DATA Communications Management
Annual Report 2016

Plain-text annual report

ANNUAL REPORT 2016 TABLE OF CONTENTS 4 6 8 DATA IN 2016: SHAPING UP FOR GROWTH LETTER TO SHAREHOLDERS ABOUT DATA COMMUNICATIONS MANAGEMENT 14 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 48 FINANCIAL REPORTING RESPONSIBILITY OF MANAGEMENT 49 INDEPENDENT AUDITOR’S REPORT 50 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION 51 52 53 54 CONSOLIDATED STATEMENTS OF OPERATIONS CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (DEFICIT) CONSOLIDATED STATEMENTS OF CASH FLOWS 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 105 CORPORATE INFORMATION ABOUT DATA MANAGEMENT REPORTS FINANCIAL STATEMENTS ABOUT DATA DATA IN 2016 SHAPING UP FOR GROWTH IN 2016, OUR MAIN PRIORITY WAS POSITIONING DATA FOR GROWTH WITH THE FOLLOWING INITIATIVES: Financial Operations REFINANCING OF SENIOR CREDIT FACILITY CONSOLIDATION OF OPERATIONS DATA refinanced its former senior credit facilities by From 2013 to 2017, DATA reduced its facility size by establishing a revolving credit facility with a Canadian 600,000 square feet. The reduction included the 2016 chartered bank and a private term debt provider. consolidation of its Alberta operations, in which DATA MICHAEL G. SIFTON MAKES SIGNIFICANT PERSONAL INVESTMENT IN DATA closed its large Edmonton plant. The consolidation was completed in Q4, on plan and under budget. DATA raised $2.8 million pursuant to a private SINGLE LARGEST HIGH-PRODUCTION DIGITAL placement of Common Shares, with Mr. Sifton UPGRADES BY A CANADIAN GRAPHIC subscribing for 50% of the offering. COMMUNICATIONS COMPANY 100 TO 1 SHARE CONSOLIDATION After giving effect to the Share Consolidation, DATA’s 1,197,504,525 Common Shares outstanding were consolidated into 11,975,053 Common Shares DATA upgraded its entire digital print fleet and entered into an exclusive agreement with Xerox for the supply, installation, and maintenance of digital print equipment and workflow software. outstanding. INVESTMENT IN DIGITAL PRINT AND LABEL PRODUCTION In January 2017, DATA announced a $2.1 million investment in digital print and digital label equipment. This investment included the addition of another Xerox iGen® 5 digital press and a new digital label press, together with other upgrades and technology enhancements to current label presses. 4 About DATADATA COMMUNICATIONS MANAGEMENT CORP.Client Focus KNOWLEDGEABLE SALES FORCE DATA realigned its Sales team, designating account executives as knowledge experts who specialize in key industry verticals of Financial Services, Retail, Healthcare, Not-for-Profit, Energy, and Lottery & Gaming. This is part of an ongoing effort to better align DATA’s services with client needs. Strengthened Leadership CHANGES TO BOARD OF DIRECTORS Mr. Sifton re-joined the Board; J.R Kingsley Ward was appointed Chair; and Gregory J. Cochrane was appointed Director of DATA. Derek J. Watchorn and James J. Murray, O.Ont., SIOR, were also added to the Board. TALENTED NEW HIRES While DATA reduced its overall employee count, 50+ key hires were also added. One of those was Gregory J. Cochrane, who was appointed President of DATA, and assumed certain responsibilities previously performed by Mr. Sifton as CEO and President. Mr. Cochrane’s primary focus is sales and business development. Mr. Sifton is focussed on strategic initiatives. In early 2017, DATA acquired two leading commercial printing companies: Eclipse Colour and Imaging Corp. and Thistle Printing Limited. Eclipse is one of Canada’s preeminent large-format printers and Thistle is a well-established Toronto area commercial printer. The addition of these two operations brings our centres of excellence to seven. Strategic Acquisitions 5 ANNUAL REPORT 2016DATA COMMUNICATIONS MANAGEMENT CORP.LETTER TO SHAREHOLDERS DEAR FELLOW SHAREHOLDERS, pressures, particularly in business forms. Sales were It was a busy year at DATA. While we made significant also adversely affected by a weaker economy in progress in our operating efficiencies and developed our Western Canada and the threat of a work stoppage at strategy for growth, we fell short on our revenue and Canada Post, which significantly reduced demand for EBITDA targets. mail-stream products, such as direct mail and printed statement roll products. This was particularly the case After reporting strong financial results in the third in the second half of the year. and fourth quarter of 2015, and then again in the first and second quarter of 2016, we suffered revenue and Despite the difficult environment, we at DATA have consequently profitability setbacks in the third and continued to build our sales leadership, go-to- fourth quarter of 2016. market strategies, and vertical market focus. Our technology team has focused on enhancing our network I am disappointed in our financial results. With the capabilities, streamlining our employee and systems efforts our team undertook in 2016, I expected our work flow, and advancing our ERP project, which will financial results to be stronger. However, that was not provide us with the latest in fully integrated, cloud- the case as several market and external factors affected based architecture for our financial, manufacturing our financial performance. Nonetheless, we believe that and web-to-print systems. the progress made and the initiatives completed have positioned DATA for success in 2017. At the same time, we have made significant progress in developing an acquisition strategy to leverage our Operationally, we made significant improvements in core capabilities and diversify our business from our production capabilities and facilities. With the the secular declines in the print segments which we closure of our large Edmonton, Alberta facility, DATA have been experiencing. We recently announced the ended 2016 with five major centres of excellence acquisitions of Eclipse Colour and Imaging Corp., one strategically located across the country, augmented of Canada’s pre-eminent large format and point-of by several smaller warehouses to meet our clients’ sale printers, and Thistle Printing Limited, a well- national needs. By focusing on these five centres, established Toronto, Ontario area commercial printer. DATA has reduced its total production facilities by over 600,000 square feet in the last three years. In We believe that the collective capabilities of Eclipse this timeframe, DATA’s total workforce has also been and Thistle position us well to capitalize on growth reduced by more than 400 employees. opportunities that we have identified in the retail On the sales front, DATA continued to face headwinds such as wide format print, in-store signage, point- from both lower demand from our clients and pricing of sale packaging and commercial print. Given the and enterprise markets, including applications 6 About DATADATA COMMUNICATIONS MANAGEMENT CORP.highly fragmented nature of the Canadian print and I’d also like to commend our team for simultaneously marketing communications market, we believe there are closing the strategic acquisitions of Eclipse and Thistle significant other strategic acquisitions available to us at - our first acquisitions in many years - along with our attractive prices that could help us further diversify our increased credit facility to fund the transactions. We business from the declines we have been experiencing. believe we are well positioned to execute on additional The addition of these two operations brings our centres acquisitions in our pipeline and that DATA has laid the of excellence to seven. groundwork to strategically evolve, be better positioned to meet client needs and become more profitable. As DATA is transitioning, we needed to evolve our capital structure to allow for stability and growth. In Thank you for your continued support as we reshape March 2016, we refinanced our senior credit facilities our business. I look forward to reporting back on our to better support our business. In January 2017, we progress. For a full description of our financial results amended those senior credit facilities. DATA entered for the fourth quarter and full year financial results for into an amended senior revolving credit facility with a 2016, please refer to our audited consolidated financial Canadian chartered bank, including an increase in the statements for the year ended December 31, 2016 and total available commitment under that facility from related management’s discussion and analysis, copies $25.0 million to up to $35.0 million and the extension of which are available at www.sedar.com. of the term of this facility by one year to March 31, 2020 from March 11, 2019. We also completed an Sincerely, amendment to our term facility, which provides DATA with a total borrowing base of up to $72.0 million from $50.0 million. We are pleased to have stable, long-term financial partners. Signed: Michael G. Sifton As with any transformation, leadership is essential. Michael G. Sifton While we have reduced our overall employee count, we Chief Executive Officer DATA Communications Management Corp. March 2017 also added leadership strength through key hires across the entire organization. The one addition I would like to highlight is the appointment of Gregory J. Cochrane as President. I am confident Greg will help me lead the organization through its next stages of development. He has tremendous experience in the marketing communications and services industries, with extensive industry knowledge and C-suite client relationships. 7 ANNUAL REPORT 2016DATA COMMUNICATIONS MANAGEMENT CORP.ABOUT DATA COMMUNICATIONS MANAGEMENT At DATA, we are experts at planning and driving business communications. We help marketers and agencies unify and execute communications campaigns across multiple channels, and we help operations teams streamline and automate document and communications management processes. Our core capabilities include direct marketing, print services, labels and asset tracking, event tickets and gift cards, logistics and fulfilment, content and workflow management, DATA management and analytics, and regulatory communications. We serve clients in key vertical markets such as financial services, retail, healthcare, lottery and gaming, not-for-profit, and energy. We are strategically located across Canada to support clients on a national basis, and serve the U.S. market through our facilities in Chicago, Illinois. 8 DATA COMMUNICATIONS MANAGEMENT CORP.Commercial Printing STREAMLINE PRINT PRODUCTION From large national marketing programs to personalized sales kits and HR material, we have the resources and expertise you can depend on. • PROCESS IMPROVEMENT • PRINT-ON-DEMAND • WEB-TO-PRINT • COMMERCIAL PRINT • WIDE-FORMAT PRINT SERVICES • VARIABLE COMPOSITION TECHNOLOGY Direct Marketing EXPAND YOUR REACH One campaign — or your entire DM program. Bring us your requirements and we’ll take it from there. • DIRECT MAIL • EMAIL • VARIABLE PRINT / PERSONALIZATION • DATA MANAGEMENT Labels and Asset Tracking MANAGE AND TRACK THE FULL SUPPLY CHAIN First point of in-store contact. Full supply- chain tracking. Either way, labelling solutions are about a lot more than labels. • BARCODES & RFID • VARIABLE IMAGING • BRAND PROTECTION & SECURITY • AUTOMATED ID SOLUTIONS • PRIMARY LABELS • HARDWARE 9 DATA COMMUNICATIONS MANAGEMENT CORP.Event Tickets and Gift Cards STRENGTHEN CUSTOMER RELATIONSHIPS Event tickets and gift cards are powerful communicators and motivators. Trust DATA to securely handle all aspects of creative and production. • EVENT TICKETS • GIFT AND LOYALTY CARDS CONTENT AND WORKFLOW MANAGEMENT SPEED UP DOCUMENT APPROVALS We deliver tools and processes that make your business and marketing communications work better. • MARKETING CAMPAIGN MANAGEMENT • RETAIL CAMPAIGN MANAGEMENT • PRINT-ON-DEMAND • VARIABLE COMPOSITION • E-FORMS & E-PRESENTMENT • DIGITAL ASSET MANAGEMENT 10 DATA COMMUNICATIONS MANAGEMENT CORP. Logistics and Fullfillment ENSURE SAFE STORAGE AND RELIABLE DELIVERY Communication impact has a lot to do with presentation and timing. We get it—and we get it there on time. • INVENTORY MANAGEMENT & IMPROVEMENT • DISTRIBUTION & FULFILLMENT Data Management and Analytics GAIN VALUABLE CUSTOMER INSIGHTS Target customers. Inform operational decision-making. Optimize your spend. • DATA MANAGEMENT • DATA ANALYTICS • PROCESS IMPROVEMENT 11 Regulatory Communications STREAMLINE REGULATORY COMMUNICATIONS MANAGEMENT In markets where there’s a lot of change and very little room for error, we’ve got your back. DATA COMMUNICATIONS MANAGEMENT CORP.MANAGEMENT REPORTS Management’s discussion and analysis of financial condition and results of operations risks, uncertainties and other factors which may cause the actual results, performance, objectives or achievements of DATA, or industry results, to be materially different from any future results, The following management’s discussion and analysis (“MD&A”) is intended to assist readers in understanding the business environment, strategies, performance and risk factors of DATA Communications Management Corp. (TSX: DCM.TO) and its subsidiaries (referred to herein as “DATA” or the “Company”) for the years ended December 31, 2016 and 2015. This MD&A should be read in conjunction with the audited consolidated financial statements and accompanying notes of DATA for the years ended December 31, 2016 and 2015. Additional information about the Company, including its most recently filed audited consolidated financial statements, Annual Information Form and Management Information Circular may also be obtained on SEDAR (www.sedar. com). Unless otherwise indicated, all amounts are expressed in Canadian dollars. performance, objectives or achievements expressed or implied by such forward-looking statements. When used in this MD&A, words such as “may”, “would”, “could”, “will”, “expect”, “anticipate”, “estimate”, “believe”, “intend”, “plan”, and other similar expressions are intended to identify forward-looking statements. These statements reflect DATA’s current views regarding future events and operating performance, are based on information currently available to DATA, and speak only as of the date of this MD&A. These forward-looking statements involve a number of risks, uncertainties and assumptions and should not be read as guarantees of future performance or results, and will not necessarily be accurate indications of whether or not such performance or results will be achieved. Many factors could cause the actual results, performance, objectives or achievements of DATA to be materially different The Company’s Board of Directors, on the from any future results, performance, objectives or recommendation of its Audit Committee, approved achievements that may be expressed or implied by such the contents of this MD&A. This MD&A reflects forward-looking statements. The principal factors, information as of March 9, 2017. assumptions and risks that DATA made or took into Basis of presentation The consolidated financial statements are prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”). account in the preparation of these forward-looking statements include: the limited growth in the traditional printing industry and the potential for further declines in sales of DATA’s printed business documents relative to historical sales levels for those products; the risk that changes in the mix of products and services sold by DATA which are related to reduced demand for its printed products will adversely affect DATA’s financial On July 4, 2016, DATA consolidated its issued and results; the risk that DATA may not be successful in outstanding common shares (“Common Shares”) on reducing the size of its legacy print business, realizing the basis of one post-consolidation Common Share for the benefits expected from restructuring and business each 100 pre-consolidation Common Shares (the “Share reorganization initiatives, reducing costs, reducing and Consolidation”). All references in this MD&A to Common repaying its long-term debt, repaying or refinancing its Shares, restricted share units and stock options reflect outstanding 6.00% convertible unsecured subordinated the Share Consolidation, unless specified otherwise. debentures, and growing its digital communications Forward-looking statements Certain statements in this MD&A constitute “forward- looking” statements that involve known and unknown business; the risk that DATA may not be successful in managing its organic growth; DATA’s ability to invest in, develop and successfully market new digital and other products and services; competition from competitors supplying similar products and services, some of whom 14 Management’s Discussion and AnalysisDATA COMMUNICATIONS MANAGEMENT CORP.have greater economic resources than DATA and are Adjusted net income (loss) per share (basic and diluted) well-established suppliers; DATA’s ability to grow its is calculated by dividing Adjusted net income (loss) sales or even maintain historical levels of its sales of for the period by the weighted average number of printed business documents; the impact of economic common shares (basic and diluted) outstanding during conditions on DATA’s businesses; risks associated with the period. Pro forma Adjusted net income (loss) per acquisitions by DATA; the failure to realize the expected share (basic and diluted) assumes that Adjusted net benefits from acquisitions and risks associated with income (loss) per share was calculated on the basis of the integration of acquired businesses; increases in the total number of common shares outstanding at the costs of paper and other raw materials used by December 31, 2016, rather than the weighted average DATA; and DATA’s ability to maintain relationships or the weighted average diluted number of common with its customers. Additional factors are discussed shares outstanding at the respective period ends, given elsewhere in this MD&A and under the headings “Risk the significant changes in the number of common Factors” and “Risks and Uncertainties” in DATA’s shares of DATA outstanding during those periods. DATA publicly available disclosure documents, as filed by believes that, in addition to net income (loss), Adjusted DATA on SEDAR (www.sedar.com). Should one or net income (loss), Adjusted net income (loss) per share, more of these risks or uncertainties materialize, or Pro forma Adjusted net income (loss) per share, EBITDA should assumptions underlying the forward-looking and Adjusted EBITDA are useful supplemental measures statements prove incorrect, actual results may vary in evaluating the performance of DATA. Adjusted net materially from those described in this MD&A as income (loss), Adjusted net income (loss) per share, intended, planned, anticipated, believed, estimated Pro forma Adjusted net income (loss) per share, EBITDA or expected. Unless required by applicable securities and Adjusted EBITDA are not earnings measures law, DATA does not intend and does not assume any recognized by IFRS and do not have any standardized obligation to update these forward-looking statements. meanings prescribed by IFRS. Therefore, Adjusted net income (loss), Adjusted net income (loss) per share, Pro forma Adjusted net income (loss) per share, EBITDA and Adjusted EBITDA are unlikely to be comparable to similar measures presented by other issuers. Investors are cautioned that Adjusted net income (loss), Adjusted net income (loss) per share, Pro forma Adjusted net income (loss) per share, EBITDA and Adjusted EBITDA should not be construed as alternatives to net income (loss) determined in accordance with IFRS as an indicator of DATA’s performance. For a reconciliation of net income (loss) to EBITDA and a reconciliation of net income (loss) to Adjusted EBITDA, see Table 3 below. For a reconciliation of net income (loss) to Adjusted net income (loss) and a presentation of Adjusted net income (loss) per share and Pro forma Adjusted net income (loss) per share, see Table 4 below. Non-IFRS measures This MD&A includes certain non-IFRS measures as supplementary information. Except as otherwise noted, when used in this MD&A, EBITDA means earnings before interest and finance costs, taxes, depreciation and amortization and Adjusted net income (loss) means net income (loss) adjusted for the impact of certain non-cash items and certain items of note on an after-tax basis. Adjusted EBITDA means EBITDA adjusted for restructuring expenses, one-time business reorganization costs, goodwill impairment charges, gain on redemption of convertible debentures, gain on cancellation of convertible debentures, and acquisition costs. Adjusted net income (loss) means net income (loss) adjusted for restructuring expenses, one-time business reorganization costs, goodwill impairment charges, gain on redemption of convertible debentures, gain on cancellation of convertible debentures, acquisition costs and the tax effects of those items. 15 ANNUAL REPORT 2016DATA COMMUNICATIONS MANAGEMENT CORP.Business of DATA OVERVIEW DATA is a leading provider of business communication solutions, bringing value and collaboration to marketing and operations teams in companies across North America. DATA helps marketers and agencies unify and execute communications campaigns across multiple channels, and it helps operations teams streamline and automate document and communications processes. DATA is strategically located across Canada, including seven centres of excellence to support clients on a national basis, and serves the U.S. market through its facilities in Chicago, Illinois. FOURTH QUARTER EVENTS As part of the Company’s ongoing initiatives to reduce its cost of operations, DATA completed the closure of its large Edmonton, Alberta manufacturing facility, in addition to headcount reductions across various functions within the business, during the fourth quarter of 2016. Total restructuring costs related to these initiatives, primarily pertaining to headcount reductions, were $1.7 million. Other one-time business reorganization costs totaling approximately $1.0 million related to the relocation of machinery and equipment from the large Edmonton, Alberta facility to other plants, employee hiring, training and relocation costs and certain raw material inventory write-offs were also incurred during the fourth quarter. Total cost savings DATA derives its revenues from the following core from these restructuring initiatives are expected to be capabilities: direct marketing, commercial print $5.2 million on an annualized basis. DATA downsized services, labels and asset tracking, event tickets and gift significantly in Edmonton, Alberta to a 10,000 square cards, logistics and fulfilment, content and workflow foot sales, customer experience and high-volume digital management, data management and analytics, and print production facility in order to strategically serve regulatory communications. The Company serves the local market. clients in key vertical markets such as financial services, retail, healthcare, lottery and gaming, not-for-profit, and energy. On November 28, 2016, Gregory J. Cochrane was appointed as President of DATA. In his new role, Mr. Cochrane assumed certain responsibilities previously Customer agreements and terms typically include performed by Michael G. Sifton as Chief Executive provisions consistent with industry practice, which Officer (“CEO”) and President, with a focus on sales and allow DATA to pass along increases in the cost of paper business development. Mr. Sifton remains as CEO of and other raw materials used to manufacture products. DATA with a focus on financial and strategic initiatives. DATA’s revenue is subject to the seasonal advertising and mailing patterns of certain customers. Typically, higher revenues and profit are generated in the fourth quarter relative to the other three quarters, however this can vary from time to time by changes in customers’ purchasing decisions throughout the year. As a result, DATA’s revenue and financial performance for any single quarter may not be indicative of revenue and financial performance which may be expected for the full year. DATA has approximately 1,250 employees in Canada and the United States, and revenues of $278.4 million in 2016. Website: www.datacm.com. Mr. Cochrane brings a diverse business background, with particular recognition of his leadership in the communication and marketing services arena. His addition to the senior leadership team is expected to help the Company generate sales through organic growth and future acquisitions. SUBSEQUENT EVENTS On February 22, 2017 (the “Closing Date”), DATA completed the acquisition (the “Eclipse Acquisition”) of substantially all of the assets of Eclipse Colour and Imaging Corp. (“Eclipse”) and the acquisition (the “Thistle Acquisition”) of all of the shares of Thistle Printing Limited (“Thistle”). 16 Management’s Discussion and AnalysisDATA COMMUNICATIONS MANAGEMENT CORP.ECLIPSE ACQUISTION capabilities which it has historically outsourced Eclipse is a leading Canadian large-format and point- to local tier two suppliers. This acquisition adds of-purchase printing and packaging company, with expertise in commercial printing, design, prepress approximately 100 employees operating in an 80,000 and bindery services to DATA’s portfolio, and square foot facility located in Burlington, Ontario. complements DATA’s current capabilities in direct The acquisition of Eclipse adds significantly expanded mail, fulfilment and data management. Thistle wide format, large format, and grand format printing generated approximately $16.4 million in revenues capabilities to DATA’s portfolio of products and services, (audited) for its fiscal year ended October 31, 2016. with Eclipse having a product mix focused on in-store print, outdoor, transit, display, packaging, kitting and fulfilment capabilities. DATA intends to relocate its current wide format capabilities from its Ambassador Road, Mississauga, Ontario facility to Calgary, Alberta. The combined wide format printing, distribution and fulfilment capabilities of Eclipse and DATA will provide a unique national offering in the market to better serve the combined businesses’ customer base. Eclipse generated approximately $21.3 million in revenues (unaudited) for its fiscal year ended November 30, 2016, and, over the past three years, has experienced average revenue growth rates of approximately 10% per year. Under the terms of the Eclipse Acquisition, DATA acquired from Eclipse substantially all of the assets of Eclipse for a net purchase price of approximately $9.4 million. The purchase price was satisfied as follows: $3.5 million in cash, $1.3 million through the issuance of 634,263 Common Shares of DATA, and $4.6 million through the issuance of a secured, non-interest bearing vendor take-back promissory note, which is payable in two equal instalments on each of the first and second anniversaries of the Closing Date. The purchase price is subject to customary post- closing working capital and other adjustments. THISTLE ACQUISITION Thistle is a full service commercial printing company with approximately 65 employees operating in a 42,000 square foot facility located in Toronto, Ontario. The acquisition of Thistle provides DATA with a full service commercial print facility in Eastern Canada and enables DATA to expand its margins by insourcing commercial printing 17 Under the terms of the Thistle Acquisition, DATA acquired all of the outstanding common shares of Thistle from Capri Media Group Inc. (“Capri”). Companies controlled by the Chair of the Board of Directors (the “Board”) and the President of DATA, respectively, control Capri. As a result, Capri is a related party of DATA for purposes of IFRS. See “Transactions with related parties” section below for further details related to the determination of a fair purchase price for the Thistle Acquisition. Thistle was acquired for a net purchase price of approximately $6.1 million. The purchase price was satisfied as follows: $1.1 million in cash, $1.5 million through the issuance of 644,445 Common Shares of DATA, and $3.5 million in the form of a secured, non-interest bearing vendor take-back promissory note, which is payable in 24 equal monthly payments following the Closing Date. The purchase price is subject to customary post-closing working capital and other adjustments. The purchase price was measured at the exchange amount, which represents the amount of consideration established and agreed to by the related parties. In aggregate, a total of 1,278,708 Common Shares of DATA were issued to the vendors of Eclipse and Thistle and the number of DATA’s issued and outstanding common shares increased from 11,975,053 to 13,253,761. INCREASE IN SENIOR CREDIT FACILITIES AND AMENDMENT TO EXISTING TERMS In connection with the Eclipse and Thistle acquisitions, on January 31, 2017, DATA amended its senior revolving credit facility with a Canadian chartered bank, including an increase in the total ANNUAL REPORT 2016DATA COMMUNICATIONS MANAGEMENT CORP.available commitment from up to $25.0 million to REVENUE RECOGNITION POLICY up to $35.0 million and the extension of the term by DATA recognizes revenue from the sale of products one year, to March 31, 2020. The amount available upon shipment to the customer when costs and under the sub-facility was increased to $7.0 million, revenues can be reliably measured, collection is an increase from $5.0 million under the original probable, the transfer of title occurs and the risk of sub-facility. The increased availability was partially loss passes to the buyer. When the customer requests used to finance the up-front cash components a bill and hold arrangement, revenue is recognized and related transaction costs of the Eclipse and when the goods are ultimately shipped to the customer. Thistle acquisitions and will also provide DATA Since the majority of DATA’s products are customized, with additional flexibility to continue to pursue its product returns are not significant. DATA may provide strategic growth objectives. On January 31, 2017, DATA also amended its term loan facility with Integrated Private Debt Fund IV (“IAM IV”), which, among other things, provides senior funded debt of DATA may not exceed $72.0 million (after giving effect to the provisions of the inter-creditor agreement), an increase from $50.0 million in the original term loan facility dated March 10, 2016. See “Liquidity and capital resources” section below for more details on changes to these senior credit facilities, assumed indebtedness of Eclipse and Thistle and the provisions of the new inter-creditor agreement. FURTHER PROCESS IMPROVEMENTS DATA commenced 2017 with some additional restructuring as a part of its ongoing effort to reduce costs, become more agile and build a best-in-class process. On January 31, 2017, DATA announced a process realignment of its operations, which DATA anticipates will result in estimated cost savings of $2.4 million on an annualized basis. In connection with these improvements, DATA will incur a total of approximately $1.8 million in severance expenses in 2017. This restructuring primarily involves a reduction of DATA’s indirect labour force across its operations, which is designed to streamline DATA’s order-to-production process. This process re-design and automation is expected to improve manufacturing processes from DATA’s on-line web-to-print ordering system, directly to digital production. pre-production services to its customers; however, these services do not have standalone value and there is no objective and reliable evidence of their fair value. Therefore, these pre-production services and the final custom made printed product are considered to be one unit of accounting. DATA recognizes warehousing, administration and marketing service fees when the services are provided, the amount of revenue can be measured reliably, it is probable that economic benefits associated with these services will flow to DATA and the costs associated with these services can be reliably measured. DATA occasionally provides warehousing services that are negotiated as a separate charge based on market rates, even if included in the overall selling price of its products. Warehousing services represent a separate unit of accounting because they can be sold separately, have value to the customer on a stand- alone basis, and there is objective and reliable evidence of the fair value of these services. If warehousing, administration and marketing service fees are included in one overall selling price of DATA’s custom print products, the consideration is allocated to each component based on relative selling prices. COST OF REVENUES AND EXPENSES DATA’s cost of revenues consists of raw materials, manufacturing salaries and benefits, occupancy, lease of equipment and depreciation. DATA’s raw material costs consist primarily of paper, carbon and ink. Manufacturing salaries and benefits costs consist of employee salaries and health benefits at DATA’s printing and warehousing facilities. Occupancy costs consist primarily of lease payments at DATA’s facilities, utilities, insurance and building 18 Management’s Discussion and AnalysisDATA COMMUNICATIONS MANAGEMENT CORP.maintenance. DATA’s expenses consist of selling, depreciation and amortization, and general and administration expenses. Selling expenses consist primarily of employee salaries, health benefits and commissions, and include related costs for travel, corporate communications, trade shows, and marketing programs. Depreciation and amortization represent the allocation to income of the cost of property, plant and equipment, and intangible assets over their estimated useful lives. General and administration expenses consist primarily of employee salaries, health benefits, and other personnel related expenses for executive, financial and administrative personnel, as well as facility, telecommunications, pension plan expenses and professional service fees. DATA has incurred restructuring expenses in each of the last three fiscal years, which primarily consisted of severance costs associated with headcount reductions and costs related to facilities closures. Selected consolidated financial information The following tables set out summary consolidated financial information and supplemental information for the periods indicated. The summary annual financial information for each of Fiscal 2016, Fiscal 2015 and Fiscal 2014 has been derived from consolidated financial statements, prepared in accordance with IFRS. The unaudited financial information presented has been prepared on a basis consistent with our audited consolidated financial statements. In the opinion of management, such unaudited financial data reflects all adjustments, consisting of normal and non-recurring adjustments, necessary for a fair presentation of the results for those periods. 