<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM 20-F
/x/ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
OR
/ / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER ___________
IDS Intelligent Detection Systems Inc./Systemes de Detection Intelligents Inc.
- -------------------------------------------------------------------------------
(Exact Name of Registrant as specified in its charter)
Not Applicable
--------------
(Translation of Registrant's name into English)
Province of Ontario, Canada
---------------------------
(Jurisdiction of incorporation or organization)
11 King Street West, Suite 1200
Toronto, Ontario, Canada M5H 4C7
--------------------------------
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each Class: Name of each exchange on which registered:
COMMON THE AMERICAN STOCK EXCHANGE
Securities registered or to be registered pursuant to Section 12(g) of the Act:
<PAGE>
NONE
----
Title of Class
Exhibit Index Appears on Page 55
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: NONE
Title of Class
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of December 31, 1999: 22,132,328 Common
Shares, 572,850 Class B Shares.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES / / NO /x/
Indicate by check mark which financial statement item the registrant has elected
to follow.
Item 17 /x/ Item 18 / /
Except as otherwise noted, all dollar amounts are presented in Canadian dollars.
Exchange Rate: As at January 21, 2000, the exchange rate of Canadian dollars
into United States dollars was $1.4395 Canadian to $1.00 United States.
<PAGE>
TABLE OF CONTENTS
Part I
Item 1. Description of Business ...................................... 1
Introduction ................................................. 1
Corporate Background ......................................... 5
Divisions .................................................... 6
Item 2. Description of Property ...................................... 35
Item 3. Legal Proceedings ............................................ 36
Item 4. Control of Registrant ........................................ 36
Item 5. Nature of Trading Market ..................................... 38
Item 6. Exchange Controls and Other Limitations Affecting
Securities Holders ........................................... 39
Item 7. Taxation ..................................................... 41
Item 8. Selected Financial Data ...................................... 42
Selected Financial Information ............................... 42
Exchange Rates ............................................... 46
Item 9. Management's Discussion and Analysis of Financial
Condition and Results of Operations .......................... 47
Results of Operations ........................................ 47
Liquidity and Capital Resources .............................. 52
Item 10. Directors and Officers of the Company ........................ 56
Item 11. Compensation of Directors and Officers ....................... 61
Item 12. Options to Purchase Securities from Registrants or
Subsidiaries ................................................. 62
Item 13. Interest of Management in Certain Transactions ............... 65
Part II
Item 14. Description of Securities to be Registered ................... 65
i
<PAGE>
Part III
Item 15. Defaults Upon Senior Securities .............................. 67
Item 16. Changes in Securities and Changes in Security for Registered
Securities ................................................... 67
Part IV
Item 17. Financial Statements ......................................... 67
Item 18. Financial Statements ......................................... 67
Item 19. Financial Statements and Exhibits ............................ 68
(a) Financial Statements ................................... 68
(b) Exhibits ............................................... 68
ii
<PAGE>
PART I
Item 1. Description of Business
Introduction
IDS Intelligent Detection Systems Inc./Systemes de Detection Intelligents
Inc. (the "Company" or "IDS") develops, manufactures and markets advanced
technology used in a variety of detection applications, including security and
crime prevention, geophysical surveys, geophysical instrumentation power
generation control and information technology ("IT") professional consulting
services.
IDS's core technology combines two distinct chemical analysis techniques -
gas chromatography and ion mobility spectrometry, or GC/IMS(TM) - to identify
and verify the presence of target chemical molecules. The principal competitive
advantage of the Company's products is the incorporation of a unique, patented
application of gas chromatography/ion mobility spectrometry ("GC/IMS")
technology in the design and manufacture of its products. This technology allows
the Company to produce commercial chemical detection products to selectively
target chemicals from a wide range of organic substances with the ability to
detect chemicals in quantities at the parts per trillion level or particles
measured in picograms, and the equipment's throughput capability of providing
new-real time analysis in approximately six seconds. The Company continues to
adapt its
1
<PAGE>
patented core technology for new applications-such as industrial process control
and medical diagnostics, and is pursuing opportunities in a variety of new
markets.
The Company's acquisition of Scintrex Limited ("Scintrex") in 1998
enhanced the Company's capabilities in the high-technology detection field. The
combined Company is now also engaged in the research, design and manufacture of
geophysical instrumentation, nuclear reactor monitoring devices, environmental
and defense-related equipment and other scientific products. The acquisition
also expanded the Company's line of analytical instruments, including portable
detectors of explosives and narcotics. Scintrex also has a global marketing and
distribution network.
Following the acquisition of Scintrex, IDS subsequently moved to
strengthen performance and clarify accountability by restructuring operations
into five stand-alone business units or Divisions: Analytical & Security,
Scintrex Earth Science Instrumentation, Survey & Exploration Technology, IDS
Power Control Systems, and IEC (Integration, Engineering and Consulting). The
Company established three additional business units to expand applications of
core sensory technology to industry quality control systems and point-of-care
health analysis by acquiring ChemiCorp and establishing Caduceon, Inc. and
GeoCommerce, Inc. in 1999. Each business unit operates independently and is
guided by its own management and performance goals.
Prior to June 1998, the Company, through its IEC division, acted as a
value-added reseller of computer hardware products and also provided systems
integration, engineering and consulting services, primarily to the Canadian
Federal Government. In June 1998, the Company discontinued the value-added
reselling component of the IEC division due to its small margins and in order to
focus the Company's attention on its core chemical detection business and the
implementation of the Scintrex acquisition.
The Company, through its Analytical and Security Division, develops,
manufactures and markets a wide range of high-speed chemical detection,
measurement and analysis products which are based on proprietary patented
technology. Such products, which include airport scanners, hand-held drug
detectors and vehicle scanners, are targeted currently at two principal markets,
explosives detection and the drug detection equipment market. The Analytical and
Security Division focuses on developing and marketing explosive and drug
detection equipment to government organizations, transportation authorities, law
enforcement agencies and commercial entities primarily for public safety and
security purposes, including transportation security, security of government
facilities, schools and security for commercial properties such as hotels,
shopping centers and office buildings. The Company's customers for explosives
detection equipment have included the United States military, law enforcement
agencies in Italy, military clients in India and international clients of the
Canadian Commercial Corporation. As of December 31, 1999, more than 1,000 of the
Company's hand held portable trace chemical units have been deployed worldwide.
Drug detection equipment is used by governments, law enforcement agencies
(such as customs organizations, police forces and prisons) and commercial
enterprises to curtail the
2
<PAGE>
burgeoning world-wide problem of drug trafficking and consumption. The Company's
customers for drug detection equipment include Correctional Services Canada and
the United States Drug Enforcement Administration.
The Power Control Systems Division supplies advanced custom-designed
control and safety instrumentation for control subsystems in nuclear reactors
and other power generation plants. Formerly known as Scintrex Nucleonics, the
new name reflects the Division's transition to a wider power generation and
control system market. Scintrex has 26 years experience developing and
manufacturing instrumentation and systems for Canada's CANDU type heavy water
nuclear power reactor systems. The monitoring and control devices are used in
nuclear power plants in Canada, China, Korea, Argentina and Romania. The
division also manufactures health physics monitors for the nuclear industry,
including hand held tritium, gamma and beta, gamma contamination monitors and
radiation detection badges.
The Survey & Exploration Technology Division has serviced the worldwide
exploration and remote sensing industry for 40 years. The products and services
have historically been sold primarily for use in mineral exploration and
environmental monitoring, with increasing sales to the oil and gas industry. The
Division's products include a range of airborne instrumentation and systems for
use in helicopters and fixed-wing aircraft, as well as hardware and software for
processing, mapping and interpreting this geophysical data. The Division has
performed contract services in more than 40 countries, including airborne
geophysical and remote sensing surveys, ground geophysical and geochemical
surveys, borehole geophysical logging surveys and the installation and support
of integrated airborne systems.
The Division has more recently also diversified into the oil and gas
exploration industry by the development through the development of a number of
products, including 3-D magnetic gradiometry and new Gravity acquisition tools.
This Division recently began offering the PDS-3M(TM) pipeline detection system
(for which a patent is pending in the United States), an airborne remote sensing
tool used by companies such as Mexico's PEMEX for detecting buried oil and gas
pipelines and for enhancing the safety of seismic crews operating in the field.
Scintrex Earth Science Instrumentation designs and manufactures
geophysical instrument technology which are sold or leased worldwide for mining,
hydrocarbon exploration, groundwater archaeology and other scientific
applications. The market for this equipment is strongly influenced by the state
of the mining and petroleum industries, which have historically been cyclical in
nature. The Division's highly sensitive mineral exploration equipment has
numerous applications, including locating deposits of base metals, precious
metals, iron, uranium, diamonds and groundwater and geothermal resources. The
Division also offers a range of advanced geophysical borehole logging equipment
- - which is important investigative equipment for the mineral industry. Scintrex
equipment is used by coal miners, mineral explorers, groundwater consultants,
geotechnical engineers and environmental management authorities worldwide.
The IEC (Integration, Engineering and Consulting) division provides
specialized engineering, systems integration and consulting services to
high-priority security elements within the
3
<PAGE>
Canadian government. These services include Project Management, System
Administration (UNIX and Windows NT), Technical support, Engineering (plan,
design, implement, test and install), Database Administration (Sybase and
Oracle), Web development and Operations, Training, requirement analysis as well
as providing and delivering turn-key solutions. Prior to June 1998, the division
also acted as a value-added reseller of computer hardware products. In June
1998, the Company discontinued the value-added reselling component of its IEC
division due to its small margins and in order to focus the Company's attention
on its core chemical detection business and the integration of Scintrex. In the
fiscal year ended December 31, 1997, revenues from the IEC division were $17.6
million, representing approximately 73% of the Company's overall revenues. The
discounted value-added reseller business accounted for all of the $17.6 million
in revenues. The IEC division continues to provide systems integration,
engineering and consulting services and accounts for approximately $900,000 in
revenues in the nine months ended September 30, 1999.
The Company believes that its core GC/IMS technology is adaptable to many
chemical detection applications beyond explosives detection and drug
interdiction. These applications include point-of-care health analysis and
industrial process control. Management believes that these new applications will
play a significant role in the long term growth of the Company, particularly in
new private sector markets, for industrial process control and point-of-care
health analysis technology.
In 1999, the Company increased its ownership from 20% to 70% of the
outstanding stock of ChemiCorp. International Inc. ("ChemiCorp"), a
developmental stage company which is pursuing development of high-speed, in-line
measurement instruments to quickly assess the purity of substances and detect
contaminants during the manufacturing process. ChemiCorp is exploring various
applications, including food and beverage production - where consistent chemical
composition is critical for flavor and aroma - as well as searching for
flavor-affecting volatile organic compounds. The Company believes that there is
also significant potential for GC/IMS equipment to monitor toxic or unwanted
compounds in the workplace, thus enabling companies to meet occupational safety
and industrial hygiene requirements.
The Company established IDS Medical Services Inc. in 1998 (the name was
then changed to Caduceon Inc. in April of 1999) to develop an affordable,
easy-to-use, automated mass spectrometer for point-of-care breath analysis
("Caduceon"). The products are in the development stage. Caduceon's anticipated
products for the early detection of disease will involve a patient breathing
into the apparatus and will be less invasive than traditional blood and urine
test. The products will be designed to produce immediate results. The IDS
technology does not need water removal or preparatory preconcentrations to
obtain levels of sensitivity up to parts per trillion. The equipment may allow
quick and accurate analysis in one automated step. The Company believes that
these features are advantageous in intensive care and emergency room settings,
and in physicians' offices.
In November 1999, the Company established GeoCommerce, Inc. to market
products and services of companies worldwide. GeoCommerce, Inc. comprises two
Internet portals to serve the mining and oil and gas exploration industries.
4
<PAGE>
The Company markets its products primarily through a worldwide network of
approximately 70 distributors and representatives with established relationships
with key purchasers in its target markets. The Company's Internet site is also
used as an order-generating tool, particularly for hand held devices.
Corporate Background
The Company was founded in 1986 under the name "CPAD Holdings Ltd." From
1986 to 1995, the Company existed primarily as an applied research organization
focused on the development of technology for the detection, identification and
analysis of organic chemicals for use in explosives and land mine detection
applications.
In April 1995, Dr. Mariusz Rybak, Andy Rybak and Alan Greene formed MAA
International Corporation ( "MAA ") (later changed to IDS Intelligent Detection
Systems Inc.) in order to acquire a controlling interest in CPAD Holdings Ltd.
On May 12, 1995, the name of CPAD Holdings Ltd. was changed to CPAD Technologies
Inc.
On December 16, 1996, MAA purchased all the remaining shares in CPAD. On
February 3, 1997, MAA purchased shares in CPAD from Research Corporation
Technologies, Inc. ("RTC") on the exercise of a call right negotiated in
connection with the April 1995 transaction. See "Certain Transactions." MAA, for
the purposes of accomplishing these share transactions in the most tax effective
manner, incorporated 1202733 Ontario Inc. During the period December 1996
through January 1997, MAA sold some of its CPAD shares to several investors at
prices ranging from $3.63 to $6.26 per share.
5
<PAGE>
On August 27, 1997, articles of amendment were filed for MAA changing its
name to IDS Intelligent Detection Systems Inc. ("old IDS") and subdividing its
existing Class A Common Shares on a 900 for 1 basis.
In preparation for an initial public offering of Common Shares which was
completed in December 1997, old IDS, CPAD Technologies Inc. ("old CPAD") and
1202733 Ontario Inc. amalgamated on September 30, 1997 under the name of IDS
Intelligent Detection Systems Inc.
IDS, through a tender offer consisting of $18,316,000 and 3,914,858 shares
of the Company's Common Stock, acquired all of the issued and outstanding shares
of Scintrex in 1998. The acquisition was financed through a public offering by
IDS of 3,355,000 shares of its Common Stock issuable or transferable upon
exercise of special warrants, which yielded net proceeds to the Company of
approximately $18.8 million.
Scintrex was incorporated under the laws of Ontario under the name E.J.
Sharpe Instruments of Canada Ltd. on June 22, 1960. On July 6, 1970, the name
was changed to Scintrex Limited.
Scintrex has three wholly-owned active subsidiaries: Scintrex Pty. Ltd.,
incorporated in the State of Western Australia; Scintrex Inc., incorporated in
the State of New York; and Scintrex Europe S.A.R.L., incorporated in France.
Scintrex Pty. Ltd. has one wholly-owned active subsidiary: Scintrex/Auslog Pty.
Ltd., incorporated in the State of Queensland, Australia. Scintrex Pty. Ltd is
primarily involved in providing ground geophysical services to the mining
industry in Australia and surrounding countries. Scintrex/Auslog Pty. Ltd., an
Australian manufacturer of borehole instrumentation for groundwater,
environmental and mining applications, was acquired by Scintrex Pty. Ltd. in the
first quarter of fiscal 1998. Scintrex Inc. and Scintrex Europe S.A.R.L. were
incorporated by Scintrex to conduct business in the United States and Europe,
respectively. During 1998, Scintrex acquired 51% control of the issued and
outstanding shares of Megafisica Survey Aerolevantamentos S.A., incorporated
under the laws of Brazil, which provides airborne geophysical survey services in
Brazil.
IDS's principal executive offices are located at 11 King Street West,
Suite 1200, P.O. Box 20 Toronto, Canada M5H 4C7. Telephone: (416) 214-6726.
Scintrex Limited's principal executive offices are located at 222 Snidercroft
Road, Concord, Ontario, Canada. Telephone: (905) 669-2280.
<TABLE>
<S> <C>
--------------------------------------
IDS Intelligent Detection Systems Inc.
(Ontario)
--------------------------------------
|
------------------------------------------------------------------------------------------------------------------
| | | | | | | |
- --------------- --------------- ---------------- ------------- ---------- ---------------- ------------- -------------
1374422 Ontario Agiss Power IDS Services LLC Geo Commerce IDS Europe Scintrex Limited LTG Lasertech Caduceon Inc.
Inc. International (Delaware) Inc. S.A.R.L. (Ontario) Group Inc. (Canada)
(Ontario) 100% Corporation 100% (Delaware)81% (France) 100% (Ontario) 87%
(British Virgin 100% 15%
Islands) 10%
- --------------- --------------- ---------------- ------------- ---------- ---------------- ------------- -------------
| | |
| | ----------------------------------------------------------
- --------------- | | | | |
1374423 Ontario --------------- --------------- ----------------------- ------------- ------------------
Inc. Chemicorp Scintrex Europe Megafisica Survey Scintrex Inc. Scintrex Pty. Ltd.
(Ontario) 100% International, S.A.R.L. Aerolevantamentos S.A. (New York) (Australia)
- --------------- Inc. (France) (Brazil) 100% 100%
(Delaware) 100% 51%
70%
--------------- --------------- ----------------------- ------------- ------------------
| |
| |
----------------- |
| | ----------------
----------- ----------- Auslog Pty. Ltd.
2904144 Areco (Australia)
Canada Inc. Canada Inc. 100%
(Canada) (Canada) ----------------
100% 100%
----------- -----------
|
---------------
Tracc
Technology Inc.
(Canada)
66.6%
---------------
</TABLE>
Divisions
Analytical & Security Division
The Company's Analytical & Security Division combines the research,
development and manufacturing capabilities of IDS and Scintrex to develop
products and solutions to help security and law enforcement agencies detect
explosives, drugs and other controlled substances. The
6
<PAGE>
Division pursues two specific markets: the explosives detection market and the
drug interdiction and possession market.
Trace Detection Market - Explosives
Explosives detection equipment is used primarily for public safety and
security purposes and is generally purchased by government organizations,
transportation authorities, military law enforcement organizations and
commercial entities. The market opportunity is worldwide and believed by the
Company to be in its early growth stage due to increasing concern over public
safety and the limited effectiveness of traditional responses to terrorism. The
demand for explosives detection equipment is driven largely by the number and
sophistication of bomb-related terrorist attacks and the need and political will
of governments to take action to combat such activities.
Primary applications for explosives detection equipment include security
of government facilities such as government offices, embassies and military
bases; security for commercial properties such as hotels, shopping centers, and
office buildings; transportation security, particularly relating to aviation,
and public services security including postal services and public events (e.g.
the Olympics), all of which have been the targets of explosives-based terrorist
attacks.
In 1998, the United States Federal Aviation Administration ("FAA") reduced
its expenditures below previously announced estimates for the aviation security
sector. Accordingly, the Company shifted the Analytical & Security Division's
focus from the politically unpredictable regulated markets, such as the FAA. In
the first and second quarters of 1998, divisional operations were refocused to
pursue opportunities in unregulated markets such as correctional institutions
and other public and government facilities, and private sector entities such as
hotels and corporations. The Company believes that it is choosing markets where
it has a competitive advantage - where security needs are not being met or where
rising security standards are leaving existing systems wanting. Under such
conditions, the Company believes that it can capture increased market share. By
the fourth quarter of 1998, the Company began benefitting from this shift in
strategy, with consolidated sales for the Company more than doubling to $11
million from $5 million in the fourth quarter of 1998, largely based on sales to
these markets. In the nine months ended September 30, 1999, sales in this
division were approximately $14 million.
Government Facilities. The market for explosives detection devices in government
facilities, such as government offices, prisons, military bases, nuclear power
plants and embassies, has evolved largely as a result of recent incidents such
as the 1996 Oklahoma City bombing and the 1998 bombing of, American embassies in
Kenya and Tanzania. In 1999, the Company sold detection equipment to the United
States Department of Defense. Management believes counter-terrorism policies are
also being contemplated by other countries.
Commercial Properties. The Company believes that a market will evolve for
explosives
7
<PAGE>
detection equipment in commercial properties such as hotels, shopping centers
and office buildings as a result of targeting of public areas by terrorist
groups as evidenced by the 1996 bombings of the World Trade Center in New York,
the IBM offices in Athens, Greece and the Samsung Electronics Company and Korea
Telecom International offices in Sri Lanka.
Public Services. Public services such as postal and telecommunications services
have become not only a means of delivering explosives in the case of postal
service but also potential targets.
Transportation Security. Transportation security, and specifically aviation
security, is perhaps the most developed and advanced market for explosives
detection devices. The United States and the United Kingdom are generally
regarded as the leaders in developing strategies and implementing solutions for
aviation safety. In 1997, the US Government, through the Gore Commission,
released a report on aviation safety which defined an infrastructure for
explosives detection for all US airports. This resulted in the US Government's
appropriation in October 1996 of US$400 million for the acquisition of new
explosives detection technology and other security enhancements of which
US$144.2 million was specifically designated for the immediate procurement of
explosives detection devices. There can be no assurance that monies that are
appropriated by the FAA will be spent.
Management believes that the FAA and the European Civil Aviation Council ("ECAC)
will influence other aviation authorities worldwide in the implementation of
security strategies and technologies. Management also believes that the
strategies and technologies applied in aviation security are very advanced and
will influence the adoption and implementation of trace technology for security
in other transportation facilities, including subways, train stations and
trains, and other non-transportation markets.
Other Markets. In addition to the markets listed above, the threat of explosives
is also present at border crossings, schools, government buildings, military
compounds, embassies, corporate buildings and nuclear facilities.
Trace Detection Market - Drugs
The production, trafficking and use of illegal drugs is worldwide.
Governments, law enforcement agencies and commercial enterprises are attempting
to curtail both trafficking and consumption.
Purchasers of drug detection equipment include law enforcement agencies
throughout the world such as customs organizations, police forces and prisons.
In addition, private companies,
8
<PAGE>
particularly airlines, shipping and courier companies, have also begun
purchasing detection equipment to curtail their unwitting transport of illegal
substances. Private employers and school organizations have also begun using
detection devices to investigate possible drug use by their employees and
students, respectively.
Demand for drug detection equipment by government and law enforcement
agencies is driven to a large degree by the budget allocations made available to
such agencies. Worldwide anti-drug efforts are difficult to quantify, although
the United States federal government, according to the Office of National Drug
Control Policy, was expected to spend over $1.8 billion in 1999 on drug
interdiction and $1.9 billion in 2000. These figures do not include spending by
local or state police or customs agencies.
The IDS Solution
The Company has developed a comprehensive suite of products available for
the explosives detection and drug detection markets, including portable,
handheld, walkthrough and vehicle scanning products. The Company's products are
based on patented technology which combines a GC/IMS analytical detection
system, an automated preconcentrator to automatically capture samples for
testing and proprietary analytical computer software to provide fully automated,
unmanned operation and detailed results analysis.
The Company believes that it is the only company in the world to use fully
integrated dual detection analytical capability in the form of gas
chromatography (GC) and ion mobility spectrometry (IMS) analytical processes for
explosives detection and drug detection. This enables the Company's equipment to
achieve what management believes to be the highest sensitivity and selectivity
capabilities of any chemical detection device currently available.
With respect to sensitivity, the Company's equipment is able to detect
targeted chemicals in quantities as small as parts per trillion, which is
critical in explosives detection applications. The quantity threshold level for
the equipment is adjustable by the operator to varying levels of sensitivity, as
it may be desirable in some applications such as drug detection, to raise the
threshold to avoid the detection of ambient quantities of illegal substances. In
terms of selectivity, the Company's products have the capability to separate,
detect, analyze and positively identify all organic chemicals in both
qualitative and quantitative terms. For example, the equipment can distinguish
nitrogen found in common items, such as cheese, from nitrogen compounds found in
explosive materials.
The fully automated preconcentrator, contained in the Company's products,
simultaneously performs three distinctive functions -- collection, desorption
(transferring the sample to the analytical unit) and cleaning. Management
believes that the Company's automated and continuous sample collection process
results in superior throughput and the fastest operational system commercially
available. A full analysis on any sample can be completed within six seconds
and, in contrast to non-continuous sampling instruments, successive samples may
be introduced without waiting for analysis of prior samples to be completed.
9
<PAGE>
The Company's proprietary computer software allows the Company's equipment
to be fully integrated with computerized networks and allows for encryption of
data. The software also facilitates the ease of use of the equipment, as no
interpretation of results is required by the operator. The device is able to
automatically exhibit a "pass/fail" message, identify the substance and its
concentration. The proprietary software can be readily programmed for the
detection and analysis of new substances, thereby enabling the core technology
to be adapted to new applications such as clinical diagnosis and industrial
process control.
Analytical & Security Division Strategy
The Division's mission is to become a leader in the trace detection
market. The strategy of the Division is based on the following:
o global presence
o market segmentation
o product optimization
o technology innovation.
The Company seeks to utilize its core technology and knowledge of the
equipment markets for explosives detection and drug detection to focus on
markets where the Company believes that needs are unmet or where rising security
standards leave existing systems wanting.
The Company believes that its greatest opportunities are in markets, such
as corrections, military, customs, government, public security and commercial
entities. The Company seeks markets with lower barriers to entry and markets
which can benefit most from its products. In 1998, the division's engineering,
manufacturing and sales and marketing resources were shifted to these markets.
The acquisition of Scintrex expanded the Company's line of portable explosives
detectors, such as the EVD-3000, which are particularly suited to a broad range
of security applications.
The Company seeks to coordinate sales and marketing initiatives with
regional partners who have familiarity with local markets and may also
contribute financially to local promotion and service. The Company's worldwide
network of distributors has an established presence in many non-aviation markets
and is working with the Company to address industry-specific requirements. An
example of this joint development is the Company's hand held trace detection
system for the drug detection market which was developed without a nuclear
ionization source in response to market requirements as defined by IC AeroTech
Corporation, one of the Company's distributors.
The Company is pursuing the development of new trace detection
technologies which it believes will further enhance its competitive position
within its selected markets. For example, the Company is developing an
explosives detection system based on laser technology for baggage screening
based on a contract from the FAA and Transport Canada.
10
<PAGE>
Analytical & Security Division Products
The Analytical & Security Division manufactures a product line consisting
of portable and stationary explosives and narcotics detectors. Selling prices
for the Company's equipment vary by product, configuration, and market. Prices
are generally quoted in US dollars and range from a low of US$20,000 for small
and portable hand-held units to a high price, in excess of $1,000,000, for the
largest stand-alone chemical detection system that the company currently offers
on the market at the present time.
Portable Hand-held Devices
IDS designs, manufactures and sells portable, hand held explosives and
narcotics detection systems. The NDS-2000 is a user-friendly hand-held narcotics
detection system. The instrument is targeted to organizations requiring a
cost-effective system providing clear and reliable results. Potential users
include police and security forces, the military, customs, correctional
institutions, aviation and marine carriers, postal and courier operators and
schools.
The EVD-3000 hand-held explosives detector is a portable explosives trace
detector capable of detecting explosive vapors and particles. The Company
believes that it is the only commercially available product that does not use of
a radioactive source or external carrier gas. The detector is ready for use in
60 seconds and delivers results in 10 seconds. Police, airport, military and
security authorities around the world use the device. The EVD-3000 is one of the
most widely deployed explosives detection products in the world.
Large-scale Systems
The Large Vehicle Bomb Detection System ("LVBDS") is an integrated system
that can be easily modified and customized for new and existing facilities. The
core of the system is the proven and patented GC/IMS chemical detection system
that detects trace quantities of explosives accurately, quickly and
continuously.
The Company has designed a prototype of a walk-through portal bomb
detection system (NOVA Explosives Detection Walk-Through System) based on the
Company's Orion Plus vapor detection system which incorporates several new
technologies. The explosives detection system is complemented with a camera
system that can produce images of a person revealing any objects hidden under
the clothing. A metal detection system can also be integrated into the portal.
All data from the NOVA system could be sent to a Central Command and Control
Center where it may be analyzed and displayed. A provisional patent has been
filed with respect to this technology in the United States.
Stand-alone Devices
The Orion and Orion Plus are fully automated stand-alone systems,
incorporating the
11
<PAGE>
Company's core technology to detect explosives including EGDN, NG, TNT, AN, PETN
and RDX. These explosives are sampled in the form of trace particles deposited
on surfaces (for example, persons, baggage and packages) in as little as parts
per trillion quantities. The system was originally developed to meet FAA
requirements and has subsequently been approved by the FAA for installation at
US airports.
Vapor and Super-particulate Screening
In many jurisdictions, detecting a target chemical particulate is not
sufficient grounds to detain an individual or deny access under local
regulations. Particulates indicate recent contact. Vapors, however, indicate
possession, and IDS gas chromatography/ion mobility spectrometry (GC/IMS)
technology is suitable to detect both. The Company manufacturers and markets
equipment for detecting vapors on people and in bags, containers and vehicles.
The Core Technology
A number of products in the Analytical & Securities division, including
the Northstar and Orion product lines, as well as proposed products for
manufacturing process control and health care diagnostics in ChemiCorp and the
Caduceon division utilize the proprietary patented GC/IMS technology to analyze
samples for the presence of targeted chemical compounds in quantities smaller
than a billionth of a gram.
The operation and internal workings of the Orion Plus product, which is
representative of the Company's products incorporating the GC/IMS technology,
can be demonstrated as follows: A sample, in a vapor and/or particle form, is
first introduced to the detection device either automatically or by an operator.
The sample is then suctioned into the proprietary preconcentrator, where it is
heated to the point that the molecules vaporize.
The preconcentrator consists of two separate sub-modules called the PCAD
(Particle Collection and Detection) and VCAD (Vapor Collection and Detection)
optimized for particle collection and vapor collection, respectively. Each
preconcentrator consists of a rotating carousel holding three tabs equally
spaced. The tabs rotate between three positions continuously -- sampling,
desorbing (transferring the sample to the analytical unit) and cleaning.
Once the sample has been collected on the tab in the sampling position,
that tab is moved into the desorbing position where the trapped particles and
vapors are selectively desorbed into the GC/IMS analytical units. This tab is
then moved to the cleaning position where it is prepared to accept the next
sample. These processes, are conducted in parallel and thereby considerably
speed up the overall sampling rate of the system when working in a continuous
operation mode.
The PCAD and VCAD sub-modules of the preconcentrator each have an
analytical unit, optimized for low and high volatiles respectively. The desorbed
analyte is transferred to the analytical units via transfer tubes kept at
elevated temperatures. The vapor samples are retrapped in a smaller volume in
the analytical units and are then injected in less than a few hundred
milliseconds into a Gas Chromatographic (GC) column connected to an Ion Mobility
12
<PAGE>
Spectrometer (IMS). A two dimensional analysis of the sample then takes place in
the analytical system by separating the components of the injected sample by
retention time in the GC column and by mobility in the IMS. The output of the
analytical system consists of a series of voltage waveforms taken at regular
intervals over a five second period which is the elution time for all the
relevant compounds from the column. This output is digitized by the computer,
analyzed by comparison to a stored database of target chemicals, and the results
are displayed on the output screen of the unit. In the event that one of the
compounds of interest detected is present above a preset threshold value, the
unit produces an alarm signal and provides relevant detailed information on the
display screen.
One important feature of IDS' equipment is its use of PC-based computer
software developed by the Company, which controls the mechanical, pneumatic and
electrical components of the system yielding a completely automated process. The
software also provides the operator with enhanced graphic read-outs of the test
results enabling the user to view the data in more detail. All of the results of
the detection are shown on the touch screen display in a variety of user
selectable formats. Software configurable input menu buttons are also displayed
on the screen for user input by touch.
Analytical & Security Division Market Requirements
Although specific requirements vary between the explosives detection
equipment market and the drug detection equipment market, the Company believes
the following factors are generally considered by customers when evaluating
detection equipment:
Sensitivity. Detection equipment must be capable of detecting very small traces
of organic chemicals. A high degree of sensitivity is particularly critical in
explosives detection applications. With respect to drug detection applications,
device sensitivity should be configurable such that ambient quantities of
illegal substances will not trigger positive detection.
Selectivity. Detection equipment must be capable of detecting and identifying
specific organic materials, notwithstanding the presence of varying background
levels of chemical substances or the presence of substances with similar
chemical characteristics to the targeted substance but which are innocuous.
Ease of Use. As detection equipment is often operated by employees with little
technical training or in areas subject to high turnover, such as airport and
building security personnel, the equipment must be easy to use with minimal
training and the results of testing must be easy to interpret.
Portability. The ability to easily move the equipment is particularly important
in the drug detection market where law enforcement personnel must actively
search for illegal substances in remote locations, such as cars, schools and
prisons. IDS has a line of portable explosive and drug detectors.
High Throughput. Detection equipment must be capable of processing a significant
volume of
13
<PAGE>
people, luggage or packages, while effectively identifying targeted chemicals
(such as explosives or drugs) and maintaining a low false alarm rate. Throughput
is particularly critical for passenger and baggage screening in airports as well
as in postal processing applications.
Automation. Detection equipment is increasingly being integrated into large,
computerized, comprehensive security systems and must, as a result, provide for
automated operation and appropriate systems interfacing.
Cost. As purchasers of detection equipment are most often government or
quasi-government bodies, the cost of acquisition as well as ongoing maintenance,
training and staffing costs play a significant role in the procurement decision.
While achieving a high degree of functionality and performance, the
Company's products retain a mid-market pricing level in terms of acquisition
cost. The Company's products also have low ongoing maintenance costs.
Regulatory Acceptance. The approval or certification of the equipment by a
recognized authority, such as FAA or the Department of Transportation ("DOT"),
is essential for many government security projects, particularly in the area of
explosives detection, and may increasingly become a requirement in commercial
markets. Many of the Company's products were developed with the financial
participation and technical direction of the FAA and Transport Canada.
ICAO Taggants. The ability of the equipment to detect taggants, or signature
markers, which the International Civil Aviation Organization ("ICAO") has
mandated be included in plastic explosives for the purposes of identification.
To the Company's knowledge, its Orion Plus product is one of few products in the
world capable of operationally detecting the taggants mandated by the ICAO.
Ionization Source. Most chemical detection equipment relies on nuclear materials
as an ionization source and as a result requires additional regulatory approvals
and licenses thereby increasing the cost of acquisition and restricting
transportability. There is concern, particularly in the case of a handhold unit,
with respect to perceived health impacts of radioactive material on operators.
As a result, the Company believes that a non-nuclear source will increasingly be
a requirement. The Company's drug detection products are, to management's
knowledge, the only products which do not rely on nuclear materials as an
ionization source and as a result, no additional regulatory approvals or
licenses are required and no health hazards are posed.
Scintrex Earth Science Instrumentation Division
The Earth Science Instrumentation Division designs, develops and
manufactures geophysical instruments, which are sold or leased for ground water
studies, archeology and environmental site characterization, and mining and
hydrocarbon exploration. The market for mineral exploration equipment is
strongly influenced by the state of the mining industry, which has historically
been cyclical in nature. Due largely to its history of mining exploration,
Canada has
14
<PAGE>
become a significant manufacturing center for geophysical equipment. The Earth
Science Instrumentation division's primary clients in the mining and petroleum
fields include exploration contractors, resource companies, government agencies,
international agencies and educational institutions throughout the world.
Scintrex's highly sensitive mineral exploration equipment is used for
numerous applications. These include: locating deposits of base metals, precious
metals, iron, uranium, diamonds and groundwater and geothermal resources and
studies for archaeology and environmental site characterization, including
groundwater contamination and buried hazardous waste. IDS's equipment measures
variations of natural radiation, magnetic fields, electric fields, gravity and
other force fields and rock properties in order to identify areas favorable to
mineral and hydrocarbon resources.
Scintrex Earth Science Instrumentation specializes in providing complete
geophysical solutions to clients around the world. Utilizing in-house products
and expertise, as well as by key relationships with several Original Equipment
Manufacturer suppliers ("OEM") suppliers, Scintrex is able to provide complete
packages to our clients. This is an important consideration for international
funding agencies as the preference is to have one company which is capable of
providing all required geophysical instrumentation, support equipment, software
and training to the client.
Products
Scintrex Earth Science Instrumentation has its head office located in
Concord, Ontario, Canada where it has a complete manufacturing facility. As well
all Sales & Marketing, R&D/Engineering and Customer Service is also based out of
and controlled by the head office. As well Scintrex Earth Science
Instrumentation has Sales, Rental and Customer Service capabilities in its
regional offices based in Denton, Texas, U.S.A., Orleans, Frances and Brisbane,
Australia. The Brisbane office also has a small manufacturing facility where our
borehole logging products are currently manufactured.
Scintrex' is a well known supplier and distributor of geophysical
instrumentation worldwide. The Division's products are designed to operate and
perform in a wide variety of conditions, including mountains, swamps, jungles,
deserts and ice fields. IDS equipment provides information from deep below the
earth's surface and from the bottom of the sea. Equipment can also be fastened
to aircraft exteriors and suspended from helicopters for gathering highly
accurate geophysical data.
In 1998, the Division acquired Scintrex/Auslog Pty Ltd., adding a range of
borehole logging instruments to its product portfolio. Its systems are
custom-designed to meet the demands of users conducting borehole geophysical
surveys. Borehole logging equipment is widely used in the mineral equipment
industry.
On December 31, 1999, Scintrex acquired 100% of the capital stock of
Micro-g Solutions Inc., a Colorado based
15
<PAGE>
geophysical instrument company.
In 1999, the Division launched its advanced SARIS - Scintrex Automated
Resistivity Imaging System. SARIS combines a transmitter and receiver in one
device, and uses intelligent electrodes to provide users with an electrical
image of the subsurface. Applications for SARIS include groundwater exploration,
environmental site investigation, archaeology and mineral exploration.
