARTICLE EIGHTEEN Expropriation 18.01 Expropriation If at any time during the term of this Lease the whole or a portion of the Building or the Common Areas (whether or not including the Premises) are expropriated by right or exercise by any competent authority of powers of expropriation, the parties hereto shall each be entitled to separately advance their claims for compensation for the loss of their respective interest in the Premises and shall be entitled to receive and obtain such compensation as may be awarded to each respectively. If an award of compensation made to the Landlord specifically includes an award for the Tenant, the Landlord will account therefore to the Tenant and if an award of compensation made to the Tenant specifically includes an award for the Landlord, the Tenant will account therefore to the Landlord. Upon termination of the Lease by expropriation or other operation of law, the Tenant will forthwith pay the Landlord the Rent, and all other charges which may be due to the Landlord up to the date of such termination. The Tenant will have no claim upon the Landlord up to the date of such termination. The Tenant will have no claim upon the Landlord for the value of its property expropriated or the unexpired term of the Lease, or for any other damages, costs, losses or -23- expenses whatsoever. The Landlord and Tenant agree to cooperate one with the other in respect of any expropriation of all or any part of the Premises or the Building, so that each may receive the maximum award in the case of any expropriation to which they are respectively entitled in law. In the event that any portion or portions of the Building other than the Premises shall be expropriated as aforesaid, then the full proceeds accruing therefrom or awarded as a result thereof; will ensure to the benefit of and belong to the Landlord. ARTICLE NINETEEN Common Areas 19.01 Control of Common Areas All Common Areas shall at all times be subject to the exclusive control and management of the Landlord. The Landlord will operate and maintain the Common Areas of the Building in such manner as the Landlord, in its sole discretion, from time to time determines. Without restricting or limiting the generality of the foregoing, the Landlord will have the right, in the control, management and operation of the Common Areas to: (a) construct, maintain and operate lighting, heating, ventilating and air conditioning in all or any parts of the Common Areas; (b) police and supervise all or any part o parts of the Common Areas; (c) grant, modify and terminate easements or other agreements pertaining to the use and maintenance of all or any part or parts of the Common Areas; (d) obstruct or close off all or any part of the Common Areas or parts thereof for the purpose of maintenance, reconstruction, construction or repair and for the purpose of providing security or to prevent the accrual of rights therein to any person; (e) use of the Common Areas from time to time for merchandising, display, decorations, entertainment and structures designated for special features and promotional activities; (f) from time to time change the area, level, location, arrangement and use of the Common Areas; (g) construct other buildings, structures or improvements in the Common Areas and make alterations thereof or additions thereto or subtractions therefrom or rearrangements thereof; and build additional storeys on any Building or Buildings and build adjoining same; (h) construct elevated or underground parking facilities. 19.02 License All Common Areas which the Tenant may be permitted to use and occupy are to be used and occupied for the purposes for which they were intended under a revocable license, and if the area of the Common Areas be diminished, the Landlord shall not be subject to any liability nor shall the Tenant be entitled to any compensation, damages, or diminution or abatement of rent, nor shall such diminution of such Common Areas be deemed constructive or actual eviction, or a breach of any covenant for quiet enjoyment set forth herein ARTICLE TWENTY Guarantee 20.01 GUARANTEE - INTENTIONALLY DELETED -24- ARTICLE TWENTY-ONE Over-Holding 21.01 Over-Holding In the event the Tenant remains in possession of the Premises after the expiration of this Lease and without the execution and delivery of a new lease, the Landlord may re-enter and take possession of the Premises and remove the Tenant therefrom and the Tenant will, in the event of such over-holding, be deemed to be occupying the Premises as a tenant from month to month at a monthly rental payable in advance on the first day of each month equal to twice the highest Rent actually paid in any month during the term of this Lease, subject to all of the covenants, agreements, conditions, provisos and obligations of this Lease insofar as the same are applicable to a month to month tenancy, and a tenancy from year to year will not be created by implication of law. ARTICLE TWENTY-TWO Notice 22.01 To Landlord Any notices herein provided or permitted to be given by the Tenant to the Landlord shall be sufficiently given if mailed by registered mail, postage prepaid, address to the Landlord do Colliers Macaulay Nicolls Inc., 16th Floor, Granville Square, 200 Granville Street, Vancouver, British Columbia Canada V6C 2R6, with a copy to C.T. Management Corporation, Suite 300, 905 West Fender Street, Vancouver, BC, V6C 1L6. 22.02 To Tenant Any notices herein provided or permitted to be given by the Landlord to the Tenant shall be sufficiently given if: (a) written or printed copy of such notice is delivered to the Tenant at the Premises or posted upon a door of the Premises; or (b) a written or printed copy of such notice is mailed by registered mail, postage prepaid, addressed to the Tenant at the Premises. 22.03 Deemed Receipt All notices given as aforesaid shall be conclusively deemed to have been given, and received by the party to whom such notice was directed, on the day on which such notice was received at the addresses as aforesaid, or on the day on which such notice is delivered or affixed as aforesaid. 22.04 Change of Address Either party hereto may at any time in the manner provided above give notice in writing to the other of any change of address of the party giving such notice and from and after the giving of such notice the address therein specified shall be deemed to be the address of such party for the giving of notices hereunder. ARTICLE TWENTY-THREE Force Majeure 23.01 Force Majeure -25- In the event that either party hereto shall be delayed or hindered in or prevented from the performance of any act required hereunder by reason of strikes, lockouts, labour troubles, inability to procure materials, failure of power, restrictive governmental laws or regulations, riots, insurrections, war or other reason of a like nature not the fault of the party delayed in performing work or doing acts required under the terms of this Lease, then performance of such act shall be excused for a period of the delay and the period for the performance of any such act shall be extended for a period equivalent to the period of such delay. The provisions of this paragraph shall not operate to excuse the Tenant from the prompt payment of Rent nor entitle the Tenant to compensation for any inconvenience, nuisance of discomfort thereby occasioned. ARTICLE TWENTY-FOUR Prepaid Rental and Security Deposit 24.01 Prepaid Rent The Landlord acknowledges having received payment from the Tenant of the sum of Nine Thousand Six Hundred Seventy Seven and 03/100 Dollars ($9,677.03) which sum shall be applied in payment of the Gross Monthly Rent and GST payable by the Tenant hereunder for the first month of the term hereof. 24.02 Security Deposit The Landlord acknowledges having received payment from the Tenant of the sum of Ten Thousand Six Hundred Ninety Seven and 26/100 Dollars ($10,697.26) as partial consideration for the execution by the Landlord of this Lease, and such sum shall be held by the Landlord, without liability for interest, as security for the faithful performance by the Tenant of all the terms, covenants and conditions of this Lease, and if at any time during the term of this Lease the Rent payable by the Tenant hereunder is overdue and unpaid then the Landlord may at its option apply any portion of such security deposit toward the payment of such overdue Rent without thereby limiting or excluding any other right which the Landlord may have hereunder or at law, and if such security deposit is not so applied during the term hereof then such sum shall be applied toward payment of the Gross Monthly Rent payable by the Tenant for the last month(s) of the term hereto. In the event the entire security deposit or any portion thereof is applied by the Landlord towards the payment of overdue Rent then the Tenant will on the written demand of the Landlord forthwith remit to the Landlord such sum as is sufficient to restore such security deposit to the original sum deposited. In the even any portion of the security deposit is then remaining, it shall be applied to the Tenant's last months Gross Monthly Rent and GST payable hereunder. ARTICLE TWENTY-FIVE Miscellaneous 26.01 Time of Essence Time shall be of the essence hereof 26.02 Amendment This Lease shall not be or be deemed or construed to be modified or amended, except by an instrument in writing signed by the parties hereto, specifically asserting that the Lease is thereby amended. 26.03 Entire Agreement Subject to the provisions of any written collateral agreements this Lease contains the entire agreement between the parties which is admitted so that they shall be forever estopped from asserting to the contrary that there is any representation, condition, precedent or warranty whatsoever to the within Lease. Any offer to lease made by the Tenant to the Landlord in respect of the Premises shall be merged in this Agreement except to the extent that such offer to lease specifically provides for non-merger of its terms in this Lease, and execution hereof by the Tenant shall constitute an acknowledgment from the Tenant that the Landlord's obligations have been fully performed and satisfied to the extent stated herein. Delivery of an unsigned copy of this Lease to the Tenant, notwithstanding insertion of all particulars in the Lease and presentation of any cheque or acceptance of any monies by the Landlord given by the Tenant as a deposit, does not constitute an offer by the Landlord and no contractual or other legal right shall be created between the parties hereto until this Lease has been fully executed by both parties and delivery -26- has been made of an executed copy of this Lease to the Tenant. 26.04 Captions and Headings The captions, paragraph or section numbers and headings appearing in this Lease are inserted only as a matter of convenience and in no way define, limit or describe the scope or intent of this Lease nor any part hereof. 26.05 Interpretation Wherever the neuter, singular number or a gender is used in this instrument the same shall be construed as including the plural and the masculine, feminine and neuter respectively where the fact or context so requires; and in any case where this Lease is executed by more than one Tenant, all covenants and agreements therein contained shall be construed and taken as against such executing Tenants as joint and several; and the heirs, executors, administrators, successors and assigns of each Tenant executing this Lease shall be jointly and severally bound by the covenants, agreements, stipulations and provisos herein contained. The covenants, agreements, stipulations and provisos herein stated shall be in addition to those granted or implied by Statute. Wherever the word "Landlord" is used in this Lease, such word shall be deemed to include the Landlord and its duly authorized representatives. 26.06 Acceptance The Tenant does hereby accept this Lease of the Lands, to be held by the Tenant as tenant, and subject to the conditions, restrictions and covenants above set forth. 26.07 Inurement These presents and everything herein contained shall, except where otherwise provided, be binding upon and enure to the benefit of the parties hereto and the successors and assigns of the Landlord, and the heirs, executors, administrators and approved successors and assigns of the Tenant and the Guarantor, and this Lease shall be interpreted under and be governed by the laws of the Province of British Columbia and the courts of that Province will have sole jurisdiction to adjudicate on such matters, and the parties hereto submit to such jurisdiction. 26.08 Special Clauses (a) The Tenant accepts the Premises "as is". Any alterations the Tenant wishes to carry out shall comply with the terms of this Lease and the Tenant shall obtain any applicable approvals of the local Municipal Authority and of the Landlord's architects, mechanical, electrical and structural consultants, at the Tenant's cost. (b) For the purposes of planning and the construction of its leasehold improvements, the Tenant shall have access to the Premises prior to the Commencement Date from the execution of this Lease. During this period, the Tenant shall not be obligated to pay any Gross Monthly Rent, but shall abide by all other terms of this Lease. IN WITNESS WHEREOF the parties hereto have executed this Lease by affixing their corporate seals by their authorized officers in that behalf; or by the Tenant's signature hereto, or by the Guarantor's signature hereto, as of the day and year first above written. THE CORPORATE SEAL of C.T. MANAGEMENT CORPORATION was hereunto affixed in the presence of ----------------------------------- Authorized Signatory -27- THE CORPORATE SEAL OF DSI DATOTECH SYSTEMS INC. was hereunto affixed in the presence of: -------------------------------- Authorized Signatory -28- SCHEDULES Schedule A Definitions THIS IS SCHEDULE "A" TO THE LEASE AGREEMENT DATED JULY 25, 2000 BETWEEN: C.T. MANAGEMENT CORPORATION Landlord AND: DSI DATOTECH SYSTEMS INC. Tenant In the Lease, including all schedules thereto: (a) "Additional Charges" - means all such amounts other than Gross Annual Rent or Additional Rent as are payable by the Tenant pursuant to the provisions of the Lease; (b) "Additional Rent" - means the amount payable by the Tenant for any additional work performed by the Landlord specifically for the Tenant other than Landlord's Work and any excess or additional costs in the Landlord's Work occasioned by the Tenant's requirements; (c) "Allowance in Kind" - means that portion of the Tenant's Work, if any, to be performed by the Landlord at the sole cost of the Landlord; (d) "Building" - means the building in which the Premises are situated; (e) "Cash Allowance" - means that allowance, if any, to be contributed by the Landlord to the Tenant towards the cost to the Tenant of performing the Tenant's Work; (f) "Commencement Date" - means the earlier to occur of the three dates referred to in Article 3.01 with reference to commencement of the term of the Lease; (g) "Common Areas" - includes all areas, facilities, utilities, improvements, equipment and installations of the Building which are from time to time provided to be used in common by, or for the common benefit of; any two or more of the Landlord, the Tenant, other tenants or space in the Building, employees and customers of tenants of the Building, and all others entitled to the use or benefit of such areas, facilities, utilities, improvements, equipment and installations and, without restricting the generality of the foregoing, includes; i. all parking areas, access roads, employee parking areas, truck courts, driveways, loading docks and areas, pedestrian sidewalks, landscaped or planted areas exterior to the Building, bus stops, exterior weather walls, roofs, entrances to and exits from the Building and the plumbing, mechanical, electrical, heating and air conditioning systems serving the Building and all of the components thereof; and -29- ii. all interior walls not required to be maintained by tenants of the Building, all space in all enclosed malls, courts and ramps, landscaped and planted areas contained within the Building, stairways, first aid stations, washrooms, storage facilities, utilities and service rooms, escalators, elevators, moving sidewalks, music and public address systems, general signs, lighting equipment, standards and facilities, except to the extent that the Landlord may from time to time prescribe that anyone or more of the foregoing or any portion thereof shall not be included in Common Areas; (h) "Encumbrancer" - means any purchaser, transferee, lessee or mortgagee, or any trustee for them, severally and jointly together with any purchaser from or successor to them, who acquires by way of sale, transfer, lease, mortgage or other manner a charge upon the interest of the Landlord in the Lands or the Buildings; (i) "Gross Leasable Area" - of the Building shall be the sum of the leasable area of all the floors of the Building, save and except those leasable areas designated by the Landlord as storage areas. (j) "Landlord's Architect" - means such firm of professional architects or engineers as the Landlord may from time to time engage for preparation of construction drawings for the Building or for general supervision of architectural and engineering aspects and operations thereof; and includes any consultant from time to time appointed by the Landlord or the architect whenever in accordance with normal professional practice such consultant is acting within the scope of his appointment and specialty; (k) "Landlord's Taxes" - means the aggregate of: i. any taxes (specifically including property taxes and corporation capital taxes), rates, charges, .levies or assessments imposed by a municipal, parliamentary, school or other competent authority upon or in respect of the Lands and/or upon or in respect of any Buildings or improvements on or under the Lands; and ii. any imposition upon the Landlord by reason of its ownership of the Lands for or in respect of any purpose of schools or education whether or not the same are payable to or raised by one or more competent authority; and iii. any frontage or other assessments or levies upon the Lands for local or special improvements or municipal utilities or services; and iv. any charges whether in the nature of taxes, rent, amortized payment, or otherwise and whether directly charged upon the Lands or otherwise, which the Landlord is required to pay for or in connection with any lease, easement or other use of portion or portions of any street land, tunnel or pedway providing access, ingress, egress or other facilities to or for the Lands or the Building; and v. any costs and expenses (including legal and other professional fees and interest and penalties on deferred payments) incurred by the Landlord in good faith in appealing, contesting or resisting any of the aforementioned; (l) "Landlord's Work" - means all work, labour, materials, o other improvements required by the Landlord in the Premises which will be provided and installed by the Landlord in the Premises at its expense in accordance with the Landlord's choice of materials; (m) "Lands" - means lands and premises situate in the City o Vancouver, Province of British Columbia, more particularly described as: Plan 210, Lots 11 and 12, Block 20, District Lot 541, N. WD. and includes the Building; (n) "Lease" - means the Agreement to which this schedule is annexed, and includes this and all other schedules annexed to the Agreement; (o) "Lease Year" - means the period of one year commencing on the Commencement Date or the anniversary thereof; -30- (p) "Gross Annual Rent" - means the rent payable by the Tenant pursuant to Article 4.01 of the Lease; (q) "Gross Monthly Rent" - means one-twelfth (1/12) of the Gross Annual Rent; (r) "Partial Destruction" - means any damage to the Building or the Premises less than Total Destruction, but which renders all or any part of the Premises temporarily unfit for use by the Tenant for the Tenant's business; (s) "Premises" - means that portion of the Building prescribed, limited, and quantified as to area by reference to the provisions of Articles 2.01, 2.03, and 204 of the Lease; (to) "Rent" -includes, but is not limited to, all monies payable at any time and from time to time by the Tenant to the Landlord in respect of Gross Annual Rent, Gross Monthly Rent, Additional Charges and Additional Rent; (u) "Structural Repair" -means any required maintenance, repair, or replacement of the footings, foundations, columns, beams, concrete floor slab, and roof supports of the Building; (v) "Tenant's Work" - means all work, labour, materials, or other improvements required for the Premises which will be provided and installed at the Tenant's cost by either the Landlord or the Tenant; and (w) "Total Destruction" - means such damage to the Buildings or other Premises as renders the latter unfit for use by the Tenant for the Tenant's business and which cannot reasonably be repaired within 12 months of the date of the destruction to the state wherein the Tenant could use substantially all of the Premises for its business. -31- Schedule B Plan THIS IS SCHEDULE "B" TO THE LEASE AGREEMENT DATED JULY 25, 2000 PLAN OF THE PREMISES THIRD FLOOR, 905 W. PENDER VANCOUVER, BC -32- Schedule C Statement of Lease Commencement THIS IS SCHEDULE "C" TO THE LEASE AGREEMENT DATED JULY 25, 2000 BETWEEN: C.T. MANAGEMENT CORPORATION Landlord AND: DSI DATOTECH SYSTEMS INC. Tenant Dear Sir: Re: Lease Agreement dated July 25, 2000 This letter will confirm that, with respect to the Premises leased to the undersigned pursuant to the above agreement: (a) The Commencement Date is _________________ (b) The precise floor area of the Premises is _____________ square feet; (c) The Tenant's Proportionate Share is as defined in the Lease. (d) The undersigned is in possession of the Premises, and is paying all Rent payable pursuant to the above Lease; (e) The undersigned commenced to pay Rent on ___________________ (f) The Gross Monthly Rent is ___________________ (g) The undersigned has delivered to the Landlord __________ being ____________ month(s) prepaid Gross Monthly Rent and _____________ as a security deposit; -33- (h) The Premises have been completed in accordance with all obligations of the Landlord and are entirely satisfactory and suitable for the use thereof; (i) The undersigned has no claims, defenses, set-offs, or counterclaims against you; and (j) The above Lese is unamended and in good standing as at the date hereof. DATED, this _____ day of_______________ 200_. THE CORPORATE SEAL OF DSI DATOTECH SYSTEMS INC. was hereunto affixed in the presence of: - ---------------------------- Authorized Signatory - ---------------------------- Authorized Signatory -34- Schedule D Rules and Regulations THIS IS SCHEDULE "D" TO THE LEASE AGREEMENT DATED JULY 25, 2000 BETWEEN: C.T. MANAGEMENT CORPORATION Landlord AND: DSI DATOTECH SYSTEMS INC. Tenant RULES AND REGULATIONS 1. The Tenant will not burn any trash or garbage in or about the Premises or anywhere within the confines of the Building. All garbage, trash and rubbish shall be kept within the interior of the Premises until the day of removal Such removal will comply with arrangements prescribed from time to time by the Landlord, and shall be at the expense of the Tenant. If the Tenant's trash or garbage is of a deteriorating nature, creating offensive odours, then the Tenant will provide and maintain at its sole expense sealed refrigerated garbage rooms In the event that it is considered necessary by the Landlord that such garbage be placed outside the Premises, and the Landlord consents in writing to the placing of garbage outside the Premises, then such garbage shall be placed in a container specified by the Landlord, but provided at the expense of the Tenant 2. The Tenant will not load any floor of the Premises in the office tower with a weight in excess of 50 pounds per square foot or in the retail buildings with a weight in excess of ] 00 pounds per square foot, nor will the Tenant hang or suspend from any wall or ceiling or roof; or any other part of the Building any equipment, displays, fixtures or signs which are not authorized by the Landlord 3. The Tenant will at its expense maintain all office fixtures and lighting fixtures and the components thereof. 4. The Tenant will not attempt any repairs, alterations or modifications to the heating, air conditioning, plumbing or electrical systems of the Premises or the Building without the prior written approval of the Landlord. The Tenant will not impede the operation of; or place any articles upon, any heating or air conditioning equipment or facilities within the Premises or the Building 5. The Tenant will not change locks on doors or install auxiliary or additional locks without the prior approval of the Landlord. 6. The Tenant will not make or permit any noise or conduct in the Building which, in the opinion of the Landlord, may disturb any other tenant No pets, animals or birds shall be brought into the Building, or kept therein, without the prior written consent of the Landlord. No portion of the Premises shall be used for the storage of personal effects, or articles not required for business purposes. 7. The Tenant will ensure that all loading, unloading and shipping of merchandise, supplies, fixtures and other materials whatsoever are made only through such areas, entrances, elevators and corridors and during such days and hours and in compliance with such provisions for the regulation of same as the Landlord may from time to time prescribe, and that delivery and shipping to and from the Building and the Premises are in accordance with and subject to such rules and regulations as are in the judgment of the Landlord necessary for the proper operation of the Building. -35- 8. The Landlord reserves the right to restrict, control or prohibit canvassing, soliciting and peddling within the Building and upon the Lands The Tenant will not grant any concessions, licenses or permission for the sale or taking of orders for food or services or merchandise in the Premises or the Building, nor install or permit the installation or use of any machinery or equipment for dispensing goods or foods or beverages in the Building, nor permit the preparation, serving, distribution or delivery of food or beverages in the Premises without the approval of the Landlord and in compliance with arrangements prescribed by the Landlord Only persons approved by the Landlord shall be permitted to serve, distribute or deliver food and beverages within the Building, or to use the elevators or public areas of the Building for that purpose 9. If the Tenant requires any electrical equipment which will overload the electrical facilities in the Premises, the Tenant will first submit to the Landlord plans and specifications for the work required to install and supply additional electrical equipment necessary to prevent overloading of the electrical facilities in the Premises, and obtain from the Landlord written approval to perform the same. All such work will meet all governmental regulations, regulations of any other competent authority, regulations of the Canadian Underwriters' Association, and requirements as set down by the Landlord's insurers, and shall be at the sole expense of the Tenant. 