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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- --------------------------------------------------------------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 0-28968
MDSI MOBILE DATA SOLUTIONS INC.
(Exact name of registrant as specified in its charter)
CANADA NOT APPLICABLE
(Jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
10271 Shellbridge Way
Richmond, British Columbia,
Canada V6X 2W8
(Address of principal executive offices)
Registrant's telephone number: (604) 207-6000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, no par value
---------------------------
(Title of Class)
Rights to Purchase Common Shares
--------------------------------
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Aggregate market value of the Registrant's Common Shares held by
non-affiliates as of March 27, 2001 was approximately US$29,364,000. The number
of shares of the Registrant's Common Shares outstanding as of March 27 , 2001
was 8,621,897.
TABLE OF CONTENTS
PART I ....................................................................... 1
ITEM 1: BUSINESS .................................................... 1
ITEM 2: PROPERTIES ..................................................20
ITEM 3: LEGAL PROCEEDINGS ...........................................21
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .........21
PART II ......................................................................21
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS .................................21
ITEM 6: SELECTED FINANCIAL DATA .....................................22
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS .........................23
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK .................................................35
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA .................35
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE .........................35
PART III .....................................................................36
ITEM 10: DIRECTORS AND OFFICERS OF THE REGISTRANT ...................36
ITEM 11: EXECUTIVE COMPENSATION .....................................40
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT .............................................44
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .............45
PART IV ......................................................................46
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K ........................................46
i
Forward-Looking Statements
Certain statements in this Annual Report on Form 10-K constitute
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of MDSI Mobile Data Solutions Inc. ("MDSI"
or the "Company"), or developments in the Company's industry, to differ
materially from the anticipated results, performance or achievements expressed
or implied by such forward-looking statements. Such factors include, but are not
limited to: the Company's limited operating history, lengthy sales cycles, the
Company's dependence upon large contracts and relative concentration of
customers, risks involving the management of growth and integration of
acquisitions, competition, product development risks and risks of technological
change, dependence on selected vertical markets and third-party marketing
relationships and suppliers, risks and uncertainties related to delivering its
products and services on the Internet, the Company's ability to protect its
intellectual property rights and the other risks and uncertainties described
under "Business - Risk Factors" in Part I of this Annual Report on Form 10-K.
Certain of the forward looking statements contained in this Report are
identified with cross references to this section and/or to specific risks
identified under "Business - Risk Factors."
Exchange Rates
The following table sets forth, for each period presented, the exchange
rates at the end of such period, the average of the exchange rates on the last
day of each month during the period and the high and low exchange rates for one
Canadian dollar, expressed in U.S. dollars, based on the noon buying rate in New
York City for cable transfers payable in Canadian dollars as certified for
customs purposes by the Federal Reserve Bank of New York.
U.S. Dollars Per Canadian Dollar
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Period End US$0.6666 US$0.6925 US$0.6504 US$0.6999 US$0.7301
Average 0.6740 0.6744 0.6715 0.7198 0.7329
High 0.6983 0.6925 0.7105 0.7487 0.7513
Low 0.6397 0.6535 0.6341 0.6945 0.7235
On March 27, 2001 the noon buying rate was CDN$1.00 = US$0.6372. The
Canadian dollar is convertible into U.S. dollars at freely floating rates, and
there are currently no restrictions on the flow of Canadian currency between
Canada and the United States. Unless stated otherwise, all financial information
is expressed in United States dollars.
ii
Part I
Item 1: Business
The Company
By combining wireless communications, advanced workforce management
applications and the Internet, MDSI is improving the way in which companies sell
and deliver services. MDSI enables companies of any size, in any service market,
to manage mobile and on site service workers to deliver better and more
efficient services, and empowers those workers to perform more efficiently using
reliable, wireless links to enterprise or Internet resources. MDSI's solutions
consist of a suite of wireless connectivity, and service management solutions
that can be delivered through traditional on-site, enterprise implementations or
as a hosted service over the Internet. Founded in 1993, MDSI has over 100 major
customers worldwide with operations and support offices in the United States,
Canada, Europe and Australia.