19 ANNUAL REPORT 2016DATA COMMUNICATIONS MANAGEMENT CORP.TABLE 1 The following table sets out selected historical consolidated financial information for the periods noted. For the years ended December 31, 2016, 2015 and 2014 (in thousands of Canadian dollars, except share and per share amounts, unaudited) January 1 to December 31, 2016 January 1 to December 31, 2015 January 1 to December 31, 2014 Revenues Cost of revenues Gross profit Selling, general and administrative expenses Restructuring expenses Impairment of goodwill Gain on redemption of convertible debentures Gain on cancellation of convertible debentures Acquisition costs (Loss) income before finance costs and income taxes Finance costs (income) Interest expense Interest income Amortization of transaction costs (Loss) income before income taxes Income tax (recovery) expense Current Deferred Net (loss) income for the year Basic (loss) earnings per share Diluted (loss) earnings per share Weighted average number of common shares outstanding, basic Weighted average number of common shares outstanding, diluted As at December 31, 2016, 2015 and 2014 (in thousands of Canadian dollars, unaudited) Current assets Current liabilities Total assets Total non-current liabilities Shareholders’ equity (deficit) 20 $ 278,363 $ 304,575 $ 313,175 215,295 63,068 55,934 4,200 31,066 — — 68 91,268 (28,200) 3,414 (8) 578 3,984 (32,184) 1,572 (1,649) (77) (32,107) (2.89) (2.89) $ $ $ 233,505 71,070 56,663 13,560 26,000 (12,766) — — 83,457 (12,387) 5,599 (11) 468 6,056 (18,443) 1,191 (462) 729 (19,172) (40.33) (40.33) $ $ $ 238,563 74,612 58,990 2,804 — — (103) — 61,691 12,921 6,124 (21) 591 6,694 6,227 69 1,679 1,748 4,479 19.07 19.07 $ $ $ 11,125,518 475,382 234,906 11,125,518 475,382 234,906 As at December 31, 2016 As at December 31, 2015 As at December 31, 2014 $ 68,620 $ 58,473 90,910 42,372 $ (9,935) $ 80,125 90,298 134,067 24,750 19,019 $ 83,619 46,176 164,977 100,388 $ 18,413 Management’s Discussion and AnalysisDATA COMMUNICATIONS MANAGEMENT CORP. TABLE 2 The following table sets out selected historical consolidated financial information for the periods noted. See “Non-IFRS Measures”. For the years ended December 31, 2016, 2015 and 2014 (in thousands of Canadian dollars, except percentage amounts, unaudited) January 1 to December 31, 2016 January 1 to December 31, 2015 January 1 to December 31, 2014 Revenues Gross profit $ $ 278,363 63,068 $ $ 304,575 71,070 $ $ 313,175 74,612 Gross profit, as a percentage of revenues 22.7 % 23.3 % 23.8 % Selling, general and administrative expenses $ 55,934 $ 56,663 $ 58,990 As a percentage of revenues 20.1 % 18.6 % 18.8 % Adjusted EBITDA (see Table 3) $ 14,381 $ 21,110 $ 22,478 Adjusted EBITDA, as a percentage of revenues 5.2 % 6.9 % 7.2 % Net (loss) income for the year Adjusted net income (see Table 4) Adjusted net income, as a percentage of revenues $ $ (32,107) 2,944 1.1 % $ $ (19,172) 5,764 1.9 % $ $ 4,479 6,487 2.1 % TABLE 3 The following table provides reconciliations of net (loss) income to EBITDA and of net (loss) income to Adjusted EBITDA for the periods noted. See “Non-IFRS Measures”. EBITDA AND ADJUSTED EBITDA RECONCILIATION For the years ended December 31, 2016, 2015 and 2014 (in thousands of Canadian dollars, unaudited) January 1 to December 31, 2016 January 1 to December 31, 2015 January 1 to December 31, 2014 Net (loss) income for the year $ (32,107) $ (19,172) $ 4,479 Interest expense Interest income Amortization of transaction costs Current income tax expense Deferred income tax (recovery) expense Depreciation of property, plant and equipment Amortization of intangible assets EBITDA Restructuring expenses One-time business reorganization costs Impairment of goodwill Gain on redemption of convertible debentures Gain on cancellation of convertible debentures Acquisition costs Adjusted EBITDA 21 3,414 (8) 578 1,572 (1,649) 4,052 2,092 5,599 (11) 468 1,191 (462) 4,754 1,949 6,124 (21) 591 69 1,679 4,940 1,916 $ (22,056) $ (5,684) $ 19,777 4,200 1,103 31,066 — — 68 13,560 — 26,000 (12,766) — — 2,804 — — — (103) — $ 14,381 $ 21,110 $ 22,478 ANNUAL REPORT 2016DATA COMMUNICATIONS MANAGEMENT CORP. TABLE 4 The following table provides reconciliations of net (loss) income to Adjusted net income and a presentation of Adjusted net income per share and Pro forma Adjusted net income per share for the periods noted. See “Non-IFRS Measures”. ADJUSTED NET INCOME RECONCILIATION For the years ended December 31, 2016, 2015 and 2014 (in thousands of Canadian dollars, except share and per share amounts, unaudited) Net (loss) income for the year Restructuring expenses One-time business reorganization costs Impairment of goodwill Gain on redemption of convertible debentures Gain on cancellation of convertible debentures Acquisition costs Tax effect of the above adjustments Adjusted net income Adjusted net income per share, basic Adjusted net income per share, diluted Pro forma Adjusted net income per share, basic (1) Pro forma Adjusted net income per share, diluted (1) Weighted average number of common shares outstanding, basic Weighted average number of common shares outstanding, diluted Number of common shares outstanding, basic Number of common shares outstanding, diluted January 1 to December 31, 2016 January 1 to December 31, 2015 January 1 to December 31, 2014 $ (32,107) $ (19,172) $ 4,479 4,200 1,103 31,066 — — 68 (1,386) 2,944 0.26 0.26 0.25 0.24 $ $ $ $ $ 13,560 — 26,000 (12,766) — — (1,858) 5,764 12.12 12.12 0.48 0.46 $ $ $ $ $ $ $ $ $ $ 2,804 — — — (103) — (693) 6,487 27.62 27.62 0.54 0.52 11,125,518 475,382 234,906 11,380,858 11,975,053 12,464,343 475,382 9,987,528 9,987,528 234,906 234,906 234,906 (1) Pro forma Adjusted net income per share, basic and pro forma Adjusted net income per share, diluted, are non-IFRS measures: assumes Adjusted net income per share, basic and diluted, were calculated on the basis of the total number of Common Shares outstanding of 11,975,053 and of 12,464,343, respectively at December 31, 2016, rather than the weighted average, basic and diluted, number of Common Shares outstanding at the respective period ends, given the significant changes in the number of Common Shares outstanding during comparable periods. Results of operations interdependent and less focused on serving separate distribution channels and therefore, DATA’s former The chief executive officer (“CEO”) of DATA is the chief Multiple Pakfold operating segment has been included operating decision-maker (“CODM”). Management in one consolidated operating segment commencing in has determined that there is one operating segment the quarter ended December 31, 2015. based on the information reviewed by the CODM for the purposes of allocating resources and assessing performance. As a result of the organizational and operational changes implemented by DATA in 2015, DATA’s operations are increasingly integrated, REVENUES For the year ended December 31, 2016, DATA recorded revenues of $278.4 million, a decrease of $26.2 million or 8.6% compared with the same period in 2015. 22 Management’s Discussion and AnalysisDATA COMMUNICATIONS MANAGEMENT CORP. The decrease in revenues for the year ended of $0.9 million related to the closure of DATA’s large December 31, 2016 was primarily due to lower Edmonton, Alberta manufacturing facility included volumes and pricing pressures from certain costs to: (i) relocate machinery and equipment, along customers that reduced their overall spend during with inventory, to other plants, (ii) hire, train and the year, with some shift to digital advertising. Other relocate employees required to operate the machinery contributors included: (i) the threatened Canada Post and equipment that was relocated to other plants labour disruption, which reduced demand for work and (iii) certain raw material inventory write-offs. destined directly or indirectly for the mail stream, In addition, DATA’s prior lease agreement for its (ii) approximately $5.1 million of non-recurring work manufacturing facility in Drummondville, Québec related to labels and forms, from a major retailer had a favourable buy out option. During the year ended and certain government agencies, respectively, in December 31, 2016, this buy out option was exercised 2015, (iii) a weaker economy in Western Canada, by another party with whom DATA entered into a new (iv) disruption caused by the closure of the large lease agreement. DATA incurred one-time costs of Edmonton, Alberta manufacturing facility and $0.2 million related to the termination of the prior reassignment of contracts to other plants, and (v) lease agreement. training of the sales force to transition to DATA’s new business structure, which is now more vertical market focused. The aforementioned reasons SELLING, GENERAL AND ADMINISTRATIVE EXPENSES impacted the normal course of DATA’s business and Selling, general and administrative (“SG&A”) expenses more than offset the growth in revenues from new customers during the year resulting in the overall reduction in revenue. for the year ended December 31, 2016 decreased $0.7 million or 1.3% to $55.9 million compared to $56.7 million for the same period of 2015. As a percentage of revenues, these costs were 20.1% and COST OF REVENUES AND GROSS PROFIT 18.6% of revenues for the years ended December 31, 2016 For the year ended December 31, 2016, cost of revenues and 2015, respectively. The decrease in SG&A expenses decreased to $215.3 million from $233.5 million for for the year ended December 31, 2016 was primarily the same period in 2015. Gross profit for the year ended attributable to cost savings initiatives implemented December 31, 2016 was $63.1 million, which represented in 2015, including headcount reductions across sales, a decrease of $8.0 million or 11.3% from $71.1 million general and administration functions, and was partially for the same period in 2015. Gross profit as a percentage offset by higher SG&A expenses related to share-based of revenues decreased to 22.7% for the year ended compensation expense, increased marketing expenses, December 31, 2016 compared to 23.3% for the costs related to DATA’s development of an Enterprise same period in 2015. The decrease in gross profit Resource Planning (“ERP”) system and additional as a percentage of revenues for the year ended corporate costs related to changes in DATA’s Board in December 31, 2016 was due to the decrease in revenues the second quarter of 2016, the change in DATA’s legal (as noted above), changes in product mix, one-time name on July 4, 2016 and the Share Consolidation. business reorganization costs incurred and compressed margins on recently negotiated large contracts with RESTRUCTURING EXPENSES certain existing customers. The decrease in gross profit Cost reductions and enhancement of operating as a percentage of revenues was partially offset by cost efficiencies has been an area of focus for DATA over reductions realized from prior cost savings initiatives the past three years in order to improve margins implemented in 2015. One-time business reorganization costs, which did not qualify as restructuring costs in accordance with IFRS, and better align costs with the declining revenues experienced by the Company, a trend that has been faced by the industry for several years now. 23 ANNUAL REPORT 2016DATA COMMUNICATIONS MANAGEMENT CORP.For the year ended December 31, 2016, DATA incurred the CGU’s carrying value. The recoverable amounts of restructuring expenses of $4.2 million. Throughout all CGU’s were determined based on their respective fair the year, a number of strategic headcount reductions value less cost to sell. DATA used the income approach were made across several functions of the business to estimate the recoverable value of each CGU which is resulting in $2.1 million of restructuring costs. predicated on the value of the future cash flows that a Additionally, in the third quarter of 2016, DATA closed business will generate going forward and converting its Richmond Hill, Ontario location. In order to exit them into a present value through discounting. the lease for this facility there were approximately Discounting uses a rate of return that is commensurate $0.4 million in restructuring charges that were with the risk associated with the business and the time incurred. Further, during the fourth quarter of 2016, value of money. This approach requires assumptions DATA completed the closure of its large Edmonton, about revenue growth rates, operating margins, tax Alberta manufacturing facility and condensed this rates and discount rates. Revenue growth rates and location significantly to a 10,000 square foot sales, operating margins were based on the 2017 budget customer experience and high-volume digital print approved by the Board and projected over a five-year production facility in order to strategically serve the period. These forecasts were adjusted downwards given local market. Machinery and equipment was relocated the declining operating results experienced by DATA in from the large Edmonton, Alberta facility to other the past, current economic conditions and the specific DATA locations. This resulted in the reduction of trends of the printing industry including continued significant labour and overhead costs for the Company reductions in spending by customers. Accordingly, going forward. Total restructuring costs relating to a weighted average declining growth rate based on the large Edmonton, Alberta manufacturing facility a range of 1% to 3% was applied to revenue and a closure, primarily pertaining to headcount reductions, perpetual long-term growth rate of 0% thereafter were approximately $1.7 million. DATA anticipates were used to derive the recoverable amount of its these restructuring initiatives will generate total cost CGU’s. As a result, DATA concluded that the fair value savings of $5.2 million on an annualized basis. of its DATA CM CGU was less than its carrying value For the year ended December 31, 2015, DATA incurred restructuring expenses of $13.6 million comprised of (i) $11.2 million of restructuring expenses due to and accordingly, recorded a non-cash impairment of goodwill for $31.1 million. There was no further goodwill remaining as at December 31, 2016. changes in senior management, headcount reductions During the fourth quarter of 2015, DATA performed its across DATA’s operations and the closure of certain annual review of impairment of goodwill. As a result of manufacturing and warehouse locations, and (ii) a that review, DATA concluded that no further goodwill charge to onerous contracts of $2.3 million for lease exit impairment charges were required at that time. charges for a warehouse that was closed in Brampton, However, earlier in the year, during the second quarter Ontario and the closure of other facilities in Calgary, of 2015, impairment indicators, including changes in Alberta and Vancouver, British Columbia. revenue trends and profit forecasts and the failure DATA will continue to evaluate its operating costs for further efficiencies as part of its commitment to making its business more agile, focused, optimized and unified. IMPAIRMENT OF GOODWILL During the fourth quarter of 2016, DATA performed its annual review of impairment of goodwill by comparing the fair value of each cash generating unit (“CGU”) to to meet certain financial covenants under its credit facilities, indicated that DATA’s assets may be impaired. As a result of this information, DATA performed an impairment analysis at June 30, 2015 and concluded that the fair value of its DATA CM CGU was less than its carrying value. Accordingly, DATA recorded a non-cash impairment of goodwill for $26.0 million during the three month period ended June 30, 2015. 24 Management’s Discussion and AnalysisDATA COMMUNICATIONS MANAGEMENT CORP.These non-cash impairment charges had no impact on ADJUSTED EBITDA DATA’s cash flow or compliance with debt covenants. For the year ended December 31, 2016, Adjusted EBITDA was $14.4 million, or 5.2% of revenues, after GAIN ON REDEMPTION OF CONVERTIBLE adjusting EBITDA for the non-cash impairment of DEBENTURES goodwill of $31.1 million, removing $4.2 million in During the year ended December 31, 2015, DATA restructuring charges and adding back $1.1 million redeemed $33.5 million aggregate principal amount related to one-time business reorganization costs. of its $44.7 million outstanding 6.00% Convertible Adjusted EBITDA for the year ended December 31, Debentures on December 23, 2015 (the “Redemption 2016 decreased $6.7 million or 31.9% from the same Date”). DATA elected to satisfy its redemption payment period in the prior year and Adjusted EBITDA margin obligation by issuing and delivering Common Shares for the period, as a percentage of revenues, decreased to the holders of the 6.00% Convertible Unsecured from 6.9% of revenues in 2015 to 5.2% of revenues in Subordinated Debentures (the “6.00% Convertible 2016. The decrease in Adjusted EBITDA for the year Debentures”), in lieu of cash. On redemption, holders of ended December 31, 2016 was attributable to lower the 6.00% Convertible Debentures redeemed received: levels of revenue and gross profit which was partially (i) a number of Common Shares equal to the principal offset by lower SG&A expenses compared to the prior amount of 6.00% Convertible Debentures redeemed on comparable period. the Redemption Date divided by 95% of the volume- weighted average trading price of the Common Shares INTEREST EXPENSE on the Toronto Stock Exchange for the 20 consecutive Interest expense, including interest on debt trading days ended on December 16, 2015, and (ii) a outstanding under DATA’s credit facilities, on its cash payment equal to accrued and unpaid interest on outstanding 6.00% Convertible Debentures, on certain the 6.00% Convertible Debentures redeemed up to but unfavourable lease obligations related to closed excluding the Redemption Date, less any applicable facilities and on DATA’s employee benefit plans, was withholding taxes. On the Redemption Date, DATA $3.4 million for the year ended December 31, 2016 issued a total of 975,262,140 Common Shares (or compared to $5.6 million for the same period in 2015. 9,752,622 post-consolidation Common Shares), which, Interest expense for the year ended December 31, based on the formula described above, was calculated 2016 was lower than the same period in the prior year using a pre-share consolidation volume-weighted primarily due to reductions in the aggregate principal average trading price of $0.03619 per share. Under IFRS, amount of outstanding 6.00% Convertible Debentures the Common Shares issued were determined to have a and debt outstanding under DATA’s credit facilities. fair value on the Redemption Date of $0.02 per share on a pre-share consolidation basis. Common Shares having a fair value of $19.5 million for purposes of IFRS were issued to satisfy the redemption price of the 6.00% Convertible Debentures redeemed on the Redemption Date, which had a carrying value of $32.7 million on that date. This resulted in a gain on redemption of convertible debentures of $13.2 million for purposes of IFRS. Transaction costs of $0.4 million were incurred to execute the redemption and have been netted against the gain on redemption of convertible debentures. INCOME TAXES DATA reported a loss before income taxes of $32.2 million, a current income tax expense of $1.6 million and a deferred income tax recovery of $1.6 million for the year ended December 31, 2016 compared to a loss before income taxes of $18.4 million, a current income tax expense of $1.2 million and a deferred income tax recovery of $0.5 million for the year ended December 31, 2015. The current income tax expense was due to the taxes payable on DATA’s estimated taxable income for the years ended December 31, 2016 and 2015, respectively. 25 ANNUAL REPORT 2016DATA COMMUNICATIONS MANAGEMENT CORP.In addition, the current tax expense for the year (the “Bank”) and an amortizing term loan facility ended December 31, 2016 includes a recovery of taxes (the “IAM IV Credit Facility”) with IAM IV, a loan paid in a prior period offset by a reclassification managed by Integrated Asset Management Corp. from deferred taxes related to an adjustment of a (“IAM”) pursuant to separate credit agreements, tax filing in the prior year. The deferred income tax each dated March 10, 2016, between DATA and the Bank recoveries primarily related to changes in estimates (the “Bank Credit Agreement”) and IAM (the “IAM IV of future reversals of temporary differences and new Credit Agreement”), respectively. As at December 31, temporary differences that arose during the years 2016, DATA had outstanding borrowings of $10.4 million ended December 31, 2016 and 2015, respectively, and letters of credit granted of $1.1 million under the offset by a reclassification to current income taxes Bank Credit Facility, and outstanding borrowings of related to an adjustment of a tax filing in the $25.6 million under the IAM IV Credit Facility. Under the prior year. NET LOSS Net loss for the year ended December 31, 2016 was $32.1 million compared to a net loss of $19.2 million for the same period in 2015. The decrease in comparable profitability for the year ended December 31, 2016 was primarily due to a larger non-cash impairment of goodwill, lower revenue, and larger deferred income tax recovery during the year ended December 31, 2016. The decrease was partially offset by lower restructuring charges and interest expenses, combined with a larger current income tax expense during the year ended December 31, 2016. During the year ended December 31, 2015, the net loss included a non-cash gain on redemption of convertible debentures which did not recur in 2016, along with a non-cash impairment of goodwill totaling $26.0 million. ADJUSTED NET INCOME Bank Credit Facility, DATA had access to $8.9 million of available credit at December 31, 2016. On January 31, 2017, DATA amended the respective terms of the Bank Credit Agreement and the IAM IV Credit Agreement in connection with the acquisitions of Eclipse and Thistle. In addition, Thistle is a party to a credit agreement (the “IAM III Credit Agreement” and, together with the IAM IV Credit Agreement, the “IAM Credit Agreements”) with Integrated Private Debt Fund III LP (“IAM III”), another loan managed by IAM, pursuant to which IAM III has advanced to Thistle a term loan facility (the “IAM III Credit Facility”) in the principal amount of $8.0 million. Upon closing of the Thistle Acquisition, DATA became a co-borrower under the IAM III Credit Agreement and Thistle’s covenants under that credit agreement were amended on a basis consistent with DATA’s covenants under the IAM IV Credit Agreement and will be determined with reference to DATA and its affiliates Adjusted net income for the year ended December on a consolidated basis. The principal amount of the 31, 2016 was $2.9 million compared to Adjusted net IAM III Credit Facility amortizes in equal monthly income of $5.8 million for the same period in 2015. payments over an 8 year term ending on October 15, The decrease in comparable profitability for the year 2022. The IAM III Credit Facility bears interest at a ended December 31, 2016 was attributable to lower fixed rate of 6.1% per annum. As of February 22, 2017, revenues, which was partially offset by lower SG&A Thistle had outstanding borrowings of $5.5 million expenses and interest expenses in 2016. under the IAM III Credit Facility. Liquidity and capital resources LIQUIDITY The amendments to the terms of the Bank Credit Agreement included an increase in the total available commitment from up to $25.0 million to up to $35.0 million and the extension of the term of the Bank DATA maintains a revolving credit facility (the “Bank Credit Facility by one year, to March 31, 2020. Credit Facility”) with a Canadian chartered bank The amount available under the term portion of the 26 Management’s Discussion and AnalysisDATA COMMUNICATIONS MANAGEMENT CORP.Bank Credit Facility (the “Bank Term Facility”) was the term of this facility. As at December 31, 2016, the increased from $5.0 million to $7.0 million. The unamortized transaction costs related to this facility Bank Term Facility will amortize in equal monthly were $0.5 million. As at December 31, 2016, all of DATA’s payments over the new term of the Bank Credit indebtedness outstanding under the Bank Credit Facility but such reductions will not reduce the Facility was subject to a floating interest rate of amount available under the revolving credit facility. 3.45% per annum. Advances under the Bank Credit Facility are subject to floating interest rates based upon the Canadian prime rate plus an applicable margin of 75 basis points. The increased availability under the Bank Credit Facility was used, in part, together with the additional availability under the Bank Term Facility, to finance the up-front cash components of the Eclipse and Thistle acquisitions and related transaction expenses and will also provide DATA with additional flexibility to continue to pursue its strategic growth objectives. In connection with these two acquisitions, DATA’s indebtedness increased by approximately $16.3 million, including assumed indebtedness of Eclipse and Thistle. Under the terms of the amendment to the IAM IV Credit Agreement, the maximum aggregate principal amount which may be outstanding at any time under the IAM IV Credit Facility, the IAM III Credit Facility and the Bank Credit Facility, calculated on a consolidated basis in accordance with IFRS (“Senior Funded Debt”), was increased from $50.0 million to $72.0 million (after giving effect to the provisions of the inter-creditor agreement described below). On February 22, 2017, DATA entered into an amended inter-creditor agreement between the Bank, IAM III, IAM IV, and the parties to the vendor take back notes (the “VTB Noteholders”) issued in connection with the Eclipse Acquisition and the Thistle Acquisition, respectively, which, among other things, establishes the rights and priorities of the respective liens of the Bank, IAM III, IAM IV and the VTB Noteholders on the present and after-acquired property of DATA, Eclipse and Thistle. Prior to amending the terms of the IAM IV Credit Agreement in January 2017, DATA had capitalized transaction costs of $0.7 million related to the IAM IV Credit Facility and the amortization of these costs are recognized over the term of this facility. As at December 31, 2016, the unamortized transaction costs related to this facility were $0.5 million. As at December 31, 2016, all of DATA’s indebtedness outstanding under the IAM IV Credit Facility was subject to a fixed interest rate equal to 6.95% per annum. The IAM IV Credit Facility matures on March 10, 2023. Each of the Bank Credit Agreement, the IAM III Credit Agreement and the IAM IV Credit agreement contain customary representations and warranties, as well as restrictive covenants which limit the discretion of the Board and management with respect to certain business matters including the declaration or payment of dividends on the Common Shares without the consent of the Bank, IAM III and IAM IV, as applicable. The respective covenants under the Bank Credit Facility and the IAM IV Credit Facility remain unchanged from the terms existing as of March 10, 2016. However, in each case the pro forma financial results for Eclipse and Thistle will be included on a trailing twelve month basis effective as of the Closing Date for the purposes of DATA’s covenant calculations. In addition, on March 9, 2017, IAM consented, effective the quarter ending March 31, 2017, to modify the calculation of debt service coverage ratio under the provisions of the IAM IV Credit Agreement to include EBITDA (as defined in the IAM IV Credit Agreement) for the six Prior to amending the terms of the Bank Credit Facility most recently completed fiscal quarters (previously in January 2017, DATA had capitalized transaction costs four most recently completed quarters) less income of $0.6 million related to the Bank Credit Facility and taxes actually paid in cash and the amount of capital the amortization of these costs are recognized over expenditures actually incurred or paid during 27 ANNUAL REPORT 2016DATA COMMUNICATIONS MANAGEMENT CORP.such period up to the amount permitted under this resignation), could result in an event of default which, agreement, divided by the aggregate of (i) scheduled if not cured or waived, could permit acceleration of principal plus interest payments on the IAM IV Credit the indebtedness outstanding under each of those Facility and IAM III Credit Facility and (ii) projected agreements. Based on the 2017 operating plan, DATA interest payments on the Bank Credit Facility for anticipates it will be in compliance with the covenants the next six quarters (previously four most recently in its credit facilities throughout 2017; however there completed quarters). can be no assurance that DATA will be successful in achieving the results targeted in its operating plan for Under the terms of the IAM Credit Agreements, DATA must maintain (i) a ratio of Senior Funded Debt the 2017 fiscal year. to EBITDA for its four most recently completed fiscal DATA’s obligations under the Bank Credit Facility, the quarters of not greater than the following levels: from IAM III Credit Facility and the IAM IV Credit Facility the date of the advance up to March 31, 2017 - 3.25 to 1; are secured by conventional security charging all of from April 1, 2017 up to March 31, 2018 - 3.00 to 1; and the property and assets of DATA and its affiliates. on and after April 1, 2018 - 2.75 to 1; (ii) a debt service The payment of the principal of, and interest on, coverage ratio of not less than 1.50 to 1; and (iii) a working DATA’s outstanding 6.00% Convertible Debentures is capital current ratio of not less than 1.25:1. During the subordinated in right of payment to the prior payment quarter ended June 30, 2016, DATA and IAM IV amended in full of DATA’s indebtedness under the Bank Credit the terms of the IAM IV Credit Agreement to exclude Agreement and the IAM Credit Agreements. the aggregate principal amount of outstanding 6.00% Convertible Debentures from current liabilities for the purposes of calculating the working capital ratio for the period from June 29, 2016 to June 30, 2017. As at December 31, 2016, the ratio of Senior Funded Debt to EBITDA was 2.38, the debt service coverage ratio was 1.95 and the working capital current ratio was 1.45. As at December 31, 2016, 6.00% Convertible Debentures in an aggregate principal amount of $11.2 million were outstanding. The 6.00% Convertible Debentures mature on June 30, 2017, bear interest at a rate of 6.00% per annum payable semi-annually and are convertible into Common Shares at the option of the holder at any time prior to June 30, 2017 Under the terms of the Bank Credit Agreement, DATA (or, if called for redemption prior to that date, on must maintain a fixed charge coverage ratio of not less the business day immediately preceding the dated than 1.1 to 1.0 at all times, calculated on a consolidated specified by DATA for redemption of the 6.00% basis, in respect of any particular trailing 12 month Convertible Debentures) at a conversion price of period, as EBITDA for such period less cash taxes, $1,220 per Common Share, being a conversion rate cash distributions (including dividends paid) and of approximately 0.8196 Common Shares per $1,000 non-financed capital expenditures paid in such period, principal amount of 6.00% Convertible Debentures, divided by the total amount required by DATA to service subject to adjustment in certain events. The terms its outstanding debt for such period. As at December 31, of the 6.00% Convertible Debentures, including the 2016, the fixed charge coverage ratio was 1.56. right of DATA to satisfy the redemption price of 6.00% A failure by DATA to comply with its obligations under any of the Bank Credit Agreement or the IAM Credit Agreements, together with certain other events, including a change of control of DATA and a change in DATA’s chief executive officer, president or chief financial officer (unless a replacement officer acceptable to IAM III and IAM IV, acting reasonably, is appointed within 60 days of the effective date of such officer’s Convertible Debentures redeemed by DATA by the issuance of Common Shares, are described in greater detail in DATA’s Annual Information Form for the year ended December 31, 2015 (subject to the changes to the 6.00% Convertible Debentures described in DATA’s subsequent filings with Canadian securities regulatory authorities), which is available on SEDAR (www.sedar.com). 