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