MDSI develops, markets, implements and supports mobile workforce management
and wireless connectivity software for use by a wide variety of companies that
have mobile workforces, such as telecommunications, cable and broadband,
utilities (electric, gas and water), commercial field services, and public
safety providers. MDSI's products are used by such companies in conjunction with
public and private wireless data communications networks to provide
comprehensive solutions for the automation of business processes associated with
the scheduling, dispatching and management of a mobile workforce. The Company's
products provide a cost-effective method for companies with mobile workers to
utilize data communications to communicate with such workers, and for such
workers to interface on a real-time basis with their corporate information
systems.
In June 2000, the Company acquired all of the outstanding share capital of
Connectria Corporation ("Connectria"), a Missouri corporation, for aggregate
consideration of 845,316 Common Shares and the assumption of 583,037 stock
options. The business combination was accounted for under the pooling of
interests method of accounting. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Effects of Acquisitions."
Unless the context otherwise requires, references herein to "MDSI" or the
"Company" refer to MDSI Mobile Data Solutions Inc. and its subsidiaries. The
Company's principal executive offices are located at 10271 Shellbridge Way,
Richmond, British Columbia, Canada V6X 2W8, and its telephone number at that
location is (604) 207-6000. The Company's web site is located at
www.mdsi-advantex.com. Information contained on the Company's web site is not
part of this report.
Background
Organizations within the field service industry are highly dependent upon
their mobile workforces to support their respective products and services. The
field service industry is composed of a number of market segments, such as the
telecommunications, cable and broadband, utilities (electric, gas and water) and
commercial field services markets, in which mobile workers principally provide
repair, maintenance, installation and other services for customers.
Historically, these organizations have managed and supported their mobile
workers by communicating information through wireline or voice radio systems.
Although voice radio systems are mobile, such systems rely on heavily used
portions of the radio spectrum and are subject to frequent periods of
congestion.
Mobile data communication systems that addressed certain limitations of
voice communications systems were first developed for a limited number of
vertical markets, such as utility, public safety, taxi, courier and general
field service. Businesses in these markets recognized certain productivity
benefits associated with wireless data applications. Although such mobile data
communications systems were introduced in a number of vertical markets, these
systems failed to achieve widespread adoption. The Company believes that the low
rate of adoption was attributable to the high cost of establishing private radio
networks, the difficulty of obtaining radio spectrum for such networks, the high
cost and limited functionality of early mobile computing devices and the
regulatory environment in certain industries, such as utilities and
telecommunications, which diminished competitive pressures. Additionally, a lack
of industry-specific application software which effectively addressed the needs
of mobile workers limited the cost-effectiveness of early systems.
1
The Company believes that significant trends in the regulatory environment,
numerous technological advances and competitive pressures have reduced many of
these limitations and have made the adoption of mobile data solutions by the
field service industry more attractive. Deregulation has exposed the utility and
telecommunications markets to competitive pressures, driving businesses within
those markets to seek ways to reduce costs, improve operations, efficiently
allocate resources and increase the quality of customer service. In addition,
the availability of powerful mobile computing devices has permitted the
development of sophisticated software applications. Finally, public data
networks, such as those operated by Motient Corporation and Cingular Interactive
L.P., are now widely available in North America, and similar networks are
available in Europe and the Asia Pacific region. Increasing competition among
these networks and the emergence of new wireless communication services,
provided by organizations such as AT&T, Ameritech Mobile Communication and
others, has resulted in greater availability of wireless networks and lower
costs to subscribers. Consequently, the Company believes that mobile data
solutions may now be implemented without the difficulty and expense of
establishing a private radio network, thereby increasing the cost-effectiveness
of such systems.
The MDSI Solution
MDSI has combined its expertise in software application development and
mobile data communications technology with its understanding of the unique needs
of targeted vertical markets in the field service and public safety industries
to develop mobile workforce management solutions that address the specific needs
of businesses within those vertical markets. MDSI's products enable
organizations in the field service and public safety industries to effectively
communicate with, manage and support their mobile workers. MDSI's products are
scaleable to address the needs of both small and large organizations. For
example, MDSI has sold applications to support as few as 70 and as many as 7,000
mobile workers.