28 Management’s Discussion and AnalysisDATA COMMUNICATIONS MANAGEMENT CORP.Market conditions and DATA’s financial condition customers, which could result from factors such and capital structure could affect the availability and as reduced demand for traditional business forms terms of any replacement credit facilities or other and other print-related products, adverse economic funding sought by DATA from time to time or upon conditions and competition from competitors the maturity of the Bank Credit Facility, IAM Credit supplying similar products and services, increases in Facilities, the 6.00% Convertible Debentures or other DATA’s operating costs (including interest expense indebtedness of DATA. As at December 31, 2016, DATA had cash and cash equivalents of $1.5 million compared to cash and cash equivalents of $0.9 million at December 31, 2015. The cash equivalents at December 31, 2015 consisted mainly of short-term investments, such as money market deposits. DATA deposits cash equivalents with a Canadian chartered bank, from which DATA believes the risk of loss to be remote. Under the terms of the IAM IV Credit Agreement, DATA is required to deposit and hold cash in a blocked account to be used for repayments of principal and interest of indebtedness outstanding under the IAM IV Credit Facility. As at December 31, 2016, there was a balance of $0.4 million in the blocked account, which is recognized as restricted cash in DATA’s consolidated statements of financial position. In assessing DATA’s liquidity requirements, DATA takes into account its level of cash and cash equivalents, together with currently projected cash to be provided by operating activities, cash available from its unused credit facilities, cash from investing activities such as sales of redundant assets, access to the capital markets and anticipated reductions in operating costs projected to result from existing and planned restructuring activities, as well as its ongoing cash needs for its existing operations, including expenditures related to its growth strategy, payments associated with various restructuring and productivity improvement initiatives, contributions to its pension plans, payment of income tax liabilities and cash required to finance currently planned expenditures. Cash flows from operations have been, and could continue to be, negatively impacted by decreased demand for DATA’s products and services and pricing pressures from its existing and new on its outstanding indebtedness and restructuring expenses) and increased costs associated with the manufacturing and distribution of products or the provision of services. DATA’s ability to conduct its operations could be negatively impacted in the future should these or other adverse conditions affect its primary sources of liquidity. PENSION FUNDING OBLIGATIONS DATA maintains a defined benefit and defined contribution pension plan (the “DATA Communications Management Pension Plan”) for some of its employees. Effective January 1, 2008, no further service credits will accrue under the defined benefit provision of the DATA Communications Management Pension Plan. However, DATA is required under applicable pension legislation to make monthly, annual and/or one-time cash contributions to the DATA Communications Management Pension Plan to fund current or future funding deficiencies which may emerge in the defined benefit provision of the DATA Communications Management Pension Plan. Applicable pension legislation requires that the funded status of the defined benefit provision of the DATA Communications Management Pension Plan be determined periodically on both a going concern basis (i.e., essentially assuming indefinite plan continuation) and a solvency basis (i.e., essentially assuming immediate plan termination). The funded status of DATA’s pension plan is impacted by actuarial assumptions, the plan’s investment performance, changes in economic conditions and debt and equity markets, changes in long-term interest rates, estimates of the price of annuities, and other elements of pension plan experience such as demographic changes and administrative expenses, among others. Where an actuarial valuation reveals a solvency deficit, current pension regulations require 29 ANNUAL REPORT 2016DATA COMMUNICATIONS MANAGEMENT CORP.it to be funded by equal payments over a maximum DATA makes contributions to the Québec Graphics period of five years from the date of valuation. Actuarial Communications Supplemental Retirement and valuations are required on the DATA Communications Disability Fund of Canada (the “SRDF”) based on a Management Pension Plan every three years, beginning percentage of the wages of its unionized employees January 1, 2014. Based on these valuations, the annual covered by the respective collective bargaining cash contributions to this plan will be determined and agreements, all of whom are employed at DATA facilities will depend on the plan’s investment performance located in the Province of Québec. The SRDF is a and changes in long-term interest rates, estimates of negotiated contribution defined benefit, multi-employer the price of annuities, and other elements of pension pension plan which provides retirement benefits to plan experience such as demographic changes and unionized employees in the printing industry. The SRDF administration expenses, among others. is jointly-trusteed by representatives of the employers During the year ended December 31, 2014, DATA engaged actuaries to complete an updated actuarial valuation of the DATA Communications Management Pension Plan, which confirmed that, as at January 1, 2014, the DATA Communications Management Pension Plan had a reduced solvency deficit from January 1, 2013. Based upon the January 1, 2014 actuarial valuation report, DATA’s annual cash contributions to the defined benefit provision of the DATA Communications Management Pension Plan was $1.3 million. During the year ended of SRDF members and the unions which represent SRDF members in collective bargaining. Based upon the terms of those applicable collective bargaining agreements, DATA’s estimated annual funding obligation for the SRDF for 2017 is $0.6 million. The most recent funding actuarial report (as at December 31, 2013) in respect of the Québec members of the plan disclosed a solvency deficiency and a gap between the minimum total contributions required under applicable Québec pension legislation and total employer contributions determined pursuant to collective agreements. December 31, 2016, DATA made all the required Under Québec pension legislation applicable prior to payments related to its funding requirement December 31, 2014, DATA would have been required to for the defined benefit provision of the DATA fund any outstanding solvency deficiency in respect of Communications Management Pension Plan for 2016, its employees, pensioners and vested deferred members which assumes no change in Canadian economic if DATA had withdrawn from the plan or if the plan conditions from those in effect as at January 1, had been terminated. On February 18, 2015, Bill 34 2014. DATA’s projected funding obligations for the (An Act to amend the Supplemental Pension Plans Act defined benefit provision of this plan are set out with respect to the funding and restructuring of certain below in the “Contractual obligations – Summary” multi-employer pension plans) was tabled in the table under the heading “Contractual obligations”. Québec legislature. Bill 34, which was adopted on DATA’s expects that, in 2017 its funding obligation April 2, 2015 with effect from December 31, 2014, for the defined benefit provision of the DATA amends and clarifies the Québec pension legislation Communications Management Pension Plan will for the SRDF to, among other things: be approximately $1.3 million. DATA’s final funding obligations for the defined benefit provision of the DATA Communications Management Pension Plan for 2017 and future years will be determined based on the actuarial valuation as at January 1, 2017, which will be completed within the first nine months of 2017. Accordingly, DATA continues to make contributions • limit required employer contributions only to those amounts specified in the applicable collective agreements negotiated with the relevant unions; • eliminate the employer’s obligation to fund solvency deficiencies; based on the January 1, 2014 valuation. • allow for the reduction of accrued benefits; and 30 Management’s Discussion and AnalysisDATA COMMUNICATIONS MANAGEMENT CORP.• remove the responsibility of participating employers on hand as a result of lower sales and due to higher to fund their share of the solvency deficit upon collections on outstanding receivables from customers withdrawal from the plan or termination of the plan, at the end of 2016. Accounts payables decreased due except in certain circumstances when withdrawal to the timing of payments to suppliers for purchases from the plan or termination of the plan occurs within and lower production levels, also a result of lower five years of Bill 34 being adopted. revenues. In addition, $7.4 million of cash was used to In addition, another consequence of Bill 34 will be to require the administrator of the SRDF to propose and seek consensus on a “Recovery Plan”. On October 31, 2016, DATA received a letter from the Board of Trustees administering the SRDF and was advised that a form of Recovery Plan was filed with the Québec pension regulatory authorities in August 2016 and that plan members will be sent a personalised statement indicating the effect that the proposed plan will have on their respective pension entitlements. DATA understands that the Recovery Plan was approved in December 2016 and has been advised that employers’ obligations to fund any solvency deficiency have been eliminated in accordance with Bill 34. All participating employers will be receiving a copy of the decisions in the near future. DATA has accounted for this plan on a defined contribution basis. Certain former senior executives of a predecessor corporation participated in a Supplementary Executive Retirement Plan (“SERP”), which provides for pension benefits payable as a single life annuity with a five year guarantee. The SERP is unfunded. DATA’s annual funding obligation under the SERP is approximately $0.6 million. CASH FLOW FROM OPERATIONS During the year ended December 31, 2016, cash flows provided by operating activities were $10.1 million compared to $8.2 million during the same period in 2015. $12.1 million of current year cash flows resulted from operations, after adjusting for non-cash items, compared with $16.7 million in 2015. The $4.6 million decrease over the prior year related primarily to lower revenue earned in the current year. Changes in working capital in 2016 generated $7.6 million compared with $3.5 million in the prior year primarily due to lower accounts receivables, deferred revenue and inventory 31 make payments primarily related to severances and lease termination costs, compared with $9.8 million of restructuring related payments in 2015. Contributions made to the Company`s pension plans were $1.9 million, which was unchanged from the prior year. INVESTING ACTIVITIES During the year ended December 31, 2016, $2.9 million in cash flows were used for investing activities compared with $3.9 million during the same period in 2015. In 2016, this lower level was primarily made up of $2.7 million in capital expenditures to recalibrate machinery and equipment that was moved from the large Edmonton, Alberta manufacturing facility to other locations, install new racking in the Calgary, Alberta warehouse and the purchase of new software. There were $3.2 million of capital expenditures in the prior year, which mainly related to the consolidation of three manufacturing facilities into the Calgary, Alberta manufacturing facility. Total capital expenditures as a percentage of revenue were approximately 1% for both years. FINANCING ACTIVITIES During the year ended December 31, 2016, cash flow used by financing activities was $6.5 million compared to $4.3 million during the same period in 2015. $2.8 million in gross proceeds were received, less issuance expenses of $0.1 million, for net aggregate proceeds of $2.7 million from the private placement completed in 2016 (see “Outstanding share data” below for further details). The net proceeds of the private placement were used by DATA for general working capital purposes. During the year ended December 31, 2016, DATA established new credit facilities and used cash from advances under those credit facilities totaling $43.3 million to repay the outstanding principal amounts under its prior credit ANNUAL REPORT 2016DATA COMMUNICATIONS MANAGEMENT CORP.facilities. In addition, DATA repaid a total of of the private placement was 1,987,525 or approximately $7.2 million of the principal amount outstanding 19.9% of the current number of outstanding Common under its new credit facilities during the year Shares on May 27, 2016. compared to $4.0 million of principal repaid under its prior credit facilities in 2015. DATA incurred $1.3 million of transaction costs related to the establishment of new credit facilities during the year ended December 31, 2016. Outstanding share data At March 9, 2017, December 31, 2016 and December 31, At March 9, 2017, December 31, 2016 and December 31, 2015, $11.2 million aggregate principal amount of 6.00% Convertible Debentures were outstanding. The 6.00% Convertible Debentures are convertible into Common Shares at the option of the holder at any time prior to June 30, 2017. See “Liquidity and capital resources” for further details related to the 6.00% Convertible Debentures. 2015, there were 13,253,761, 11,975,053 and 9,987,528 During the year ended December 31, 2016, the Board Common Shares outstanding, respectively. approved awards of options to purchase up to 987,011 On February 22, 2017, a total of 1,278,708 Common Shares were issued to Eclipse and Capri as partial consideration for the assets of Eclipse and the shares of Thistle acquired by DATA. Each of Eclipse and Capri has entered into a lock-up agreement with DATA, pursuant to which they have agreed not to sell the Common Shares issued to them pursuant to those sale transactions until for a period of twelve months from the closing of the relevant transaction. On July 4, 2016, DATA completed the Share Consolidation and consolidated its issued and outstanding Common Shares on the basis of one post-consolidation Common Share for each 100 pre-consolidation Common Shares. On May 31, 2016, DATA completed a portion of a non-brokered private placement and issued a total of 1,678,567 Common Shares at a price of $1.40 per Common Share, of which 988,766 were purchased by the CEO of DATA. On July 4, 2016, following receipt of disinterested shareholder approval at the annual and special meeting of DATA’s shareholders held on June 30, 2016, DATA completed the remaining portion of the private placement and issued an additional 308,958 Common Shares to a minority interest shareholder (the “Minority Shareholder”) at a price of $1.40 per Common Share pursuant to the exercise of Common Shares to the executive management team of DATA pursuant to the terms of DATA’s existing long-term incentive plan. Once vested, the options are exercisable for a period of seven years from the grant date at an exercise price of $1.50 per share, representing the fair value of the Common Shares on the date of grant. A total of 499,377 options were awarded to DATA’s CEO and vested on June 23, 2016 and a total of 487,634 options were awarded to the other members of DATA’s executive management team and vest at a rate of 1/24th per month beginning on June 23, 2016. During the year ended December 31, 2016, 39,011 of these options awarded to the executive management team were forfeited. During 2015, the Board approved the award of options to purchase up to 11,745 Common Shares to the CEO of DATA pursuant to the terms of DATA’s existing long- term incentive plan. The options were granted on April 16, 2015 and once vested, are exercisable for a period of seven years from the grant date at an exercise price of $75 per share, representing the fair value of the Common Shares on date of the grant. Financial instruments and risk management anti-dilution rights held by the Minority Shareholder. DATA’s financial instruments consisted of cash and The total number of Common Shares issued as a result cash equivalents, restricted cash, trade receivables, 32 Management’s Discussion and AnalysisDATA COMMUNICATIONS MANAGEMENT CORP.trade payables, loans payable and long-term debt, DATA has trade receivables from clients engaged in the amounts of which are included in DATA’s various industries including financial institutions, consolidated statements of financial position as at insurance, healthcare, lottery and gaming, retailing, December 31, 2016 and December 31, 2015, respectively. not-for-profit, energy and governmental agencies DATA did not enter into financial instruments for that are not concentrated in any specific geographic trading or speculative purposes. area. DATA does not believe that any single industry FAIR VALUE The carrying value of cash and cash equivalents, trade receivables, trade payables and loans payable approximate their fair value due to the immediate or short-term maturity of these financial instruments. The fair value of restricted cash approximates its carrying value because it is a deposit held with a Canadian chartered bank. The fair value of DATA’s Credit Facilities are equivalent to their carrying value since their interest rates are comparable to market rates. The 6.00% Convertible Debentures are listed for trading on the TSX and the debt portion of those debentures is recorded at its amortized cost. Based on the quoted market price, the 6.00% Convertible Debentures had a fair value of $10.6 million at December 31, 2016 compared to a book value of $11.1 million for the debt portion and of $0.1 million for the conversion options recorded at its historical value. CREDIT RISK Credit risk is the risk of an unexpected loss if a customer or counterparty to a financial instrument fails to meet its contractual obligations. Financial instruments that potentially subjected DATA to credit risk consisted of cash and cash equivalents, restricted cash and trade receivables. The carrying amount of assets included in the consolidated statements of financial position of DATA represents the maximum credit exposure. or geographic region represents significant credit risk. Credit risk concentration with respect to trade receivables is mitigated by DATA’s large client base. Based on historical experience, DATA records a reserve for estimated uncollectible amounts. Management assesses the adequacy of this reserve quarterly, taking into account historical experience, current collection trends, the age of receivables and, when warranted and available, the financial condition of specific counterparties. Management focuses on trade receivables outstanding for more than 90 days in assessing DATA’s credit risk and records a reserve, when required, to recognize that risk. When collection efforts have been reasonably exhausted, specific balances are written off. As at December 31, 2016, 3.7% (or $1.1 million), of trade receivables were more than 90 days old, an increase from 3.2% (or $1.2 million), of trade receivables that were more than 90 days old at December 31, 2015. LIQUIDITY RISK Liquidity risk is the risk that DATA may encounter difficulties in meeting obligations associated with financial liabilities as they become due. DATA believes that the currently projected cash flow from operations, cash on hand and anticipated lower operating costs resulting from existing and planned restructuring initiatives will be sufficient to fund DATA’s currently projected operating requirements, including expenditures related to its growth strategy, payments DATA grants credit to customers in the normal course of business. DATA typically does not require collateral associated with provisions as a result of on-going productivity improvement initiatives, payment of or other security from customers; however, credit income tax liabilities, contributions to DATA’s pension evaluations are performed prior to the initial granting plans, maintenance capital expenditures and interest of credit terms when warranted and periodically and scheduled repayments of borrowings under thereafter. Normal credit terms for amounts due from DATA’s credit facilities. See “Contractual obligations” customers call for payment within 0 to 90 days. section below which contains additional information 33 ANNUAL REPORT 2016DATA COMMUNICATIONS MANAGEMENT CORP.on the contractual undiscounted cash flows of DATA’s significant financial liabilities and the future commitments of the Company. As at December 31, 2016, DATA had access to $10.0 million of additional available credit less letters of credit granted of $1.1 million under the Bank Credit Facility. See “Liquidity” section above for further details of the amendments to the Bank Credit Facility on January 31, 2017. MARKET RISK INTEREST RATE RISK Interest rate risk refers to the risk that the value of a financial instrument or cash flows associated with Contractual obligations DATA believes that it will have sufficient resources from its operating cash flow, existing cash resources and borrowing under available credit facilities to meet its contractual obligations as they become due. Contractual obligations have been defined as contractual commitments in existence but not paid for as at December 31, 2016. Short-term commitments such as month-to-month office leases, which are easily cancelled, are excluded from this definition. Operating leases include payments to landlords for the rental of facilities and payments to vendors for the rental of equipment. the financial instrument will fluctuate due to changes The outstanding 6.0% Convertible Debentures mature in market interest rates. Interest rate risk arises from on June 30, 2017. DATA is considering a range of interest bearing financial assets and liabilities. Non- alternatives with respect to its payment obligations derivative interest bearing assets are primarily short upon maturity of those debentures, including term liquid assets. DATA’s interest rate risk arises from drawing upon or increasing its senior credit facilities, long-term debt issuances at floating interest rates. As at refinancing, redeeming or amending the terms of the December 31, 2016, $10.4 million of DATA’s indebtedness 6.00% Convertible Debentures and equity issuances. outstanding was subject to floating interest rates of No decision with respect to any such alternative has 3.45% per annum, $25.6 million of DATA’s indebtedness been taken by the Company. DATA believes that its existing cash resources and projected cash flows from operations will be sufficient to fund its currently projected operating requirements and that it will continue to remain compliant with its covenants and other obligations under its credit facilities. outstanding was subject to a fixed interest rate of 6.95% per annum and DATA’s remaining outstanding 6.00% Convertible Debentures are subject to a fixed interest rate of 6.00% per annum. CURRENCY RISK Currency risk is the risk that the fair value of future cash flows arising from a financial instrument will fluctuate because of changes in foreign currency exchange rates. In the normal course of business, DATA does not have significant foreign exchange transactions and, accordingly, the amounts and currency risk are not expected to have adverse material impact on the operations of DATA. Management considers the currency risk to be low and does not hedge its currency risk and therefore sensitivity analysis is not presented. Note 16 to the audited consolidated financial statements of DATA for the year ended December 31, 2016 contains additional information on DATA’s financial instruments. 34 Management’s Discussion and AnalysisDATA COMMUNICATIONS MANAGEMENT CORP.TABLE 6 The following table sets out DATA’s significant contractual obligations and commitments as of December 31, 2016. (in thousands of Canadian dollars, unaudited) Total 2017 2018 2019 2020 2021 Pension funding contributions (1) Loan payable (2) Long-term debt (3) Convertible debentures (4) Operating leases $ $ $ $ $ 7,124 $ 1,878 $ 1,871 $ 853 $ 846 $ 838 $ 151 43,225 11,510 69.393 151 7,866 11,510 11,239 — — — — 5,737 12,613 5,057 5,059 — 9,421 — 8,614 — 8,116 — 7,221 2022 and thereafter 838 — 6,893 — 24,782 Total $ 131,403 $ 32,644 $ 17,029 $ 22,080 $ 14,019 $ 13,118 $ 32,513 (1) DATA is required under applicable pension legislation to make monthly, annual and/or one-time cash contributions to the DATA Communications Management Pension Plan to fund current or future funding deficiencies which may emerge in the defined benefit provision of the DATA Communications Management Pension Plan. See “Liquidity and capital resources – Pension funding obligations” above. The table above includes amounts payable under the SERP. DATA’s obligations under the SERP consist of benefits payable as a single life annuity with a five year guarantee. The duration of these payments is dependent on the length of each participant’s life and, in certain cases, that of their designated beneficiary, and their age in any given year. (2) DATA entered into a loan agreement for licensed software. (3) Bank Credit Facility, expiring on March 10, 2019. As at December 31, 2016, the outstanding balance totalled $10,434 and bore interest at an average floating rate of 3.45% per annum. The outstanding balance will be reduced by monthly principal repayments of $208 ending February 1, 2018, a principal payment of $8 on March 10, 2018 and principal repayment of $7,514 on March 10, 2019. The amounts at December 31, 2016 include estimated interest totalling $320 for 2017, $261 for 2018 and $44 for 2019. IAM IV Credit Facility, expiring on March 10, 2023. As at December 31, 2016, the outstanding balance totalled $25,611 and bore interest at a fixed rate of 6.95% per annum. Monthly blended principal and interest payments of $422. See “Liquidity and capital resources” above for more details on changes to DATA’s long-term debt and assumed indebtedness of Eclipse and Thistle, related to the acquisitions of Eclipse and Thistle. (4) 6.00% Convertible Debentures, which mature on June 30, 2017 and are convertible at 0.8196 common shares per $1,000 principal amount of debenture. Annual interest of $0.3 million is based on the aggregate amount 6.00% Convertible Debentures outstanding at December 31, 2016. Off-balance sheet arrangements subsidiaries and therefore the directors and officers of DATA’s subsidiaries are considered related parties. DATA’s off-balance sheet arrangements are operating leases. DATA leases real estate, printing equipment and office equipment in connection with its sales and manufacturing activities under non-cancellable lease agreements, which expire at various dates. Transactions with related parties During the year ended December 31, 2016, there were regular intercompany activities between DATA and its subsidiary during the normal course of business. These transactions and balances are eliminated in the consolidated financial statements of DATA. Related parties are defined as individuals who can influence the direction or management of DATA or any of its CORPORATE INSURANCE POLICIES Effective June 23, 2015, DATA appointed an insurance company as its broker of record for its corporate insurance policies and subsequently entered into new general corporate insurance policies, including the renewal of its directors and officers liability insurance later in the year. The insurance company continues as DATA’s broker of record and earns fees based on a percentage of the insurance expense paid by DATA. During the fiscal year, DATA recorded an insurance expense of $0.5 million (2015 – $0.2 million) related to these policies. As at December 31, 2016, prepaid expenses and other current assets included prepaid insurance to the insurance company of $0.3 million 35 ANNUAL REPORT 2016DATA COMMUNICATIONS MANAGEMENT CORP.(2015 – $0.2 million). The insurance company is a Acquisition. On January 31, 2017, Cormark delivered related party whereby the Chair of the Board and the a written opinion that, based upon and subject to President of DATA each are Directors and indirectly have the various assumptions made, procedures followed, a minority interest in the insurance company, through matters considered and limitations on the review companies controlled by them. undertaken as set forth therein, the consideration PRIVATE PLACEMENT OF COMMON SHARES paid to Capri for the shares of Thistle pursuant to the Thistle Acquisition was fair, from a financial point of During the year ended December 31, 2016, the CEO and a view, to DATA’s common shareholders. minority shareholder of DATA participated in a private placement of common shares (see “Outstanding share data” above), purchasing 1,297,724 common shares for consideration of $1.8 million. OFFICE LEASE After careful consideration of the terms of the Thistle Acquisition and the associated opportunities, risks and uncertainties, and consultation with Cormark and the Independent Committee’s legal advisors, the Independent Committee unanimously determined On December 21, 2016, DATA entered into a new that the Thistle Acquisition was in the best interests agreement to lease approximately 2,000 square feet of of DATA and resolved to recommend that the Board office space in Toronto, Ontario from a company that approve the Thistle Acquisition. The Thistle Acquisition the Chair of the Board and the President are Directors was unanimously approved by the Board (other than of. Under the lease agreement, the lease commences the Chair of the Board, who did not participate in the March 1, 2017, runs month-to-month and can be Board’s consideration of the transaction) following terminated by either party with reasonable notice. the recommendation of the Independent Committee. Thistle was acquired for a net purchase price of approximately $6.1 million. The purchase price was satisfied as follows: $1.1 million in cash, $1.5 million through the issuance of 644,445 Common Shares of DATA, and $3.5 million in the form of a secured, non-interest bearing vendor take-back promissory note, which is payable in 24 equal monthly payments following the Closing Date. The purchase price is subject to customary post-closing working capital and other adjustments. These transactions are provided in the normal course of operations and were measured at the exchange amount, which represents the amount of consideration established and agreed to by the related parties. The monthly expense will be $7 thousand per month. THISTLE ACQUISITION On February 22, 2017, DATA acquired all of the outstanding common shares of Thistle from Capri Media Group Inc. (“Capri”). Companies controlled by the Chair of the Board and the President of DATA, respectively, control Capri. As a result, Capri is a related party of DATA for purposes of IFRS. The Board established an independent committee (the “Independent Committee”) comprised of three independent members of the Board, to supervise the negotiation of the terms of the Thistle Acquisition and make a recommendation to the Board as to approval of the transaction. The Independent Committee retained Cormark Securities Inc. (“Cormark”), an independent third party, to provide it with an opinion as to the fairness, from a financial point of view, to the holders of DATA’s common shares of the consideration to be paid to Capri pursuant to the Thistle Acquisition. Cormark’s fee for providing its fairness opinion was not contingent on the completion of the Thistle 36 Management’s Discussion and AnalysisDATA COMMUNICATIONS MANAGEMENT CORP.Operating results for the fourth quarter of 2016 and 2015 TABLE 7 The following table sets out selected consolidated quarterly financial information for the periods noted. (in thousands of Canadian dollars, except share and per share amounts, unaudited) Revenues Cost of revenues Gross profit Selling, general and administrative expenses Restructuring expenses Impairment of goodwill Gain on redemption of convertible debentures Acquisition costs (Loss) income before finance costs and income taxes Finance costs (income) Interest expense Interest income Amortization of transaction costs (Loss) income before income taxes Income tax (recovery) expense Current Deferred Net (loss) income for the period Adjusted EBITDA (see Table 8) Adjusted net income (see Table 9) Adjusted net income per share, basic and diluted Pro forma Adjusted net income per share, basic (1) Pro forma Adjusted net income per share, diluted (1) October 1 to December 31, 2016 October 1 to December 31, 2015 $ 68,191 $ 54,950 13,241 13,394 1,721 31,066 — 68 (33,008) 839 — 111 950 81,010 61,237 19,773 13,082 1,545 — (12,766) — 17,912 1,370 (1) 163 1,532 (33,958) 16,380 194 (1,037) (843) 941 2,034 2,975 (33,115) $ 13,405 2,217 25 nil nil nil $ $ $ $ $ 8,377 3,437 2.89 0.29 0.28 $ $ $ Weighted average number of common shares outstanding, basic and diluted 11,975,053 1,188,968 Number of common shares outstanding, basic Number of common shares outstanding, diluted 11,975,053 12,465,818 9,987,528 9,987,528 (1) Pro forma Adjusted net income per share, basic and pro forma Adjusted net income per share, diluted, are non-IFRS measures: assumes Adjusted net income per share, basic and diluted, were calculated on the basis of the total number of Common Shares outstanding of 11,975,053 and of 12,465,818, respectively at December 31, 2016, rather than the weighted average, basic and diluted, number of Common Shares outstanding at the respective period ends, given the significant changes in the number of Common Shares outstanding during comparable periods. See “Non-IFRS Measures”. 37 ANNUAL REPORT 2016DATA COMMUNICATIONS MANAGEMENT CORP. TABLE 8 The following table provides a reconciliation of net (loss) income to Adjusted EBITDA for the periods noted. See “Non-IFRS Measures”. (in thousands of Canadian dollars, unaudited) Net (loss) income for the period Interest expense Interest income Amortization of transaction costs Current income tax expense Deferred income tax (recovery) Depreciation of property, plant and equipment Amortization of intangible assets EBITDA Restructuring expenses One-time business reorganization costs Impairment of goodwill Gain on redemption of convertible debentures Acquisition costs Adjusted EBITDA October 1 to December 31, 2016 October 1 to December 31, 2015 $ (33,115) $ 839 — 111 194 (1,037) 815 560 $ (31,633) $ 1,721 995 31,066 — 68 $ 2,217 $ 13,405 1,370 (1) 163 941 2,034 1,182 504 19,598 1,545 — — (12,766) — 8,377 TABLE 9 The following table provides a reconciliation of net (loss) income to Adjusted net income for the periods noted. See “Non-IFRS Measures”. (in thousands of Canadian dollars, unaudited) Net (loss) income for the period Restructuring expenses One-time business reorganization costs Impairment of goodwill Gain on redemption of convertible debentures Acquisition costs Tax effect of above adjustments Adjusted net income October 1 to December 31, 2016 October 1 to December 31, 2015 $ (33,115) $ (13,405) 1,721 995 31,066 — 68 (710) $ 25 $ 1,545 — — (12,766) — 1,253 3,437 38 Management’s Discussion and AnalysisDATA COMMUNICATIONS MANAGEMENT CORP. REVENUES As a percentage of revenues, these costs were 19.6% For the quarter ended December 31, 2016, DATA of revenues for the quarter ended December 31, 2016 recorded revenues of $68.2 million, a decrease of compared to 16.1% of revenues for the same period in $12.8 million or 15.8% compared with the same 2015. The increase in SG&A expenses for the quarter period in 2015. The decrease in revenues was due to ended December 31, 2016 was primarily attributable (i) lower volumes and pricing from certain customers, to increased marketing expenses and costs related to (ii) approximately $3.6 million of non-recurring work DATA’s ERP system development. related to labels and forms from a major retailer and certain government agencies, respectively, RESTRUCTURING EXPENSES in 2015, (iii) a weaker economy in Western Canada, For the quarter ended December 31, 2016, DATA (iv) disruption caused by the closure of the large incurred restructuring expenses of $1.7 million Edmonton, Alberta manufacturing facility and primarily to related headcount reductions associated reassignment of contracts to other plants, and with the closure of its large Edmonton, Alberta (v) training of the sales force to transition to DATA’s manufacturing facility, in addition to headcount new business structure which is now more vertical reductions across other functions of the business. market focused. The aforementioned reasons more For the quarter ended December 31, 2015, DATA than offset the growth in revenues from incurred restructuring expenses of $1.5 million new customers during the quarter. primarily related to a lease exit charge associated with the closure of its Vancouver, British Columbia COST OF REVENUES AND GROSS PROFIT manufacturing facility as well as additional headcount For the quarter ended December 31, 2016, cost of reductions completed in the fourth quarter of 2015. revenues decreased to $55.0 million from $61.2 million for the same period in 2015. Gross profit for the quarter IMPAIRMENT OF GOODWILL ended December 31, 2016 was $13.2 million, which During the fourth quarter of 2016, DATA performed represented a decrease of $6.5 million or 33.0% from its annual review for impairment of goodwill, which $19.8 million for the same period in 2015. Gross profit resulted in DATA recognizing a non-cash impairment as a percentage of revenues decreased to 19.4% for the of goodwill charge of $31.1 million related to the quarter ended December 31, 2016 compared to 24.4% DATA CM CGU. During the fourth quarter of 2015, for the same period in 2015. The decrease in gross DATA performed its annual review for impairment profit as a percentage of revenues for the quarter ended of goodwill, which resulted in DATA recognizing no December 31, 2016 was due to the decrease in revenues impairment of goodwill charges. (as noted above), changes in product mix, one-time business reorganization costs incurred and compressed margins on recently negotiated large contracts with certain existing customers. The decrease in gross profit as a percentage of revenues was partially offset by the cost reductions realized from prior cost savings initiatives implemented in 2015. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES GAIN ON REDEMPTION OF CONVERTIBLE DEBENTURES On December 23, 2015, DATA redeemed $33.5 million aggregate principal amount of its $44.7 million outstanding 6.00% Convertible Debentures and recorded a gain on redemption of convertible debentures of $13.2 million. Transaction costs of $0.4 million were incurred to execute the redemption and have been netted against the gain on redemption SG&A expenses for the quarter ended December 31, of convertible debentures. 2016 increased $0.3 million or 2.4% to $13.4 million compared to $13.1 million in the same period in 2015. 39 ANNUAL REPORT 2016DATA COMMUNICATIONS MANAGEMENT CORP.ADJUSTED EBITDA NET (LOSS) INCOME For the quarter ended December 31, 2016, Adjusted Net loss for the quarter ended December 31, 2016 was EBITDA was $2.2 million, or 3.3% of revenues. Adjusted $33.1 million compared to net income of $13.4 million EBITDA for the quarter ended December 31, 2016 for the quarter ended December 31, 2015. The decrease decreased $6.2 million or 73.5% from the same period in comparable profitability for the quarter ended in the prior year and Adjusted EBITDA margin for the December 31, 2016 was substantially due to lower quarter, as a percentage of revenues, decreased from gross profit as a result of lower revenues, higher 10.3% of revenues in 2015 to 3.3% of revenues in 2016. SG&A expenses, a non-cash goodwill impairment The decrease in Adjusted EBITDA for the quarter ended charge, restructuring expenses, and one-time December 31, 2016 was due to lower gross profit as a business reorganization costs incurred during the result of lower revenues and higher SG&A expenses. quarter ended December 31, 2016. The net income INTEREST EXPENSE Interest expense on long-term debt outstanding for the quarter ended December 31, 2015 included a gain for purposes of IFRS on the partial redemption of the 6.00% Convertible Debentures. The decrease under DATA’s credit facilities, the 6.00% Convertible in comparable profitability was partially offset by Debentures, certain unfavourable lease obligations lower interest expense and a net deferred tax recovery related to closed facilities and DATA’s employee during the quarter ended December 31, 2016. benefit plans was $0.8 million for the quarter ended December 31, 2016 compared to $1.4 million for the ADJUSTED NET INCOME same period in 2015. Interest expense for the quarter Adjusted net income for the quarter ended ended December 31, 2016 was lower than the same December 31, 2016 was $25.0 thousand compared period in the prior year primarily due to a reduction to Adjusted net income of $3.4 million for the in debt outstanding under DATA’s credit facilities. same period in 2015. The decrease in comparable profitability for the quarter ended December 31, 2016 was attributable to gross profit as a result of lower revenues and higher SG&A expenses which was partially offset by lower interest expense in 2016. INCOME TAXES DATA reported a loss before income taxes of $34.0 million, a current income tax expense of $0.2 million and a deferred income tax recovery of $1.0 million for the quarter ended December 31, 2016 compared to income before income taxes of $16.4 million, a current income tax expense of $0.9 million and a deferred income tax expense of $2.0 million for the quarter ended December 31, 2015. The current tax expense was primarily related to the income tax payable on DATA’s estimated taxable income for the quarters ended December 31, 2016 and 2015. The deferred income tax recovery primarily related to changes in estimates of the timing of future reversals of temporary differences and new temporary differences that arose during the quarters ended December 31, 2016 and 2015, respectively. 40 Management’s Discussion and AnalysisDATA COMMUNICATIONS MANAGEMENT CORP.Summary of eight quarter results TABLE 10 The following table summarizes quarterly financial information for the past eight quarters. (in thousands of Canadian dollars, except per share amounts, unaudited) 2016 2015 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Revenues $ 68,191 $ 65,842 $ 69,716 $ 74,614 $ 81,010 $ 74,116 $ 73,447 $ 76,002 Net income (loss) attributable to shareholders Basic earnings (33,115) (1,865) 991 1,882 13,405 (1,763) (29,683) (1,131) (loss) per share (2.77) (0.16) 0.09 0.19 11.27 (7.51) (126.36) (4.81) Diluted earnings (loss) per share (2.77) (0.15) 0.09 0.19 11.27 (7.51) (126.36) (4.81) The variations in DATA’s quarterly revenues and of goodwill of $31.1 million related to its DATA CM net income (loss) over the eight quarters ended CGU. DATA’s net income for the fourth quarter of 2015 December 31, 2016 can be attributed to several included restructuring expenses of $1.5 million and a principal factors: revenue declines in DATA’s gain on partial redemption of its 6.00% Convertible traditional print business due to production volume Debentures of $12.8 million. declines largely related to technological change, price concessions and competitive activity, seasonal variations in customer spending, restructuring expenses and business reorganization costs related to DATA’s ongoing productivity improvement and cost reduction initiatives, profitability improvements resulting from cost savings initiatives which lowered direct and indirect labour costs and improved utilization rates at DATA’s key plants, gain on partial redemption of its 6.00% Convertible Debentures, lower interest expense as a result of the partial redemption of its outstanding 6.00% Convertible DATA’s net loss for the third quarter of 2016 included restructuring expenses of $1.8 million related to its cost reduction initiatives. There were $5.8 million of restructuring expenses in the third quarter of 2015. DATA’s net income for the second quarter of 2016 included restructuring expenses of $0.4 million related to its cost reduction initiatives. DATA’s net loss for the second quarter of 2015 included $4.2 million of restructuring expenses and a non-cash impairment of goodwill of $26.0 million related to its DATA CM CGU. Debentures in 2015 and non-cash goodwill DATA’s net income for the first quarter of 2016 included impairment charges. DATA’s net loss for the fourth quarter of 2016 included restructuring expenses of $1.7 million and $1.0 million in one-time business reorganization costs related to its cost reduction initiatives, and a non-cash impairment restructuring expenses of $0.3 million related to its cost reduction initiatives. There were $2.1 million of restructuring expenses in the first quarter of 2015. 41 ANNUAL REPORT 2016DATA COMMUNICATIONS MANAGEMENT CORP.Accounting policies Critical accounting estimates CHANGES IN ACCOUNTING POLICIES The accounting policies used in the preparation of the consolidated financial statements are outlined in notes 2 and 3 of the Notes to the audited consolidated financial statements of DATA for the year ended December 31, 2016. DATA did not adopt any new accounting policies during the year that would have a significant impact on its consolidated financial statements. The preparation of the financial statements requires management to make judgements, estimates and assumptions that are not readily apparent from other sources about the carrying amounts of assets and liabilities, and reporting of income and expenses. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ materially from these estimates. The estimates and underlying assumptions are reviewed on an FUTURE ACCOUNTING STANDARDS ongoing basis. NOT YET ADOPTED DATA has not yet determined the impact of adopting the changes in accounting standards listed below. The assessment of the impact on our consolidated financial statements of these new standards or the amendments to these standards is ongoing. Please see notes 3 of the Notes the audited consolidated financial statements of DATA for the year ended December 31, 2016 in order to obtain more information. • Amendments to IAS 12 Income taxes Revisions to accounting estimates are recognized during the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. The following are certain critical judgements and estimations that management has made in the process of applying the Company’s accounting policies and that have the most significant effect on the amounts recognized in the consolidated financial statements for • Amendments IAS 7 Statement of Cash Flows the years ended December 31, 2016 and 2015: • IFRS 9 Financial Instruments • Amendments to IFRS 7 Financial Instruments: Disclosure IMPAIRMENT OF GOODWILL, INTANGIBLE AND NON-CURRENT ASSETS Goodwill, intangible and non-current assets are tested • IFRS 15 Revenue from Contracts with Customers for impairment if there is an indicator of impairment, • An amendment to IFRS 2 Share-based Payment, classification and measurement of share-based payment transactions. • IFRS 16 Leases and in the case of goodwill, annually at the end of each fiscal year. The determination of the impairment of goodwill, intangible and non-current assets are impacted by estimates of the fair value of CGU’s, assumptions of future cash flows, and achieving forecasted business results. These assumptions can be impacted by economic conditions and also require considerable judgment by management. Declines in business results or declines in the fair value of DATA’s 42 Management’s Discussion and AnalysisDATA COMMUNICATIONS MANAGEMENT CORP.reporting segments could result in impairments in are based on rates of inflation and mortality that future periods. Changing the assumptions selected management considers to be reasonable. It also by management, in particular the discount rate and takes into account DATA’s specific anticipation of growth assumptions used in the cash flow projections, future salary increases, retirement ages of employees could significantly affect DATA’s impairment evaluation and other actuarial factors. Discount factors are and hence results. INCOME TAXES determined close to each fiscal year end by reference to high quality corporate bonds that are denominated in the currency in which the benefits will be paid In assessing the probability of realizing deferred and that have terms to maturity approximating to income tax assets, management has made estimates the terms of the related pension liability. Estimation related to expectations of future taxable income, uncertainties exist, which may vary significantly in applicable tax planning opportunities, expected timing future actuarial valuations and the carrying amount of reversals of existing temporary differences and the of DATA’s defined benefit obligations. likelihood that tax positions taken will be sustained upon examination by applicable tax authorities. PROVISIONS Deferred tax assets also reflect the benefit of unused Provisions are liabilities of uncertain timing or amount. tax losses that can be carried forward to reduce income Provisions are recognized when DATA has a present taxes in future years. In making its assessments, legal or constructive obligation arising from past management gives additional weight to positive and events, when it is probable that an outflow of funds negative evidence that can be objectively verified. will be required to settle the obligation, and a reliable UNCERTAIN TAX POSITIONS estimate can be made of the amount of the obligation. The amount recognized as a provision is DATA’s best DATA maintains provisions for uncertain tax positions estimate of the present obligation at the end of the using the best estimate of the amount expected to be reporting period. When the effect of discounting is paid based on a qualitative assessment of all relevant significant, the amount of the provision is determined factors. DATA reviews the adequacy of these provisions by discounting the expected cash flows at a pre-tax rate at the end of the reporting period. It is possible that that reflects current market assessments of the time at some future date, liabilities in excess of the DATA’s value of money and the risks specific to the liability. provisions could result from audits by, or litigation DATA’s main provisions are related to restructuring with, relevant taxing authorities. Where the final costs and onerous contracts. Provisions are reviewed at outcome of these tax-related matters is different each reporting date and any changes to estimates are from the amounts that were initially recorded, such reflected in the statement of operations. differences will affect the tax provisions in the period in which such determination is made. PENSION OBLIGATIONS Management estimates the pension obligations annually using a number of assumptions and with the assistance of independent actuaries; however, the actual outcome may vary due to estimation uncertainties. The estimates of its pension obligations 43 ANNUAL REPORT 2016DATA COMMUNICATIONS MANAGEMENT CORP.Management’s report on internal controls over financial reporting DISCLOSURE CONTROLS AND PROCEDURES With the supervision and participation of DATA’s senior management team, the Chief Executive Officer and the Chief Financial Officer of DATA have evaluated the effectiveness of disclosure controls and procedures (as defined in Multilateral Instrument 52-109) of DATA DATA’s management has determined that there were no changes in the internal controls over financial reporting of DATA during the year ended December 31, 2016 reporting period that have materially affected, or are reasonably likely to materially affect, the internal controls over financial reporting of DATA. Outlook as of December 31, 2016. Based on that evaluation, During 2016, DATA made progress on several those officers have concluded that, as of December 31, important strategic projects. These included: further 2016, such disclosure controls and procedures were improvements to operating efficiencies through sufficiently effective to provide reasonable assurance headcount reductions across various functions, in that (i) material information relating to DATA was made known to management and (ii) information addition to the closure its large Edmonton, Alberta manufacturing facility, which was completed ahead required to be disclosed by DATA in its annual filings, of schedule; the advancement of DATA’s internal interim filings or other reports filed or submitted by ERP replacement project; the implementation of new it under securities legislation is recorded, processed, technology for improving service levels, new data summarized and reported within the time periods storage facilities and PC platforms; refinement of specified in the securities legislation. INTERNAL CONTROLS OVER FINANCIAL REPORTING DATA’s sale team at the leadership level, along with enhancements to DATA’s sales process and go-to market strategy, which is now more vertical market focused; and an addition to DATA’s executive leadership team With the supervision and participation of DATA’s senior with the introduction of Greg J. Cochrane as President. management team, the Chief Executive Officer and the Chief Financial Officer of DATA have evaluated the effectiveness of the internal controls over financial reporting (as defined in Multilateral Instrument 52-109) of DATA as of December 31, 2016. DATA continued into 2017 with further cost reductions to streamline the Company’s order-to-production process and has now shifted its focus onto the growth of its business through organic growth and potential acquisitions. In February of 2017, DATA took In making this evaluation, the criteria set forth in 2013 its first step in executing on its growth strategy by by the Committee of Sponsoring Organizations of the successfully completing the acquisitions of Eclipse Treadway Commission in Internal Control – Integrated and Thistle. The Company is currently working Framework was used to design the internal controls on integrating these businesses and identifying over financial reporting. Based on that evaluation, those potential revenue synergies and other opportunities officers have concluded that, as of December 31, 2016, for synergies. DATA is actively pursuing other growth such internal controls over financial reporting were opportunities it sees in its markets which leverage sufficiently effective to provide reasonable assurance its key competencies of managing complexity and regarding the reliability of DATA’s financial reporting providing superior execution for its clients’ business and the preparation of consolidated financial statements and marketing communications needs. for external purposes in accordance with IFRS. 44 Management’s Discussion and AnalysisDATA COMMUNICATIONS MANAGEMENT CORP.Including the additions of Eclipse and Thistle, the Company expects full year non-IFRS Adjusted EBITDA Risks and uncertainties to be between $22.0 million and $26.0 million in 2017, An investment in DATA’s securities involves risks. In representing an improvement of approximately 53% to addition to the other information contained in this 80% compared to 2016, despite anticipated softness in report, investors should carefully consider the risks described in DATA’s most recent Annual Information Form and other continuous disclosure filings made by DATA with Canadian securities regulatory authorities before investing in securities of DATA. The risks described in this report, the Annual Information Form and those other filings are not the only ones facing DATA. Additional risks not currently known to DATA, or that DATA currently believes are immaterial, may also impair the business, results of operations, financial condition and liquidity of DATA. the first quarter of 2017. At the end of the second quarter of 2017, the 6.00% Convertible Debentures will come due. DATA is currently evaluating various alternatives to finance the settlement of the 6.00% Convertible Debentures on maturity. Management expects to be able to meet all of its ongoing obligations and finance future growth through a potential combination of its operating cash flows, drawing upon or increasing its senior credit facilities, refinancing, redeeming or amending the terms of the 6.00% Convertible Debentures and through the issuance of Common Shares. DATA recognizes that there were certain anomalies that transpired during the year, especially in the second half, which affected its ability to meet its annual financial targets for 2016. In addition, the Company is conscious of the challenges that lie ahead, however, the Company expects 2017 will be a better year as the strategic projects completed in 2016 are now behind it and there is optimism that the benefits of these initiatives will come to fruition in the years to follow. 45 ANNUAL REPORT 2016DATA COMMUNICATIONS MANAGEMENT CORP.FINANCIAL STATEMENTS Financial reporting responsibility of management The accompanying consolidated financial statements of DATA Communications Management Corp. (“DATA”) have been prepared by management and approved by the Board of Directors of DATA. Management of DATA is responsible for the preparation and presentation of the consolidated financial statements and all the financial information contained within this Annual Report within reasonable limits of materiality. The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards. In the preparation of the consolidated financial statements, estimates are sometimes necessary because a precise determination of certain assets and liabilities is dependent on future events. Management believes such estimates have been based on available information and careful judgements and have been properly reflected in the accompanying consolidated financial statements. The financial information throughout the text of this Annual PricewaterhouseCoopers LLP, Chartered Accountants, are appointed by the shareholders and have audited the consolidated financial statements of DATA in accordance with Canadian generally accepted auditing standards. Their report outlines the nature of their audit and expresses their opinion on the consolidated financial statements of DATA. The Board of Directors has appointed an Audit Committee composed of three directors who are not members of management of DATA. The Audit Committee meets periodically with management and the auditors to discuss internal controls over the financial reporting process, auditing matters and financial reporting issues. It is responsible for reviewing DATA’s annual and interim consolidated financial statements and the report of the auditors. The Audit Committee reports the results of such reviews to the Board of Directors and makes recommendations with respect to the appointment of DATA’s auditors. In addition, the Board of Directors may refer to the Audit Committee other matters and questions relating to the financial position of DATA. Report is consistent with that in the consolidated The Board of Directors are responsible for ensuring that financial statements. To assist management in discharging these responsibilities, DATA maintains a system of internal controls which are designed to provide reasonable assurance that DATA’s consolidated assets are safeguarded, that transactions are executed in accordance with management’s authorization and that the financial records form a reliable base for the preparation of accurate and timely financial information. management fulfills its responsibilities for financial reporting, and are responsible for approving the consolidated financial statements of DATA. Signed: Michael G. Sifton Michael G. Sifton Chief Executive Officer DATA Communications Management Corp. Management recognizes its responsibilities for conducting DATA’s affairs in compliance with Signed: James E. Lorimer established financial standards and applicable laws, and for the maintenance of proper standards of conduct in its activities. James E. Lorimer Chief Financial Officer DATA Communications Management Corp. March 9, 2017 Brampton, Ontario 48 DATA COMMUNICATIONS MANAGEMENT CORP. MARCH 9, 2017 Independent Auditor’s Report TO THE SHAREHOLDERS OF DATA COMMUNICATIONS MANAGEMENT CORP. We have audited the accompanying consolidated selected depend on the auditor’s judgment, including financial statements of DATA Communications the assessment of the risks of material misstatement Management Corp. and its subsidiary, which comprise of the consolidated financial statements, whether due the consolidated statements of financial position as to fraud or error. In making those risk assessments, at December 31, 2016 and December 31, 2015 and the the auditor considers internal control relevant to consolidated statements of operations, comprehensive the entity’s preparation and fair presentation of loss, changes in equity (deficit) and cash flows for the consolidated financial statements in order to the years then ended, and the related notes, which design audit procedures that are appropriate in the comprise a summary of significant accounting policies circumstances, but not for the purpose of expressing and other explanatory information. an opinion on the effectiveness of the entity’s MANAGEMENT’S RESPONSIBILITY FOR THE CONSOLIDATED FINANCIAL STATEMENTS Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Reporting Standards, and for such internal control as We believe that the audit evidence we have obtained management determines is necessary to enable the in our audits is sufficient and appropriate to provide a preparation of consolidated financial statements that basis for our audit opinion. are free from material misstatement, whether due to fraud or error. OPINION AUDITOR’S RESPONSIBILITY In our opinion, the consolidated financial statements present fairly, in all material respects, the financial Our responsibility is to express an opinion on these position of DATA Communications Management consolidated financial statements based on our audits. Corp. and its subsidiary as at December 31, 2016 and We conducted our audits in accordance with Canadian December 31, 2015 and their financial performance and generally accepted auditing standards. Those standards their cash flows for the years then ended in accordance require that we comply with ethical requirements with International Financial Reporting Standards. and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the Chartered Professional Accountants, consolidated financial statements. The procedures Licensed Public Accountants Signed: PricewaterhouseCoopers LLP 49 DATA COMMUNICATIONS MANAGEMENT CORP.Financial Statements Consolidated statements of financial position (in thousands of Canadian dollars) ASSETS CURRENT ASSETS Cash and cash equivalents Trade receivables (note 4) Inventories (note 5) Prepaid expenses and other current assets NON-CURRENT ASSETS Deferred income tax assets (note 12) Restricted cash (note 10) Property, plant and equipment (note 6) Pension assets (note 14) Intangible assets (note 7) Goodwill (note 8) LIABILITIES CURRENT LIABILITIES Trade payables Current portion of Credit facilities (note 10) Current portion of Convertible debentures (note 11) Provisions (note 9) Income taxes payable Deferred revenue NON-CURRENT LIABILITIES Provisions (note 9) Credit facilities (note 10) Convertible debentures (note 11) Deferred income tax liabilities (note 12) Other non-current liabilities (note 13) Pension obligations (note 14) Other post-employment benefit plans (note 15) EQUITY SHAREHOLDERS’ EQUITY (DEFICIT) Shares (note 17) Conversion options Contributed surplus Accumulated other comprehensive income Deficit December 31, 2016 December 31, 2015 $ 1,544 $ 29,157 33,252 4,667 68,620 3,839 425 12,483 1,589 3,954 — 90,910 $ 27,304 $ 5,886 11,082 3,305 2,231 8,665 58,473 675 29,156 — — 1,691 8,340 2,510 871 38,051 37,053 4,150 80,125 2,070 — 14,422 770 5,614 31,066 134,067 29,766 43,095 — 5,723 903 10,811 90,298 1,483 — 10,912 76 1,362 8,354 2,563 100,845 $ 115,048 237,432 $ 234,782 128 1,164 258 128 385 306 (248,917) (9,935) 90,910 $ $ (216,582) 19,019 134,067 $ $ $ $ $ $ Approved by Board of Directors Signed: J.R. Kingsley Ward Signed: Michael G. Sifton J.R. Kingsley Ward Director Michael G. Sifton Director The accompanying notes are an integral part of these consolidated financial statements. 50 DATA COMMUNICATIONS MANAGEMENT CORP. A N N U A L R E P O R T 2 0 1 6 Consolidated statements of operations (in thousands of Canadian dollars, except per share amounts) For the year ended December 31, 2016 For the year ended December 31, 2015 REVENUES COST OF REVENUES GROSS PROFIT EXPENSES (INCOME) Selling, commissions and expenses General and administration expenses Restructuring expenses (note 9) Impairment of goodwill (note 8) Gain on redemption of convertible debentures (note 11) Acquisition costs LOSS BEFORE FINANCE COSTS AND INCOME TAXES FINANCE COSTS (INCOME) Interest expense Interest income Amortization of transaction costs LOSS BEFORE INCOME TAXES INCOME TAX (RECOVERY) EXPENSE Current (note 12) Deferred (note 12) NET LOSS FOR THE YEAR BASIC LOSS PER SHARE (note 18) DILUTED LOSS PER SHARE (note 18) $ 278,363 $ 215,295 63,068 31,376 24,558 4,200 31,066 — 68 91,268 (28,200) 3,414 (8) 578 3,984 (32,184) 1,572 (1,649) (77) 304,575 233,505 71,070 33,194 23,469 13,560 26,000 (12,766) — 83,457 (12,387) 5,599 (11) 468 6,056 (18,443) 1,191 (462) 729 $ $ $ (32,107) $ (19,172) (2.89) (2.89) $ $ (40.33) (40.33) The accompanying notes are an integral part of these consolidated financial statements. 51 DATA COMMUNICATIONS MANAGEMENT CORP.Financial Statements Consolidated statements of comprehensive loss (in thousands of Canadian dollars) NET LOSS FOR THE YEAR OTHER COMPREHENSIVE (LOSS) INCOME: ITEMS THAT MAY BE RECLASSIFIED SUBSEQUENTLY TO NET LOSS Foreign currency translation ITEMS THAT WILL NOT BE RECLASSIFIED TO NET LOSS Re-measurements of post-employment benefit obligations Taxes related to post-employment adjustment above For the year ended December 31, 2016 For the year ended December 31, 2015 $ (32,107) $ (19,172) (48) (48) (309) 81 (228) 214 214 159 (41) 118 OTHER COMPREHENSIVE (LOSS) INCOME FOR THE YEAR, NET OF TAX COMPREHENSIVE LOSS FOR THE YEAR $ $ (276) $ 332 (32,383) $ (18,840) The accompanying notes are an integral part of these consolidated financial statements. 52 DATA COMMUNICATIONS MANAGEMENT CORP.A N N U A L R E P O R T 2 0 1 6 Consolidated statements of changes in equity (deficit) (in thousands of Canadian dollars) Shares Conversion options Contributed surplus Accumulated other comprehensive income Total equity Deficit (deficit) Balance as at December 31, 2014 $ 215,336 $ 513 $ — $ 92 $ (197,528) $ 18,413 Net loss for the year Other comprehensive income for the year Total comprehensive income (loss) for the year Shares issued on the redemption of convertible debentures (note 17) — — — — — — — — — — (19,172) (19,172) 214 118 332 214 (19,054) (18,840) 19,446 (385) 385 — — 19,446 Balance as at December 31, 2015 $ 234,782 $ 128 $ 385 $ 306 $ (216,582) $ 19,019 BALANCE AS AT DECEMBER 31, 2015 $ 234,782 $ 128 $ 385 $ 306 $ (216,582) $ 19,019 Net loss for the year Other comprehensive loss for the year Total comprehensive loss for the year Issuance of common shares (note 17) Share-based compensation expense BALANCE AS AT DECEMBER 31, — — — 2,650 — — — — — — — — — — 779 — (32,107) (32,107) (48) (228) (276) (48) (32,335) (32,383) — — — — 2,650 779 2016 $ 237,432 $ 128 $ 1,164 $ 258 $ (248,917) $ (9,935) The accompanying notes are an integral part of these consolidated financial statements. 53 DATA COMMUNICATIONS MANAGEMENT CORP.Financial Statements Consolidated statements of cash flows (in thousands of Canadian dollars) CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES Net loss for the year Adjustments to net loss Depreciation of property, plant and equipment (note 6) Amortization of intangible assets (note 7) Share-based compensation expense Pension expense Loss on disposal of property, plant and equipment Impairment of goodwill (note 8) Gain on redemption of convertible debentures (note 11) Provisions (note 9) Amortization of transaction costs Accretion of convertible debentures Other non-current liabilities Other post-employment benefit plans, net Tax credits recognized Income tax (recovery) expense Changes in working capital (note 19) Contributions made to pension plans Provisions paid (note 9) Income taxes paid INVESTING ACTIVITIES Purchase of property, plant and equipment (note 6) Purchase of intangible assets (note 7) Proceeds on disposal of property, plant and equipment FINANCING ACTIVITIES Increase in restricted cash Proceeds from issuance of common shares, net (note 17) Proceeds from Credit Facilities (note 10) Repayment of Credit Facilities (note 10) Proceeds from loan payable (note 13) Repayment of loan payable Finance and transaction costs (note 10) Finance lease payments INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS DURING THE YEAR CASH AND CASH EQUIVALENTS – BEGINNING OF YEAR EFFECTS OF FOREIGN EXCHANGE ON CASH BALANCES CASH AND CASH EQUIVALENTS – END OF YEAR $ $ The accompanying notes are an integral part of these consolidated financial statements. 54 For the year ended December 31, 2016 For the year ended December 31, 2015 $ (32,107) $ (19,172) 4,052 2,092 779 589 358 31,066 — 4,200 578 85 469 94 (124) (77) 12,054 7,619 (1,878) (7,426) (223) 10,146 (2,653) (432) 167 (2,918) (425) 2,650 49,532 (56,737) — (191) (1,341) (18) (6,530) 698 871 (25) 1,544 $ $ 4,754 1,949 — 609 56 26,000 (12,766) 13,560 468 212 692 (250) (181) 729 16,660 3,521 (1,878) (9,757) (380) 8,166 (4,300) (302) 654 (3,948) — — — (4,000) 342 (32) (565) (37) (4,292) (74) 812 133 871 DATA COMMUNICATIONS MANAGEMENT CORP.Notes to Financial Statements For the years ended December 31, 2016 and 2015 (in thousands of Canadian dollars, except percentages, shares and per share amounts) 1 General information Standards (“IFRS”) issued by the International Accounting Standards Board (“IASB”). DATA Communications Management Corp. (formerly DATA Group Ltd.) (“DATA”) plans and executes business communications. DATA helps marketers and agencies unify and execute communications campaigns across multiple channels, and it helps operations teams streamline and automate document and communications processes. DATA derives its revenues from the following core capabilities: direct marketing, commercial print services, labels and automated identification solutions, event tickets and gift cards, logistics and fulfilment, content and workflow management, data management and analytics, and regulatory communications. DATA is strategically located across Canada to support clients on a national basis, and serves the U.S. market through its facilities in Chicago, Illinois. DATA’s revenue is subject to the seasonal advertising and mailing patterns of certain customers. Typically, higher revenues and profit are generated in the fourth quarter relative to the other three quarters, however this can vary from time to time by changes in customers’ purchasing decisions throughout the year. As a result, DATA’s revenue and financial performance for any single quarter may not be indicative of revenue and financial performance which may be expected for the full year. These consolidated financial statements were approved by the Board of Directors (“Board”) of DATA Communications Management Corp., on March 9, 2017. SIGNIFICANT ACCOUNTING POLICIES BASIS OF MEASUREMENT The consolidated financial statements have been prepared under the historical cost convention, except for the revaluation of certain financial assets and financial liabilities to fair value, including derivative instruments. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or liability, DATA takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes in these consolidated financial statements is determined on such a basis, except for share-based payment transactions that are within the scope of IFRS 2 Share based- payments, International Accounting Standards (“IAS”) 17 The common shares of DATA are listed on the Toronto Leases, and measurements that have some similarities Stock Exchange (“TSX”) under the symbol “DCM”. to fair value but are not fair value, such as net realizable DATA’s outstanding 6.00% Convertible Unsecured value in IAS 2 Inventories or value in use in IAS 36 Subordinated Debentures (the “6.00% Convertible Impairment of assets. In addition, for financial reporting purposes, fair value measurements are categorized into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurements in its entirety, which are described as follows: Debentures”) are listed on the TSX under the symbol “DCM.DB”. The address of the registered office of DATA is 9195 Torbram Road, Brampton, Ontario. 