The CG-3 "AutoGrav" Automated Gravity Meter is the flagship product for
the Earth Science Division. This quartz based gravity sensor is used in the
measurement of gravity worldwide. This technology has also been modified to meet
unique applications such as the SeaGrav, a version of this sensor which is used
to take gravity measurements on the sea-floor or mounted inside submersible
vessels. There is also a version used in the HeliGrav system, a proprietary
helicopter-borne survey technique used by the Survey and Exploration Technology
Division.
The ENVI Geophysical System is a lightweight, portable proton precision
magnetometer/gradiometer with very low frequency electromagnetic capabilities,
enabling the user to survey large areas quickly and accurately. The ENVI
Geological System is used in the first stage of mineral exploration projects.
Its ease of use and simple operator interface allows it to be a very useful tool
for environmental and groundwater applications.
The CS-2 is a high resolution cesium magnetometer sensor used primarily by
airborne geophysical operators, as well as in ground and marine systems.
The SMARTMAG is a high-resolution ground cesium magnetometer system
incorporating a CS-2 sensor and user interface console. Aside from providing a
high-resolution exploration tool, it is also widely used in the archaeology,
environmental and unexploded ordnance (UXO) markets.
The Earth Science Division also offers a wide range of induced
polarization and resistivity products such as the IPR-12, the TSQ line of
transmitters, and a suite of ancillary products principally used in exploration
for precious and base metal mineral deposits. A new high power IP transmitter,
the VERSA is schedule for release in 2000.
Radiometric instruments used for exploring mineral resources and for
measuring environmental and health concerns include the GRS-500 and the
vehicle-borne CARS-2000, a portable radiometric mapping system.
Survey & Exploration Technology Division
IDS's Survey & Exploration Technology division provides a wide range of
airborne, ground and borehole contract geophysical services to the exploration
and remote sensing communities.
16
<PAGE>
The union of airborne services with ground survey operations and borehole
logging services expanded the division's scope to provide broader technological
and geographical market coverage. The focus is on contract geophysical surveying
and mapping services, and on providing integrated airborne survey system
solutions for sale or lease. The Survey & Exploration Technology Division has
established its operating bases in Australia, Southeast Asia and North and South
America.
Integrated Systems and Surveys
Services include the sale and support of integrated airborne systems,
surveys incorporating the Division's proprietary technology - such as the
PDS-3M(TM) pipe-line detection system and the HeliGrav(TM)
helicopter-transported long-line gravity system - and standard ground and
airborne geochemical, geophysical and borehole logging surveys. Market
opportunities for Survey & Exploration Technology's expertise exist in oil and
gas exploration, base mineral and precious metals exploration, environmental
monitoring and contamination quantification, groundwater exploration and
pipeline mapping. The airborne element of Scintrex has performed over 3,500
geo-physical surveys and 300 airborne system installations worldwide over the
past 40 years.
In 1998, IDS's acquisition of Scintrex led to a reorganization of the
Survey & Exploration Technology division. The union of airborne services with
ground survey operations and borehole logging services created a new business
with broader technological and geographical market coverage. The focus is now on
contract geophysical surveying and mapping services, and on providing integrated
airborne survey system solutions for sale or lease. The division has since
established and strengthened its operating bases in Southeast Asia and North and
South America.
In addition to its proprietary technologies, the Survey & Exploration
Technology division offers a range of contract airborne geophysical services
including "Helimag" surveys, multi-sensor helicopter borne surveys (EM,
magnetic, radiometrics and very low frequency electromagnetic ("VLF")) and
fixed-wing magnetometer and/or fixed-wing multi-sensor surveys (magnetics,
radiometrics and VLF). All airborne systems include Differential Global
Positioning System Navigation (including real-time corrections where practical),
color video of flight path recording and PC-based data acquisition systems.
Survey data is processed either in the field at the survey site or at data
processing centers maintained at the division's head office in Concord, Ontario
and at its Perth, Australia base.
The Division provides contract geophysical exploration and consulting
services from its headquarters in Concord, Ontario, as well as through
subsidiary companies. These include Scintrex Pty. Ltd., which operates from a
base in Perth, Australia, and Megafisica Survey Aerolevantamentos S.A., Scintrex
also operates a second fixed-wing aircraft system based in Rio de Janeiro,
Brazil.
On October 1, 1999, Scintrex entered into letters of intent to acquire
100% of the capital stock of Val d'or Sagax Inc. and Sial Geosciences Inc.,
Quebec based geophysical instrument and survey companies. The agreement is based
on a share for share exchange of Scintrex common shares for Val d'or Sagax Inc.
and Sial Geosciences Inc. shares.
17
<PAGE>
The Survey & Exploration Technology division operates a PC-based, data
processing/mapping system which utilizes proprietary technology. The integrated
geophysical processing software carries out flight path recovery, EM and
resistivity data processing, magnetic and gravity data processing and leveling,
gamma-ray spectrometer correction and processing filtering, gridding and
contouring of data, imaging of gridded data and high quality plotting of line
and imaged data to any desired map scale and map layout.
The products and services of the division have historically been sold
primarily for use in mineral exploration and environmental monitoring. The
Division has more recently diversified into the oil and gas exploration industry
by the development of a number of products including 3-D Magnetic gradiometry.
The Surveys Exploration Technology Division developed HeliGravTM helicopter
borne technology for gravity surveys and for surveying inaccessible or
environmentally sensitive areas. This Division has also developed the PDS-3M
System, a three-dimensional magnetic gradient measurement system used in the
detection of oil field pipelines and well heads. The system is being used to
determine the precise locations of unknown pipelines in existing, operational
oil fields and to enhance the safety of seismic crews operating in the field.
In addition to performing surveys, the division also sells Integrated
Airborne Geophysical Survey Systems to government clients around the world. The
Division's products include a range of airborne instrumentation and systems for
use in helicopters and fixed-wing aircraft, as well as hardware and software for
processing, mapping and interpreting airborne geophysical data. Scintrex has
installed airborne systems ranging from magnetometer/spectrometers to fully
configured EM systems with associated data processing facilities. These systems
are based on sensor technologies either owned by the Company or licensed or
acquired from third parties, which are integrated together with data
acquisitions, navigation ancillary instrumentation.
Recent Projects
Representative examples of the Division's recent projects include: an
airborne magnetic survey covering 12,000 square miles for a Bolivian oil
company; delivery of an upgrade of a fully integrated airborne system to the
Indian government; a large gravity survey using HeliGrav(TM) and conventional
methods in Australia; geophysical borehole logging and survey projects
throughout Australia and Southeast Asia; and helping PEMEX, Mexico's state-owned
oil company, with large-scale pipeline identification and mapping projects.
Strategy
The level of oil and mineral prices, which are cyclical in nature,
strongly affect the division's business. Nonetheless, since 1998, the Division
performed services for Amoco, Chevron, Shell Canada and Petro-bras, among other
oil and gas companies.
The Survey & Exploration Technology division is also pursuing and
succeeding in markets beyond mineral and petroleum exploration, including
environmental, pipe-line and groundwater
18
<PAGE>
surveys. The Scintrex PDS-3M pipeline detection system detects buried oil and
gas pipelines, well-heads and other environmental targets. Recent clients
include Mexico's state-run oil company PEMEX and major seismic companies such as
Western Geophysical and Schlumberger. The Division also owns six Scintrex CG-3
AutoGrav gravity meters and HeliGravs(TM) for use in gravity surveys. Working
with partner companies in locations around the world, the Division is expanding
its contact base and demonstrating systems such as the PDS-3M pipeline detection
system, the 3D-GM(TM) three-dimensional magnetic gradient system and
HeliGrav(TM) to new clients in new applications.
IDS Power Control Systems Division
IDS Power Control Systems Division supplies custom-designed control and
safety instrumentation for control sub-systems in nuclear reactors and other
power generation plants. Since 1973, the Company's subsidiary Scintrex has
developed and manufactured control room instrumentation, high-gain DC amplifiers
and safety shutdown systems for Canada's CANDU type heavy water nuclear power
reactor system. Many of the IDS Power Control Systems' products were developed
as adaptations of existing Scintrex technology and include a number of
monitoring and control devices for use in CANDU nuclear power plants located in
Ontario, Quebec, New Brunswick, China, Korea, Argentina and Romania. Such
products comprise reactivity control logic cabinets, shut-off rod logic modules
and logic panels for safety shut-down systems.
Formerly known as Scintrex Nucleonics, the new name reflects the
Division's transition to a wider power generation market. The division has
increased its emphasis on light water reactor subsystems and other
energy-generating applications. The worldwide light water reactor market is
estimated to be about 10 times the size of the heavy water reactor market, and
in order to diversify its customer base, IDS Power Control Systems is currently
bidding on more than five contracts to provide safety systems to a variety of
light water nuclear reactor installations. The Division is also pursuing
additional business from Canatom/NPM for instrumentation for the Qinshan 1 and 2
nuclear power projects in China. At present 10 different proposals have been
submitted, although to date, the Company has not been awarded any light water
nuclear reactor installation contracts.
IDS Power Control Systems also manufactures a line of health physics
monitors for the nuclear industry including portable handheld tritium, gamma and
beta-gamma contamination monitors, as well as radiation dosimeter "badges" which
are used to determine cumulative long-term exposure to small amounts of
radiation. The monitors include large sophisticated systems for monitoring
entire buildings. The units are supplied to reactor sites, lab facilities and
other places where tritium gas poses a hazard.
The division's new Emergency Fuel Control System is a highly sophisticated
combination of mechanical, electronic, process control and computer components.
The division is currently manufacturing this key control component for the
Qinshan power station project in China; however, this system can eventually be
applied to other industrial control applications. IDS Power Control Systems also
received orders in 1998 and 1999 for
19
<PAGE>
enhancements to the main control room panels, temperature transmitters and other
elements at Qinshan. For the nine months ended September 30, 1999, these orders
accounted for approximately $9 million, or 25% of the Company's revenues. For
the Qinshan project, IDS Power Control Systems is responsible for all aspects of
system development and integration, including design, manufacture and quality
control.
The Division's strategy is to increase market share for its traditional
line of equipment for CANDU power stations while bidding on contracts for light
water plants. Another element of new business is the supply of computer networks
for instrumentation and control applications. Emphasis will also be placed on
the integration of process control systems utilizing programmable logic
controllers.
IEC (Integration, Engineering and Consulting)
IEC (Integration, Engineering and Consulting) is the systems integration
business unit of IDS. IEC's primary business is providing systems and services
to the Canadian federal government, especially the Canadian Department of
National Defense (DND). IEC comprises a Division of systems specialists who are
qualified Microsoft Certified Systems Engineers and/or Sun Microsystems
Certified System and Network Administrators. The division specializes in the
analysis, design, installation, integration, administration and support of
complex computer security systems. The division has almost 10 years of
continuous corporate experience, offering a full spectrum of services, including
provision of hardware and software products.
Utilizing accepted international security standards and policies, IEC is
able to bring together the security products, technologies and professional
services, such as CMW, C2 and B1 desktop applications and networks, to address
TEMPEST, INFOSEC, COMSEC and Secure Access Control system requirements. In
attaining this level of expertise, IEC has developed strong relationships with
other high-tech companies.
Systems Integrator
IEC has developed innovative security technologies and solutions for
Canadian government departments and security agencies which have significant
domestic and international security requirements. The Division specializes in
Command and Control, Intelligence and Data Fusion. Effective command and control
are critical in times of crisis and require the attention of the trusted and
experienced specialists. IEC has extensive experience with many Command and
Control systems, both with the DND and the United States Department of Defense
(DoD).
Supplier
IEC provides high quality products and solutions such as secure Message
Handling Systems, Geographic Information Systems, Mathematical Modeling and
Analytical Tools, Computer Aided Design, Imagery Exploitation and Document
Scanning and Optical Character Recognition. IEC's products and services are
purchased primarily by Canadian government security
20
<PAGE>
organizations, such as DND, the Royal Canadian Mounted Police (RCMP), the
Canadian Security Intelligence Service (CSIS), the Communications Security
Establishment (CSE), Health and Welfare Canada and the Department of Foreign
Affairs and International Trade.
Security
Secure supplier status is a rigorous requirement for any organization
providing information technology products and services to government departments
such as DND, CSIS, CSE and the RCMP. IDS has some high level government facility
security clearances, including the Canadian "TOP SECRET" and NATO "SECRET"
facility security clearances. IEC employees hold security clearances involving
considerable site security and in-depth personal background checks. IEC believes
that the security clearances provide a significant competitive advantage.
Synergies
IEC's experience in developing security systems solutions enables it to
form synergies with IDS's six other business units. The Division's engineering
and integration strengths played a role in the early stage of the development of
the Large Vehicle Bomb Detection System for the Analytical & Security division.
ChemiCorp and Caduceon Divisions
The Company acquired ChemiCorp and established the Caduceon Division to
adapt its core technology to the industrial process controls and point-of-use
health care, respectively. The Company intends to develop products independently
or to partner with an existing established organization in the application area
to jointly pursue market research and development. Currently, neither division
has any products. ChemiCorp's products are expected to be marketable in the
summer of 2000, while Caduceon does not expect products any earlier than 2001,
due in part to the need for government approval. Once product feasibility and
marketability have been proven, the Company intends to either manufacture and
sell products based on such new technology or to license its technology and
design to the strategic partner for manufacturing and marketing purposes.
ChemiCorp
IDS acquired ChemiCorp to enter the industrial process control and
environmental monitoring markets. The subsidiary is performing research and
development on various applications for the GC/IMS technology in industrial
manufacturing settings and for environmental use. Manufacturers regularly
require quantitative and qualitative monitoring of the chemical composition of
their processes to ensure product integrity, purity and quality. In 1999, IDS
increased its ownership of ChemiCorp, a development stage company, to 70% of
ChemiCorp's outstanding capital stock for $314,700 in equipment and a license
for patented trace chemical detection technology.
21
<PAGE>
ChemiCorp is pursuing development of high-speed in-line process control,
product inspection and management systems. The Company's robotic analysis
capabilities automate the process, limiting the need for chemists and their
equipment. Industries that could employ such chemical detectors span the range
of manufacturing sectors from auto makers to food and beverage companies, pulp
and paper makers, pharmaceutical companies, petrochemical companies and chemical
companies.
The Company has commenced the development of a high-speed gas
chromatograph system that can analyze chemical samples at speeds 100-300 times
faster than conventional gas chromatographs. Such instruments are to be used in
analytical testing in commercial and industrial quality laboratories,
particularly the chemical, pharmaceutical, and food sectors.
One potential area of application is in food and beverage production,
where consistent chemical composition relating to the flavor and aroma of a
product is critical. The GC/IMS technology can be used to detect
flavor-affecting volatile organic compounds such as esters.
The Company believes that its core GC/IMC technology can be used to
develop equipment to monitor toxic and other unwanted compounds in the
workplace. Such equipment may minimize employee risk of exposure to dangerous
compounds, particularly where existing devices are not adequately sensitive.
Caduceon Division
IDS formed Caduceon in 1998 to adapt its core GC/IMS sensory technology as
a non-invasive diagnostic screening platform for use in point-of-care clinical
diagnostic settings. The Company owns 87% of the outstanding stock of Caduceon.
Dr. Mariusz Rybak, Chief Executive Officer, and his wife own 5% and 3% of the
Caduceon stock, respectively. Mr. Sanje Ratnavale is also a 5% shareholder of
Caduceon. Accessing blood-stream properties through breath analysis can provide
significant information about metabolic processes in the body. More than 400
volatile organic compounds related to disease states have been identified in
human breath. However, the development of breath analysis technology for
detecting low levels of these compounds has been complicated by technological
barriers at the start of the process. Water must often be removed from the
sample because it can create physical and chemical interference. IDS technology
has no need for water removal. IDS believes that the sensitivity of the
equipment permits analysis from a normal breath sample.
IDS is performing research and development on an easy-to-use mass
spectrometer to perform point-of-care breath analysis in one automated step. A
breath analyzer could have many possible uses. In point-of-care settings, such
as emergency rooms and intensive care units, breath analyzers could help
physicians gather in seconds, without the need for invasive arterial blood
analysis, near-real-time information about patients' metabolic states.
Physicians could monitor, for example, patients' levels of ammonia, lactic acid,
nitric oxide and ketone bodies such as acetone and other blood gases.
Breath analysis for evidence of possible cell-damaging oxidative stress
represents a broader
22
<PAGE>
medical application, and there is already an emerging demand for this kind of
analysis in the fitness and alternative health markets. Also, by monitoring
chemical concentrations in the breath of employees, companies could ensure that
they meet necessary occupational safety and industrial hygiene requirements.
GeoCommerce, Inc.
On November 16, 1999, a new e-commerce business initiative named
GeoCommerce, Inc. commenced operations. GeoCommerce, Inc. is an 81% owned
subsidiary of the Company. The balance of the shares are owned by management of
GeoCommerce, Inc. GeoCommerce is an on-line, e-commerce initiative designed to
serve the international exploration and mining industry. GeoCommerce was
developed using Sun-Netscape Alliance iPlant e-commerce software.
Initially, GeoCommerce will consist of two Internet portals called
GeophysicsOnline.com for the mining and oil and gas exploration industries, and
a second portal called MineOnline.com for the mining production equipment
sector. Both GeophysicsOnline.com and MineOnline.com will give mining,
geophysics, and exploration professionals access to the services and products of
companies worldwide. The portals will also feature full service, e-commerce
capabilities, specifically designed to meet the business-to-business needs of
the industry.
GeoCommerce will act as a broker on these portals, bringing buyers and
sellers together, providing key information about products, services, data sets
and land options available, and finalizing transactions with full billing credit
and bank capabilities. GeoCommerce is working with Scotiabank and its
subsidiary, e-Scotia.com to provide a complete range of electronic options and
security services.
Sales and Marketing
The Company pursues a global marketing strategy based on the regional
forecast of its sales and service centers (with offices in the United States and
Europe), as well as an exclusive network of local distributors and
representatives.
An international sales management responsible for achieving specific
performance targets manages each of the five major regions (United States,
Europe, Middle East/Africa, Latin America and Asia/Pacific). The Company sells
its products through both a direct sales organization consisting of four
individuals and through approximately 70 distributors and strategic partners
throughout the world. In Canada, the United States and Europe, the Company uses
its direct sales force and a network of manufacturer's representatives.
Referral selling is important to the Company. Local distributors are
selected carefully and the Company believes that they are well trained and
motivated. Many of the distributors are also certified service providers working
closely with the Company's customer service department. While the material costs
are shared with local partners, the Company advertises it's products in
international industry magazines, on the Internet and through participation in
major trade shows, conferences, sales promotions, product demonstrations and
world events. Frequent customer
23
<PAGE>
visits enable the Company to address customers' needs and follow market trends.
Sales promotion is carried out through visiting clients to show new instruments,
participating in technical conferences and exhibitions and advertising in trade
publications.
The Analytical and Security Division's direct sales and marketing efforts
are focused on security markets such as government facilities, commercial
properties and public service as they are believed to represent the most
immediate sales opportunities. The Division's marketing and distribution network
is comprised of over 25 distributors and strategic partners.
The Company's sales and marketing efforts typically involve extensive
customer visits, demonstrations and field testing. Sales prospects are generally
targeted by the Company or its sales partners, although the Company also
responds to requests for proposals. Once a sale has been completed, the Company
provides on-site training, including proper sampling and maintenance techniques.
The Company generally provides a one-year parts and labor warranty with the
purchase of its equipment, and offers extended warranties for an additional fee.
The Company has entered into a service relationship with EG&G Astrophysics to
provide service and maintenance in the United States.
In 1999 the Company opened a United States sales office in the Washington,
DC area and established a sales, service and marketing presence in Europe. The
Company also intends to identify strategic partners in South America and Central
Asia.
The Scintrex Earth Science Instrumentation Division's sales and marketing
operation are based in the Concord office, where sales and marketing activities
are coordinated. Regional offices have been established in Denton, Texas for the
United States, Orleans, France for Europe and French Africa and Brisbane,
Australia for Australia and Southeast Asia. Sales and marketing are handled by
six primary regional sales managers, three based in Concord and one in each of
the three regional offices. Scintrex Earth Science Instrumentation Division has
also developed a comprehensive network of approximately 50
distributors/representatives throughout the world.
The IDS Power Control Systems Division's exports of health physics
products are marketed by distributors and commissioned sales agents in the
United States and Europe. The majority of the sales and marketing effort of this
Division are targeted at the international electrical generation market. The
Division has traditionally focused (when it was Scintrex Nucleonics) on the
nuclear generation segment. Following the acquisition of Scintrex by the
Company, the Division expanded its area of sales and marketing efforts into the
fossil and other power generation markets. The Division has also focussed on its
strength as a systems integrator, especially with systems containing networked
industrial PC's and Programmable Logic Controllers (PLCs). The Division's health
physics instrumentation sales include its most recent significant new product,
the tritium-in-breath monitor.
The Survey and Exploration Technology Division sells its products and
services directly from three office locations in Concord, Ontario; Rio de
Janeiro, Brazil and Perth, Australia. This base is broadened further through the
use of representation agreements and joint ventures in many other countries,
with specific focus in Mexico, Chile, Bolivia, the United States, Hong
24
<PAGE>
Kong, India and both Eastern and Western Europe. Negotiations are ongoing to
provide sales exposure in Africa and other areas of strong potential business
opportunities.
Manufacturing and Assembly
The Analytical and Security Division manufactures and assembles its
chemical detection equipment at its facility in Nepean, Ontario. The Company
assembles the units from components provided by various suppliers and from parts
manufactured internally. All parts are carefully chemically cleaned prior to
being introduced to the assembly process. Quality assurance is performed as an
ongoing process after each step in the manufacturing cycle, starting with the
initial receipt of raw materials and sub-components and ending with a final
inspection of the completed unit. On completion of the final inspection, a
Quality Assurance Checklist is completed, signifying that the unit has passed
final inspection and is ready for shipment to the customer.
The Company manufactures and assembles its geophysical instrumentation at
its facilities in Concord, Ontario for the Scintrex Earth Science
Instrumentation Division, the Survey and Exploration Division and the IDS Power
Control Systems Division. Included in the main plant is a machine shop and a
model shop which are used principally for the fabrication and machining of
parts. The machine shop and model shop improve the Division's ability to
undertake system developments. The bulk of all manufacturing for these
divisions' products is carried out at the Concord plant, although some of the
manufacturing is contracted to third parties. The Earth Science Instrumentation
Division also acts as a subcontractor to the other divisions of the Company,
building sub-assemblies for these other divisions. The Earth Science
Instrumentation Division also has a manufacturing facility at Scintrex/Auslog in
Brisbane, Australia for the borehole logging products.
The Survey and Exploration Technology Division is predominantly a service
provider and as such has no manufacturing
In terms of quality assurance, Scintrex is a certified ISO-9001 and
CSAZ299.3 company for manufacturing and producing instruments governed by
various quality standards. Scintrex has also obtained certain other
certifications for some key products in order to meet European market
requirements.
The Company purchases the majority of the components used in its
manufacturing process from approximately 75-100 suppliers. The Company believes
that there is an adequate supply and source for the raw materials used in the
products. The Company believes that it has the manufacturing capacity to meet
anticipated demand for its products through 2001.
Research and Development
The Company has 43 people involved in research and development with seven
people focused on fundamental research and development of the Company's existing
and new core
25
<PAGE>
technologies, and the remaining 36 people pursuing product development. The
research and development budget for the Company has been doubled to $1.5 million
in 1999 from $0.8 million for the year ended December 31, 1998. Developmental
research, in contrast to "pure research", consists of development efforts to
either upgrade existing technology or to bring into commercial production
successful prototype products developed through pure research. Developmental
research is performed in response to marketplace opportunities. The staff
includes professional engineers and scientists trained in various fields such as
electronics, mechanical and chemical engineering, nuclear physics and nuclear
chemistry.
Analytical and Security Division is the Company's center for trace
detection technology research, product engineering and manufacturing. Chemicorp.
and Caduceon are involved in specific applications development relevant to their
target markets.
Scintrex Earth Science Instrumentation Division has its engineering and
research and development efforts based in the Concord office for all products,
with the exception of the borehole logging systems, for which research and
development is performed at the Scintrex/Auslog office in Brisbane, Australia.
The research and development efforts are focused around a combination of new
product development and upgrading of key core products. The Division's research
and development is partially funded by an outside source to develop proprietary
technology for this customer. The research and development staff is working on
software, electronic and mechanical projects for many different customers.
Since 1996, the Survey and Exploration Division has made significant
research and development investments into its proprietary 3D-Magnetic Gradient
systems, including the PDS-3M(TM) system, the 3D-GM(TM) systems and the
HeliGrav(TM) helicopter transported gravity technology. The Survey and
Exploration Division is investing in research and development to enhance the
usage of the data collected by these systems.
The IDS Power Control Systems Division is working on software, electronic
and mechanical projects for many different customers, including an integrated
Resistive Temperature Detector (RTD), a networked computerized plant display
system and a networked radiation monitoring system. The Nucleonic's branch of
Scintrex's research and development staff is developing a Tritium-In-Breath
Monitor which is intended to provide a rapid reading of body tritium.
Internally and externally-funded research and development expenditures are
set forth in the following table for the Company's fiscal year ended December
31, 1998. The Company's accounting policy is to expense the majority of its
research and development expenses as incurred.
26
<PAGE>
<TABLE>
<CAPTION>
Scintrex Earth Survey & IDS Power IEC-Integration, ChemiCorp. Aggregate
Analytical & Science Exploration Control Engineering and International Caduceon Company
Security Instrumentation Technology Systems Consulting Inc. Inc. R&D Expense
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gross R&D
Expense $638,000 $154,000 $159,000 $ 1,000 0 N/A 0 $952,000
Government
and Other
Grants $ 67,000 $ 67,000 0 0 0 N/A 0 $134,000
Investment
Tax
Credits 0 0 0 0 0 N/A 0 0
Net R&D
Expenses $571,000 $ 87,000 $159,000 $ 1,000 0 N/A 0 $818,000
</TABLE>
Customers
The Company's Analytical & Security division customers have been
primarily in the government sector. However, the Company's Analytical & Security
products have also been purchased by non-government organizations. With respect
to its trace detection products, customers have included the FAA, Securair
International Limited (Hong Kong), the Royal Canadian Mounted Police, the
Ministry of Defense (U.K.), the Canadian Commercial Corporation, Lockheed Martin
Canada Inc., the Federal Court of Canada, Transport Canada, the Department of
National Defense (Canada), Correctional Services Canada and California
Correctional Services. During the year ended December 31, 1998, sales to the FAA
amounted to $1.85 million, or 8.4% of the Company's total sales. No other
customer accounted for more than 5% of the Company's revenues in 1998. The FAA
did not purchase any products in 1999, although the Company believes that the
FAA may be a customer in 2000. Sales of power control systems through Canatom
NPM, a Canadian government agency, to China accounted for 25% of revenues for
the nine months ended September 30, 1999. Sales to Canadian Commercial Corp., an
agency of the Canadian government, for resale to a government in the Middle
East, accounted for 22% of our revenue for the nine month period ended September
30, 1999 but accounted for 0% in 1998.
The Company's primary clients for its Scintrex Earth Science
Instrumentation Division in the mining and petroleum fields include exploration
contractors, resource companies, government agencies, international agencies and
educational institutions throughout the world.
The personnel and corporate entities that constitute the Survey &
Exploration Technology Division have worked for many of the world's major mining
companies, oil and gas companies and governmental agencies. Since January 1,
1998, the Division's clients have included such groups as the Australian
Geological Survey Organization, the Hong Kong Royal Observatory, the United
States Department of Defense, the Indian Geological Survey-Airborne Wing, PEMEX,
Schlumberger, Western Geophysical, Input-Output, Amoco, Chevron, Kennecott,
Ashton Mining
27
<PAGE>
and SOQUEM.
IDS Power Control Systems customers include Westinghouse Savannah River,
Battelle Pacific, Korea Electric Power Corporation, Canatom NPM, Inc. and Atomic
Energy of Canada Limited, among others.
IEC's products and services are purchased primarily by Canadian government
security organizations, such as the Department of National Defense, the Royal
Canadian Mounted Police, the Canadian Security Intelligence Service, the
Communications Security Establishment, Health and Welfare Canada and the
Department of Foreign Affairs and International Trade.
Competition
Analytical & Security Division
The Company believes that its most direct competitors in the Analytical &
Security division of its business are Barringer Technologies Inc. ("Barringer")
and Ion Track Instruments ("ITI").
The Company believes its products are unique in that they are based on a
patented dual analytical system, GC/IMS. The Company believes that Barringer's
and its products are based solely on IMS technology. Management believes that
the Company's dual analytical system is a more advanced detection system than
either of Barringer or ITI, providing a higher operational throughput based on a
low false alarm rate and the automation of sample collection and analysis, while
providing simple instrumentation that can be operated by relatively low skilled
personnel. From a technical perspective, management believes that the Company's
technology provides higher discrimination (selectivity), and unlike Barringer or
ITI, the Analytical & Security division's products have the ability to
simultaneously monitor both vapors and particles and detect all of the mandated
ICAO taggants.
Competitors like Barringer and ITI have in the past had better results
with large government agencies like the FAA. One competitive advantage that
Barringer and Ion Track have been in business longer than IDS and thus the name
and brand recognition, especially in the United States, may offer an advantage
over IDS's ability to market its product with some regulated agencies.
The Analytical & Security division also completes indirectly for
government expenditures with equipment manufacturers utilizing other
technologies, such as Invision Technologies, Inc. and Vivid Technologies, Inc.,
which manufacture enhanced x-ray, CATSCAN and other bulk imaging technologies.
28
<PAGE>
The Analytical & Security division also competes with the use of canines
to locate the presence of explosives and drugs. Although canines have a highly
developed sense of smell and are able to follow a substance trail, the Company
believes that its products are most effective and cost efficient than canines,
because they can operate 24 hours a day, have greater selectivity and can
identify the composition of the substance detected.
Scintrex Earth Science Instrumentation Division
There are many smaller single technology companies that can be considered
competitors to the various technologies within the Scintrex Earth Science
Instrumentation division. The major competitor to this division is OYO
Corporation of Japan ("OYO"). OYO has its own instrumentation division and has
been aggressively acquiring other geophysical instrumentation companies over the
past several years, now controlling a large number of companies which are direct
competitors to the Company. These include Geometrics, Inc. (USA), IRIS
Instruments (France) and Robertson Geologging Ltd. (UK). Other significant
competition to the Scintrex Earth Science Instrumentation division include
LaCoste & Romberg LLC (USA), GEM Systems Inc. (Canada), Century Geophysical
Corporation (USA), Mount Sports Instrument Company (USA) and ABEM Instrument AB
(Sweden).
A recent wave of consolidations has lead to some geophysical
instrumentation products being controlled by a few companies that are larger and
have more financial resources than IDS. Market segments of some Geophysical
instruments may be dominated by one company with a vast catalogue and which is
able to reduce profit margins on products similar to products sold by the
Company, thus making it more difficult for smaller firms to compete in the
geophysical instrumentation market.
The Company's main competitor for gravity sensor technology is LaCoste &
Romberg LLC. LaCoste has greater market share and has more experience in the
market than the Company. The Company believes that the division's quartz sensor
technology is competitive with the metal based LaCoste sensors, although LaCoste
has recently taken more aggressive steps in updating its technology.
The geophysical instrumentation market is primarily driven by commodity
prices, which are cyclical in nature. As prices go down and exploration for
commodities declines, a corresponding drop may also be seen in the division's
sales. However, during periods of increased commodity prices and the
corresponding increase in exploration, sales may also increase for the
division's products.
29
<PAGE>
Survey & Exploration Technology Division
The Survey & Exploration Technology division markets its services to two
key sectors, namely, mineral exploration and oil and gas exploration. The Survey
& Exploration Technology division offers airborne and ground contract
geophysical surveys to both the mineral exploration and oil and gas exploration
sectors. Demand for the Division's services is dependent, in part, on world
prices for metals, oil, and gas. The division's significant competitors for
fixed-wing surveys are World Geoscience Corporation, High-Sense Geophysics
Limited, Sander Geophysics Limited, Geoterrex-Dighem, CGG-Canada Ltd. and Kevron
Geophysics TTY, Ltd. Prices for fixed-wing geophysical surveys have been
depressed as the market is currently highly competitive. Competition for
ground-based geophysical surveys is less intense. The division's significant
competitors for ground-based geophysical surveys are Edcon Aerosurveys
Explorations Inc., Quantec Consulting Inc., Val d'Or Sagax Inc.,
Poseidon/Geodass PTY Limited and Geoterrex-Dighem, CGG-Canada Ltd.
IDS Power Control Systems Division
The IDS Power Control Systems division competes with a large number of
companies including Nuclear Research Corporation, Gamma Metricks Ltd. and
Blenkhorn & Sawle Ltd., particularly for contracts awarded by Atomic Energy of
Canada Limited and Ontario Hydro. Nuclear Research Corporation and Gamma
Metricks Ltd. are seen as our main competitors in this market. Both companies
are well established and have a history of doing business in this industry. A
competitive advantage over IDS Power Control may exist for certain projects in
which IDS has no history of supplying specific products to certain market
segments.
Management believes that the quality of products and services that it
provides to its customers has made this division well known throughout the
industry. The Company believes that the Power Control Systems division's
competitive advantage lies in the niche market that it occupies with such
products as the main control panel and safety shut down systems for CANDU
nuclear reactors. In addition, the division supplies another niche product
market, in the form of Tritium detection technology. Many of the Power Control
Systems division's competitors offer no such products in this market.
Patents and Proprietary Rights
The Company uses patents as the principal form of intellectual property
protection for its proprietary technology. This is achieved by a combination of
licensing on an exclusive basis the right to exploit certain patents and by
applying for and obtaining patents in its own right. The Company believes that
these patents provide the Company with a significant competitive advantage in
the markets for certain products. The Company also considers technical know-how
and trade secrets to be important to its business.
30
<PAGE>
o Detection of Organic Vapors - With the acquisition of Scintrex, the
Company now holds a patent issued in each of the United States and the
United Kingdom relating to the detection of organic vapors, and has filed
a patent application which is pending for the same technology in Canada.
This technology is employed by the Analytical & Security division of the
Company.
o Surface Ionization Detection - With the acquisition of Scintrex, the
Company now holds a patent issued in the United States for a surface
ionization detector used for detecting trace amounts of organic molecules,
and has filed a patent application which is pending for the same
technology in Canada. This technology is employed by the Analytical &
Security division of the Company.
o Regional Gravity Surveys - With the acquisition of Scintrex, the Company
now holds a patent issued in the United States and has filed two patent
applications which are pending in Canada and Australia relating to
regional gravity surveys. This technology is employed by the Scintrex
Earth Science Instrumentation and Survey & Exploration Technology
divisions of the Company.
o Collection of Explosives and Narcotic Samples - The Company has assumed a
provisional patent application filed by Scintrex which is now pending in
Canada and Australia relating to the collection of explosives and narcotic
samples. This technology is employed by the Analytical & Security division
of the Company.
o Detection & Location of Buried Pipelines - The Company has assumed a
provisional patent application filed by Scintrex which is now pending in
Canada and Australia relating to the detection and location of buried
pipelines. This technology is employed by the Survey & Exploration
Technology division of the Company.
o Ion Mobility Spectroscopy - The Company has obtained one patent relating
to Ion Mobility Spectroscopy in the United States and certain other
countries. The Company's Ion Mobility Spectroscopy technology is employed
by the Analytical & Security and Caduceon divisions of the Company.
o Laser Detection Systems - The Company has filed one patent application
which is pending for a laser detection system. The Company's laser
detection technology is employed by the Analytical & Security divisions of
the Company.
o Other Patents - With the acquisition of Scintrex, the Company now holds
two additional patents issued in Canada, one for an apparatus that
automatically determines the position at which a beam of light impinges on
a target, and one relating to the detection of certain minerals of zinc,
tungsten, fluorine, molybdenum, mercury and other metals, using
photoluminescence. Neither of these patents is used in any current
products distributed by the Company.
The IDS Power Control Systems division has an extensive amount of
intellectual property
31
<PAGE>
with respect to its product line in the form of proprietary designs and know
how. In addition, the Company, through Scintrex, has also entered into a number
of license agreements to commercialize technology developed by government
institutions such as Atomic Energy of Canada Limited.
The Company, through Scintrex, holds the following trade-marks in the
United States with respect to its products: "SCINTREX", "AUTOGRAV", "ENVI" and
"HeliGrav". "HeliGrav" is also a trade-mark of Scintrex in Canada and Australia.
Human Resources
As of December 31, 1999, the Company had 253 full-time employees and 7
temporary employees, of whom 75 were engaged exclusively in manufacturing, a
further 36 were involved in product development and manufacturing, 7 were
engaged in applied research, 9 were engaged in integration, engineering and
consulting and 89 were engaged in sales, service and general administration.
None of the Company's employees is represented by any union, and the Company
considers its relationships with its employees to be satisfactory. The Company
currently has a Human Resources Manager to support employee relations.
Approximately 73 people are employed in the Earth Science Instrumentation
Division, 31 are employed in the Survey and Exploration Technology Division, 63
are employed in the Analytical and Security Division and 36 are employed in the
Power Control Division. IDS has a policy of entering into confidentiality and
non-disclosure agreements with its employees and limiting access to and
dissemination of its proprietary technology.