10. The Tenant and its employees, agents and contractors may enter the Premises at all times outside regular business hours of the Building, but only by such entrances as the Landlord may from time to time prescribe, and subject to such means as the Landlord may require to control the presence of persons within the Building when it is closed to the public. 11. The Tenant shall be entitled to have its name shown upon the directory board or the Building, but the Landlord shall in its sole discretion decide the style of such identification and allot space on the directory board for each tenant. 12. No awnings or other projections shall be attached to the outside walls or the Building All curtains, blinds, shades or screens attached to or hung in, or used in connection with, any window or door of the Premises shall be subject to the approval of the Landlord. Window shading shall be kept closed on exterior windows when exposed to the sun and at such other times as may be directed by the Landlord. 13. The Tenant shall not mark, paint, drill into, or in any way deface any part or the Premises or the Building. No boring, cutting or stringing of wires shall be permitted, except with the prior written consent or the Landlord, and as the Landlord may direct. The Tenant shall not lay linoleum, or other similar floor covering, so that the same shall come in direct contact with the floor of the Premises, and, if linoleum or other similar floor covering is desired to be used an interlining of builders deadening felt shall be first affixed to the floor by a paste or other material soluble in water. 14. Except as may be otherwise approved by the Landlord, the Tenant shall not occupy or permit any portion of the Premises to be occupied by a public stenographer or typist, or for the possession, storage, manufacture, or sale of liquor, narcotics, tobacco in any form, or as a barber or manicure shop, or engage or pay any employees on the Premises, except those actually working for the Tenant on the Premises, or advertise for laborers giving an address at the Premises. 15. All persons entering and leaving the Building at any time other than during normal business hours as designated by the Landlord from time to time shall register in the books kept by the Landlord at or near the night entrance and the Landlord will have the right to prevent any person from entering or leaving the Building unless provided with a key to the Premises to which such person seeks entrance or a pass in a form to be approved by the Landlord. Any persons round in the Building at such times without such key or pass will be subject to the surveillance of the employees and agents of the Landlord. The Landlord shall be under no responsibility for failure to enforce this rule. -36- Schedule E Termination in the Event of Demolition THIS IS SCHEDULE "E" TO THE LEASE AGREEMENT DATED JULY 25, 2000 BETWEEN: C.T. MANAGEMENT CORPORATION Landlord AND DSI DATOTECH SYSTEMS INC. Tenant TERMINATION IN THE EVENT OF DEMOLITION The Tenant hereby agrees that if the Landlord desires at any time to remodel the building housing the Premises or any part thereof or to take down the said building, the Landlord may terminate this Lease and all rights to renew the same upon giving the Tenant 12 months' written notice of the Landlord's intention so to do, provided that the date of termination as specified in such notice shall not be before the expiry of the first five years of the original term of this Lease. The Tenant will surrender this Lease and all the remainder of the term, if any, then yet to come and unexpired, as from the day of termination mentioned in such notice, and will, subject nevertheless to the provisions hereinbefore contained thereupon, vacate the premises and yield up to the Landlord the peaceable possession thereof. It is understood that the said 12 months' notice need not expire at the end of any year or at the end of any month, and in the event of the day fixed for termination of this Lease expiring on some other day than the last day of the month, the rent for such month shall be apportioned for the broken period. EX-4.2 9 0009.txt DSI DATOTECH SYSTEMS INC. 1996 STOCK OPTION PLAN Exhibit 4.2 DSI DATOTECH SYSTEMS INC. 1996 STOCK OPTION PLAN 1. INTERPRETATION 1.1 Defined Terms - For the purposes of this Plan, the following terms shall have the following meanings: (a) "Affiliate" means a Parent Corporation or a Subsidiary Corporation of a corporation; (b) "Associate" means, where used to indicate a relationship with any Person, (i) any relative of that Person, (ii) any person of the opposite sex to whom that Person is married or with whom that Person is living in a conjugal relationship outside marriage, (iii) any relative of a Person mentioned in clause (ii) who has the same home as that Person, (iv) any partner of that Person, (v) any trust or estate in which such Person has a substantial beneficial interest or as to which such Person serves as trustee or in a similar capacity, or (vi) any corporation of which such Person beneficially owns, directly or indirectly, voting securities carrying more than ten percent of the voting rights attached to all outstanding voting securities of the corporation; (c) "Beneficial Owner" of a security includes any Person who, directly or indirectly, through any contract, arrangement understanding, relationship or otherwise has voting power over the security or the power to dispose or direct the disposition of the security, and any Person who uses a trust or other arrangement with the purpose or effect of divesting such Person of beneficial ownership as part of a plan to evade the reporting requirements of section 13 of the Exchange Act shall be deemed to be the Beneficial Owner of the security; (d) "Board" means the Board of Directors of the Company; (e) "Code" means the United States Internal Revenue Code of 1986, as amended from time to time; 2 (f) "Committee" means a committee of the Board appointed in accordance with this Plan, or if no such committee is appointed, the Board itself; (g) "Company" means DSI Datotech Systems Inc. and its Affiliates; (h) "Date of Grant" means the date on which a grant of an Option is effective; (i) "Direct or Indirect Ownership" of securities by a Person is calculated in accordance with the following rules: (i) the Person shall be deemed to own stoc owned, directly or indirectly, by or for his brothers and sisters (including half-brothers and half-sisters), spouse, ancestors and lineal descendants, and (ii) stock owned, directly or indirectly, b or for a corporation, partnership, estate or trust, shall be deemed to be owned proportionately by or for its shareholders, partners or beneficiaries; (j) "Disability" means a medically determinable physical or mental impairment expected to result in death or to last for a continuous period of not less than 12 months which causes an individual to be unable to engage in any substantial gainful activity; (k) "Disinterested Person" means a director who qualifies as a "Disinterested Person" as defined in subclause 240.16b-3(c)(2)(i) of Title 17 of the Code of Federal Regulations of the United States; meaning a director who has not been granted or awarded equity securities pursuant to the Plan or any other plan of the Company for one year prior to the initiation of his service as an administrator of the Plan, other than securities received pursuant to an annual retainer fee; (1) "Disposition" includes a sale, exchange, gift, or transfer of legal tide, but does not include a pledge, hypothecation, transfer from a descendent to an estate, transfer by bequest or inheritance, or the other excepted circumstances referred to in section 424(c) of the Code; (m) "Domestic Relations Successor" means a person entitled to receive transfer of ownership of an Option pursuant to a Qualified Domestic Relations Order; (n) "Effective Date" means the effective date of this Plan, which is November 15, 1996; (o) "Exchange Act" means the Securities Exchange Ac of 1934, as amended; 3 (p) "Fair Market Value" means: (i) where the Shares are listed for tradin on the VSE, the closing price of the Shares on the VSE, (ii) where the Shares are publicly traded but are not listed for trading on the VSE, the closing price of the Shares on such stock exchange or over the counter market as may be selected for such purpose by the Committee, or (iii) where the Shares are not publicly traded, the value which is determined by the Committee to be the fair value of the Shares at the Date of Grant, taking into consideration all factors that the Committee deems appropriate, including, without limitation, recent sale and offer prices of the Shares in private transactions negotiated at arm's length; (q) "Guardian" means the guardian, if any, appointed for an Optionee; (r) "ISO" means an Option granted to an employee of the Company that qualifies as an "incentive stock option" for purposes of section 422 of the Code and is therefore subject to favorable tax treatment under the Code; (s) "ISO Optionee" means an Optionee to whom an ISO has been granted; (to) "Modification" means any change in the terms of an Option which gives the Optionee additional benefits under the Option, but such change shall not include a change in the terms of an Option: (i) to make the Option not transferable other than by will or the laws of descent and distribution, (ii) to make the Option exercisable only by the Optionee during his lifetime, (iii) in the case of an Option not immediately exercisable in full, to accelerate the time within which the Option may be exercised, or (iv) attributable to the issuance or assumption of an Option by reason of a corporate merger, consolidation, acquisition of property or stock, separation, reorganization or liquidation if the new Option or assumption of the old Option does not give the Optionee additional benefits which he did not have under the old Option; 4 (u) "Non-ISO" means an Option that is not an " incentive stock option" for purposes of section 422 of the Code, and is therefore not subject to favorable tax treatment under the Code; (v) "Non-ISO Optionee" means an Optionee to whom a Non-ISO has been granted; (w) "Option" means an option to purchase Shares granted pursuant to the terms of this Plan; (x) "Option Agreement" means a written agreement between the Company and an Optionee, specifying the terms of the Option being granted to the Optionee under the Plan; (y) "Option Price" means the price at which an Option is exercisable to purchase Shares; (z) "Optionee" means a person to whom an Option has been granted; (aa) "Parent Corporation" means any corporation in a unbroken chain of corporations ending with the Company if, at the Date of Grant, each corporation other than the Company owns stock possessing 50 percent or mor of the total combined voting power of all classes of stock in one of the other corporations in such chain; (bb) "Person" means a natural person, company, government, or political subdivision or agency of a government; and where two or more Persons act as a partnership, limited partnership, syndicate or other group for the purpose of acquiring, holding or disposing of securities of an issuer, such syndicate or group shall be deemed to be a Person; (cc) "Plan" means this Stock Option Plan of the Company; (dd) "Qualified Domestic Relations Order" means a judgment or order which relates to the provision of child support, alimony payment or marital property rights to a spouse, former spouse, child or other dependent of an Optionee, made pursuant to domestic relations law of a state of the United States, and which meets all the requirements of section 414(p) of the Code; (ee) "Qualified Successor" means a person who is: (i) entitled to ownership of an Option upo the death of an ISO Optionee, pursuant to a will or the applicable laws of descent and distribution upon death, or (ii) a Domestic Relations Successor of an Optionee; 5 (ff) "Shares" means the common shares without par value in the capital of the Company; (gg) "Subsidiary Corporation" means any corporation in an unbroken chain of corporations beginning with the Company if, at the Date of Grant, each of the corporations other than the last corporation owns stock possessing 50 percent or more of the total combined voting power of all classes of stock in one of the other corporations in such chain; (hh) "Term" means the period of time during which an Option is exercisable; (ii) "Terminating Event" means: (i) the dissolution or liquidation of the Company, (ii) a merger or consolidation of the Company with one or more corporations as a result of which, immediately following such merger or consolidation, the shareholders of the Company as a group will hold less than a majority of the outstanding capital stock of the surviving corporation, (iii) the sale or other disposition of all o substantially all of the assets of the Company, (iv) the occurrence of an event whereby any Person or entity becomes the Beneficial Owner of Shares representing 50% or more of the combined voting power of the voting securities of the Company, or (v) a material change in the capital structure of the Company that is deemed to be a Terminating Event by virtue of the last sentence of Section 11.1 of this Plan or by virtue of Section 11.4 of its Plan; (jj) "VSE" means the Vancouver Stock Exchange. 2. STATEMENT OF PURPOSE 2.1 Principal purposes - The principal purposes of the Plan are to provide the Company with the advantages of the incentive inherent in stock ownership on the part of employees, officers, directors, and consultants responsible for the continued success of the Company; to create in such individuals a proprietary interest in, and a greater concern for, the welfare and success of the Company; to encourage such individuals to remain with the Company; and to attract new employees, officers, directors and consultants to the Company. 6 2.2 ISOs and Non-ISOs - Under this Plan, the Company may grant either ISOs or Non- ISOs. Each ISO granted hereunder is intended to constitute an "incentive stock option," for the purposes of section 422 of the Code, and this Plan and each such ISO is intended to comply with all of the requirements of Section 422 of the Code and of all other provisions of the Code applicable to "incentive stock options" and to plans issuing the same. Each Non-ISO granted hereunder is intended to constitute an Option that is not an "incentive stock option" for the purposes of section 422 of the Code, and that does not comply with the requirements of Section 422 of the Code. 2.3 Benefit to shareholders - The Plan is expected to benefit shareholders by enabling the Company to attract and retain personnel of the highest caliber by offering them an opportunity to share in any increase in value of the Shares resulting from their efforts. 3. ADMINISTRATION 3.1 Board or Committee - The Plan shall be administered by the Board or by a Committee appointed in accordance with Section 3.2 or 3.4(b) below. 3.2 Appointment of Committee - The Board may at any time appoint a Committee, consisting of not less than two of its members, to administer the Plan on behalf of the Board in accordance with such terms and conditions as the Board may prescribe, consistent with this Plan. Once appointed, the Committee shall continue to serve until otherwise directed by the Board. From time to time, the Board may increase the size of the Committee and appoint additional members, remove members (with or without cause) and appoint new members in their place, fill vacancies however caused, or remove all members of the Committee and thereafter directly administer the Plan. 3.3 Quorum and voting - A majority of the members of the Committee shall constitute a quorum, and, subject to the limitations in this Section 3, all actions of the Committee shall require the affirmative vote of members who constitute a majority of such quorum. Members of the Committee who are not Disinterested Persons may vote on any matters affecting the administration of the Plan or the grant of Options pursuant to the Plan, except that no such member shall act upon the granting of an Option to himself (but any such member may be counted in determining the existence of a quorum at any meeting of the Committee during which action is taken with respect to the granting of Options to him). 3.4 Administration of Plan upon registration of equity securities - Notwithstanding the foregoing provisions of this Section 3, if the Company registers any class of any equity security pursuant to section 12 of the Exchange Act the Plan shall, from the effective date of such registration until six months after the termination of such registration, be administered as follows: (a) the Plan shall be administered by the Board so long as each member of the Board is a Disinterested Person; and, 7 (b) if at any time not all members of the Board are Disinterested Persons, then the Board shall appoint a Committee consisting of two or more of its members, all of whom are Disinterested Persons, to administer the Plan o behalf of the Board in accordance with such terms and conditions as the Board may prescribe, consistent with this Plan. Once appointed, the Committee shall continue to serve until otherwise directed by the Board. From time to time the Board may increase the size of the Committee and appoint additional members (all of whom shall b Disinterested Persons), remove members (with or without cause) and appoint new members in their place, fill vacancies however caused, or remove all members of the Committee and thereafter directly administer the Plan so long as all members of the Board are Disinterested Persons. At no time shall a person who is not a Disinterested Person serve on the Committee appointed under this Section 3.4%, no shall such Committee at any time consist of less than two members of the Board. 3.5 Powers of Committee - Any Committee appointed ------------------- under Section 3.2 or 3.4(b) above shall have the authority to do the following: (a) administer the Plan in accordance with its express terms; (b) determine all questions arising in connection with the administration, interpretation, and application of the Plan, including all questions relating to the value of the Shares; (c) correct any defect, supply any information, or reconcile any inconsistency in the Plan in such manner and to such extent as shall be deemed necessary or advisable to carry out the purposes of the Plan; (d) prescribe, amend, and rescind rules and regulations relating to the administration of the Plan; (e) determine the duration and purposes of leaves o absence from employment which may be granted to Optionees without constituting a termination of employment for purposes of the Plan; (f) do the following with respect to the granting o Options: (i) determine the employees, officers, directors, or consultants to whom Options shall be granted, based on the eligibility criteria set out in this Plan, (ii) determine whether such Options shall b ISOs or Non-ISOs, (iii) determine the terms and provisions of the Option Agreement to be entered into with any Optionee (which need not be identical with the terms of any other Option Agreement), 8 (iv) amend the terms and provisions of Option Agreements, provided the Committee obtains: (A) the consent of the Optionee; and (B) the approval of any stock exchange on which the Company is listed, (v) determine when Options shall be granted, (vi) determine the number of Shares subject to each Option, and (g) make all other determinations necessary or advisable for administration of the Plan. 3.6 Obtain regulatory approvals - In administering this Plan the Committee will obtain any regulatory approvals which may be required pursuant to applicable securities laws or the rules of any stock exchange on which the Company is listed. 3.7 Administration by Committee - The Committee's exercise of the authority set out in Section 3.5 shall be consistent with the intent that ISOs issued under the Plan be qualified under the terms of Section 422 of the Code, and that Non-ISOs shall not be so qualified. All determinations made by the Committee in good faith on matters referred to in Section 3.5 shall be final, conclusive, and binding upon all Persons. The Committee shall have all powers necessary or appropriate to accomplish its duties under this Plan. In addition, the Committee's administration of the Plan shall in all respects be consistent with the policies and rules of the VSE governing the granting of stock options for so long as the Shares are listed on the VSE and any other regulatory authorities having jurisdiction. 4. ELIGIBILITY 4.1 Eligibility for ISOs - ISOs may be granted to any employee of the Company, including directors or officers of the Company who are employees of the Company. An Optionee who is not an employee of the Company is not eligible to receive an ISO under the Plan. 4.2 Eligibility for Non-ISOs - Non-ISOs may be granted to any employee, officer, director ------------------------- or consultant of the Company. 4.3 No violation of securities laws - No Option shall be granted to any Optionee unless the Committee has determined that the grant of such Option and the exercise thereof by the Optionee will not violate the securities law of the jurisdiction where the Optionee resides. 4.4 Limit on maximum grant to any Optionee - Notwithstanding anything in this Plan to the contrary, no officer or employee of the Company shall receive Options exercisable for more than 750,000 Shares over any three year period. 9 5. SHARES SUBJECT TO THE PLAN 5.1 Number of Shares - The Committee, from time to time, may grant Options to purchase an aggregate of up to 1,500,000 Shares, subject to regulatory approval, to be made available from authorized, but unissued or reacquired, Shares, provided that not more than 750,000 options may be granted to directors and officers in management, administration and investor relations and the remaining options may be granted to employees and consultants and members of any advisory board working in the research, development, marketing and commercialization of gesture interface control systems and other technology developed by the Company. In calculating the foregoing 1,500,000 Shares, the Committee shall include all Shares subject to options outstanding prior to the Effective Date of the Plan. The foregoing number of Shares shall be adjusted, where necessary, to take account of the events referred to in Section 11 hereof 5.2 Decrease in number of Shares subject to Plan - Upon exercise of an Option, the number of Shares thereafter available under the Plan and under the Option shall decrease by the number of Shares as to which the Option was exercised. 5.3 Expiry of option - If an Option expires or terminates for any reason without having been exercised in full, the unpurchased Shares subject thereto shall again be available for the purposes of the Plan. 5.4 Reservation of Shares - The Company will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. 6. OPTION TERMS ------------ 6.1 Option agreement - With respect to each Option to be granted to an Optionee, the Committee shall specify the following terms in the Option Agreement between the Company and the Optionee: (a) whether such Option is an ISO or a Non-ISO; (b) the number of Shares subject to purchase pursuant to such Option, provided that so long as the Shares are listed on the VSE, the number of Shares reserved for issuance to any one person pursuant to Options does not exceed 5% of the outstanding Shares; (c) Date of Grant; (d) the Term, provided that: 10 (i) the Term shall in no event be more than ten years following the Date of Grant provided that while the Company is listed on the Venture Board of the VSE, the Term shall be not more than five years from the Date of Grant; and (ii) if an ISO Option is granted to an Optionee who on the Date of Grant has Direct or Indirect Ownership of more than 10% of the total combined voting power of all classes of stock of the Company, the Term of the Option shall not exceed five years; (e) the Option Price, provided that, (i) so long as the Shares are listed on th VSE, the Option Price shall not be less than the Fair Market Value of the Shares on the trading day preceding the Date of Grant; and (ii) if an ISO Option is granted to an Optionee who on the Date of Grant has Direct or Indirect Ownership of more than 10% of the total combined voting power of all classes of stock of the Company, then the Option Price shall be at least 110% of the Fair Market Value of the Shares on the Date of Grant; (f) any vesting schedule upon which the exercise of an Option is contingent provided that each Option must be subject to a vesting schedule under which not more than 25% of the initial aggregate number of Shares which may be purchased under the Option may vest in any six month period, on a cumulative basis; and (g) such other terms and conditions as the Committee deems advisable and are consistent with the purposes of this Plan. 6.2 No grant after ten years from effective date - No Option shall be granted under the Plan later than ten years from the Effective Date of the Plan. Except as expressly provided herein, nothing contained in this Plan shall require that the terms and conditions of Options granted under the Plan be uniform. 6.3 No Disposition for six months - An Optionee who is subject to section 16 of the Exchange Act shall not make a Disposition of any Shares issued upon exercise of an Option unless at least six months has elapsed between the Date of Grant of the Option and the date of Disposition of the Shares issued upon exercise of such Option. 7. LIMITATION ON GRANTS OF OPTIONS 7.1 Non-ISO if Exceed $100.000 (U.S.) - If the aggregate Fair Market Value of: -------------------------------- 11 (a) Shares underlying ISOs which have been granted to an Optionee under this Plan and which are exercisable for the first time during a calendar year, and (b) Shares underlying incentive stock options which have been granted to such Optionee under any other plan of the Company and which are exercisable for the first time during that calendar year, exceeds $100,000 (U.S.), as such amount may be adjusted from time to time under Section 422(d) of the Code, then to the extent of such excess such Options shall be treated as Non-ISOs. 7.2 ISO Optionee owning greater than 10% of voting securities - The Committee may grant an ISO to an employee of the Company who, at the Date of Grant, owns securities of the Company representing more than 10% of the total combined voting power of all classes of stock of the Company only if: (a) the Option Price is at least 110% of the Fair Market Value of the Shares at the Date of Grant; and (b) the Term is five years or less. 8. EXERCISE OF OPTION ------------------ 8.1 Method of Exercise - Subject to any limitations or conditions imposed upon an Optionee pursuant to the Option Agreement or Section 6 above, an Optionee may exercise an Option by giving written notice thereof to the Company at its principal place of business or as otherwise indicated by the Company in writing. 