2 Basis of presentation and significant accounting policies BASIS OF PRESENTATION DATA prepares its consolidated financial statements in accordance with International Financial Reporting 55 DATA COMMUNICATIONS MANAGEMENT CORP.• Level 1 inputs are quoted prices (unadjusted) in active an acquisition-by-acquisition basis, either at markets for identical assets or liabilities that the fair value or at the non-controlling interest’s entity can access at the measurement date; proportionate share of the recognized amounts of • Level 2 inputs are inputs, other than quoted prices the acquiree’s identifiable net assets. included within Level 1; that are observable for the The excess of the consideration transferred, asset or liability; either directly or indirectly; and the amount of any non-controlling interest in • Level 3 inputs are unobservable inputs for the asset or liability. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of DATA and its subsidiaries. All intercompany transactions, balances and unrealized gains and losses from intercompany transactions are eliminated upon consolidation. (a) Subsidiaries the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the identifiable net assets acquired is recorded as goodwill. If the total consideration transferred, non-controlling interest(s) recognized and previously held interest measured is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recorded directly in profit or loss. (b) Changes in ownership interests in subsidiaries Subsidiaries are all entities (including structured without change of control entities) over which DATA has control. Control exists when DATA is exposed to, or has the rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date which control is obtained. They are deconsolidated from the date that control ceases. DATA uses the acquisition method of accounting to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair value of the assets transferred, the liabilities incurred and the equity interests issued by DATA or one of its subsidiaries. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. DATA recognizes a non-controlling interest in the acquiree on Transactions with non-controlling interests that do not result in loss of control are accounted for as equity transactions – that is, as transactions with the owners in their capacity as owners. The difference between fair value of any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity. (c) Disposal of subsidiaries When DATA ceases to have control, any retained interest in the entity is re-measured to its fair value at the date when control is lost, with the change in carrying amount recognized in profit or loss. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amounts previously recognized in other comprehensive income (loss) in respect of that entity are accounted for as if DATA had directly disposed of 56 Notes to Financial StatementsFor the years ended December 31, 2016 and 2015(in thousands of Canadian dollars, except percentages, shares and per share amounts)DATA COMMUNICATIONS MANAGEMENT CORP. the related assets or liabilities. This may mean FINANCIAL INSTRUMENTS that amounts previously recognized in other Financial assets and liabilities are recognized when comprehensive income (loss) are reclassified to DATA becomes a party to the contractual provisions the statement of operations. FOREIGN CURRENCY TRANSLATION of the instrument. Financial assets are derecognized when the rights to receive cash flows from the assets have expired or have been transferred and DATA has Items included in the financial statements of each transferred substantially all risks and rewards of entity within DATA are measured using the currency ownership. of the primary economic environment in which the entity operates (the “functional currency”). These consolidated financial statements are presented in Canadian dollars, which is DATA’s functional currency. The functional currency of DATA’s United States operations is U.S. dollars. All financial information presented in Canadian dollars has been rounded to the nearest thousand. Monetary assets and liabilities denominated in foreign currencies are translated into Canadian dollars at rates of exchange in effect at the statement of financial position date. Revenues and expenses denominated in foreign currencies are translated into Canadian dollars at rates prevailing on the transaction dates. Gains and losses resulting from translation of monetary assets and liabilities denominated in currencies other than Canadian dollars are included in the determination of income for the year. The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisitions, are translated to Canadian dollars at exchange rates at the reporting date. The income and expenses of foreign operations are translated to Canadian dollars at average exchange rate during the period. Foreign currency differences are recognized in other comprehensive income (loss) in the foreign currency translation reserve account. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of cash on hand, deposits held with banks, bank overdraft and highly liquid short-term interest bearing securities with maturities of three months or less at the date of purchase. 57 Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously. At initial recognition, DATA classifies its financial instruments in the following categories depending on the purpose for which the instruments were acquired: (i) Financial assets and liabilities at fair value through profit or loss: A financial asset or liability is classified in this category if acquired principally for the purpose of selling or repurchasing in the short-term. Derivatives are also included in this category unless they are designated as hedges. Financial instruments in this category, which include the restricted share units (RSU’s), are recognized initially and subsequently at fair value. Transaction costs are expensed in the statement of operations and are included in finance costs. Gains and losses arising from changes in fair value are presented in the statement of operations within other gains and losses in the period in which they arise. Financial assets and liabilities at fair value through profit or loss are classified as current except for the portion expected to be realized or paid beyond twelve months of the statement of financial position date, which is classified as non- current. (ii) Loans and receivables: Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an ANNUAL REPORT 2016DATA COMMUNICATIONS MANAGEMENT CORP. active market. DATA’s loans and receivables are of financial position within other assets or comprised of trade receivables and cash and cash other liabilities, and are classified as current equivalents, and are included in current assets or non-current based on the contractual terms due to their short-term nature. Restricted cash specific to the instrument. Gains and losses on is presented as a non-current asset as it is not re-measurement of interest rate swaps that do available for general use. Loans and receivables are not meet the hedge criteria and of the written initially recognized at the amount expected to be put options are included in finance costs. At received less, if applicable, a discount to reduce the December 31, 2016 and 2015, DATA had not loans and receivables to fair value. Subsequently, entered into any interest rate swap agreements. loans and receivables are measured at amortized cost using the effective interest method less a provision for impairment. (iii) Other Financial liabilities which are measured at amortized cost: Financial liabilities measured at amortized cost include trade payables, loans payable, credit facilities and convertible debentures. Trade payables are initially recognized at the amount required to be paid less, if applicable, a discount to reduce the payables to fair value. Subsequently, trade payables are measured at amortized cost using the effective IMPAIRMENT OF FINANCIAL ASSETS At each reporting date, DATA assesses whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a loss event) and that loss event has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. interest method. The credit facilities and the non- The amount of the loss is measured as the difference derivative component of convertible debentures are recognized initially at fair value, net of any transaction costs incurred, and subsequently at amortized cost using the effective interest between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the financial asset’s original effective interest rate. The asset’s carrying amount is reduced and the method. DATA’s convertible debentures contained amount of the loss is recognized in the statement of a host contract and an embedded derivative. The comprehensive income (loss). host contract (the debt portion of the convertible debenture) is measured as the residual of the proceeds after deducting the fair value of the embedded derivative, net of any transaction costs incurred, and subsequently at amortized cost using the effective interest method. Financial liabilities are classified as current liabilities if payment is due within twelve months. Otherwise, they are presented as non-current liabilities. (iv) Derivative financial instruments: DATA may also use derivatives in the form of interest rate swaps to manage risks related to its variable rate debt. All derivatives have been classified as held for trading, are included on the statement If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the reversal of the previously recognized impairment is recognized in the statement of comprehensive income (loss). DATA recognizes an impairment loss, as follows: (i) Financial assets carried at amortized cost: The loss is the difference between the amortized cost of the loan or receivable and the present value of the estimated future cash flows, discounted using the instrument’s original effective interest rate. The carrying amount of the asset is reduced by this amount through the use of an allowance account. 58 Notes to Financial StatementsFor the years ended December 31, 2016 and 2015(in thousands of Canadian dollars, except percentages, shares and per share amounts)DATA COMMUNICATIONS MANAGEMENT CORP.INVENTORIES first-in, first-out method. Inventory manufactured Raw materials inventories are stated at the lower of includes the cost of materials, labour and production cost and net realizable value. Printed finished goods overheads (based on normal operating capacity) and work-in-progress are recorded at the lower of cost including applicable depreciation on property, plant and net realizable value. Raw materials are recorded and equipment. Net realizable value is the estimated on a weighted average cost basis. Cost of finished selling price less cost to complete and applicable goods and work-in-process are determined using the selling expenses. PROPERTY, PLANT AND EQUIPMENT associated with the item will flow to DATA and the Property, plant and equipment are recorded at cost cost can be measured reliably. The carrying value less accumulated depreciation and accumulated of a replaced asset is derecognized when replaced. impairments. Costs include expenditures that are Maintenance and repairs are expensed as incurred. directly attributable to the acquisition of the asset. Depreciation is computed using the methods and rates Subsequent costs are included in the asset’s carrying based on the estimated useful lives of the property, value or recognized as a separate asset, as appropriate, plant and equipment as outlined below: only when it is probable that future economic benefits Leasehold improvements Office furniture and equipment Presses and printing equipment Computer hardware and software BASIS straight-line straight-line straight-line straight-line RATE Shorter of life or lease term 5 years 1 to 10 years 1 to 5 years DATA allocates the amount initially recognized in Gains and losses on disposals of property, plant and respect of an item of property, plant and equipment to equipment are determined by comparing the proceeds its significant parts and depreciates separately each with the carrying amount of the asset and are included such part. Residual values, the method of depreciation in general and administration expenses in the and useful lives of the assets are reviewed annually and statement of operations. adjusted if appropriate. INTANGIBLE ASSETS so that it will be available for use Intangible assets that are acquired are measured at cost and are carried at cost less accumulated amortization. These assets include customer relationships, existing software and technology, trademarks and trade names. Research costs and costs associated with maintaining software programs are recognized as an expense as incurred. Development costs that are directly • management intends to complete the software and use or sell it • there is an ability to use or sell the software • it can be demonstrated how the software will generate probable future economic benefits attributable to the design and testing of identifiable • adequate technical, financial and other resources and unique software products controlled by DATA are to complete the development and to use or sell the recognized as intangible assets when the following software are available, and criteria are met: • it is technically feasible to complete the software development can be reliably measured. • the expenditure attributable to the software during its 59 ANNUAL REPORT 2016DATA COMMUNICATIONS MANAGEMENT CORP.Directly attributable costs that are capitalized as part of Management’s judgment is required to determine the the software include employee costs and an appropriate useful lives of intangible assets including reviewing portion of relevant overheads. Capitalized development the length of customer relationships and other costs are recorded as intangible assets and amortized factors. These finite life assets are amortized over from the point at which the asset is ready for use. their estimated useful lives as outlined below. Customer relationships Software and technology Computer software development costs Trademarks and trade names BASIS straight-line straight-line straight-line straight-line RATE 3 to 12 years 7 years 5 years 9 years Residual values, the method of amortization and useful lives of the assets are reviewed annually and adjusted if appropriate. GOODWILL IMPAIRMENT OF NON-FINANCIAL ASSETS Goodwill represents the excess of the aggregate of Property, plant and equipment and intangible assets consideration transferred in a business combination are tested for impairment when events or changes and the non-controlling interest in the acquired in circumstances indicate that the carrying amount business over the net fair value of net identifiable may not be recoverable. For the purpose of measuring assets and liabilities acquired. Adjustments to fair recoverable amounts, assets are grouped at the lowest value assessments are recorded to goodwill over the levels for which there are separately identifiable cash measurement period, not exceeding one year from the flows (CGUs). The recoverable amount is the higher of date of acquisition. Goodwill is allocated to the cash an asset’s fair value less costs to sell and value in use generating unit (“CGU”) or a group of CGUs to which (being the present value of the expected future cash it relates. A CGU is an identifiable group of assets that flows of the relevant asset or CGU). The projections are largely independent of the cash flows from other of future cash flows take into account the relevant assets or group of assets, which is not higher than an operating plans and management’s best estimate of the operating segment. most probable set of conditions anticipated to prevail Goodwill is evaluated for impairment annually or more frequently if events or circumstances indicate there may be impairment. Impairment is determined for goodwill by assessing if the carrying value of a cash including a number of estimates and assumptions such as projected future revenues, cost of revenues, operating margins, market conditions well into the future, and discount rates. generating unit, including the allocated goodwill, An impairment loss is recognized for the amount exceeds its recoverable amount determined as the by which the asset’s carrying amount exceeds its greater of the estimated fair value less costs to sell recoverable amount. Impairment losses are recorded or the value in use. Impairment losses recognized in as impairment provisions within accumulated respect of a CGU are first allocated to the carrying depreciation for depreciable assets. DATA evaluates value of goodwill and any excess is allocated to the impairment losses, other than goodwill impairment, carrying amount of assets in the CGU. Any goodwill for potential reversals when events or circumstances impairment is charged to income in the period in which warrant such consideration. Where an impairment loss the impairment is identified. Impairment losses on subsequently reverses the carrying amount of the asset goodwill are not subsequently reversed. or CGU is increased to the lesser of the revised estimate 60 Notes to Financial StatementsFor the years ended December 31, 2016 and 2015(in thousands of Canadian dollars, except percentages, shares and per share amounts)DATA COMMUNICATIONS MANAGEMENT CORP.of recoverable amount and the carrying amount that three years. At January 1, 2014, the solvency deficiency would have been recorded had no impairment loss been had reduced to a level such that actuarial valuations are recognized previously. to be completed every three years. SHARE-BASED COMPENSATION DATA has share-based compensation plans as part of DATA’s long-term incentive plan, as described in note 17. All transactions involving share-based payments are recognized as an expense in the statement of operations over the vesting period. Equity-settled share-based payment transactions, DATA also contributes to the Graphics Communications Supplemental Retirement and Disability Fund of Canada (“SRDF”) for certain employees at its Drummondville and Granby plants in Québec. The SRDF is a negotiated contribution defined benefit, multi-employer pension plan which provides retirement benefits to unionized employees in the printing industry jointly-trusteed by representatives of the employers of SRDF members and such as stock option awards, are measured at the grant the unions which represent SRDF members in collective date at the fair value of employee services received bargaining. in exchange for the grant of options or share awards and, for non-employee transactions, at the fair value of the goods or services received at the date on which the entity recognizes the goods or services. The total amount of the expense recognized in the statement of Certain former senior executives of a predecessor corporation participated in a Supplementary Executive Retirement Plan (“SERP”), which provides for pension benefits payable as a single life annuity with a five year operations is determined by reference to the fair value guarantee. of the share awards or options granted, which factors in the number of options expected to vest. Equity-settled (a) Defined contribution plan share-based payment transactions are not remeasured A defined contribution plan is a post-employment once the grant date fair value has been determined. benefit plan under which an entity pays fixed Cash-settled share-based payment transactions are measured at the fair value of the liability. The liability is remeasured at each reporting date and at the date of settlement, with changes in fair value recognized in the statement of operations. EMPLOYEE BENEFITS DATA maintains a defined benefit and defined contribution pension plan (the “DATA Communications Management Pension Plan”) for some of its employees. Pension benefits are primarily based on years of service, compensation and accrued contributions with contributions into a separate entity and has no legal or constructive obligation to pay further amounts. Pension benefits for defined contribution formula are based on the accrued contributions with investment earnings. Under the defined contribution provision of the DATA Communications Management Pension Plan, DATA’s annual pension expense is based on the amounts contributed in respect of eligible employees when they are due. (b) Defined benefit plans investment earnings. DATA’s funding policy is to fund A defined benefit plan is a post-employment the annual amount required to meet or exceed the minimum statutory requirements. Annual actuarial valuations are required on the DATA Communications Management Pension Plan until the solvency deficiency is reduced to a level under which the applicable pension benefit plan other than a defined contribution plan. Pension benefits for the defined benefit formula are generally calculated based on the number of years of service and the maximum average eligible earnings of each employee during any regulations allow the valuations to be completed every period of five consecutive years. DATA accrues its obligations for the defined benefit provision of the 61 ANNUAL REPORT 2016DATA COMMUNICATIONS MANAGEMENT CORP. DATA Communications Management Pension Plan in actuarial assumptions used to determine the and the SERP and related costs, net of plan assets, accrued benefit obligation and from changes to where applicable. The cost of pensions earned by accrued benefit obligation resulting from actual employees covered by these plans are actuarially experience differing from long-term assumptions determined using the projected unit credit method used to determine the accrued benefit obligation. taking into account management’s best estimate of Re-measurements, comprising actuarial gains and salary escalation, retirement ages and longevity of losses, the effect of the changes to the asset ceiling employees, where applicable. When the calculation (if applicable) and the actual return on plan assets results in a benefit to DATA, the recognized asset (excluding interest), is reflected immediately in is limited to the present value of economic benefits the statement of financial position with a charge available in the form of any future refunds from or credit recognized in other comprehensive the plan or reductions in future contributions to income (loss) in the period in which they occur. the plan. In order to calculate the present value of Re-measurements recognized in other economic benefits, consideration is given to any comprehensive income (loss) are reflected minimum funding requirements that apply to any immediately in retained earnings (deficit) and plan in DATA. An economic benefit is available to will not be reclassified to statement of operations. DATA if it is realizable during the life of the plan, or on settlement of the plan liabilities. The retirement benefit obligation recognized in the statement of financial position represents Improvements to the pension plans are recognized the actual deficit or surplus in the DATA’s defined as past service costs in the period of the plan benefit plans. When the payment in the future amendment. Current service costs are expensed of minimum funding requirements related to in the period that the benefits are accrued. past service would result in a net defined benefit Administration costs incurred by the DATA surplus or an increase in a surplus, the minimum Communications Management Pension Plan are funding requirements are recognized as a liability recognized as period costs. Curtailments and to the extent that the surplus would not be fully settlements are accounted for as period costs. available as a refund or a reduction in future Current service costs, administration costs and contributions to the plans. past services costs are recognized in general and administration expenses in the statement of operations. Net interest is calculated by applying the discount rate at the beginning of the period to the net benefit liability or asset and is recognized in finance expense (income) in the statement of operations. A liability for a termination benefits is recognized at the earlier of when the entity can no longer withdraw the offer of the termination benefit and when the entity recognizes any related restructuring costs. Termination benefits that require future services are required to be recognized over the periods the future services The discount rate used to determine the accrued are provided. benefit obligation is determined by reference to yields on high quality corporate bonds and that have terms to maturity approximating the terms of the related pension liability. Actuarial gains and losses arise from the difference between actual rate of return on plan assets and the discount rate for that period, from changes The SERP is unfunded. The SRDF is a negotiated contribution defined benefit multi-employer plan, however, the trustees of this plan are not able to provide sufficient information for DATA to account for this plan as a defined benefit plan. DATA has accounted for 62 Notes to Financial StatementsFor the years ended December 31, 2016 and 2015(in thousands of Canadian dollars, except percentages, shares and per share amounts)DATA COMMUNICATIONS MANAGEMENT CORP. this plan on a defined contribution basis as DATA of economic benefits will be required to settle the does not believe there is sufficient information to obligation. Provisions are measured at management’s recognize participation on a defined benefit basis. best estimate of the expenditure required to settle See note 20. the obligation and discounted to its present value if material. The unwinding of the discount is recognized (c) Other long-term employee benefit plans as a finance cost. Certain employees of DATA are provided with post-employment benefits, including health care and life insurance benefits on retirement to certain former employees, their beneficiaries and covered dependents. DATA’s net obligation in respect of its non-pension post-employment benefit plans is the amount of future benefit that employees have (i) Restructuring: A provision for restructuring is recognized when DATA has approved a detailed and formal restructuring plan, and the restructuring either has commenced or has been announced publicly. Future operating losses are not provided for. earned in return for their service in the current (ii) Onerous contracts: DATA performs evaluations to and prior periods; that benefit is discounted to identify onerous contracts and, where applicable, determine its present value. The calculation is records provisions against such contracts. performed using the projected unit credit method. Any actuarial gains and losses related to non- INCOME TAXES pension post-employment benefit plans are recognized in other comprehensive income (loss) in the period in which they arise and will not be Income tax expense comprises current and deferred tax. Current income tax and deferred income tax are recognized in profit or loss except to the extent that it reclassified to statement of operations. DATA also relates to a business combination, or items recognized provides other long-term employee benefit plans directly in equity or in other comprehensive income including pension, health care and dental care benefits for employees on long-term disability. (loss), in which case the current and/or deferred tax is also recognized directly in equity or other DATA’s net obligation in respect of its other comprehensive income (loss). long-term employee benefit plans is the actuarial present value of all future projected benefits determined as at the valuation date. Any actuarial gains and losses related to other long-term post- employment benefit plans are recognized in the statement of operations in the period in which they arise. The discount rate is the yield at the reporting date on yields on high quality corporate bonds that have maturity dates approximating the terms of DATA’s obligations. These non-pension post- employment and other long-term employee benefit plans are funded on a pay-as-you-go basis. PROVISIONS A provision is recognized if, as a result of a past event, DATA has a present legal or constructive obligation for which the amount can be estimated reliably, and it is more likely than not that an outflow Current income taxes is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years that are expected to be paid. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. DATA establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Deferred income tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred income tax is not recognized for the following temporary differences: the initial recognition of assets or liabilities in a transaction that is not a business 63 ANNUAL REPORT 2016DATA COMMUNICATIONS MANAGEMENT CORP. combination and that affects neither accounting under finance leases are reduced by lease payments nor taxable profit or loss, and temporary differences net of imputed interest. Other lease agreements relating to investments in subsidiaries and jointly are operating leases and the leased assets are not controlled entities to the extent that it is probable recognized in DATA’s statement of financial position. that they will not reverse in the foreseeable future. Payments made under operating leases are recognized In addition, deferred income tax is not recognized in profit or loss on a straight-line basis over the term of for taxable temporary differences arising on the the lease. Lease incentives received are recognized as an initial recognition of goodwill. Deferred income tax is integral part of the total lease expense, over the term of measured on a non-discounted basis at the tax rates the lease. The unamortized portion of lease incentives that are expected to be applied to temporary differences and the difference between the straight-line rent when they reverse, based on the laws that have been expense and the payments, as stipulated under the lease enacted or substantively enacted by the reporting date. agreement, are included in other non-current liabilities. A deferred income tax asset is recognized for unused SHARE CAPITAL tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can Common shares are classified as equity instruments. Incremental costs directly attributable to the issue of common shares are recognized as a deduction from be utilized. Deferred income tax assets are reviewed at equity, net of any tax effects. each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be REVENUE RECOGNITION realized in the foreseeable future. Revenue from the sale of product is recognized upon Deferred income tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously. Deferred income tax assets and liabilities are presented as non-current. LEASES shipment to the customer when costs and revenues can be reliably measured, collection is probable, the transfer of title occurs, and risk of loss passes to the buyer. When the customer requests a bill and hold arrangement, revenue is recognized when the goods are ultimately shipped to the customer. When customer payments exceed the revenue recognized, the excess is recorded as deferred revenue. Pre- production services have no standalone value and no reliable evidence of their fair value and are therefore included with the final printed products as one unit of accounting. The majority of products are customized and product returns are not significant. Leases are classified as financing or operating Warehousing, administration and marketing service depending on the terms and conditions of the contracts. fees are recognized as the services are provided, when Lease agreements where DATA assumes substantially the amount of revenue can be measured reliably, it is all the risks and rewards of ownership are classified probable that economic benefits associated with these as finance leases. Upon initial recognition the leased services will flow to DATA and the costs associated with asset is measured at an amount equal to the lower of its these services can be reliably measured. If warehousing, fair value and the present value of the minimum lease administration and marketing service fees are included payments. Subsequent to initial recognition, the asset is in one overall selling price of a custom print product, accounted for in accordance with the accounting policy the consideration is allocated to each component based applicable to that asset class. Obligations recorded on relative selling prices. 