MDSI's proprietary, wirelessly-enabled applications enable service
companies to provide better customer service through the efficient management of
service appointments and their workforces. MDSI's solutions help companies
optimally schedule, assign, dispatch, track, complete and report on service work
orders, and provide constant, near real-time communication between the company
and its mobile workforce. Mobile workers and their organizations stay connected
through status updates (e.g., "en route," "on site" or "job complete"), two-way
messaging, remote access to enterprise databases and applications, and other
features.
MDSI's products are modular in design, which allows a solution to be
implemented and then expanded to satisfy an organization's evolving information
requirements. MDSI's products are designed to interface with a variety of public
and private mobile data networks, including PCS networks and satellite-based
data transmission networks, and are compatible with a variety of operating
platforms, computer networks and enterprise applications. The most recent
versions of MDSI's software are also designed to be Internet-enabled, allowing
service companies' call takers, dispatchers and mobile technicians to use Web
browsers to access and input data and some products allow customers to schedule
appointments and track appointment progress online, anytime. For the mobile
user, MDSI's Internet-enabled software can be accessed on any mobile device,
such as a laptop, personal digital assistant, pager or an internet enabled
phone.
MDSI combines its products with professional services, such as
implementation planning, project management, software configuration, software
customization, training and ongoing technical support and software maintenance,
to effectively address a customer's mobile workforce management requirements.
Where appropriate, MDSI also provides third party products and services as part
of a complete mobile data solution. MDSI also offers general consulting services
to organizations evaluating the costs and benefits of implementing mobile
workforce management systems, as well as organizations evaluating wireless
industry software products and technologies.
In MDSI's traditional enterprise product deployment, MDSI's software is
installed on the customer's server at the customer's site. In 2000, MDSI
announced plans to implement its "eBusiness" strategy under which MDSI will
offer its Advantex family of mobile workforce management and wireless
connectivity application software products over the Internet from a
wirelessly-enabled Applications Service Provider ("ASP") site. The eBusiness
applications will include Advantex ASP, eService Manager and eService Manager
Mobile, which are designed to be similar in functionality to existing versions
of MDSI's software products.. MDSI intends to provide application hosting and
management services related to the eBusiness applications as a subscription
service for a monthly fee or on a "per transaction" basis.
2
MDSI believes that the growing usage of the Internet by the services
industry will provide opportunities to provide essential scheduling and
dispatching technology and services through its ASP site. The eBusiness strategy
is expected to provide smaller organizations that were previously unable to
afford mobile data workforce solutions or lacked the technical resources to
support such products, access to MDSI's products. See "Forward-Looking
Statements." MDSI intends to offer its ASP solution to customers through direct
sales by MDSI, co-marketing and partnership arrangements with other ASP
providers in select vertical markets, independent software vendors, systems
integration and wireless carriers. Ultimately, MDSI believes that larger
customers, including current MDSI customers, may elect to use MDSI's eBusiness
products rather than the traditional on-site systems currently used by larger
organizations.
Markets
MDSI has combined its expertise in software application development and
mobile data communications technology with its understanding of the unique needs
of targeted vertical markets to develop mobile workforce management solutions
that address the specific needs of businesses within those vertical markets.
Traditionally, MDSI has focused its attention on large customers in the
telecommunications, cable and broadband and utilities (electric, gas and water)
markets and to a lesser extent, commercial field service, and public safety
markets. MDSI evaluates new target markets based upon their similarity to
existing vertical markets in which MDSI has been successful, and upon the
ability of MDSI to utilize its core competencies and proven technology to meet
the needs of companies in these new markets.
Field Service
Telecommunications, Cable and Broadband. MDSI sells its
Advantex-Telecommunications product into the telecommunications, cable and
broadband markets. Recently, changes in the regulatory environment have led to
significant competition in these markets. For example, companies that provided
traditional voice telecommunications services are now permitted to provide data
services, basic cable and other broadband services. Similarly, companies that
provided traditional cable TV service, now also provide cable telephony services
and Internet services. The telecommunications market consists of wireline
providers of local, and long-distance services, wireless communication service
providers and ISPs (Internet service providers), worldwide. MDSI has installed
or has a contract to supply its products to numerous telecommunication companies
worldwide, including AT&T, Tele Danmark A/S, Cablevision Systems, and Belgacom
S.A.