8.2 Payment of Option price - The notice described in Section 8.1 shall be accompanied by full payment of the aggregate Option Price to the extent the Option is so exercised, and full payment of any amounts the Company determines must be withheld for tax purposes from the Optionee pursuant to the Option Agreement. Such payment shall be: (a) in lawful money (Canadian funds) in cash or by check; (b) at the discretion of the Committee and if such form of payment is permitted under the corporate laws then governing the Company, by delivery of the Optionee's personal recourse note bearing interest at a rate deemed appropriate by the Committee; (c) at the discretion of the Committee, and subject to all applicable securities laws, through delivery by the Optionee and/or withholding the Company, of Shares having a market value as of the date of exercise equal to the cash exercise price of the Option plus any amounts that the Company determines must be withheld from the 12 Optionee for U.S. or Canadian tax purposes. The market value of each of the Shares on the date of delivery shall be determined in good faith by the Committee, which determination shall be binding for all purposes hereunder; or (d) at the discretion of the Committee, by any combination of Sections 8.2(a) to 8.2(c) above. 8.3 Issuance of stock certificate - As soon ~s practicable after exercise of an Option in accordance with Sections 8.1 and 8.2 above, the Company shall issue a stock certificate evidencing the Shares with respect to which the Option has been exercised. Until the issuance of such stock certificate, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to such Shares, notwithstanding the exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 11 below. 9. TRANSFERABILITY OF OPTIONS 9.1 Non-transferable - Except as provided otherwise in this Section 9, Options are non- assignable and non-transferable. 9.2 Death of Optionee - If the employment of an Optionee as an employee or consultant of the Company, or the position of an Optionee as a director of the Company, terminates as a result of his or her death, any Options held by such Optionee shall pass to the Qualified Successor of the Optionee, and (a) in the case of an ISO, shall be exercisable by the Qualified Successor for a period of six months following such death, and (b) in the case of a Non-ISO, shall be exercisable by the Qualified Successor for a period of 12 months following such death. 9.3 Disability of Optionee - If the employment of an Optionee as an employee or consultant of the Company, or the position of an Optionee as a director of the Company, is terminated by the Company by reason of such Optionee's Disability, any Option held by such Optionee that could have been exercised immediately prior to such termination of employment shall be exercisable by such Optionee, or by his Guardian, for a period of one year following the termination of employment of such Optionee. 9.4 Disability and death of Optionee - If an Optionee who has ceased to be employed by the Company by reason of such Optionee's Disability dies within six months after the termination of 13 such employment, any Option held by such Optionee that could have been exercised immediately prior to his or her death shall pass to the Qualified Successor of such Optionee, and shall be exercisable by the Qualified Successor (a) in the case of an ISO, for a period of six months following the death of such Optionee, and (b) in the case of a Non-ISO, for a period of 12 months following the death of such Optionee. 9.5 Qualified Domestic Relations Order - In the event that a Qualified Domestic Relations Order mandates the transfer of any Option that could have been exercised immediately prior to the issuance of such order, such Option shall pass to the Domestic Relations Successor, and shall be exercisable by such person or persons in accordance with the terms of the applicable Option Agreement. 9.6 Vesting - Options held by a Qualified Successor or exercisable by a Guardian shall, during the period prior to their termination, continue to vest in accordance with any vesting schedule to which such Options are subject. 9.7 Unanimous agreement - If two or more persons constitute the Qualified Successor or the Guardian of an Optionee, the rights of such Qualified Successor or such Guardian shall be exercisable only upon the unanimous agreement of such persons. 9.8 Deemed non-interruption of employment - Employment shall be deemed to continue intact during any military or sick leave or other bona fide leave of absence if the period of such leave does not exceed 90 days or, if longer, for so long as the Optionee's right to reemployment with the Company is guaranteed either by statute or by contract. If the period of such leave exceeds 90 days and the Optionee's reemployment is not so guaranteed, then his or her employment shall be deemed to have terminated on the ninety-first day of such leave. 10. TERMINATION OF OPTIONS 10.1 Termination of Options - To the extent not earlier exercised or terminated in accordance with section 9 above, an Option shall terminate at the earliest of the following dates: (a) the termination date specified for such Option in the Option Agreement; (b) where the Optionee's position as an employee, consultant or director of the Company is terminated for just cause, the date of such termination for just cause; (c) where the Optionee's position as an employee, consultant or director of the Company terminates for a reason other than the Optionee's Disability, death, or 14 termination for just cause, 30 days after such date of termination, or upon the Optionee making written application to the Committee and receiving the written consent of the Committee, which consent may be given at the discretion of the Committee, up to 90 days after such date of termination; (d) the date of any sale, transfer, assignment or hypothecation, or any attempted sale, transfer, assignment or hypothecation, of such Option in violation of Section 9.1 above; and (e) the date specified in Section 11.2 below for such termination in the event of a Terminating Event. 11. ADJUSTMENTS TO OPTIONS 11.1 Alteration in capital structure - If there is a material alteration in the capital structure of the Company resulting from a recapitalization, stock split, reverse stock split, stock dividend, or otherwise, the Committee shall make such adjustments to this Plan and to the Options then outstanding under this Plan as the Committee determines to be appropriate and equitable under the circumstances, so that the proportionate interest of each holder of any such Option shall, to the extent practicable, be maintained as before the occurrence of such event Such adjustments may include, without limitation (a) a change in the number or kind of shares of stock of the Company covered by such Options, and (b) a change in the Option Price payable per share; provided, however, that the aggregate Option Price applicable to the unexercised portion of existing Options shall not be altered, it being intended that any adjustments made with respect to such Options shall apply only to the price per share and the number of shares subject thereto. For purposes of this Section 11.1, neither (i) the issuance of additional shares of stock of the Company in exchange for adequate consideration (including services), nor (ii) the conversion of outstanding preferred shares of the Company into Shares shall be deemed to be material alterations of the capital structure of the Company. If the Committee determines that the nature of a material alteration in the capital structure of the Company is such that it is not practical or feasible to make appropriate adjustments to this Plan or to the Options granted hereunder, such event shall be deemed a Terminating Event for the purposes of this Plan. 11.2 Terminating events - Subject to Section 11.3, all Options granted under the Plan shall terminate upon the occurrence of a Terminating Event. 11.3 Notice of Terminating Event - The Committee shall give notice to Optionees not less than thirty days prior to the consummation of a Terminating Event Upon the giving of such notice, all Options granted under the Plan shall become immediately exercisable, notwithstanding any contingent vesting provision to which such Options may have otherwise been subject. 11.4 Corporate reorganization - In the event of a reorganization as defined in this Section 11.4 in which the Company is not the surviving or acquiring corporation, or in which the Company 15 is or becomes a wholly-owned subsidiary of another corporation after the effective date of the reorganization, then unless provision is made by the acquiring corporation for the assumption of each Option granted under this Plan, or the substitution of an option therefor, such that no Modification of any such Option occurs, all Options granted under this Plan shall terminate and such event shall be deemed a Terminating Event. For purposes of this Section 11.4, reorganization shall mean any statutory merger, statutory consolidation, sale of all or substantially all of the assets of the Company, or sale, pursuant to an agreement with the Company, of securities of the Company pursuant to which the Company is or becomes a wholly-owned subsidiary of another corporation after the effective date of the reorganization. 11.5 Acceleration of date of exercise - The Committee shall have the right to accelerate the date of exercise of any installment of any Option; provided that, without the consent of the Optionee with respect to any Option, the Committee shall not accelerate the date of any installment of any Option granted to an employee as an ISO (and not previously converted into a Non-ISO pursuant to Section 13 below) if such acceleration would violate the annual vesting limitation contained in Section 422(d) of the Code, as described in Section 7.1 above. 11.6 Determination to be made by Committee - Adjustments and determinations under this Section 11 shall be made by the Committee, whose decisions as to what adjustments or determination shall be made, and the extent thereof, shall be final, binding, and conclusive. 12. TERMINATION AND AMENDMENT OF PLAN 12.1 Termination of Plan - Unless earlier terminated as provided in Section 11 above or in Section 12.2 below, the Plan shall terminate on, and no Option shall be granted under the Plan, after ten years has passed from the Effective Date of the Plan. 12.2 Power of Committee to terminate or amend Plan - Subject to the approval of any stock exchange on which the Company is listed, the Committee may terminate, suspend or amend the terms of the Plan; provided, however, that, except as provided in Section 11 above, the Committee may not do any of the following without obtaining, within 12 months either before or after the Committee's adoption of a resolution authorizing such action, approval by the affirmative votes of the holders of a majority of the voting securities of the Company present, or represented, and entitled to vote at a meeting duly held in accordance with the applicable corporate laws, or by the written consent of the holders of a majority of the securities of the Company entitled to vote: (a) increase the aggregate number of Shares which may be issued under the Plan; (b) materially modify the requirements as to eligibility for participation in the Plan, or change the designation of the employees or class of employees eligible to receive ISOs under the Plan; (c) materially increase the benefits accruing to participants under the Plan; or 16 (d) make any change in the terms of the Plan that would cause the ISOs granted hereunder to lose their qualification as "incentive stock options" under Section 422 of the Code. 12.3 No grant during suspension of Plan - No Option may be granted during any suspension, or after termination, of the Plan. Amendment, suspension, or termination of the Plan shall not, without the consent of the Optionee, alter or impair any rights or obligations under any Option previously granted. 13. CONVERSION OF ISOS INTO NON-ISOS 13.1 Conversion of ISOs into Non-ISOs - At the written request of any ISO Optionee, the Committee may in its discretion take such actions as may be necessary to convert such Optionee's ISOs (or any installments or portions of installments thereof) that have not been exercised on the date of conversion into Non-ISOs at any time prior to the expiration of such ISOs, regardless of whether the Optionee is an employee of the Company at the time of such conversion. Such actions include, but shall not be limited to, extending the exercise period of such ISOs. At the time of such conversion, the Committee, with the consent of the Optionee, may impose such conditions on the exercise of the resulting Non-ISOs as the Committee in its discretion may determine, provided that such conditions are consistent with this Plan. Nothing in the Plan shall be deemed to give any Optionee the right to have such Optionee's ISOs converted into Non-ISOs, and no such conversion shall occur until and unless the Committee takes appropriate action. The Committee, with the consent of the Optionee, may also terminate any portion of any ISO that has not been exercised at the time of such conversion. 14. CONDITIONS PRECEDENT TO ISSUANCE OF SHARES 14.1 Compliance with securities laws - Shares shall not be issued pursuant to the exercise of any Option unless the exercise of such Option and the issuance and delivery of such Shares comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, any applicable state or provincial securities law, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the Shares may then be listed or otherwise traded. 14.2 Representations by Optionee - As a condition precedent to the exercise of any Option, the Company may require the Optionee to represent and warrant, at the time of exercise, that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such representations and warranties are required by any applicable law. 14.3 Regulatory approval to issuance of Shares - The Company's inability to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's 17 counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability with respect to the failure to issue or sell such Shares. 15. USE OF PROCEEDS --------------- 15.1 Use of Proceeds - Proceeds from the sale of Shares pursuant to the Options granted and exercised under the Plan shall constitute general funds of the Company and shall be used for general corporate purposes. 16. NOTICES 16.1 Notices - All notices, requests, demands and other communications required or permitted to be given under this Plan and the Options granted under this Plan shall be in writing and shall be either served personally on the party to whom notice is to be given, in which case notice shall be deemed to have been duly given on the date of such service; telefaxed, in which case notice shall be deemed to have been duly given on the date the telefax is sent; or mailed to the party to whom notice is to be given, by first class mall, registered or certified, return receipt requested, postage prepaid, and addressed to the party at his or its most recent known address, in which case such notice shall be deemed to have been duly given on the tenth postal delivery day following the date of such mailing. 17. MISCELLANEOUS PROVISIONS 17.1 No obligation to exercise - Optionees shall be under no obligation to exercise Options granted under this Plan. 17.2 No obligation to retain Optionee - Nothing contained in this Plan shall obligate the Company to retain an Optionee as an employee, officer, director, or consultant for any period, nor shall this Plan interfere in any way with the right of the Company to reduce such Optionee's compensation. 17.3 Binding agreement - The provisions of this Plan and each Option Agreement with an Optionee shall be binding upon such Optionee and the Qualified Successor or Guardian of such Optionee. 17.4 Use of terms - Where the context so requires, references herein to the singular shall include the plural, and vice versa, and references to a particular gender shall include either or both genders. 18. SHAREHOLDER APPROVAL TO PLAN 18 18.1 Shareholder approval to Plan - This Plan must be approved by a majority of the votes cast at a meeting of the shareholders of the Company, other than votes attaching to securities beneficially owned by: (a) insiders of the Company, meaning directors, officers and greater than 10 percent shareholders; and (b) Associates of persons referred to in (a). 19. EFFECTIVE DATE OF PLAN 19.1 Effective date of Plan - This Plan was adopted by the Board of Directors on November 15, 1996, and will be submitted to the shareholders of the Company for approval at the next annual general meeting of the shareholders of the Company. The Effective Date of the Plan is November 15, 1996, provided that any Options granted pursuant to the Plan prior to the date on which shareholder approval to the Plan is given may not be exercised until the Plan and any such Options receive shareholder approval. DSI DATOTECH SYSTEMS INC. AMENDMENT NO. 1 TO THE 1996 STOCK OPTION PLAN The 1996 Stock Option Plan of DSI Datotech Systems Inc. (the "Company") effective November 15, 1996 (the "Plan") attached hereto as Schedule "A" is amended as follows: 1. Subparagraph 4.4 under "Limit on maximum grant to any Optionee" of the Plan is hereby deleted in its entirety and replaced with the following: "4.4 Limit on maximum grant to any Optionee - Notwithstanding anything in this Plan to the contrary, no officer or employee of the Company shall receive Options exercisable for more than 987,500 Shares over any three year period." 2. Subparagraph 5.1 under "Numbers of Shares" of the Plan is hereby deleted in its entirety and replaced with the following: "5.1 Number of Shares - The Committee, from time to time, may grant Options to purchase an aggregate of up to 1,975,086 Shares, subject to regulatory approval, to be made available from authorized, but unissued or reacquired, Shares, provided that no more than 987,500 options may be granted to directors and officers in management, administration and investor relations and the remaining options may be granted to employees and consultants and members of any advisory board working in the research, development, marketing and commercialization of gesture interface control systems and other technology developed by the Company. In calculating the foregoing 1,975,086 Shares, the Committee shall include all shares subject to options outstanding prior to the Effective Date of the Plan. The foregoing number of Shares hall be adjusted, where necessary, to take account of the events referred to in Section 11 hereof." 3. In all other respects the Plan shall remain the same. This Amendment to the Plan was adopted by the Board of Directors on January 9, 1998 and submitted to the shareholders of the Company for approval at the annual general meeting held January 9, 1998. EX-4.3 10 0010.txt EX-4.3 DSI & EDWARD C. PARDIAK HOLDINGS LIMITED -1- Exhibit 4.3 THIS AGREEMENT, effective August 1, 1997, is BETWEEN: DSI Datotech Systems Inc., a company duly incorporated under the laws of the Province of British Columbia, having its Registered and Records Office at #1750-750 West Pender Street, Vancouver, British Columbia (the "Company") THE FIRST PART AND: EDWARD C. PARDIAK HOLDINGS LIMITED. a corporation incorporated under the laws of Ontario, Canada and having an office at 501-738 Broughton Street, Vancouver, B.C. V6G 3A7 (the "Contractor") THE SECOND PART WHEREAS: A. The Company is involved in the business of developing a gesture based data input technology among other input systems and acquiring complementary technology based businesses and/or assets; B. The sole voting shareholder of the Contractor is Edward Pardiak ("Pardiak"); C. The Company desires to retain the Contractor to manage the Company in evolving from a research and development company to a company with cash flow generated from the sale and/or licensing of its products pursuant to the terms of this Agreement. NOW THEREFORE THIS AGREEMENT WITNESSETH that in consideration of the premises and mutual covenants and conditions herein contained, the parties hereto covenant and agree each with the other as follows: 1. The preamble hereto shall form an integral part of this Agreement. 2. This Agreement is subject to the approval of each of the following: -2- (i) the Board of Directors of the Company; and (ii) the Vancouver Stock Exchange. (ii) the Vancouver Stock Exchange Duties of the Contractor 3. The Company agrees to employ the Contractor, and the Contractor agrees to provide "Pardiak" to serve, as the Chief Financial Officer and the Chairman of The Board of Directors of the Company to oversee the Company's administration and control pursuant to the terms and conditions of this Agreement and as required by the British Columbia Company Act. 4. The Contractor will have the following duties: (a) overseeing administration of the day to day affairs of the Company and any subsidiary; (b) providing liaison and instructions with the Company's auditors, accountants and lawyers; (c) developing financial plans for actual or proposed development of the Company's technology, or that of the Company's subsidiaries, if any; (d) aiding in the negotiating and concluding of, but not limited to, financings, mergers and acquisitions, dispositions, joint ventures, strategic alliances and licensing and royalty agreements; (e) being an integral part of the negotiating and concluding of future financings of the Company as required from time to time to carry out those matters referred to in clauses (c) and (d), and in particular not be less then $2,500,000 shall be raised by July 31, 1998. All of the aforementioned financings can emanate from any source but shall be subject to the approval of the Board of Directors (f) coordinating the dissemination of news of the Company to the public and to shareholders of the Company; and (g) serving as the manager of departments (e.g. marketing & business development) until such time as the Company can hire individuals to fill those positions. 5. The Contractor agrees that it shall, during the term of this Agreement, perform the functions of the Contractor under this Agreement full-time, subject to such reasonable amounts of time, including time during regular business hours, that it may spend on other matters, and the Contractor will performs said functions faithfully, diligently, to the best of its abilities and in the best interests of the Company. -3- 6. The term subsidiary as used herein means any company or companies of which more than fifty per cent of the outstanding shares carrying votes at all times (provided that the ownership of such shares confers the right at all times to elect at least a majority of the Board of Directors of such company or companies) are owned by or held for the Company and/or any other company in like relation to the Company and include any company in like relation to the subsidiary. Term of this Agreement 7. The term of this Agreement shall be two years commencing on the date first written above. 8. Provided the Contractor is not in default hereunder, this Agreement shall automatically renew for a further one year term, and shall successively renew for further one year terms, and salary may be re-negotiated. The Company can elect not to renew this Agreement for any further term by giving to the Contractor written notice of non-renewal sixty days before the renewal date, in which case this Agreement will terminate at the end of the sixty day notice period. The Company will pay to the Contractor on the date of termination the equivalent in dollars to one year's compensation under this Agreement. Compensation to the Contractor 9. For the Contractor's services under this Agreement, the Company shall: (a) pay to the Contractor a fee in the amount of $10,000 (gross) per month; (b) effective on the signing of this Agreement, pay a reasonable amount for all premium costs of a benefit package for "Pardiak" and his immediate family. Such benefit package to include life insurance at three times the Contractor's annual fee, accidental death and dismemberment, extended health, long-term disability and dental; (c) pay to the Contractor fee as set out in paragraph 9(a) above prior to obtaining Vancouver Stock Exchange approval of this Agreement; in the event that the Vancouver Stock Exchange refuses to approve this fee and will only approve a lower fee, then the Contractor will reimburse the Company the difference, but the Company shall use its best efforts to obtain Vancouver Stock Exchange approval to this Agreement; (d) in addition to statutory holidays, provide to the Contractor an annual paid vacation of 20 working days to be taken when the Contractor deems appropriate in consideration of the Company's operational requirements. The Contractor may not accumulate and use in any subsequent year vacation entitlement that was unused in a previous year. If at the end each year and at the end of this Agreement the Contractor has unused -4- vacation time to its credit, then the Company will pay to the Contractor the equivalent in cash; (e) pay to the Contractor a car allowance in the amount of $300 per month; and (f) pay to the Contractor bonuses associated with but not limited to financings, mergers and acquisitions, dispositions, joint ventures, strategic alliances and licensing and royalty agreements as determined by the Company's Board of Directors from time to time and subject to the approval of Vancouver Stock Exchange. 