64 Notes to Financial StatementsFor the years ended December 31, 2016 and 2015(in thousands of Canadian dollars, except percentages, shares and per share amounts)DATA COMMUNICATIONS MANAGEMENT CORP.EARNINGS (LOSS) PER SHARE growth assumptions used in the cash flow projections, Basic earnings (loss) per share is calculated by dividing could significantly affect DATA’s impairment evaluation net income (loss) by the weighted average number and hence results. of shares outstanding during the period. Diluted earnings (loss) per share is calculated by adjusting net INCOME TAXES income (loss) and weighted average number of shares In assessing the probability of realizing deferred outstanding during the period for the effects of dilutive income tax assets, management has made estimates potential shares, which includes the options granted related to expectations of future taxable income, and interest related to DATA’s convertible debentures. applicable tax planning opportunities, expected timing USE OF ESTIMATES AND MEASUREMENT UNCERTAINTY of reversals of existing temporary differences and the likelihood that tax positions taken will be sustained upon examination by applicable tax authorities. The preparation of consolidated financial statements Deferred tax assets also reflect the benefit of unused requires management to make critical judgements, estimates and assumptions that affect the reported amount of certain assets and liabilities and the disclosure of the contingent assets and liabilities at the date of the consolidated financial statements tax losses that can be carried forward to reduce income taxes in future years. In making its assessments, management gives additional weight to positive and negative evidence that can be objectively verified. and revenues and expenses for the period reported. UNCERTAIN TAX POSITIONS Management must also make estimates and judgements DATA maintains provisions for uncertain tax positions about future results of operations, related specific using the best estimate of the amount expected to be elements of the business and operations in assessing paid based on a qualitative assessment of all relevant recoverability of assets and recorded value of liabilities. factors. DATA reviews the adequacy of these provisions Significant areas of measurement uncertainty are at the end of the reporting period. It is possible that summarized below. For each item, actual results at some future date, liabilities in excess of the DATA’s could differ from estimates and judgements made by provisions could result from audits by, or litigation management. IMPAIRMENT OF GOODWILL, INTANGIBLE AND NON-CURRENT ASSETS with, relevant taxing authorities. Where the final outcome of these tax-related matters is different from the amounts that were initially recorded, such differences will affect the tax provisions in the period Goodwill, intangible and non-current assets are tested in which such determination is made. for impairment if there is an indicator of impairment, and in the case of goodwill, annually at the end of PENSION OBLIGATIONS each fiscal year. The determination of the impairment Management estimates the pension obligations of goodwill, intangible and non-current assets are annually using a number of assumptions and with impacted by estimates of the fair value of CGU’s, the assistance of independent actuaries; however, assumptions of future cash flows, and achieving the actual outcome may vary due to estimation forecasted business results. These assumptions can uncertainties. The estimates of its pension obligations be impacted by economic conditions and also require are based on rates of inflation and mortality that considerable judgment by management. Declines in management considers to be reasonable. It also takes business results or declines in the fair value of DATA’s into account DATA’s specific anticipation of future reporting segments could result in impairments in salary increases, retirement ages of employees and future periods. Changing the assumptions selected other actuarial factors. Discount factors are determined by management, in particular the discount rate and close to each fiscal year end by reference to high quality 65 ANNUAL REPORT 2016DATA COMMUNICATIONS MANAGEMENT CORP.corporate bonds that are denominated in the currency the asset’s tax base. They also clarify certain other in which the benefits will be paid and that have terms aspects of accounting for deferred tax assets. The to maturity approximating to the terms of the related amendments are effective for the year beginning pension liability. Estimation uncertainties exist, which January 1, 2017. DATA does not expect these may vary significantly in future actuarial valuations amendments to have a significant impact on its and the carrying amount of DATA’s defined benefit consolidated financial statements. obligations. PROVISIONS Provisions are liabilities of uncertain timing or amount. Provisions are recognized when DATA has a present legal or constructive obligation arising from past events, when it is probable that an outflow of funds will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. The amount recognized as a provision is DATA’s best estimate of the present obligation at the end of the reporting period. When the effect of discounting is significant, the amount of the provision is determined by discounting the expected cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. DATA’s main provisions are related to restructuring costs and onerous contracts. Provisions are reviewed at each reporting date and any changes to estimates are reflected in the statement of operations. 3 Change in accounting policies (ii) Amendments to IAS 7 Statement of Cash Flows were issued in January 2016 to introduce additional disclosure requirements for liabilities arising from financing activities. The amendments are effective for the year beginning January 1, 2017. DATA does not expect this amendment to have a significant impact on its consolidated financial statements. (iii) IFRS 9 Financial Instruments was issued in July 2014. IFRS 9 sets out the requirements for recognizing and measuring financial assets, financial liabilities and some contracts to buy and sell non-financial items. IFRS 9 replaces IAS 39 Financial Instruments: Recognition and Measurement. The new standard establishes a single classification and measurement approach for financial assets that reflects the business model in which they are managed and their cash flow characteristics. It also provides guidance on an entity’s own credit risk relating to financial liabilities and has modified the hedge accounting model to better link the economics of risk management with its accounting treatment. Additional disclosures will also be required under (a) New and amended standards adopted the new standard. IFRS 9 is effective for annual DATA has not adopted any new accounting policies that would have a significant impact on its consolidated financial statements since the year ended December 31, 2015. (b) Future accounting standards not yet adopted. (i) Amendments to IAS 12 Income taxes titled Recognition of Deferred Tax Assets for Unrealized Losses were issued in January 2016 to clarify the requirements for recognizing deferred tax assets on unrealized losses. The amendments clarify the accounting for deferred tax where an asset is measured at fair value and that fair value is below periods beginning on or after January 1, 2018, with early adoption permitted. DATA is currently assessing the impact of the new standard on its consolidated financial statements. (iv) Amendments to IFRS 7 Financial Instruments: Disclosure were issued in September 2014. This standard was amended to provide guidance on additional disclosures on transition from IAS 39 to IFRS 9. The amendments are effective on adoption of IFRS 9. DATA is currently evaluating the impact of the amendments to the standard on its consolidated financial statements. 66 Notes to Financial StatementsFor the years ended December 31, 2016 and 2015(in thousands of Canadian dollars, except percentages, shares and per share amounts)DATA COMMUNICATIONS MANAGEMENT CORP. (v) IFRS 15 Revenue from Contracts with Customers was classification of the transaction from cash-settled issued in May 2014 to establish principles to record to equity-settled. The amendments are effective revenues from contracts for the sale of goods or for the year beginning on or after January 1, 2018. services, unless the contracts are in the scope DATA does not expect this amendment to have a of IAS 17 Leases or other IFRSs. Under IFRS 15, significant impact on its consolidated financial revenue is recognized at an amount that reflects statements. the expected consideration receivable in exchange for transferring goods or services to a customer, applying the following five steps: (vii) IFRS 16 Leases was issued in January 2016. IFRS 16 requires lessees to recognize assets and liabilities for most leases. Application of the standard is 1. Identify the contract with a customer mandatory for annual reporting periods beginning 2. Identify the performance obligations in the contract on or after January 1, 2019, with early application permitted. DATA is currently assessing the impact of the new standard on its consolidated financial 3. Determine the transaction price statements. 4. Allocate the transaction price to the performance obligations in the contract There are no other IFRS or International Financial Reporting Interpretations Committee (‘IFRIC’) interpretations that are not yet effective that would 5. Recognize revenue when (or as) the entity satisfies be expected to have a material impact on DATA. a performance obligation The new standard also provides guidance relating to contract costs and for the measurement and recognition of gains and losses on the sale of certain non-financial assets such as property and equipment. Additional disclosures will also be required under the new standard. In September 2015, the IASB deferred the effective date of the standard to annual reporting periods beginning on or after January 1, 2018 with earlier application permitted. DATA is currently assessing the impact of the new standard on its consolidated financial statements. (vi) An amendment to IFRS 2 Share-based Payment was issued in June 2016 to clarify the accounting for certain types of share-based payment transactions. The amendments provide requirements on accounting for the effects of vesting and non-vesting conditions of cash- settled share-based payments, withholding tax obligations for share-based payments with a net settlement feature, and when a modification to the terms of a share-based payment changes the 67 ANNUAL REPORT 2016DATA COMMUNICATIONS MANAGEMENT CORP. 4 Trade receivables Trade receivables Provision for doubtful accounts 5 Inventories Raw materials Work-in-progress Finished goods December 31, 2016 December 31, 2015 $ $ 29,597 $ 38,577 (440) (526) 29,157 $ 38,051 December 31, 2016 December 31, 2015 $ 3,774 $ 2,940 26,538 5,923 2,850 28,280 $ 33,252 $ 37,053 Raw materials and finished goods inventory amounts are net of obsolescence reserves of $360 (2015 – $657). The cost of inventories recognized as an expense within cost of revenues for the year ended December 31, 2016 was $202,539 (2015 – $220,656). 68 Notes to Financial StatementsFor the years ended December 31, 2016 and 2015(in thousands of Canadian dollars, except percentages, shares and per share amounts)DATA COMMUNICATIONS MANAGEMENT CORP.6 Property, plant and equipment The following tables present changes in property, plant and equipment for the years ended December 31, 2016 and 2015: Leasehold improvements Office furniture and equipment Presses and printing equipment Computer hardware and software Construction in progress Total Year ended December 31, 2016 Opening net book value $ 6,249 $ 368 $ 7,294 $ 511 $ — $ 14,422 621 107 1,366 72 487 2,653 Additions Effect of movement in exchange rates Disposals Depreciation for the year (1,514) (141) (2,177) (2) (126) — (41) (6) (301) (7) (57) (220) — — — (15) (525) (4,052) Closing net book value $ 5,228 $ 293 $ 6,176 $ 299 $ 487 $ 12,483 At December 31, 2016 Cost $ 12,869 $ 1,951 $ 44,810 $ 5,233 $ 487 $ 65,350 Accumulated depreciation (7,641) (1,658) (38,634) (4,934) — (52,867) Net book value $ 5,228 $ 293 $ 6,176 $ 299 $ 487 $ 12,483 Year ended December 31, 2015 Opening net book value $ 4,258 $ 385 $ 9,781 $ 483 $ 616 $ 15,523 3,570 140 946 260 (616) 4,300 — — — — — — — 63 (710) (4,754) $ 14,422 $ 68,799 (54,377) $ 14,422 Additions Effect of movement in exchange rates Disposals 15 (128) 5 (1) 25 (580) 18 (1) (249) Depreciation for the year (1,466) (161) (2,878) Closing net book value $ 6,249 $ 368 $ 7,294 $ 511 $ At December 31, 2015 Cost Accumulated depreciation Net book value $ $ 15,374 $ 1,892 $ 45,979 $ 5,554 $ (9,125) (1,524) (38,685) (5,043) 6,249 $ 368 $ 7,294 $ 511 $ 69 ANNUAL REPORT 2016DATA COMMUNICATIONS MANAGEMENT CORP. 7 Intangible assets The following tables present changes in intangible assets for the years ended December 31, 2016 and 2015: Customer relationships Software and technology Trademarks and trade names Construction in progress Total Year ended December 31, 2016 Opening net book value $ 5,260 $ 354 $ — (1,869) 308 (223) $ 3,391 $ 439 $ — — — — $ — $ 5,614 124 — 432 (2,092) $ 124 $ 3,954 Additions Amortization for the year Closing net book value At December 31, 2016 Cost Additions Amortization for the year Closing net book value At December 31, 2015 Cost Accumulated amortization (72,232) (10,593) (7,700) — (90,525) Net book value $ 3,391 $ 439 $ — $ 124 $ 3,954 $ 75,623 $ 11,032 $ 7,700 $ 124 $ 94,479 Year ended December 31, 2015 Opening net book value $ 7,091 $ 170 $ — (1,831) 302 (118) $ 5,260 $ 354 $ — — — — $ $ Accumulated amortization (70,363) (10,370) (7,700) Net book value $ 5,260 $ 354 $ — $ $ 75,623 $ 10,724 $ 7,700 $ — — — — — — — $ 7,261 302 (1,949) $ 5,614 $ 94,047 (88,433) $ 5,614 The remaining useful lives of the customer relationships are between 1 and 2 years. During the year ended December 31, 2016, DATA incurred costs mainly related to the development and implementation of new Enterprise Resource Planning ("ERP") software. These costs of $124 were included in construction in progress and were not depreciated during the year. 70 Notes to Financial StatementsFor the years ended December 31, 2016 and 2015(in thousands of Canadian dollars, except percentages, shares and per share amounts)DATA COMMUNICATIONS MANAGEMENT CORP. 8 Goodwill Opening balance Impairment of goodwill Ending balance Cost Accumulated impairment losses Net carrying value December 31, 2016 December 31, 2015 31,066 $ (31,066) — $ 57,066 (26,000) 31,066 December 31, 2016 December 31, 2015 160,725 $ 160,725 (160,725) (129,659) — $ 31,066 $ $ $ $ During the fourth quarter of 2016, DATA performed growth rate of 0% thereafter (2015 – 0%) were used to its annual review for impairment of goodwill by derive the recoverable amount of its CGU’s. As a result, comparing the fair value of each of its CGU’s to the DATA concluded that the fair value of its DATA CM CGU’s carrying value. DATA did not make any changes CGU was less than its carrying value and accordingly, to the valuation methodology used to assess goodwill recorded a non-cash impairment of goodwill for impairment since its last annual impairment test. $31,066. There was no further goodwill remaining as The recoverable amounts of all CGUs have been at December 31, 2016. determined based on the fair value less cost to sell. DATA uses the income approach to estimate the recoverable value of each CGU. The income approach is predicated on the value of the future cash flows that a business will generate going forward. The discounted cash flow method was used which involves projecting cash flows and converting them into a present value through discounting. The discounting uses a rate of return that is commensurate with the risk associated with the business and the time value of money. This approach requires assumptions about revenue growth rates, operating margins, tax rates and discount rates. DATA assumed a discount rate to calculate the present value of the projected cash flows, representing a pre-tax discount rate using a weighted average cost of capital (“WACC”) for DATA adjusted for tax, and is an estimate of the total overall required rate of return on an investment for both debt and equity owners. Determination of the WACC requires separate analysis of cost of equity and debt, and considers a risk premium based on the assessment of risks related to the projected cash flows of DATA. DATA used a discount rate of 16.0% (2015 – 15.5%) reflecting management’s judgment that sales channels and size of its CGU’s Revenue growth rates and operating margins were would affect the volatility of each CGU’s cash flows. based on the 2017 budget approved by the Board and projected over a five-year period. These forecasts were adjusted downwards given the declining operating results experienced by DATA in the past, current economic conditions and the specific trends of the printing industry and market. Accordingly, a weighted average declining growth rate based on a range of 1% to 3% was applied to revenue (2015 – declining revenue growth rate of 1%) and a perpetual long-term DATA projects cash flows net of income taxes using substantively enacted tax rates effective during the forecast periods. DATA used a tax rate of 26.25% (2015 – 26.5%). Tax assumptions are sensitive to changes in tax laws as well as assumptions about the jurisdictions in which profits are earned. It is possible that actual tax rates could differ from those assumed. 71 ANNUAL REPORT 2016DATA COMMUNICATIONS MANAGEMENT CORP.During the fourth quarter of 2015, DATA performed its financial covenants under its credit facilities, indicated annual review for impairment of goodwill by comparing that DATA’s assets may be impaired. As a result of that the fair value of each of its CGU’s to the CGU’s carrying new information, DATA performed an impairment value. As a result of that review, DATA recorded no analysis by comparing the fair value of each CGU to the goodwill impairment charges. The estimated recoverable CGU’s carrying value. As a result of that review, DATA amount of the DATA CM CGU exceeded its carrying value concluded that the fair value of its operating CGU was by approximately $18,400 and its recoverable amount less than its carrying value. Accordingly, DATA recorded would equal its carrying value if the discount rate was a non-cash impairment of goodwill for $26,000 related increased by 4.25% to 19.75%. to the operating CGU during the second quarter of 2015. During the second quarter of 2015, impairment indicators, including changes in the revenue trends and profit forecasts and the failure to meet certain 9 Provisions Balance – Beginning of year Additional charge during the year Utilized during the year Balance – End of year Less: Current portion of provisions As at December 31, 2016 Balance – Beginning of year Additional charge during the year Utilized during the year Balance – End of year Less: Current portion of provisions As at December 31, 2015 Restructuring Onerous contracts 4,614 3,771 (5,612) $ 2,592 $ 429 (1,814) 2,773 $ 1,207 $ (2,571) (734) 202 $ 473 $ Restructuring Onerous contracts 1,300 $ 2,103 $ 11,231 (7,917) 2,329 (1,840) 4,614 $ 2,592 $ (3,981) (1,742) 633 $ 850 $ $ $ $ $ $ $ Total 7,206 4,200 (7,426) 3,980 (3,305) 675 Total 3,403 13,560 (9,757) 7,206 (5,723) 1,483 RESTRUCTURING resulted in $11,231 of restructuring expenses in the During the year ended December 31, 2016, DATA consolidated statement of operations due to headcount continued its restructuring and ongoing productivity reductions across DATA’s operations and the closure of improvement initiatives to reduce its cost of certain manufacturing locations. operations. During the year ended December 31, 2016, these initiatives resulted in $3,771 of additional restructuring expenses in the consolidated statement of operations due to headcount reductions across DATA’s operations, which included the closure of its manufacturing facility in Edmonton, Alberta. During the year ended December 31, 2015, these initiatives For the year ended December 31, 2016, cash payments of $5,612 (2015 – $7,917) were made to former employees for severance and other restructuring costs. The remaining severance and restructuring accruals of $2,773 at December 31, 2016 are expected to be paid in 2017 and in 2018. 72 Notes to Financial StatementsFor the years ended December 31, 2016 and 2015(in thousands of Canadian dollars, except percentages, shares and per share amounts)DATA COMMUNICATIONS MANAGEMENT CORP. ONEROUS CONTRACTS remaining lease costs under each lease agreement During the year ended December 31, 2016, DATA and building maintenance costs at each location, closed a Richmond Hill, Ontario facility. A lease exit were recorded and will be paid over the remaining charge of $429, representing the liability, at present term of the leases, which expired in 2016. value, for remaining lease costs under the lease agreement and building maintenance costs, was recorded and will be paid over the remaining term of the lease, expiring in 2019. During the year ended December 31, 2015, DATA also closed a Vancouver, British Columbia facility. A lease exit charge of $941, representing the liability, at present value, for remaining lease costs under the During the year ended December 31, 2015, DATA lease agreement and building maintenance costs, was closed a Brampton, Ontario warehouse and a Calgary, recorded and will be paid over the remaining term of Alberta facility. Lease exit charges of $719 and $669, the lease, expiring in 2018. representing the liabilities, at present value, for the 10 Credit facilities Term loans December 31, 2016 December 31, 2015 - 4.86% bankers’ acceptances, matured January 16, 2016 $ — $ 35,750 - floating rate debt, maturing March 10, 2018 - 6.95% term debt, maturing March 10, 2023 Revolving facilities - 4.86% bankers’ acceptances, matured January 16, 2016 - floating rate debt, maturing March 10, 2019 Credit facilities Unamortized transaction costs Less: Current portion of Credit facilities Credit facilities 2,920 25,611 — 7,514 36,045 (1,003) $ $ 35,042 $ (5,886) 29,156 $ — — 7,500 — 43,250 (155) 43,095 (43,095) — As at December 31, 2015, DATA maintained credit facilities term loan facility (the “IAM IV Credit Facility”) with (the “Former Credit Facilities”) with a syndicate of Integrated Private Debt Fund IV LP (“IAM IV”) a loan Canadian chartered banks pursuant to a Third Amended managed by Integrated Asset Management Corp. and Restated Credit Agreement dated December 19, 2014. (“IAM”) pursuant to separate credit agreements, The Former Credit Facilities, which had a maximum each dated March 10, 2016, between DATA and the available principal amount of $55.0 million (comprised of Bank (the “Bank Credit Agreement”) and IAM (as a $10.0 million revolving facility, a $5.0 million swing line amended, the “IAM IV Credit Agreement”), respectively. facility, and a $40.0 million amortizing term loan), were Approximately $43,250 of the total principal amount to have matured on August 31, 2016 without the option for available to DATA under the IAM IV Credit Agreement renewal or extension. and the Bank Credit Agreement was used to fully repay In March 2016, DATA established a revolving credit facility (the “Bank Credit Facility”) with a Canadian chartered bank (the “Bank”) and an amortizing DATA’s outstanding indebtedness under its Former Credit Facilities. As at March 11, 2016, DATA had outstanding borrowings of $15,931 and letters of credit 73 ANNUAL REPORT 2016DATA COMMUNICATIONS MANAGEMENT CORP.granted of $2,159 under the Bank Credit Facility, and Facility was subject to a floating interest rate of outstanding borrowings of $28,000 under the IAM IV 3.45% per annum. Under the Bank Credit Facility, Credit Facility. DATA had access to $8,888 of available credit at The Bank Credit Facility has a maximum available December 31, 2016. principal amount of $25,000. A portion of the Bank The IAM IV Credit Facility matures on March 10, Credit Facility consists of a non-revolving term credit 2023 and has a maximum available principal amount facility (the “Bank Term Facility”) in a maximum of $28,000. Indebtedness outstanding under the principal amount of $5,000 as well as a committed IAM IV Credit Facility bears interest at a fixed rate treasury facility pursuant to which the Bank may, in equal to 6.95% per annum. Under the terms of the its sole discretion, agree to enter into non-speculative IAM IV Credit Agreement, DATA is required to make hedging arrangements, subject to certain restrictions. mandatory blended equal monthly repayments of Advances under the Bank Credit Facility may not, at principal and interest such that, on maturity, advances any time, exceed the lesser of $25,000 and a fixed under the IAM IV Credit Facility and applicable percentage of DATA’s aggregate accounts receivable interest on those advances will have been fully repaid. and inventory (less certain amounts). The Bank Term Monthly blended principal and interest repayments Facility is a sub facility of the Bank Credit Facility and of $422 and an April 2016 blended principal and is available by way of a single advance of $5,000 and it’s interest repayment of $448 cannot be reborrowed. availability is not based on DATA’s accounts receivable DATA has capitalized transaction costs of $665 related or inventories. The proceeds of the Bank Term Facility to this facility and the amortization of these costs were used by DATA to repay indebtedness owing by it is recognized over the term of this facility. As at under the senior credit facilities previously maintained December 31, 2016, the unamortized transaction costs by DATA with a syndicate of Canadian chartered banks. related to this facility were $546. Under the terms Advances under the Bank Credit Facility are subject to of the IAM IV Credit Agreement, DATA is required floating interest rates based upon the Canadian prime to deposit and hold cash in a blocked account to be rate plus an applicable margin of 75 basis points. used for repayments of principal and interest of The Bank Term Facility matures on the earlier of indebtedness outstanding under the IAM IV Credit March 10, 2018 and the date on which the Bank Credit Facility. As at December 31, 2016, there was a balance Facility is terminated pursuant to the Bank Credit of $425 in the blocked account which is recognized Agreement and monthly principal repayments of as restricted cash on the consolidated statement of $208 made on the Bank Term Facility will not reduce financial position. As at December 31, 2016, DATA had the total available principal amount under the Bank outstanding borrowings of $25,611 under the IAM IV Credit Facility. The Bank Credit Facility matures on Credit Facility. the earlier of March 10, 2019 and the date on which the Bank Credit Facility is terminated pursuant to the Bank Credit Agreement. DATA has capitalized transaction costs of $625 related to this facility and the amortization of these costs is recognized over the term of this facility. As at December 31, 2016, the unamortized transaction costs related to this facility were $457. At December 31, 2016, DATA had outstanding borrowings of $10,434 and letters of credit granted of $1,132 under the Bank Credit Facility and all of DATA’s indebtedness outstanding under the Bank Credit Both the Bank Credit Agreement and the IAM IV Credit Agreement contain customary representations and warranties, as well as restrictive covenants which limit the discretion of the Board and management with respect to certain business matters including the declaration or payment of dividends on the common shares of DATA without the consent of the Bank or IAM, as applicable. Under the terms of the IAM IV Credit Agreement, DATA has agreed that it will not, without the prior written consent of IAM, change (or permit any 74 Notes to Financial StatementsFor the years ended December 31, 2016 and 2015(in thousands of Canadian dollars, except percentages, shares and per share amounts)DATA COMMUNICATIONS MANAGEMENT CORP.change) in its Chief Executive Officer, President or Chief management compensation, including the grant of Financial Officer, provided that, if he or she voluntarily stock options or restricted options to employees; resigns as an officer of DATA, or if any such person has any gain or loss attributable to the sale, conversion either died or is disabled and can therefore no longer or other disposition of property out of the ordinary carry on his or her duties of such office, DATA will have course of business; interest or dividend income; foreign 60 days to replace such officer, such replacement officer exchange gain or loss; gains resulting from the write to be satisfactory to IAM, acting reasonably. The Bank up of property and losses resulting from the write Credit Facility limits spending on capital expenditures down of property (except allowances for doubtful by DATA to an aggregate amount not to exceed $5,500 accounts receivable and non-cash reserves for obsolete during any fiscal year, and the IAM IV Credit Agreement inventory); any gain or loss on the repurchase or limits the incurrence of capital expenditures to no more redemption of any securities (including in connection than $5,000 in any fiscal year. with the early retirement or defeasance of any debt); Under the terms of the IAM IV Credit Agreement, DATA must ensure that the aggregate of the principal amount outstanding under the IAM IV Credit Facility and the principal amount outstanding under the Bank Credit Facility, calculated on a consolidated basis in accordance with generally accepted accounting goodwill and other intangible asset write-downs; and any other extraordinary, non recurring or unusual items as agreed to by the lender. As at December 31, 2016, the ratio of Senior Funded Debt to EBITDA was 2.38, the debt service coverage ratio was 1.95 and the working capital current ratio was 1.45. principles (“Senior Funded Debt”), does not exceed Under the terms of the Bank Credit Agreement, DATA $50,000; and DATA must maintain (i) a ratio of Senior must maintain a fixed charge coverage ratio of not less Funded Debt to EBITDA (as defined below) for its four than 1.1 to 1.0 at all times, calculated on a consolidated most recently completed fiscal quarters of not greater basis, in respect of any particular trailing 12 month than the following levels: from the date of the advance period, as EBITDA for such period less cash taxes, up to March 31, 2017 – 3.25 to 1; from April 1, 2017 cash distributions (including dividends paid) and up to March 31, 2018 – 3.00 to 1; and on and after non-financed capital expenditures paid in such period, April 1, 2018 – 2.75 to 1; (ii) a debt service coverage divided by the total amount required by DATA to ratio of not less than 1.50 to 1; and (iii) a working capital service its outstanding debt for such period. As at current ratio of not less than 1.25:1. During the quarter December 31, 2016, the fixed charge coverage ratio ended June 30, 2016, DATA and IAM amended the was 1.56. terms of the IAM IV Credit Agreement to exclude the aggregate principal amount of the 6.00% Convertible Debentures from current liabilities for the purposes of calculating the working capital ratio for the period from June 29, 2016 to June 30, 2017. For purposes of the Bank Credit Agreement and the IAM IV Credit Agreement, “EBITDA” means net income or net loss for the relevant period, calculated on a consolidated basis in accordance with generally accepted accounting principles, plus amounts deducted, or minus amounts added, in calculating net income or net loss in respect of: the aggregate expense incurred for interest on debt and other costs of obtaining credit; income taxes, whether or not deferred; depreciation and amortization; non-cash expenses resulting from employee or A failure by DATA to comply with its obligations under either of the Bank Credit Agreement or the IAM IV Credit Agreement, together with certain other events, including a change of control of DATA and a change in DATA’s chief executive officer, president or chief financial officer (unless a replacement officer acceptable to IAM, acting reasonably, is appointed within 60 days of the effective date of such officer’s resignation), could result in an event of default which, if not cured or waived, could permit acceleration of the indebtedness outstanding under each of those agreements. Based on the 2017 operating plan, DATA anticipates it will be in compliance with the covenants in its credit facilities throughout 2017; however there can be no assurance 75 ANNUAL REPORT 2016DATA COMMUNICATIONS MANAGEMENT CORP.that DATA will be successful in achieving the results The payment of the principal of, and interest on, targeted in its operating plan for the 2017 fiscal year. DATA’s outstanding 6.00% Convertible Debentures is Each of the Bank Credit Facility and the IAM IV Credit Facility is secured by conventional security charging all of the property and assets of DATA and its affiliates. subordinated in right of payment to the prior payment in full of DATA’s indebtedness under the Bank Credit Agreement and the IAM IV Credit Agreement. The principal repayments on the long-term debt are as follows: 2017 2018 2019 2020 2021 and thereafter December 31, 2016 5,886 4,057 11,407 4,173 10,522 36,045 $ Subsequent to the year ended December 31, 2016, DATA amended its Senior Funded Debt with the Bank and IAM. See note 25 for further details. 11 Convertible debentures 6.00% Convertible Debentures, maturing June 30, 2017, interest payable in June and December, convertible at 0.8196 common shares per $1,000 of debenture Unamortized transaction costs Less: Current portion of Convertible debentures Convertible debentures December 31, 2016 December 31, 2015 $ $ $ 11,129 $ 11,044 (47) (132) 11,082 $ 10,912 11,082 — — $ 10,912 The 6.00% Convertible Debentures in an aggregate in DATA’s subsequent filings with Canadian securities principal amount of $11,175 (2015 – $11,175) bear interest regulatory authorities). See note 17. at a rate of 6.00% per annum payable semi-annually, in arrears, on June 30 and December 31. The 6.00% Convertible Debentures mature on June 30, 2017 and are convertible into common shares of DATA (“Common Shares”) at the option of the holder prior to maturity or redemption at a conversion price of $1,220 per common share, subject to adjustment in certain events described in greater detail in DATA’s Annual Information Form for the year ended December 31, 2015 (subject to the changes to the 6.00% Convertible Debentures described On redemption or at maturity, DATA may, at its option, subject to regulatory approval and certain other conditions, elect to satisfy its obligation to pay the applicable redemption price for the principal amount of the 6.00% Convertible Debentures by issuing and delivering that number of Common Shares obtained by dividing the aggregate redemption price of the debentures to be redeemed, or the principal amount of outstanding debentures which have matured, by 76 Notes to Financial StatementsFor the years ended December 31, 2016 and 2015(in thousands of Canadian dollars, except percentages, shares and per share amounts)DATA COMMUNICATIONS MANAGEMENT CORP.95% of the current market price of the Common Shares IFRS, the Common Shares issued were determined to on the date fixed for redemption or the maturity date. have a fair value on the Redemption Date of $0.02 per DATA capitalized transaction costs of $2,266 related share on a pre-share consolidation basis. Common to this issuance and the amortization of these costs Shares having a fair value of $19,505 were issued to is recognized over the term of the 6.00% Convertible satisfy the redemption price of the 6.00% Convertible Debentures. As at December 31, 2016, $47 (2015 – $132) Debentures redeemed on the Redemption Date, of these transaction costs remain unamortized. which had a carrying value of $32,735 on that date. REDEMPTION OF 6.00% CONVERTIBLE UNSECURED SUBORDINATED DEBENTURES FOR SHARES This resulted in a gain on redemption of convertible debentures of $13,230 under IFRS. A total of $523 of transaction costs were incurred to execute the redemption. Of the total costs, $59 were directly DATA redeemed $33,530 aggregate principal amount of attributable to the issuance of the Common Shares its $44,705 outstanding 6.00% Convertible Debentures and were netted against the increase in shares. The on December 23, 2015 (the “Redemption Date”). DATA elected to satisfy its redemption payment remaining costs of $464 were directly attributable to the redemption of the 6.00% Convertible Debentures obligation by issuing and delivering Common Shares and were expensed and netted against the gain on to holders of the 6.00% Convertible Debentures, in lieu of cash. On redemption, holders of the redemption of convertible debentures within the consolidated statement of operations. DATA also made 6.00% Convertible Debentures redeemed received: a cash payment of $970 representing the accrued and (i) a number of Common Shares equal to the principal unpaid interest on the 6.00% Convertible Debentures amount of 6.00% Convertible Debentures redeemed redeemed up to but excluding the Redemption Date, on the Redemption Date divided by 95% of the volume- less any applicable withholding taxes. weighted average trading price of the Common Shares on the Toronto Stock Exchange for the 20 consecutive trading days ended on December 16, 2015, and (ii) a The redemption resulted in a reduction of $385 of conversion options being written off to contributed cash payment equal to accrued and unpaid interest on surplus. the 6.00% Convertible Debentures redeemed up to but excluding the Redemption Date, less any applicable withholding taxes. The redemption of the 6.00% Convertible Debentures was completed in accordance with the terms of the amended and restated trust indenture dated as of January 1, 2012 (the “Trust Indenture”) between DATA and Computershare Trust Company of Canada (the “Debenture Trustee”), which governs the 6.00% Convertible Debentures, and did not require the consent of 6.00% Convertible Debenture holders. NORMAL COURSE ISSUER BID In May 2016, DATA’s normal course issuer bid (“NCIB”) expired and was not renewed. Under the NCIB, DATA could have purchased up to a maximum of $4,365 aggregate principal amount of its outstanding 6.00% Convertible Debentures, representing 10% of the “public float” of the 6.00% Convertible Debentures outstanding and daily purchases were limited to $14 principal amount of 6.00% Convertible Debentures, other than block purchase exemptions. No 6.00% On the Redemption Date, DATA issued a total of Convertible Debentures were purchased under 975,262,140 Common Shares (or 9,752,622 post- the NCIB that expired in May 2016. Under the consolidation Common Shares) see (note 17), which, previous NCIB, which expired in May 2015, an based on the formula described above, was calculated aggregate of $295 aggregate principal amount of using a pre-share consolidation volume-weighted the 6.00% Convertible Debentures were purchased. average trading price of $0.03619 per share. Under 77 ANNUAL REPORT 2016DATA COMMUNICATIONS MANAGEMENT CORP.12 Income taxes Significant components of DATA’s deferred income tax assets and liabilities as of December 31, 2016 and 2015 are as follows: December 31, 2016 Pension obligations and other post-employment benefit plans Unfavourable lease obligation Lease escalation Benefit of income tax loss and other carry-forwards Deferred finance fees Deductible reserves Tax credit carry-forwards Convertible debentures Property, plant and equipment Intangible assets Other Assets Liabilities Net $ 2,414 $ 207 344 1,619 149 607 238 — — — — — — — — — — — (12) (840) (867) (20) $ 2,414 207 344 1,619 149 607 238 (12) (840) (867) (20) Total deferred income tax assets (liabilities) $ 5,578 $ (1,739) $ 3,839 December 31, 2015 Assets Liabilities Net Pension obligations and other post-employment benefit plans Unfavourable lease obligation Lease escalation Deferred finance fees Deductible reserves Tax credit carry-forwards Convertible debentures Property, plant and equipment Intangible assets Tax related to tax credit carry-forwards Other $ 2,649 $ 216 200 130 1,166 125 — — — — — — — — — — — (34) (1,083) (1,321) (33) (21) $ 2,649 216 200 130 1,166 125 (34) (1,083) (1,321) (33) (21) Total deferred income tax assets (liabilities) $ 4,486 $ (2,492) $ 1,994 As at December 31, 2016, DATA recorded net deferred income tax assets of $3,839 (2015 – $2,070) and net deferred income tax liabilities of $nil (2015 – $76) in its consolidated statements of financial position. 