The Company is actively recruiting skilled employees, in particular to
meet expected manpower demands in the manufacturing area.
Significant Characteristics of the Company's Business
IDS's Reliance on the Ownership and Protection of Proprietary Technology. The
Company relies on patent, trademark, copyright and trade secret laws, employee
and third party non-disclosure agreements and other methods to protect its
proprietary rights. The Company owns patents, has patents pending and has filed
provisional patents covering its technology. Also, certain of the technology
used in the Company's products, which was developed by the Company, is owned by
Research Corporation Technologies, Inc. and has been licensed back to the
Company on an exclusive royalty-bearing basis. There can be no assurance that
any of the patents owned or licensed or pending or future patent applications
will not be challenged,
32
<PAGE>
invalidated or circumvented or that rights granted under such patents will
provide competitive advantages to the Company. Further, any inability of the
Company to access licensed technologies could have a material adverse effect on
the Company's business, financial condition and results of operations. In
addition there can be no assurances that the Company's trade secrets or
non-disclosure agreements will provide meaningful protection of the Company's
proprietary technology or that others will not dependently develop similar
technologies or duplicate any technology developed by the Company or that
Company's technology will not infringe patents or other proprietary rights of
others.
Dependence of Government Regulatory Approval. Many of the Company's analytical
and security products are subject to government regulation. The Company seeks
government regulatory approval for the design, manufacture and installation of
certain products, that are currently under development. For example, the
Company's proposed non-invasive breath analysis product will regain approval of
U.S. Food and Drug Administration. There is no certainty that such products will
obtain regulatory approval or that regulations on existing products will not
change.
Dependence on IDS's Chemical Detection Product line and Market Acceptance. The
Company expects that it will derive substantial revenues from the sale of its
chemical detection product line based on GC/IMS technology. The Company's
operations would be adversely affected if we are unable to market our product
line successfully. There can be no assurance that markets for GC/IMS technology
will develop as the Company expects or that the Company will be able to
capitalize on such market development.
Competition. The Company competes with other entities, including Barringer
Technologies Inc. and Thermedics Detection Inc., both of which presently have
significantly greater financial, marketing and other resources than the Company.
Principal competitive factors include selectivity (the ability of an instrument
to identify the presence of a particular substance), sensitivity (the ability of
an instrument to detect small amounts of a particular substance), false alarm
rate, speed of analysis, price, marketing and ease of use. The Company also
competes for government expenditures with equipment manufacturers utilizing
other types of detection technologies, such as InVision Technologies, Inc. and
Vivid Technologies, Inc., including enhanced x-ray, CATSCAN and other bulk
imaging technologies, as well as with manufacturers of other IMS equipment and
manufacturers using other trace particle detection technologies. There can be no
assurance that we will be able to continue to compete successfully with our
competitors or be able to compete with new market entrants or in new markets
that may develop.
Lengthy Sales Cycle. Our sales process is often protracted due to the lengthy
approval processes that often accompany government expenditures. Typically 6 to
12 months may elapse between a new customer's initial evaluation of our products
and the execution of a contract. As a result, significant resources may be
directed by the Company to certain sales opportunities without ultimately
obtaining an order from such customer. In addition, a delay or failure in
obtaining large orders may have a material adverse effect on quarterly and
annual results of operations. With respect to the forecast contained in this
prospectus, the Company has made
33
<PAGE>
certain assumptions as to when orders will be produced and shipped, but from
time to time our customers have requested delaying delivery of orders because of
changes to customer deployment schedules or for other reasons beyond the our
control.
International Business; Risk of Change in Foreign Regulations; Fluctuations in
Exchange Rates. In 1998 and the nine months ended September 30, 1999, over 90%
of our revenues was from customers outside of Canada. Accordingly, we are
exposed to the risks of international business operations, including unexpected
changes in foreign and domestic regulatory requirements, possible foreign
currency controls, uncertain ability to protect and utilize our intellectual
property in foreign jurisdictions, currency exchange rate fluctuations or
devaluations, tariffs or other barriers, difficulties in staffing and managing
foreign operations, difficulties in obtaining and managing vendors and
distributors and potentially negative tax consequences. The Company is also
subject to risks associated with regulations relating to the import and export
of high technology products. The Company cannot predict whether quotas, duties,
taxes or other charges or restrictions upon the importation or exportation of
the Company products in the future will be implemented by the U.S. or any other
country.
Our sales outside of Canada are denominated in United States dollars.
Fluctuations in currency exchange rates could adversely affect our profitability
and could cause the Company's products to become relatively more expensive to
customers in a particular country, leading to fewer sales or reduced selling
prices in that country. As a result, the Company is exposed to a certain degree
of exchange rate risk. We generally do not hedge our foreign exchange exposure.
In addition, certain of our products contain nuclear source materials and
may require export permits and/or specific permits for entering into certain
countries.
Dependence on a Limited Number of Customers The Company's revenues have
been dependent on sales from a limited number of customers whose orders may
change significantly from year to year. In the event that orders from
significant customers declined and the Company were unable to find alternate
sources fo revenue, the Company's business would be adversely affected. The
United States Federal Aviation Agency accounted for 8.4% of the Company's sales
in 1998 but none in 1999. Sales through Canatom NPM, a Canadian government
agency, to the Chinese government, accounted for 25% of all revenues in the nine
months ended September 30, 1999. Sales through Canadian Commercial Corp., an
export agency of the Canadian government, to a Middle Eastern government,
accounted for 22% of sales in the nine months ended September 30, 1999.
Dependence on Limited Number of Suppliers. Certain key components used in the
Company's products have been designed by the Company to certain specifications
and are currently purchased only from one or a limited number of suppliers. We
currently do not have long-term agreements with these suppliers, and in view of
the high cost of many of these components, we do not maintain significant
inventories of some necessary components. If the Company's suppliers were to
experience financial, operational, production or quality assurance difficulties,
the supply of components to the Company would be reduced or interrupted.
34
<PAGE>
Product Liability. The Company currently does not maintain product liability
insurance. The Company believes that, as it distributes more products into the
marketplace and expands its product lines, its exposure to potential product
liability claims and litigation may increase. In particular, the failure of a
Company product to detect an explosive could result in a significant claim
against the Company.
Dependence on Light Water Nuclear Reactors. IDS Power Control Systems
Division could be adversely affected as a result of its dependence on the light
water nuclear reactor market. Some nations are considering a moratorium on the
installation of light water nuclear reactors. Developed and developing nations
may decide not to install light water reactors. Alternative sources of energy
that are less expensive or perceived to pose fewer environmental risks may
become more available.
Dependence of Government Regulatory Approval. Many of the Company's analytical
and security products are subject to government regulation. The Company seeks
government regulatory approval for the design, manufacture and installation of
certain products, that are currently under development. For example, the
Company's proposed non-invasive breath analysis product will require approval of
U.S. Food and Drug Administration. There is no certainty that such products will
obtain regulatory approval or that regulations on existing products will not
change.
Item 2. Description of Properties
The Company currently conducts its operations from the following premises:
<TABLE>
<CAPTION>
Location Use of Facility Annual Rent,
- -------- --------------- if applicable
<S> <C> <C>
11 King Street West, Head office and corporate headquarters, sales & $217,125
Suite 1200, marketing.
Toronto, Ontario
Canada (2)
370 Queens Quay West Headquarters for Caduceon Division $54,648
Toronto, Ontario
Canada (2)
222 Snidercroft Road Head office, R&D, manufacturing, sales, marketing N/A
Concord, Ontario & support, data processing, operations and systems
Canada (1) engineering for the Company's Scintrex Earth
Science Instrumentation, Survey & Exploration
Technology and IDS Power Control Systems divisions
152 Cleopatra Drive R&D, manufacturing, sales, marketing & support for $146,880
Nepean, Ontario the Company's Analytical & Security division
Canada (2)
40 Camelot Drive Headquarters for the Company's ChemiCorp division $106,800
Nepean, Ontario
Canada (2)
7799 Leesburg Pike Sales, marketing and support services for the $14,000
Suite 900 Company's Analytical & Security division
North Falls Church,
Virginia
USA (2)
900 Woodrow Lane Sales, marketing and support services for the US$9,600
Suite 100 Company's Scintrex Earth Science Instrumentation
Denton, Texas division
USA (2)
83 Jijaws Street Manufacturing, development, sales and service US$28,603
Summer Part, Brisbane office for the Company's Scintrex Earth Science
Australia (2) Instrumentation division
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
Location Use of Facility Annual Rent,
- -------- --------------- if applicable
<S> <C> <C>
90 avenue Denis Papin Sales and marketing and support services for the $30,000
St. Jean de Braye Company's Analytical & Security and Scintrex Earth
France (2) Science Instrumentation divisions
20 Century Road Regional operations and support, data processing, $12,000
Malaga marketing and sales for the Company's Survey &
Australia(2) Exploration Technology division
</TABLE>
(1) Premises owned by the Company.
(2) Premises leased by the Company.
Item 3. Legal Proceedings
On February 23, 1996, Scintrex commenced an action in the Ontario Court of
Justice (General Division) against Timothy Bodger ("Bodger"), Aero Surveys Inc.
("Aero"), Geotech Limited ("Geotech") and two other individuals for damages for
breach of fiduciary duty, breach of contract and for inducing breach of contract
in the aggregate amount of $6,000,000 plus interest and costs. In response to
the Company's claim, Geotech raised a counter-claim against Scintrex in the
amount of $10,000,000 based upon an alleged misuse of trade secrets, and on
alleged breach of contract by two employees of the Company who were formerly
employed by Geotech. Geo tech alleges in the counter-claim that Scintrex
conspired to misuse information confidential to Geotech for the purpose of
cloning airborne geophysical survey technology proprietary to Geotech, known as
the EMEX-II bird. Geotech's counter-claim alleges that Mr. George Petriou, a
former employee of Geotech, divulged information that is confidential to
Geotech. Mr. Petriou denies any such divulgence of information. Scintrex
maintains that it merely conducted repair and maintenance of EMEX-II birds
originally sold to them by Geotech using parts purchased from Geotech. In the
event a court should find liability, it is the position of Scintrex that there
are no recoverable damages, since the plaintiff "Geotech" admits to having
abandoned the EMEX-II technology. Based on the information Scintrex has provided
to its counsel in the action, counsel has advised Scintrex that the
counter-claim is without merit. Scintrex intends to vigorously prosecute its
claim and defend the counter-claim. The action is in the discovery phase. A
trial is scheduled for April 2000.
Item 4. Control of Registrant
The following table sets forth certain information concerning the
beneficial ownership of the Common Shares as at December 31, 1999 of each
officer and director and each person known by the Company who owns beneficially
five percent or more of the Common Shares.
36
<PAGE>
<TABLE>
<CAPTION>
Name and Municipality of Number of Percentage of
Residence of Beneficial Owner Common Shares Common Shares
- ----------------------------- ------------- -------------
<S> <C> <C>
Mariusz Rybak, Ph.D 2,214,576(1)(11) 10.01%
Toronto, Ontario
Andy Rybak, M.A 2,143,746(2)(11) 9.69%
Ottawa, Ontario
Gary Munsinger 1,611,077(3) 7.28%
Tucson, Arizona
Adrian Beale 13,334 0.06%
Oakville, Ontario
Adrian Van Vroenhoven 800 0.00%
Toronto, Ontario
Michel Brown 20,170(4) 0.09%
Gatineau, Ontario
Lawrence Haley, Ph.D 196,139(5) 0.89%
Ottawa, Ontario
Brian Rich 12,500 0.06%
Kanata, Ontario
Terence McConnell 15,000(6) 0.03%
Aurora, Ontario
Jay Sarkar 7,500(7) 0.07%
Thornhill, Ontario
*Phil Hembruff 5,000(8) 0.02%
Burlington, Ontario
Francois Hubert 13,000(9) 0.06%
Gatineau, Ontario
Thomas F. de Faye 33,682(9) 0.15%
London, Ontario
Raymond V. Hession 13,000(10) 0.06%
Ottawa, Ontario
Paul R. Curley 5,000 0.02%
Toronto, Ontario
Alan Green 1,384,054 6.25%
Darien, Connecticut
All executive officers and
directors as a group 6,299,524 28.46%
</TABLE>
- ----------
* Scintrex Ltd. Vice-Presidents
(1) Includes 175,000 Common Shares subject to outstanding options currently
exercisable by Mr. Rybak.
(2) Includes 104,170 Common Shares subject to outstanding options currently
exercisable by Mr. Rybak.
37
<PAGE>
(1) Includes 81,750 Common Shares subject to outstanding options currently
exercisable by Mr. Rybak.
(2) Includes 1,611,077 Common Shares owned by Research Corporation Technologies,
Inc. Mr. Munsinger is President of Research Corporation Technologies, Inc.
(3) Includes 17,670 Common Shares subject to outstanding options currently
exercisable by Mr. Brown.
(4) Includes 10,000 Common Shares subject to outstanding options currently
exercisable by Dr. Haley.
(5) Includes 10,000 Common Shares subject to outstanding options currently
exercisable by Mr. McConnell.
(6) Includes 5,000 Common Shares subject to outstanding options currently
exercisable by Mr. Hembruff.
(7) Includes 13,000 Common Shares subject to outstanding options currently
exercisable by Mr. Hubert.
(8) Includes 11,000 Common Shares subject to outstanding options currently
exercisable by Mr. DeFaye.
(9) Includes 13,000 Common Shares subject to outstanding options currently
exercisable by Mr. Hession.
(10) Pursuant to an escrow agreement (the "TSE Escrow Agreement") entered into
among CIBC Mellon Trust Company (the "Trustee"), the Company and Dr. Mariusz
Rybak, Mr. Andy Rybak, Mr. Alan Greene and Research Corporation Technologies,
Inc. (the "Escrowed Shareholders") concurrently with the filing of a final
prospectus in connection with the Company's December 1997 initial public
offering, the Escrowed Shareholders agreed to deposit with the Trustee an
aggregate of 7,841,684 Common Shares (the "Escrowed Shares"). The Escrowed
Shares, after giving effect to the public offering (assuming neither the
Over-Allotment Options issued in connection with the Company's initial public
offering nor Compensation Options issued in connection with the Company's
initial public offering were exercised), represented 53.76% of the total
outstanding Common Shares. The Toronto Stock Exchange (TSE) Escrow Agreement
provides that Escrow Shares will be automatically released to the Escrowed
Shareholders, as to 25% of the number of Escrowed Shares, on each of the first,
second, third and fourth anniversaries of the date of the Escrowed Shares are
listed on the TSE. Shares were listed on the TSE in December of 1997, and
7,841,684 shares were initially deposited in escrow. As of December 31,
1999, 3,736,420 Common Shares remain in escrow.
Item 5. Nature of Trading Market.
The common shares of the Company are listed on The Toronto Stock Exchange
in Ontario, Canada. The Company's shares are not currently trading on any United
States stock exchange or in the over-the-counter market, and, accordingly, there
is currently no public market for the
38
<PAGE>
common stock of the Company in the United States. There can be no assurance that
any such market will develop after the effective date of this Registration
Statement.
The following table sets forth the reported high and low bid prices for
the common shares as quoted over The Toronto Stock Exchange on a quarterly basis
for the most recent two fiscal years ending December 31, 1999.
High Low
---- ---
First Quarter 1998 $8.90 $7.25
Second Quarter 1998 $8.00 $5.95
Third Quarter 1998 $4.70 $1.50
Fourth Quarter 1998 $2.40 $1.25
First Quarter 1999 $2.20 $1.25
Second Quarter 1999 $3.70 $1.30
Third Quarter 1999 $4.15 $2.90
Fourth Quarter 1999 $5.95 $2.50
As of December 31, 1999, the Company has 22,132,328 shares of Common Stock
issued and outstanding and 4,532 beneficial owners and 545 record owners. As of
December 31, 1999, the Company's share register indicates that 3,369,684 of the
issued and outstanding Common Shares were held by 101 record holders with
addresses in the United States. As of December 31, 1999, there were 3 record
holders of the 572,850 outstanding shares of Class B Stock with addresses in the
United States.
The Company paid dividends to its shareholders in the fiscal year ended
December 31, 1997 of $0.1564 per share. The Company's policy at the present time
is to retain earnings for corporate purposes. The payment of dividends in the
future will depend on the earnings and financial conditions of the Company and
such other factors as the Board of Directors of the Company may consider
approximate. Since the Company is in an expansion stage, it is unlikely that
earnings will be available for the payment of dividends in the near future.
Item 6. Exchange Controls and Other Limitations Affecting Security Holders.
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. See "Item 7 - Taxation."
There is no limitation imposed by Canadian law or by the articles or other
charter documents of the Company on the right of a non-resident to hold or vote
Common Shares of the Company, other than as provided in the Investment Canada
Act, as amended (the "Investment Act").
39
<PAGE>
The Investment Act generally prohibits implementation of a reviewable
investment by an individual, government or agency thereof, corporation,
partnership, trust or joint venture that is not a "Canadian" as defined in the
Investment Act (a "non-Canadian"), unless, after review the Minister responsible
for the Investment Act is satisfied that the investment is likely to be of net
benefit to Canada. If an investment by a non-Canadian is not a reviewable
investment, it nevertheless requires the filing of a short notice which may be
given at any time up to 30 days after the implementation of the investment.
An investment in Common Shares of the Company 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 the Company and the value of the assets of the Company
equaled or exceeded $192 million, the threshold established for 2000, as
indicated on the financial statements of the Company 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 the Company 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 the Company and the value of the assets
were $5.0 million or more, as indicated on the financial statements of the
Company for its fiscal year immediately preceding the implementation of the
investment.
A non-Canadian, whether a WTO investor or otherwise, would acquire control
of the Company for the purposes of the Investment Act if he, she or it acquired
a majority of the Common Shares of the Company or acquired all or substantially
all of the assets used in conjunction with the Company's business. The
acquisition of less than a majority, but one-third or more of the Common Shares
of the Company, would be presumed to be an acquisition of control of the Company
unless it could be established that the Company 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 the Company, including:
(a) an acquisition of Common Shares of the Company 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 the Company 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
40
<PAGE>
(c) an acquisition of control of the Company by reason of an
amalgamation, merger, consolidation or corporate reorganization
following which the ultimate direct or indirect control in fact of
the Company, through the ownership of voting interests, remains
unchanged.
Item 7. 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 the Company, 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 the Company, 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 the Company 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 the Company 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.
41
<PAGE>
Generally, shares of the Company 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 the
Company 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 the Company at any time
within five years preceding the particular time.
A holder of shares of the Company 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 the Company 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 the Company. 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.
Item 8. Selected Financial Data
Selected Financial Information
Set forth below is the selected consolidated financial information for the
period from April 13 to December 31, 1995, years ended December 31, 1996, 1997,
1998 and the periods ended September 30, 1998 and 1999 which are derived from
the Consolidated Financial Statements of the Company and are prepared in
accordance with accounting principals generally accepted in Canada ("Canadian
GAAP"). These principals as applied to the Company do not differ materially from
those accounting principals and requirements of the Securities and Exchange
Commission in the United States ("US GAAP") except as disclosed in Note 18 to
the Company's Consolidated Financial Statements. All figures are in Canadian
funds. This information should be read in conjunction with the Company's
Consolidated Financial Statements and accompanying notes included in this
Registration Statement.
42
<PAGE>
Selected Consolidated Financial Statements
(in Thousands of Dollars)
Updated
<TABLE>
<CAPTION>
Year Ending
Dec. 31 Nine months ending
1994 April 13 to Year ending December 31, September 30
CPAD Holdings December 31, -------------------------------- ---------------------
Ltd. 1995(1) 1996 1997 1998 1998(2) 1999
--- ------- ---- ---- ---- ------- ----
(As restated) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Data
Sales $ 321 $ 1,050 $ 4,443 $ 6,673 $ 21,984 $ 10,691 $ 36,016
Cost of goods
sold 0 0 2624 4053 13,134 6,003 16,901
------- ------- ------- ------- -------- -------- --------
Gross Profit 321 1,050 1,819 2,620 8,850 4,688 19,115
Selling,
general and
administrative
expenses 2,272 352 1,813 1,338 8,133 5,087 7,871
Amortization 18 282 585 596 1,959 1,122 2,319
Interest and
finance -- 136 280 0 0 0 133
Research and
development 0 224 490 490 818 1,106 829
------- ------- ------- ------- -------- -------- --------
Income (loss)
before other
items and
income taxes (1,969) 56 (1,349) 196 (2,060) (2,627) 7,963
Interest and
other income
(expense) 113 116 170 (1,033) 859 782 275
Restructuring
costs -- 0 0 0 (244) (225) (78)
Dilution of
gains -- 0 2,619 680 0 0 0
Goodwill
write-off -- 0 0 (68) 0 0 0
Minority
Interest -- (48) 280 137 0 (8) (19)
------- ------- ------- ------- -------- -------- --------
Net income
(loss) before
income taxes (1,856) 124 1,720 (88) (1,445) (2,078) 8,141
Income tax
(recovery)
provision -- 0 300 (120) (65) 25 (177)
------- ------- ------- ------- -------- -------- --------
Net income
(loss) from
continuing
operations (1,856) 124 1,420 32 (1,380) (2,103) 8,318
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
Year Ending
Dec. 31 Nine months ending
1994 April 13 to Year ending December 31, September 30
CPAD Holdings December 31, -------------------------------- ---------------------
Ltd. 1995(1) 1996 1997 1998 1998(2) 1999
--- ------- ---- ---- ---- ------- ----
(As restated) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Net income
(loss) from
discontinued
operations -- 0 0 (116) 100 105 0
------- ------ ------ -------- -------- -------- -------
Net earnings
(loss) for the
period $(1,856) $ 124 $1,420 $ (84) $ (1,280) $ (1,998) $ 8,318
======= ====== ====== ======== ======== ======== =======
Basic earnings
(loss) per
share $ (0.95) $ 0.02 $ 0.17 $ (0.01) $ (0.07) $ (0.12) $ 0.37
======= ====== ====== ======== ======== ======== =======
Fully diluted
earnings
(loss) per
share $ (0.95) $ 0.02 $ 0.17 $ (0.01) $ (0.07) $ (0.12) $ 0.36
======= ====== ====== ======== ======== ======== =======
Dividends per
common share $ 0.00 $ 0.00 $ 0.00 $ 0.16 $ 0.00 $ 0.00 $ 0.00
------- ------ ------ -------- -------- -------- -------
Weighted
average number
of shares
outstanding 1,949 8,100 8,910 15,159 22,654 18,155 22,668
Adjusted
Weighted
average number
of shares
outstanding 1,949 8,100 8,910 15,159 22,941 18,552 22,995
Balance Sheet Data
(unaudited)
Cash 113 $ 19 $ 961 $ 13,088 $ 1,154 $ 5,437 $ 723
Net Working
Capital
(deficit) 99 418 1,241 16,658 21,311 21,987 28,823
Capital Assets 115 426 459 12,943 12,756 15,062
Total Assets 446 2,844 6,574 36,081 60,385 58,377 71,464
Short-term
bank loan and
current
portion of
long term debt 5 132 1,559 1,640 367 0 1,478
Long-term
debt, net 6 510 1,251 0 0 0 0
Retained
Earnings
(deficit) (1,972) 0 1,259 497 (783) (1,501) 7,535
Dividends 0 0 0 962 0 0 0
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
Year Ended
Dec. 31 Nine months ending
1994 April 13 Year ending December 31, September 30
CPAD Holdings December 31, -------------------------------- ---------------------
Ltd. 1995(1) 1996 1997 1998 1998(2) 1999
--- ------- ---- ---- ---- ------- ----
(As restated) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Shareholders'
equity 204 $125 $1,261 $ 17,819 $ 54,130 $ 53,887 $ 62,697
Changes under
US GAAP
Earnings
(loss) from
continuing
operations -- -- 1,420 32 (1,380) (2,103) 8,318
Deferred
development
costs -- -- -- -- 878 213 824
Amortization -- -- -- -- (29) (6) (90)
Income tax
expense -- -- -- -- 988 333 2,618
Earnings
(loss) from
continuing
operations
under US GAAP -- -- $1,420 $ 32 $ (3,318) $ (2,643) $ 4,956
Earnings
(loss) from
discontinued
operations -- -- -- (116) 100 105 --
Net earnings
(loss) under
US GAAP -- -- 1,420 (84) (3,218) (2,538) 4,966
Other
comprehensive
income (loss)
net of tax:
Foreign
currency
translation
adjustment -- -- -- -- (84) (33) 219
Other
comprehensive
income (loss) -- -- -- -- (84) (33) 219
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
Year Ended
Dec. 31 Nine months ending
1994 April 13 Year ending December 31, September 30
CPAD Holdings December 31, -------------------------------- ---------------------
Ltd. 1995(1) 1996 1997 1998 1998(2) 1999
--- ------- ---- ---- ---- ------- ----
(As restated) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Comprehensive
income (loss)
under US GAAP $ 1,420 $ (84) $ (3,302) $ (2,571) $ 5,185
Earnings
(loss) from
continuing
operations
under US GAAP $-- $-- $ 0.17 $ -- $ (0.17) $ (0.14) $ 0.22
Earnings
(loss) from
discontinued
operations -- -- -- $ (0.01) -- $ 0.01 --
Earnings
(loss) after
discontinued
operations in
US GAAP -- -- $ 0.17 $ (0.01) $ (0.17) $ (0.13) $ 0.22
</TABLE>
- -----------------
(1) IDS Intelligent Detection Systems Inc. was formed in April 1995 and
acquired control of CPAD Technologies Inc. in May 1995. The financial
information reflects consolidated results of operations from such date
forward. Financial Statements for the period January 1, 1995 - April 14,
1995 are unavailable.
(2) The Company acquired Scintrex Limited in June 1998.
Exchange Rate
The following table sets forth for the periods and dates indicated,
certain information concerning exchange rates of United States and Canadian
dollars. All the figures shown represent noon buying rates for cable transfers
in New York City, certified for customs purposes by the Federal Reserve Bank of
New York. The source of this data is the Federal Reserve Bulletin and Digest.
(CDN$/US$)
Period Period End High Low Average
- ------ ---------- ---- --- -------
December 1995 $1.3725 $1.4267 $1.3275 $1.3726
December 1996 $1.3760 $1.3865 $1.3287 $1.3636
December 1997 $1.4305 $1.4399 $1.3345 $1.3843
December 1998 $1.5330 $1.5845 $1.4040 $1.4831
December 1999 $1.4433 $1.5475 $1.4420 $1.4858
46
<PAGE>
Item 9. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
The Company in its present form is the result of the merging of three
lines of business, the chemical detection business, the geophysical
instrumentation and survey and the IEC business. The Company's chemical
detection division was formed as a result of the April 13, 1995 acquisition of
CPAD Holdings Ltd., a company focused on the development of technology for the
detection, identification and analysis of organic chemicals for use in
explosives and landmine detection applications. The Company's IEC division was
formed as a result of the March 1, 1996 acquisition of AGISS Power Technologies
Corporation, a business involved in secure systems integration, consulting and
value-added reselling of computer equipment. As the Company began operation in
its current form as a result of the acquisition of the chemical detection
business on April 13, 1995, only financial information subsequent to this date
is presented.
The following discussion and analysis provides a review of the activities,
results of operations and financial condition of IDS Intelligent Detection
Systems Inc. (the "Company" or "IDS") for the fiscal year ended December 31,
1998 ("1998") in comparison with those for the fiscal year ended December 31,
1997 ("1997"), as well as fiscal year ended December 31, 1997 in comparison with
those for the year ended December 31, 1996 ("1996"). This discussion should be
read in conjunction with the Company's 1996, 1997 and 1998 Consolidated
Financial Statements. All amounts are in Canadian dollars unless otherwise
stated.
In the second quarter of 1998, IDS discontinued the low-margin value-added
reselling activities of its IEC division. The IEC division continues to provide
secure systems integration and consulting services, principally to the Canadian
federal government.
Results of Operations
Nine Month Period Ended September 30, 1999 Compared to the Nine Month Period
Ended September 30, 1998
In the third quarter ended September 30, 1999, the company announced
quarterly revenues of $10.2 million compared to $5.2 million for the third
quarter ended September 30, 1998, an increase of 96 percent. Revenues for the
nine months ended September 30, 1999 increased to $36.0 million compared to
$10.7 million for the nine months ended September 30, 1998. Revenue increased as
a result of growing sales in the worldwide markets for the Company's analytical
and security products increasing from $4.1 million to $14 million, an increasing
production ramp-up on the nuclear contracts in Qinshan, China from $1.8 million
to $11 million as well as several large new contracts awarded to the Surveys
Exploration Technology and Earth Science Instrumentation Divisions. The sales
for these divisions increased from a total of $4.4 million for the nine months
ended September 30, 1998 to $9.8 million for the nine months ended
47
<PAGE>
September 30, 1999. Revenue in the first and second quarters was higher, due
primarily to $7.4 million of revenue related to the Large Vehicle Bomb Detection
System (LVBDS) installation. In the third quarter approximately $400 thousand of
the LVBDS order was recorded and the remaining balance of the order's revenue
approximately $350 thousand is expected to be recognized in the fourth quarter
of 1999.
Gross profit for the nine months ended September 30, 1999 was $19.1
million, compared with $4.7 million for the nine months ended September 30,
1998, representing an increase of 308%. Gross margins as a percentage of revenue
rose to 53% for the nine months ended September 30, 1999, compared to 44% for
the same period in 1998. The gross margin increased as compared to the previous
nine months ended September 30, 1998, primarily with the recognition of the
LVBDS contract and further sales of the portable hand-held analytical and
security products, which carry above average margins for the Company as a whole.
Higher commissions associated with the larger volume contracts and margin
pressure on the geophysical survey business affected the gross margin directly.
Selling, general and administrative (SG&A) expenses for the nine months
ended September 30, 1999 were $7.9 million compared to $5.1 million for the nine
months ended September 30, 1998 on a pre-acquisition basis. This increase is
related to additional expenses assumed with the acquisition of Scintrex Limited
and the development of IDS's security products distribution network. SG&A as a
percentage of sales decreased to 22% for the first nine months of 1999 compared
to 48% of sales for the first nine months of 1998. The first half of the year is
generally characterized by greater up-front sales and marketing expenses
associated with tradeshows and conferences leading to greater demand usually in
the second half of the year. SG&A expenses for the three months ended September
30, 1999 decreased 15 percent compared to the three months ended September 30,
1998. The Company will see further realized savings in SG&A costs as results of
cost reductions that were put into effect during the second quarter of 1999.
Research and development expenses for the nine months ended September 30,
1999 were $0.8 million, compared to $1.1 million for the nine months ended
September 30, 1998. The lower year to date research and development expenses for
1999 are attributed to the increased expenses incurred on new security and
geophysical products, during the post acquisition of Scintrex time period in the
third quarter of 1998. However, in both cases with the increased research and
development expenses, these expenses were offset by significant R&D contract
revenue from external sources like the FAA, Transport Canada and western
Canadian based oil service companies.
Amortization increased from $1.1 million for the nine months ended
September 30, 1998 to $2.3 million for the same period ended September 30, 1999.
The Company continues to incur high depreciation and amortization expenses
associated with the goodwill and asset revaluation on the acquisition of
Scintrex, representing more than $1.0 million alone in the first three quarters
of 1999. IDS carries $18.0 million of goodwill on its balance sheet, principally
from the acquisition of Scintrex.
48
<PAGE>
Net Income Before Other Items and Income Taxes
The net income before other items and income taxes for the nine months
ended December 31, 1999 increased to $8.1 million compared to a net loss of $2.1
million for the nine months ended September 30, 1998. The dramatic increase in
earnings of the Company is the result of higher gross margins, and a wide and
growing acceptance of IDS' advanced sensory technology products from a diverse
array of markets from around the world.
During the first nine months of 1999, the Company received interest income
of $275 thousand compared to $782 thousand for the nine months ended September
30, 1998. This was principally due to the cash proceeds of the Company's initial
public offering and the Special Warrant issue in June of 1998.
The Company incurred a provision of $78 thousand in restructuring costs
during the nine months ended September 30, 1999. These costs were associated
with the reduction of the labor force within the Company. Cost reductions
throughout the organization amounting to $2 million in annual savings in 1999
alone and representing approximately 18 percent of the Company's worldwide
payroll costs.
Income tax recovery for the nine months ended September 30, 1999 was $177
thousand. The tax recovery during the period ended September 30, 1999, results
from the carry back of a non-capital loss to a prior period.
Net income for the nine months ended September 30, 1999 was $8.3 million
compared to a net loss of $2.0 million for the nine months ended September 30,
1998.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
In 1998, revenues increased to $22 million from $6.7 million in 1997. The
results for the year were significantly impacted by the consolidation of
Scintrex effective June 7, 1998, and by the discontinuation of the IEC
value-added reselling business. This discontinued activity, which has been
removed from the presentation of IDS's results for both 1997 and 1998,
contributed $11.4 million in revenues until June 1998, as compared to $17.6
million for the full year in 1997.
Sales for the year ended December 31, 1998 were $22 million compared with
$6.7 million for the year ended December 31, 1997 - representing an increase of
229%. This increase was due primarily to the contribution in revenue from
Scintrex that began in June. The Analytical & Security business increased
revenue from $6.6 million in 1997 to $7.8 million in 1998. This was made
possible by the deployment of the initial drawdown on the FAA order, the release
of a new portable narcotics detector and the contribution of sales from
Scintrex's EVD-3000 hand-held explosives detector starting in June. The Scintrex
Earth Science Instrumentation business, acquired with Scintrex, contributed $7.1
million in revenue from June, despite difficult conditions in commodity markets.
The Survey & Exploration Technology division, acquired with Scintrex,
contributed $4.1 million, with instrumentation integration representing a
sizeable part of the total. IDS Power Control Systems contributed $2.5 million
in revenue, beginning in
49
<PAGE>
June, as it started ramping up work for the Qinshan reactors in China. The IEC
Division achieved sales of $0.6 million in 1998, principally from consulting
activities.
The following table sets out, for the fiscal years ended December 31,1997 and
1998, the percentage of total consolidated revenues received from third parties
by each of the Company's operating divisions accounting for 15% or more of total
consolidated revenues for all divisions.
Sales to Third Party Customers Fiscal Year Ended December 31,
1997 1998
Analytical & Security division 98% 36%
Scintrex Earth Science Instrumentation
division n/a 32%
Survey & Exploration Technology
division n/a 19%
Gross profit for the year ended December 31, 1998 was $8.9 million,
compared with $2.6 million for the year ended December 31, 1997, representing an
increase of 240%. Gross margins as a percentage of revenue rose slightly to 40%
in 1998 compared with 39% in 1997. IDS managed to maintain gross margins at 40%
for the whole year despite the changing business mix brought on by the
acquisition of Scintrex.
Research and development expenses for the year ended December 31, 1998
were $0.8 million compared to $0.5 million for the year ended December 31, 1997,
representing an increase of 67%. The increase resulted primarily from increased
expenses in the Analytical & Security business associated with the development
of portable narcotics detectors, next-generation laser-based detection systems
and breath analyzers.
Selling, general and administrative expenses for the year ended December
31, 1998 were $8.1 million, compared to $1.3 million for the year ended December
31, 1997. This increase related to additional expenses assumed with the
acquisition of Scintrex and the development of IDS's security products
distribution network. SG&A as a percentage of sales increased from 20% in 1997
to 37% for full-year 1998, although it fell in the last quarter to 27% of sales.
Amortization increased from $0.6 million in 1997 to $2.0 million.
Depreciation at IDS actually increased by only $0.1 million to $0.7 million
during the year, with the remainder coming from depreciation at Scintrex of $0.6
million and goodwill amortization of $0.7 million. IDS carries $19 million of
goodwill on its balance sheet, principally from the acquisition of Scintrex.
Loss Before Other Items and Income Taxes
The loss before other items and income taxes for the year ended December
31, 1998 was $2.1
50
<PAGE>
million, compared to a profit of $0.2 million for the year ended December 31,
1997. This loss was due principally to the build-up of infrastructure associated
with the expectation of additional orders from the FAA, and the increased
amortization associated with goodwill incurred on the acquisition of Scintrex.
During the year, the Company received interest income of $0.8 million, as
compared with interest expenses of $1.0 million in 1997. This was principally
due to the cash proceeds of the initial public offering of the Company in
December 1997 and the Special Warrant issue in March 1998.
The Company incurred $0.25 million in restructuring costs related to the
acquisition of Scintrex during 1998. These costs were associated with management
changes and the consolidation of the security activities of the two companies in
Ottawa.
Net loss from continuing operations for the year ended December 31, 1998
was $1.3 million, compared to a net loss of $0.1 million for the year ended
December 31, 1997.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Sales for the year ended December 31, 1997 were $6.7 million compared to
$4.4 million for the year ended December 31, 1996, representing an increase of
52%. This increase is due primarily to an increase in revenue from the chemical
detection division. Revenues for the chemical detection division increased from
$0.1 million in 1996 to $6.6 million in 1997. The increase in chemical detection
revenues is due to sales of explosive detection equipment to the FAA and other
international clients and narcotics detection equipment to correctional service
agencies in Canada and the United States. Revenues increased only $2.3 million
in 1997 despite increased sales in the chemical detection division as a result
of a restatement of financial results in 1997 arising from the discontinuance of
the reselling business.