MDSI believes that a number of major telecommunications companies have
evaluated the need for mobile workforce management systems. The Company
believes, however, that recent trends in the telecommunications industry have
affected levels of capital spending by companies in this industry, and that such
trends may adversely effect the rate at which these companies will adopt mobile
workforce management systems. Over time, MDSI believes that this market will
grow as companies implement mobile workforce management solutions to improve
their competitiveness, efficiency and service levels as deregulation of the
telecommunications markets continues. See "Forward-Looking Statements."
Cable and broadband services consist of basic cable television services and
new digital interactive broadband services, including digital cable TV services,
cable data and Internet services, cable telephony services, and other
interactive broadband data and multimedia services. The market is comprised of
traditional cable multiple system operators (MSO's) and independent cable system
operators, satellite service operators, new broadband divisions of traditional
telecommunication firms, and new broadband entrants. Currently, in North
America, approximately 80% of the subscriber base is under the control of the
ten largest MSO's. Although several of these major cable operators have
implemented mobile data solutions in selected sites, few operators have rolled
out these systems to multiple sites. Additionally, these MSO's are increasingly
outsourcing some of their field technician work to specialty contractors, a
group where MDSI does not currently have customers. See "Forward-Looking
Statements." MDSI has installed or has a contract to supply its products to
seven major cable operators, including Cox Communications Inc., Comcast Corp.,
MediaOne, Inc. and Adelphia Communications Corporation in the United States and
Rogers Cablesystems Ltd and Videotron in Canada. MDSI has also targeted the new
broadband overbuilder market (i.e., companies offering broadband services in
markets that traditionally have had only one service provider), which currently
is estimated to have only 4% share of the North American subscriber base, but
has grown rapidly. MDSI has successfully installed its r7 Advantex software with
one customer in the emerging broadband overbuilder market, Western Integrated
Networks, L.L.C. ("WinFirst").
3
Utilities. The utilities market targeted by MDSI primarily consists of gas,
electric and water companies in the United States, Canada, Europe and Asia. MDSI
has traditionally targeted the distribution operations within a utility. MDSI
believes, however, that such operations generally account for only a portion of
the total number of a utility's mobile workers, with the balance attributable to
mobile workers engaged in sales, construction, engineering and management
functions. As a result, MDSI believes that there is an opportunity to increase
sales to existing customers and generate incremental revenue. See
"Forward-Looking Statements". MDSI's products have been implemented or are being
implemented in over 60 gas and electric utilities located in the United States,
Canada, Europe and Asia.
Commercial Field Service. The commercial field market consists of a large
number of organizations mainly comprised of small and medium-sized firms who
provide a wide variety of general field services. These organizations include
companies engaged in the maintenance and repair of office equipment, insurance
adjustment, product repair and maintenance, computer technical support and
service, delivery services and on-site technical support. To date, MDSI has not
focused its primary attention on this market, but it has successfully sold its
Advantex-Field Service application to a small number of companies in this
market, including most recently, Diebold, Incorporated. The Company believes
that its new eBusiness products are designed to address the needs of small and
medium sized organizations in this market. See "Forward-Looking Statements."
Public Safety
The public safety market consists of federal, state and local agencies that
provide police, fire, medical and other emergency services. The public safety
industry was one of the first vertical industries to adopt mobile data
technology. As a result, MDSI believes that many organizations in the public
safety industry would benefit from the replacement of their original mobile data
systems with new technology that provides increased capabilities over the first
generation systems. See "Forward Looking Statements." MDSI has installed its
Advantex-Public Safety product with the North Carolina State Highway Patrol and
has a contract to supply this product to the State of Ohio. The Advantex-Public
Safety product is able to control multiple public safety agencies from one
platform infrastructure. Once the original system is installed within a
government agency, other agencies can be added to the system without procuring a
new system. An incremental license fee is charged for each agency and mobile
data terminal added to the system.