78 Notes to Financial StatementsFor the years ended December 31, 2016 and 2015(in thousands of Canadian dollars, except percentages, shares and per share amounts)DATA COMMUNICATIONS MANAGEMENT CORP.Changes in deferred income tax assets and liabilities during the years ended December 31, 2016 and 2015 are as follows: Balance at January 1, 2016 Recognized in statement operations Recognized in comprehensive loss Balance at December 31, 2016 Other Pension obligations and other post- employment benefit plans $ 2,649 $ Unfavourable lease obligation Lease escalation Benefit of income tax loss and other carry-forwards Deferred finance fees Deductible reserves Tax credit carry-forwards Convertible debentures Property, plant and equipment Intangible assets Tax related to tax credit carry-forwards Other 216 200 — 130 1,166 125 $ $ 4,486 $ (34) $ (1,083) (1,321) (33) (21) $ (2,492) $ — — — — — — 113 113 — — — — 2 2 $ (316) $ 81 $ 2,414 (9) 144 1,619 19 (559) — — — — — — — 207 344 1,619 149 607 238 898 $ 81 $ 5,578 $ 22 243 454 33 (1) $ 751 $ — — — — — — $ (12) (840) (867) — (20) $ (1,739) Deferred income tax assets (liabilities), net $ 1,994 $ 115 $ 1,649 $ 81 $ 3,839 Balance at January 1, 2015 Recognized in statement operations Recognized in comprehensive loss Balance at December 31, 2015 Other Pension obligations and other post- employment benefit plans $ 3,035 $ $ (345) $ (41) $ 2,649 68 152 914 — 657 — $ $ 4,826 $ (190) $ (1,279) (1,712) (155) — (32) $ (3,368) $ — — — — — — 125 125 — — — — — (10) (10) 148 48 (914) 130 509 — — — — — — — (424) $ (41) $ $ 156 196 391 155 (33) 21 $ — — — — — — — 216 200 — 130 1,166 125 4,486 (34) (1,083) (1,321) — (33) (21) $ 886 $ $ (2,492) $ 1,458 $ 115 $ 462 $ (41) $ 1,994 Unfavourable lease obligation Lease escalation Benefit of income tax loss and other carry-forwards Deferred finance fees Deductible reserves Tax credit carry-forwards Convertible debentures Property, plant and equipment Intangible assets Deferred finance fees Benefit of other carry-forwards Other Deferred income tax assets (liabilities), net 79 $ $ $ $ ANNUAL REPORT 2016DATA COMMUNICATIONS MANAGEMENT CORP.The realization of the deferred income tax In the ordinary course of business, DATA and its assets is dependent on the generation of future subsidiary and predecessors have entered into taxable income during the years in which those transactions where the ultimate tax determination may temporary differences become deductible. Based on be uncertain. These uncertainties require management management's projections of future taxable income to make estimates of the ultimate tax liabilities and, and tax planning strategies, management expects accordingly, the provision for income taxes. Since there to realize these net deferred income tax assets in are inherent uncertainties, additional tax liabilities may advance of expiry. As at December 31, 2016, DATA has result if tax matters are ultimately resolved or settled at non-capital tax loss carry-forwards of $6,434 (2015 – amounts different from those estimates. $nil). The non-capital tax loss carry-forwards expire in varying amounts from 2033 to 2036. The major components of income tax (recovery) expense for the years ended December 31, 2016 and 2015 are set out below: Current income tax expense: Current tax on profits for the year Recovery of taxes for prior periods Adjustment to current income tax on filing Total current income tax expense Deferred income tax recovery: Origination and reversal of temporary differences described above Adjustment to deferred income tax on filing Total deferred income tax recovery For the year ended December 31, 2016 For the year ended December 31, 2015 $ 397 $ 1,191 (195) 1,370 1,572 (279) (1,370) (1,649) — — 1,191 (462) — (462) Total income tax (recovery) expense for the year $ (77) $ 729 For the year ended December 31, 2016, deferred income tax recovery on the recognition of actuarial gains (losses) related to DATA's defined benefit plans of $81 (2015 – $41 expense) were recognized in the statements of comprehensive loss. 80 Notes to Financial StatementsFor the years ended December 31, 2016 and 2015(in thousands of Canadian dollars, except percentages, shares and per share amounts)DATA COMMUNICATIONS MANAGEMENT CORP.The following are reconciliations of income tax (recovery) expense calculated at the statutory rate of Canadian corporate income taxes below for the years ended December 31, 2016 and 2015. For the year ended December 31, 2016 For the year ended December 31, 2015 Loss before income taxes $ (32,184) $ Expected income tax recovery calculated at statutory income tax rate (1) (8,413) Adjustment to income taxes resulting from: Difference between Canadian rates and rates applicable to subsidiary in another country Impairment of goodwill Gain on redemption of convertible debentures Non-deductible expenses and other items 124 8,122 — 90 Total income tax (recovery) expense for the year $ (77) $ (1) The calculation of the current income tax is based on a combined federal and provincial statutory income tax rate of 26.14% (2015 – 25.89%). (18,443) (4,775) 171 6,731 (1,310) (88) 729 The current tax rate for the current year is 0.25% higher settled. Deferred income tax assets and liabilities have than 2015 due to the effect of changes in statutory tax been measured using an expected average combined rates and the allocation of taxable income between statutory income tax rate of 25.28% (2015 – 25.63%) provinces. Deferred income tax assets and liabilities based on the tax rates in years when the temporary are measured at tax rates that are expected to apply to differences are expected to reverse. the period when the asset is realized or the liability is 13 Other non-current liabilities Deferred lease inducement Lease escalation liabilities Finance lease liabilities Loan payable Less: Current portion of other non-current liabilities December 31, 2016 December 31, 2015 $ $ $ 793 $ 1,321 — 151 2,265 $ (574) 1,691 $ 828 768 18 342 1,956 (594) 1,362 The current portion of other non-current liabilities is leases are recognized in the consolidated statements of included in trade payables. operations on a straight-line basis over the term of the DATA’s operations are conducted in leased properties. lease, expiring in 2017 to 2028. DATA’s leases generally provide for minimum rent and During the year ended December 31, 2016, DATA entered may also include escalation clauses, guarantees and into a lease extension agreement for its Brampton, certain other restrictions, and generally require it to Ontario facility that included lease inducements which pay a portion of the real estate taxes and other property were deferred and are recognized over the life of the operating expense. Payments made under operating lease, expiring in 2025. 81 ANNUAL REPORT 2016DATA COMMUNICATIONS MANAGEMENT CORP.During the year ended December 31, 2015, DATA entered Management Pension Plan had a reduced into a lease agreement for its Calgary, Alberta facility solvency deficit from January 1, 2013. Based upon that included lease inducements which were deferred the January 1, 2014 actuarial valuation report, and are recognized over the life of the lease, expiring DATA’s annual cash contribution to the defined in 2022. During the year ended December 31, 2016, benefit provision of the DATA Communications DATA entered into a lease extension agreement for this Management Pension Plan was $1,311 for the year Calgary, Alberta facility, expiring in 2027. (2015 – $1,311). During the year ended December 31, During the year ended December 31, 2015, DATA entered into a loan payable agreement for licensed software in the amount of $368. The loan has an interest rate of 2.90% and repayments of $19 per month will be made over 20 months ending in August 2017. 2016, DATA made all the required payments related to its funding requirements for the defined benefit provision of the DATA Communications Management Pension Plan for 2016, which assumes no change in Canadian economic conditions from those in effect as at January 1, 2014. 14 Pension obligations, assets and expenses Effective January 1, 2008, no further service credits will accrue under the defined benefit provision of the DATA Communications Management Pension Plan. Annual actuarial valuations are required on the DATA Communications Management Pension Plan until the solvency deficiency is reduced to a level under which the applicable pension regulations allow the valuations to be completed every three years. At January 1, 2014, the solvency deficiency had reduced to a level such that actuarial valuations are to be completed every three years. Based on those valuations, the annual cash contributions in respect of the defined benefit provision of the DATA Communications Management Pension Plan are depended on the plan’s investment performance and changes in long-term interest rates, estimates of the price of annuities, and other elements of pension plan experience such as demographic changes and administration expenses, among others. Under applicable pension regulations, the plan’s solvency deficiency can be funded over a maximum period of five years. During the year ended December 31, 2014, DATA engaged actuaries to complete an updated actuarial valuation of the DATA Communications Management Pension Plan, which confirmed that, as at January 1, 2014, the DATA Communications 82 Notes to Financial StatementsFor the years ended December 31, 2016 and 2015(in thousands of Canadian dollars, except percentages, shares and per share amounts)DATA COMMUNICATIONS MANAGEMENT CORP.The following is a summary of DATA’s net pension obligations: Present value of funded obligations Less: Fair value of plan assets Surplus of funded plans Present value of unfunded obligations Pension obligations, net December 31, 2016 December 31, 2015 $ $ 60,559 $ (62,148) (1,589) 8,340 6,751 $ 59,929 (60,699) (770) 8,354 7,584 CHANGE IN THE PRESENT VALUE OF DEFINED BENEFIT PLAN OBLIGATIONS Funded Unfunded December 31, 2016 Balance – Beginning of year $ 59,929 $ 8,354 $ Interest expense Benefits paid Re-measurements: - Loss from change in financial assumptions - Experience (gains) losses Balance – End of year 2,412 (3,531) 1,776 (27) 315 (567) 162 76 $ 60,559 $ 8,340 $ 68,283 2,727 (4,098) 1,938 49 68,899 Funded Unfunded December 31, 2015 Balance – Beginning of year $ 61,455 $ 8,623 $ 2,416 (3,023) (900) (19) 317 (567) (85) 66 70,078 2,733 (3,590) (985) 47 $ 59,929 $ 8,354 $ 68,283 Interest expense Benefits paid Re-measurements: - Gain from change in financial assumptions - Experience (gains) losses Balance – End of year 83 ANNUAL REPORT 2016DATA COMMUNICATIONS MANAGEMENT CORP.CHANGE IN THE FAIR VALUE OF PLAN ASSETS Funded Unfunded Balance – Beginning of year $ 60,699 $ Interest income Employer contributions Benefits paid Administrative expenses paid from plan assets Re-measurements: - Return on plan assets, excluding amounts included in interest income Balance – End of year 2,463 1,311 (3,531) (325) 1,531 $ 62,148 $ — — 567 (567) — — — Funded Unfunded Balance – Beginning of year $ 61,129 $ Interest income Employer contributions Benefits paid Administrative expenses paid from plan assets Re-measurements: - Return on plan assets, excluding amounts included in interest income 2,424 1,311 (3,023) (300) (842) Balance – End of year $ 60,699 $ — — 567 (567) — — — DATA COMMUNICATIONS MANAGEMENT PENSION PLAN ASSET COMPOSITION December 31, 2016 $ 60,699 2,463 1,878 (4,098) (325) 1,531 62,148 December 31, 2015 61,129 2,424 1,878 (3,590) (300) (842) 60,699 $ $ $ For the year ended December 31, 2016 For the year ended December 31, 2015 Quoted 4,660 5,591 10,251 9,652 38,208 3,443 51,303 594 62,148 $ $ $ $ $ $ Percentage of plan assets $ $ $ $ $ $ 16% 83% 1% 100% Quoted 3,687 5,164 8,851 10,241 37,570 3,677 51,488 360 60,699 Percentage of plan assets 14% 85% 1% 100% Domestic equities Foreign equities Equity instruments Short and mid-term bonds Long-term bonds Commercial mortgages Debt instruments Cash and cash equivalents Total 84 Notes to Financial StatementsFor the years ended December 31, 2016 and 2015(in thousands of Canadian dollars, except percentages, shares and per share amounts)DATA COMMUNICATIONS MANAGEMENT CORP.ELEMENTS OF DEFINED BENEFIT EXPENSE RECOGNIZED IN THE STATEMENTS OF OPERATIONS Defined benefit expense recognized $ 274 $ 315 $ Administration expenses Interest expense Interest income Total net interest expense Administration expenses Interest expense Interest income Total net interest expense Funded Unfunded December 31, 2016 $ 325 $ — $ 325 2,412 (2,463) (51) 315 — 315 Funded Unfunded December 31, 2015 $ 300 $ — $ 300 2,416 (2,424) (8) 317 — 317 2,727 (2,463) 264 589 2,733 (2,424) 309 609 Defined benefit expense recognized $ 292 $ 317 $ AMOUNTS RECOGNIZED IN THE STATEMENTS OF COMPREHENSIVE LOSS Funded Unfunded December 31, 2016 Re-measurements: - Loss from change in financial assumptions $ 1,776 $ 162 $ - Experience (gains) losses - Return on plan assets, excluding amounts included in interest income Deferred income tax effect (27) (1,531) 218 (57) 76 — 238 (62) Defined benefit expense recognized $ 161 $ 176 $ 1,938 49 (1,531) 456 (119) 337 Funded Unfunded December 31, 2015 Re-measurements: - Gain from change in financial assumptions $ (900) $ (85) $ - Experience (gains) losses - Return on plan assets, excluding amounts included in interest income Deferred income tax effect (19) 842 (77) 20 66 — (19) 5 Defined benefit recovery recognized $ (57) $ (14) $ (985) 47 842 (96) 25 (71) 85 ANNUAL REPORT 2016DATA COMMUNICATIONS MANAGEMENT CORP.DATA manages its pension plans by meeting with pension assets relative to the market. Assumptions an actuarial consultant and the fund managers on a are reviewed on an ongoing basis and adjustments are regular basis and reviews periodic reports outlining made whenever management believes that conditions changes in the plan liabilities and the return on have materially changed. SIGNIFICANT ACTUARIAL ASSUMPTIONS ADOPTED IN MEASURING DATA’S DEFINED BENEFIT OBLIGATIONS DATA Communications Management Pension Plan Discount rate Rate of compensation increase SERP Discount rate December 31, 2016 December 31, 2015 3.90% 3.00% 4.10% 3.00% 3.70% 3.90% DATA decreased the discount rate that was used to calculate its defined benefit obligations as at December 31, 2016 to better reflect current Canadian economic conditions and long-term interest rates. The salary increase assumption remained unchanged at December 31, 2016. Assumptions regarding future mortality are set based on actuarial advice in accordance with published statistics and experience in Canada. These assumptions translate into an average life expectancy in years for a pensioner retiring at age 65: Retiring at the end of the reporting period: Male Female Retiring in 25 years after the end of the reporting period: Male Female December 31, 2016 December 31, 2015 21.6 24.1 22.3 25.3 21.5 24.0 22.9 25.2 Through its defined benefit plans, DATA is exposed to fluctuate, if the growth of plan liabilities exceeds that a number of risks, the most significant of which are of plan assets a deficit will result. The defined benefit detailed below: ASSET VOLATILITY For a defined benefit pension plan, fluctuations in provision of the DATA Communications Management Pension Plan currently holds a small proportion of equities, 16% of total assets, which are expected to outperform corporate bonds in the long-term while the value of plan assets are assessed in the context of providing volatility and risk in the short-term. The fluctuations in the plan liabilities. The plan liabilities defined benefit provision of the DATA Communications are calculated using a discount rate set with reference Management Pension Plan’s investment time horizon to high quality corporate bond yields. As discount and financial position are key inputs in deciding on the rates change, the value of the plan liabilities will proportion of equities held. 86 Notes to Financial StatementsFor the years ended December 31, 2016 and 2015(in thousands of Canadian dollars, except percentages, shares and per share amounts)DATA COMMUNICATIONS MANAGEMENT CORP.The defined benefit provision of the DATA SALARY RISK Communications Management Pension Plan is closed The present value of the pension benefit obligations to new membership, which means the investment time is calculated by reference to the future salaries of horizon is shrinking as the plan matures. Beginning plan participants, so salary increases of the plan in 2012 and as the plan matured, the defined benefit participants greater than assumed will increase provision of the DATA Communications Management plan liabilities. Pension Plan’s level of investment risk was reduced by lowering the proportion of equities and increasing the proportion of bonds which are a better match to the plan liabilities. This shift from equities to better matching bonds commenced in 2012 and was expected LIFE EXPECTANCY The majority of the plans’ obligations provide benefits for the life of the member, so increases in life expectancy will result in an increase in the plans’ to conclude in 2026. This period was selected based liabilities. The sensitivity of the defined benefit obligations to changes in assumptions at December 31, 2016 and at December 31, 2015 are set out below. The effects on each plan of a change in an assumption are weighted proportionately to the total plan obligations to determine the total impact for each assumption presented. on analysis of projected pension benefit cash flows. Through the derisking schedule, the defined benefit provision of the DATA Communications Management Pension Plan lowered its interest rate risk, inflation risk and equity risk. In 2011, the defined benefit provision of the DATA Communications Management Pension Plan had 60% equities and 40% bonds. In 2026, the defined benefit provision of the DATA Communications Management Pension Plan was expected to have 15% equities and 85% bonds. This derisking strategy is reviewed annually to consider the current environment and may be revised at any point in time. In 2014, the derisking strategy was reviewed against the investment time horizon and the financial position of the defined benefit provision of the DATA Communications Management Pension Plan. With a significant improvement in the financial position, the defined benefit provision of the DATA Communications Management Pension Plan asset mix was moved to 15% equities and 85% bonds, with the bond portfolio being adopted with liability cash flow matching characteristics. There were no significant changes in the investment strategy during 2016. CHANGES IN BOND YIELDS A decrease in corporate bond yields will increase plan liabilities, although this will be partially offset by an increase in the value of the plan’s bond holdings. 87 ANNUAL REPORT 2016DATA COMMUNICATIONS MANAGEMENT CORP.Discount rate Salary growth rate Life expectancy Discount rate Salary growth rate Life expectancy December 31, 2016 Impact on defined benefit obligations Change in assumption Increase in assumption Decrease in assumption 0.25% $ (2,410) $ 0.25% 754 2,545 (775) Increase by 1 year in assumption Decrease by 1 year in assumption $ 1,816 $ (1,857) December 31, 2015 Impact on defined benefit obligations Change in assumption Increase in assumption Decrease in assumption 0.25% $ (2,364) $ 0.25% 693 2,505 (711) Increase by 1 year in assumption Decrease by 1 year in assumption $ 1,668 $ (1,708) Each sensitivity analysis disclosed in this note is based on changing one assumption while holding all other assumptions constant. In practice, this is unlikely to occur and changes in some of the assumptions may be correlated. When calculating the sensitivity of the defined benefit obligation to variations in significant actuarial assumptions, the same method (present value of the defined benefit obligation calculated with the projected unit credit method at the end of the reporting period) has been applied as for calculating the liability recognized in the statements of financial position. The weighted average duration of the defined benefit obligations is 14.4 years (2015 – 14.3 years). Expected maturity analysis of undiscounted pension benefits: At December 31, 2016 At December 31, 2015 $ $ 2,893 2,782 $ $ 6,106 5,839 $ $ 6,762 6,433 $ $ 18,684 18,096 Less than a year Between 1 to 2 years Between 2 to 5 years Between 5 to 10 years The annual pension expense for the defined contribution provision of the DATA Communications Management Pension Plan is based on the amounts contributed in respect of eligible employees. The annual pension expense for the SRDF, which is accounted for as a defined contribution plan, is based on amounts contributed based on a percentage of wages of unionized employees who are covered by the respective collective bargaining agreements, all of whom are employed at DATA facilities located in the Province of Québec. 88 Notes to Financial StatementsFor the years ended December 31, 2016 and 2015(in thousands of Canadian dollars, except percentages, shares and per share amounts)DATA COMMUNICATIONS MANAGEMENT CORP.DATA’s pension expense related to DATA’s defined contribution plans are as follows: Defined contribution plan Defined benefit multi-employer plan For the year ended December 31, 2016 For the year ended December 31, 2015 $ $ 1,493 570 $ $ 1,720 640 DATA expects that, in 2017, contributions to the the DATA Communications Management Pension Plan defined benefit provision of the DATA Communications will be approximately $1,471, contributions to the SERP Management Pension Plan will be approximately $1,311, will be approximately $567 and contributions to the contributions to the defined contribution provision of SRDF will be approximately $579. 15 Other post-employment benefit plans Costs related to non-pension post-employment and other long-term employee benefit plans are actuarially determined using the projected unit credit method, the actuarial present value of all future projected benefits determined as at the valuation date and management’s best assumptions. The following summarizes the change in the obligations related to DATA’s non-pension post- employment and other long-term employee benefit plans: December 31, 2016 December 31, 2015 $ 2,563 $ 289 99 (203) (250) 58 (46) 2,876 284 120 (260) (150) (20) (287) $ 2,510 $ 2,563 December 31, 2016 December 31, 2015 $ $ 289 $ 99 (91) 297 $ 284 120 (394) 10 Balance – Beginning of year Current service cost Interest expense Benefits paid Re-measurements: - Gain from change in demographic assumptions - Loss (gain) from change in financial assumptions - Experience gains Balance - End of year ELEMENTS OF OTHER POST-EMPLOYMENT BENEFIT EXPENSE RECOGNIZED IN THE STATEMENTS OF OPERATIONS Current service cost Interest expense Re-measurements: - Experience gains Benefit expense recognized 89 ANNUAL REPORT 2016DATA COMMUNICATIONS MANAGEMENT CORP.AMOUNTS RECOGNIZED IN THE STATEMENTS OF COMPREHENSIVE LOSS December 31, 2016 December 31, 2015 Re-measurements: - Gain from change in demographic assumptions $ (207) $ - Loss (gain) from change in financial assumptions - Experience losses (gains) Deferred income tax effect Benefit recovery recognized 40 20 (147) 38 $ (109) $ — (12) (51) (63) 16 (47) SIGNIFICANT ACTUARIAL ASSUMPTIONS ADOPTED IN MEASURING DATA’S OTHER POST-EMPLOYMENT BENEFIT OBLIGATIONS DATA OTHER LONG-TERM EMPLOYEE OBLIGATIONS Discount rate Health care cost trend rate – Initial Health care cost trend rate declines by 2028 (2015 – 2028) December 31, 2016 December 31, 2015 3.90% 6.00% 4.50% 4.10% 6.10% 4.50% DATA NON-PENSION POST-EMPLOYMENT OBLIGATION December 31, 2016 December 31, 2015 Discount rate Health care cost trend rate – Initial Health care cost trend rate declines by 2028 (2015 – 2028) 3.90% 6.61% 4.50% 4.10% 6.58% 4.50% 90 Notes to Financial StatementsFor the years ended December 31, 2016 and 2015(in thousands of Canadian dollars, except percentages, shares and per share amounts)DATA COMMUNICATIONS MANAGEMENT CORP.SENSITIVITY ANALYSIS ON OTHER POST-EMPLOYMENT BENEFIT OBLIGATIONS The effects on each plan of a change in an assumption are weighted proportionately to the total plan obligations to determine the total impact for each assumption presented. At December 31, 2016 Change in assumption Increase in assumption Decrease in assumption Impact on other post-employment benefit obligations Discount rate Health care cost trend rates Life expectancy 0.25% $ 1.00% (46) $ 165 49 (145) Increase by 1 year in assumption Decrease by 1 year in assumption $ (61) $ 62 At December 31, 2015 Change in assumption Increase in assumption Decrease in assumption Impact on other post-employment benefit obligations Discount rate Health care cost trend rates Life expectancy 0.25% $ 1.00% (48) $ 182 50 (163) Increase by 1 year in assumption Decrease by 1 year in assumption $ 84 $ (80) Expected maturity analysis of undiscounted other post-employment benefits: At December 31, 2016 At December 31, 2015 $ $ 267 264 $ $ 450 483 $ $ 427 443 $ $ 887 980 Less than a year Between 1 to 2 years Between 2 to 5 years Between 5 to 10 years DATA expects that, in 2017, contributions to its other post-employments benefit plans will be approximately $267. 16 Financial instruments term maturity of these instruments. The fair value of restricted cash approximates its carrying value because DATA’s financial instruments consist of cash and cash it is a deposit held with a Canadian chartered bank. equivalents, restricted cash, trade receivables, trade payables, loans payable, credit facilities, and convertible debentures, as indicated in DATA’s statements of consolidated financial position as at December 31, 2016 and 2015. DATA does not enter into financial instruments for trading or speculative purposes. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of cash and cash equivalents, trade receivables, trade payables and loans payable The fair value of DATA's Credit Facilities are equivalent to their carrying value since their interest rates are comparable to market rates. The 6.00% Convertible Debentures are listed for trading on the TSX, and the debt portion is recorded at amortized cost. Based on the quoted market price, the 6.00% Convertible Debentures had a fair value of $10,616 at December 31, 2016 compared to a book value of $11,082 for the debt portion and of $128 for the conversion options recorded at its approximates their carrying value because of the short- historical value. 91 ANNUAL REPORT 2016DATA COMMUNICATIONS MANAGEMENT CORP.CATEGORIES OF FINANCIAL ASSETS AND LIABILITIES December 31, 2015. All financial assets and financial liabilities listed are categorized as level 1 inputs in the The carrying values and the fair values of DATA’s fair value hierarchy. There were no transfers between financial instruments are classified into the categories levels 1, 2 or 3 during the year. listed below as at December 31, 2016 and as at December 31, 2016 Loans and receivables (1) Financial liabilities at amortized cost (2) December 31, 2015 Loans and receivables (1) Financial liabilities at amortized cost (2) Carrying Value Fair Value $ $ $ $ 31,126 72,018 $ $ 31,126 71,505 Carrying Value Fair Value 39,264 82,400 $ $ 39,264 78,356 (1) Includes cash and cash equivalents, restricted cash and trade receivables. (2) Includes trade payables (excluding financial liabilities related to commodity taxes that are not contractual and that arise as a result of statutory requirements imposed by governments and therefore do not meet the definition of financial assets or financial liabilities), loan payable, credit facilities and convertible debentures. There are no financial instruments recorded at fair value in the consolidated statements of financial position as at December 31, 2016 and 2015. RISKS ARISING FROM FINANCIAL INSTRUMENTS evaluations are performed prior to the initial granting DATA is exposed to various risks as it relates to of credit terms when warranted and periodically financial instruments. These risks and the processes thereafter. Normal credit terms for amounts due from for managing the risk are set out below. customers call for payment within 0 to 90 days. CREDIT RISK Credit risk is the risk of an unexpected loss if a customer or counterparty to a financial instrument fails to meet its contractual obligations. Financial DATA has trade receivables from clients engaged in various industries including financial institutions, insurance, healthcare, lottery and gaming, retailing, not-for-profit, energy and governmental agencies instruments that potentially subjected DATA to credit that are not concentrated in any specific geographic risk consisted of cash and cash equivalents and trade area. DATA does not believe that any single industry receivables. The carrying amount of assets included or geographic region represents significant credit in the consolidated statements of financial position represents the maximum credit exposure. risk. Credit risk concentration with respect to trade receivables is mitigated by DATA’s large client base. The cash equivalents consisted mainly of short-term Based on historical experience, DATA records a reserve investments, such as money market deposits. DATA has for estimated uncollectible amounts. Management deposited the cash equivalents with Canadian Schedule assesses the adequacy of this reserve quarterly, 1 banks, from which management believes the risk of taking into account historical experience, current loss to be remote. DATA grants credit to customers in the normal course of business. DATA typically does not require collateral or other security from customers; however, credit collection trends, the age of receivables and, when warranted and available, the financial condition of specific counterparties. Management focuses on trade receivables outstanding for more than 90 days in assessing DATA’s credit risk and records a reserve, 92 Notes to Financial StatementsFor the years ended December 31, 2016 and 2015(in thousands of Canadian dollars, except percentages, shares and per share amounts)DATA COMMUNICATIONS MANAGEMENT CORP.when required, to recognize that risk. When collection 90 days old, an increase from 3.2% (or $1,217), of efforts have been reasonably exhausted, specific trade receivables that were more than 90 days old at balances are written off. As at December 31, 2016, December 31, 2015. The movement in DATA’s allowance 3.7% (or $1,102), of trade receivables were more than for doubtful accounts for 2016 and 2015 are as follows: Balance – Beginning of period Provisions and revisions Balance – End of period For the year ended December 31, 2016 For the year ended December 31, 2015 $ $ 526 $ (86) 440 $ 660 (134) 526 LIQUIDITY RISK additional available credit less letters of credit granted Liquidity risk is the risk that DATA may encounter of $1,132 under the Bank Credit Facility. See note 25 for difficulties in meeting obligations associated with details of the amendments to the Bank Credit Facility financial liabilities as they become due. As at on January 31, 2017. December 31, 2016, DATA had access to $10,020 of The contractual undiscounted cash flows of DATA’s significant financial liabilities are as follows: December 31, 2016 Trade payables Loan payable Long-term debt (1) Convertible debentures (2) Total December 31, 2015 Trade payables Loan payable Long-term debt (1) Convertible debentures (2) Total Less than a year 1 to 3 years 4 years and greater $ 27,304 $ 151 7,866 11,510 $ — — 23,407 — — — 11,952 — $ 46,831 $ 23,407 $ 11,952 $ Less than a year 1 to 3 years 4 years and greater $ 29,766 $ — $ 228 44,608 671 141 — 11,510 $ 75,273 $ 11,651 $ — — — — — $ $ Total $ 27,304 151 43,225 11,510 82,190 Total 29,766 369 44,608 12,181 86,924 (1) Bank Credit Facility, expiring on March 10, 2019. As at December 31, 2016, the outstanding balance totalled $10,434 and bore interest at an average floating rate of 3.45% per annum. The outstanding balance will be reduced by monthly principal repayments of $208 ending February 1, 2018, a principal payment of $8 on March 10, 2018 and principal repayment of $7,514 on March 10, 2019. The amounts at December 31, 2016 include estimated interest totalling $320 for 2017, $261 for 2018 and $44 for 2019. IAM IV Credit Facility, expiring on March 10, 2023. As at December 31, 2016, the outstanding balance totalled $25,611 and bore interest at a fixed rate of 6.95% per annum. Monthly blended principal and interest payments of $422. Former Credit Facilities, expired on August 31, 2016. As at December 31, 2015, the outstanding balance totalled $43,250 and bore interest at an average floating rate of 4.86% per annum. The outstanding balance was reduced by principal repayments on March 31 and June 30 of 2016. The amounts at December 31, 2015 include estimated interest totalling $1,358 for 2016. The estimated interest was calculated based on the total borrowings outstanding during the period and the average annual floating interest rate in effect as at December 31, 2015. See note 25 for details of changes to DATA's long-term debt subsequent to year end. (2) 6.00% Convertible Debentures, maturing on June 30, 2017, convertible at 0.8196 common shares per $1,000 of debenture. The aggregate principal amount totalled $11,175 as at December 31, 2016 and 2015. The amounts at December 31, 2016 include interest totalling $335 for 2017. The amounts at December 31, 2015 include interest totalling $671 for 2016 and $335 for 2017. 