10. The Company shall reimburse the Contractor for all expenses actually and properly incurred by the Contractor on behalf of the Company in carrying out its duties and performing its functions under this Agreement provided that for all expenses the Contractor shall furnish relevant statements and vouchers to the Company prior to reimbursement. Escrow Shares 11. Subject to acceptance by the Vancouver Stock Exchange, the Company will allot and issue to the Contractor, or if unable to obtain such acceptance, then issue to Segev, upon the receipt of payment in full of $0.01 per share as fully paid and non-assessable 1,300,000 common shares ("Contractor's Performance Shares") to be escrowed in accordance with the escrow agreement attached as schedule 1 hereto, the release of which will be based on the following: the number of Performance Shares to be released will be determined by calculating the Company's Cumulative Cash flow (as that term is defined in Local Policy 3-07 of the British Columbia Securities Commission, or such other equivalent section or policy that governs the release of performance shares) not previously applied towards the release of any outstanding escrow or allotted shares issued by the Company, divided by the earn out price where the earn out price is $0.25. Indemnity 12. The Company will indemnify the Contractor and "Pardiak" in respect of its acts or omissions under this Agreement and as the Chief Executive Officer of the Company to the extent permitted by Part 19 of the Company's Articles of Incorporation and to the extent permitted by law. 13. The Company will diligently pursue the obtaining of directors and officers insurance and secure such insurance for the benefit of "Pardiak". Restrictions on the Contractor 14. The Company is aware that the Contractor has now and will continue to provide limited management services to other companies and the Company recognizes that these companies -5- will require a certain portion of the Contractor's time. The Company agrees that the Contractor may continue to provide services to such outside interests, provided that such interests do not conflict with its duties under this Agreement. 15. The Contractor shall nor, except as authorized or required by its duties or required by law, reveal or divulge to any person or companies any of the trade secrets, or secret or confidential information concerning the Company or its subsidiaries which may come to its knowledge during the term of this Agreement and shall keep in complete secrecy all confidential information entrusted to it and shall not use or attempt to use any such information in any manner which may injure or cause loss either directly or indirectly to the Company's business or may be likely so to do. This restriction shall continue to apply for 24 months after the termination of this Agreement, and such longer time as is required by the laws of fiduciary duties, but shall cease to apply to information or knowledge which may come into the public domain. Termination 16. This Agreement may be terminated forthwith by the Company without prior notice if, at any time the Contractor or "Pardiak", while in the performance of the duties under this Agreement: (a) is guilty of conduct which at common law constitutes just cause for termination of employment; (b) becomes bankrupt; (c) is unable to perform the required duties under this Agreement for a period of greater than 90 days after due notice by the Company; or (d) dies. 17. The Contractor may terminate this Agreement by giving the Company ninety days written notice delivered to the Company, and upon the 90th day the Company will pay the Contractor all amounts due to that date and thereafter the Contractor will not be entitled to any further payments. 18. If the Company terminates this Agreement pursuant to paragraph 16, then no further payments are due to the Contractor. 19. If the Company terminates this Agreement other than pursuant to paragraph 16 or paragraph 8, then the Company must pay to the Contractor a termination fee in an amount equal to the greater of one year's compensation under this Agreement and the total compensation that remains outstanding under the term of this Agreement. -6- 20. In all instances, following the termination of this Agreement the Company will use its best efforts to make applications for release of the Contractor's Performance Shares on a timely basis if any of the Contractor's Performance Shares are eligible for release from escrow, and will cause the Company's auditors to make the calculation for which on a timely basis. Solvency 21. If the Company's working capital is less than $250,000 then the Company will defer, without interest or penalty, cash payments owing to the Contractor pursuant to this Agreement in accordance with the following: (a) the Company will resume full payments to the Contractor when the Company's working capital balance exceeds $500,000; (b) the Company will determine the repayment schedule to fully reimburse the Contractor all outstanding arrears when the Company's working capital exceeds $500,000. (c) the Contractor will not secure any debts owing to it by the Company General 22. Time shall be of the essence in this Agreement. 23. The parties hereto agree from time to time after the execution hereof to make, do, execute or cause or permit to be made, done or executed all such further and other lawful acts, deeds, things, devices and assurances in law whatsoever as may be required to carry out the true intention and to give full force and effect to this Agreement. 24. This Agreement embodies the entire agreement and understanding between the parties hereto and supersedes all prior agreements and undertakings, whether oral or written, relative to the subject matter hereof 25. The following rules shall be applied in interpreting this Agreement: (a) this Agreement shall inure to the benefit of an be binding upon each of the parties hereto and their respective successors and permitted assigns; (b) any reference herein to the Company or the Contractor shall include their respective successors and permitted assigns; (c) if any provision of this Agreement or any part thereof shall be found or determined to be invalid it shall be severable from this Agreement and the remainder of this Agreement shall be construed as if such invalid provision or part has been deleted from this Agreement; -7- (e) in this Agreement all reference to the singular shall be construed to include the plural where the context so permits, the masculine to include the feminine and neutral gender and where necessary a body corporate and vice versa. 26. Any notice, direction or instrument required or permitted to be given hereunder shall be given in writing and be mailed, postage prepaid or delivered by one party to the other at the addresses first herein appearing. Any notice, direction or other instrument aforesaid if delivered shall be deemed to be given or made on the day on which it was delivered or if mailed, shall be deemed to have been given or made on the third business day following the day on which it was mailed, provided that if there shall be a postal strike, slow down or other labor dispute which may affect the delivery of such notice through the mail between the time of mailing and the actual receipt of notice then such notice shall only be effective if actually delivered. Any party may, from time to time, give notice of any change of its respective address and, in such event, the address of such party shall be deemed to be changed accordingly. IN WITNESS WHEREOF the Company and the Contractor have duly executed this Agreement. The common seal of DSI Datotech Systems, Inc. was affixed in the presence of: /s/ Davis c/s - ---------------------------------------------------------- /s/ Maren K. Dancer - -------------------------------------------------- Date: December 19, 1997 The Corporate seal of Edward C. Pardiak Limited was affixed in the presence of: /s/ Edward C. Pardiak c/s - -------------------------------------------------- Date: December 19, 1997 EX-4.4 11 0011.txt EX-4.4 - ESCROW AGREEMENT -1- Exhibit 4.4 ESCROW AGREEMENT THIS AGREEMENT is dated for reference November 17, 1997. UNDERTAKING REQUIRED FROM NON-REPORTING COMPANY TO: Executive Director or Vancouver Stock Exchange or B.C. Securities Commission 609 Granville Street #1100 - 865 Hornby Street Vancouver, B.C. Vancouver, B.C. V6Z 2H4 V7Y 1H1 (If the shares are not listed on the VSE) (if the shares are listed on the VSE) The undersigned (the "Corporate Escrow Shareholder") represents that Edward C. Pardiak is the sole holder of voting shares of the Corporate Escrow Shareholder and undertakes, for the duration of time that the Corporate Escrow Shareholder is the registered owner of escrowed shares of DSI DATOTECH SYSTEMS INC. (the "Issuer"), a. to effect or permit transfer of ownership in the voting shares of the Corporate Escrow Shareholder, or b. to allot and issue further voting shares of any class of shares of the Corporate Escrow Shareholder only upon receipt of the written consent of the Executive Director of the British Columbia Securities Commission, if the Issuer's shares are not listed on the Vancouver Stock Exchange (the "Exchange"), or the Exchange, if the Issuer's shares are listed on the Exchange. Dated at Vancouver on the 7 day of December, 1997. The Corporate/Common Seal of EDWARD C. PARDIAK HOLDINGS LIMITED was affixed in the presence of /s/ Edward C. Pardiak c/s - -------------------------------------------------- Authorized Signatory - ------------------------------ Authorized Signatory -2- AMONG: PACIFIC CORPORATE TRUST COMPANY, a company having an office at 830, 625 Howe Street, Vancouver, British Columbia, V6C 3B8 (the "Escrow Agent") AND: DSI DATOTECH SYSTEMS INC., a company having an office at 712 - 525 Seymour Street, Vancouver, British Columbia V6B 3H7 (the "issuer") AND: PARDIAK MANAGEMENT INTERNATIONAL LIMITED. as defined in this ------- ---------- ------------- ------- Agreement (collectively, the "Parties") WHEREAS the Shareholder has acquired or is about to acquire shares of the Issuer; AND WHEREAS the Escrow Agent has agreed to act as escrow agent in respect of the shares upon the acquisition of the shares by the Shareholder; NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of the covenants contained in this agreement and other good and valuable consideration (the receipt and sufficiency of which is acknowledged), the Parties agree as follows: 1. INTERPRETATION In this agreement: -3- (a) "Acknowledgment" means the acknowledgment and agreement to be bound in the form attached as Schedule A to this agreement: (b) "Act" means the Securities Act, R.S.B.C. 1996, c.238, as amended from time to time; (c) "Exchange" means the Vancouver Stock Exchange; (d) "IPO" means the initial public offering of common shares of the Issuer under a prospectus which has been filed with, and for which a receipt has been obtained from, the Executive Director under section 61 of the Act; (e) "Local Policy Statement 3-07" means the Local Policy Statement 3-07 in effect as of the date of reference of this agreement and attached as Schedule B to this agreement; (f) "Shareholder" means a holder of shares of the Issuer who executed this agreement or an Acknowledgment; (g) "Shares" means the shares of the Shareholder described in Schedule C to this agreement, as amended from time to time in accordance with section 9; (h) "Executive Director" means the Executive Director of the B.C. Securities Commission appointed under the Act; and (i) "Executive Director or the Exchange" means the Executive Director, if the shares of the Issuer are not listed on the Exchange, or the Exchange, if the shares of the Issuer are listed on the Exchange. 2. PLACEMENT OF SHARES IN ESCROW The Shareholder places the Shares in escrow with the Escrow Agent and shall deliver the certificates representing the Shares to the Escrow Agent as soon as practicable. For the purposes of this agreement, the Escrow Agent is the agent solely of the Executive Director or the Exchange, not the Issuer. 3. VOTING OF SHARES IN ESCROW Except as provided by section 4(a), the Shareholder may exercise all voting rights attached to the Shares. 4. WAIVER OF SHAREHOLDER'S RIGHTS -4- The Shareholder waives the rights attached to the Shares (a) to vote the Shares on a resolution to cancel any of the Shares, (b) to receive dividends, and (c) to participate in the assets and property of the Issuer on a winding up or dissolution of the Issuer. 5. ABSTENTION FROM VOTING AS A DIRECTOR A Shareholder that is or becomes a director of the Issuer shall abstain from voting on a directors' resolution to cancel any of the Shares. 6. TRANSFER WITHIN ESCROW (a) The Shareholder shall not transfer any of the Shares except in accordance with Local Policy Statement 3-07 and with the consent of the Executive Director or the Exchange. (b) The Escrow Agent shall not effect a transfer of the Shares within escrow unless the Escrow Agent has received (i) a copy of an Acknowledgment executed by the person to whom the Shares are to be transferred, and (ii) a letter from the Executive Director or the Exchange consenting to the transfer. (c) Upon the death or bankruptcy of a Shareholder, the Escrow Agent shall hold the Shares subject to this agreement for the person that is legally entitled to become the registered owner of the Shares. (d) If the sole voting shareholder, Edward C. Pardiak, of the Shareholder ceases to be an officer of the Company because: (i) the shareholder terminates its consulting employment agreement with the Company, or (ii) the Company terminates his employment agreement with the Company because the Shareholder or Pardiak is guilty of conduct which at common law constitutes just cause for termination of employment -5- the Shareholder shall be entitled to retain that number of Shares equal to the number of Shares then held by it, times the number of months from August 1, 1997 until the date the Shareholder ceased to be contracted by the Company, rounded to the nearest tenth, divided by 24 and shall not be obligated to transfer or surrender that number of Shares to the Company or any other person, but the balance of the Shares shall be deemed to have been forthwith gifted to the Company. (e) A Shareholder who ceases to be a principal, as that term is defined in Local Policy Statement 3-07 for any other reason not covered by the paragraph immediately above, dies or becomes bankrupt, shall be entitled to retain any Shares then held by it and shall not be obligated to transfer or surrender the Shares to the Company or any other person. 7. RELEASE FROM ESCROW (a) The Shareholder irrevocably directs the Escrow Agent to retain the Shares until the Shares are released from escrow pursuant to subsection (b) or surrender for cancellation pursuant to section 8. (b) The Escrow Agent shall not release the Shares from escrow unless the Escrow Agent has received a letter from the Executive Director or the Exchange consenting to the release. (c) The approval of the Executive Director or the Exchange to a release from escrow of any of the Shares shall terminate this agreement only in respect of the Shares so released. (d) The Shareholders acknowledges that there are currently 468,500 performance shares held in escrow for Osvaldo Contini and 1,000,000 shares allotted to Seth McCloud (collectively the "Existing Performance Shares") and that 100% of the Cumulative Cash flow is to be allocated to the calculation of the release of the Existing Performance Shares until such time as the Existing Performance Shares are released from escrow and/or issued, as the case may be. Thereafter, 100% of the Cumulative Cash flow will be allocated to the calculation of the release of the Shares and the 1,300,000 common shares of the Company to be issued to Segev Management International Ltd., to be released pro rata!! 8. SURRENDER FOR CANCELLATION The Shareholder shall surrender the Shares for cancellation and the Escrow Agent shall deliver the certificates representing the Shares to the Issuer -6- (a) at the time of a major reorganization of the Issuer, if required as a condition of the consent to the reorganization by the Executive Director or the Exchange, (b) where the Issuer's shares have been subject to a cease trade order issued under the Act for a period of 2 consecutive years. (c) five years from the date the exchange has accepted this Agreement for filing or (d) where required by section 6(d). 9. AMENDMENT OF AGREEMENT (a) Subject to subsection (b), this agreement may be amended only by a written agreement among the Parties and with the written consent of the Executive Director or the Exchange. (b) Schedule C to this agreement shall be amended upon (i) a transfer of Shares pursuant to section 6, (ii) a release of Shares from escrow pursuant to section 7, or (iii) a surrender of Shares for cancellation pursuant to section 8, and the Escrow Agent shall note the amendment on the Schedule C in its possession. 10. INDEMNIFICATION OF ESCROW AGENT The Issuer and the Shareholders, jointly and severally, release, indemnify and save harmless the Escrow Agent from all costs, charges, claims, demands, damages, losses and expenses resulting from the Escrow Agent's compliance in good faith with this agreement. 11. RESIGNATION OF ESCROW AGENT (a) If the Escrow Agent wishes to resign as escrow agent in respect of the Shares, the Escrow Agent shall give notice to the Issuer. (b) If the Issuer wishes the Escrow Agent to resign as escrow agent in respect of the Shares, the Issuer shall give notice to the Escrow Agent. (c) A notice referred to in subsection (a) or (b) shall be in writing and delivered to -7- (i) the Issuer at: Suite 712 - 525 Seymour Street Vancouver, British Columbia V6B 3147 Attention: Secretary (ii) the Escrow Agent at: Pacific Corporate Trust Company 830 -625 Howe Street Vancouver, British Columbia V6C 3B8 Attention: Stock Transfer and the notice shall be deemed to have been received on the date of delivery. The Issuer or the Escrow Agent may change its address for notice by giving notice to the other party in accordance with this subsection. (d) A copy of a notice referred to in subsection (a) or (b) shall concurrently be delivered to the Executive Director or the Exchange. (e) The resignation of the Escrow Agent shall be effective and the Escrow Agent shall cease to be bound by this agreement on the date that is 180 days after the date of receipt of the notice referred to in subsection (a) or (b) or on such other date as the Escrow Agent and the Issuer may agree upon (the "resignation date"). (f) The Issuer shall, before the resignation date and with the written consent of the Executive Director or the Exchange, appoint another escrow agent and that appointment shall be binding on the Issuer and the Shareholders. 12. FURTHER ASSURANCES The Parties shall execute and deliver any documents and perform any acts necessary to carry out the intent of this agreement. 13. TIME Tine is of the essence of this agreement. 14. GOVERNING LAWS -8- This agreement shall be construed in accordance with and governed by the laws of British Columbia and the laws of Canada applicable in British Columbia. 15. COUNTERPARTS This agreement may be executed in two or more counterparts, each of which shall be deemed to be an original and all of which shall constitute one agreement. 16. LANGUAGE Wherever a singular expression is used in this agreement, that expression is deemed to include the plural or the body corporate where required by the context. -9- Compared with original and certified to be a true copy /s/ Authorized Signing Officer Pacific Corporate Trust Company 17. ENUREMENT This Agreement inures to the benefit of and is binding on the Parties and their heirs, executors, administrators, successors and permitted assigns. 18. EARN-OUT PRICE The "earn-out price" as defined in Local Policy Statement 3-07 is agreed to be $0.25 per Share. IN WITNESS WHEREOF the Parties have executed and delivered this agreement as of the date of reference of this agreement. The Corporate/Common Seal of ) PACIFIC CORPORATE TRUST ) COMPANY w as affixed in the presence ) of: ) /s/ ) c/s Authorized Signatory ) ) /s/ ) Authorized Signatory ) ) ) The Common Seal of DSI DATOTECH ) SYSTEMS INC. was affixed in the ) presence of: ) ) /s/__________________________ ) c/s Authorized Signatory ) ) /s/Maren K. Dancer ) Authorized Signatory ) ) ) -10- The Corporate/Common Seal of SEGEV ) MANAGEMENT INTERNATIONAL ) LTD. was affixed in the presence of: ) ) Authorized Signatory ) c/s /s/ Compared with original and certified to be a true copy /s/ ------------------------------ Authorized Signing Officer Pacific Corporate Trust Authorized Signatory ) ) /s/ ) ) The Corporate/Common Seal of ) PARDIAK MANAGEMENT ) INTERNATIONAL LIMITED was ) affixed in the presence of: ) ) c/s Authorized Signatory ) ) ) Authorized Signatory ) ) ) SCHEDULE A TO ESCROW AGREEMENT ACKNOWLEDGMENT AND AGREEMENT TO BE BOUND TO: Executive Director or Vancouver Stock Exchange B.C. Securities Commission 609 Granville Street #1100 - 865 Hornby Street Vancouver, B.C. Vancouver, B.C. V6Z 2H4 V7Y 1H1 (if the shares are not listed on the VSE) (if the shares are listed on the VSE) I acknowledge that (a) I have entered into an agreement with _______________________ under which _____________ common shares of DSI DATOTECH SYSTEMS INC. (the "Shares") will be transferred to me upon receipt of regulatory approval, and (b) the Shares are held in escrow subject to an escrow agreement dated for reference November 17, 1997 (the "Escrow Agreement"), a copy of which is attached as Schedule A to this acknowledgment. In consideration of $1.00 and other good and valuable consideration (the receipt and sufficiency of which is acknowledged) I agree, effective upon receipt of regulatory approval of the transfer to me of the Shares, to be bound by the Escrow Agreement in respect of the Shares as if I were an original signatory to the Escrow Agreement. Dated at __________________________________ on ________________________ 19__ Where the transferee is an individual: SIGNED, SEALED and DELIVERED by [transferee] in the presence of: ) ) Name: ) ) Address ) [Shareholder] ) Occupation ) Where the transferee is a company: The Corporate/Common Seal of ) [transferee] was affixed in the presence of: ) ) - ---------------------------------- ) Authorized Signatory ) c/s ) Authorized Signatory ) [GRAPHIC_OMITTED] Province of BRITISH COLUMBIA SECURITIES COMMISSION British Columbia SCHEDULE B OFFICE OF THE CHAIRMAN LOCAL POLICY STATEMENT 3-07 POLICY GUIDELINES RESPECTING TRADING SHARES, PERFORMANCE SHARES AND OTHER CONSIDERATION
TABLE OF CONTENTS PART TITLE PAGE - ---- ----- ---- 1. IMPLEMENTATION 1 2. APPLICATION 1 2. 1 Pre-prospectus 2.2 Reactivations and reorganizations 3. TRANSITION 2 3.1 Agreements made under former policy statement 3.2 Option of conforming with new policy statement 4. DEFINITIONS 2 4.1 Defined terms 4.2 Terms defined in legislation 5. GENERAL MATTERS 5 5.1 Review of opinions and reports 5.2 Requirement for valuation opinion 5.3 Out of pocket costs 5.4 Confirmation of fair value 6. ISSUANCE OF TRADING SHARES 6 6.1 Minimum price and maximum aggregate value 6.2 Interest in operating subsidiary 6.3 Value assigned to non-cash assets 6.4 Purchase of interest in mineral property
PART TITLE PAGE - ---- ----- ---- 6.5 Accumulated deficit related to issuer's stated business purpose 6.6 Exclusion of amounts by Superintendent 7. ISSUANCE OF PERFORMANCE SHARE 8 7.1 Issuance to principals 7.2 Natural resource issuer 7.3 Industrial issuer 7.4 Escrow requirement 7.5 Escrow agreement 7.6 Limitations on rights of holders of performance shares 7.7 Rights on ceasing to be a principal 7.8 undertaking of holding company 8. TRANSFER OF PERFORMANCE SHARES WITHIN ESCROW 10 8.1 Permitted transferees 8.2 Request for consent to transfer 8.3 Documents to be filed with request for consent to transfer 8.4 Letter of consent or objection 8.5 No transfer during period between prospectus receipt and listing 9. RELEASE OF PERFORMANCE SHARES FROM ESCROW 11 9. 1 Release of shares of natural resource issuer 9.2 Reduction in release for natural resource issuer 9.3 Release of shares of industrial issuer 9.4 Adjustment of release calculation 9.5 Requirements for release 9.6 Annual release based on annual audited financial statements 9.7 Request for consent to release 9.8 Documents to be filed with request for consent to release 9.9 Letter of consent or objection 9.10 Request by holder of performance shares for consent to release 10. SURRENDER OF PERFORMANCE SHARES FOR 14 CANCELLATION
PART TITLE PAGE - ---- ----- ---- 11. OTHER CONSIDERATION 14 11.1 Natural resource issuer 11.2 Industrial issuer Appendix A Escrow Agreement Appendix B Examples of earn-out prices for performance shares issued by an industrial issuer Appendix C Undertaking Required from Non-Reporting or Closely Held Company