For the fiscal year ended December 31, 1997, the company had a gross
margin of $2.6 million compared to $1.8 million of the year ended December 31,
1996 representing an increase of 44%. The increase was directly a result of
increased revenues in the chemical detection division. The gross margins for the
company were lower at 39% for the year ended December 31, 1997, compared to
gross margins of 41% for the year ended December 31, 1996. Research and
development expenses, net of investment tax credits, for the year ended December
31, 1997 amounted to $0.5 million, virtually no change from the year ended
December 31, 1996. In the year ended December 31, 1996, considerable materials
were consumed in the development of downsized explosive detection and mine
detector prototypes.
Selling, general and administrative expenses for the year ended December
31, 1997 were $l.3 million compared to $1.8 million for the year ended December
31, 1996, representing a decrease of 26%. This decrease resulted primarily from
the discontinuation of the IEC resale business division.
Interest expense for the year ended December 31, 1997 was $1 million
compared to $0.17
51
<PAGE>
million for the year ended December 31, 1996 representing an increase of 488%.
Finance charges were incurred during the year ended December 31, 1997 as a
result of the restructuring of debts owing to Research Corporation Technologies,
Inc., all of which were satisfied by the share conversion in conjunction with
the amalgamation transaction.
The earnings before other items income taxes for the year ended December
31, 1997 were $0.2 million compared to a loss of $1.3 million for the year ended
December 31, 1996. The improvement in earnings is due to a decrease in selling,
general and administrative expenses from the discontinued IEC resale business
and the decrease interest expenses resulting from the share conversion of the
promissory note payable to Research Corporation Technologies, Inc.
During the year ended December 31, 1996, the disposal of shares held in
CPAD by "old IDS" to third parties for cash and the issuance of share capital by
CPAD Technologies Inc. in conjunction with the acquisition of AGISS Power
Technologies Corporation had an anti-dilutive effect. During the year ended
December 31, 1997, the disposal of shares held in CPAD by "old IDS" to third
parties for cash had an anti-dilutive effect.
Income tax recovery for the year ended December 31, 1997 was $0.12
million. The tax recovery during the year ended December 31, 1997 results from
the carry back of the non-capital loss incurred during this period to the fiscal
year 1996.
Net loss for the year ended December 31, 1997 was $0.1 million compared to
net earnings of $1.4 million for the year ended December 31, 1996. The 1996 net
earnings are attributable to dilution gains. The 1997 results are attributable
to operations as the dilution gains were offset by finance charges incurred on
conversion of long-term debt to equity.
Liquidity and Capital Resources
On March 12, 1998, the Company completed a Special Warrant issue of common
shares, which raised $18.8 million. In June 1998, IDS completed the acquisition
of Scintrex for a total consideration of $36.2 million, including $18.3 million
in cash. The proceeds of the initial public offering were used to complete this
acquisition.
During fiscal 1997 and 1998, the Company funded its activities through
cash provided by financing activities from a Special Warrant issue. At the nine
months ended September 30, 1998 and 1999, cash provided by operating activities
was a use of $5.7 million and $1.8 million, respectively. At September 30, 1998
and 1999, the Company had working capital of $22.0 million and $28.8 million,
respectively.
Cash used in investment activities at September 30, 1998 was $20.1
million, and was primarily related to the acquisition of Scintrex Limited,
common shares, and the purchases of capital assets. At September 30, 1999 the
Company's investing activities consisted primarily of the purchase of equipment
and the renovations of the Scintrex facility in Concord, Ontario and the
purchase of computer hardware and software, thus representing capital
52
<PAGE>
expenditures of $3.6 million.
Cash generated through financing activities for fiscal 1998 resulted
primarily from the sale of Special Warrants of the Company's common shares for
net proceeds of $18.1 million. Cash generated through financing activities at
September 30, 1999 resulted primarily from the utilization of the company's
existing operating banking facility, for a total of $1.1 million. The increase
in the utilization of the banking facility was used for the purchase of direct
materials inventory and the manufacturing of products in the Analytical and
Security and the IDS Power Control Systems Divisions.
As at September 30, 1999, the Company's principal sources of liquidity
consisted of cash in the amount of $723 thousand and a short-term operating
credit facility (the "Facility") of approximately $15 million from the Toronto
Dominion Bank. It has been the Company's experience that its customers pay their
accounts on a timely basis and the Company's bad debt expense has historically
been negligible. As at September 30, 1999, the Company had $1.5 million
outstanding under the Facility. Principal amounts outstanding under the Facility
bear interest at national prime (6.25% at September 30, 1999). Availability
under the Facility is calculated based on 90 percent of qualified Economic
Development Corporation ("EDC") insured accounts receivable and no more than 67
percent for non-EDC insured accounts receivables. The Company has pledged its
inventory, accounts receivable and certain intangible rights to secure
indebtedness under the operating facility. Under the Facility, the Company is
subject to certain covenants regarding its operations and corporate actions,
such as restrictions relating to the borrowing of funds, changes in control,
liquidation and dividends.
The Company measures its backlog of product sales as orders for which
contracts or purchase orders have been signed, but that have not yet been
shipped and for which revenues have not yet been recognized. The Company
typically ships its product within three months of receiving an order. As of
September 30, 1999, Scintrex had in its backlog product orders totaling an
aggregate of $16,100,000: $3,000,000, $3,300,000 and $9,800,000 in each of its
Earth Science Instrumentation Division, Surveys Exploration Technology Division
and Power Control Systems Division, respectively. Products recorded in
Scintrex's backlog for each of its Earth Science Instrumentation Division and
Surveys Exploration Technology Division are scheduled for delivery in 1999, and
in the case of the Power Control Systems Division are scheduled for delivery
from 1999 to 2001.
The Company believes that its existing cash resources and cashflow from
operations will be sufficient to fund the Company's operations for a least the
next twelve to twenty-four months.
Over the next twelve months, cash and income generated from Scintex, which
continues to be integrated into the Company since its acquisition in 1998, is
anticipating to provide the Company with amble
53
<PAGE>
liquidity to focus on the core business of the chemical trace detection and
power control systems divisions. The Company's oil exploration survey and
instrumentation business is anticipated to generage increased revenues if oil
prices remain strong.
Year 2000 Issues
The Company did not experience any interruptions or problems caused by
Year 2000 issues nor, to our knowledge, did out principal suppliers or
customers.
Item 9A Quantitative and Qualitative Disclosure About Market Risk
The Company exposed to financial market risks including changes in foreign
currency exchange rates and interest rates. In 1998 and the nine months ended
September 30, 1999, over 90% of our revenues were from sales outside Canada and
were transacted in United States dollars. The Company's expenses are largely in
Canadian dollars. As a result, changes in foreign currency exchange rate or
foreign markets could adversely affect our financial results.
54
<PAGE>
We do not use derivative instruments to hedge our foreign exchange risks.
55
<PAGE>
The majority of our exposure relates to routine sales and collections on such
sales.
Item 10. Directors and Officers of Company.
Directors and Officers
The following table lists the directors and executive officers of IDS as
of December 31, 1999:
Name Age Position
Mariusz S. Rybak 46 Director, Chief Executive Officer,
President, Chairman of the Board
Andy A. Rybak 53 Director, Executive Vice President, Vice
Chairman of the Board
Francois Hubert 52 Director, Chairperson of Audit Committee
Thomas F. de Faye 56 Director
Raymond V. Hession 58 Director, Chairperson of Audit Committee
Paul R. Curley 56 Director
Lawrence Haley 52 Director, Vice President, Research and
Development
Gary Munsinger 62 Director
Adrian van Vroenhoven 42 Chief Financial Officer
Adrian Beale 56 Senior Vice President, Operations
Brian Rich 43 Vice President, Design and Product
Engineering
Michel Brown 38 Vice President, IEC Division
Thomas A. Houston 46 Secretary
Dr. Mariusz S. Rybak, President and Chief Executive Officer
Prior to acquiring control of CPAD in April 1995, Dr. Rybak was President
of Areco Canada Inc., an environmental consulting company, which he founded in
1986. Dr. Rybak has previously been a visiting Professor at Brock University,
University of Toronto and a Professor at the Institute of Hydrobiology and Water
Conservation in Olsztyn, Poland. Dr. Rybak holds a Ph.D. in environmental
engineering from the Institute of Hydrobiology and has published more than 30
articles in international scientific journals. Mr. Mariusz Rybak is the brother
of Mr. Andy Rybak.
Andy A. Rybak, Executive Vice-President
56
<PAGE>
Mr. Rybak has served as Executive Vice-President since April 1995. Prior
to joining the Company, Mr. Rybak was the President of Adamas Environmental
Inc., an environmental engineering company which he co-founded with Dr. Mariusz
Rybak in 1986. Mr. Rybak previously held senior marketing positions in the ship
building industry in Eastern Europe and the shipping industry in Canada. Mr.
Rybak holds a Master of Arts in Economics from the Gdansk University in Poland.
Mr. Andy Rybak is the brother of Mr. Mariusz Rybak.
Dr. Lawrence V. Haley, Vice-President, Research and Development
Dr. Haley joined the Company in 1988 and is responsible for the management
and direction of the Company's research and development effort. Prior to 1988,
Dr. Haley was a Senior Research Associate at Carleton University and an Adjunct
Professor. Dr. Haley holds a Ph.D. in Theoretical Chemistry from the University
of Pennsylvania and has published over 40 articles in international scientific
journals.
Francois Hubert, Director
Mr. Hubert has been a Director of the Company since December 1997. Since
February 1999, Mr. Hubert was appointed District Vice President of Hitachi Data
Systems, a computer hardware manufacturer of information technology and
integration systems. Mr. Hubert was a Partner and Director of CGI, another
computer firm, from June 1997 through January 1999. Mr. Hubert is also a
director of ChemiCorp International Inc., a company engaged in industrial
process control, since January 1999. Prior to June 1997, Mr. Hubert was employed
as a Director of Information Technology with the Government of Canada for a
period of 10 years.
Thomas F. de Faye, Director
Mr. de Faye has been a Director of the Company since 1997. Since, January
1998, he has been the Director of International Sales and Marketing, Diesel
Division, of General Motors of Canada Limited (an automotive company). From
1996 through 1997, he was a Major General in the Canadian Armed Forces and a
military attache of the Canadian Armed Forces in the United States. Prior to
1996, he served as Chief of Force Development and Commander of Land Forces
Western Area for the Canadian Armed Forces.
Raymond V. Hession, Director
Mr. Hession has been a Director of the Company since 1996. Since October
1995, he has been President and Chief Executive Officer of Hession, Neville &
Associates (a government relations consulting firm) and Chairman of the Board of
Hickling Lewis Brod Inc. (an economics consulting firm).
Gary Munsinger, Director
Mr. Munsinger has been a Director of the Company since January 2000.
He is the President of Research Corporation Technologies Inc., a
firm which specializes in the licensing and patenting of technologies.
Adrian van Vroenhoven, Chief Financial Officer
Mr. van Vroenhoven was appointed Chief Financial Officer of the Company
effective August 20, 1999. From February 1996 to August 1999 Mr. van Vroenhoven
was an independent contractor, where he acted as a CFO/Financial Consultant for
his clients. Mr. van Vroenhoven's clients included Corby Distilleries, Inc.,
YTV, Inc., Liquor License Control Board of Ontario and ManuLife Financial. Mr.
van Vroenhoven has more than 17 years experience in both private and public
sector financial management. From 1993 to February, 1996 Mr. van Vroenhoven was
controller at MacLean Hunter, a paging communications firm. Mr van Vroenhoven
currently holds a CA and a CMA designation.
Adrian Beale, Senior Vice President, Operations
Mr. Beale has been Senior Vice President of Operations for the Company
since August 1999, when his title was changed from Vice President of Operations.
Prior to June 1998, Mr. Beale was Vice President of Operations for Scintrex
Limited from 1990 and became Vice President of Operations for the entire company
when the Company acquired Scintrex in 1998.
Brian Rich, Vice President of Design and Product Engineering
57
<PAGE>
Mr. Rich has been with the Company since February 1998. Prior to joining
the Company, Mr. Rich was a co-founder and Vice President of Engineering and
Systems at Senstar-Stellar Corporation, where he was employed for over 17 years.
Mr. Rich holds a Bachelor's degree in Electrical Engineering from the University
of Toronto.
Michel Brown, Vice-President, IEC Division
Michel Brown has served as the Vice President of the IEC division of IDS,
since July 1998. Prior to becoming Vice President of the IEC division, Mr. Brown
was the Senior Vice President of Operations for the Company from May 1997 to
July 1998. Mr. Brown has also served as Vice President of systems engineering
and a Director of Secure Systems Integration for AGISS Power Technologies corp.,
a value added reseller of computer hardware, software and systems engineering
services, from May 1994 to May 1997. Prior to joining AGISS, Mr. Brown served a
number of years in the Canadian Armed Forces.
Thomas A. Houston, Secretary
Mr. Houston has been Secretary of the Company since 1999. He has been a
partner of the firm of Fraser Milner, legal counsel to the Company, since 1985.
Board Committees
The Board currently has two committees: the Audit Committee and the
Compensation Committee. From time to time, ad hoc committees of the Board are
appointed to consider particular issues or conduct specific reviews.
Audit Committee
During the financial year ended December 31, 1998, the Audit Committee was
comprised of two "unrelated directors" and one "related director". The committee
is responsible for reviewing the Company's financial reporting procedures,
internal controls and the performance of the Company's external auditors. The
committee is also responsible for reviewing quarterly financial statements and
the annual financial statements prior to their approval by the full Board of
Directors. The Audit Committee met six times during the financial year ended
December 31, 1998. Currently, the members of the Audit Committee are Francois
Hubert, Raymond V. Hession and Mariusz S. Rybak.
Compensation Committee
During the financial year ended December 31, 1998, the Compensation
Committee was comprised of two "unrelated directors". The committee makes
recommendations to the Board on, among other things, the compensation of senior
executives. The committee held three meetings during the financial year ended
December 31, 1998. Currently, the members of the Compensation Committee are
Francois Hubert and Raymond V. Hession.
Employment Contracts
The Company has entered into employment agreements dated as of September
1, 1998 (the "Rybak Employment Agreements") with each of Mariusz S. Rybak,
President and Chief Executive Officer, and Andy A. Rybak, Executive
Vice-President. The Rybak Employment
58
<PAGE>
Agreements amend and replace the Rybaks' employment agreements dated October 15,
1997, the details of which were described in the Company's management proxy
circular distributed to shareholders in connection with the Company's annual and
special meeting of shareholders held on June 22, 1998. The terms of the Rybak
Employment Agreements are identical, except with respect to salaries and
severance entitlement as noted below. The base annual salaries of Mariusz S.
Rybak and Andy A. Rybak are $275,000 and $170,000, respectively, and are subject
to annual review by the Company's Compensation Committee. In addition, Mariusz
S. Rybak and Andy A. Rybak are entitled to be paid bonuses of up to 75% and 40%
of their annual base salaries, respectively, if certain targets are met based on
the Company reaching specified revenue and earnings per share targets. The term
of Mariusz S. Rybak's employment runs to August 31, 2002 and, thereafter, will
be automatically extended for a three year period until August 31, 2005 and,
thereafter, will be automatically extended for successive one-year periods,
subject to the rights of termination described below. The term of Andy A.
Rybak's employment agreement runs to August 31, 2001 and, thereafter, will be
automatically extended for successive one-year periods, subject to the rights of
termination described below.
Each Rybak Employment Agreement may be terminated by the Company for cause
at any time without notice or further compensation and without cause on
specified notice or a lump sum payment in lieu of notice, such notice being
twenty-four months in the case of Mariusz S. Rybak and twelve months in the case
of Andy A. Rybak. In addition, in the event that Mariusz S. Rybak is terminated
without cause or his employment agreement is not renewed after the initial
four-year term, he is entitled to receive a lump sum payment equal to fifty
percent of the value of 200,000 Shares determined as at the date of his
termination. Each of the Rybak Employment Agreements may be terminated by the
applicable employee on not less than three months' notice.
The Company entered into an employment agreement with Adrian van
Vroenhoven, Chief Financial Officer (the "Vroenhoven Agreement"). The base
annual salary for Mr. van Vroenhoven is $120,000. Pursuant to the terms of the
Vroenhoven Agreement, Mr. van Vroenhoven is a probationary employee until
February, 2000. Mr. van Vroenhoven is entitled to be paid a bonus of up to 20%
of his annual salary if certain specified performance targets are met. The
Company and Mr. van Vroenhoven are currently negotiating a three (3) year
employment agreement. The Vroenhoven Agreement may be terminated by the Company
for cause at any time without notice or further compensation and without cause
on two weeks notice or a payment in lieu of notice plus applicable severance
which Ontario law requires be negotiated between management and the Company.
The Company has also entered into employment agreements (the "Employment
Agreements") with each of Phil Hembruff, Vice-President and General Manager,
Scintrex Earth Sciences Instrumentation Division; Terence J. McConnell,
Vice-President, Survey and Exploration Technology Division; Jay Sarkar,
Vice-President, IDS Power Control Systems Division. The terms of the Employment
Agreements are identical, except with respect to salaries and severance
entitlements as noted below. The base annual salaries of Mr. Hembruff, Mr.
McConnell, Mr. Sarkar and Mr. Brown are $110,000, $110,000, $90,000 and
$100,000, respectively, and are subject to annual review by the Company's
Compensation Committee. In addition, each of Mr. Hembruff, Mr. McConnell, Mr.
Sarkar and Mr. Brown are entitled to be
59
<PAGE>
paid bonuses of up to 20% of their base salaries if certain specified
performance targets are met. The terms of the Employment Agreements for Mr.
Hembruff, Mr. McConnell and Mr. Brown run for a three-year period from September
1998. Mr. Sarkar's Employment Agreement is subject to annual renewals commencing
September 28, 1999.
Each of the Employment Agreements may be terminated by the Company for
cause at any time without notice or further compensation and without cause on
specified notice or a lump sum payment in lieu of notice equal to twelve months
compensation, provided that the employment of each of Mr. Hembruff and Mr.
McConnell may be terminated without cause at the end of the term of their
respective Employment Agreements on six months notice or upon payment of a lump
sum equal to six months compensation. Each of the Employment Agreements may be
terminated by the applicable employee on not less than three months' notice.
Each of the named executive officers has also agreed to assign to the
Company all rights in any inventions, discoveries and designs made or conceived
by the employee relating to the business of the Company. Finally, each named
executive officer's employment agreement contains non-competition and
non-solicitation covenants.
Directors' and Officers' Insurance
The Company currently maintains liability insurance for the directors and
officers of the Company in the amount of $15,000,000 for an annual premium of
$58,930 plus applicable taxes.
60
<PAGE>
Item 11. Compensation of Directors and Officers.
The following table sets forth the compensation paid to the Company's
Chief Executive Officer and the other four most highly compensated executive
officers for the fiscal years ended December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
------------------------------------------ ----------------------------
Name and Principal Period Other Securities
- ------------------- Ended Annual Options All other
Position Dec. 31 Salary($) Bonus($) Compensation($) Granted(#) Compensation($)
- -------- ------- --------- -------- --------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
MARIUSZ S. RYBAK 1999 275,000 219,326 - - -
Chief Executive 1998 209,050 50,000 - 220,000 -
Officer 1997 136,125 - - 150,000 -
ANDY A. RYBAK 1999 170,000 45,333 - 10,000 -
Executive 1998 156,270 - - 90,000 -
Vice-President 1997 105,958 - - 125,000 -
</TABLE>
61
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
JAY SARKAR(1)
Vice-President, IDS 1999 90,000 238,568 -- 10,000 --
Power Control Systems 1998 66,923(2) 40,663(3) -- 30,000 3,346(4)
ADRIAN BEALE
Senior Vice-president,
Operations 1999 120,000 54,538 -- -- --
MICHEL BROWN
Vice-president, IEC 1999 100,000 27,968 -- -- --
</TABLE>
--------------
(1) Mr. Sarkar became an executive officer of the Company on June 8, 1998 upon
the acquisition of approximately 95% of the issued and outstanding shares of
Scintrex Limited ("Scintrex") pursuant to an offer mailed by the Company to
shareholders of Scintrex on April 15, 1998.
(2) Of Mr. Sarkar's total salary for the financial year ended December 31, 1998,
$27,692 was paid by Scintrex prior to June 8, 1998.
(3) Of Mr. Sarkar's total bonus for the financial year ended December 31, 1998,
$30,311 was paid by Scintrex prior to June 8, 1998.
(4) Consists of $3,346 paid as a defined contribution to an Ontario registered
pension plan, of which $1,384 was paid by Scintrex prior to June 8, 1998.
Compensation of Directors
The Company pays a $500 meeting fee to each non-executive director and a
$7,000 annual retainer to each non-executive director. In addition, the Company
grants 5,000 stock options under the terms of the 1997 Option Plan to each
non-executive director each year, which options vest on the first anniversary of
the date of grant. Both Chairman of the Audit and Compensatio9n Committees
receive an additional $3,000 annual retainer, plus the Company grants an
additional 3,000 stock options.
Item 12. Options to Purchase Securities from Company or Subsidiaries.
62
<PAGE>
On October 22, 1997, the Company adopted the 1997 Stock Option Plan (the
"1997 Option Plan") pursuant to which the Board of Directors or the Compensation
Committee may from time to time grant to the directors, consultants, officers or
eligible employees of the Company and its subsidiaries options to acquire Shares
in such numbers, for such terms and at such exercise prices as are determined by
the Board of Directors or the Compensation Committee. It is the Company's
intention to grant options under the 1997 Option plan principally to key
employees. The purpose of the 1997 Option Plan is to advance the interests of
the Company by providing key employees with a financial incentive for the
continued improvement in the performance of the Company and encouragement to
stay with the Company. Under the 1997 Option Plan, the option price must be not
less than the fair value or the market price of the Shares at the time the
option is granted, and the option term may not exceed ten years. Options granted
under the 1997 Option Plan are non-transferable and terminate on cessation of
employment or directorship with the Company for all causes other than death,
unless otherwise determined by the Board of Directors. It is not intended that
any financial assistance will be provided to optionees to facilitate the
purchase of Shares under the 1997 Option Plan.
The maximum number of Shares which are reserved for issuance under the
1997 Option Plan is 1,500,000 Shares and no individual may hold options to
purchase Shares exceeding 5% of the then outstanding number of Shares. In
addition, the 1997 Option Plan contains certain other restrictions which limit
the number of Shares which may be issued under the 1997 Option Plan to insiders
of the Company.
Generally, options granted under the 1997 Option Plan will expire seven to
ten years from the date of grant or such lesser period of time as the Board of
Directors or the Compensation Committee may approve. Options may be exercised in
whole or in part any time after a date specified by the Board of Directors, upon
prior notice to the Company. Theoptions will generally vest over a three year
period following the date of grant, and be exercisable on a quarterly basis
following the date of the grant of the options.
Stock Options
63
<PAGE>
Option Grants during the Fiscal Year Ended December 31, 1999
<TABLE>
<CAPTION>
Market
Value of
% of Total Securities
Common Options Underlying
Share Granted to Options on
Under Employees Exercise or the Date of
Options in Financial Base Price Grant
Name (#) Year ($/Security) ($/Security) Expiration Date
- ---- --- ---- ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C>
Andy A. Rybak 10,000 4.8 2.00 2.00 December 31, 2008
Jay Sarkar 10,000 4.8 2.00 2.00 December 21, 2008
</TABLE>
The following table sets forth certain information regarding the number
and value of options granted to the Executive Officers of the Company under the
1997 Option Plan.
64
<PAGE>
Aggregated Option Exercises during
the Year Ended December 31, 1999 and Fiscal Year-End Values
<TABLE>
<CAPTION>
Securities Value of Unexercised
Acquired Aggregate Unexercised Options in-the-Money Options
on Exercise Value at FY-End(#) at FY-End($)
Name (#) Realized($) Exercisable/Unexercisable Exercisable/Unexercisable
- ---- --- ----------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Mariusz S. Rybak -- -- 175,000/322,500 NA/NA
Andy A. Rybak -- -- 104,170/186,250 NA/NA
Jay Sarkar 8,334 32,086 5,834/31,660 NA/NA
Adrian Beale 13,336 60,012 3,334/26,664 NA/NA
Michel Brown -- -- 4,170/10,000 NA/NA
</TABLE>
Item 13. Interest of Management in Certain Transactions.
Except as disclosed below, none of the directors, senior officers,
principal shareholders, or associates or affiliates of such persons or
companies, has or has had, directly or indirectly, any material interest in any
material transaction with the Company within the past three years or in any
proposed transaction which will materially affect the Company.
In July 1998 the Company registered 503,249 shares of Common Stock by
certain officers and principal shareholders of the Company, which shares were
subsequently sold by such selling shareholders. The selling shareholders
included Mariusz Rybak, who sold 113,397 shares; Andy Rybak, who sold 113,397
shares; Alan Greene, who sold 97,199 shares and Research Corporation
Technologies, Inc., which sold 179,256 shares.
PART II
Item 14. Description of Securities to be Registered.
Common Shares
The Company's capital consists of an unlimited number of common shares
without par value and an unlimited number of Class B Shares. As of December 31,
1999, 22,132,328 common shares were issued and outstanding and 572,850 Class B
Shares were issued and outstanding.
Each of the classes of shares of the Company is identical in all respects
except that the
65
<PAGE>
Common Shares are entitled to one vote per share at meetings of shareholders and
the Class B Shares are non-voting except where a vote is provided by applicable
law.
The holders of the Class A Shares and Class B 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 stock upon liquidation, dissolution or
winding up of our affairs;
o do not have preemptive, subscription or conversion rights, or redemption
or access to any sinking fund; and
Escrow Agreement
Pursuant to the TSE Escrow Agreement entered into among the Trustee and
the Escrowed Shareholders concurrently with the filing of a final prospectus in
connection with the Company's December 1997 initial public offering, the
Escrowed Shareholders agreed to deposit with the Trustee an aggregate of
7,841,684 Common Shares. These shares, after giving effect to the public
offering (assuming neither the Over-Allotment Options issued in connection with
the Company's initial public offering nor Compensation Options issued in
connection with the Company's initial public offering were exercised),
represented 53.76% of the total outstanding Common Shares. The TSE Escrow
Agreement provides that the Escrowed Shares may not be sold, pledged,
hypothecated, alienated, transferred within escrow or in any manner dealt with,
without the prior written consent, order or direction of the TSE. The Escrowed
Shares will be automatically released to the Escrowed Shareholders, as to 25% of
the number of Escrowed Shares, on each of the first (less the number of Common
Shares transferable by the Escrowed Shareholders on the exercise of the Special
Warrants), second, third and fourth anniversaries of the date the Escrowed
Shares are listed on the TSE. In connection with the Special Warrant offering,
the TSE consented to the Escrowed Shareholders selling an aggregate of 503,250
Common Shares in order to satisfy the Company's delivery obligations in respect
of the Common Shares issuable on the exercise of certain Special Warrants under
such offering. Such substituted delivery represented 457,500 of the 3,507,500
Special Warrants issued by the Company, with the remaining 3,050,000 Special
Warrants satisfied by the issuance by the Company of 3,355,000 Common Shares.
In addition to the TSE Escrow Agreement, the Escrowed Shareholders and
certain other executive officers and shareholders of the Company have entered
into contractual escrow agreements with the underwriters of the public offering
in December 1997. Under the contractual escrow agreements with the Escrowed
Shareholders, the Escrowed Shareholders have agreed not to sell or otherwise
dispose of their Common Shares for a period of three years after closing without
the consent of the underwriters of the public offering except that, subject to
the TSE Escrow Agreement and applicable law, up to 20% of such Common Shares
after one year and up to an additional 40% of such Common Shares after two
years.
66
<PAGE>
As of December 31, 1999, 3,736,420 of the Company's shares were held in
escrow, 16,462,985 shares were free-trading and 1,368,160 shares were subject to
varying hold terms pursuant to the policies of The Toronto Stock Exchange.
The transfer agent and registrar for the common shares of the Company is
CIBC Mellon Trust Company, 320 Bay Street, PO Box 1, Toronto, Ontario, Canada,
M5H 4A6.
PART III
Item 15. Defaults Upon Senior Securities.
Not applicable.
Item 16. Changes in Securities and Changes in Security for Registered
Securities.
Not applicable.
PART IV
Item 17. Financial Statements
See Item 19(a). Pages F-1 through F-28 are incorporated by reference.
Item 18. Financial Statements
The Company has elected, pursuant to instruction G(c) to Form 20-F, to
provide financial statements pursuant to Item 17.
67
<PAGE>
Item 19(a) Financial Statements and Exhibits
(a) Index to Consolidated Financial Statements of
IDS Intelligent Detection Systems Inc.
Page No.
--------
IDS Intelligent Detection Systems Inc.
--------------------------------------
Auditors Report F-1
Balance Sheet F-2
Statement of Earnings F-3
Statement of Retained Earnings F-4
Statement of Cash Flow F-5
Notes to Consolidated Financial Statements F-6
Scintrex Limited
----------------
Auditor's Report F-26
Balance Sheet F-27
Statement of Retained Earnings F-28
Statement of Earnings F-29
Statement of Changes in Financial Position F-30
Notes to Consolidated Financial Statements F-31
IDS Intelligent Detection Systems Inc.
--------------------------------------
Unaudited Pro Forms Consolidated Income Statement F-42
<TABLE>
<S> <C>
(b) Exhibits(1)
3 (a) Articles of Incorporation for MAA International Corporation dated May 6,
1995(1)
3 (b) Articles of Amendment dated August 27, 1997 for name change from
MAA International Corporation to IDS Intelligent Detection Systems Inc.(1)
3 (c) Articles of Amalgamation dated September 30, 1997(1)
3 (d) Articles of Amendment dated November 21, 1997(1)
3 (e) By-laws(1)
10 (a) Sublease between IDS Intelligent Detection Systems Inc. and Egon Zehnder
International dated October 28, 1998 for King Street property(1)
10 (b) Lease between IDS Intelligent Detection Systems Inc. and Curb II 1993
Limited Partnership dated October 1, 1997 for Cleopatra Drive property(1)
10 (c) Employment Agreement between IDS Intelligent Detection Systems Inc. and
Mariusz S. Rybak dated September 1, 1998(1)
10 (d) Employment Agreement between IDS Intelligent Detection Systems Inc. and
Andy A. Rybak dated September 1, 1998(1)
10 (e) Employment Agreement between IDS Intelligent Detection Systems Inc. and
Phil Hembruff dated September 28, 1998(1)
10 (f) Employment Agreement between IDS Intelligent Detection Systems Inc. and
Terence J. McConnell dated September 28, 1998(1)
10 (g) Employment Agreement between IDS Intelligent Detection Systems Inc. and
Jay
</TABLE>
68
<PAGE>
<TABLE>
<S> <C>
Sarkar dated September 28, 1998(1)
10 (h) Employment Agreement between IDS Intelligent Detection Systems Inc. and
Adrian van Vroenhoven dated August 19, 1999(1)
10 (i) License Agreement between CPAD Holdings Ltd. and Research Corporation
Technologies, Inc. dated as of September 1, 1988 and amended April 13, 1995(1)
10 (j) Offer to purchase all of the issued and outstanding shares of
Scintrex, dated April 15, 1998, as varied and extended on May 1, 1998,
May 12, 1998 and May 26, 1998(1)
10 (k) Escrow Agreement between IDS Intelligent Detection Systems Inc., CIBC
Mellon Trust Company, Dr. Mariusz Rybak, Andy Rybak, Alan Greene and Research
Corporation Technologies, Inc.(1)
10 (l) Lease for premises at 11 King Street West property between the
Company and Omers Realty Management Corporation dated September 1,
1999.
21 List of Subsidiaries
</TABLE>
69
<PAGE>
Filed with the Company's Registration Statement on Form 20-F on
December 14, 1999.(1)
<PAGE>
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.
IDS INTELLIGENT DETECTION SYSTEMS INC./
SYSTEMES DE DETECTION INTELLIGENTS INC.
By: /s/ Mariusz S. Rybak
-------------------------------------
Mariusz S. Rybak
Chief Executive Officer
Date: February 7, 2000
71
<PAGE>
[KPMG Letterhead]
AUDITORS' REPORT TO THE SHAREHOLDERS
We have audited the consolidated balance sheets of IDS Intelligent Detection
Systems Inc. as at December 31, 1998 and 1997 and the consolidated statements of
earnings, retained earnings (deficit) and cash flows for each of the three years
ended December 31, 1998, 1997 and 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 1998
and 1997 and the results of its operations and its cash flows for each of the
three years ended December 31, 1998, 1997 and 1996 in accordance with Canadian
generally accepted accounting principles.
/s/ KPMG LLP
Chartered Accountants
Ottawa, Canada
December 14, 1999
F-1
<PAGE>
IDS INTELLIGENT DETECTION SYSTEMS INC.
Consolidated Balance Sheets
(In thousands of Canadian dollars)
<TABLE>
<CAPTION>
December 31,
September 30, ---------------
1999 1998 1997
---- ---- ----
(unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash $ 723 $ 1,154 $ 13,088
Accounts receivable 17,401 10,990 3,354
Unbilled revenue 4,519 1,707 -
Investment tax credit receivable 119 119 435
Income taxes recoverable 128 29 272
Inventory (note 4) 13,294 12,605 511
Prepaid expenses 1,049 725 56
Assets of discontinued operations - 76 17,154
--------- -------- --------
37,233 27,405 34,870
Long-term investments 327 243 -
Capital assets (note 5) 15,062 12,943 459
Deferred development costs 824 979 -
Goodwill 18,018 18,815 752
--------- -------- -------
$ 71,464 $ 60,385 36,081
========= ======== =======
Liabilities and Shareholders' Equity
Current liabilities:
Bank loan (note 6) $ 1,478 $ 367 $ 1,552
Accounts payable and accrued liabilities 6,634 5,472 2,713
Deferred revenue 84 125 276
Income taxes payable 214 130 -
Current portion of long-term debt - - 88
Liabilities of discontinued operations - - 13,583
--------- -------- --------
8,410 6,094 18,212
Deferred lease inducement 31 39 50
Deferred income taxes 81 122 -
Non-controlling interest 245 - -
Shareholders' equity:
Share capital (note 7) 55,027 54,997 17,322
Cumulative translation adjustment 135 (84) -
Retained earnings (deficit) 7,535 (783) 497
--------- -------- --------
62,697 54,130 17,819
Commitments (note 12)
Subsequent events (note 16)
$ 71,464 $ 60,385 $ 36,081
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
On behalf of the Board:
_____________________ Director
_____________________ Director
F-2
<PAGE>
IDS INTELLIGENT DETECTION SYSTEMS INC.
Consolidated Statements of Earnings
(In thousands of Canadian dollars, except per share amounts)
<TABLE>
<CAPTION>
Nine months ended Years ended
September 30, December 31,
----------------------- ---------------------------------
1999 1998 1998 1997 1996
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Sales $ 36,016 $ 10,691 $ 21,984 $ 6,673 $ 4,443
Cost of goods sold 16,901 6,003 13,134 4,053 2,624
--------- -------- --------- -------- --------
19,115 4,688 8,850 2,620 1,819
Expenses:
Selling, general and
administrative 7,871 5,087 8,133 1,338 1,813
Amortization 2,319 1,122 1,959 596 585
Interest and finance 133 - - - 280
Research and development 829 1,106 818 490 490
--------- -------- --------- -------- --------
11,152 7,315 10,910 2,424 3,168
7,963 (2,627) (2,060) 196 (1,349)
Interest and other income
(expense) 275 782 859 (1,033) 170
Restructuring costs (78) (225) (244) - -
Dilution gains - - - 680 2,619
Non-controlling interest in income (19) (8) - 137 280
Goodwill write-off - - - (68) -
Earnings (loss) before
income taxes 8,141 (2,078) (1,445) (88) 1,720
Income tax expense (recovery) (177) 25 (65) (120) 300
Earnings (loss) from continuing
operations 8,318 (2,103) (1,380) 32 1,420
Earnings (loss) from discontinued
operations (note 15) - 105 100 (116) -
--------- -------- --------- -------- --------
Net earnings (loss) $ 8,318 $ (1,998) $ (1,280) $ (84) $ 1,420
========= ======== ========= ======== ========
Net earnings (loss)
per share (note 8):
Basic
Continuing operations $ 0.37 $ (0.12) $ (0.07) $ - $ 0.17
Net loss 0.37 (0.11) (0.07) (0.01) 0.17
Fully diluted
Continuing operations 0.36 (0.12) (0.07) - 0.17
Net loss 0.36 (0.11) (0.07) (0.01) 0.17
========= ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
IDS INTELLIGENT DETECTION SYSTEMS INC.
Consolidated Statements of Retained Earnings (Deficit)
(In thousands of Canadian dollars)
<TABLE>
<CAPTION>
Nine months ended Years ended
September 30, December 31,
----------------------- -------------------------------
1999 1998 1998 1997 1996
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Retained earnings (deficit),
beginning of period $ (783) $ 497 $ 497 $ 1,259 $ 123
Net earnings (loss) 8,318 (1,998) (1,280) (84) 1,420
Dividend on common
shares - - - (962) -
Refundable dividend taxes - - - 284 (284)
------- -------- -------- -------- -------
Retained earnings (deficit),
end of period $ 7,535 $ (1,501) $ (783) $ 497 $ 1,259
======= ======== ======== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
IDS INTELLIGENT DETECTION SYSTEMS INC.