Customers and Applications
For the year ended December 31, 2000, MDSI's software and services revenues
were distributed approximately as follows: 50% from the telecommunications,
cable and broadband market, 40% the utility (electric, gas and water) market and
the remaining 10% from the other markets. During the year ended December 31,
2000, MDSI generated approximately 80% of its revenue from North America,
approximately 14% from the EMEA countries (Europe, Middle East and Africa), and
the remaining 6% from other parts of the world, primarily Austral-Asia.
MDSI's customers vary in size from small local service companies to large
regional and international organizations. During the year ended December 31,
2000, MDSI did not earn revenue from any one customer that accounted for greater
than 10% of overall revenue while in the years ended December 31, 1999 and 1998,
one U.S. utility company accounted for 10.1% and 8.5%, respectively, of MDSI's
consolidated revenue. In the years ended December 31, 2000, 1999 and 1998,
approximately 25.8%, 31.0% and 30.2%, respectively, of MDSI's consolidated
revenue was attributable to five or fewer customers. MDSI believes that revenue
derived from a limited number of customers will continue to represent a
significant portion of its consolidated revenue. In the years ended December 31,
2000, 1999 and 1998, revenue derived from sales outside of North America
accounted for 20.0%, 22.1% and 3.1% of MDSI's total revenue, respectively. See
Note 12 of MDSI's Consolidated Financial Statements. Because MDSI's revenue is
dependent, in large part, on significant contracts with a limited number of
customers, the percentage of MDSI's revenues that is derived from sales outside
of North America has fluctuated, and may continue to fluctuate, from
period-to-period. See "Business-Risk Factors - Dependence on Large Contracts and
Concentration of Customers" and "Forward-Looking Statements."
4
MDSI's eBusiness offering, including Advantex ASP, eService Manager and
eService Manager Mobile were launched during the year ended December 31, 2000.
MDSI has yet to realize any material revenues from these products. MDSI believes
that its eBusiness products will initially appeal to smaller customers who
cannot afford the upfront costs of on-site implementations and who do not have
the internal technical resources to operate such systems. MDSI intends to offer
its eBusiness products on a monthly subscription and/or transaction fee basis.
See "Forward-Looking Statements." MDSI also provides managed-hosting services to
numerous third parties. The customers for these services are typically medium-
to large- sized businesses that outsource their computer hosting needs in order
to increase efficiency, obtain increased technical expertise, and reduce cost.
Products
Advantex r7. Traditionally, MDSI has focused on on-site, enterprise
implementations for large customers in the telecommunications, cable and
broadband, utilities (electric, gas and water), commercial field services, and
public safety markets. MDSI has developed versions of its Advantex suite of
software products that are targeted specifically to meet the needs of each of
these vertical markets. The enterprise solution is typically comprised of the
sale of software licenses (priced on a per user basis) for Advantex r7 wireless
workforce management product and may include MDSI's Advantex Enterprise Gateway
product, which enables seamless wireless connectivity over a variety of wireless
networks. Additionally, MDSI provides the implementation and integration
services necessary to install the solution on the customers' site and connect it
to the customers' other enterprise applications. Finally, as part of an Advantex
enterprise sale, MDSI offers a maintenance and service agreement that may vary
in length up to multi-year terms. Advantex r7, introduced in 2000 as the latest
version of MDSI's Advantex product line, is scalable to meet the needs of large
field service organizations (tens of thousands of workers) or much smaller ones.
It is designed to be highly interoperable so that it can be seamlessly and
quickly integrated to other enterprise applications, such as inventory or
billing, on an organization's LAN or WAN. Advantex r7 is configurable by the
customer and has been designed to enable an ASP deployment. MDSI has
successfully implemented its first Advantex r7 deployment and expects to
complete the second implementation by the second quarter of 2001.
Advantex-ASP. Advantex-ASP represents a version of Advantex that can be
pre-configured to support the needs of a variety of potential customers and
deployed from a centrally hosted system. In contrast to MDSI's traditional,
one-time sale and delivery of a licensed software product, Advantex ASP allows
service companies to subscribe for hosted versions of Advantex r7 and the
Advantex Enterprise Gateway product from MDSI's wireless ASP site in St. Louis.