-1- PART 1 IMPLEMENTATION 1.1 The following local policy statements are hereby rescinded and this local policy statement substituted therefor, effective March 1, 1990: (a) Local Policy Statement 3-07, dated February 6, 1987 (the "Former Policy Statement"), and (b) Local Policy Statements 3-08, 3-09 and 3-10, each dated February 1, 1987. PART 2 APPLICATION 2.1 Pre-prospectus - This local policy statement sets out guidelines for issuance of shares and payment of consideration for assets by an issuer intending to do an initial public offering and obtain a listing on the Vancouver Stock Exchange. This local policy statement addresses (a) the issuance of trading shares, which are common shares issued as consideration for cash or assets contributed to the issuer and, in certain cases, expenses incurred to advance the business of the issuer, (b) the issuance of and escrow restrictions imposed on performance shares, which are common shares issued to directors, officers, promoters and other principals of the issuer to provide them with both a reasonable assurance of control during the formative stages of the issuer's development and an incentive to support the issuer, and (c) the payment of other consideration by the issuer for assets or services. 2.2 Reactivations and reorganizations - This local policy statement applies, with the --------------------------------- necessary changes, to (a) the reactivation of an issuer by way of a prospectus, carried out in accordance with Local Policy Statement 3-35 and the policies of the Vancouver Stock Exchange, and (b) a major reorganization of an issuer, including a reverse take over, carried out in accordance with the policies of the British Columbia Securities Commission and the Vancouver Stock Exchange. PART 3 TRANSITION -2- 3.1 Agreements made under former policy statement - Subject to section 3.2, shares issued in accordance with the Former Policy Statement will continue to be governed by any agreements made in accordance with the Former Policy Statement. Such shares, however, will be subject to the transfer restrictions and procedures set out in Part B and the release criteria and procedures set out in sections 9.5 through 9.10 of this local policy statement. 3.2 Option of conforming with new policy statement - An issuer that has issued shares in accordance with the Former Policy Statement may reorganize its capital to fully conform with this local policy statement. Before doing so, the issuer must obtain the approval of its shareholders and the written consent of the Superintendent of Brokers, if the issuer's shares are not listed on the Vancouver Stock Exchange, or the Vancouver Stock Exchange, if the issuer' s shares are listed on that exchange. Both the approval and consent must be obtained by March 1, 1991. PART 4 DEFINITIONS 4.1 Defined terms-- In this local policy statement: ------------- "Act" means the Securities Act, S.B.C. 1985, c. 83; "arm's length transaction" means a transaction other than a non-arm's length transaction; "cash flow" means net income or loss before tax, adjusted to add back the following expenses: (a) depreciation, (b) amortization of goodwill and deferred research and development costs, excluding general and administrative costs, (c) expensed research and development costs, excluding general and administrative costs, and (d) any other amounts permitted or required by the Superintendent; "cumulative cash flow" means, - at -any time, the aggregate cash flow of an issuer up to that time from a date no earlier than the issuer's financial year end immediately preceding the date of its IPO, net of any negative cash flow; "earn-out factor" means the number obtained by squaring the performance share percentage, expressed as a decimal, and multiplying by four; "earn-out price" means the IPO price multiplied by the earn-out factor; -3- "escrow agreement" means an agreement in the form attached as Appendix A to this local policy statement; "Exchange" means the Vancouver Stock Exchange; "industrial issuer" means an issuer other than a natural resource issuer; "IPO" means the initial public offering of common shares of an issuer under a prospectus which has been filed with, and for which a receipt has been obtained from, the Superintendent under section 42 of the Act; "IPO price" means the price per share paid by the public on an issuer's IPO; "non-arm's length transaction" means a transaction between the issuer and a person that, at any time from the date of the transaction until the date of completion of the issuer's IPO, is (a) an insider, associate, affiliate or principal of the issuer, (b) a person that (i) has a control person, insider or promoter that is a control person, insider or promoter of the issuer, or (ii) has a control person, insider or promoter that is an associate or affiliate of a control person, insider or promoter of the issuer except where the person's insiders that are described in paragraphs (i) and (ii) hold in total less than 10% of the voting securities of the person, or (c) determined by the Superintendent not to be at arm's length to the issuer; "performance shares" means common shares of an issuer issued in accordance with Part 7 of this local policy statement, so long as they are held in escrow in accordance with this local policy statement; "performance share percentage" means the percentage, determined on the date the issuer's shares are listed, posted and called for trading on the Exchange, that the issued performance shares of the issuer are of the total issued and outstanding voting securities of the issuer; "principal" means, in relation to an issuer, -4- (a) a promoter of the issuer, (b) a director of the issuer or of an operating subsidiary of the issuer, (c) a full time management employee of the issuer, or of an operating subsidiary of the issuer, whose direct or indirect employment is with the issuer or the subsidiary, (d) a person who has provided key services or contributed a fundamental asset to the issuer and has elected to be treated as a principal, or (e) a company all the voting securities of which are owned by one or more of the persons referred to in subsections (a) through (d); "Regulation" means the Securities Regulation, B.C. Reg. 270/86; "Superintendent or the Exchange" means the Superintendent, if the issuer's shares are not listed on the Exchange, and the Exchange, if the issuer's shares are listed on the Exchange; "trading shares" means shares of the class of common shares issued on an issuer's IPO, excluding performance shares issued in accordance with Part 7 of this local policy statement; "valuation opinion" means, in respect of (a) a natural resource issuer, a written opinion prepared by a qualified expert as to the fair market value of a resource property, determined either through the computation of present value or some other recognized method of valuation acceptable to the Superintendent, and (b) an industrial issuer, a written opinion prepared in accordance with generally applied valuation approaches by a Chartered Business Valuator, or another expert acceptable to the Superintendent, as to the highest price available for the issuer's business, assets or shares in an open and unrestricted market between informed, prudent parties, acting at arm's length and under no compulsion to act, expressed in terms of money or money's worth. 4.2 Terms defined in legislation - Subject to section 4.1, terms defined in the Act, the ---------------------------- Regulation and the Interpretation Act, R.S.B.C. 1979, c. 206 and used in this local policy statement have the same meaning as in the Act, the Regulation and the Interpretation Act. -5- PART 5 GENERAL MATTERS 5.1 Review of opinions and reports - The Superintendent may, with the agreement of an issuer, seek the opinion of an engineer, appraiser, business valuator, accountant or other expert to determine the acceptability of a valuation opinion or other report filed pursuant to this local policy statement and, in such circumstances, the issuer will be liable for the fees charged by such person in connection with providing the opinion. 5.2 Requirement for valuation opinion - The Superintendent may, at the time of reviewing an issuer's prospectus for its IPO, require a valuation opinion in support of the value attributed to any non-cash assets. 5.3 Out of pocket costs. Where this local policy statement provides that the value of trading shares issued or other consideration paid to a person by an issuer for a non-cash asset must be calculated on the basis of the out of pocket costs incurred by the person in respect of the non-cash asset, those out of pocket costs must (a) be reasonable, (b) have contributed or be reasonably expected to contribute to the future operations of the issuer, (c) be supported by an audited statement of costs, and (d) in respect of a resource property, be restricted to acquisition costs and such other costs as are necessary to secure a preliminary evaluation of the resource property and to lead to the identification of exploration targets. 5.4 Confirmation of fair value - The onus will be on an issuer, if questioned, to satisfy the Superintendent that fair value was received for costs or expenditures associated with a non-arm's length transaction. PART 6 ISSUANCE OF TRADING SHARES 6.1 Minimum price and maximum aggregate value - Although in most cases trading shares will be paid for in cash, trading shares may be issued for consideration other than cash. Subject to sections 6.2 through 6.6, an issuer may issue trading shares at a minimum price of $.25 per share up to an aggregate value equal to: (a) the amount of cash paid in as share capital; plus -6- (b) the fair market value of any non-cash assets contributed as share capital; plus (c) the issuer's retained earnings, if any; less (d) where the issuer has an accumulated deficit, that portion of the accumulated deficit that does not directly relate to the issuer's stated business purpose at the time of its IPO. 6.2 Interest in operating subsidiary - Where an issuer has an operating subsidiary, or is proposing to issue trading shares in order to acquire an operating subsidiary, and the value of that operating subsidiary is not supported by a current valuation opinion, the principles of this Part will apply to the operating subsidiary for the purpose of determining the number of trading shares that may be issued by the issuer in respect of its interest in the operating subsidiary. 6.3 Value assigned to non-cash assets - For the purpose of section 6.l(b), where non- cash assets are contributed to an issuer by a person in a non-arm's length transaction, the fair market value attributed to the non-cash assets must be either (a) supported by a valuation opinion, or (b) limited to an amount equal to the out of pocket costs incurred by the person in respect of the non-cash assets, determined in accordance with section 5.3. 6.4 Purchase of interest in mineral property - A natural resource issuer that, in an arm's length transaction, agrees to issue trading shares as consideration for a mineral property or an option on a mineral property, the value of which is not supported by a current valuation opinion, will generally be required to meet the following conditions: (a) The consideration must consist of not more than 200,000 trading shares issuable in no fewer than four blocks, each block consisting of not more than 50,000 trading shares. (b) One block of shares may be issued prior to the date the issuer s shares are listed, posted and called for trading on the Exchange. (c) The remaining blocks of shares may be issued in stages upon the filing with the Exchange of engineering reports, acceptable to the Exchange, recommending further work on the mineral property. -7- 6.5 Accumulated deficit related to issuer's stated business purpose - For the purpose of section 6.1(d), that portion of the issuer's accumulated deficit that directly relates to the issuer's stated business purpose at the time of its IPO includes (a) for a natural resource issuer, expenses incurred (i) in exploring and developing the resource properties upon which the issuer's IPO proceeds are to be spent, and (ii) in exploring and developing other resource properties, provided that these expenses do not exceed the expenses referred to in paragraph (i), and (b) for an industrial issuer, expenses incurred in respect of the project or business to be financed by the issuer's IPO proceeds. 6.6 Exclusion of amounts by Superintendent- The Superintendent may require that an amount be excluded from the determination of the number of trading shares that may be issued under this Part if in the circumstances he considers that to include any such amount would be inappropriate or unconscionable. For example, the Superintendent would question the appropriateness of issuing trading shares for non-cash assets unrelated to the issuer's stated business purpose at the time of its IPO or for excessive administrative expenses . PART 7 ISSUANCE OF PERFORMANCE SHARES 7.1 Issuance to principals - Performance shares may be issued for cash to the ---------------------- principals of an issuer (a) to provide the principals with a measure of control to facilitate the development of the issuer in an orderly fashion, (b) to provide an incentive for the principals to diligently support the affairs of the issuer, and (c) to provide an incentive for the principals to contribute management services or fundamental assets to the issuer. 7.2 Natural resource issuer - A natural resource issuer may issue to its principals up to a total of 750,000 performance shares, at a minimum price of $.01 per share. -8- 7.3 Industrial issuer - An industrial issuer may issue performance shares to its principals, at a minimum price of $.01 per share, provided that the resulting performance share percentage does not exceed 65%. 7.4 Escrow requirement - Performance shares are required to be escrowed. It should be noted that the higher the performance share percentage, the more difficult it becomes to obtain a release of the performance shares from escrow. The table attached as Appendix B to this local policy statement provides some examples of the operation of the release provisions for industrial issuers set out in Part 9 of this local policy statement . 7.5 Escrow agreement - Prior to or at the time of acquiring performance shares, principals must execute an escrow agreement. The certificates representing the performance shares must be registered in the names of the holders of the shares and deposited with the escrow agent in accordance with the terms of the escrow agreement. Only a trust company carrying on business in British Columbia or a company approved by the Superintendent may act as an escrow agent. 7.6 Limitations on rights of holders of performance shares- The escrow agreement provides that the holders of performance shares waive any rights attached to those shares to receive dividends or to participate in the assets and property of the issuer on a winding up or dissolution. Holders of performance shares do retain the right to vote those shares, except on a resolution respecting their cancellation. 7.7 Rights on ceasing to be a principal - The escrow agreement requires that the parties to it set out in the agreement any rights or obligations of a person who ceases to be a principal, dies or becomes bankrupt to retain, transfer or surrender to the issuer for cancellation any performance shares then held by the person. 7.8 Undertaking of holding company - Where performance shares are to be issued to a non-reporting or closely held company, wherever situate, rather than to an individual, the company must, prior to or at the time of acquiring the performance shares, execute an undertaking in the form attached as Appendix C to this local policy statement. In the undertaking, the company agrees not to effect or permit any transfer of ownership of shares of the company nor to issue further shares of any class in the company without the consent of the Superintendent or the Exchange, so long as the company continues to hold any of the issuer's performance shares. An application for consent should be made in the same manner as an application for consent to a transfer of performance shares pursuant to Part 8 of this local policy statement. PART 8 TRANSFER OF PERFORMANCE SHARES WITHIN ESCROW -------------------------------------------- -9- 8.1 Permitted transferees - Performance shares may be transferred only to ---------------------- (a) other principals, including incoming principals, (b) the issuer of the performance shares, or (c) an offeror under a formal bid (as defined in section 74 of the Act). 8.2 Request for consent to transfer - In order to transfer performance shares, the holder of performance shares must deliver to the Superintendent or the Exchange a written request for consent to the transfer. The request for consent to the transfer must include: (a) the name of the escrow agent and the reference date of the escrow agreement, (b) an explanation of the reason for the transfer, (c) a description of the consideration to be paid for the performance shares, (d) where the performance shares are to be transferred to a principal, confirmation that the transferee is a principal or will become a principal on or before the date of the proposed transfer, and (e) a description of the exemptions in the Act or the Regulation, if any, being relied upon to make the transfer 8.3 Documents to be filed with request for consent to transfer - The request for consent to the transfer must be accompanied by: (a) a copy of the transfer agreement, (b) an acknowledgment and agreement to be bound in the form attached as Schedule A to the escrow agreement, executed by the transferee, (c) where the performance shares are to be transferred to a non-reporting or closely held company, wherever situate, rather than to an individual, an undertaking by the company in the form attached as Appendix C to this local policy statement, (d) where applicable, evidence that the proposed change of control has been approved by the shareholders of the issuer, and -10- (e) the appropriate application fee. 8.4 Letter of consent or objection - Upon receiving a request for consent to a transfer and accompanying documents that comply with sections 8.2 and 8.3, the Superintendent or the Exchange will issue to the applicant a letter that either consents or objects to the transfer. A letter consenting to the transfer will be copied to the escrow agent. 8.5 No transfer during period between prospectus receipt and listing - The Superintendent will generally refuse to consent to a transfer of performance shares during the period between the date of the receipt for the issuer's prospectus for its IPO and the date the issuer's securities are listed, posted and called for trading on the Exchange. PART 9 RELEASE OF PERFORMANCE SHARES FROM ESCROW ----------------------------------------- 9.1 Release of shares of natural resource issuer - Holders of performance shares of a natural resource issuer will be entitled to the pro-rata release of those performance shares on the basis of 15% of the original number of performance shares for every $100,000 expended on exploration and development of a resource property by (a) the issuer, or (b) a person other than the issuer in order to earn an interest in the resource property, but only in respect of that proportion of the expenditure equal to the issuer's remaining proportionate interest in the resource property after the person's interest has been earned, provided that (c) no more than 50% of the original number of performance shares may be released in any 12 month period, and (d) no expenditure on exploration and development made prior to the date of the receipt for the issuer's prospectus for its IPO may be included. 9.2 Reduction in release for natural resource issuer Where administrative expenses exceed 33% of total expenditures during the period on which the calculation in section 9.1 is based, (a) the pro-rata release factor of 15% will be reduced to 7.5%, and -11- (b) the percentage of the original number of performance shares available for release in any 12 month period will be reduced to 25%. 9.3 Release of shares of industrial issuer - Holders of performance shares of an industrial issuer will be entitled to the pro-rata release of a number of performance shares equal to the amount of cumulative cash flow, not previously applied towards release, divided by the earn-out price. 9.4 Adjustment of release calculation - On a consolidation, subdivision, amalgamation or reclassification of the issuer's shares, the release calculation must be adjusted so that the proportion of the outstanding performance shares available for release is unaffected by the consolidation, subdivision, amalgamation or reclassification . 9.5 Requirements for release - No performance shares may be released from escrow ------------------------ unless, at the time of the application for release, (a) the issuer is meeting its current obligations in the ordinary course of business as they generally become due, as evidenced by a statutory declaration of the president or chief financial officer of the issuer, (b) the issuer's shares are listed, posted and called for trading on all stock exchanges having jurisdiction over it, as evidenced by letters from those stock exchanges, (c) the issuer is not in default of any requirement of the Act or the Regulation, as evidenced by a certificate issued by the Commission, and (d) the issuer is in good standing with respect to its filing of returns with the Registrar of Companies under the Company Act or, if the issuer is incorporated, organized or continued in a jurisdiction other than British Columbia, with the registrar of companies or similar authority in that jurisdiction, as evidenced by a certificate issued by the Registrar of Companies or by that similar authority. 9.6 Annual release based on annual audited financial statements - Performance shares may be released only once during an issuer's financial year. The release calculation must be based on the issuer's annual audited financial statements for the year or years during which the release requirements were met in respect of the performance shares to be released. 9.7 Request for consent to release - In order to obtain a release of performance shares, the issuer must deliver to the Superintendent or the Exchange a written request for -12- consent to the release. The request for consent to the release must include the name of the escrow agent and the reference date of the escrow agreement. 9.8 Documents to be filed with request for consent to release - The request for consent to the release must be accompanied by: (a) written evidence of compliance with the requirements of section 9.5, (b) annual audited financial statements of the issuer for the financial year or years during which the release requirements were met in respect of the performance shares to be released, (c) where expenditures on a resource property were made by a person other than the issuer, an audited statement of costs, (d) a calculation, prepared by the issuer's auditor, of the number of performance shares to be released, and (e) the appropriate application fee. 9.9 Letter of consent or objection - Upon receiving a request for consent to a release and accompanying documents that comply with sections 9.7 and 9.8, the Superintendent or the Exchange will issue to the issuer a letter that either consents or. objects to the release. A letter consenting to the release will be copied to the escrow agent. 9.10 Request by holder of performance shares for consent to release - A holder of performance shares may apply to the Superintendent or the Exchange for release where the issuer is unable or unwilling to do so. If the president or chief financial officer of the issuer refuses to provide the statutory declaration referred to in section 9.5(a), the Superintendent or the Exchange may waive that requirement. PART 10 SURRENDER OF PERFORMANCE SHARES FOR CANCELLATION ------------------------------------------------ 10.1 Performance shares must be surrendered to the issuer for cancellation (a) at the time of a major reorganization of the issuer, if required as a condition of the consent to the reorganization by the Superintendent or the Exchange, (b) where the issuer's shares have been subject to a cease trade order issued under the Act for a period of 2 consecutive years, or -13- (c) 10 years from the later of the date of issue of the performance shares and the date of the receipt for the issuer's prospectus for its IPO. PART 11 OTHER CONSIDERATION 11.1 Natural resource issuer - Where a natural resource issuer proposes to acquire from a person a resource property or an option on a resource property, the value of which is not supported by a valuation opinion, the following principles apply: (a) In an arm's length transaction, the issuer may pay the person cash consideration. (b) In an arm's length transaction, the issuer may agree to pay the person additional consideration at such time as the resource property commences commercial production. Such additional consideration may, depending on the circumstances, consist of cash consideration, reasonable payments from net profits, securities, or any combination of these. (c) In a non-arm's length transaction, the issuer may pay the person cash consideration up to the amount of the out of pocket costs incurred by the person in respect of the resource property, determined in accordance with section 5.3. (d) In a non-arms length transaction, the issuer may agree to pay the person additional consideration at such time as the resource property commences commercial production, where the person has carried out extensive exploration with results that indicate that the resource property appears to have substantial merit. The extent of the person's effort, skill and risk in developing the resource property will be taken into account by the Superintendent in determining whether additional consideration is justified. Such additional consideration may, depending on the circumstances, consist of cash consideration, reasonable payments from net profits, securities, or any combination of these. A 15% net profits interest would normally be considered reasonable. 11.2 Industrial issuer - Where an industrial issuer proposes to acquire from a person non-cash assets, the value of which are not supported by a valuation opinion, the following principles apply: (a) In an arm's length transaction, the issuer may pay the person cash consideration, a royalty or a combination of these. -14- (b) In a non-arm's length transaction, the issuer may pay the person cash consideration up to the amount of the out of pocket costs incurred by the person in respect of the non-cash assets, determined in accordance with section 5.3. DATED at Vancouver, British Columbia, this 21st day of December 1989. /s/Douglas M. Hyndman Douglas M. Hyndman Chairman APPENDIX A TO LOCAL POLICY STATEMENT 3-07 ESCROW AGREEMENT THIS AGREEMENT is dated for reference and made AMONG: (the "Escrow Agent"); AND: (the "Issuer"); AND: EACH SHAREHOLDER, as defined in this Agreement ---------------- (collectively, the "Parties"). WHEREAS the Shareholder has acquired or is about to acquire shares of the Issuer; AND WHEREAS the Escrow Agent has agreed to act as escrow agent in respect of the shares upon the acquisition of the shares by the Shareholder; NOW THEREFORE in consideration of the covenants contained in this agreement and other good and valuable consideration (the receipt and sufficiency of which is acknowledged), the Parties agree as follows: 1. INTERPRETATION In this agreement: (a) "Acknowledgment" means the acknowledgment and agreement to be bound in the form attached as Schedule A to this agreement; (b) "Act" means the Securities Act, S.B.C. 1985, c. 83; -2- (c) "Exchange" means the Vancouver Stock Exchange; (d) "IPO" means the initial public offering of common shares of the Issuer under a prospectus which has been filed' with and for which a receipt has been obtained from, the Superintendent under section 42 of the Act; (e) "Local Policy Statement 3-07" means the Local Policy Statement 3-07 in effect as of the date of reference of this agreement and attached as Schedule B to this agreement; (f) "Shareholder" means a holder of shares of the Issuer who executes this agreement or an Acknowledgment; (g) "Shares" means the shares of the Shareholder described in Schedule C to this agreement, as amended from time to time in accordance with section 9; (h) "Superintendent" means the Superintendent of Brokers appointed under the Act; and (i) "Superintendent or the Exchange" means the Superintendent, if the shares of the Issuer are not listed on the Exchange, or the Exchange, if the shares of the Issuer are listed on the Exchange. 2. PLACEMENT OF SHARES IN ESCROW The Shareholder places the Shares in escrow with the Escrow Agent and shall deliver the certificates representing the Shares to the Escrow Agent as soon as practicable. 3. VOTING OF SHARES IN ESCROW. Except as provided by section 4(a), the Shareholder may exercise all voting rights attached to the Shares. 4. WAIVER OF SHAREHOLDER'S RIGHTS The Shareholder waives the rights attached to the Shares (a) to vote the Shares on a resolution to cancel any of the Shares, (b) to receive dividends, and -3- (c) to participate in the assets and property of the Issuer on a winding up or dissolution of the Issuer. 5. ABSTENTION FROM VOTING AS A DIRECTOR A Shareholder that is or becomes a director of the Issuer shall abstain from voting on a directors' resolution to cancel any of the Shares. 