Consolidated Statements of Cash Flows
(In thousands of Canadian dollars, except per share amounts)
<TABLE>
<CAPTION>
Nine months ended Years ended
September 30, December 31,
----------------------- -------------------------------
1999 1998 1998 1997 1996
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Operations:
Earnings (loss) from
continuing operations $ 8,318 $ (2,103) $ (1,380) $ 32 $ 1,420
Items not involving cash:
Amortization 2,319 1,122 1,959 596 585
Non-controlling interes - - - (137) (280)
Increase in non-controlling
interest 245 128 - - 361
Deferred income taxes (41) 94 122 - -
Changes in non-cash operating
working capital (9,130) (8,586) (11,784) (1,146) (65)
-------- -------- -------- -------- --------
1,711 (9,345) (11,083) (655) 2,021
Discontinued operations 76 3,676 3,595 (2,832) -
-------- -------- -------- -------- --------
1,787 (5,669) (7,488) (3,487) 2,021
Investments:
Additions to capital assets (3,641) (1,554) (3,318) (165) (101)
Increase in long-term
investments (84) - (243) - -
Decrease in goodwill - - - 44 216
Increase (decrease) in deferred
lease inducement (8) 78 (11) 50 -
Net assets of subsidiaries acquired
- net of cash - (18,426) (18,316) - (1,145)
Increase in deferred development
costs 155 (213) (979) - -
-------- -------- -------- -------- --------
(3,578) (20,115) (22,867) (71) (1,030)
Financing:
Increase (decrease) in bank loan 1,111 (1,552) (1,185) 280 1,222
Increase (decrease) in due from
affiliated companies - - - 53 (77)
Increase (decrease) in due from
shareholders - (46) - 446 (528)
Decrease in long-term debt - (88) (88) (1,736) (383)
Issuance of share capital, net
of issuance costs 30 19,786 19,778 17,320 1
Dividend - - - (962) -
Refundable dividend taxes (recovery) - - - 284 (284)
Cumulative foreign exchange 219 33 (84) - -
-------- -------- -------- -------- -------
1,360 18,133 18,421 15,685 (49)
Increase (decrease) in cash and
cash equivalents (431) (7,651) (11,934) 12,127 942
Cash and cash equivalents,
beginning of period 1,154 13,088 13,088 961 19
-------- -------- -------- -------- -------
Cash and cash equivalents,
end of period $ 723 $ 5,437 $ 1,154 $ 13,088 $ 961
======== ======== ======== ======== =======
Cash paid for:
Interest $ 133 $ 44 $ - $ (155) $ (280)
======== ======== ======== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
IDS INTELLIGENT DETECTION SYSTEMS INC.
Notes to Consolidated Financial Statements
Years ended December 31, 1998, 1997 and 1996
Information as at September 30, 1999 and for the nine months ended September
30, 1999 and 1998 is unaudited
(In thousands of Canadian dollars, except per share amounts)
1. General:
IDS Intelligent Detection Systems Inc. ("IDS" or the "Company") is
incorporated under the Ontario Business Corporations Act. The Company
offers more than 70 intelligent detection products to the security, nuclear
and geophysical survey markets. Products range from narcotics and explosive
detectors, to nuclear safety control instruments, to airborne geophysical
survey services and equipment for use in mineral, oil and gas exploration.
IDS is a global company with offices in Canada, the United States, France,
the United Kingdom, Australia and Brazil.
2. Significant accounting policies:
(a) Basis of consolidation:
The consolidated balance sheets are comprised of the balance sheets of
the Company and its subsidiaries. The Company's significant
subsidiaries are Caduceon Inc., Scintrex Limited, Scintrex Inc.,
Scintrex Pty Ltd., Auslog Pty Ltd. and Scintrex Europe SARL. The
consolidated statements of earnings are comprised of the statements of
earnings of the Company and the operations of the above-mentioned
subsidiary companies from the acquisition date of June 8, 1998, except
for Caduceon Inc., which was created on December 31, 1998.
(b) Revenue recognition:
Revenue from product sales is recognized upon shipment. Revenue from
maintenance services contracts is recognized on a straight-line basis
over the term of the contract. Revenue on contracts is recognized in
the accounts on the percentage of completion basis.
(c) Inventories:
Finished goods are stated at the lower of average cost and net
realizable value. Other inventories are stated at the lower of cost and
replacement cost which is not in excess of net realizable value. Cost
is generally determined on the first-in, first-out basis.
(d) Long-term investments:
Long-term investments are recorded at cost and represent investments in
companies over which the Company exercises no control or significant
influence.
F-6
<PAGE>
IDS INTELLIGENT DETECTION SYSTEMS INC.
Notes to Consolidated Financial Statements, page 2
Years ended December 31, 1998, 1997 and 1996
Information as at September 30, 1999 and for the nine months ended September
30, 1999 and 1998 is unaudited
(In thousands of Canadian dollars, except per share amounts)
2. Significant accounting policies (continued):
(e) Capital assets:
Capital assets are stated at cost. Amortization is provided using the
straight-line method over the estimated useful lives as follows:
Asset Useful life
----- -----------
Buildings twenty years
Scientific research and development equipment fifteen years
Office equipment five years
Computer equipment three years
Leasehold improvements four years
Computer equipment under capital lease three years
Computer software one year
Production equipment ten years
Patents are amortized using the straight-line method over their
estimated useful lives of 17 years. Assets under construction are
amortized over their useful life commencing in the year they are
available for use by the Company.
(f) Research and development:
Research costs are expensed as incurred. Development costs are expensed
as incurred unless they meet generally accepted accounting criteria for
deferral and subsequent amortization. These costs are amortized based
on the revenue arising from the sale of the products. The Company
reassesses whether it has met the relevant criteria for continued
deferral and amortization at each reporting date.
(g) Goodwill:
Goodwill represents the excess of the purchase price over the fair
value of net assets acquired, and is being amortized on a straight-line
basis over 20 years. On an ongoing basis, management reviews the
valuation and amortization of goodwill, taking into consideration any
events and circumstances which might have impaired the fair value.
During 1997, the Company fully provided for $68 of goodwill that was
created from an acquisition in 1996.
(h) Foreign currency translation:
The operations of the Company's foreign subsidiaries are considered to
be self-sustaining and as a result are translated to Canadian dollars
using the current rate method. Under this method, assets and
liabilities are translated at year-end exchange rates and revenues and
expenses are translated using approximate rates of exchange in effect
at the transaction date. Gains or losses on translation of foreign
subsidiaries is included in the cumulative translation adjustment
account, which is included as a separate component of shareholders'
equity.
F-7
<PAGE>
IDS INTELLIGENT DETECTION SYSTEMS INC.
Notes to Consolidated Financial Statements, page 3
Years ended December 31, 1998, 1997 and 1996
Information as at September 30, 1999 and for the nine months ended September
30, 1999 and 1998 is unaudited
(In thousands of Canadian dollars, except per share amounts)
2. Significant accounting policies (continued):
(i) 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 assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues
and expenses during the year. Actual results could differ from these
estimates.
3. Business acquisition:
(a) On June 7, 1998, IDS acquired for cash and 3,914,858 common shares 100%
of the issued and outstanding common shares of Scintrex Limited and its
wholly-owned subsidiaries ("Scintrex"). The acquisition was accounted
for by the purchase method. The results of Scintrex's operations are
included in the accounts from the effective date of acquisition.
Details of the acquisition are as follows:
Fair value of net assets acquired:
Working capital $ 7,025
Capital assets 10,301
Goodwill 18,887
---------
$ 36,213
Consideration given:
Cash $ 18,316
Common shares 17,897
---------
$ 36,213
=========
(b) On September 30, 1997, MAA International Corporation ("MAA"), CPAD
Technologies ("CPAD") and its wholly-owned subsidiary, 1202733 Ontario
Inc., amalgamated to form IDS. On September 30, 1997, MAA owned 64.5%
of CPAD which represented a dilution through 1996 and 1997 from its
original 77.5% ownership interest in 1995. The transaction was
accounted for using the predecessor companies' book values.
The total assets and liabilities brought into the combination were as
follows:
1202733
MAA CPAD Ontario
Inc.
(unaudited) (unaudited) (unaudited)
----------- ----------- -----------
Total assets at book value $3,123 $2,538 $ 2
Total liabilities at book value 454 3,500 1
====== ====== =======
Prior to September 30, 1997 the results of operations reflect the
consolidated results of MAA and its subsidiary CPAD.
F-8
<PAGE>
IDS INTELLIGENT DETECTION SYSTEMS INC.
Notes to Consolidated Financial Statements, page 4
Years ended December 31, 1998, 1997 and 1996
Information as at September 30, 1999 and for the nine months ended September
30, 1999 and 1998 is unaudited
(In thousands of Canadian dollars, except per share amounts)
3. Business acquisition (continued):
(c) AGISS Power Technologies Corporation:
Effective March 1, 1996, CPAD acquired 100% of the issued and
outstanding shares of all classes of AGISS Power Technologies
Corporation ("AGISS") in exchange for cash and the issuance of Class A
common shares of CPAD. The transaction has been accounted for by the
purchase method with the results of operations included in these
financial statements from the date of acquisition.
Net assets acquired at fair values are:
Current assets $ 2,183
Capital assets 311
---------
2,494
Less:
Bank indebtedness 339
Current liabilities 1,570
Long-term debt 102
---------
2,011
483
Goodwill 323
--------
$ 806
========
Consideration:
Issuance of Class A common shares $ 783
Cash 23
--------
$ 806
========
(d) Amalgamation:
On November 1, 1996, CPAD amalgamated its operations with its
wholly-owned subsidiary, AGISS and continued to operate as CPAD.
The total assets and liabilities brought into the combination are as
follows:
CPAD AGISS
---- -----
Total assets at book value $ 1,708 $ 1,599
Total liabilities at book value 1,286 976
========= =========
F-9
<PAGE>
IDS INTELLIGENT DETECTION SYSTEMS INC.
Notes to Consolidated Financial Statements, page 5
Years ended December 31, 1998, 1997 and 1996
Information as at September 30, 1999 and for the nine months ended September
30, 1999 and 1998 is unaudited
(In thousands of Canadian dollars, except per share amounts)
4. Inventory:
<TABLE>
<CAPTION>
September 30, December 31,
------------- -----------------------
1999 1998 1997
---- ---- ----
(unaudited)
-----------
<S> <C> <C> <C>
Finished goods $ 4,617 $ 4,440 $ 322
Work-in-process 2,933 4,483 13
Raw materials 5,744 3,043 176
Contracts in progress - 639 -
-------- ------- --------
$ 13,294 $12,605 $ 511
======== ======= ========
</TABLE>
5. Capital assets:
<TABLE>
<CAPTION>
Accumulated Net book
September 30, 1999 Cost amortization value
------------------ (unaudited) (unaudited) (unaudited)
----------- ----------- -----------
<S> <C> <C> <C>
Land and buildings $ 3,272 $ 340 $ 2,932
Scientific research and
development equipment 1,654 150 1,504
Office equipment 972 207 765
Computer equipment 701 315 386
Leasehold improvements 477 250 227
Computer equipment under capital lease 37 37 -
Computer software 290 172 118
Production equipment 10,149 1,827 8,322
Patents 114 28 86
Assets under construction 781 59 722
-------- ------- --------
$ 18,447 $ 3,385 $ 15,062
======== ======= ========
Accumulated Net book
December 31, 1998 Cost amortization value
----------------- ---- ------------ -----
Land and buildings $ 3,143 $ 131 $ 3,012
Scientific research and
development equipment 1,049 92 957
Office equipment 860 134 726
Computer equipment 592 219 373
Leasehold improvements 477 168 309
Computer equipment under capital lease 37 36 1
Computer software 274 99 175
Production equipment 7,288 535 6,753
Patents 95 25 70
Assets under construction 567 - 567
-------- ------- --------
$ 14,382 $ 1,439 $ 12,943
======== ======= ========
</TABLE>
F-10
<PAGE>
IDS INTELLIGENT DETECTION SYSTEMS INC.
Notes to Consolidated Financial Statements, page 6
Years ended December 31, 1998, 1997 and 1996
Information as at September 30, 1999 and for the nine months ended September
30, 1999 and 1998 is unaudited
(In thousands of Canadian dollars, except per share amounts)
5. Capital assets (continued):
<TABLE>
<CAPTION>
Accumulated Net book
December 31, 1997 Cost amortization value
----------------- ---- ------------ -----
<S> <C> <C> <C>
Scientific research and
development equipment $ 159 $ 25 $ 134
Office equipment 118 45 73
Computer equipment 196 100 96
Leasehold improvements 186 86 100
Computer equipment under capital lease 37 28 9
Patents 66 19 47
------- ----- ------
$ 762 $ 303 $ 459
======= ===== ======
</TABLE>
6. Bank loan:
<TABLE>
<CAPTION>
September 30, December 31,
------------- -----------------------
1999 1998 1997
---- ---- ----
(unaudited)
<S> <C> <C> <C>
Demand operating line of credit at
bank prime rate plus 0.5% $1,478 $ 367 $ 950
Demand promissory note,
payable on receipt of
investment tax credits
at bank prime plus 2% - - 161
Progress Payment Program line of credit
payable out of proceeds on sale of
inventory, at bank prime - - 441
------ ----- -----
$1,478 $ 367 $1,552
====== ===== ======
</TABLE>
The demand operating line of credit is secured by cash on deposit of $150
and a mortgage over land and building of Scintrex Pty Ltd.
F-11
<PAGE>
IDS INTELLIGENT DETECTION SYSTEMS INC.
Notes to Consolidated Financial Statements, page 7
Years ended December 31, 1998, 1997 and 1996
Information as at September 30, 1999 and for the nine months ended September
30, 1999 and 1998 is unaudited
(In thousands of Canadian dollars, except per share amounts)
7. Share capital:
<TABLE>
<CAPTION>
September 30, December 31,
------------- -------------------------
1999 1998 1997
---- ---- ----
(unaudited)
(a) Authorized and issued share capital:
<S> <C> <C> <C>
Authorized voting
common shares - unlimited
Issued voting common shares:
Number of shares 22,095,618 22,080,560 14,586,120
Stated capital $ 55,027 $ 54,997 $ 17,322
Authorized Class B non-voting
shares - unlimited
Issued Class B non-voting shares:
Number of shares 572,850 572,850 572,850
Stated capital $ - $ - $ -
</TABLE>
(b) Stock option incentive program:
On October 22, 1997, the Company established the 1997 Stock Option
Plan, under which options to purchase common shares of the Company may
be granted by the Compensation Committee of the Board of Directors
subject to the approval of regulatory authorities.
At December 31, 1998, there were 1,216,200 options outstanding with
exercise prices ranging from $2.00 to $7.60 per share. These options
expire during periods between January 1, 2002 and September 1, 2008 and
generally vest over a four-year period from the date of grant.
Subsequent to year-end, an additional 228,000 options were granted at
$2.00 per share. These options expire on December 31, 2008 and
generally vest over a four-year period from date of grant.
F-12
<PAGE>
IDS INTELLIGENT DETECTION SYSTEMS INC.
Notes to Consolidated Financial Statements, page 8
Years ended December 31, 1998, 1997 and 1996
Information as at September 30, 1999 and for the nine months ended September
30, 1999 and 1998 is unaudited
(In thousands of Canadian dollars, except per share amounts)
7. Share capital (continued):
(c) Share issuance:
<TABLE>
<CAPTION>
Number
Common shares Value of shares
------------- ----- ---------
<S> <C> <C>
Balance, December 31, 1996:
MAA $ 2 8,910,000
CPAD 1 810,000
Shares issued for cash 1,380 395,556
Conversion of debt 1,730 734,948
Shares cancelled on amalgamation:
MAA - (8,910,000)
CPAD - (1,940,504)
Shares reissued on amalgamation - 10,493,360
Options issued for cash 117 172,188
Conversion of debt 645 101,691
Shares issued for cash 13,447 3,818,881
-------- -----------
Issued and outstanding as of December 31, 1997 $ 17,322 14,586,120
Options issued for cash 958 224,582
Shares issued for cash 18,820 3,355,000
Shares issued on acquisition of Scintrex Limited 17,897 3,914,858
-------- -----------
Balance, December 31, 1998 $ 54,997 22,080,560
Options issued for cash 30 15,058
-------- -----------
Balance, September 30, 1999 (unaudited) $ 55,027 22,095,618
======== ===========
Class B shares $ - 572,850
======== ===========
</TABLE>
8. Earnings per share:
The per share amounts used for the calculation of basic earnings per share
include common and Class B shares in equal proportion, as both share
equally in the earnings of the Company.
The basic earnings per share figures are calculated using the weighted
monthly average number of shares outstanding during the respective fiscal
years.
F-13
<PAGE>
IDS INTELLIGENT DETECTION SYSTEMS INC.
Notes to Consolidated Financial Statements, page 9
Years ended December 31, 1998, 1997 and 1996
Information as at September 30, 1999 and for the nine months ended September
30, 1999 and 1998 is unaudited
(In thousands of Canadian dollars, except per share amounts)
9. Income taxes:
Income tax expense varies from the amount that would be computed by
applying the basic federal and provincial tax rates to earnings before
income taxes, as follows:
<TABLE>
<CAPTION>
September 30, December 31,
-------------- --------------------------------
1999 1998 1998 1997 1996
---- ---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Expected tax rate 44.60% 44.60% 44.60% 44.60% 44.60%
Expected tax rates applied to earnings
before income taxes $ 3,611 $ (927) $ (644) $ (91) $ 767
Increase (decrease) resulting from:
Losses not recorded for
accounting purposes - 831 450 - 305
Benefit of losses not previously
recognized for accounting
purposes (3,299) - - (118) -
Refundable taxes - - - 102 (217)
Non-taxable portion of dilution gains - - - (167) (653)
Share issuance costs (307) (228) (304) - -
Write-off and amortization of goodwill 249 249 368 223 156
Manufacturing and processing tax credit (379) 78 41 - -
Other (52) 22 24 (69) (58)
-------- -------- -------- -------- ---------
$ (177) $ 25 $ (65) $ (120) $ 300
======== ======== ======== ======== =========
</TABLE>
As at December 31, 1998, the Company had losses for tax purposes of
approximately $5,422 (1997 - $Nil) available to be carried forward until
2005, the benefits of which have not been reflected in the financial
statements. The Company also had amounts deductible for tax purposes in
excess of book purposes of approximately $12,824 (1997 - $2,800) for
Canadian federal tax purposes and $3,900 (1997 - $2,800) for provincial tax
purposes, primarily related to scientific research and experimental
development expenditures and share issuance costs, the benefits of which
have not been reflected in these financial statements.
As at December 31, 1998, investment tax credits totalling approximately
$1,220 (1997 - $Nil) were available to reduce income tax in future years
and have not been recorded in these financial statements.
10. Segmented data:
The Company has adopted CICA Handbook Section 1701, Segment Disclosures,
which establishes standards for reporting information about operating
segments, products and services, geographic operations and major customers.
F-14
<PAGE>
IDS INTELLIGENT DETECTION SYSTEMS INC.
Notes to Consolidated Financial Statements, page 10
Years ended December 31, 1998, 1997 and 1996
Information as at September 30, 1999 and for the nine months ended September 30,
1999 and 1998 is unaudited
(In thousands of Canadian dollars, except per share amounts)
10. Segmented data (continued):
The Company has identified operating segments in relation to the products
and services it delivers. IDS's operating segments include Scintrex Earth
Science Instrumentation (ESID), IDS Power Control Systems (Power Control),
Analytical & Security (Security) and Survey & Exploration Technology
(Survey). Scintrex Earth Science Instrumentation is engaged in the
research, design and manufacture of geophysical and geochemical
instrumentation. Power Control is engaged in the research, design and
manufacture of nuclear reactor and analytical instrumentation. Security is
engaged in the research, design and manufacture of chemical detection
systems. Survey and Exploration is engaged in systems installation and
integration, standard airborne and ground geophysical surveys and
proprietary surveys based on proprietary technology.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies. IDS generally
evaluates the performance of each operating segment based on actual sales
and expenditures.
<TABLE>
<CAPTION>
ESID Power Control Security Survey Other Total
---- ------------- -------- ------ ----- -----
<S> <C> <C> <C> <C> <C> <C>
Nine months ended September
30, 1999 (unaudited):
Net sales $ 5,181 $ 10,961 $ 13,964 $ 4,616 $ 1,294 $ 36,016
Segment operating
income (loss) 1,225 4,451 3,755 (1,104) (364) 7,963
Interest and other
income (loss) - - 275 - - 275
Restructuring costs - - (78) - - (78)
Non-controlling interest - - - (19) - (19)
Income (loss) before
income taxes 1,225 4,451 3,952 (1,123) (364) 8,141
Amortization - - - - - 2,319
Identifiable assets - - - - - 52,491
Corporate assets - - - - - 18,973
Total assets - - - - - 71,464
Capital expenditures - - - - - 3,641
</TABLE>
F-15
<PAGE>
IDS INTELLIGENT DETECTION SYSTEMS INC.
Notes to Consolidated Financial Statements, page 11
Years ended December 31, 1998, 1997 and 1996
Information as at September 30, 1999 and for the nine months ended September 30,
1999 and 1998 is unaudited
(In thousands of Canadian dollars, except per share amounts)
10. Segmented data (continued):
<TABLE>
<CAPTION>
ESID Power Control Security Survey Other Total
---- ------------- -------- ------ ----- -----
Nine months ended September 30,
1998 (unaudited):
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 2,511 $ 1,812 $ 4,094 $ 1,869 $ 405 $ 10,691
Segment operating
income (loss) 257 (47) (3,581) 403 341 (2,627)
Interest and other
income (loss) - - 782 - - 782
Restructuring costs - - (225) - - (225)
Non-controlling interest - - (8) - - (8)
Income (loss) before
income taxes 257 (47) (3,032) 403 341 (2,078)
Amortization - - - - - 1,122
Identifiable assets - - - - - -
Corporate assets - - - - - -
Total assets - - - - - 58,377
Capital expenditures - - - - - 1,554
<CAPTION>
ESID Power Control Security Survey Other Total
---- ------------- -------- ------ ----- -----
Year ended December 31, 1998:
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 7,097 $ 2,439 $ 7,811 $ 4,066 $ 571 $ 21,984
Segment operating
income (loss) 1,052 231 (4,524) 1,081 100 (2,060)
Interest and other
income (loss) - - 859 - - 859
Restructuring costs - - - - - (244)
Loss before income taxes - - - - - (1,445)
Amortization 346 66 1,382 165 - 1,959
Identifiable assets 10,880 6,453 17,307 3,323 509 38,472
Corporate assets - - - - - 21,913
Total assets - - - - - 60,385
Capital expenditures 1,177 - 1,998 143 - 3,318
======== ======== ======== ======== ======== ========
</TABLE>
F-16
<PAGE>
IDS INTELLIGENT DETECTION SYSTEMS INC.
Notes to Consolidated Financial Statements, page 12
Years ended December 31, 1998, 1997 and 1996
Information as at September 30, 1999 and for the nine months ended September
30, 1999 and 1998 is unaudited
(In thousands of Canadian dollars, except per share amounts)
10. Segmented data (continued):
<TABLE>
<CAPTION>
ESID Power Control Security Survey Other Total
---- ------------- -------- ------ ----- -----
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1997:
Net sales $ - $ - $ 6,565 $ - $ 108 $ 6,673
Segment operating
income (loss) - - 196 - - 196
Interest and finance
expense - - (1,033) - - (1,033)
Dilution gain - - - - - 680
Goodwill write-off - - - - - (68)
Non-controlling interest - - - - - 137
Loss before income taxes - - - - - (88)
Amortization - - 596 - - 596
Identifiable assets - - 4,457 - 14,470 18,927
Capital expenditures - - 95 - 70 165
<CAPTION>
ESID Power Control Security Survey Other Total
---- ------------- -------- ------ ----- -----
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
Net sales $ - $ - $ 110 $ - $ 4,333 $ 4,443
Segment operating
income (loss) - - (554) - 1,130 576
Other income and
dilution gain - - - - - 2,789
General corporate
expenses - - - - - 1,646
Income before
income taxes - - - - - 1,720
Amortization - - - - - 585
Identifiable assets - - - - - 3,565
Corporate assets - - - - - 3,009
Total assets - - - - - 6,574
Capital expenditures - - - - - 101
</TABLE>
F-17
<PAGE>
IDS INTELLIGENT DETECTION SYSTEMS INC.
Notes to Consolidated Financial Statements, page 13
Years ended December 31, 1998, 1997 and 1996
Information as at September 30, 1999 and for the nine months ended September 30,
1999 and 1998 is unaudited
(In thousands of Canadian dollars, except per share amounts)
10. Segmented data (continued):
The following table presents revenues from customers based on the location
of the customer.
<TABLE>
<CAPTION>
September 30, December 31,
---------------------- --------------------------------
1999 1998 1998 1997 1996
---- ---- ---- ---- ----
(unaudited)(unaudited)
<S> <C> <C> <C> <C> <C>
Canada $ 3,025 $ 1,643 $ 1,904 $ 1,080 $ 4,333
United States 3,693 2,547 4,714 5,593 110
Asia 12,609 1,955 5,268 - -
Europe 3,666 2,031 2,845 - -
Australia 2,367 639 2,150 - -
Middle East 8,156 594 816 - -
South America 2,050 951 772 - -
Africa 343 259 704 - -
Other 107 72 2,811 - -
-------- -------- -------- -------- -------
$ 36,016 $ 10,691 $ 21,984 $ 6,673 $ 4,443
======== ======== ======== ======== =======
</TABLE>
Assets based on physical location of assets are as follows:
<TABLE>
<CAPTION>
September 30, December 31
---------------------- --------------------
1999 1998 1998 1997
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Canada $ 67,891 $ 54,550 $ 56,670 $ 36,081
Others 3,573 3,827 3,715 -
--------- -------- -------- --------
$ 71,464 $ 58,377 $ 60,385 $ 36,081
========= ======== ======== ========
</TABLE>
Sales to major customers as a percentage of total sales are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
----------------- --------------------------
1999 1998 1998 1997 1996
---- ---- ---- ---- ----
(unaudited)(unaudited)
<S> <C> <C> <C> <C> <C>
Federal Aviation Administration - 27.3% 8.4% 16.5% 4.1%
Canadian Commercial Corporation 21.9% - - 10.0% -
Canatom/NPM 24.9% - - - -
U.S. Private Customer - - - 55.5% -
==== ==== === ==== ===
</TABLE>
11. Related party transactions:
During 1998, the Company established operations in South America through an
affiliated company known as Megafisica Survey Aerolevantamentos S/A
("Megafisica"), based in Rio de Janiero, Brazil. During the year, the
Company subcontracted with Megafisica on a fee basis to perform airborne
system operations in several countries. Fees paid to Megafisica for the
year ended December 31, 1998 and the nine months ended September 30, 1999
were $254 and $58 respectively.
F-18
<PAGE>
IDS INTELLIGENT DETECTION SYSTEMS INC.
Notes to Consolidated Financial Statements, page 14
Years ended December 31, 1998, 1997 and 1996
Information as at September 30, 1999 and for the nine months ended September 30,
1999 and 1998 is unaudited
(In thousands of Canadian dollars, except per share amounts)
12. Commitments:
(a) During the normal course of business, Scintrex Limited is required to
post performance bonds for its contracts in progress. As at December
31, 1998, these performance bonds amounted to approximately $2,301
(1997 - $1,200).
(b) On February 23, 1996, Scintrex Limited commenced an action in the
Ontario Court of Justice (General Division) against Timothy Bodger
("Bodger"), Aero Surveys Inc. ("Aero"), Geotech Limited ("Geotech") and
two other individuals for damages for breach of fiduciary duty, breach
of contract and inducing breach of contract in the aggregate amount of
$6,000 plus interest and costs.
In response to Scintrex Limited's claim, Geotech has raised a
counter-claim against Scintrex Limited in the amount of $10,000 based
upon an alleged misuse of trade secrets, and on alleged breach of
contract by two employees of Scintrex Limited who were formerly
employed by Geotech. Based on the information Scintrex Limited has
provided to its counsel in the action, counsel has advised Scintrex
Limited that the counter-claim is without merit. Scintrex Limited
intends to vigorously prosecute its claim and defined the
counter-claim. Any ultimate liability will be accounted for as a charge
to operations in the year incurred.
(c) Scintrex Limited has made a claim against a customer for unpaid bills
in the amount of $376 in respect of services rendered. This amount has
been fully provided for in the accounts. On April 25, 1996, a
counter-claim was filed against Scintrex Limited for an unspecified
amount. It is the opinion of management that the counter-claim is
without merit. Counsel has further advised that based on the
information supplied to date, no damages appear to have been incurred.
Scintrex Limited intends to vigorously prosecute its claim and defend
the counterclaim. Any ultimate liability will be accounted for as a
charge to operations in the year incurred.
(d) The Company leases office premises and equipment under long-term
operating leases. The Company is committed to make future minimum
payments under these leases for the years ended December 31 as follows:
1999 $ 430
2000 179
2001 188
2002 138
-----
$ 935
=====
F-19
<PAGE>
IDS INTELLIGENT DETECTION SYSTEMS INC.
Notes to Consolidated Financial Statements, page 15
Years ended December 31, 1998, 1997 and 1996
Information as at September 30, 1999 and for the nine months ended September 30,
1999 and 1998 is unaudited
(In thousands of Canadian dollars, except per share amounts)
13. Cumulative foreign exchange translation adjustment:
September 30, December 31,
------------- ------------
1999 1998 1997
---- ---- ----
(unaudited)
Balance, beginning of year $ (84) $ - $ -
Increase (decrease) due to fluctuation
in exchange rates 219 (84) -
----- ----- ----
Balance, end of year $ 135 $ (84) $ -
===== ===== ====
14. Financial instruments:
(a) Credit risk:
The Company provides credit to its customers in the normal course of
business. The Company maintains reserves for potential credit losses
which, when realized, have been within the range of management's
expectations.
(b) Fair value:
The carrying value of all financial instruments approximate their fair
value given the relatively short periods to maturity of the
instruments.
15. Discontinued operations:
On June 11, 1998, IDS announced the immediate discontinuation of the
computer resale activities of its IEC Division. IEC was principally engaged
in value-added reselling of computers and consulting services. The
consulting services were continued by IDS. The discontinued computer
reselling activity was not core to the mission of IDS. Revenue from the
discontinued operations in 1998 and 1997 was $11,383, and $17,554,
respectively.
16. Subsequent events:
(a) Acquisition of ChemiCorp International, Inc.:
Subsequent to year end, IDS acquired a further interest in ChemiCorp
International, Inc. (formerly Advanced Environmental Solutions Inc.),
which brought its interest to 70%. In consideration for its licenses
and options to license, IDS received 52,909,663 of ChemiCorp's common
shares and in consideration for equipment valued at $314, IDS received
12,588,000 common shares.
F-20
<PAGE>
IDS INTELLIGENT DETECTION SYSTEMS INC.
Notes to Consolidated Financial Statements, page 16
Years ended December 31, 1998, 1997 and 1996
Information as at September 30, 1999 and for the nine months ended September 30,
1999 and 1998 is unaudited
(In thousands of Canadian dollars, except per share amounts)
16. Subsequent events (continued):
(b) Acquisition of Micro-g Solutions Inc.:
On December 31, 1999, the Company's wholly-owned subsidiary, Scintrex
Limited successfully completed the acquisition of 100% of Micro-g
Solutions Inc., a Colorado based geophysical instrument company. The
agreement is based on a share for share exchange of Scintrex Limited
shares for Micro-g Solutions Inc. shares. The Company will issue
124,533 shares of Scintrex Limited.
(c) Acquisition of Val d'or Sagax Inc.:
On October 1, 1999, the Company's wholly-owned subsidiary, Scintrex
Limited, entered into an agreement to acquire 100% of Val d'or Sagax
Inc., a Quebec based geophysical instrument and survey company. The
agreement is based on a share for share exchange of Scintrex Limited
shares for Val d'or Sagax Inc. shares. The Company will issue
101,933 shares of Scintrex Limited.
(d) Acquisition of SIAL Geosciences INc.;
On October 1, 1999, the Company's wholly-owned subsidiary, Scintrex
Limited, entered into a letter of intent to acquire 100% of SIAL
Geosciences Inc., a Quebec based geophysical instrument and survey
company. The agreement is based on a share for share exchange of
Scintrex Limited shares for SIAL Geosciences Inc. shares. The Company
will issue 294,728 shares of Scintrex Limited. The Company will issue
294,728 shares of Scintrex Limited.
17. 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. The effects of the Year 2000 Issue
may be experienced before, on, or after January 1, 2000 and, if not
addressed, the impact on operations and financial reporting may range from
minor errors to significant systems failure which could affect the
Company's ability to conduct normal business operations. It is not possible
to be certain that all aspects of the Year 2000 Issue affecting the
Company, including those related to the efforts of customers, suppliers, or
other third parties, will be fully resolved.
F-21
<PAGE>
IDS INTELLIGENT DETECTION SYSTEMS INC.
Notes to Consolidated Financial Statements, page 17
Years ended December 31, 1998, 1997 and 1996
Information as at September 30, 1999 and for the nine months ended September 30,
1999 and 1998 is unaudited
(In thousands of Canadian dollars, except per share amounts)
18. United States accounting principles:
The consolidated financial statements presented herein have been prepared
in accordance with Canadian generally accepted accounting principles
("GAAP") which in the case of the Company differ in the following material
respects from those generally accepted in the United States:
(a) Consolidated statement of earnings:
<TABLE>
<CAPTION>
Nine months ended Years ended
September 30, December 31,
--------------------- ----------------------------
1999 1998 1998 1997 1996
---- ---- ---- ---- ----
(unaudited)(unaudited)
<S> <C> <C> <C> <C> <C>
Earnings (loss) from
continuing
operations $ 8,318 $(2,103) $(1,380) $ 32 $ 1,420
Deferred development
costs 824 213 979 - -
Amortization (90) (6) - - -
Income tax expense 2,618 333 988 - -
------- ------- ------- ------- -------
Earnings (loss) from
continuing
operations under
US GAAP 4,966 (2,643) (3,318) 32 1,420
Earnings (loss) from
discontinued
operations - 105 100 (116) -
------- ------- ------- ------- -------
Net earnings (loss)
under US GAAP $ 4,966 $(2,538) $(3,218) $ (84) $ 1,420
======= ======= ======= ======= =======
<CAPTION>
Nine months ended Years ended
September 30, December 31,
----------------------------- -----------------------------------------------
1999 1998 1998 1997 1996
---- ---- ---- ---- ----
(unaudited)(unaudited)
<S> <C> <C> <C> <C> <C>
Earnings (loss)
per share:
From continuing
operations $ 0.22 $ (0.14) $ (0.17) $ - $ 0.17
From discontinued
operations - 0.01 - (0.01) -
After discontinued
operations 0.22 (0.13) (0.17) (0.01) 0.17
Weighted average
number of shares
used in the
calculation of basic
earnings per share 22,655,000 18,485,300 19,140,851 10,128,370 8,235,000
=========== ============ ============ ============ ============
</TABLE>
F-22
<PAGE>
IDS INTELLIGENT DETECTION SYSTEMS INC.
Notes to Consolidated Financial Statements, page 18
Years ended December 31, 1998, 1997 and 1996
Information as at September 30, 1999 and for the nine months ended September 30,
1999 and 1998 is unaudited
(In thousands of Canadian dollars, except per share amounts)
18. United States accounting principles (continued):
(a) Consolidated statement of earnings (continued):
Under Canadian and US GAAP, basic earnings per share is computed by
dividing the net earnings (loss) for the period available to common
shareholders as measured by the respective accounting principles
(numerator), by the weighted average number of common and Class B
shares. Basic earnings per share excludes the dilutive effect of
potential common shares resulting from stock options. The potential
dilutive effect is either antidilutive or does not result in a
material change in the per share amount.
(b) Deferred development costs:
Under Canadian GAAP, development costs can be deferred and amortized
if certain criteria are met. Under US GAAP, development costs are
expensed as incurred resulting in an increase in the year ended
December 31, 1998 and the nine months ended September 30, 1998 loss
from continuing operations of $979 and $213, respectively, and a
decrease in the nine months ended September 30, 1999 earnings from
continuing operations of $824.
(c) Income taxes:
The Company follows the deferral method of accounting for income
taxes. Under US GAAP, the asset and liability method is applied
resulting in the following difference.
Certain previously unrecognized deferred tax assets were utilized by
Scintrex with the tax effect of these utilized deferred tax assets
amounting to $988 for the year ended December 31, 1998 and $333 and
$2,618 for the nine months ended September 30, 1998 and 1999,
respectively. In accordance with US GAAP the utilized deferred tax
assets should be applied as a reduction of goodwill and reflected as
an income tax expense. The goodwill reduction results in the reduction
of goodwill amortization of $29 for the year ended December 31, 1998
and $6 and $90 for the nine months ended September 30, 1998 and 1999,
respectively.
F-23
<PAGE>
IDS INTELLIGENT DETECTION SYSTEMS INC.
Notes to Consolidated Financial Statements, page 19
Years ended December 31, 1998, 1997 and 1996
Information as at September 30, 1999 and for the nine months ended September
30, 1999 and 1998 is unaudited
(In thousands of Canadian dollars, except per share amounts)
18. United States accounting principles (continued):
(d) Acquisition of Scintrex:
Under US GAAP, the following additional disclosure would be provided
pursuant to the requirements of APB No. 16 "Business Combinations".