MDSI believes that Advantex ASP will make it easier and faster for organizations
to enjoy the benefits of a wireless workforce management system without
investing in data center operations and support functions, and allows companies
to focus exclusively on operating their core business more effectively. MDSI
believes that these benefits will be particularly attractive to mid-size
organizations in MDSI's core markets (as well as other field service markets
that are comprised primarily of mid-size organizations). The ASP offering may
also be attractive to large organizations as well, or as a means of
pilot-testing the MDSI solution prior to committing to an outright purchase of
licenses.
MDSI provides the expertise required to customize, host, manage, maintain,
and support the software application. This includes network services, data
center operations, application management and business systems integration. MDSI
will host the Advantex r7 workforce management software and the Advantex
Enterprise Gateway wireless connectivity software from its own wireless ASP
site. Advantex ASP was introduced in 2000 and MDSI is in the process of
implementing it at its data center. Advantex ASP will rely upon the continued
development of Advantex r7 product. MDSI anticipates that additional vertical
market versions of Advantex-ASP may be developed to meet the needs of customers
in new vertical markets, as they are established. See "Forward-Looking
Statements."
Advantex-Enterprise Gateway. The Advantex-Enterprise Gateway family of
inter-networking software products provides high speed, cost effective,
enterprise-wide connectivity solutions across multiple wireless and wireline
data networks. This software technology provides for the integration of existing
wireline-based computing environments with the most prevalent wireless networks.
Advantex-Enterprise Gateway allows users to integrate wireless and wireline data
applications in a marketplace where no connectivity or interoperability
standards are currently defined. MDSI markets the Advantex-Enterprise Gateway
product primarily to customers of its Advantex workforce management
applications. The Advantex-Enterprise Gateway product consists of both the open
message service (OMS) and open message client (OMC) software components. OMS is
a UNIX-based messaging solution providing bridge, router and gateway
functionality. OMC is a Windows product providing wireless and wireline data
access for PC compatible mobile computing devices.
5
eServiceManager. eServiceManager is a scaled-down software application
designed for smaller service companies with up to 50 mobile workers per
location. The application enables consumers to book appointments with service
providers online. It also allows the service provider's call-takers to schedule
appointments in response to orders by consumers via the phone. The application
performs algorithm-based resource allocation to assign each job to the most
appropriate mobile worker.
eService Manager Mobile. For small field service organizations, like
plumbers and electricians, who require an end-to-end workforce management
solution without all the features of Advantex, MDSI offers eService Manager
Mobile as a hosted service. Like Advantex, eService Manager Mobile allows
companies to schedule, assign, dispatch, update, complete and report on service
work orders and the people that execute them but was designed to meet the
requirements of a small organization. Additionally, eService Manager Mobile
provides the customer-facing functionality that allows service companies to
offer their services 24x7 through self-service, online scheduling. For small
"fixed location" service organizations, like a dentist offices, physicians, hair
salons, auto service centers or eye care outlets, without mobile workers, MDSI
offers eService Manager, a subset of eService Manager Mobile which offers
Internet-based scheduling and work order assignment without wireless
capabilities. Both eService solutions are hosted from MDSI's ASP site in St.
Louis. Unlike Advantex r7 its enterprise or ASP forms, the eService solutions
are accessible only from an Internet browser and typically are not integrated
with other enterprise applications. Accordingly, comparatively little service
work is required to implement the eService solutions.
Bundled Wireless Solutions. MDSI is currently certifying and testing a
number of products and services which are designed to provide seamless
communications between industry standard mobile devices, such as pagers, PDAs,
webphones, laptops, and wireless modems, with wireless networks and gateways
that permit communication between such mobile devices and MDSI's AdvantexASP,
eService Manager Mobile and eService Manager applications. MDSI has entered into
several reseller agreements with manufacturers and distributors of mobile
devices and the network carriers to enable it to provide these products and
services as a bundled wireless solution to its customers.
Professional and Customer Support Services
MDSI provides a complete range of specialized professional and customer
support services to assist its clients in implementing and using MDSI's products
effectively. Typically, contracts for the sale of MDSI's software include
implementation planning, project management, software configuration, software
customization, installation, education and training, technical support and
ongoing maintenance. MDSI believes that providing high quality, cost-effective
professional services facilitates effective implementation of its products and
fosters a strong relationship with the customer that often leads to future
orders for MDSI products and services. Through its wireless ASP operations, MDSI
also offers a number of professional services that are unrelated to the sale of
its products.