93 ANNUAL REPORT 2016DATA COMMUNICATIONS MANAGEMENT CORP. DATA also has significant contractual obligations DATA does not have significant foreign exchange in the form of operating leases (note 20), as well as transactions and, accordingly, the amounts and contingent obligations in the form of letters of credit. currency risk are not expected to have adverse material DATA believes that the currently projected cash flow impact on the operations of DATA. Management from operations, cash on hand and anticipated lower considers the currency risk to be low and does not operating costs resulting from existing and planned hedge its currency risk and therefore sensitivity restructuring initiatives will be sufficient to fund its analysis is not presented. currently projected operating requirements, including expenditures related to its growth strategy, payments associated with provisions as a result of on-going productivity improvement initiatives, payment of income tax liabilities, contributions to its pension plans, maintenance capital expenditures and interest and scheduled repayments of borrowings under its credit facilities. MARKET RISK INTEREST RATE RISK 17 Shares DATA is authorized to issue an unlimited number of common shares. The common shares have a stated capital of one dollar. Each common share is entitled to one vote at any meeting of shareholders. Each holder of the common shares will be entitled to receive dividends if, as and when declared by the Board. In the event of the liquidation, dissolution, winding up of DATA or other distribution of assets of DATA among Interest rate risk refers to the risk that the value of its shareholders for the purpose of winding up its a financial instrument or cash flows associated with affairs, the holders of the common shares will, subject the financial instrument will fluctuate due to changes to the rights of the holders of any other class of shares in market interest rates. Interest rate risk arises from of DATA entitled to receive assets of DATA upon such interest bearing financial assets and liabilities. Non- a distribution in priority to or concurrently with the derivative interest bearing assets are primarily short holders of the common shares, be entitled to participate term liquid assets. DATA’s interest rate risk arises from in the distribution. Such distribution will be made in long-term debt issuances at floating interest rates. equal amounts per share on all the common shares at At December 31, 2016, $10,434 of DATA’s indebtedness the time outstanding without preference or distinction. outstanding was subject to floating interest rates of On July 4, 2016, DATA consolidated its issued and 3.45% per annum; a 1% increase/decrease in interest outstanding common shares on the basis of one rates would have resulted in an increase/decrease in post-consolidation common share for each 100 profit or loss and comprehensive income (loss) by pre-consolidation common shares (the “Share $171 for the year ended December 31, 2016 (2015 – Consolidation”). As a result, the total number of $456), respectively. At December 31, 2016, $25,611 of DATA’s issued and outstanding common shares were DATA’s indebtedness outstanding was subject to a fixed consolidated to 11,975,053 on that date. No fractional interest rate of 6.95% per annum. DATA’s remaining common shares were issued, and any fractional share outstanding 6.00% Convertible Debentures are subject entitlements resulting from the Share Consolidation to a fixed interest rate of 6.00% per annum. CURRENCY RISK Currency risk is the risk that the fair value of future cash flows arising from a financial instrument will fluctuate because of changes in foreign currency exchange rates. In the normal course of business, were rounded up to the nearest whole number of common shares. All references to common shares, restricted share units and stock options in these consolidated financial statements reflect the Share Consolidation, unless specified otherwise. 94 Notes to Financial StatementsFor the years ended December 31, 2016 and 2015(in thousands of Canadian dollars, except percentages, shares and per share amounts)DATA COMMUNICATIONS MANAGEMENT CORP.The following summarizes the change in number of issued and outstanding common shares during the periods below: Balance – January 1, 2016 Shares issued - May 31, 2016 Shares issued - July 4, 2016 Balance – December 31, 2016 Balance – January 1, 2015 Shares issued - December 23, 2015 Balance – December 31, 2015 Number of Common shares Amount 9,987,528 $ 234,782 1,678,567 308,958 2,280 370 11,975,053 $ 237,432 234,906 $ 215,336 9,752,622 19,446 9,987,528 $ 234,782 On May 27, 2016, DATA announced that it intended SHARE-BASED COMPENSATION to complete a non-brokered private placement of DATA has adopted a Long-Term Incentive Plan ("LTIP") up to 198,751,793 common shares (or 1,987,525 post- to: recruit and retain highly qualified directors, officers, consolidation common shares) (or approximately employees and consultants (the "Participants"); 19.9% of the then current number of outstanding provide Participants with an incentive for productivity common shares) at a price of $0.014 per share and an opportunity to share in the growth and the (or $1.40 per post-consolidation share) for gross value of DATA; and, align the interests of Participants proceeds to DATA of approximately $2,783 in two with those of the shareholders of DATA. Awards to tranches. On May 31, 2016, the first portion of the Participants are primarily based on the financial private placement was completed and DATA issued a results of DATA and services provided. The aggregate total of 1,678,567 common shares for gross proceeds maximum number of common shares available for of $2,350, less issue expenses of $70 for net proceeds issuance from DATA's treasury under the LTIP is of $2,280. On July 4, 2016, after receiving disinterested 1,197,505 common shares or 10% of the issued and shareholder approval at DATA's annual and special outstanding common shares of DATA. The shares to be meeting of shareholders held on June 30, 2016, DATA awarded will be authorized and unissued shares. completed the second portion of the private placement announced on May 27, 2016 and issued 308,958 common shares for gross proceeds of $433, less issue expenses of $63 for net proceeds of $370. DATA's share-based compensation plan consists of five types of awards: restricted share unit ("RSUs"), options, deferred share unit ("DSUs"), restricted shares or stock appreciation right ("SARs") awards. No DSUs, restricted On December 23, 2015, DATA redeemed $33,530 shares or SARs have been granted to date. aggregate principal amount of its $44,705 outstanding 6.00% Convertible Debentures and satisfied this obligation by issuing 975,262,140 common shares (or 9,752,622 post-consolidation common shares) of DATA. The share issuance was recorded based on the trading price on the day of the transaction of $0.02 per share. Transaction costs related to the issuance of $59 were deducted when recording the shares. (a) Restricted share unit ("RSU") Under the RSU portion of the LTIP, selected employees are granted RSUs where each RSU represents the right to receive a distribution from the company in an amount equal to the fair value of one DATA common share. RSUs generally vest within three years and primarily settle in cash upon vesting. 95 ANNUAL REPORT 2016DATA COMMUNICATIONS MANAGEMENT CORP.A liability for RSUs is measured at fair value on component of costs of revenues, selling, commissions the grant date and is subsequently adjusted for and expenses, and general and administration changes in fair value. The liability is recognized on a expenses. Compensation expenses for RSUs incorporate graded vesting basis over the vesting period, with a an estimate for expected forfeiture rates based on corresponding charge to compensation expense, as a which the fair value is adjusted. Balance - beginning of year Units granted Units forfeited Units paid Balance - end of year December 31, 2016 Number of RSUs December 31, 2015 Number of RSUs 2,366 452,371 (425,199) — 29,538 — 3,186 (551) (269) 2,366 During the year ended December 31, 2016, a total During the year ended December 31, 2016, of 425,199 RSUs were granted to certain members compensation expense of $17 (2015 – $12) was of DATA's management team. Eligible participants recognized in the consolidated statement of received a number of performance RSUs based on operations related to RSUs granted. a percentage of their base salaries at a price of $1.75 per share, being the volume-weighted average trading price of DATA’s common shares between December 23, 2015 and December 31, 2015, which would cliff vest on December 31, 2018, based on certain net income and share price performance hurdles being met by the end of December 31, 2016 and December 31, 2018, respectively. As at December 31, 2016, the net income hurdle was not met and therefore all of these RSUs were forfeited. During the year ended December 31, 2016, a total of 27,172 RSUs were granted to the president ("President") and the chief executive officer ("CEO") of DATA. These are non-performance RSUs which will cliff vest three years after the grant date. During the year ended December 31, 2015 a total of 3,186 RSUs were granted to senior executives at DATA, 551 RSUs were forfeited and 269 RSUs were paid in cash. Of the total outstanding RSUs at December 31, 2016, 234 (2015 – 117) have vested and are payable. The carrying amount of the liability relating to the RSUs at December 31, 2016 was $17 (2015 – $1). 96 Notes to Financial StatementsFor the years ended December 31, 2016 and 2015(in thousands of Canadian dollars, except percentages, shares and per share amounts)DATA COMMUNICATIONS MANAGEMENT CORP.(b) Option (“Option”) A summary of Option activities for the year ended December 31, 2016 and 2015 is as follows: 2016 2015 Number of Options Weighted average Exercise Price Number of Options Weighted average Exercise Price Options outstanding - beginning of year 11,745 $ 75.00 — $ Granted Forfeited 987,011 (39,011) Options outstanding - end of year 959,745 $ 1.50 1.50 2.41 11,745 — 11,745 $ — 75.00 — 75.00 Exercisable 641,603 $ 1.50 — $ — The outstanding options had an exercise price range as follows: $75.00 $1.50 Options outstanding December 31, 2016 Number of Options December 31, 2015 Number of Options 11,745 948,000 959,745 11,745 — 11,745 The Black-Scholes option-pricing model inputs used to compute compensation expense under the fair value-based method are as follows: Expected life Expected volatility Dividend yield Risk free rate of return December 31, 2016 December 31, 2015 7 yrs 40% 0% 0.99% 7 yrs 40% 0% 1.03% — Weighted average fair value of options granted $ 1.00 $ During 2015, the Board approved the award of options option-pricing model and current market inputs, is to purchase up to 11,745 common shares to the CEO revalued at each reporting date. of DATA. The options were granted on April 16, 2015, have an exercise period of seven years from the grant date once vested, and have an exercise price of $75 per share, representing the fair value of the common shares on the date of grant. The vesting of the award is based on meeting certain performance targets for Actual EPS and Actual Return on Capital Employed ("ROCE") for the fiscal 2016, 2017 and 2018 fiscal periods. As the targets have not been set, the value of the award, as determined using a Black-Scholes During the year ended December 31, 2016, the Board approved awards of options to purchase up to 987,011 common shares to the executive management team of DATA. Once vested, the options are exercisable for a period of seven years from the grant date at an exercise price of $1.50 per share, representing the fair value of the common shares on the date of grant. A total of 499,377 options were awarded to DATA's CEO and vested on June 23, 2016 and a total of 97 ANNUAL REPORT 2016DATA COMMUNICATIONS MANAGEMENT CORP. 487,634 options were awarded to the other members During the year ended December 31, 2016, of DATA's executive management team and vest at a compensation expense of $779 (2015 – $nil) rate of 1/24th per month beginning on June 23, 2016. was recognized in the consolidated statement of During the year ended December 31, 2016, 39,011 of operations related to options granted. these options awarded to the executive management team were forfeited. 18 Loss per share BASIC LOSS PER SHARE Net loss for the year attributable to common shareholders Weighted average number of shares Basic loss per share DILUTED LOSS PER SHARE Net loss for the year attributable to common shareholders Weighted average number of shares Diluted loss per share For the year ended December 31, 2016 For the year ended December 31, 2015 $ $ $ $ (32,107) $ 11,125,518 (2.89) $ (32,107) $ 11,125,518 (2.89) $ (19,172) 475,382 (40.33) (19,172) 475,382 (40.33) 6.00% Convertible Debentures in the aggregate 948,000 common shares where the market price of the principal amount of $11,175 (2015 – $11,175) and the common shares was higher than the exercise price were related interest expense were excluded from the excluded from the computation of diluted earnings per computation of diluted earnings per share as their share as their effect would have been anti-dilutive. effect would have been anti-dilutive. Options to purchase up to 11,745 common shares were excluded from the computation of diluted earnings per share because their exercise price was higher than the market price of the common shares. Options to purchase up to The prior year loss per share calculations have been retroactively adjusted to reflect the Share Consolidation. See note 17. 19 Changes in working capital Trade receivables Inventories Prepaid expenses and other current assets Trade payables Deferred revenue For the year ended December 31, 2016 For the year ended December 31, 2015 $ 8,879 $ 3,782 (520) (2,378) (2,144) $ 7,619 $ (805) 3,101 1,462 396 (633) 3,521 98 Notes to Financial StatementsFor the years ended December 31, 2016 and 2015(in thousands of Canadian dollars, except percentages, shares and per share amounts)DATA COMMUNICATIONS MANAGEMENT CORP.20 Commitments and contingencies DATA leases real estate, printing equipment, trucks and office equipment in connection with its sales and manufacturing activities under non-cancellable lease agreements, which expire at various dates. Future commitments under non-cancellable operating leases are as follows: 2017 2018 2019 2020 2021 2022 and thereafter December 31, 2016 $ 11,239 9,421 8,614 8,116 7,221 24,782 69,393 $ DATA and its subsidiary are subject to various claims, under applicable Québec pension legislation and potential claims and lawsuits. While the outcome of total employer contributions determined pursuant to these matters is not determinable, DATA’s management collective agreements. does not believe that the ultimate resolution of such matters will have a material adverse impact on DATA’s financial position. Under Québec pension legislation applicable prior to December 31, 2014, DATA would have been required to fund any outstanding solvency deficiency in respect of DATA makes contributions to the Québec Graphics its employees, pensioners and vested deferred members Communications Supplemental Retirement and if DATA had withdrawn from the plan or if the plan Disability Fund of Canada (the “SRDF”) based on a had been terminated. On February 18, 2015, Bill 34 percentage of the wages of its unionized employees (An Act to amend the Supplemental Pension Plans Act covered by the respective collective bargaining with respect to the funding and restructuring of certain agreements, all of whom are employed at DATA multi-employer pension plans) was tabled in the facilities located in the Province of Québec. Québec legislature. Bill 34, which was adopted on The SRDF is a negotiated contribution defined April 2, 2015 with effect from December 31, 2014, benefit, multi-employer pension plan which provides amends and clarifies the Québec pension legislation retirement benefits to unionized employees in the for the SRDF to, among other things: printing industry. The SRDF is jointly-trusteed by representatives of the employers of SRDF members and the unions which represent SRDF members in collective bargaining. Based upon the terms of those applicable collective agreements, DATA’s estimated annual funding obligation for the SRDF for 2017 is $579. The most recent funding actuarial report (as at • limit required employer contributions only to those amounts specified in the applicable collective agreements negotiated with the relevant unions; • eliminate the employer’s obligation to fund solvency deficiencies; December 31, 2013) in respect of the Québec members • allow for the reduction of accrued benefits; and of the plan disclosed a solvency deficiency and a gap between the minimum total contributions required 99 ANNUAL REPORT 2016DATA COMMUNICATIONS MANAGEMENT CORP.• remove the responsibility of participating employers advised that a form of Recovery Plan was filed with to fund their share of the solvency deficit upon the Québec pension regulatory authorities in August withdrawal from the plan or termination of the plan, 2016 and that plan members will be sent a personalised except in certain circumstances when withdrawal statement indicating the effect that the proposed plan from the plan or termination of the plan occurs will have on their respective pension entitlements. within five years of Bill 34 being adopted. DATA understands that the Recovery Plan was approved In addition, another consequence of Bill 34 will be to require the administrator of the SRDF to propose and seek consensus on a “Recovery Plan”. On October 31, 2016, DATA received a letter from the Board of Trustees administering the SRDF and was in December 2016 and has been advised that employers’ obligations to fund any solvency deficiency have been eliminated in accordance with Bill 34. All participating employers will be receiving a copy of the decisions in the near future. 21 Capital structure DATA’s objectives when managing its capital DATA’s Credit Facilities are subject to a number of structure are: • To seek to ensure sufficient liquidity to safe guard DATA’s ability to continue as a going concern. • To maintain a strong capital base so as to maintain shareholders’, creditors’, customers’, suppliers’ and market confidence. • To provide a return to shareholders. covenants and restrictions including the requirement to meet certain financial ratios and financial condition tests (see note 10). Management also uses Debt to EBITDA Ratio as a key indicator in managing DATA’s capital. With respect to its equity, the current level of capital is considered adequate in the context of current operations and the present strategic plan of DATA. The equity component of capital increases primarily DATA’s capital structure consists of various types based upon the income of the business less any of long-term debt and shareholder’s equity. DATA’s dividends paid. Management anticipates that any primary uses of capital are to finance increases in major acquisition or significant growth initiatives working capital, payments towards other long-term would be financed in part with additional equity obligations, capital expenditures and acquisitions. and debt. DATA’s capital structure is as follows: Credit facilities Convertible debentures Total long-term debt Total equity (deficit) December 31, 2016 December 31, 2015 $ $ $ 35,042 $ 11,082 46,124 (9,935) $ $ 43,095 10,912 54,007 19,019 DATA is not subject to any externally imposed capital requirements other than certain restrictions under the terms of its credit facilities, which relates mainly to permitted investments, acquisitions, lease agreements, dividends and subordinated debt. 100 Notes to Financial StatementsFor the years ended December 31, 2016 and 2015(in thousands of Canadian dollars, except percentages, shares and per share amounts)DATA COMMUNICATIONS MANAGEMENT CORP.22 Expenses by nature Raw materials and other purchases Wages and benefits Pension and other post-employment expenses Occupancy costs Restructuring expenses Depreciation, amortization and impairments Gain on cancellation of convertible debentures Other expenses For the year ended December 31, 2016 For the year ended December 31, 2015 $ 140,691 $ 94,297 2,587 16,273 4,200 37,210 — 11,305 153,336 101,938 2,550 16,761 13,560 32,703 (12,766) 8,880 316,962 Total cost of revenues and operating expenses $ 306,563 $ 23 Segmented information however at December 31, 2016, U.S. sales were not significant to disclose separately. The chief executive officer (“CEO”) of DATA is the chief operating decision-maker (“CODM”). Management has determined that there is one operating segment based on the information reviewed by the CODM for the purposes of allocating resources and assessing performance. As a result of the organizational and operational changes implemented by DATA in 2015, DATA’s operations are increasingly integrated, interdependent and less focused on serving separate distribution channels and therefore, DATA’s former Multiple Pakfold operating segment has been included in Warehousing revenues were approximately 6% of total consolidated revenues for the year ended December 31, 2016 and were approximately 7% of total consolidated revenues for the year ended December 31, 2015. 24 Related party transactions Effective June 23, 2015, DATA appointed an insurance company as its broker of record for its corporate insurance policies and subsequently entered into new general corporate insurance policies, including the one consolidated operating segment commencing in renewal of its directors and officers liability insurance the quarter ended December 31, 2015. Management later in the year. The insurance company continues evaluates the performance of the reporting segment as DATA’s broker of record and earns fees based on a based on income before interest, finance costs and income taxes. Corporate expenses, certain non- percentage of the insurance expense paid by DATA. During the fiscal year, DATA recorded an insurance recurring expenses, interest expense, finance costs expense of $480 (2015 – $180) related to these policies. and income taxes are not taken into account in As at December 31, 2016, prepaid expenses and other the evaluation of the performance of the reporting current assets included prepaid insurance to the segment. All significant external sales are to customers located in Canada. DATA established insurance company of $259 (2015 – $230). The insurance company is a related party whereby the Chair of the operations in Niles, Illinois during the fourth quarter Board and the President of DATA each are Directors of 2012 in order to service the U.S. operations of a and indirectly have a minority interest in the insurance large customer and is seeking to grow its U.S. sales, company, through companies controlled by them. 101 ANNUAL REPORT 2016DATA COMMUNICATIONS MANAGEMENT CORP.During the year ended December 31, 2016, the CEO and a On February 22, 2017, DATA acquired all of the minority shareholder of DATA participated in a private outstanding common shares of a company that was placement of common shares (see note 17), purchasing indirectly controlled by the Chair of the Board and the 1,297,724 common shares for consideration of $1,817. President of DATA, through companies controlled by On December 21, 2016, DATA entered into a new them. See note 25 for further details. agreement to lease approximately 2,000 square feet of These transactions are provided in the normal course office space in Toronto, Ontario from a company that of operations and are measured at the exchange the Chair of the Board and the President are Directors amount, which represents the amount of consideration of. Under the lease agreement, the lease commences established and agreed to by the related parties. March 1, 2017, runs month-to-month and can be terminated by either party with reasonable notice. The monthly expense will be $7 per month. COMPENSATION OF KEY MANAGEMENT Key management personnel are deemed to be the CEO, president, chief financial officer and other members of the senior executive team. Compensation awarded to key management personnel included: Salaries and other short-term employee benefits Termination and retirement benefits Post-employment benefits Share-based compensation expense Total For the year ended December 31, 2016 For the year ended December 31, 2015 $ $ 2,599 $ — 20 779 2,405 1,135 29 — 3,398 $ 3,569 The CEO was granted 145,566 RSUs (of which 120,477 of substantially all of the assets of Eclipse Colour RSUs were forfeited) and was granted options to and Imaging Corp.("Eclipse") and the acquisition purchase up to 499,377 common shares during the year (the "Thistle Acquisition") of all of the shares of (see note 17). Thistle Printing Limited (“Thistle”). During the year ended December 31, 2016, DATA’s Under the terms of the Eclipse Acquisition, DATA general and administration expenses include a charge acquired from Eclipse substantially all of the assets of $372 (2015 – $322) for the duties performed by of Eclipse for a net purchase price of approximately DATA’s Board. 25 Subsequent events ACQUISITIONS OF ECLIPSE COLOUR AND IMAGING CORP. AND THISTLE PRINTING LIMITED On February 22, 2017 (the “Closing Date”), DATA completed the acquisition (the “Eclipse Acquisition”) $9,425. The purchase price was satisfied as follows: $3,534 in cash, $1,325 through the issuance of 634,263 Common Shares of DATA, and $4,566 through the issuance of a secured, non-interest bearing vendor take-back promissory note, which is payable in two equal instalments on each of the first and second anniversaries of the Closing Date. The purchase price is subject to customary post-closing working capital and other adjustments. The acquisition of Eclipse 102 Notes to Financial StatementsFor the years ended December 31, 2016 and 2015(in thousands of Canadian dollars, except percentages, shares and per share amounts)DATA COMMUNICATIONS MANAGEMENT CORP.adds significantly expanded wide format, large reductions will not reduce the amount available under format, and grand format printing capabilities to the revolving credit facility. The covenants under DATA’s portfolio of products and services. the Bank Credit Facility remain unchanged from the Under the terms of the Thistle Acquisition, DATA acquired all of the outstanding common shares of Thistle from Capri Media Group Inc. (“Capri”). Capri is a related party whereby companies controlled by the Chair of the Board and the President of DATA, respectively, control Capri. Thistle was acquired for a net purchase price of approximately $6,058. The purchase price was satisfied as follows: $1,107 in cash, $1,457 through the issuance of 644,445 Common Shares of DATA, and $3,494 in the form of a secured, non-interest bearing vendor take-back promissory note, which is payable in 24 equal monthly payments following the Closing Date. The purchase price is terms existing as of March 10, 2016, however the pro forma financial results for Eclipse and Thistle will be included on a trailing twelve month basis effective as of the Closing Date for the purposes of DATA's covenant calculations. The increased availability under the Bank Credit Facility was used in part, together with the additional availability under the Bank Term Facility, to finance the up-front cash components of the Eclipse and Thistle acquisitions and related transaction expenses and will also provide DATA with additional flexibility to continue to pursue its strategic growth objectives. In connection with these two acquisitions, DATA’s indebtedness increased by approximately $16,251, including assumed indebtedness of Eclipse subject to customary post-closing working capital and other adjustments. This acquisition adds expertise in and Thistle. commercial printing, design, prepress and bindery On January 31, 2017, DATA amended its IAM IV Credit services to DATA’s portfolio, and complements Facility with IAM, which, among other things, provides DATA’s current capabilities in direct mail, fulfilment that Senior Funded Debt of DATA may not exceed and data management. $72,000 (after giving effect to the provisions of the In aggregate, a total of 1,278,708 common shares of DATA were issued to the vendors of Eclipse and Thistle and the number of DATA’s issued and outstanding common shares has increased from 11,975,053 to 13,253,761. The purchase price accounting related to the Eclipse and Thistle acquisitions are in progress as at the date of the consolidated financial statements. inter-creditor agreement described below), an increase from $50,000 in the original term loan facility dated March 10, 2016. The covenants under the IAM IV Credit Facility remain unchanged from the terms existing as of March 10, 2016 however the pro forma financial results for Eclipse and Thistle will be included on a trailing twelve month basis effective as of the Closing Date for the purposes of DATA's covenant calculations. In addition, on March 9, 2017, IAM consented, effective the quarter ending March 31, 2017, to modify the INCREASE IN SENIOR CREDIT FACILITIES AND calculation of debt service coverage ratio under the AMENDMENT TO EXISTING TERMS provisions of the IAM IV Credit Agreement to include On January 31, 2017, DATA amended its Bank Credit EBITDA (as defined in the IAM IV Credit Agreement) Facility, including an increase in the total available for the six most recently completed fiscal quarters commitment from up to $25,000 to up to $35,000 (previously four most recently completed quarters) less and the extension of the term by one year, to March 31, 2020. The amount available under the income taxes actually paid in cash and the amount of capital expenditures actually incurred or paid during Bank Term Facility was increased to $7,000, an increase such period up to the amount permitted under this from $5,000 under the original sub facility. The Bank agreement, divided by the aggregate of (i) scheduled Term Facility will amortize in equal monthly payments principal plus interest payments on the IAM IV Credit over the new term of the Bank Credit Facility but such Facility and IAM III Credit Facility and (ii) projected 103 ANNUAL REPORT 2016DATA COMMUNICATIONS MANAGEMENT CORP.interest payments on the Bank Credit Facility for the next six quarters (previously four most recently completed quarters). Integrated Private Debt Fund III LP (“IAM III”), another loan managed by IAM, is a senior secured lender to Thistle. There is an existing term loan in the amount of $8,000 which amortizes in equal monthly payments over an 8 year term ending on October 15, 2022, with a fixed interest rate of 6.1% per annum (“IAM III Credit Facility”). On February 22, 2017, an amendment was made to the IAM III Credit Facility in which DATA will become a co-borrower with Thistle, pursuant to which the covenants will be amended to match those of DATA under its IAM IV Credit Facility and reported on a consolidated basis. As at February 22, 2017, Thistle had outstanding borrowings of $5,533 under the IAM III Credit Facility. On February 22, 2017, DATA entered into an amended inter-creditor agreement between the Bank, IAM III, IAM IV, and the parties to the vendor take-back promissory notes (the “VTB Noteholders”) issued in connection with the Eclipse Acquisition and the Thistle Acquisition, respectively, which, among other things, establishes the rights and priorities of the respective liens of the Bank, IAM III, IAM IV and the VTB Noteholders on the present and after-acquired property of DATA, Eclipse and Thistle. RESTRUCTURING EXPENSES On January 31, 2017, DATA announced the completion of a process realignment of its operations. In connection with these improvements, DATA expects to incur a total of approximately $1,800 in severance expenses. This restructuring primarily involves a reduction of DATA's indirect labour force across its operations, which is designed to streamline DATA’s order-to-production process. This process re-design and automation is expected to improve manufacturing processes from DATA’s on-line web-to-print ordering system, directly to digital production. 104 Notes to Financial StatementsFor the years ended December 31, 2016 and 2015(in thousands of Canadian dollars, except percentages, shares and per share amounts)DATA COMMUNICATIONS MANAGEMENT CORP.Corporate information DIRECTORS AND OFFICERS J.R. Kingsley Ward 3 Chairman, Director William Albino 1,2,3 Director EXECUTIVE TEAM Michael G. Sifton Chief Executive Officer Gregory J. Cochrane President James J. Murray O.Ont., SIOR 1,2 Director James E. Lorimer Chief Financial Officer Derek J. Watchorn 1,2,3 Director Steve Wittal Senior Vice-President, Sales Michael G. Sifton Director & Officer Chief Executive Officer James E. Lorimer Officer Alan Roberts Senior Vice-President, Operations Judy Holcomb-Williams Vice-President, Human Resources Chief Financial Officer & Corporate Secretary Karl Spangler Chief Technology Officer CORPORATE INFORMATION Auditors PricewaterhouseCoopers LLP Transfer Agent Computershare Investor Services Inc. Corporate Counsel McCarthy Tétrault LLP Corporate Office 9195 Torbram Road Brampton, Ontario L6S 6H2 Telephone: 905-791-3151 Facsimile: 905-791-1713 Website DATACM.COM Toronto Stock Exchange Symbols DCM / DCM.DB 1 Member, Audit Committee (Chairperson is William Albino) 2 Member, Corporate Governance Committee (Chairperson is Derek J. Watchorn) 3 Member, Human Resources & Compensation Committee (Chairperson is J.R. Kingsley Ward) 105 ANNUAL REPORT 2016DATA COMMUNICATIONS MANAGEMENT CORP.DATACM.COM DATA COMMUNICATIONS MANAGEMENT CORP. 9195 TORBRAM ROAD, BRAMPTON, ON L6S 6H2 

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