The following unaudited pro forma financial information presents the
combined results of operations of IDS and Scintrex as if the
acquisition had occurred as of the beginning of 1998 for the year
ended December 31, 1998 and the nine month period ended September 30,
1998 and as of the beginning of 1997 for the year ended December 31,
1997. The pro forma results include certain adjustments for
amortization of goodwill and capital assets. The pro forma financial
information does not necessarily reflect the results of operations
that would have occurred had IDS and Scintrex constituted a single
entity during such periods.
Nine months ended Year ended
September 30, December 31,
---------------- -----------------------
1998 1998 1997
---- ---- ----
(unaudited) (unaudited) (unaudited)
Net sales $ 17,478 $ 28,771 $ 26,687
-------- --------- ----------
Net loss $ (6,530) $ (5,453) $ (967)
-------- --------- ----------
Loss per share $ (0.32) $ (0.26) $ (0.07)
-------- --------- ----------
F-24
<PAGE>
IDS INTELLIGENT DETECTION SYSTEMS INC.
Notes to Consolidated Financial Statements, page 20
Years ended December 31, 1998, 1997 and 1996
Information as at September 30, 1999 and for the nine months ended September
30, 1999 and 1998 is unaudited
(In thousands of Canadian dollars, except per share amounts)
18. United States accounting principles (continued):
(e) Comprehensive income:
Under US GAAP, the following additional disclosure would be provided
pursuant to the requirements of SFAS No. 130 "Reporting Comprehensive
Income" which established standards for the reporting of comprehensive
income and its components:
Consolidated statement of comprehensive income (loss):
<TABLE>
<CAPTION>
Nine months ended Years ended
September 30, December 31,
------------------------ -----------------------------
1999 1998 1998 1997 1996
---- ---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Net earnings (loss)
under US GAAP $ 4,966 $ (2,538) $ (3,218) $ (84) $ 1,420
Other comprehensive
income (loss), net
of tax:
Foreign currency
translation
adjustment 219 (33) (84) - -
-------- --------- --------- ------ -------
Other comprehensive
earnings (loss) 219 (33) (84) - -
-------- --------- --------- ------ -------
Comprehensive
income (loss)
under US GAAP $ 5,185 $ (2,571) $ (3,302) $ (84) $ 1,420
======== ========= ========= ====== =======
</TABLE>
Accumulated other comprehensive earnings (loss) balances:
September 30, December 31,
Foreign currency translation adjustment 1999 1998
---- ----
(unaudited)
Balance, beginning of year $ (84) $ -
Current year change 219 (84)
------ -------
Balance, end of year (period) $ 135 $ (84)
====== =======
(f) Stock-based compensation:
United States accounting principles allow, as specified in SFAS 123,
but do not require companies to record compensation cost for employee
stock option plans at fair value. The Company has chosen to continue
to account for stock options using the intrinsic value method
prescribed under US GAAP in APB 25 which does not result in a
difference when compared to the accounting under Canadian GAAP.
F-25
<PAGE>
[Letterhead of Richter, Usher & Vineberg]
Auditors' Report
To the Directors of
Scintrex Limited
We have audited the consolidated balance sheets of Scintrex Limited as at
December 31, 1997 and 1996 and the consolidated statements of earnings, retained
earnings and changes in financial position for the years then ended. These
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the company as at December 31, 1997
and 1996 and the results of its operations and the changes in its financial
position for the years then ended in accordance with accounting principles
generally accepted in Canada.
/s/ Richter, Usher & Vineberg
Chartered Accountants
Toronto, Ontario
February 27, 1998
except as to note 14, which is as of October 12, 1999
F-26
<PAGE>
Scintrex Limited
Consolidated Balance Sheets
As At December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
(thousands of dollars)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current
Cash and short-term deposits $ 8,309 $ 6,976
Accounts receivable (note 2) 4,573 6,444
Inventories (note 3) 8,097 8,611
Prepaid expenses 169 121
- -------------------------------------------------------------------------------------------------------------------
21,148 22,152
- -------------------------------------------------------------------------------------------------------------------
Capital Assets (note 4) 4,672 4,591
- -------------------------------------------------------------------------------------------------------------------
$ 25,820 $ 26,743
- -------------------------------------------------------------------------------------------------------------------
Liabilities
Current
Accounts payable 1,783 2,433
Income taxes payable 35 138
Unearned revenue 12 999
- -------------------------------------------------------------------------------------------------------------------
1,830 3,570
- -------------------------------------------------------------------------------------------------------------------
Deferred Income Taxes 137 55
- -------------------------------------------------------------------------------------------------------------------
Commitment and Contingencies (note 5)
Shareholders' Equity
Capital Stock (note 6) 20,610 20,026
Cumulative Foreign Exchange Translation Adjustment (note 7) (175) 87
Retained Earnings 3,418 3,005
- -------------------------------------------------------------------------------------------------------------------
23,853 23,118
- -------------------------------------------------------------------------------------------------------------------
$ 25,820 $ 26,743
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
F-27
<PAGE>
Scintrex Limited
Consolidated Statements of Retained Earnings
For the Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
(thousands of dollars)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance - Beginning of Year $ 3,005 $ 649
Net earnings 433 2,376
- -------------------------------------------------------------------------------------------------------------------
3,438 3,025
Dividends on preference shares 20 20
- -------------------------------------------------------------------------------------------------------------------
Balance - End of Year $ 3,418 $ 3,005
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
F-28
<PAGE>
Scintrex Limited
Consolidated Statements of Earnings
For the Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
(thousands of dollars)
(Except for net earnings per share)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenue $ 20,014 $ 21,298
- -------------------------------------------------------------------------------------------------------------------
Expenses
Amortization 628 520
Cost of sales 11,012 11,545
Research and development (note 8) 1,174 606
Selling and administrative 6,691 5,805
- -------------------------------------------------------------------------------------------------------------------
19,505 18,476
- -------------------------------------------------------------------------------------------------------------------
Operating Income 509 2,822
Interest income 359 316
Gain on sale of investment - 138
- -------------------------------------------------------------------------------------------------------------------
Earnings Before Income Taxes 868 3,276
Income taxes (note 9) 435 900
- -------------------------------------------------------------------------------------------------------------------
Net Earnings $ 433 $ 2,376
- -------------------------------------------------------------------------------------------------------------------
Net Earnings Per Common Share (note 10)
Basic $ 0.16 $ 1.05
- -------------------------------------------------------------------------------------------------------------------
Fully diluted $ 0.15 $ 0.98
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
F-29
<PAGE>
Scintrex Limited
Consolidated Statements of Changes in Financial Position
For the Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
(thousands of dollars)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Funds Provided (Used) -
Operating Activities
Net earnings $ 433 $ 2,376
Amortization 628 520
Gain on sale of capital assets (143) (306)
Gain on sale of investment - (138)
Deferred income taxes 82 (40)
- -------------------------------------------------------------------------------------------------------------------
1,000 2,412
Changes in non-cash operating elements of working capital 597 (3,575)
- -------------------------------------------------------------------------------------------------------------------
1,597 (1,163)
- -------------------------------------------------------------------------------------------------------------------
Financing Activities
Issuance of common shares 584 7,229
Dividends (20) (20)
Foreign exchange translation adjustment (262) 103
- -------------------------------------------------------------------------------------------------------------------
302 7,312
- -------------------------------------------------------------------------------------------------------------------
Investing Activities
Purchase of capital assets (789) (1,345)
Proceeds on sale of capital assets 223 368
Proceeds on sale of investment in private company - 138
- -------------------------------------------------------------------------------------------------------------------
(566) (839)
- -------------------------------------------------------------------------------------------------------------------
Increase in Cash and Short-term Deposits 1,333 5,310
Cash and Short-term Deposits
Beginning of Year 6,976 1,666
- -------------------------------------------------------------------------------------------------------------------
End of Year $ 8,309 $ 6,976
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
F-30
<PAGE>
Scintrex Limited
Notes to Consolidated Financial Statements
December 31, 1997
1. Summary of Significant Accounting Policies
Principles of Consolidation
These consolidated financial statements comprise the financial statements
of Scintrex Limited and its wholly-owned subsidiary companies, Scintrex
Inc. and Scintrex Pty. Ltd.
Foreign Currency Translation
With the exception of the accounts of the company's self-sustaining
foreign subsidiary, foreign currency amounts have been translated into
Canadian dollars as follows:
Monetary items - at exchange rates in effect at the balance sheet
date;
Non-monetary items - at exchange rates in effect on the date of
transaction; and
Revenue and expenses - at average exchange rates prevailing during
the year, except for inventories and amortization which are
translated at rates prevailing when the related assets were acquired.
Gains and losses arising from foreign currency translation are included in
income except for unrealized exchange gains and losses arising from the
translation of long-term monetary items which are deferred and amortized
over the remaining life of the monetary items.
The assets and liabilities of the company's self-sustaining subsidiary in
Australia are translated into Canadian dollars at the year end exchange
rate and income and expense items are translated at the average exchange
rate during the year.
Gains and losses from the translation of the self-sustaining foreign
subsidiary are excluded from the consolidated statement of income and
accumulated in the cumulative foreign exchange translation adjustment.
Fair Value of Financial Instruments
The carrying amounts of cash and short-term deposits, accounts receivable
and accounts payable approximate fair value because of the short-term
maturity of these instruments.
F-31
<PAGE>
Scintrex Limited
Notes to Consolidated Financial Statements
December 31, 1997
1. Summary of Significant Accounting Policies (cont'd)
Use of Estimates
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reported period. By their nature, these estimates are subject
to measurement uncertainty and actual results may differ from these
estimates.
Revenue Recognition
Revenue from the sale of inventories is recognized in the accounts at the
time of delivery.
Revenue on contracts is recognized in the accounts on the percentage of
completion basis.
Inventories
Finished goods are stated at the lower of average cost and net realizable
value. Other inventories are stated at the lower of cost and replacement
cost which is not in excess of net realizable value. Cost is generally
determined on the first-in, first-out basis.
Amortization
Annual amortization rates adopted by the company are applied on the
straight-line method as follows:
Buildings 20 years
Equipment 5 to 20 years
Research and Development Costs
Research and development costs (net of government grants and other amounts
recoverable) are charged against income as incurred.
F-32
<PAGE>
Scintrex Limited
Notes to Consolidated Financial Statements
December 31, 1997
2. Accounts Receivable
<TABLE>
<CAPTION>
1997 1996
(thousands of dollars)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Trade receivables $ 4,534 $ 5,449
Accrued contracts in progress revenue 39 995
- -------------------------------------------------------------------------------------------------------------------
$ 4,573 $ 6,444
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
3. Inventories
<TABLE>
<CAPTION>
1997 1996
(thousands of dollars)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 2,753 $ 1,829
Work in process 2,491 5,348
Finished goods 2,853 1,434
- -------------------------------------------------------------------------------------------------------------------
$ 8,097 $ 8,611
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
4. Capital Assets
<TABLE>
<CAPTION>
1997 1996
(thousands of dollars)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land and buildings $ 3,293 $ 3,337
Equipment 8,778 8,550
- -------------------------------------------------------------------------------------------------------------------
12,071 11,887
Accumulated amortization 7,399 7,296
- -------------------------------------------------------------------------------------------------------------------
$ 4,672 $ 4,591
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
F-33
<PAGE>
Scintrex Limited
Notes to Consolidated Financial Statements
December 31, 1997
5. Commitment and Contingencies
i) During the normal course of business, the company is required to post
performance bonds for its contracts in progress. As at December 31,
1997, these performance bonds amounted to approximately $1,200,000
(1996 - $1,800,000).
ii) On February 23, 1996, the company commenced an action in the Ontario
Court of Justice (General Division) against Timothy Bodger
("Bodger"), Aero Surveys Inc. ("Aero"), Geotech Limited ("Geotech")
and two other individuals for damages for breach of fiduciary duty,
breach of contract and for inducing breach of contract in the
aggregate amount of $6,000,000 plus interest and costs.
In response to the company's claim, Geotech has raised a
counter-claim against the company in the amount of $10,000,000 based
upon an alleged misuse of trade secrets, and on alleged breach of
contract by two employees of the company who were formerly employed
by Geotech.
Based on the information the company has provided to its counsel in
the action, counsel has advised the company that the counter-claim is
without merit. The company intends to vigourously prosecute its claim
and defend the counter-claim.
iii) The company has made a claim against a customer for unpaid bills in
the amount of $376,000 in respect of services rendered. On April 25,
1996 a counter-claim was filed against the company for an unspecified
amount. It is the opinion of management that the counter-claim is
without merit. Counsel has further advised that based on the
information supplied to date, no damages appear to have been
incurred. The company intends to vigourously prosecute its claim and
defend the counter-claim. Any ultimate liability will be accounted
for as a charge to operations in the year incurred.
F-34
<PAGE>
Scintrex Limited
Notes to Consolidated Financial Statements
December 31, 1997
6. Capital Stock
Authorized without limit as to number
non-voting, convertible preference shares, having a cumulative
dividend rate of $0.06 per share
Common shares
Issued -
<TABLE>
<CAPTION>
Preference Shares Common Shares Total Share
Number Amount Number Amount Capital
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance - December 31, 1995 327,500 $ 327,500 1,994,265 $ 12,469,986 $ 12,797,486
Issued under employee stock
option plan - - 13,125 34,761 34,761
Issued to directors - - 30,000 87,600 87,600
Issued to underwriters,
net of costs - - 485,000 7,106,484 7,106,484
- ---------------------------------------------------------------------------------------------------------------------
Balance - December 31, 1996 327,500 327,500 2,522,390 19,698,831 20,026,331
Issued under employee stock
option plan - - 8,775 24,469 24,469
Issued to directors - - 139,868 311,500 311,500
Issued to underwriters,
net of costs - - 13,750 248,188 248,188
- ---------------------------------------------------------------------------------------------------------------------
Balance - December 31, 1997 327,500 $ 327,500 2,684,783 $ 20,282,988 $ 20,610,488
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
i) Preference Shares
The preference shares may be converted at any time by the holders
thereof into fully paid common shares (as presently constituted) of
the company on the basis of one common for two preference shares.
Dividends on these cumulative preference shares are payable
semi-annually on the last days of June and December of each year.
These shares are non-voting unless the company has failed to pay
dividends for a period of two years. As of December 31, 1997 there are
no dividends in arrears.
ii) Stock Option Plan
The Stock Option Plan provides for the granting of stock options to
officers and other full-time employees of the company, although the
directors reserve the right to grant options to consultants or other
persons with whom the corporation does business.
In May 1991, pursuant to an employment agreement, an officer of the
company was granted options to purchase 100,000 common shares at
$2.50 per share. These options were exercised in 1997.
F-35
<PAGE>
Scintrex Limited
Notes to Consolidated Financial Statements
December 31, 1997
6. Capital Stock (cont'd)
ii) Stock Option Plan (cont'd)
In August 1993, 98,400 common shares were authorized for issuance
under the Employee Stock Option Plan of which 68,250 options were
granted at the price of $2.50 per share exercisable over a five year
period to full time employees of the company. Options to purchase
7,650 (1996 - 13,125) common shares were exercised in 1997. In 1995,
a further 5,000 options were granted at a price of $4.75. Options to
purchase 1,125 (1996 - nil) common shares were exercised in 1997. The
remaining 25,150 authorized stock options have not been granted and
the option price has not been determined.
In April 1994, the directors of the company approved the granting of
options for 9,000 common shares for each of the seven directors at
$2.90 per share, exercisable over a three year period commencing
January 1, 1995 and ending December 31, 1997 at 3,000 shares per year
cumulative. These options were issued to each of the seven directors
who are not full time employees and in aggregate amount to options on
63,000 shares. These options were approved by the shareholders on
June 22, 1995. Options to purchase 15,000 (1996 - 24,000) common
shares were exercised in 1997.
In July 1994, the directors of the company approved the granting of
options for 9,000 common shares to each of two newly appointed
directors of the company who are not full time employees of the
company at the price of $3.00 per share exercisable over a two and
one half year period commencing July 1, 1995 and ending December 31,
1997 at 3,000 shares in each of the years 1995, 1996 and 1997
cumulative. These options were approved by the shareholders on June
22, 1995. Options to purchase 6,000 common shares were exercised in
1997 (1996- 6,000).
Pursuant to an agreement approved by shareholders at the annual
meeting on June 26, 1996, the company shall allot for issuance to an
officer of the company 56,604 common shares for no consideration or
additional payment, on July 1 of each of 1996, 1997 and 1998 provided
that the officer is an employee of the company. The 18,868 shares for
1996 have been issued to the officer. The 18,868 shares for 1997 were
issued to the officer subsequent to year end.
The board approved an amendment to the stock option plan which was
approved by shareholders at the annual meeting on June 26, 1996. The
maximum number of common shares issuable pursuant to the ammended
plan is 400,000 common shares.
iii) Shares Available for Issue
At December 31, 1997, there were 48,232 (1996 - 43,800) common shares
available for issue to employees and directors of the company under
the company stock option plans.
F-36
<PAGE>
Scintrex Limited
Notes to Consolidated Financial Statements
December 31, 1997
6. Capital Stock (cont'd)
iv) Shares Issued
During the year, the company issued 13,750 common shares at $18.05
per share for cash consideration of $248,188.
7. Cumulative Foreign Exchange Translation Adjustment
<TABLE>
<CAPTION>
1997 1996
(thousands of dollars)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance - Beginning of Year $ 87 $ (16)
Increase (decrease) due to fluctuation in exchange rates
during the year (262) 103
- -------------------------------------------------------------------------------------------------------------------
Balance - End of Year $ (175) $ 87
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
8. Research and Development
<TABLE>
<CAPTION>
1997 1996
(thousands of dollars)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Research and development $ 1,626 $ 1,487
Government and other grants (158) (95)
Investment tax credits (294) (786)
- -------------------------------------------------------------------------------------------------------------------
$ 1,174 $ 606
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
F-37
<PAGE>
Scintrex Limited
Notes to Consolidated Financial Statements
December 31, 1997
9. Income Taxes
Income tax expense varies from the amounts that would be computed by
applying the basic combined federal and provincial rate of 44.62%
(1996 - 44.62%) as follows:
<TABLE>
<CAPTION>
1997 1996
(thousands of dollars)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Basic rate applied to pre-tax income $ 387 $ 1,462
Increase (decrease) in taxes resulting from
Manufacturing and processing rate reduction (78) (295)
Large corporation tax 28 28
Unrecorded timing difference benefits 151 25
Non-deductible expenses 7 11
Non-taxable portion of capital gain (10) (34)
Other 29 (52)
- -------------------------------------------------------------------------------------------------------------------
514 1,145
Utilization of prior years' unrecorded tax loss benefits 79 245
- -------------------------------------------------------------------------------------------------------------------
$ 435 $ 900
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The company has deducted expenses in the accounts that have not been
claimed for income tax purposes in amounts aggregating approximately
$10,605,000 and $3,163,000 for federal and provincial income tax purposes
respectively as at December 31, 1997. These expenses are available in
future years to reduce taxable income as otherwise calculated.
The company has unclaimed investment tax credits of approximately
$1,028,000 available for application against federal income taxes
otherwise payable, expiring as follows:
<TABLE>
<CAPTION>
(thousands of dollars)
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
2003 $ 30
2004 224
2005 215
2006 271
2007 288
- -------------------------------------------------------------------------------------------------------------------
$ 1,028
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The potential income tax benefits arising from the above items have not
been recorded in the accounts.
F-38
<PAGE>
Scintrex Limited
Notes to Consolidated Financial Statements
December 31, 1997
10. Net Earnings Per Common Share
Net income per common share has been calculated using the weighted average
number of shares outstanding during the year amounting to 2,671,643 shares
(1996 - 2,261,669 shares).
11. Segmented Information
The company is engaged in the research, design and manufacture of
geophysical and geochemical instrumentation, nuclear reactor and
analytical instruments, and provides ground and airborne exploration and
consulting services for selected markets worldwide.
Information by industry and geographic segments is presented below:
<TABLE>
<CAPTION>
1997 1996
(thousands of dollars)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Industry Segments
Identifiable assets
Instrumentation $ 21,753 $ 23,379
Exploration services 4,067 3,364
- -------------------------------------------------------------------------------------------------------------------
25,820 26,743
- -------------------------------------------------------------------------------------------------------------------
Capital expenditures
Instrumentation 588 936
Exploration services 201 409
- -------------------------------------------------------------------------------------------------------------------
$ 789 $ 1,345
- -------------------------------------------------------------------------------------------------------------------
Amortization
Instrumentation 475 425
Exploration services 153 95
- -------------------------------------------------------------------------------------------------------------------
$ 628 $ 520
- -------------------------------------------------------------------------------------------------------------------
Sales
Instrumentation 16,094 18,504
Exploration services 3,920 2,794
- -------------------------------------------------------------------------------------------------------------------
$ 20,014 $ 21,298
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
F-39
<PAGE>
Scintrex Limited
Notes to Consolidated Financial Statements
December 31, 1997
11. Segmented Information (cont'd)
<TABLE>
<CAPTION>
1997 1996
(thousands of dollars)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Export Sales
United States of America $ 1,733 $ 2,512
Asia/Africa 7,885 8,500
Europe 1,749 3,367
Latin America 2,471 895
Geographic Segments
Identifiable assets
Canada 23,505 24,783
Australia 2,315 1,960
- -------------------------------------------------------------------------------------------------------------------
25,820 26,743
- -------------------------------------------------------------------------------------------------------------------
Capital expenditures
Canada 585 1,065
Australia 204 280
- -------------------------------------------------------------------------------------------------------------------
$ 789 $ 1,345
- -------------------------------------------------------------------------------------------------------------------
Amortization
Canada 497 430
Australia 131 90
- -------------------------------------------------------------------------------------------------------------------
$ 628 $ 520
- -------------------------------------------------------------------------------------------------------------------
Sales
Canada 17,968 19,938
Australia 2,494 1,571
United States of America 838 288
- -------------------------------------------------------------------------------------------------------------------
21,300 21,797
Transfers between geographic segments (1,286) (499)
- -------------------------------------------------------------------------------------------------------------------
$ 20,014 $ 21,298
- -------------------------------------------------------------------------------------------------------------------
Income from operations
Canada 206 2,921
Australia 303 (99)
- -------------------------------------------------------------------------------------------------------------------
$ 509 $ 2,822
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
F-40
<PAGE>
Scintrex Limited
Notes to Consolidated Financial Statements
December 31, 1997
12. Subsequent Events
Subsequent to year end, the company acquired Auslog PTY Ltd. in
Australia for approximately $500,000 including all costs.
The company announced that, by means of normal course issuer bid, it
intends to purchase up to a maximum $100,000 of its issued common shares,
being 7% of the public float. The bid, which will be open for a period of
one year starting January 29, 1998 is being made in accordance with the
Toronto Stock Exchange Policy on normal course issuer bids. During March
1998, the company proceeded with its share buyback program.
13. Comparative Figures
Certain reclassifications of 1996 amounts have been made to facilitate
comparison with the current year.
14. United States Accounting Principles
The consolidated financial statements presented herein have been prepared
in accordance with Canadian generally accepted accounting principles
("GAAP") which differ in the following material respects from those
generally accepted in the United States:
(a) Consolidated statements of earnings:
<TABLE>
<CAPTION>
Years ended
December 31
1997 1996
(thousands of dollars)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net earnings $ 433 $ 2,376
- -------------------------------------------------------------------------------------------------------------------
Net earnings under United States GAAP 433 2,376
- -------------------------------------------------------------------------------------------------------------------
Net earnings per common share 0.16 1.05
Weighted average number of shares used in the
calculation of basic earnings per share $ 2,671,643 $ 2,261,669
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Under Canadian and United States GAAP, basic earnings per share is
computed by dividing the net earnings for the period available to
common shareholders as measured by the respective accounting
principles (numerator), by the weighted average number of common
shares. Basic earnings per share excludes the dilutive effect of
potential common shares resulting from the exercise of stock options
and conversion of preference shares.
F-41
<PAGE>
Scintrex Limited
Notes to Consolidated Financial Statements
December 31, 1997
14. United States accounting principles (cont'd):
(b) Income taxes:
The company follows the deferral method of accounting for income
taxes. Under United States GAAP, the asset and liability method is
used. In the case of the company, application of the asset and
liability method does not result in a significant difference in the
tax amounts reported in the consolidated statements of earnings.
(c) Comprehensive income:
Under United States GAAP, the following additional disclosure would
be provided pursuant to the requirements of SFAS No. 130 "Reporting
Comprehensive Income" which established standards for the reporting
of comprehensive income and its components:
Consolidated statement of comprehensive income:
<TABLE>
<CAPTION>
Years ended
December 31
1997 1996
(thousands of dollars)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net earnings under United States GAAP $ 433 $ 2,376
Other comprehensive income:
Foreign currency translation adjustment (262) 103
- -------------------------------------------------------------------------------------------------------------------
Comprehensive earnings under United States GAAP $ 171 $ 2,479
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(d) Stock-based compensation:
United States accounting principles allow, as specified in SFAS 123,
but do not require companies to record compensation cost for employee
stock option plans at fair value. The company has chosen to continue
to account for stock options using the intrinsic value method
prescribed under United States GAAP in APB 25 which does not result
in a difference when compared to the accounting under Canadian GAAP.
F-42
<PAGE>
IDS INTELLIGENT DETECTION SYSTEMS INC.
Unaudited Pro forma Consolidated Statement of Earnings
Year ended December 31, 1998
(In thousands of dollars, except per share amounts)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Scintrex
Limited
January 1
to June 7, Pro forma Pro forma
Historical 1998 Subtotal adjustments combined
- ------------------------------------------------------------------------------------------------------------------------
(note 2)
<S> <C> <C> <C> <C> <C>
Sales $ 21,984 $ 6,787 $ 28,771 $ 28,771
Cost of sales 13,134 4,361 17,495 17,495
- ------------------------------------------------------------------------------------------------------------------------
8,850 2,426 11,276 11,276
Expenses:
Selling, general and
administrative 8,133 3,245 11,378 11,378
Depreciation and
Amortization 1,959 273 2,232 715 2.947
Research and
Development 818 743 1,561 1,561
- ------------------------------------------------------------------------------------------------------------------------
10,910 4,261 15,171 715 15,886
- ------------------------------------------------------------------------------------------------------------------------
(2,060) (1,835) (3,895) (715) (4,610)
Interest and other
income 859 146 1,005 1,005
Restructuring costs (244) (1,751) (1,995) (1,995)
- ------------------------------------------------------------------------------------------------------------------------
Loss before income taxes (1,445) (3,440) (4,885) (715) (5,600)
Income tax expense
(recovery) (65) 18 (47) (47)
- ------------------------------------------------------------------------------------------------------------------------
Loss from continuing
operations $ (1,380) $ (3,458) $ (4,838) (715) $ (5,553)
- ------------------------------------------------------------------------------------------------------------------------
Net loss per share:
Continuing operations $ (0.27)
- ------------------------------------------------------------------------------------------------------------------------
Weighted average
number of shares
outstanding 20,858,436
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to unaudited pro forma consolidated statement of
earnings.
F-43
<PAGE>
IDS INTELLIGENT DETECTION SYSTEMS INC.
Notes to Unaudited Pro forma Consolidated Statement of Earnings
Year ended December 31, 1998
(In thousands of dollars, except per share amounts)
- --------------------------------------------------------------------------------
1. Basis of presentation:
On June 7, 1998, IDS Intelligent Detection Systems Inc. ("IDS" or the
"Registrant") acquired for cash and common shares 100% of the issued and
outstanding common shares of Scintrex Limited ("Scintrex") and its
wholly-owned subsidiaries. The acquisition was accounted for by the
purchase method with the results of Scintrex's operations included in the
accounts of the Registrant from the effective date of the acquisition. The
Registrant acquired Scintrex Limited by paying cash of $18,316 and issuing
3,914,858 common shares of the Registrant valued at $17,897.
The accompanying pro forma consolidated statement of earnings is based upon
the audited and unaudited consolidated statement of earnings of IDS and
Scintrex for the year ended December 31, 1998, respectively, and has been
prepared by management of IDS for inclusion in this registration statement.
The pro forma consolidated statement of earnings has been prepared in
accordance with generally accepted accounting principles in Canada to
illustrate the Registrant's acquisition of Scintrex as if the acquisition
occurred on January 1, 1998.
The pro forma consolidated income statement may not necessarily be
indicative of the results that would have been obtained had the two
companies operated as a single entity from January 1, 1998.
This statement should be read in conjunction with the historical
consolidated statement of earnings of the Registrant, which is included
elsewhere in this registration statement.
2. Notes to pro forma consolidated statement of earnings:
(a) Amortization:
To reflect the increase in amortization expense due to (a) the
amortization of goodwill on a straight-line basis over 20 years, and
(b) increase in amortization resulting from the step-up in capital
assets amortized on a straight-line basis over periods of five to
twenty years.
(b) Non-recurring charges:
Included in the results for Scintrex to June 8, 1998 under
restructuring charges are amounts related to Scintrex's defense of
IDS's takeover and severance paid to certain members of Scintrex after
completion of the takeover by IDS. These amounts totalling $1,751 are
not expected to occur in future periods and would reduce the loss from
continuing operations to $3,802.
(c) Scintrex Limited from January 1, 1998 to June 7, 1998:
The consolidated operating results for Scintrex for the period January
1, 1998 to June 7, 1998 were obtained from management and are
unaudited.
F-44
<PAGE>
IDS INTELLIGENT DETECTION SYSTEMS INC.
Notes to Unaudited Pro forma Consolidated Statement of Earnings, page 2
Year ended December 31, 1998
(In thousands of dollars, except per share amounts)
- --------------------------------------------------------------------------------
3. United States accounting principles:
The pro forma consolidated income statement has been prepared in accordance
with Canadian generally accepted accounting principles ("GAAP") which in
the case of the Registrant differ in the following material respects from
those generally accepted in the United States:
Pro forma loss from continuing operations $ (5,553)
Deferred development costs 979
- --------------------------------------------------------------------------------
Pro forma loss from continuing operations under U.S. GAAP $ (6,532)
- --------------------------------------------------------------------------------
Net loss per common share:
Continuing operations $ (0.31)
- --------------------------------------------------------------------------------
Weighted average number of shares outstanding 20,858,436
- --------------------------------------------------------------------------------
Under Canadian GAAP, development costs can be deferred and amortized if
certain criteria are met. Under U.S. GAAP, development costs are expensed
as incurred resulting in an increase in the 1998 pro forma loss from
continuing operations of $979.
F-45
<PAGE>
LEASE BETWEEN
OMERS REALTY MANAGEMENT CORPORATION
(the "Landlord")
-and-
INTELLIGENT DETECTION SYSTEMS INC.
(the "Tenant")
September 1, 1999
11 KING WEST
<PAGE>
TABLE OF CONTENTS
ARTICLE 1 --INTERPRETATION
Section 1.01 Defined Terms.................................................1
Section 1.02 Number, Gender, Liability.....................................8
Section 1.03 Headings and Captions.........................................8
Section 1.04 Obligations as Covenants......................................8
Section 1.05 Entire Agreement..............................................8
Section 1.06 Governing Law.................................................8
Section 1.07 Severability..................................................8
Section 1.08 Successors and Assigns........................................9
Section 1.09 Schedules.....................................................9
Section 1.10 Time of the Essence...........................................9
ARTICLE 2 --DEMISE
Section 2.01 Premises.......................................................9
ARTICLE 3 ---TERM
Section 3.01 Term...........................................................9
ARTICLE 4 ---RENT
Section 4.01 Minimum Rent.............................................10
Section 4.02 Additional Rent..........................................10
Section 4.03 Payment of Tenant's Proportionate Share..................11
Section 4.04 Accrual of Rent..........................................11
Section 4.05 Currency and Place of Payment............................11
Section 4.06 Interest on Amounts in Default...........................12
Section 4.07 Net Lease to Landlord....................................12
ARTICLE 5 ---COMMON AREAS AND FACILITIES
Section 5.01 Control of Building......................................12
Section 5.02 Landlord's Alterations, etc..............................12
ARTICLE 6 ---UTILITIES AND HEATING, VENTILATING AND AIR-CONDITIONING
Section 6.01 Heating, Ventilating and Air Conditioning................13
Section 6.02 Utilities................................................14
Section 6.03 Janitorial Services......................................14
<PAGE>
ARTICLE 7---PROPERTY TAXES
Section 7.01 Property Taxes Payable by the Landlord...................14
Section 7.02 Property Taxes Payable by the Tenant......................15
Section 7.03 Tenant's Other Taxes......................................15
Section 7.04 Postponement..............................................16
Section 7.05 Tenant to Deliver Receipts................................16
Section 7.06 Assessment Appeals........................................16
ARTICLE 8 ---USE OF PREMISES
Section 8.01 Use.......................................................16
Section 8.02 Nuisance..................................................16
Section 8.03 Compliance with Laws......................................17
Section 8.04 Compliance with Rules and Regulations.....................17
Section 8.05 Signs and advertising.....................................17
Section 8.06 Disfiguration, Overloading, etc...........................17
Section 8.07 Energy Conservation.......................................18
Section 8.08 Remedial Action...........................................18
ARTICLE 9 ---INSURANCE
Section 9.01 Tenant's Insurance.......................................18
Section 9.02 Form of Policies.........................................19
Section 9.03 Release of Landlord......................................19
Section 9.04 Landlord's Insurance.....................................20
Section 9.05 Insurance Risks..........................................21
Section 9.06 Release of Tenant........................................21
ARTICLE 10---MAINTENANCE AND REPAIR
Section 10.01 Landlord's Obligations...................................21
Section 10.02 Maintenance and Repairs by the Tenant....................21
ARTICLE 11--DAMAGE AND DESTRUCTION
Section 11.01 Abatement and Termination................................22
ARTICLE 12 ---ASSIGNMENT AND SUBLETTING
Section 12.01 Permitted Occupants......................................23
Section 12.02 Assignment or Subletting.................................23
Section 12.03 Conditions of Consent....................................24
Section 12.04 Landlord's Option........................................24
Section 12.05 Surrender................................................25
Section 12.06 Change in Control........................................25
<PAGE>
Section 12.07 Continuing Obligations...................................26
Section 12.08 Assignment by Landlord...................................26
ARTICLE 13 ---STATUS CERTIFICATES, ATTORNMENT, SUBORDINATION
Section 13.01 Status Certificates......................................26
Section 13.02 Subordination and Attornment.............................26
ARTICLE 14 ---LIMITATION OF LIABILITIES
Section 14.01 Unavoidable Delay........................................27
Section 14.02 Waiver...................................................27
Section 14.03 No Claim for Inconvenience...............................27
Section 14.04 Indemnity by Tenant......................................27
ARTICLE 15 ---ACCESS
Section 15.01 Entry by Landlord........................................27
Section 15.02 Exhibiting Premises......................................28
Section 15.03 Excavation...............................................28
ARTICLE 16 ---TENANT'S ALTERATIONS
Section 16.01 Restrictions.............................................28
Section 16.02 Occupational Health and Safety...........................29
Section 16.03 Leasehold Improvements...................................30
Section 16.04 Liens....................................................30
ARTICLE 17 ---REMEDIES OF LANDLORD ON TENANT'S DEFAULT
Section 17.01 Remedying by Landlord....................................31
Section 17.02 Right to Re-enter........................................31
Section 17.03 Bankruptcy of Tenant.....................................31
Section 17.04 Right to Terminate.......................................32
Section 17.05 Right to Relet...........................................32
Section 17.06 Distress.................................................33
Section 17.07 (Intentionally omitted)..................................33
Section 17.08 Failure of Tenant to Take Possession.....................33
Section 17.09 Remedies Cumulative......................................33
ARTICLE 18 ---MISCELLANEOUS
Section 18.01 Notices..................................................33
Section 18.02 Registration of Lease....................................34
Section 18.03 Overholding - No Tacit Renewal...........................34
Section 18.04 Planning Act.............................................34
<PAGE>
Section 18.05 Partial Payment of Rent..................................35
Section 18.06 Brokerage Commissions....................................35
Section 18.07 Metric Conversion........................................35
Section 18.08 Decision of Expert.......................................35
SCHEDULE "A" DESCRIPTION OF LAND......................................A-1
SCHEDULE "B" FLOOR PLAN...............................................B-1
SCHEDULE "C" RULES AND REGULATIONS....................................C-1
SCHEDULE "D" SPECIAL PROVISIONS.......................................D-1
<PAGE>
This lease is made as of the 1st day of September, 1999 between:
OMERS REALTY MANAGEMENT CORPORATION
(the "Landlord")
of the first part
-and-
INTELLIGENT DETECTION SYSTEMS, INC.