6. TRANSFER WITHIN ESCROW (1) The Shareholder shall not transfer any of the Shares except in accordance with Local Policy Statement 3-07 and with the consent of the Superintendent or the Exchange. (2) The Escrow Agent shall not effect a transfer of the Shares within escrow unless the Escrow Agent has received (a) a copy of an Acknowledgment executed by the person to whom the Shares are to be transferred, and (b) a letter from the Superintendent or the Exchange consenting to the transfer. (3) Upon the death or bankruptcy of a Shareholder, the Escrow Agent shall hold the Shares subject to this agreement for the person that is legally entitled to become the registered owner of the Shares. (4) [Set out in this subsection the rights and obligations of a Shareholder who ceases to be a principal, as that term is defined in Local Policy Statement 3-07, dies, or becomes bankrupt, to retain, transfer or surrender to the Issuer for cancellation any Shares held by the Shareholder. 7. RELEASE FROM ESCROW (1) The Shareholder irrevocably directs the Escrow Agent to retain the Shares until the Shares are released from escrow pursuant to subsection (2) or surrendered for cancellation pursuant to section 8. -4- (2) The Escrow Agent shall not release the Shares from escrow unless the Escrow Agent has received a letter from the Superintendent or the Exchange consenting to the release. (3) The approval of the Superintendent or the Exchange to a release from escrow of any of the Shares shall terminate this agreement only in respect of the Shares so released. 8 . SURRENDER FOR CANCELLATION The Shareholder shall surrender the Shares for cancellation and the Escrow Agent shall deliver the certificates representing the Shares to the Issuer (a) at the time of a major reorganization of the Issuer, if required as a condition of the consent to the reorganization by the Superintendent or the Exchange, (b) where the Issuer's shares have been subject to a cease trade order issued under the Act for a period of 2 consecutive years, (c) 10 years from the later of the date of issue of the Shares and the date of the receipt for the Issuer's prospectus on its IPO, or (d) where required by section 6(4). 9. AMENDMENT OF AGREEMENT (1) Subject to subsection (2), this agreement may be amended only by a written agreement among the Parties and with the written consent of the Superintendent or the Exchange. (2) Schedule C to this agreement shall be amended upon (a) a transfer of Shares pursuant to section 6, (b) a release of Shares from escrow pursuant to section 7, or (c) a surrender of Shares for cancellation pursuant to section 8, and the Escrow Agent shall note the amendment on the Schedule C in its possession. -5- 10. QUALIFICATION OF ESCROW AGENT The Issuer and the Shareholders, jointly and severally, release, indemnify and save harmless the Escrow Agent from all costs, charges, claims, demands, damages, losses and expenses resulting from the Escrow Agent's compliance in good faith with this agreement. 11. RESIGNATION OF ESCROW AGENT (1) If the Escrow Agent wishes to resign as escrow agent in respect of the Shares, the Escrow Agent shall give notice to the Issuer. (2) If the Issuer wishes the Escrow Agent to resign as escrow agent in respect of the Shares, the Issuer shall give notice to the Escrow Agent. (3) A notice referred to in subsection (1) or (2) shall be in writing and delivered to (a) the Issuer at __________________________, or (b) the Escrow Agent at ________________________ and the notice shall be deemed to have been received on the date of delivery. The Issuer or the Escrow Agent may change its address for notice by giving notice to the other party in accordance with this subsection. (4) A copy of a notice referred to in subsection (1) or shall concurrently be delivered to the Superintendent or the Exchange. (5) The resignation of the Escrow Agent shall be effective and the Escrow Agent shall cease to be bound by this agreement on the date that is 180 days after the date of receipt of the notice referred to in subsection (1) or (2) or on such other date as the Escrow Agent and the Issuer may agree upon (the "resignation date"). (6) The Issuer shall, before the resignation date and with the written consent of the Superintendent or the Exchange, appoint another escrow agent and that appointment shall be binding on the Issuer and the Shareholders. 12. FURTHER ASSURANCES The Parties shall execute and deliver any documents and perform any acts necessary to carry out the intent of this agreement. -6- 13. TIME Time is of the essence of this agreement. 14. GOVERNING LAWS This agreement shall be construed in accordance with and governed by the laws of British Columbia and the laws of Canada applicable in British Columbia. 15. COUNTERPARTS This agreement may be executed in two or more counterparts, each of which shall be deemed to be an original and all of which shall constitute one agreement. 16. LANGUAGE Wherever a singular expression is used in this agreement, that expression is deemed to include the plural or the body corporate where required by the context. 17. INUREMENT This Agreement inures to the benefit of and is binding on the Parties and their heirs, executors, administrators, successors and permitted assigns. The Parties have executed and delivered this agreement as of the date of reference of this agreement. The Corporate/Common Seal of [Escrow Agent] was affixed in the presence of: ________________________________ c/s Authorized signatory - -------------------------------- Authorized signatory -7- The Corporate/Common Seal of [Issuer] was affixed in the presence of: ____________________________________ c/s Authorized signatory - ------------------------------------ Authorized signatory Where the Shareholder is an individual: Signed, sealed and delivered by [Shareholder] in the presence of: - ---------------------------------- Name - ---------------------------------- -------------------------- Address [Shareholder] - ---------------------------------- - ---------------------------------- Occupation Where the Shareholder is a company: The Corporate/Common Seal of [Shareholder] was affixed in the presence of: __________________________________ c/s Authorized signatory - ---------------------------------- Authorized signatory SCHEDULE A TO ESCROW AGREEMENT ACKNOWLEDGMENT AND AGREEMENT TO BE BOUND To: Superintendent of Brokers or Vancouver Stock Exchange #1100 - 865 Hornby Street 609 Granville Street Vancouver, B.C. Vancouver, B.C. V6Z 2H4 V7Y lH1 (if the shares are not (if the shares are listed listed on the Vancouver on the Vancouver Stock Stock Exchange) Exchange) I acknowledge that (a) I have entered into an agreement with _______________________ under which __________ shares of ______________ (the "Shares") will be transferred to me upon receipt of regulatory approval, and (b) the Shares are held in escrow subject to an escrow agreement dated for reference _____________________, 19__ the "Escrow Agreement"), a copy of which is attached as Schedule A to this acknowledgment. In consideration of $1.00 and other good and valuable consideration (the receipt and sufficiency of which is acknowledged) I agree, effective upon receipt of regulatory approval of the transfer to me of the Shares, to be bound by the Escrow Agreement in respect of the Shares as if I were an original signatory to the Escrow Agreement. Dated at on 19 . ------------------- ----------------------------------- ----- Where the transferee is an individual: Signed, sealed and delivered by [transferee) in the presence of: - -------------------------------------- Name - -------------------------------------- --------------------------- [transferee] Address - -------------------------------------- Occupation Where the transferee is a company: The Corporate/Common Seal of [transferee] was affixed in the presence of: ______________________________________ c/s Authorized signatory - -------------------------------------- Authorized signatory SCHEDULE C TO ESCROW AGREEMENT NAME OF SHAREHOLDER NUMBER OF SHARES HELD IN ESCROW APPENDIX B TO LOCAL POLICY STATEMENT 3-07 EXAMPLES OF EARN-OUT PRICES FOR PERFORMANCE SHARES ISSUED BY AN INDUSTRIAL ISSUER
EARN-OUT PRICE IN DOLLARS PERFORMANCE SHARE PERCENTAGE 5% 25% 45% 65% EARN-OUT FACTOR .01x .25x .81x 1.69x I P $0.40 .004 .10 .324 .676 0 $0.60 .006 .15 .486 1.014 P R $0.80 .008 .20 .648 1.352 I C $1.00 .010 .25 .810 1.690 E - ------------------------------------ ----------------- ------------------ --------------- ----------------
The earn-out price represents the amount of cash flow that must be generated to release one performance share from escrow. The following definitions are applicable to the calculation. Earn-out Price: The IPO price multiplied by the earn-out factor. IPO Price: The price per share paid by the public on the issuer's IP0. Earn-out Factor: The number obtained by squaring the performance share percentage, expressed as a decimal, and multiplying the result by four. Performance Share Percentage: The percentage, determined on the date the issuer's shares are listed, posted and called for trading on the Exchange, that the issued performance shares of the issuer are of the total issued and outstanding voting securities of the issuer. APPENDIX C TO LOCAL POLICY STATEMENT 3-07 UNDERTAKING REQUIRED FROM NON-REPORTING OR CLOSELY HELD COMPANY To: Superintendent of Brokers or Vancouver Stock Exchange #1100 - 865 Hornby Street 609 Granville Street Vancouver, B.C. Vancouver, B.C. V6Z 2H4 V7Y 1H1 (If the Issuer's shares (if the Issuer's shares are not listed on the are listed on the Vancouver Stock Exchange) Vancouver Stock Exchange) _________________ (the "Company") undertakes, for the duration of the time that the Company is the registered owner of escrowed shares of - ----------------------------------------------- (the "Issuer"), (a) to effect or permit transfer of ownership in the shares of the Company, or (b) to allot and issue further shares of any class of shares of the Company only upon receipt of the written consent of the Superintendent of Brokers, if the Issuer's shares are not listed on the Vancouver Stock Exchange (the "Exchange"), or the Exchange, if the Issuer's shares are listed on the Exchange. Dated at on 19 . ------------------- ------------------------------------ ----- The Corporate/Common Seal of [Company] was affixed in the presence of: - -------------------------------------- Authorized signatory c/s - -------------------------------------- Authorized signatory SCHEDULE C TO ESCROW AGREEMENT NAME OF SHAREHOLDER NUMBER OF SHARES HELD IN ESCROW Pardiak Management International Limited 1,300,000 UNDERTAKING REQUIRED FROM NON-REPORTING COMPANY TO: Executive Director or Vancouver Stock Exchange B.C. Securities Commission 609 Granville Street #1100 - 865 Hornby Street Vancouver, B.C. Vancouver, B.C. V6Z 2H4 V7Y 1H1 (if the shares are not listed on the (if the shares are listed on the VSE) VSE) The undersigned (the "Corporate Escrow Shareholder") represents that Edward C. Pardiak is the sole holder of voting shares of the Corporate Escrow Shareholder and undertakes, for the duration of time that the Corporate Escrow Shareholder is the registered owner of escrowed shares of DSI DATOTECH SYSTEMS INC. (the "Issuer"), a. to effect or permit transfer of ownership in the voting shares of the Corporate Escrow Shareholder, or b. to allot and issue farther voting shares of any class of shares of the Corporate Escrow Shareholder only upon receipt of the written consent of the Executive Director of the British Columbia Securities Commission, if the Issuer's shares are not listed on the Vancouver Stock Exchange (the "Exchange"), or the Exchange, if the Issuer's shares are listed on the Exchange. Dated at Vancouver on the 7 day of December, 1997. The Corporate/Common Seal of EDWARD C. PARDIAK HOLDINGS LIMITED was affixed in the presence of: /s/Edward C. Pardiak c/s - ------------------------------------------------------ Authorized Signatory Authorized Signatory EX-4.5 12 0012.txt EX-4.5 DSI/BIOMETRICS OPTION AGREEMENT Exhibit 4.5 OPTION AGREEMENT AGREEMENT made and entered into this 22nd day of August, 2000, by and between DSI Datotech Systems, Inc., a Vancouver corporation, having its principal offices at 525 Seymour Street, Suite 712, Vancouver BC, Canada V6B 3H7 ("Datotech") and Biometrics Security, Inc., a State of Nevada, USA corporation, having its principal offices at 675 Fairview Drive, Suite 246, Carson City, Nevada USA 89701 ("Biometrics Security"). W I T N E S S E T H: ------------------- WHEREAS Datotech represents that it is the developer and the owner of the right title and interest in and to the Technology and Existing Proprietary Property as hereinafter defined; and WHEREAS Biometrics Security desires Datotech to disclose the details of the Technology to Biometrics Security to permit Biometrics Security to evaluate the Technology and to determine whether Biometrics Security will exercise the Option granted to Biometrics Security hereunder and enter into an exclusive License Agreement (in the form attached hereto and made apart hereof as Exhibit A) with Datotech for the Technology, all know-how related to the Technology and the Existing Proprietary Property; WHEREAS, Datotech wishes to grant Biometrics Security the sole and exclusive Option to acquire the exclusive licensing rights for the exploitation of the developed Technology for Licensed Items within the Territory through the License Agreement; NOW THEREFORE, in consideration of the provisions contained herein, and of the payment of the Option Price, the receipt and sufficiency of which is hereby acknowledged, the undersigned agree as follows: ARTICLE 1 Definitions The following terms used in this Option Agreement shall have the meanings set forth below: (a) "Agreement" shall mean this Option Agreement, entered into on the date first above written. (b) "Existing Proprietary Property" shall mean all intellectual property rights in the Technology, including without limitation, (i) any and all patent applications filed worldwide based upon the Technology, including any and all continuations, divisions and continuations-in-part thereof, and all patents, inventor's certificates, utility models and the like issuing therefrom worldwide, including any and all re-examinations, reissues, renewals and extensions thereof, (ii) any copyrightable or copyrighted works based upon the Technology, including computer software and computer programs, (iii) any confidential or proprietary know-how and information regarding the Technology, (iv) any trademarks and trade names 1 associated with the Technology, whether or not registered, and (v) all fixed representations, hardware, hard copies, computer-readable media and other tangible implementation of the Technology (collectively, the "Proprietary Property"), patent rights, copyrights, trademarks and trade secret rights. "Existing Proprietary Property" shall also include patent rights in the Technology that are pending as of the date hereof. (c) "License Agreement" shall mean the License Agreement attached hereto and made apart hereof as Exhibit A that may be executed by the parties hereto upon the exercise by Biometrics Security of the Option granted to Biometrics Security hereunder. (d) "Licensed Items" shall mean the interfaces and software for executing banking and financial transactions, in which the Technology may be utilized pursuant to the execution by the parties herein of the License Agreement. (e) "Option" shall mean the sole, transferable and exclusive Option of Biometrics Security to acquire, for the Option Price, the exclusive licensing rights for the exploitation of the Technology within the Territory through a license agreement. (f) "Option Period" shall mean the period commencing on the date hereof and ending three months from the date when a reasonably acceptable prototype is made available to Biometrics Security by Datotech. (g) "Option Price" shall mean the amount of $320,000 US Dollars fully creditable towards any amount, which may be owed to Datotech pursuant to the execution of the License Agreement. (h) "Prototype" shall mean a device using Datotech Technology that will demonstrate, beyond any reasonable doubt, multi-touch gesture recognition and individual gestures utilizing a PC system. Datotech commits to use its best efforts to make this prototype available, at a charge of $3,000,000 US Dollars to Biometrics Security, within 12 months of the delivery of $3,000,000 US Dollars to Datotech. This charge of $3,000,000 US Dollars is fully creditable towards any amount that may be owed to Datotech pursuant to the execution of the License Agreement. (i) "Technology" shall mean Datotech's proprietary gesture recognition technology ("GRT") system comprising multiple-touch sensors and related hardware, gesture recognition algorithms and software, and user interface designs for mapping gestures to control electronic devices, as well as alterations, improvements, modifications and derivatives to the Technology described herein, as well as all related software, documentation and other materials, embodying GRT theretofore or hereafter created or developed by Datotech. (j) "Territory" shall mean all major markets worldwide. (k) "Third-Party Licenses" shall mean sub-licenses granted by Biometrics Security to third parties pursuant to the license and rights granted to Biometrics Security by Datotech in accordance with the License Agreement. "Third-Party Licensees" shall mean those parties to whom Third-Party Licenses are granted in accordance with the License Agreement. 2 ARTICLE 2 Datotech Obligations 2.1 Research and Development. Datotech shall conduct research and development of the Technology with the ultimate goal of developing the Technology and Existing Proprietary Property for the Licensed Items and otherwise maximize the commercial value of the Technology and Existing Proprietary Property for the Licensed Items. 2.2 Disclosure of Improvements. From time to time throughout the duration of this Option, Datotech shall disclose any and all improvements to the Technology for Licensed Items to Biometrics Security so as to keep Biometrics Security as current as is practicable regarding the Technology. Datotech shall also disclose any and all improvements to the Technology for Licensed Items to prospective Third-Party Licensees as well as participate in meetings and presentations with prospective Third-Party Licensees to demonstrate the feasibility of integrating the Technology into the Licensed Items. Datotech shall cooperate with Biometrics Security and prospective Third-Party Licensees by providing, at no cost, all required disclosures and assistance in order to demonstrate the feasibility of integrating the Technology into the Licensed Items, including but not limited to, hardware and software for demonstrations and simulations. Such disclosures shall be in a form and manner to be agreed upon by the parties on a case-by-case basis. Datotech and Biometrics Security shall each bear their own expenses resulting from such meetings, presentations or any disclosures required pursuant to this Section 2.2. 2.3 Maintenance of Existing Proprietary Property. During the term of this Agreement Datotech shall utilize its best efforts to maintain all Existing Proprietary Property in valid force and effect. ARTICLE 3 Biometrics Security Obligations 3.1 No Obligation to Exercise Option. Biometrics Security has a genuine interest in -------------------------------- commercializing the Technology but shall not be obligated to exercise the Option granted hereunder and may refuse to execute the License Agreement. 3.2 Confidentiality. Biometrics Security shall have an affirmative duty of confidentiality regarding all confidential information provided to it by Datotech hereunder. Such obligation shall survive the termination of this Agreement and the License Agreement for a period of two (2) years. Moreover, Biometrics Security acknowledges and agrees that, because of the nature of the property rights involved under this Agreement and the License Agreement, any breach of Biometrics Security's obligations under this Section 3.2 shall cause immediate, irreparable injury to Datotech; therefore, Biometrics Security agrees and acknowledges that Datotech shall be entitled, in addition to its other rights and remedies at law 3 and in equity, to seek temporary, preliminary and/or permanent injunctions in the event an unauthorized disclosure is made or appears to be imminent. ARTICLE 4 Grant of option 4.1 Biometrics Security Option. Datotech hereby grants Biometrics Security the sole, transferable and exclusive Option, for the Option Period to acquire the exclusive rights to exploit the Technology, the Existing Proprietary Property, and any proprietary property related to the Technology conceived pursuant to this Agreement within the Territory for Licensed Items through an exclusive license agreement in the form attached hereto as Exhibit A. ARTICLE 5 Consideration for Option 5.1 Consideration. In consideration of the option granted to Biometrics Security hereunder, Biometrics Security shall pay Datotech the amount of $320,000 US Dollars, which shall be fully creditable towards any amounts due Datotech under the License Agreement. Said $320,000 US Dollars shall be due and payable within two months of the signing of this Option Agreement. Biometrics Security shall pay Datotech $3,000,000 US Dollars within eleven months of signature of the Option Agreement. Datotech will exclusively apply the $3,000,000 payment towards the development of the Prototype. "Prototype" shall mean a device using Datotech Technology that will demonstrate, beyond any reasonable doubt, multi- touch gesture recognition and individual gesture patterns utilizing a PC system. Datotech commits to use its best efforts to make this prototype available at this charge of $3,000,000 US Dollars to Biometrics Security, within 12 months of the delivery of this $3,000,000 US Dollars to Datotech. Upon the exercise by Biometrics Security of the Option granted hereunder and the signing of the License Agreement, Biometrics Security shall pay Datotech the amount of $8 Million US Dollars less the above amount of $3,320,000 US Dollars paid to Datotech within the terms of this Agreement. Biometrics Security must exercise its Option within three months of the time a reasonably acceptable prototype is made available to Biometrics Security by Datotech. In addition, Biometrics Security or its assignee grants to Datotech a perpetual non- dilutive twenty percent (20%) Common Share Interest in Biometrics Security or the assignee of the Option and License Agreements upon the signing of the Licensing Agreement. ARTICLE 6 Term and termination 6.1 Term. The term of this Agreement shall be for the duration of the Option Period unless ---- otherwise terminated as provided herein. 4 6.2 Termination. Any exercise of the right of termination hereunder shall not impose any liability upon the terminating party nor waive any other rights that the terminating party has or may have. This Agreement may be terminated, in whole or in part, at the option of the party having such right as below provided, by written notice upon the occurrence of any of the following events: (a) by either party in the event the other party is adjudicated bankrupt, or if a receiver or trustee is appointed for such party or for a substantial portion of its assets, or if any assignment is made for the benefit of creditors; (b) by Datotech in the event Biometrics Security elects not to pay $320,000 US Dollars to Datotech within two months of the signature of the Option Agreement. (c) by Datotech in the event Biometrics Security elects not to pay $3,000,000 US Dollars to Datotech within eleven months of the signature of the Option Agreement. (d) by Datotech in the event Biometrics Security elects not to exercise the Option granted hereunder and not to proceed with negotiations for the execution of the License Agreement. (d) Biometrics Security elects not to pay the balance of the $8 million US Dollars under the terms of this Agreement within three months from the date when a reasonably acceptable prototype is made available to Biometrics Security by Datotech. ARTICLE 7 Miscellaneous 7.1 No Third Party Beneficiaries. There shall be no third party beneficiaries to this ---------------------------- Agreement. 7.2 Assignability. This Agreement shall be assignable by either party in whole or in part upon the written and signed consent of the other party which shall not be unreasonably withheld. 7.3 Binding Effect. Subject to the restrictions on assignability contained herein, this -------------- Agreement shall be binding upon and inure to the benefit of the parties and their respective authorized successors and assigns. 7.4 Governing Law. This Agreement shall be governed by and construed in accordance with ------------- the laws of British Columbia, Canada. 7.5 Notices. All notices, requests or consents provided for or permitted under this Agreement must be in writing and must be given either by mail addressed to the recipient, postage paid, registered or certified mail return receipt requested, or by delivering the writing to the recipient in person, by courier or by facsimile transmission. Such a writing so delivered shall be effective upon receipt. 7.6 Headings. Headings are used in this Agreement for the purpose of organization only and -------- do not constitute terms of the Agreement. The words "herein," "hereof," "hereunder" and other words of 5 similar import refer to this Agreement as a whole and not to any particular subdivision unless otherwise expressly indicated. 7.7 Severability. If any provision of this Agreement or its application to any person or circumstance shall be invalid, illegal, or unenforceable to any extent, the remainder of this Agreement and its application shall not be affected and shall be enforceable to the fullest extent permitted by law unless the provision held to be illegal, invalid or unenforceable is so fundamental to the sense of this Agreement that its illegality, invalidity or unenforceability would make the enforceability of the remainder unreasonable. 7.8 Entire Agreement. This Agreement sets forth the entire, final and exclusive agreement and understanding between the parties as to the subject matter hereof and supersedes all prior and contemporaneous writings and discussions between the parties pertaining hereto. 7.9 No Oral Modifications. This Agreement may be amended or modified only by a written --------------------- instrument signed by proper and duly authorized representatives of both parties. 