(the "Tenant")
In consideration of the rents, covenants and agreements hereinafter
contained, the parties agree as follows:
ARTICLE 1
INTERPRETATION
Section 1.01 Defined Terms
In this Lease, unless there is something in the subject matter or context
inconsistent therewith:
(a) "Additional Rent" means all amounts in addition to Minimum Rent payable by
the Tenant to the Landlord pursuant to any provision of this Lease;
(b) "Architect" means the architect designated from time to time by the
Landlord, who shall be independent of the Landlord;
(c) "Building" means the multi-storey building located on the Lands and at
present known as 11 King Street West, Toronto, Ontario, MSH 4C7, together with
related parking and storage facilities, if any, as such building and facilities
may be altered, expanded, reduced or reconstructed from time to time;
(d) "Business Day" means any day which is not a Saturday, Sunday or a holiday,
as defined in the Interpretation Act (Ontario);
(e) "Business Hours" means the period from 7:00 a.m. to 7:00 p.m. on any
Business Day;
Page 1
<PAGE>
(f) "Business Taxes" means all taxes and licence fees in respect of any business
carried on by tenants or other occupants of the Building and includes, without
limitation, business taxes levied or assessed pursuant to the Assessment Act
(Ontario);
(g) "Capital Tax" means the applicable amount as hereinafter defined of any tax
or taxes payable by the Landlord under the legislation of Canada or of a
province or of any political subdivision within a province, based upon or
computed by reference to the paid-up capital or place of business of the
Landlord or its ownership of capital employed in the Building or the
Development, as determined for the purposes of such tax; provided that for the
purpose of this definition the phrase "applicable amount" of such tax shall
mean:
(A) with respect to a tax payable under the legislation of a province or
political subdivision respectively the amount thereof that would be
payable if the Building or the Development were the only
establishment of the Landlord in the province or political
subdivision respectively and any other establishments of the
landlord therein were located outside the province or political
subdivision;
(B) with respect to a tax payable under the legislation of Canada the
amount thereof that would be payable if the Building or the
Development was the only establishment of the Landlord in Canada and
any other establishments of the Landlord were located outside
Canada; and
(C) with respect to a tax imposed in excess of a specified limit or
exemption, the amount of the limit or exemption attributable to the
Building or Development shall be allocated by the Landlord acting
equitably.
(h) "Common Areas and Facilities" means those areas, facilities, improvements,
installations, systems and equipment which, from time to time, (i) form
part of the Lands or the Building and are not designated or intended by the
Landlord to be leased for office purposes, or (ii) serve or benefit the
Lands or the Building, regardless of location, and are designated from time
to time by the Landlord as part of the Common Areas and Facilities;
including, without limitation of the foregoing, the roof, weather walls,
structural elements and bearing walls of the Building, and any malls,
courts, and other public areas, parking areas, and access routes, loading
docks, pedestrian routes and sidewalks, stairways, escalators, elevators
and other transportation facilities or systems, landscaped areas, public
seating areas, public transportation facilities or systems, public
washrooms, utility rooms, storage rooms, mechanical, electrical, plumbing
and other installations, equipment, furniture systems or services and all
structures containing the same (including, without limitation, the HVAC
System) and security, fire, life safety, music and communication systems;
(i) "Eligible Corporation" means a corporation which controls or is controlled
by or under common control with the Tenant, control meaning the direct or
indirect beneficial ownership of more than fifty percent of the voting
shares of a corporation;
Page 2
<PAGE>
(j) "Expert" means any architect, engineer, land surveyor, chartered
accountant or other professional consultant, in any case appointed by the
Landlord and, in the reasonable opinion of the Landlord, qualified to
perform the specified function;
(k) "HVAC System" means all heating, ventilating and air-conditioning equipment
and facilities provided or operated and maintained by the Landlord;
(l) "Indemnitor" means the Person named as the indemnitor in the Indemnity
Agreement attached to this Lease as Appendix A, if applicable;
(m) "Landlord" means the party of the first part and its successors and
assigns;
(n) "Lands" means the lands described in Schedule "A" hereto, as they may be
altered, expanded or reduced from time to time pursuant to the provisions
hereof;
(o) "Lease" means this lease as it may be amended from time to time in
accordance with the provisions hereof;
(p) "Lease Year" means a period of twelve months commencing on the first day
of January in each year except that:
(i) the first Lease Year begins on the first day of the Term and ends on
the last day of the calendar year in which the first day of the Term
occurs, and
(ii) the last Lease Year of the Term begins on the first day of the
calendar year during which the last day of the Term occurs and ends
on the last day of the Term,
provided that the Landlord may from time to time by written notice to the
Tenant specify an annual date upon which each subsequent Lease Year is to
commence, in which event the Lease Year which would otherwise be current
when such annual date first occurs shall terminate on such date;
(q) "Minimum Rent" means the rent specified in Section 4.01 of this Lease;
(r) "Mortgage" means any mortgage, charge or security instrument (including a
deed of trust and mortgage securing bonds and all indentures supplemental
thereto) which may now or thereafter affect the Lands;
(s) "Mortgagee" means the mortgagee, chargee, secured party or trustee for
bondholders, as the case may be, named in a Mortgage;
(t) "Operating Costs" means the aggregate of all costs, expenses, fees, rentals
and disbursements of every kind and nature, direct or indirect, incurred,
accrued or equitably
Page 3
<PAGE>
attributed by or on behalf of the Landlord in the maintenance, repair,
operation, supervision and mange of the Building and, without limitation
and without duplication, shall include:
(i) the cost of cleaning, janitorial, landscaping, supervisory,
maintenance and other services;
(ii) the cost of providing interior climate control, water, electricity and
all other utilities and services not payable by any specific tenant of
the Building and the portion of the operating costs of the HVAC System
allocated by the Landlord to the Common Areas;
(iii) the cost of security, supervision and traffic control;
(iv) the cost of all insurance maintained by the Landlord in respect of the
Building or its operation, including insurance against loss of Rent;
(v) the cost of all maintenance, repairs and replacements properly
chargeable against income made from time to time by the Landlord, or
on its behalf, to the Building, including the Common Areas and
Facilities;
(vi) fees and expenses incurred for legal, accounting and other
professional services relating to the operation of the Building,
excluding legal fees for the enforcement of obligations of other
tenants;
(vii) salaries, wages and fringe benefits of all personnel, including
supervisory personnel, employed directly in the maintenance, repair,
operation or management of the Building;
(viii) payments to independent contractors for services in connection with
the Building and payments for the rental of any equipment, furniture,
installations, systems or signs used in connection with the Building;
(ix) all Property Taxes, Rental Taxes, business taxes and other taxes, if
any, from time to time payable for or attributed equitably by the
Landlord to the Common Areas and Facilities, and Capital Tax;
(x) expenditures for equipment, systems, alterations or replacements
undertaken primarily to reduce Operating Costs up to maximum aggregate
expenditure of $50,000 in any Lease Year, unless the Landlord elects
to depreciate or amortize any such expenditures;
(xi) depreciation on or amortization of:
Page 4
<PAGE>
(A) the cost of all plant, equipment and fixtures forming part of
the Common Areas and Facilities (other than weather walls,
structural elements and bearing walls) or otherwise serving
the Building;
(B) expenditures for equipment, systems or alterations undertaken
primarily to reduce Operating Costs unless they are, pursuant
to paragraph (x) above, charged fully in the Lease Year in
which they are incurred; and
(C) the costs incurred after the Commencement Date of the Term for
repairing or replacing the Common Areas and Facilities
(including the HVAC System), or any part thereof; unless they
are, pursuant to paragraph (v) or paragraph (x) above, charged
fully in the Lease Year in which they are incurred;
in each case together with interest at a rate equal to 1% above
Prime at the beginning of each Lease Year on the undepreciated or
unamortized portion of all such items being depreciated or amortized
from time to time;
(xii) the fair market rental value of leasable space which the Landlord
uses for operating, managing or maintaining the Building, up to a
maximum of 2,500 square feet; and
(xiii)an administrative and supervisory fee equal to 15% of the Operating
Costs as otherwise determined after deducting therefrom the costs
referred to in paragraphs (ix) and (xii), and interest charged
pursuant to paragraph (xi) above.
provided that there shall be deducted or excluded, as the case may be,
from the aggregate of the amounts listed in paragraphs (i) to (xiii)
above, mutually inclusive, the following:
(A) net recoveries by the Landlord from other tenants (other than
recoveries from such tenants under clauses in their respective
leases similar to Section 4.03 and recoveries on account of
items not otherwise included in Operating Costs) which reduce
the expenses incurred by the Landlord in operating and
maintaining the Building;
(B) net proceeds received by the Landlord from its insurance
policies to the extent that such proceeds relate to costs and
expenses included in Operating Costs;
(C) the costs of procuring any lease, debt service costs, any
taxes of a personal nature of the Landlord (other than Capital
Tax) to the extent they are not imposed in lieu of Property
Taxes, and payments under any ground lease;
(D) costs determined by the Landlord, acting reasonably, to be
allocable to correction of construction or design faults;
Page 5
<PAGE>
(E) costs incurred by the Landlord in promoting and leasing the
Building, including all commissions, advertising costs and
tenant inducements; and
(F) all amounts chargeable directly to specific tenants of the
Building under lease provisions similar to Section 6.02, to
the extent that those amounts are included in Operating Costs;
(G) the costs of repairing or replacing any structural defects in
the floors, foundations, exterior walls and interior load
bearing walls of the Building;
(H) goods and services taxes in respect of which the Landlord has
input credits;
(u) "Person", according to the context, includes any person, corporation,
firm, partnership or other entity, any group of persons, corporations,
firms, partnerships or other entities, or any combination thereof;
(v) "Premises" means the premises located on the 12th floor of the Building
shown outlined in red on Schedule "B" attached hereto and further
described in Section 2.01, provided that the Common Areas and Facilities
which are within the space enclosed by the boundaries of the Premises do
not form part of the Premises notwithstanding the definition of Rentable
Area of the Premises;
(w) "Prime" means the rate of interest from time to time announced by the
Landlord's designated Canadian chartered bank as its prime rate;
(x) "Property Taxes" means all taxes, rates, duties, levies, fees, charges,
sewer levies, local improvement rates, charges and assessments whatsoever,
imposed, assessed, levied, rated or charged against the Lands or the
Building or any part thereof from time to time by any lawful taxing
authority whether school, municipal, regional, provincial, federal,
parliamentary or otherwise and any taxes or other amounts which are imposed
in lieu of, or in addition to, any of the foregoing whether or not in
existence at the commencement of the Term and whether of the foregoing
character or not and any such taxes levied against the Landlord on account
of its ownership of the Building or its interest therein but excluding
Landlord's income taxes;
(y) "Proportionate Share" means a fraction which has: (i) as its numerator the
Rentable Area of the Premises; and (ii) as its denominator the Rentable
Area of the Building less: (A) the areas, if any, occupied by the Landlord
or its agents or contractors to maintain, repair, operate, manage and
supervise the Building; and (B) the Rentable Area of the Building which is
not leased at the time of the calculation up to a maximum of three per cent
of the Rentable Area of the Building;
(z) "Rent" means all Minimum Rent and Additional Rent payable pursuant to this
Lease;
Page 6
<PAGE>
(aa) "Rentable Area" in the case of the Premises or any other premises,
means the area expressed in square feet, as certified by an Expert,
of all floors of the premises, determined as follows:
(A) in the case of premises on a floor occupied entirely by one
tenant the Rentable Area shall be all the floor area within the
exterior walls calculated by measuring from the inside face of
the glass of the exterior walls without deduction for columns and
projections and including elevator lobbies, service corridors,
electrical rooms, telephone rooms, janitor closets, washrooms,
mechanical rooms and any special stairs and or elevators for the
specific use of the particular tenant but excluding other stairs,
elevator shafts, flues, pipe shafts and vertical ducts and their
enclosing walls;
(B) in the case of premises on a floor occupied by more than one
tenant the Rentable Area shall be the aggregate of (i) all floor
area within the exterior walls of such premises calculated by
measuring from the inside face of the glass of the exterior walls
to the face of permanent interior walls and to the center line of
demising partitions without deduction for columns and projections
but excluding stairs and elevator shafts supplied by the Landlord
for use in common with other tenants within the relevant floors;
and (ii) a proportionate share of the area of Common Areas and
Facilities located on such floor, such proportionate share to be
of the same proportion of such area that the area of the space
referred to in clause (i) above is of the total rentable area of
such floor determined without reference to this clause (ii); and
(iii) any service areas which are for the specific use of the
particular tenant, such as special stairs and elevators,
it being acknowledged that the Rentable Area of the Premises or the
Building or any other space as at the commencement of the Term will
be adjusted from time to time to reflect any expansion, reduction,
rearrangement or relocation;
(bb) "Rental Taxes" means any tax or duty imposed upon; or collectable
by, the Landlord Which is measured by or based in whole or in part
directly upon the Rent, whether existing at the date hereof or
hereinafter imposed by any governmental authority, including without
limitation the goods and services tax, value added tax, business
transfer tax, retail sales tax, federal sales tax, excise tax or
duty, or any tax similar to any of the foregoing;
(cc) "Storage Areas" means those areas which are designated from time to
time by the Landlord to be used for storage purposes;
(dd) "Tenant" means the party of the second part and, to the extent
permissible under this Lease, its successors, assigns and legal
representatives;
Page 7
<PAGE>
(ee) "Term" means the term of this Lease as specified in Section 3.01, as
it may be extended by the Tenant pursuant to the options to renew,
if any;
(ff) "Unavoidable Delay" means any cause beyond the control of the party
affected thereby which prevents the performance by such party of any
obligation hereunder and not caused by its default or act of
commission or omission and not avoidable by the exercise of
reasonable care, excluding financial inability.
Section 1.02 Number, Gender, Liability
The grammatical changes required to make the provisions of this Lease
apply in the plural sense where the Tenant comprises more than one Person and to
corporations, firms, partnerships, or individuals, male or female, will be
assumed as though in each case fully expressed. If the Tenant consists of more
than one Person, the covenants of the Tenant shall be deemed to be joint and
several covenants of each such Person. If the Tenant is a partnership (the
"Tenant Partnership") each Person who is presently a member of the Tenant
Partnership, and each Person who becomes a member of any successor Tenant
Partnership, shall be and continue to be liable jointly and severally for the
performance of this Lease, whether or not such Person ceases to be a member of
such Tenant Partnership or successor Tenant Partnership.
Section 1.03 Headings and Captions
The table of contents, article numbers, article headings, Section numbers
and Section headings are inserted for convenience of reference only and are not
to be considered when interpreting this Lease.
Section 1.04 Obligations as Covenants
Each obligation of the Landlord or the Tenant expressed in this Lease
shall be a covenant for all purposes.
Section 1.05 Entire Agreement
This Lease contains all the representations, warranties, covenants,
agreements, conditions and understandings between the parties concerning the
Premises and the subject matter of this Lease and may be amended only by an
agreement in writing signed by the parties hereto.
Section 1.06 Governing Law
This Lease shall be interpreted under and is governed by the laws of the
Province of Ontario.
Section 1.07 Severability
Page 8
<PAGE>
If any provision of this Lease is illegal or unenforceable it shall be
considered severable from the remaining provisions of this Lease, which shall
remain in force.
Section 1.08 Successors and Assigns
This Lease and everything herein contained shall benefit and bind the
successors and assigns of the party of the first part and the heirs, executors,
administrators and permitted successors and assigns of the party of the second
part.
Section 1.09 Schedules
The Schedules to this Lease shall form part of this Lease and shall be
interpreted as if they were contained herein.
Section 1.10 Time of the Essence
Time shall be of the essence of this Lease and every part thereof.
ARTICLE 2
DEMISE
Section 2.01 Premises
The Landlord hereby leases to the Tenant, and the Tenant leases from the
Landlord, the Premises, which contain a Rentable Area of approximately nine
thousand four hundred and thirty (9,430) square feet. The Rentable Area of the
Premises as at commencement of the Term shall be conclusively determined by the
Landlord's Expert and shall be set out in a certificate of such Expert, a copy
of which shall be given to the Tenant. Such determination shall be in accordance
with BOMA, Standard ANSI Z65.1 1980 (reaffirmed 1989) and shall be binding upon
both the Landlord and the Tenant.
Notwithstanding the provisions of subsection 1.01 (aa) the boundaries of
the Premises are as follows: (i) the interior face of all exterior walls, doors
and windows; (ii) the interior face of all interior walls, doors and windows
separating the Premises from the Common Areas and Facilities, if any; (iii) the
center line of all interior walls separating the Premises from adjoining
leasable premises; and (iv) the top surface of the structural subfloor and the
bottom surface of the structural ceiling.
ARTICLE 3
TERM
Page 9
<PAGE>
Section 3.01 Term
The Term shall be the period of five (5) years, 0 months and 0 days
commencing on the 1st day of January, 2000 (the "Commencement Date") and ending
on the 31st day of December, 2004 unless terminated earlier pursuant to this
Lease.
ARTICLE 4
RENT
Section 4.01 Minimum Rent
The Tenant shall pay annually to the Landlord throughout the Term as
Minimum Rent for the Premises the following:
PERIOD OF TERM ANNUALLY MONTHLY
January 1, 2000 to December 31, 2004 $212,175.00 $17,681.25
The Minimum Rent is based upon an annual rate for each square foot of
Rentable Area of:
PERIOD OF TERM RATE
January 1, 2000 to December 31, 2004 $22.50
The Minimum Rent shall be payable in equal consecutive monthly instalments each
in advance on the first day of each calendar month.
Upon determination of the Rentable Area of the Premises by the Expert the
Minimum Rent shall, if necessary, be adjusted retroactively to the Commencement
Date and the Tenant shall pay to the Landlord any deficiency in payments of
Minimum Rent made to such time or the Landlord shall refund to the Tenant any
excess Minimum Rent paid by the Tenant to such time, as the case may be, within
fifteen days after the Tenant is given written notice of such determination. At
the Landlord's request the Tenant shall enter into a supplement to this Lease to
reflect such adjustment in the Minimum Rent.
Section 4.02 Additional Rent
The Tenant shall also pay annually to the Landlord throughout the Term the
aggregate of the Tenant's Proportionate Share of Operating Costs and Property
Taxes and all other items of Additional
Page 10
<PAGE>
Rent. Without limiting such generality whenever the Landlord performs any work
or supplies any service which is the responsibility of the Tenant or for which
expense the Tenant is responsible, the Tenant shall pay to the Landlord upon
demand, as Additional Rent, in addition to the amount otherwise payable to the
Landlord in respect thereof, a charge (the "Administrative Charge") equal to 15%
of all costs, fees and expenses incurred by the Landlord in connection
therewith. All Additional Rent shall be recoverable as Rent and the Landlord
shall have the same rights upon default in any such payment as upon non-payment
of any other Rent.
Section 4.03 Payment of Tenant's Proportionate Share
Prior to the commencement of each Lease Year the Landlord shall notify the
Tenant of its estimate of the Tenant's Proportionate Share of Operating Costs
and, subject to Section 7.02, its estimate of the Tenant's Proportionate Share
of Property Taxes for that Lease Year. The Tenant shall pay such estimated
amounts in equal monthly instalments in advance on the first day of each month
during the Lease Year. The Landlord may from time to time during a Lease Year
re-estimate the Tenant's Proportionate Share of Operating Costs or the Tenant's
Proportionate Share of Property Taxes and shall fix monthly instalments for the
then remaining balance of the Lease Year so that such share will have been
entirely paid during that Lease Year. When the necessary information becomes
available, the Landlord shall make a final determination of the Tenant's
Proportionate Share of Operating Costs and the Tenant's Proportionate Share of
Property Taxes for the relevant Lease Year, which shall be binding upon both
parties, and shall provide the Tenant, upon request, with an audited statement
of the Operating Costs for the relevant Lease Year. The Landlord and the Tenant
shall expeditiously make any necessary readjusting payments; the Landlord shall
pay any excess to the Tenant within fifteen days after such final determination
has been made, or the Tenant shall pay to the Landlord the difference, if any,
between the Tenant's share and the amount actually paid by the Tenant within
fifteen days after receiving notice of such final determination, as the case may
be.
Section 4.04 Accrual of Rent
Rent shall be considered as accruing from day to day hereunder from the
Commencement Date and where it becomes necessary for any reason to calculate
such rent for an irregular period of less than one year or less than one
calendar month, an appropriate apportionment and adjustment shall be made on a
per diem basis based upon a period of three hundred and sixty-five days. If the
Commencement Date is not the first day of a month, the Tenant shall pay upon the
Commencement Date a portion of the Minimum Rent and the Tenant's Proportionate
Share of Operating Costs and of Property Taxes pro-rated on a per diem basis
from the Commencement Date to the end of the month in which the Commencement
Date occurs. All Rent payable under this Lease, including Minimum Rent and the
Tenant's Proportionate Share of Operating Costs and of Property Taxes shall be
payable without deduction, abatement, set-off or compensation except as.
otherwise expressly provided in this Lease. If the Landlord fails to pay the
Tenant allowance set out in section 2 of Schedule "D" any unpaid amount may be
set off against Rent.
Section 4.05 Currency and Place of Payment
Page 11
<PAGE>
All Rent hereunder shall be payable in lawful money of Canada and shall be
paid to the Landlord, or to such Person and at such place, as the Landlord may
from time to time direct by notice to the Tenant.
Section 4.06 Interest on Amounts in Default
If the Tenant fails to pay when due any amount of Rent, then at the option
of the Landlord, interest shall accrue on the unpaid amount from the due date to
the date of payment at the rate per annum which is one percent above Prime, and
shall be payable by the Tenant to the Landlord as Additional Rent forthwith on
demand.
Section 4.07 Net Lease to Landlord
The Tenant acknowledges and agrees that it is intended that this Lease
shall be a completely net lease for the Landlord, except as otherwise provided
herein.
ARTICLE 5
COMMON AREAS AND FACILITIES
Section 5.01 Control of Building
The Landlord shall operate and manage the Building in the manner it deems
appropriate from time to time but always in accordance with the then prevailing
standards for first class buildings of similar age in the area in which the
Building is located.
The tenants of the Building shall be entitled to use those parts of the
Common Areas and Facilities, as constituted from time to time, intended for the
common use of tenants of the Building subject at all times to the exclusive
control and management of the Landlord; it is agreed that the Landlord shall be
entitled to use, maintain, operate, police, reconstruct, alter and deal with the
Common Areas and Facilities and change the area, location and arrangement
thereof. In exercising such rights the Landlord shall use reasonable efforts to
minimize interference with the Tenant's access to and use of the Premises. The
Tenant and all other Persons using the Common Areas and Facilities do so at
their sole risk. Subject to Section 11.01, if there should be an interruption in
any service or use of any facility the Landlord shall proceed expeditiously to
end such interruption but in no event will the Tenant be entitled to any
compensation or to any abatement or repayment of Rent.
Section 5.02 Landlord's Alterations, etc.
The Landlord, at any time and from time to time and without compensation
to the Tenant, may:
Page 12
<PAGE>
(a) without cost to the Tenant, make alterations or additions to, change
the location of; expand or reduce, and build structures adjoining,
any part of any buildings, facilities, improvements and areas from
time to time on the Lands, other than the Premises, but including,
without limitation, the Common Areas and Facilities;
(b) (Intentionally omitted.)
(c) deal with the Lands as it deems appropriate in its absolute
discretion including, without limitation, dedicating or conveying
portions of the Lands to any municipal or other public authority or
other Persons and granting easements, rights-of-way or other
interests in the Lands; and
(d) construct on the Lands such buildings, structures, facilities,
roadways and other improvements as it deems appropriate in its
absolute discretion including, without limitation, parking
facilities, without cost to the Tenant.
ARTICLE 6
UTILITIES AND HEATING, VENTILATING AND AIR-CONDITIONING
Section 6.01 Heating, Ventilating and Air Conditioning
The Landlord shall provide processed air in such quantities and at such
temperatures as shall maintain in the Premises conditions of reasonable
temperature and comfort during Business Hours. In no event, however, shall the
Landlord have any obligation or liability in connection with the cessation,
interruption or suspension of the supply of such process air but the Landlord
shall use its reasonable efforts to restore it. The Landlord shall not be
responsible for the failure of the hearing, ventilating and air-conditioning
equipment and systems to perform their function if this is attributable to any
arrangement of partitioning in the premises or failure to shade windows which
are exposed to the sun, or any use of electrical power by the Tenant which, in
the Landlord's opinion, exceeds normal use by tenants in the Building, and
provided further that the Landlord shall not be liable for direct, indirect or
consequential damages or damages for personal discomfort or illness of the
Tenant, its officers, clients or customers by reason of the operation or
breakdown of such equipment or systems, nor shall there be repayment or
reduction of the Rent during any such breakdown. The interior office layout of
the Premises shall be modified by the Tenant, if necessary, in accordance with
the reasonable requirements of the Landlord to secure maximum efficiency of the
heating, ventilating and air-conditioning systems serving the Premises.
The Tenant shall comply with all rules and regulations of the Landlord
pertaining to the operation and regulation of those portions of the heating,
ventilating and air-conditioning equipment within and serving the Premises,
failing which the Landlord shall be entitled to take such steps as it deems
advisable including, without limitation, entering upon the Premises and assuming
control of such equipment, and the Tenant will pay to the Landlord forthwith
upon demand all costs and
Page 13
<PAGE>
expenses incurred by the Landlord in so doing. If the Tenant requests that the
HVAC System be operated at times other than Business Hours, the Tenant shall pay
the Landlord as Additional Rent forthwith on demand the Landlord's charge for
such operation, which is estimated to be S25.00 per hour, per floor for 1999,
and shall be subject to change from time to time by the Landlord acting
reasonably.
Section 6.02 Utilities
The Landlord shall, subject to interruption beyond its control, provide and
permit the Tenant to use any utility services (including fuel, electricity and
water) serving the Building provided that the Tenant does not overload the
capacity of any such service. The Tenant shall pay to the Landlord, or as it
otherwise directs, as Additional Rent all costs and expenses relating to such
use, as allocated or determined by the Landlord. The Tenant shall make such
payments in monthly instalments in advance based upon estimates by the Landlord
and subject to adjustment by the Landlord within a reasonable time after the end
of the Lease Year for which such estimate has been made; if required by the
Landlord, the Tenant shall install at its own expense and in a location
designated by the Landlord its separate check meters for the purpose of
measuring, without limitation, the consumption of electricity and water in the
Premises. The Tenant shall advise the Landlord forthwith of any installations,
appliances or business machines used by the Tenant which are likely to require
large consumption of electricity or other utilities. In no event, however, shall
the electricity consumed in the Premises exceed 4 1/2 watts per square foot of
the usable area of the Premises. The Landlord shall replace from time to time
electrical light bulbs, tubes and ballasts serving the Premises and the Tenant
shall pay to the Landlord forthwith upon demand as Additional Rent the cost
thereof plus the Administrative Charge.
Section 6.03 Janitorial Services
The Landlord shall provide janitorial services to the Premises to a
standard similar to that provided to comparable buildings in the area of the
Building provided that all curtains, carpets, rugs or drapes of any kind in the
Premises shall be cleaned and maintained by the Tenant. The Landlord shall not
be responsible for any omission or act of any Person employed or retained to
perform such work, or for any loss thereby sustained by the Tenant, its
servants, agents invitees or others. The Tenant shall not engage any Person to
provide janitorial services to the Premises without the written approval of the
Landlord. The Tenant shall grant access necessary for the performance of the
janitorial services (except for secured areas) and shall leave the Premises in a
reasonably tidy condition at the end of each day to permit the performance of
such services.
ARTICLE 7
PROPERTY TAXES
Section 7.01 Property Taxes Payable by the Landlord
Page 14
<PAGE>
The Landlord shall pay all Property Taxes, subject to Section 7.02,
provided that it may defer such payments or compliance with any taxing statute,
law, by-law, regulation or ordinance to the fullest extent permitted by law, so
long as it diligently pursues any contest or appeal of any such Property Taxes,
provided the Landlord pays all penalties.
Section 7.02 Property Taxes Payable by the Tenant
(a) If separate real property tax bills and separate real property
assessment notices for the Premises are issued, the Tenant shall:
(i) pay promptly when due to the taxing authorities all Property
Taxes levied, rated, charged or assessed from time to time
against the Premises or any part thereof and forthwith provide
the Landlord with evidence of payment upon request; and
(ii) provided the Landlord with a copy of each separate real
property tax bill and separate assessment notice within ten
days after receipt;
provided that if the Landlord so elects by notice to the Tenant the Tenant shall
pay such Property Taxes to the Landlord in equal monthly instalments in advance,
in accordance with the provisions of Section 4.03.
(b) If separate real property tax bills and separate real property
assessment notices for the Premises are not issued, the Tenant shall pay its
Proportionate Share of Property Taxes monthly in advance, in accordance with
Section 4.03.
(c) The Tenant shall receive any Property Tax credits as determined by the
Landlord acting reasonably, even after the termination of this Lease.
Section 7.03 Tenant's Other Taxes
In addition to the Property Taxes payable by the Tenant pursuant to
Section 7.02 the Tenant shall pay promptly when due to the taxing authorities or
to the Landlord, if it so directs, as Additional Rent, all taxes, rates, duties,
levies and assessments whatsoever, whether municipal, parliamentary or
otherwise, levied, imposed or assessed in respect of operations at, occupancy
of, or conduct of business in or from the Premises by the Tenant or any other
permitted occupant, including the Tenant's Business Taxes and Rental Taxes. The
Tenant shall also pay to the Landlord promptly on demand an amount equal to any
of the following Property Taxes the Landlord may determine to recover from the
Tenant, any amounts so paid by the Tenant to the Landlord (and by other tenants
under similar clauses in other leases) shall be excluded in the determination of
Property Taxes:
Page 15
<PAGE>
(a) all Property Taxes charged in respect of leasehold improvements,
trade fixtures, furniture and equipment made, owned or installed by
or on behalf of the Tenant in the Premises; and
(b) if the Premises, or any part of them, by reason of the act, election
or religion of the Tenant or any other occupant shall be assessed
for the support of separate schools, the amount by which the
Property Taxes so payable exceed those which would have been payable
if the Premises had been assessed for the support of public schools.
Section 7.04 Postponement
The Tenant may defer payment of any taxes, rates, duties, levies and
assessments payable by it pursuant to Sections 7.02 or 7.03 in each case to the
extent permitted by law if the Landlord is proceeding with an appeal against the
imposition thereof; provided that such postponement does not render the
Building, or any part thereof; subject to sale or forfeiture and does not render
the Landlord liable to prosecution, penalty, fine or other liability.
Section 7.05 Tenant to Deliver Receipts
Whenever requested by the Landlord, the Tenant shall deliver to the
Landlord copies of receipts for payment of all Property Taxes and other taxes,
rates, duties, levies and assessments payable by the Tenant under this Article
and furnish such other information in connection therewith as the Landlord may
reasonably require.
Section 7.06 Assessment Appeals
The Landlord, acting reasonably and prudently, alone shall be entitled to
appeal any governmental assessment or determination of the value of the Building
or any portion thereof whether or not the assessment or determination affects
the amount of tax to be paid by the Tenant.
ARTICLE 8
USE OF PREMISES
Section 8.01 Use
The Tenant shall use the Premises solely for the purpose of an office for
the conduct of the business of general office and/or any other legally permitted
use, subject to the reasonable approval of the Landlord (the "Permitted
Business") and the Tenant shall not use or allow the use of the Premises, or any
part thereof, for any other business or purpose. The Tenant shall conduct the
Permitted Business in the Premises in the first-class and reputable manner
befitting the Building.
Section 8.02 Nuisance
Page 16
<PAGE>
The Tenant shall not carry on any business or do or suffer any act or
thing which constitutes a nuisance or which is offensive or an annoyance to the
Landlord or other occupants of the Building.
Section 8.03 Compliance with Laws
The Tenant shall promptly comply with and conform to the requirements of
every applicable statute, law, by-law, regulation, ordinance and order at any
time or from time to time in force during the Term affecting the Premises or the
leasehold improvements, trade fixtures, furniture and equipment installed by the
Tenant. If any obligation to modify, extend, alter or replace any part of the
Premises or any such improvements, fixtures, furniture or equipment is imposed
upon the Landlord, the Landlord may at its option either do or cause to be done
the necessary work, at the expense of the Tenant, or forthwith give notice to
the Tenant to do so within the requisite period of time. The costs of any work
done by the Landlord shall be payable by the Tenant to the Landlord forthwith
upon demand as Additional Rent. The Landlord warrants that the Premises so
comply as at the Commencement Date.
Section 8.04 Compliance with Rules and Regulations
The Tenant shall comply with the rules and regulations annexed hereto as
Schedule "C" and cause everyone for whom the Tenant is in law responsible or
over whom the Tenant might reasonably be expected to have control to do the
same. The Landlord shall have the right from time to time during the Term to
make reasonable amendments, deletions and additions to such rules and
regulations, applicable to all tenants. Such rules and regulations, together
with all reasonable amendments, deletions and additions made thereto by the
Landlord and of which notice shall have been given to the Tenant, shall be
deemed to be part of this Lease provided that in the event of a conflict the
other provisions of this Lease shall prevail.
Section 8.05 Signs and Advertising
The Building shall be known and identified as 11 King West, Toronto,
Ontario, or by such other name as designated by the Landlord from time to time.
The Tenant shall not erect any sign or advertising material upon any part of the
Building including the Premises. The Tenant shall be entitled to have its name
upon the directory board installed by the Landlord in the ground floor lobby of
the Building and, at its own expense, shall be entitled to require the Landlord
to affix to the entrance of the Premises its name in accordance with the
Landlord's uniform scheme of tenants' identification or such other scheme as may
be approved in writing by the Landlord, which approval may be arbitrarily
withheld.
Section 8.06 Disfiguration, Overloading, etc.
The Tenant shall not do or suffer any waste or damage, disfiguration or
injury to the Premises and shall not permit or suffer any overloading of the
floors thereof or the bringing into any part of
Page 17
<PAGE>
the Building, including the Premises, any articles or fixtures that by reason of
their weight or size might damage or endanger the structure of the Building.
Section 8.07 Energy Conservation
The Tenant shall comply with any practices or procedures the Landlord or
any legislative authority may from time to time introduce to conserve or to
reduce consumption of energy or to reduce or control other Operating Costs or
pay as Additional Rent the cost, to be estimated by the Landlord acting
reasonably, of the additional energy consumed by reason of such non-compliance.
The Tenant shall also convert to whatever system or units of measurement of
energy consumption the Landlord may from time to time adopt.
Section 8.08 Remedial Action
If the Tenant is in breach of any of its obligations or restrictions
stipulated in this Article 8, the Landlord may, in addition to any other
remedies that it may have hereunder, enter upon the Premises and take such
remedial action as is necessary to remedy the breach and repair any damage
caused thereby and the Tenant shall forthwith upon demand pay to the Landlord as
Additional Rent the Landlord's costs incurred in connection therewith.
ARTICLE 9
INSURANCE
Section 9.01 Tenant's Insurance
The Tenant shall effect and maintain during the Term:
(a) "all risks" insurance upon all property owned by the Tenant or
installed by or on behalf of the Tenant which is located in the
Building including, without limitation, stock-in-trade, furniture,
fixtures and leasehold improvements made or installed by or on
behalf of the Tenant in an amount equal to not less than the
replacement cost thereof;
(b) broad form boiler and machinery insurance on a blanket repair and
replacement basis with limits for each accident in an amount not
less than the full replacement cost of all leasehold improvements
and of all boilers, pressure vessels, air-conditioning equipment and
miscellaneous electrical apparatus owned or operated by the Tenant
or by others (other than the Landlord) on behalf of the Tenant in
the Premises, or relating to or serving the Premises;
(c) comprehensive general liability insurance against claims for bodily
injury (including death), personal injury and property damage in or
about the Premises in amounts satisfactory from time to time to the
Landlord acting reasonably but in any event in
Page 18
<PAGE>
an amount not less than $5,000,000 per occurrence for bodily
injury (including death), personal injury and property damage;
(d) business interruption insurance in an amount that will reimburse the
Tenant for direct or indirect loss of earnings attributable to all
perils insured against in subsection 9.01(a) or attributable to
prevention of access to the Premises or the Building as a result of
such perils;
(e) "all risks" tenants' legal liability insurance for the actual cash
value of the Premises; and
(f) any other form of insurance that the Landlord or any Mortgagee may
reasonably require from time to time in form, amounts and for
insurance risks acceptable to the Landlord and any Mortgagee and
agreeable to the Tenant, acting reasonably.
Section 9.02 Form of Policies
(a) Each policy required pursuant to Section 9.01 shall be in form and
with insurers acceptable to the Landlord, acting reasonably. The Insurance
described in subsections 9.01 (a),(b) and (c) shall name as an additional
insured the Landlord and anyone else designated in writing by the Landlord. All
property damage and public liability insurance shall contain a provision for
cross-liability or severability of interests as between the Landlord and the
Tenant. Each policy maintained pursuant to subsections 9.01 (a),(b),(c) and (d)
shall contain a waiver of any rights of subrogation which the insurer may have
against the Landlord and those for whom the Landlord is in law responsible
whether the damage is caused by the act, omission or negligence of the Landlord
or such other Persons.
(b) Each policy required pursuant to Section 9.01 shall provide that: the
insurer must notify the Landlord and any Mortgagee in writing at least thirty
days prior to any material change or cancellation thereof; the policy shall not
be invalidated in respect ,of the interests of the Landlord and any Mortgagee by
reason of any breach of violation of any warranties, representations,
declarations or conditions contained in such policies; and the policy will be
considered as primary insurance and shall not call into contribution any other
insurance that may be available to the Landlord.
(c) The Tenant shall furnish to the Landlord, prior to the commencement of
the Term, certified copies of all such policies and shall provide written
evidence of the continuation of such policies not less than ten days prior to
their respective expiry dates. The cost of premium for each and every such
policy shall be paid by the Tenant. If the Tenant fails to maintain such
insurance the Landlord shall have the right, but not the obligation, to do so,
and to pay the cost of premium therefor, and in such event the Tenant shall
repay to the Landlord, as Additional Rent, forthwith on demand the amount so
paid.
Section 9.03 Release of Landlord
Page 19
<PAGE>
The Tenant hereby releases the Landlord, its agents, officers, employees,
and any other Person for whom the Landlord is legally responsible from any
liability for loss to the extent of all insurance proceeds paid under the
policies of insurance maintained by the Tenant or which would have been paid if
the Tenant had maintained the insurance required under this Lease and had
diligently processed any claims thereunder. Furthermore, it is agreed that, the
Landlord, its officers, employees, agents and others for whom it is legally
responsible shall not be liable for damage to or destruction or loss of (i) any
property of the Tenant entrusted to the care or control of the Landlord, or any
of them, and (ii) the Premises or any property in or upon the Premises; and any
personal or consequential injury (including, without limitation, loss of
business income) sustained by the Tenant or any of its agents, employees,
customers, invitees or licensees or any other Person who may be upon the
Premises.
Section 9.04 Landlord's Insurance
Subject to its general availability on reasonable commercial terms the
Landlord shall effect and maintain during the Term:
(a) "all risks" insurance which shall insure the Building for an amount
not less than the replacement cost thereof from time to time
(including foundations), against loss or damage by perils now or
hereafter from time to time embraced by or defined in a standard all
risks insurance policy including but not limited to fire, explosion,
impact by aircraft or vehicles, lightning, riot, vandalism or
malicious acts, smoke, leakage from fire protective equipment,
windstorm or hail, collapse or earthquake;
(b) boiler and machinery insurance on objects defined in a standard
comprehensive boiler and machinery policy against accidents as
defined therein, with limits of not less than $10,000,000, which
coverage shall include, without limitation, loss or damage of
whatsoever kind or nature by reason of explosion or collapse by
vacuum or cracking, burning, or bulging of any steam or hot water
boilers, pipes and accessories and loss of rental income;
(c) all risks rent and rental value insurance in an amount sufficient to
replace all Minimum Rent and Additional Rent payable under the
provisions of this Lease for an indemnity period of three years;
(d) comprehensive general liability insurance covering claims for
personal injury and property damage arising out of all operations in
connection with the management and administration of the Building
with limits of $5,000,000 inclusive of any one occurrence; and
(e) such other coverage, or increases in the amount of coverage
specified above in this section 9.04, as any Mortgagee may require
from time to time or as the Landlord may deem prudent from time to
time.
Page 20
<PAGE>
If any policies for such insurance shall contain any co-insurance clause, a
sufficient amount of such insurance shall be maintained at all times to meet the
requirements of any co-insurance clause so as to prevent the Landlord from
becoming a co-insurer under the terms of such policy or policies and to permit
full recovery up to the amount insured in the event of loss.
Section 9.05 Insurance Risks
The Tenant shall not do, omit to do, or permit to be done or omitted to be
done upon the Premises anything that may contravene or be prohibited by any of
the Landlord's insurance policies in force from time to time covering or in
respect of any part of the Building or which would prevent the Landlord from
procuring such policies with companies acceptable to the Landlord. If the
occupancy of the Premises, the conduct of business in the Premises or any acts
or omissions of the Tenant in the Premises or any other portion of the Building
causes or results in any increase in premiums for any of the Landlord's
insurance policies, the Tenant shall pay any such increase as Additional Rent
forthwith upon receipt of the invoices of the Landlord for such additional
premiums. If the Tenant shall be in breach of these provisions and the Landlord
has given it at least four days prior notice the Tenant shall be responsible for
all direct consequences, caused by the Tenant, flowing therefrom and shall
indemnify the Landlord in respect thereof and if the rate of insurance is
substantially increased or the coverage of such insurance is substantially
decreased, or such insurance is cancelled as a result thereof, at the option of
the Landlord, the Term shall immediately terminate upon written notice to that
effect to the Tenant.
Section 9.06 Release of Tenant
The Landlord hereby releases the Tenant, and its officers and employees,
from liability for loss and from any claim that may be made by the Landlord
against the Tenant under the provisions of this Lease with respect thereto to
the extent: (i) that the amount of such loss exceeds the amount of insurance the
Tenant is required to maintain pursuant to Section 9.01 (c) and (ii) of all
insurance proceeds actually paid to the Landlord under the policies of insurance
maintained by the Landlord (or which would have been paid if the Landlord had
maintained the insurance it is required to maintain under this Lease and had
diligently processed any claims thereunder), whichever is the lesser amount.
ARTICLE 10
MAINTENANCE AND REPAIR
Section 10.01 Landlord's Obligations
The Landlord shall at all times during the Term keep the Common Areas and
Facilities in a good and substantial state of repair, consistent with the
general standards for comparable first-class office buildings in the same area
as the Building, having regard to size, age and location, subject to reasonable
wear and tear and Section 10.02 and 11.01.
Section 10.02 Maintenance and Repairs by the Tenant
Page 21
<PAGE>
The Tenant shall, at its own expense, keep the Premises and all leasehold
improvements and fixtures therein in first-class condition and repair, subject
to reasonable wear and tear, insured damage and Section 11.01. The Tenant shall
also, at its own expense, keep those portions of the HVAC System which
exclusively serve the Premises and do not form part of the Common Areas and
Facilities in first-class condition and repair, subject to reasonable wear,
insured damage and tear and Section 11.01.
ARTICLE 11
DAMAGE AND DESTRUCTION
Section 11.01 Abatement and Termination
The Landlord and the Tenant agree that:
(a) If there is damage to the Premises such that the Premises or any
substantial part thereof are rendered not reasonably capable of use
by the Tenant for the purposes of its business for any period in
excess of ten days, then:
(i) The Rent payable under Section 4.01 and Section 4.02 shall
abate until the Premises are repaired, such abatement to be
from time to time in the proportion that the Rentable Area
of the part or parts of the Premises rendered not reasonably
capable of such use bears to the Rentable Area of the
Premises but not to exceed the amount of rental income
insurance proceeds paid to the Landlord for the relevant
period; provided that any abatement of Rent to which the
Tenant is otherwise entitled shall not extend beyond the
time by which, in the reasonable opinion of the Landlord,
repairs which are the responsibility of the Tenant ought to
have been completed; and
(ii) unless this Lease is terminated as hereinafter provided, the
Landlord or the Tenant, as the case may be, will repair such
damage with all reasonable diligence (according to their
respective obligations to repair set forth in Sections 10.01 and
10.02); provided that the Landlord's and Tenant's respective
repair obligations shall be limited always to the extent of
insurance proceeds actually received by it;
(b) in the event that:
(i) thirty-five per cent or more of the Rentable Area of the Building
or thirty-five per cent or more of the area of the Common Areas
and Facilities is damaged or destroyed;
(ii) the Premises are damaged or destroyed; or
Page 22
<PAGE>
(iii) portions of the Building which affect access or services
essential to the Premises are damaged or destroyed;
such that, in each case, in the reasonable opinion of the Landlord's
Expert, such damage cannot with reasonable diligence be repaired within
180 days after the occurrence thereof then the Landlord or the Tenant may
at its option, exercisable by notice to the other given within 90 days of
the occurrence of such damage or destruction, terminate this Lease, in
which event the Tenant shall forthwith deliver up possession of the
Premises to the Landlord and Rent shall be apportioned and paid to the
date upon which possession is so delivered up, subject to any abatement to
which the Tenant may be entitled under subsection 11.01(a) and the parties
shall each thereafter be released of all obligations;
(c) the certificate of an Expert shall be conclusive as to the
percentage of the Premises, the Common Areas and Facilities or the
Building destroyed or damaged or capable of use by the Tenant, the
state of completion of any work or repair of either the Landlord or
Tenant and the computation of the area of any premises including the
Premises; and
(d) in repairing or rebuilding the Building or the Premises in
accordance with its obligations herein the Landlord may use
drawings, designs, plans and specifications other than those used in
the original construction and may alter or relocate the Common Areas
and Facilities, or any part thereof, and other improvements,
including the Premises, provided that the Premises as altered or
relocated shall be of substantially the same size and in all
material respects (including view and access) comparable to the
original Premises.
ARTICLE 12
ASSIGNMENT AND SUBLETTING
Section 12.01 Permitted Occupants
The Tenant shall not permit or suffer any part of the Premises to be used
or occupied by any Person other than the Tenant and any subtenant or assignee
permitted under Section 12.02 nor shall it permit any Persons to be upon the
Premises other than the Tenant, such permitted subtenant or assignee and their
respective employees, customers and others having lawful business with them.
Section 12.02 Assignment or Subletting
The Tenant shall not assign this Lease or sublet the Premises, or any
portion thereof, unless it has obtained the prior written consent of the
Landlord, which consent shall not be unreasonably withheld, delayed or subject
to conditions. Any request for the Landlord's consent shall be accompanied by a
true copy of the offer to take such assignment or sublease and all information
available to the Tenant, and any additional information requested by the
Landlord, as to the reputation, financial standing and business of the proposed
assignee or subtenant. The Landlord,
Page 23
<PAGE>
acting reasonably, shall not be deemed to be unreasonably withholding its
consent if it refuses such consent upon the basis that the proposed assignee or
subtenant is an existing tenant of the Building. If such consent is given the
Tenant shall assign or sublet, as the case may be, only upon the terms set out
in the offer submitted to the Landlord. Whether or not the Landlord consents to
any request as aforesaid, the Tenant shall pay to the Landlord all reasonable
costs incurred by the Landlord, including reasonable legal fees, in considering
any such request and in completing any of the documentation involved in
implementing any such assignment or sublease, such costs not to exceed $350.00.
Any advertisement of the availability of the Premises, or a portion thereof, for
assignment or sublease without the written approval of the Landlord is
prohibited, which approval may be withheld by the Landlord in its absolute
discretion, but acting reasonably.
Notwithstanding anything herein to the contrary, the Tenant shall be
entitled to assign this Lease or sublet the whole or any part of the Premises,
without the Landlord's consent, but upon written notice to the Landlord, to (i)
a subsidiary, parent or affiliated corporation of the Tenant (within the meaning
of the Business Corporations Act (Ontario)); and (ii) a corporation formed as a
result of a merger or amalgamation of the Tenant (within the meaning of the
Business Corporations Act (Ontario)) with another corporation.
For the purpose of this Lease, the sale or transfer of the Tenant's
capital stock through any public exchange, or redemption or issuance of
additional stock of any class shall not be deemed an assignment, subletting or
any other transfer of this Lease or the Premises.
Section 12.03 Conditions of Consent
The Landlord may require as a condition of its consent that the proposed
assignee or subtenant agree with the Landlord to observe and to perform all the
obligations of the Tenant under this Lease and the Tenant agrees with the
Landlord that:
(a) in the case of an assignment, if the Tenant is to receive from any
assignee, either directly or indirectly, consideration in any form
whatsoever for the assignment of this Lease, the Tenant shall
forthwith pay an amount equal to 50% of such consideration to the
Landlord after deduction of all expenses and commissions; and
(b) if the Tenant sublets and receives consideration in any form
whatsoever from the subtenant, either directly or indirectly, which
is in excess of the Minimum Rent payable under this Lease (on a per
square foot basis) for the sublet area, the Tenant shall pay 50% of
any such excess to the Landlord in addition to all Rent payable
hereunder after deduction of all expenses and commissions.
Section 12.04 Landlord's Option
Subject to the second and third paragraph of Section 12.02 and Section
12.06 the sale of the Tenant's business or a sublet of 2,000 square feet or
less, and otherwise notwithstanding any other
Page 24
<PAGE>
provisions of this Article 12 upon receipt of the Tenant's request for consent
to assignment of this Lease or subletting whole of the Premises for the balance
of the Term, the Landlord shall have the right (exercisable by notice to the
Tenant within 10 Business Days after receipt of the Tenant's request for consent
and the accompanying material required pursuant to Section 12.02) to terminate
this Lease in respect of the whole or the part of the Premises which is affected
by the proposed assignment or subletting and the Tenant's obligations thereafter
shall be released. If the Landlord exercises this right then this Lease shall so
terminate upon the proposed date of assignment or subletting (or if none is
proposed, upon a date selected by the Landlord) unless the Tenant notifies the
Landlord in writing within 10 Business Days after receiving notice from the
Landlord of such termination that the Tenant has decided not to proceed with
such assignment or subletting, as the case may be.
Section 12.05 Surrender
If the Landlord exercises its right of termination pursuant to Section
12.04, and this termination is not subsequently nullified pursuant to Section
12.04, the Tenant shall surrender the Premises upon the date specified in the
Landlord's notice. If the whole of the Premises is required to be surrendered
all Rent shall be apportioned and paid to the date of surrender. If a part of
the Premises is required to be surrendered all Rent which is fairly attributable
to such part shall be apportioned by the Landlord and paid to the date of
surrender of such part and Minimum Rent payable hereunder shall thereafter abate
and be adjusted consistent with such attribution made by the Landlord. The
Tenant shall compensate the Landlord for the cost of partitioning, entrances and
separate services all other work required to make the part so surrendered
functionally separate and suitable for separate use and occupancy. The Tenant
shall be responsible for any appropriate modifications which are necessary in
the portion of the Premises retained by the Tenant. The provisions of this Lease
shall apply to the remaining part of the Premises as if such part were the whole
of the Premises subject to the aforementioned abatement of Minimum Rent.
Section 12.06 Change in Control
If after the date of this Lease there is to be a change in control of the
Tenant or if other steps are to be taken to accomplish a change of control the
Tenant shall promptly notify the Landlord of the proposed change, which will be
considered to be an assignment of this Lease to which Sections 12.02, 12.03 but
not 12.04 apply. For the purpose of this Section "change in control" means, in
the case of any corporation or partnership, the transfer by sale, assignment,
trust, operation of law or otherwise of any shares, interest or voting rights
which may result in a change of identity of the Person or Persons exercising
effective control of such corporation or partnership. Provided that this Section
shall not apply to a change in control of the Tenant if and so long as the
Tenant is a Public Corporation and provided further that, in either case, such
change of control does not affect the continuity of the existing management of
the Tenant and of its business practices and policies. For the purposes of this
Section "Public Corporation" means a corporation the shares of which are listed
on any recognized stock exchange in Canada or the United States.
Page 25
<PAGE>
Section 12.07 Continuing Obligations
The Landlord's consent to any assignment or sublease shall not release the
Tenant from its obligation to perform fully all the terms, covenants and
conditions of this Lease on its part to be performed. No consent by the Landlord
to any assignment or sublease shall be construed to mean that the Landlord has
consented or will consent to any further assignment or any other sublease.
Section 12.08 Assignment by Landlord
OMERS Realty Management Corporation shall be liable for the performance of
its covenants and obligations pursuant to this Lease so long as it owns the
Building. In the event of any sale or other transfer of the Building, OMERS
Realty Management Corporation shall thereupon and without further agreement be
relieved of all liability with respect to such covenants and obligations except
to the extent that they relate to the period prior to such sale or other
transfer.
ARTICLE 13
STATUS CERTIFICATES, ATTORNMENT, SUBORDINATION
Section 13.01 Status Certificates
The Tenant shall at any time and from time to time execute and deliver to
the Landlord or as the Landlord may direct within ten Business Days after it is
requested a statement in writing, in the form supplied by the Landlord,
certifying that this Lease is unmodified and in full force and effect (or if
modified, stating the modification and stating that the Lease is in full force
and effect as modified), the Commencement Date, the amount of the Minimum Rent
and other Rent then being paid hereunder, the dates to which such Rent hereunder
has been paid, whether or not there is any existing default on the part of the
Landlord of which the Tenant is aware and any other particulars that the
Landlord may reasonably request.
Section 13.02 Subordination and Attornment
This Lease and the rights of the Tenant hereunder shall be subject and
subordinate to all existing or future Mortgages and to all renewals,
modifications, consolidations, replacements and extensions thereof Whenever
requested by the Landlord or a Mortgagee the Tenant shall enter into an
agreement with the Mortgagee whereby the Tenant postpones or subordinates this
Lease to the interest of any stipulated Mortgagee and agrees that if such
Mortgagee becomes a mortgagee in possession or realizes on its security it shall
attorn to such Mortgagee as a tenant upon all the terms of this Lease. The
Landlord shall use reasonable efforts to obtain a non-disturbance agreement from
any Mortgagee with an interest in the Lands prior to that of the Tenant. If the
Lands are held by the Landlord pursuant to a ground lease, then the Tenant
shall, at the request of the Landlord or the landlord under the ground lease,
enter into an agreement with the landlord under the ground lease to the effect
that if such landlord should take possession of the Lands as a result of a
default under the ground lease then the Tenant shall attorn to such Person as a
tenant upon all terms of this Lease.
Page 26
<PAGE>
ARTICLE 14
LIMITATION OF LIABILITIES
Section 14.01 Unavoidable Delay
Except as otherwise expressly provided in this Lease, if and to the extent
that either the Landlord or the Tenant shall be prevented, delayed or restricted
by reason of Unavoidable Delay in the fulfilment of any obligation hereunder
other than a monetary obligation it shall be deemed not to be in default in the
performance of such covenant or obligation and any period for the performance of
such obligation shall be extended accordingly and the other party to this Lease
shall not be entitled to compensation for any loss, inconvenience, nuisance or
discomfort thereby occasioned.
Section 14.02 Waiver
The Landlord's or Tenant's failure or omission to take action in respect
of any default by the Tenant or the Landlord under this Lease shall not operate
as a waiver of the relevant obligation in respect of any continuing or
subsequent default. No waiver shall be effective unless expressed in writing.
The acceptance of Rent by the Landlord from the Tenant or any other Person will
not constitute a waiver of a breach by the Tenant of this Lease.
Section 14.03 No Claim for Inconvenience
The Tenant shall not be entitled to any compensation for any interruption,
inconvenience, nuisance or discomfort arising from the necessity of repair,
renovation, alteration, rebuilding, or expansion of any portion of the Building
(including the Common Areas and Facilities) or any construction or other work on
the Lands.
Section 14.04 Indemnity by Landlord
Subject to Section 9.06, the Tenant shall indemnify and save harmless the
Landlord against any and all claims, actions, damages, losses, liabilities and
expenses (including, without limitation, those in connection with loss of life,
bodily injury, personal injury or damage to property) arising from or out of the
occupancy or use by the Tenant of the Premises or any other part of the Building
occasioned wholly or in part by any act or omission of the Tenant, its officers,
employees, agents, customers, contractors or other invitees, licensees or
concessionaires or by any Person permitted by the Tenant to be on the Premises
or due to or arising out of any breach by the Tenant of this Lease.
ARTICLE 15
ACCESS
Section 15.01 Entry by Landlord
Page 27
<PAGE>
The Landlord and its authorized agents, employees and contractors shall be
permitted, at any time and from time to time, upon 24 hours' prior written
notice to the Tenant (except in an emergency, when no notice shall be required)
to enter the Premises to inspect, provide services and maintenance, make
repairs, alterations, improvements or additions to the Common Areas and
Facilities or to the other parts of the Building or to gain access to utilities
and services; in exercising its rights hereunder the Landlord shall use
reasonable efforts to minimize interference with the Tenant's business. In no
event shall the Tenant be entitled to compensation for any interruption,
inconvenience, nuisance or discomfort caused thereby. The Tenant shall not alter
the standard locks on the doors of the Premises or place any additional locks or
other security devices upon any such doors without the prior written approval of
the Landlord, which may be withheld by the Landlord in its sole discretion or
granted on a conditional basis. All locks on doors of the Premises shall operate
on the building master key system and the Tenant shall provide the Landlord with
one original key for any such lock upon installation.
Section 15.02 Exhibiting Premises
The Tenant will permit the Landlord or the agents of the Landlord, upon
receiving 24 hours' prior written notice, to exhibit the Premises to prospective
tenants at all reasonable hours during the last six months of the Term. The
Landlord shall have the right to enter upon the Premises, upon 24 hours' written
notice to the Tenant, at all reasonable hours during the Term for the purpose of
exhibiting the Building to any prospective purchaser or Mortgagee.
Section 15.03 Excavation
The Tenant shall upon reasonable notice grant entrance to the Premises for
the performance of such work as the Landlord considers necessary to preserve the
walls of the Building of which the Premises form a part from injury or damage
from any excavation or other construction upon adjacent land and to support the
same in any appropriate manner, without giving rise to any claim for damages or
indemnification against the Landlord or diminution or abatement of Rent.
ARTICLE 16
TENANT'S ALTERATIONS
Section 16.01 Restrictions
After the commencement of the Term the Tenant shall not make, erect, or
install any leasehold improvements, alterations, fixtures (including trade
fixtures) or partitions in or about the Premises without the prior written
consent of the Landlord acting reasonably. In addition the following provisions
shall be applicable:
(a) all such work shall be performed in accordance with any reasonable
conditions or regulations imposed by the Landlord and shall be
completed in a good and
Page 28
<PAGE>
workmanlike manner, in accordance with the description of the work
approved by the Landlord, all applicable laws and the requirements of
all governmental authorities;
(b) the Tenant shall, at the time of its application for such consent,
furnish the Landlord with such plans, specifications and designs as
the Landlord may require;
(c) the Landlord shall have the right to supervise any work done and to
select or approve (at its option) the contractors and workmen to be
employed by the Tenant, workmen shall have labor union affiliations
compatible with others employed by the Landlord and its contractors;
and if the work proposed by the Tenant may affect the structure of the
Premises or any part of the Building or any of the electrical,
mechanical or base building systems of the Building, the Landlord may
elect that it be performed either by the Landlord or by its
contractors, in which case the Tenant shall pay to the Landlord as
Additional Rent the costs of the Landlord relating to such work,
including reasonable fees of Experts;
(d) if the Tenant performs any work without complying with the provisions
of this Section and does not remove it upon notice the Landlord shall
have the right to do so and to restore the Premises to their previous
condition, in which case the Tenant shall pay to the Landlord as
Additional Rent the costs of such work; and
(e) the Tenant shall pay to the Landlord as Additional Rent to compensate
the Landlord for its services under this Section a supervisory fee
which is reasonable in all the circumstances, except in respect of the
initial leasehold improvements.
Section 16.02 Occupational Health and Safety
The Tenant agrees that it will ensure that a comprehensive and rigorous
health and safety program to protect workers in the Premises is implemented to
ensure that no accidents or injuries occur in connection with the performance of
any Tenant's work. The Tenant will indemnify the Landlord in respect of all
claims, infractions, prosecutions, alleged infractions, losses, cost and
expenses and any fines or proceedings relating to fines or other offences or
contravention's under all occupational health and safety and any similar
legislation that might be brought, or imposed against or suffered by the
Landlord or any of its officers, directors and employees in connection with the
performance of any Tenant's work. Without limiting the obligations set out above
in this section, the Tenant will do at least the following
(a) ensure that all obligations imposed by statute, law or regulation on
"constructors" or other persons completing or coordinating any
Tenant's work are diligently and properly completed;
(b) co-operate with the Landlord in having any Tenant's work designated as
a separate project so that the Landlord does not incur any obligations
as a constructor or
Page 29
<PAGE>
obligations similar to those of a constructor at law or by regulation
imposed in connection with the performance of any Tenant's work;
(c) ensure it provides in any tender and contract documentation for work,
a list of designated substances, if any, present in the Premises;
(d) comply with all directions that the Landlord may give to the Tenant in
connection with the performance of any Tenant's work having regard to
construction health and safety requirements; and
(e) provide to the Landlord whatever rights of access, inspection, and
whatever information, documents and other matters the Landlord
requires in order to ensure that the Tenant's obligations under this
section are complied with.
Section 16.03 Leasehold Improvements
All leasehold improvements, alterations, fixtures or permanent drywall
partitions made, erected or installed in the Premises by the Tenant, including
carpeting and light fixtures, shall become the property of the Landlord upon
installation or affixation and upon the expiration or other termination of this
Lease they shall remain upon and be surrendered with the Premises as part
thereof. Notwithstanding the foregoing, (i) the Landlord may, by notice to the
Tenant, require the removal immediately prior to the end of the Term, at the
expense of the Tenant, of all leasehold improvements, alterations, fixtures and
partitions installed by or on behalf of the Tenant and the restoration of the
Premises, such work to be done by or at the direction of the Landlord, and (ii)
if the Tenant is not in default under this Lease it shall, at the end of the
Term, have the right to remove its trade fixtures, data communication equipment
and cabling, telephone and PBX equipment and cabling, computer equipment and
cabling, custom cabinets, furniture and equipment, work stations whether or not
bolted, wired or affixed, and non standard light fixtures provided it repairs
the damage caused to the Premises by their installation or removal. Any trade
fixtures not removed by the Tenant prior to the end of the Term shall thereupon
become the property of the Landlord. No trade fixtures, furniture or equipment
may be removed by the Tenant from the Premises during the Term unless it is
being replaced by similar new furniture or equipment. If the Tenant fails to
perform any obligation set out in this Section the Landlord shall have the right
to perform it, in which case the Tenant shall pay to the Landlord as Additional
Rent the costs of such work. The Landlord shall be entitled to all insurance
proceeds and expropriation compensation payable with respect to all such
leasehold improvements, alterations, fixtures and partitions whether such
proceeds or compensation is payable or paid before or after the end of the Term.
Section 16.04 Liens
The Tenant shall comply with all the provisions of the Construction Lien
Act and other statutes from time to time applicable to any work done on or
improvements made to the Premises by or on behalf of the Tenant (including any
provision requiring or enabling holdbacks) and shall take
Page 30
<PAGE>
all steps necessary to ensure that no lien attaches to the Premises or any part
of the Building. If any lien arises the Tenant shall immediately cause it to be
discharged and any registration thereof discharged or vacated, and if the Tenant
doe snot do so within a period of three Business Days after receiving notice
requiring it to do so the Landlord shall be entitled to make such payment or
take such action as may be necessary or expedient to discharge or vacate such
lien and the registration thereof. The Tenant shall, forthwith on demand and as
Additional Rent, indemnify and reimburse the Landlord for any reasonable
payment, cost or expense, including reasonable legal fees, incurred by the
Landlord in taking any action permitted under this Section.
ARTICLE 17
REMEDIES OF LANDLORD ON TENANT'S DEFAULT
Section 17.01 Remedying by Landlord
In addition to all of its other rights and remedies, the Landlord shall
have the right, on five days prior written notice to the Tenant (except in an
emergency, when no notice shall be required), to remedy or attempt to remedy any
default of the Tenant, and in so doing may make any payments which appear to be
payable by the Tenant to other Persons and may enter upon the Premises; all
expenses of the Landlord in remedying or attempting to remedy such default shall
be payable by the Tenant to the Landlord as Additional Rent forthwith upon
demand.
Section 17.02 Right to Re-enter
If the Tenant fails to pay Rent within five days after receiving written
notice that it is due, or fails to observe or perform any of its other
obligations under this Lease after receiving five days written notice, the
Landlord, in addition to any other right or remedy it may have, shall be
entitled to re-enter the Premises, remove all Persons and property from the
Premises and store the property in a public warehouse or elsewhere at the cost
of and for the account of the Tenant, all without service of further notice or
resort to legal process and without liability for loss or damage occasioned
thereby, provided that otherwise than in the case of default in payment of Rent
notice has been given to the Tenant specifying the default and the period
allowed for it to be remedied, which will not be less than the later of (i)
fifteen days from the giving of such notice, or (ii) such longer period of time
as is reasonably necessary in the circumstances, provided that the Tenant
diligently begins to rectify such default forthwith upon receiving such notice
and diligently continues to do so until such default is rectified.
Section 17.03 Bankruptcy of Tenant
If the Term or a substantial portion of the goods and chattels of the
Tenant on the Premises are seized or taken in execution or attachment by a
creditor of the Tenant, or if the Tenant makes an assignment for the benefit of
creditors or if proceedings are commenced for the appointment of receiver,
receiver-manager or liquidator to control the conduct of the business on or from
the Premises, or if the Tenant becomes bankrupt or insolvent or commences
proceedings to take the
Page 31
<PAGE>
benefit of a statute now or hereafter in force for bankrupt or insolvent
debtors, or if proceedings are commenced for the winding-up of the Tenant, or if
the Premises, without the written consent of the Landlord, become abandoned for
a period of fifteen consecutive days or are used or occupied by any Persons
other than those entitled to do so under the terms of this Lease ('which default
is not remedied after 10 days notice), the next ensuing three months' Rent
immediately will become due and payable as accelerated rent and the Landlord may
re-enter and take possession of the Premises as though the Tenant or the
servants of the Tenant or any other occupant of the Premises were holding over
after the expiration of the Term and this Lease, at the option of the Landlord
exercisable by written notice to the Tenant, forthwith will become forfeited and
determined. Any accelerated rent will be recoverable by the Landlord in the same
manner as the Rent reserved under this Lease and as if Rent were in arrears.
Section 17.04 Right to Terminate
If it becomes entitled to re-enter the Premises under any provision of
this Lease the Landlord, in addition to all other rights and remedies, shall
have the right to terminate this Lease forthwith by leaving upon the Premises
written notice of such termination. If such notice is given, pursuant to this or
any other provision of this Lease, this Lease and the Term shall terminate,
Minimum Rent and all other payments for which the Tenant is liable under this
Lease shall be apportioned and paid in full to the date of such termination, and
the Tenant shall immediately deliver up possession of the Premises to the
Landlord.
Section 17.05 Right to Relet
If the Landlord re-enters the Premises it may either terminate this Lease
or it may from time to time, without terminating the Tenant's obligations under
this Lease, make any alterations and repairs considered by the Landlord
advisable to facilitate a reletting, and relet 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 reletting all Rent and other moneys
received by the Landlord from the reletting will be applied to the payment of
(a) indebtedness other than Rent due hereunder from the Tenant to the Landlord
(b) costs and expenses of the reletting and (c) Rent as it becomes due and
payable. If the rent received from the reletting during a month is less than the
Rent to be paid during that month by the Tenant, the Tenant shall 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 reletting without termination, the Landlord may
subsequently elect at any time to terminate this Lease for a breach which is
then continuing. If the Landlord terminates this Lease for any breach, in
addition to other remedies it may have, it may recover from the Tenant all
damages it incurs by reason of the breach including the cost of recovering the
Premises, legal fees (on a solicitor and his client basis) and the worth at the
time of termination of the excess, if any, of the amount of Rent and charges
equivalent to rent reserved in this
Page 32
<PAGE>
Lease for the remainder of the Term over the then reasonable rental value of the
Premises for the remainder of the Term, all of which amounts shall be
immediately due and payable by the Tenant to the Landlord.
Section 17.06 Distress
If any circumstance occurs which would entitle the Landlord to exercise
the rights set out in Section 17.02, in addition to any and all other rights,
the Landlord may immediately distrain for the full amount of the current month's
instalment of Minimum Rent and Additional Rent and any other payments required
to be made monthly hereunder, which shall immediately become due and payable
together with any Rent accelerated pursuant to Section 17.03 and any arrears
then unpaid. Notwithstanding anything contained in any statute now or hereafter
in force limiting or abrogating the right of distress, none of the goods,
chattels or trade fixtures of the Tenant on the Premises at any time during the
Term shall be exempt from levy by distress, save and except for the Tenant's
computers, software and proprietary information.
Section 17.07 (Intentionally omitted.)
Section 17.08 Failure of Tenant to Take Possession
The Tenant may take possession of the Premises upon receiving notification
by the Landlord that they are ready for occupancy.
Section 17.09 Remedies Cumulative
Notwithstanding any other provision in this Lease, the Landlord may from
time to time resort to any or all of the rights and remedies available to it in
the event of any default hereunder by the Tenant, either by any provision of
this Lease, by statute or common law, all of which rights and remedies are
intended to be cumulative and not alternative, and the express provisions
hereunder as to certain rights and remedies are not to be interpreted as
excluding any other or additional rights and remedies available to the Landlord
by statute or the general law.
ARTICLE 18
MISCELLANEOUS
Section 18.01 Notices
Any notice, demand, statement or request ("Notice") herein required or
permitted to be given under this Lease shall be in writing and shall be deemed
to have been sufficiently and effectually given if signed by or on behalf of the
party giving the notice and delivered or mailed by registered prepaid post,
Page 33
<PAGE>
(a) in the case of Notice to the Landlord, to it at: 70 University Avenue,
Suite 1400, Toronto, Ontario, M5J 2M4, Attention: Property Manager and
a copy to 201 City Centre Drive, Suite 800, Mississauga, Ontario, LSB
2T4, attention: Leasing Department;
(b in the case of Notice to the Tenant, to it at the Premises.
Any such Notice given as aforesaid shall be conclusively deemed to have been
given, if delivered, on the first Business Day following the date of such
delivery or, if mailed, on the fifth Business Day following the date of such
mailing. The Landlord may from time to time by Notice change the address to
which Notices to it are to be given. Notwithstanding the foregoing during any
interruption, threatened interruption or substantial delay in postal services,
Notice shall be delivered. If a copy of any Notice to the Tenant is to be sent
to a second address or to another Person other than the Tenant, the failure to
give any such copy shall not vitiate the delivery of the Notice to the Tenant.
Section 18.02 Registration of Lease
Neither the Tenant nor anyone on the Tenant's behalf or claiming under the
Tenant shall register this Lease or any other instrument pertaining to this
Lease against the Lands. Provided that if either party intends to register a
document for the purpose only of giving notice of this Lease or of any dealing
with it then, upon request of such party, the other party shall join in the
execution of a short form or notice of this Lease ("Notice of Lease") solely for
the purpose of supporting an application for registration of notice of this
Lease or any subsequent dealing therewith. The form of such documentation shall
be prepared immediately by the Landlord's solicitors without cost, failing which
the Tenant's solicitors may do so.
Section 18.03 Overholding - No Tacit Renewal
If the Tenant remains in possession of the Premises after the end of the
Term with the consent of the Landlord but has not executed and delivered a new
lease, there shall be no tacit renewal of this Lease and the Term,
notwithstanding any statutory provisions or legal presumption to the contrary,
and the Tenant shall be deemed to be occupying the Premises as a Tenant from
month to month at a monthly Minimum Rent payable in advance on the first day of
each month equal to the aggregate of 200% of the monthly amount of Minimum Rent
payable during the last month of the Term and one-twelfth of the amount of
Additional Rent payable by the Tenant in the last full twelve-month Lease Year
of the Term; and otherwise upon the same terms, covenants and conditions as are
set forth in this Lease insofar as these are applicable to a monthly tenancy.
Section 18.04 Planning Act
Page 34
<PAGE>
This Lease is expressly conditional upon compliance with the Planning Act
(Ontario) and any amendments thereto.
Section 18.05 Partial Payment of Rent
Acceptance by the Landlord of a lesser amount than the monthly payment of
Rent herein stipulated shall be deemed to be only payment on account of the
earliest stipulated Rent, and any endorsement or statement on any cheque or
documentation accompanying any payment of Rent shall not be deemed an
acknowledgment of full payment or an accord and satisfaction, and the Landlord
may accept such payment without prejudice to the Landlord's right to recover the
balance of such Rent or pursue any other remedy provided in this Lease.
Section 18.06 Brokerage Commissions
The Tenant warrants that it has not dealt with any agent or broker
representing or purporting to represent the Landlord in connection with its
leasing of the Premises other than J.J. Barnicke and Royal LePage (the
"Landlord's Agent"). The Landlord shall pay any fees or commissions of the
Landlord's Agent relating to this Lease and the Tenant shall pay and indemnify
the Landlord from any other brokerage fees or commissions payable in respect of
this Lease.
Section 18.07 Metric Conversion
The Landlord may express any measurement in this Lease in metric measure
in which case the following conversion factors apply: 1 metre = 3,2808 feet; 1
square metre = 10.7639 square feet; 1 foot = .3048 metres; and 1 square foot =
.0929 square metres.
Section 18.08 Decision of Expert
The decision of any Expert whenever provided for under this Lease and any
certificate related thereto shall be final and binding on the parties hereto and
there shall be no further right of dispute or appeal.
Section 18.09 (Intentionally omitted.)
Page 35
<PAGE>
IN WITNESS WHEREOF the parties hereto have executed this Lease under seal.
OMERS REALTY MANAGEMENT CORPORATION
By:
------------------------------------------------------
Name: Elizabeth A. Klug
Title: Director, Office Leasing
By: c/s
------------------------------------------------------
Name: George R. Steward
Title: Senior Vice-President,
Development and Operations
INTELLIGENT DETECTION SYSTEMS INC.
By:
------------------------------------------------------
Name: Adrian Beale
Title: Senior V.P. Operations
By: c/s
------------------------------------------------------
Name: Adrian Van Vroenhoven
Title: CFO
I/We have authority to bind the corporation
Page 36
<PAGE>
Exhibit 21
List of Subsidiaries
- --------------------
Auslog Pty. Ltd. (Australia)
Caduceon Inc.
ChemiCorp International, Inc. (Delaware)
IDS Services LLC (Delaware)
Megafisica Survey Aerolevantamentos S.A. (Brazil)
Scintrex Europe S.A.R.L. (France)
Scintrex Inc. (New York)
Scintrex Limited (Ontario)
Scintrex Pty. Ltd. (Australia)
Micro-g Solutions Inc.