7.10 Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. In witness whereof the parties hereto have entered into this Agreement on the date first above written. DSI DATOTECH SYSTEMS INC. By: ----------------------- Name: Edward C. Pardiak Title: Chairman & CFO BIOMETRICS SECURITY, INC. By: ----------------------- Name: Stephen J. Henry Title: President & CEO 6 Exhibit A to Option Agreement EXCLUSIVE LICENSE AGREEMENT AGREEMENT made this day of , 2001, by and between DSI Datotech Systems, Inc., a Vancouver corporation, having its principal offices at 525 Seymour Street, Suite 712, Vancouver BC, Canada V6B 3H7 (hereinafter referred to as the "Licensor" or "Datotech"), and Biometrics Security, Inc., a State of Nevada, USA corporation, having its principal offices at 675 Fairview Drive, Suite 246, Carson City, Nevada USA 89701 (hereinafter referred to as the "Licensee" or "Biometrics Security") W I T N E S S E T H : ------------------- WHEREAS, Datotech is the owner of the Technology and Existing Proprietary Property as hereinafter defined; WHEREAS, pursuant to the Option Agreement dated as of the 22nd day of August, 2000, by and between Datotech and Biometrics Security (the "Option Agreement"), Biometrics Security was granted the option to enter into an exclusive license agreement to acquire the exclusive rights to exploit the Technology and the Existing Proprietary Property for Licensed Items within the Territory as hereinafter defined; and WHEREAS, as of the date hereof, Biometrics Security has exercised the option granted to Biometrics Security pursuant to the Option Agreement and has paid the Option Price (as defined in the Option Agreement) to Datotech; NOW THEREFORE, in consideration of the mutual covenants contained herein and other good and valuable consideration from each to the other, the receipt and sufficiency of which is hereby acknowledged by both parties, it is hereby agreed as follows: ARTICLE 1 Definitions 1.1 Definitions. The following terms used in this - ----------- License Agreement (the "Agreement") shall have the meanings set forth below: (a) "Existing Proprietary Property" shall mean all intellectual property rights in the Technology, including without limitation, (i) any and all patent applications filed worldwide based upon the Technology, including any and all continuations, divisions and continuations-in-part thereof, and all patents, inventor's certificates, utility models and the like issuing therefrom worldwide, including any and all re-examinations, reissues, renewals and extensions thereof, (ii) any copyrightable or copyrighted works 7 based upon the Technology, including computer software and computer programs, (iii) any confidential or proprietary know-how and information regarding the Technology, (iv) any trademarks and trade names associated with the Technology, whether or not registered, and (v) all fixed representations, hard copies, hardware, computer-readable media and other tangible implementation of the Technology (collectively, the "Proprietary Property"), patent rights, copyrights, trademarks and trade secret rights. "Existing Proprietary Property" shall also include patent rights in the Technology that are pending as of the date hereof. (b) "License Agreement" shall mean this License Agreement by and between Datotech, as Licensor, and Biometrics Security, as Licensee. (c) "Licensed Items" shall mean the interface and software for banking and financial transactions, in which the technology might be utilized pursuant to the execution by the parties herein of this License Agreement. (d) "Option Agreement" has the meaning set forth in the second recital hereof. (e) "Purchase Price" shall mean $8 Million US Dollars payable by Biometrics Security to Datotech upon the signing of this Agreement, less the above amount of $3,320,000 US Dollars paid to Datotech within the terms of the Option Agreement. In addition, Biometrics Security or its assignee grants to Datotech a perpetual non-dilutive twenty percent (20%) Common Share Interest in Biometrics Security or the assignee of the Option and License Agreements upon the signing of the Licensing Agreement. (f) "Technology" shall mean Datotech's proprietary gesture recognition technology ("GRT") system comprising multiple-touch sensors and related hardware, gesture recognition algorithms and software, and user interface designs for mapping gestures to control electronic devices, as well as alterations, improvements, modifications and derivatives to the Technology described herein as well as all related software, documentation and other materials, embodying GRT heretofore or hereafter created or developed by Datotech. (g) "Territory" shall mean all major markets worldwide. (h) "Third-Party Licenses" shall mean sub-licenses granted by Biometrics Security to third parties pursuant to the licenses and rights granted to Biometrics Security by Datotech in accordance with this Agreement. "Third-Party Licensees" shall mean those parties to whom Third-Party Licensees are granted pursuant hereto. ARTICLE 2 License Grant 2.1 License to Exercise Rights. In consideration of the payment to Datotech of the Purchase Price, Datotech hereby grants to Biometrics Security the perpetual, royalty-free, sole and exclusive divisible and assignable license to commercially exploit the Technology and the rights constituting the Existing Proprietary Property for the Licensed Items subject to all of the terms, conditions and restrictions contained in this Agreement. The rights granted hereunder include, without limitation, the marketing, use, 8 sale and distribution of the Technology and the rights constituting the Existing Proprietary Property for Licensed Items. 2.2 Authority to Sublicense. Subject to all of the terms, conditions and restrictions contained herein, Datotech hereby grants Biometrics Security the authority to sublicense the exercise of the rights specified in Section 2.1 above. Datotech will play an active role in all negotiations for sublicensing agreements. 2.3 Reservations. Datotech retains all rights except those granted above in Sections 2.1 and 2.2. Without limiting the generality of the foregoing sentence, Datotech retains title to the Technology and the Existing Proprietary Property. ARTICLE 3 Improvements 3.1 Datotech Improvements. Biometrics Security acknowledges and agrees that Datotech shall retain exclusive ownership of any and all improvements to the Technology during the term of this Agreement as well as after this Agreement is terminated regardless of the cause or method of termination. 3.2 Biometrics Security Improvements. Datotech acknowledges and agrees that Biometrics Security shall retain ownership of any and all improvements made by Biometrics Security. Datotech also acknowledges and agrees that Biometrics Security shall retain exclusive ownership of such improvements after the termination of this Agreement regardless of the cause or method of termination. ARTICLE 4 Biometrics Security Rights and Obligations 4.1 Confidentiality of Disclosures to Third Parties. Biometrics Security may disclose any portion of the Technology, the Existing Proprietary Property, and the improvements to a third party only pursuant to a written agreement between Biometrics Security and any third-party, approved by Datotech, obligating such third party to secrecy regarding the disclosure. Biometrics Security acknowledges and agrees that, because of the nature of the property rights involved in this Agreement, any breach of Biometrics Security's obligations under this Section 4.1 shall cause immediate, irreparable injury to Datotech; therefore, Biometrics Security agrees and acknowledges that Datotech shall be entitled, in addition to its other rights and remedies at law and in equity, to seek temporary, preliminary and/or permanent injunctions in the event an unauthorized disclosure is made or appears to be imminent. 9 Biometrics Security's duty of confidentiality shall survive the termination of this Agreement regardless of the cause or method of termination. 4.2 Disclosure of Improvements. From time to time, throughout the duration of this Agreement, Datotech shall be affirmatively obligated to disclose the nature of any and all improvements to the Technology for Licensed Items to Biometrics Security so as to keep Biometrics Security as current as is practicable regarding the Technology. Datotech shall also disclose any and all improvements to the Technology for Licensed Items to prospective Third-Party Licensees as well as participate in meetings and presentations with prospective Third-Party Licensees to assist in the integration of the Technology into the Licensed Items. Datotech shall cooperate with Biometrics Security and prospective Third-Party Licensees by providing, at no cost, all required disclosures and assistance in order to integrate the Technology into the Licensed Items, including but not limited to, hardware and software for demonstrations and simulations. The form of such disclosures shall be decided by mutual agreement between the parties on a case-by-case basis. Datotech and Biometrics Security shall each bear their own expenses resulting from such meetings, presentations or any disclosures required pursuant to this Section 4.2.The costs of any subsequent development by Datotech at Biometrics Security request of any hardware and software for a specific application shall be borne by Biometrics Security. 4.3 Reporting. Biometrics Security shall provide to Datotech written reports on an annual basis, no later than March 1st of the subsequent year. Such reports shall detail Biometrics Security's exploitation, licensing and sublicensing activities and shall include a report of all related revenues received and expenses incurred for the same quarter. Such reports shall also (a) detail Biometrics Security's intellectual property protection activities and expenses under Section 6.1 hereof for the immediately preceding quarter; (b) include a status report on the condition of all worldwide intellectual property rights related to the Technology; and (c) include a report of all strategy and planning for intellectual property protection activities for the upcoming quarter. ARTICLE 5 Datotech Rights and Obligations 5.1 Rights to Licensed Items Technology Datotech represents, warrants and covenants that Datotech is the owner of the Existing Proprietary Property and has the exclusive right and license for the use of the Technology together with the right to sub-license to others, manufacture, distribute and sell the Technology in connection with the Licensed Items. Datotech shall provide all disclosures and assistance to Biometrics Security and Third-Party Licensees, at no cost, in order to integrate the Technology into the licensed Items. 10 ARTICLE 6 Protection of Intellectual Property Rights 6.1 Authorization to Biometrics Security to File for Intellectual Property Protection In the Territory. Subject to the provisions of Section 2.3, Article 4, Section 6.4, Section 7.1 hereof and all of the other terms and conditions contained herein, Biometrics Security shall have the authority but not the obligation, with the consent of Datotech, to take actions in the Territory on behalf of Datotech such as filing patent applications and seeking registrations of copyrights for the purpose of securing and protecting intellectual property rights for Datotech in the Technology and the improvements thereto. The authority granted in this Section 6.1 may not be assigned, delegated or sublicensed. Biometrics Security shall bear the expense of all of its activities under this Section 6.1 including the payment of attorney fees, patent issuance and maintenance fees, copyright and trademark registration fees and other similar fees and expenses where applicable. 6.2 Actions Not Taken by Biometrics Security. In the event Datotech, in its sole discretion, deems it necessary or beneficial to take a specific action that Biometrics Security has not taken somewhere in the Territory to protect or maintain any or all of the intellectual property rights discussed in Section 6.1 hereof, it may notify Biometrics Security of its intention in writing. Upon receipt of such notice, Biometrics Security shall respond to Datotech within fifteen (15) calendar days indicating whether Biometrics Security chooses to take the action requested. If Biometrics Security fails to respond within such time period, or if Biometrics Security responds indicating that it chooses not to undertake the requested action, then in that event Datotech may take the action independently, bearing the cost of the action. In such case, the intellectual property right or rights resulting from or saved by Datotech's action, if any, shall automatically cease to be within the scope of the license rights granted to Biometrics Security in Sections 2.1 and 2.2 hereof. 6.3 Assistance and Cooperation in Protecting Intellectual Property. Both parties, including their employees and affiliates, shall be obligated to assist and cooperate with each other in securing the legal protection of any and all intellectual property rights under Sections 6.1 and 6.2 above. 6.4 Acts or Omissions Harmful to Intellectual Property. Biometrics Security shall take no action, nor shall it omit to take any action, if the effect of such act or omission would be to harm any or all of Datotech's then-existing intellectual property rights. 11 ARTICLE 7 Disclaimers 7.1 No Representations Regarding Technology or Intellectual Property. Datotech makes no representations about and disclaims all warranties, express or implied, about the Technology, the Existing Proprietary Property, and any improvements thereto. Without limiting the generality of the foregoing, Datotech disclaims any express or implied warranties regarding the following: (a) the fitness, usefulness, efficiency or profitability of the Technology, the Existing Proprietary Property, the improvements thereto or any of the rights granted herein; (b) the validity or scope of any intellectual property rights; and (c) that anything made, used or sold based on or deriving from the Technology or any of the rights licensed herein will be free from infringement of third party rights. ARTICLE 8 Term; Termination for Cause and Survival of Certain Provisions 8.1 Term. The term of this Agreement shall commence on the date hereof and shall continue indefinitely unless terminated pursuant to the provisions of this Agreement. 8.2 Termination for Cause. Upon a breach by Biometrics Security of any of its obligations hereunder, Datotech may terminate this Agreement upon sixty (60) calendar days advance written notice to Biometrics Security describing the grounds for termination; however, such termination shall not occur if Biometrics Security conclusively demonstrates to Datotech's satisfaction before the end of such sixty (60) calendar days that the breach has been cured. 8.3 Survival. The rights and obligations contained in the following Sections shall survive -------- termination of this Agreement regardless of the method or timing of its termination: 2.3, 3.1, 3.2, 4.1, 6.3, and 7.1. 8.4 Return of Existing Proprietary Property. If this Agreement shall be terminated, Biometrics Security shall return to Datotech all technical data, know-how, confidential information and trade secrets so far as any of them consists of written materials, prints and other tangible items which either bear a stamp "confidential" or "confidential information" thereon or are designated in any other way by Datotech, 12 whether orally or in writing, as confidential information. For purposes of this Agreement, all Technology as utilized in the Licensed Items shall be classified as confidential information. ARTICLE 9 Miscellaneous 9.1 Assignability. This Agreement shall not be assignable by either party in whole or in part except upon the written and signed consent of the other party, which shall not be unreasonably withheld. 8.2 Binding Effect. Subject to the restrictions on -------------- assignability contained herein, this Agreement is binding on and inure to the benefit of the parties and their respective authorized successors and assigns. 9.3 Further Assurances. Biometrics Security agrees to execute and deliver any additional ------------------ documents and instruments and perform any additional acts that may be necessary or appropriate to comply with its obligations hereunder. 9.4 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the Province of British Columbia and of Canada as to all matters of interpretation, performance, remedies and enforceability. The parties hereto hereby irrevocably submit to the jurisdiction of the Supreme Court of British Columbia, Canada, over any action or proceeding arising out of or relating to this Agreement and hereby irrevocably agree that all claims in respect to any action or proceeding may be heard and determined in such Supreme Court. The parties hereto irrevocably consent to the service of any and all process in any such action or processing by the certified mailing with return receipt of copies of such process to their address specified in this Agreement. The parties hereto agree that a final judgment in any such action or proceeding shall be conclusive and may be enforced in any other jurisdiction by suit on the judgment or any other manner provided by law. The parties hereto waive any objection to venue in such state and any objection to an action or proceeding in such state on the basis of forum non convenience. 9.5 Notice. All notices, requests or consents provided for or permitted under this Agreement must be in writing and must be given either by sending the writing in the mail addressed to the recipient, postage paid, registered or certified mail, return receipt requested, which shall be effective upon receipt, or by delivering the writing to the recipient in person, by courier or by facsimile transmission to the address specified below: 13 If to the Licensor: DSI Datotech Systems, Inc. 525 Seymour Street Suite 712 Vancouver, BC Canada V6B 3H7 Attention: Elli Segev President & CEO If to the Licensee: Biometrics Security, Inc. 675 Fairview Drive Suite 246 Carson City, Nevada USA 89701 Attention: Stephen J. Henry President & CEO With a copy to Legal Firm: Law Offices 3838 Camino del Rio North Suite 333 San Diego, California USA 92108 1789 Attention: Carmine Bua 9.6 Headings and Certain Words. Headings are used in this Agreement for the purpose of organization only and do not constitute terms of the Agreement. The words "herein," "hereof," "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular subdivision unless otherwise expressly indicated. 9.7 Severability. If any provision of this Agreement or its application to any person or circumstance shall be invalid, illegal, or unenforceable to any extent, the remainder of this Agreement and its application shall not be affected and shall be enforceable to the fullest extent permitted by law unless the provision held to be illegal, invalid or unenforceable is so fundamental to the sense of this Agreement that its illegality, invalidity or unenforceability would make the enforceability of the remainder unreasonable. 14 9.8 Entire Agreement. This Agreement sets forth the entire, final and exclusive agreement and understanding between the parties as to the subject matter hereof and supersedes all prior and contemporaneous writings and discussions between the parties pertaining hereto. 9.9 No Oral Modification. This Agreement may be amended or modified only by a written -------------------- instrument signed by proper and duly authorized representatives of both parties. 9.10 Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. In witness whereof, the parties have caused this Agreement to be duly executed on the date first set forth above. Biometrics Security, Inc. By:___________________________________ Name: Title: DSI Datotech Systems Inc. By:___________________________________ Name: Title: 15 EX-4.6 13 0013.txt EX-4.6 DSI/NETFACE OPTION AGREEMENT Exhibit 4.6 OPTION AGREEMENT AGREEMENT made and entered into this 28th day of June, 2000, by and between DSI Datotech Systems, Inc., a Vancouver corporation, having its principal offices at 525 Seymour Street, Suite 712, Vancouver BC, Canada V6B 3H7 ("Datotech") and NetFace, LLC, a Connecticut corporation, having its principal offices at 16 Old Mill Road, Greenwich, Connecticut 06830--3345 ("NetFace"). W I T N E S S E T H: ------------------- WHEREAS Datotech represents that it is the developer and the owner of the right title and interest in and to the Technology and Existing Proprietary Property as hereinafter defined; and WHEREAS NetFace desires Datotech to disclose the details of the Technology to NetFace to permit NetFace to evaluate the Technology and to determine whether NetFace will exercise the Option granted to NetFace hereunder and enter into an exclusive License Agreement (in the form attached hereto and made apart hereof as Exhibit A) with Datotech for the Technology, all know-how related to the Technology and the Existing Proprietary Property; WHEREAS, Datotech wishes to grant NetFace the sole and exclusive Option to acquire the exclusive licensing rights for the exploitation of the developed Technology for Licensed Items within the Territory through the License Agreement; NOW THEREFORE, in consideration of the provisions contained herein, and of the payment of the Option Price, the receipt and sufficiency of which is hereby acknowledged, the undersigned agree as follows: ARTICLE 1 Definitions The following terms used in this Option Agreement shall have the meanings set forth below: 1 (a) "Agreement" shall mean this Option Agreement, entered into on the date first above written. (b) "Existing Proprietary Property" shall mean all intellectual property rights in the Technology, including without limitation, (i) any and all patent applications filed worldwide based upon the Technology, including any and all continuations, divisions and continuations-in-part thereof, and all patents, inventor's certificates, utility models and the like issuing therefrom worldwide, including any and all re-examinations, reissues, renewals and extensions thereof, (ii) any copyrightable or copyrighted works based upon the Technology, including computer software and computer programs, (iii) any confidential or proprietary know-how and information regarding the Technology, (iv) any trademarks and trade names associated with the Technology, whether or not registered, and (v) all fixed representations, hardware, hard copies, computer--readable media and other tangible implementation of the Technology (collectively, the "Proprietary Property"), patent rights, copyrights, trademarks and trade secret rights. "Existing Proprietary Property" shall also include patent rights in the Technology that are pending as of the date hereof. (c) "License Agreement" shall mean the License Agreement attached hereto and made apart hereof as Exhibit A that may be executed by the parties hereto upon the exercise by NetFace of the Option granted to NetFace hereunder. (d) "Licensed Items" shall mean the interfaces for personal computer games, console games and Internet television, in which the Technology may be utilized pursuant to the execution by the parties herein of the License Agreement. (e) "Option" shall mean the sole and exclusive Option of NetFace to acquire, for the Option Price, the exclusive licensing rights for the exploitation of the Technology within the Territory through a license agreement. (f) "Option Period" shall mean the period commencing on the date hereof and ending eighteen months from the date when a prototype reasonably acceptable to NetFace is made available by Datotech to NetFace. 2 (g) "Option Price" shall mean the amount of $200,000 US Dollars fully creditable towards any amount which may be owed to Datotech pursuant to the execution of the License Agreement. (h) "Prototype" shall mean a device using Datotech Technology that will demonstrate multi-touch capability as it is applied to playing video games and operating Internet TV, utilizing a PC system for such a demonstration. Datotech commits to use its best efforts to make this prototype available at no charge to NetFace, on a top priority basis, within less than six months from signing and delivery of this Agreement. (i) "Technology" shall mean Datotech's proprietary gesture recognition technology ("GRT") system comprising multiple-touch sensors and related hardware, gesture recognition algorithms and software, and user interface designs for mapping gestures to control electronic devices, as well as alterations, improvements, modifications and derivatives to the Technology described herein, as well as all related software, documentation and other materials, embodying GRT theretofore or hereafter created or developed by Datotech. (j) "Territory" shall mean al major markets worldwide. (k) "Third-Party Licenses" shall mean sub-licenses granted by NetFace to third parties pursuant to the license and rights granted to NetFace by Datotech in accordance with the License Agreement. "Third-Party Licensees" shall mean those parties to whom Third-Party Licenses are granted in accordance with the License Agreement. ARTICLE 2 Datotech Obligations 2.1 Research and Development. Datotech shall conduct research and development of the Technology with the ultimate goal of developing the Technology and Existing Proprietary Property for the Licensed Items and otherwise maximize the commercial value of the Technology and Existing Proprietary Property for the Licensed Items. 3 2.2 Disclosure of Improvements. From time to time throughout the duration of this Option, Datotech shall disclose any and all improvements to the Technology for Licensed Items to NetFace so as to keep NetFace as current as is practicable regarding the Technology. Datotech shall also disclose any and all improvements to the Technology for Licensed Items to prospective Third-Party Licensees as well as participate in meetings and presentations with prospective Third-Party Licensees to demonstrate the feasibility of integrating the Technology into the Licensed Items. Datotech shall cooperate with NetFace and prospective Third-Party Licensees by providing, at no cost, all required disclosures and assistance in order to demonstrate the feasibility of integrating the Technology into the Licensed Items, including but not limited to, hardware and software for demonstrations and simulations. Such disclosures shall be in a form and manner to be agreed upon by the parties on &case-by-case basis. Datotech and NetFace shall each bear their own expenses resulting from such meetings, presentations or any disclosures required pursuant to this Section 2.2. 2.3 Maintenance of Existing Proprietary Property. During the term of - -------------------------------------------- this Agreement Datotech shall utilize its best efforts to maintain all Existing Proprietary Property in valid force and effect. ARTICLE 3 NetFace Obligations 3.1 No Obligation to Exercise Option. NetFace has a genuine interest - -------------------------------- in commercializing the Technology but shall not be obligated to exercise the Option granted hereunder and may refuse to execute the License Agreement. 3.2 Confidentiality. NetFace shall have an affirmative duty of confidentiality regarding all confidential information provided to it by Datotech hereunder. Such obligation shall survive the termination of this Agreement and the License Agreement for a period of two (2) years. Moreover, NetFace acknowledges and agrees that, because of the nature of the property rights involved under this Agreement and the License Agreement, any breach of NetFace's obligations under this Section 3.2 shall cause immediate, irreparable injury to Datotech; therefore, NetFace agrees and acknowledges that Datotech shall be entitled, in addition to its other rights and remedies at law and in equity, to seek temporary, preliminary and/or permanent 4 injunctions in the event an unauthorized disclosure is made or appears to be imminent. ARTICLE 4 Grant of option 4.1 NetFace Option. Datotech hereby grants NetFace the sole and exclusive Option, for the Option Period to acquire the exclusive rights to exploit the Technology, the Existing Proprietary Property, and any proprietary property related to the Technology conceived pursuant to this Agreement within the Territory for Licensed Items through an exclusive license agreement in the form attached hereto as Exhibit A. ARTICLE 5 Consideration for Option 5.1 Consideration. In consideration of the option granted to NetFace hereunder, NetFace shall pay Datotech the amount of $200,000 US Dollars, which shall be fully creditable towards any amounts due Datotech under the License Agreement. Said $200,000 US Dollars shall be due and payable as follows: $100,000 US Dollars upon execution and delivery of this Option Agreement and $100,000 US Dollars upon delivery of a reasonably acceptable Prototype to NetFace. Upon the exercise by NetFace of the Option granted hereunder and the signing of the License Agreement, NetFace shall pay Datotech the amount of $5 Million US Dollars less the above amount of $200,000 US Dollars paid to Datotech within the terms of this Agreement, in addition to the granting by NetFace to Datotech a twenty percent (20%) Class B Membership Interest in NetFace; said 20%interest may be diluted only after a) an IPO for Netface has been successfully concluded or b) a period of three years has elapsed following the date of execution of the Licensing Agreement, which ever occurs first. Datotech shall acquire such Membership Interest by signing a copy of the NetFace Operating Agreement at the time of execution of the Licensing Agreement, thereby agreeing to be bound by its provisions. ARTICLE 6 Term and termination 6.1 Term. The term of this Agreement shall be for the duration of the ---- 5 Option Period unless otherwise terminated as provided herein. 6.2 Termination. Any exercise of the right of termination hereunder shall not impose any liability upon the terminating party nor waive any other rights that the terminating party has or may have. This Agreement may be terminated, in whole or in part, at the option of the party having such right as below provided, by written notice upon the occurrence of any of the following events: (a) by either party in the event the other party is adjudicated bankrupt, or if a receiver or trustee is appointed for such party or for a substantial portion of its assets, or if any assignment is made for the benefit of creditors; (b) by Datotech in the event NetFace elects not to exercise the option granted hereunder and not to proceed with negotiations for the execution of the License Agreement. ARTICLE 7 Miscellaneous 7.1 No Third Party Beneficiaries. There shall be no third party ---------------------------- beneficiaries to this Agreement. 7.2 Assignability. This Agreement shall not be assignable by either party in whole or in part except upon the written and signed consent of the other party which shall not be unreasonably withheld. 7.3 Binding Effect. Subject to the restrictions on assignability contained herein, this Agreement shall be binding upon and inure to the benefit of the parties and their respective authorized successors and assigns. 7.4 Governing Law. This Agreement shall be governed by and construed - ------------- in accordance with the laws of British Columbia, Canada. 7.5 Notices. All notices, requests or consents provided for or ------- permitted under this Agreement must be in writing and must be given either by 6 mail addressed to the recipient, postage paid, registered or certified mail return receipt requested, or by delivering the writing to the recipient in person, by courier or by facsimile transmission. Such a writing so delivered shall be effective upon receipt. 7.6 Headings. Headings are used in this Agreement for the purpose of organization only and do not constitute terms of the Agreement. The words "herein," "hereof "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular subdivision unless otherwise expressly indicated. 7.7 Severability. If any provision of this Agreement or its application to any person or circumstance shall be invalid, illegal, or unenforceable to any extent, the remainder of this Agreement and its application shall not be affected and shall be enforceable to the fullest extent permitted by law unless the provision held to be illegal, invalid or unenforceable is so fundamental to the sense of this Agreement that its illegality, invalidity or unenforceability would make the enforceability of the remainder unreasonable. 7.8 Entire Agreement. This Agreement sets forth the entire, final and exclusive agreement and understanding between the parties as to the subject matter hereof and supersedes all prior and contemporaneous writings and discussions between the parties pertaining hereto. 7.9 No Oral Modifications. This Agreement may be amended or modified - --------------------- only by a written instrument signed by proper and duly authorized representatives of both parties. 7.10 Counterparts. This Agreement may be executed in any number of - ------------ counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument . 7 In witness whereof the parties hereto have entered into this Agreement on the date first above written. DSI DATOTECH SYSTEMS INC. By: /s/Edward C. Pardiak Name: EDWARD C. PARDIAK Title: CHAIRMAN NETFACE, LLC By: /s/ Gerard E. Munera Name: GERARD E. MUNERA Title: MANAGING PARTNER 8 Exhibit A to Option Agreement EXCLUSIVE LICENSE AGREEMENT AGREEMENT made this ____ day of _____, 2001, by and between DSI Datotech Systems, Inc., a Vancouver corporation, having its principal offices at 525 Seymour Street, Suite 712, Vancouver BC, Canada V6B 3H7 (hereinafter referred to as the "Licensor" or "Datotech"), and NetFace, LLC, a Connecticut corporation, having its principal offices at 16 Old Mill Road, Greenwich, Connecticut 06830--3345 (hereinafter referred to as the "Licensee" or "NetFace.") WITNESSETH : ---------- WHEREAS, Datotech is the owner of the Technology and Existing Proprietary Property as hereinafter defined; WHEREAS, pursuant to the Option Agreement dated as of June 28th, 2000, by and between Datotech and NetFace (the "Option Agreement"), NetFace was granted the option to enter into an exclusive license agreement to acquire the exclusive rights to exploit the Technology and the Existing Proprietary Property for Licensed Items within the Territory as hereinafter defined; an WHEREAS, as of the date hereof, NetFace has exercised the option granted to NetFace pursuant to the Option Agreement and has paid the Option Price (as defined in the Option Agreement) to Datotech; NOW THEREFORE, in consideration of the mutual covenants contained herein and other good and valuable consideration from each to the other, the receipt and sufficiency of which is hereby acknowledged by both parties, it is hereby agreed as follows: ARTICLE 1 Definitions 1.1 Definitions. The following terms used in this License Agreement - ----------- (the "Agreement") shall have the meanings set forth below: (a) "Existing Proprietary Property" shall mean all intellectual property rights in the Technology, including without limitation, (i) any and all patent applications filed worldwide based upon the Technology, including any and all continuations, divisions and continuations-in-part thereof, and all patents, inventor's certificates, utility models and the like issuing therefrom worldwide, including any and all re-examinations, reissues, renewals and extensions thereof, (ii) any copyrightable or copyrighted works based upon the Technology, including computer software and computer programs, (iii) any confidential or proprietary know-how and information regarding the Technology, 1 (iv) any trademarks and trade names associated with the Technology, whether or not registered, and (v) all fixed representations, hard copies, hardware, computer-readable media and other tangible implementation of the Technology (collectively, the "Proprietary Property"), patent rights, copyrights, trademarks and trade secret rights. "Existing Proprietary Property" shall also include patent rights in the Technology that are pending as of the date hereof. (b) "License Agreement" shall mean this License Agreement by and between Datotech, as Licensor, and NetFace, as Licensee. (c) "Licensed Items" shall mean the interface for personal computer games, console games and Internet Television, in which the technology might be utilized pursuant to the execution by the parties herein of this License Agreement. (d) "Option Agreement" has the meaning set forth in the second recital hereof. (e) "purchase Price" shall mean $5 Million US dollars payable by NetFace to Datotech upon the signing of this Agreement, less the above amount of $200,000 US Dollars paid to Datotech within the terms of the Option Agreement, in addition to the granting by NetFace to Datotech a twenty percent (20%) Class B Membership Interest in NetFace; said 20%interest may be diluted only after a) an IPO for Netface has been successfully concluded or b) a period of three years has elapsed following the date of execution of the Licensing Agreement, which ever occurs first. Datotech shall acquire such Membership Interest by signing a copy of the NetFace Operating Agreement at the time of execution of the Licensing Agreement, thereby agreeing to be bound by its provisions. (f) "Technology" shall mean Datotech's proprietary gesture recognition technology ("GRT") system comprising multiple-touch sensors and related hardware, gesture recognition algorithms and software, and user interface designs for mapping gestures to control electronic devices, as well as alterations, improvements, modifications and derivatives to the Technology described herein as well as all related software, documentation and other materials, embodying GRT heretofore or hereafter created or developed by Datotech. (g) "Territory" shall mean all major markets worldwide. (h) "Third-Party Licenses" shall mean sub--licenses granted by NetFace to third parties pursuant to the licenses and rights granted to NetFace by Datotech in accordance with this Agreement. "Third--Party Licensees" shall mean those parties to whom Third--Party Licensees are granted pursuant hereto. ARTICLE 2 License Grant 2.1 License to Exercise Rights. In consideration of the payment to - -------------------------- 2 Datotech of the Purchase Price, Datotech hereby grants to NetFace the perpetual, royalty-free, sole and exclusive divisible and assignable license to commercially exploit the Technology and the rights constituting the Existing Proprietary Property for the Licensed Items subject to all of the terms, conditions and restrictions contained in this Agreement. The rights granted hereunder include, without limitation, the marketing, use, sale and distribution of the Technology and the rights constituting the Existing proprietary Property for Licensed Items. 2.2 Authority to Sublicense. Subject to all of the terms, conditions and restrictions contained herein, Datotech hereby grants NetFace the authority to sublicense the exercise of the rights specified in Section 2.1 above. Datotech will play an active role in all negotiations for sublicensing agreements. 2.3. Reservations. Datotech retains all rights except those granted - ------------ above in sections 2.1 and 2.2. Without limiting the generality of the foregoing sentence, Datotech retains title to the Technology and the Existing Proprietary Property. ARTICLE 3 Improvements 3.1 Datotech Improvements. NetFace acknowledges and agrees that Datotech shall retain exclusive ownership of any and all improvements to the Technology during the term of this Agreement as well as after this Agreement is terminated regardless of the cause or method of termination. 3.2 NetFace Improvements. Datotech acknowledges and agrees that NetFace shall retain ownership of any and all improvements made by Netface. Datotech also acknowledges and agrees that NetFace shall retain exclusive ownership of such improvements after the termination of this Agreement regardless of the cause or method of termination. ARTICLE 4 NetFace Rights and Obligations 4.1 Confidentiality of Disclosures to Third Parties. NetFace may disclose any portion of the Technology, the Existing Proprietary Property, and the improvements to a third party only pursuant to a written agreement between NetFace and any third-party, approved by Datotech, obligating such third party to secrecy regarding the disclosure. NetFace acknowledges and agrees that, because of the nature of the property rights involved in this Agreement, any breach of NetFace's obligations under this Section 4.1 shall cause immediate, irreparable injury to Datotech; therefore, NetFace agrees and acknowledges that Datotech shall be entitled, in addition to its other rights and remedies at law and in equity, to seek temporary, preliminary and/or permanent injunctions in the event an unauthorized disclosure is made or appears to be 3 imminent. NetFace's duty of confidentiality shall survive the termination of this Agreement regardless of the cause or method of termination. 4.2 Disclosure of Improvements. From time to time, throughout the duration of this Agreement, Datotech shall be affirmatively obligated to disclose the nature of any and all improvements to the Technology for Licensed Items to NetFace so as to keep NetFace as current as is practicable regarding the Technology. Datotech shall also disclose any and all improvements to the Technology for Licensed Items to prospective Third-Party Licensees as well as participate in meetings and presentations with prospective Third-Party Licensees to assist in the integration of the Technology into the Licensed Items. Datotech shall cooperate with NetFace and prospective Third-- Party Licensees by providing, at no cost, all required disclosures and assistance in order to integrate the Technology into the Licensed Items, including but not limited to, hardware and software for demonstrations and simulations. The form of such disclosures shall be decided by mutual agreement between the parties on a case--by-case basis. Datotech and NetFace shall each bear their own expenses resulting from such meetings, presentations or any disclosures required pursuant to this Section 4.2. The costs of any subsequent development by Datotech at NetFace request of any hardware and software for a specific application shall be borne by NetFace. 4.3 Reporting. NetFace shall provide to Datotech written reports on an annual basis, no later than March lst of the subsequent year. Such reports shall detail NetFace's exploitation, licensing and sublicensing activities and shall include a report of all related revenues received and expenses incurred for the same quarter. Such reports shall also (a) detail NetFace's intellectual property protection activities and expenses under Section 6.1 hereof for the immediately preceding quarter; (b) include a status report on the condition of all worldwide intellectual property rights related to the Technology; and (c) include a report of all strategy and planning for intellectual property protection activities for the upcoming quarter. ARTICLE 5 Datotech Rights and Obligations 5.1 Rights to Licensed Items Technology Datotech represents, warrants and covenants that Datotech is the owner of the Existing proprietary Property and has the exclusive right and license for the use of the Technology together with the right to sub-license to others, manufacture, distribute and sell the Technology in connection with the Licensed Items. Datotech shall provide all disclosures and assistance to NetFace and Third--Party Licensees, at no cost, in order to integrate the Technology into the licensed Items. 5.2 Rights of first refusal for other items and/or technologies. Datotech hereby grants to NetFace upon the signing of this Licensing Agreement, a sixty (60) day right of first refusal for the licensing of any item and/or technology not included in the present agreement and that Datotech intends to license to a third party, with the exception of "banking and 4 financial transactions" . If NetFace does not exercise its right of first refusal within sixty (60) days of written notice to Datotech of the terms on which it proposes to license such item and/or technology to a third party, and if Datotech then licenses such item and/or technology to a third party on the terms offered to NetFace within six (6) months of the expiration of NetFace's right of first refusal, then NetFace shall have no right to this item and/or technology and/or any related technical information, know how, trade secrets, proprietary business information, engineering information, invention, results of experiments, testing and/or prototypes. ARTICLE 6 Protection of Intellectual Property Rights 6.1 Authorization to NetFace to File for Intellectual Property Protection In the Territory. Subject to the provisions of Section 2.3, Article 4, Section 6.4, Section 7.1 hereof and all of the other terms and conditions contained herein, NetFace shall have the authority but not the obligation, with the consent of Datotech, to take actions in the Territory on behalf of Datotech such as filing patent applications and seeking registrations of copyrights for the purpose of securing and protecting intellectual property rights for Datotech in the Technology and the improvements thereto. The authority granted in this Section 6.1 may not be assigned, delegated or sublicensed. NetFace shall bear the expense of all of its activities under this Section 6.1 including the payment of attorney fees, patent issuance and maintenance fees, copyright and trademark registration fees and other similar fees and expenses where applicable. 6.2 Actions Not Taken by NetFace. In the event Datotech, in its sole discretion, deems it necessary or beneficial to take a specific action that NetFace has not taken somewhere in the Territory to protect or maintain any or all of the intellectual property rights discussed in Section 6.1 hereof, it may notify NetFace of its intention in writing. Upon receipt of such notice, NetFace shall respond to Datotech within fifteen (15) calendar days indicating whether NetFace chooses to take the action requested. If NetFace fails to respond within such time period, or if NetFace responds indicating that it chooses not to undertake the requested action, then in that event Datotech may take the action independently, bearing the cost of the action. In such case, the intellectual property right or rights resulting from or saved by Datotech's action, if any, shall automatically cease to be within the scope of the license rights granted to NetFace in Sections 2.1 and 2~2 hereof. 6.3 Assistance and cooperation in Protecting Intellectual Property. Both parties, including their employees and affiliates, shall be obligated to assist and cooperate with each other in securing the legal protection of any and all intellectual property rights under Sections 6.1 and 6.2 above. 6.4 Acts or Omissions Harmful to Intellectual Property. NetFace shall - -------------------------------------------------- take no action, nor shall it omit to take any action, if the effect of such act or omission would be to harm any or all of Datotech's then-existing 5 intellectual property rights. ARTICLE 7 Disclaimers 7.1 No Representations Regarding Technology or Intellectual Property. Datotech makes no representations about and disclaims all warranties, express or implied, about the Technology, the Existing Proprietary Property, and any improvements thereto. Without limiting the generality of the foregoing, Datotech disclaims any express or implied warranties regarding the following: (a) the fitness, usefulness, efficiency or profitability of the Technology, the Existing Proprietary Property, the improvements thereto or any of the rights granted herein; (b) the validity or scope of any intellectual property rights; and (c) that anything made, used or sold based on or deriving from the Technology or any of the rights licensed herein will be free from infringement of third party rights. ARTICLE 9 Tern; Termination for Cause and Survival of Certain Provisions 8.1 Term. The term of this Agreement shall commence on the date hereof and shall continue indefinitely unless terminated pursuant to the provisions of this Agreement. 8.2 Termination for Cause. Upon a breach by NetFace of any of its obligations hereunder, Datotech may terminate this Agreement upon sixty (60) calendar days advance written notice to NetFace describing the grounds for termination; however, such termination shall not occur if NetFace conclusively demonstrates to Datotech's satisfaction before the end of such sixty (60) calendar days that the breach has been cured. 8.3 Survival The rights and obligations contained in the following Sections shall survive termination of this Agreement regardless of the method or timing of its termination: 2.3, 3.1, 3.2, 4.1, 6.3, and 7.1. 8.4 Return of Existing Proprietary Property. If this Agreement shall be terminated, NetFace shall return to Datotech all technical data, know--how, confidential information and trade secrets so far as any of them consists of written materials, prints and other tangible items which either bear a stamp "confidential" or "confidential information" thereon or are designated in any other way by Datotech, whether orally or in writing, as confidential information. For purposes of this Agreement, all Technology as utilized in the Licensed Items shall be classified as confidential information. ARTICLE 9 6 Miscellaneous 9.1 Assignability. This Agreement shall not be assignable by either party in whole or in part except upon the written and signed consent of the other party, which shall not be unreasonably withheld. 9.2 Binding Effect. Subject to the restrictions on assignability -------------- contained herein, this Agreement is binding on and inure to the benefit of the parties and their respective authorized successors and assigns. 9.3 Further Assurances. NetFace agrees to execute and deliver any ------------------ additional documents and instruments and perform any additional acts that may be necessary or appropriate to comply with its obligations hereunder. 9.4 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the Province of British Columbia and of Canada as to all matters of interpretation, performance, remedies and enforceability. The parties hereto hereby irrevocably submit to the jurisdiction of the Supreme Court of British Columbia, Canada, over any action or proceeding arising out of or relating to this Agreement and hereby irrevocably agree that all claims in respect to any action or proceeding may be heard and determined in such Supreme Court. The parties hereto irrevocably consent to the service of any and all process in any such action or processing by the certified mailing with return receipt of copies of such process to their address specified in this Agreement. The parties hereto agree that a final judgment in any such action or proceeding shall be conclusive and nay be enforced in any other jurisdiction by suit on the judgment or any other manner provided by law. The parties hereto waive any objection to venue in such state and any objection to an action or proceeding in such state on the basis of forum non convenience. 9.5 Notice. All notices, requests or consents provided for or permitted under this Agreement must be in writing and must be given either by sending the writing in the mail addressed to the recipient, postage paid, registered or certified mail, return receipt requested, which shall be effective upon receipt, or by delivering the writing to the recipient in person, by courier or by facsimile transmission to the address specified below: If to the Licensor: DSI Datotech Systems, Inc., 525 Seymour Street, Suite 712, Vancouver BC, Canada V6B 3H7 Attention: ________________, Chairman With a copy to: If to the Licensee: NetFace, LLC 16 Old Mill Road Greenwich, Connecticut 06830--3345 Attention: Gerard E. Munera 7 With a copy to: David I. Faust, Esq. Faust Rabbach & Oppenheim, LLP 488 Madison Avenue New York, New York 10022 9.6 Headings and Certain Words. Headings are used in this Agreement for the purpose of organization only and do not constitute terms of the Agreement. The words "herein," "hereof," "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular subdivision unless otherwise expressly indicated. 9.7 Severability. If any provision of this Agreement or its application to any person or circumstance shall be invalid, illegal, or unenforceable to any extent, the remainder of this Agreement and its application shall not be affected and shall be enforceable to the fullest extent permitted by law unless the provision held to be illegal, invalid or unenforceable is so fundamental to the sense of this Agreement that its illegality, invalidity or unenforceability would make the enforceability of the remainder unreasonable. 9.8 Entire Agreement. This Agreement sets forth the entire, final and exclusive agreement and understanding between the parties as to the subject matter hereof and supersedes all prior and contemporaneous writings and discussions between the parties pertaining hereto. 9.9 No Oral Modification. This Agreement may be amended or modified - -------------------- only by a written instrument signed by proper and duly authorized representatives of both parties. 9.10 Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. In witness whereof, the parties have caused this Agreement to be duly executed on the date first set forth above. 8 NETFACE, LLC DATOTECH SYSTEMS INC. Title: Title: ------------------------- --------------------------- By: By: -------------------------- ---------------------------- 9 EX-8.1 14 0014.txt LIST OF SUBSIDIARIES Exhibit 8.1 LIST OF SUBSIDIARIES Interaction Technology Ltd. -----END PRIVACY-ENHANCED MESSAGE-----