Professional Services
MDSI's professional services personnel facilitate the implementation and
optimization of its products. A professional services engagement usually lasts
for six to twelve months and involves working with the client in planning,
specification and implementation of its products. During the planning phase of
the engagement, MDSI's personnel work closely with customer representatives to
prepare a detailed project plan that includes a timetable, resource
requirements, milestones, training requirements and demonstrations of product
capabilities.
6
During the specification phase of the professional services engagement,
MDSI's professional services personnel work with the customer to specify the
exact MDSI products and system configuration. MDSI personnel also work with the
customer to design the technology infrastructure, specify the business processes
and formats for those elements of the products that are configurable, define
business processes and formats for the elements that are custom designed and
establish the procedure for implementation of the product. MDSI personnel also
develop and recommend modifications to the customer's business processes to
improve the performance of MDSI software and reduce or eliminate the need for
customization.
During the final phase of implementation, MDSI personnel complete
configuration of the software products, complete project customization, finalize
product installation and develop end-user documentation and other technical and
business processes required to integrate the MDSI products into the client's
environment. MDSI personnel also work with the client to develop and test custom
features and various interfaces to corporate networks, wireless networks and
other corporate information systems.
Application Hosting and Related Professional Services.
As well as being the hosting centre for MDSI's own applications, MDSI's
wireless ASP operations in St. Louis provide advanced application hosting for
many third party solutions including advanced e-commerce Web sites and the Lotus
family of advanced collaboration and distance learning applications. MDSI's St.
Louis operations can also outsource a customer's networking needs, and provide
management of their office LAN/WAN and Internet connections. MDSI's ASP
facilities and staff provide the physical environment and engineering support
necessary to keep these technologies operating at peak performance around the
clock. In connection with this business, MDSI provides the following consulting
services:
Lotus/Domino Implementations: MDSI is a Lotus Advanced Business Partner and
has been selected on various occasions by Lotus and IBM as a subcontractor to
provide advanced Lotus implementation services to their clients. Once an
implementation or upgrade is complete, MDSI offers several plans to provide
ongoing support and maintenance to keep a Lotus environment running at peak
efficiency and cost-effectively. Some of MDSI's Lotus implementation clients
include Seton Hall University, PECO Energy, Deutsche Bank, Delaware State
University and Bowling Green State University, and others.
Java Application Development: MDSI has significant expertise in the design,
development and implementation of object-oriented and component-based Java
applications that are highly scaleable, reliable, and secure. MDSI's staff has
extensive experience using client-side and server-based Java. MDSI's technical
staff have significant experience with developing systems with several major
Java standards.
Network Engineering & Audits: MDSI's staff has extensive experience in
designing, implementing, and troubleshooting voice and data network networks,
for companies such as Deutsche Bank, A.G. Edwards, PECO Energy, Bowling Green
State University, and many others. One of MDSI's core competencies is
implementing managed desktop environments that increase network performance and
reliability while reducing Total Cost of Ownership (TCO) of PC-based networks.
MDSI also has extensive experience in performing network reviews and audits,
with advanced knowledge of all seven layers of the OSI network model. Most
importantly, MDSI's staff understands the importance of each layer and how to
optimize network components to meet the requirements of each client's network.
7
Oracle Database Administration: MDSI's staff has experience in implementing
large data warehouses for companies such as MasterCard, Union Pacific, and
Citicorp among others. MDSI is an Oracle Business Partner with extensive
knowledge of Oracle 7, 8, and 8i databases. If needed, MDSI can also provide
Oracle database administration services to customers to ensure that their
databases are operating at peak performance.
Data Center Server Management: While MDSI operates its own Internet Data
Centers (IDC), MDSI can also provide data center management of clients'
facilities either remotely or on site, including UNIX, NT, Linux, and Novell
servers, along with numerous other server or networking technologies. MDSI has
performed such services for clients such as PECO Energy, Deutsche Bank, and
Bowling Green State University among others. MDSI's staff has extensive
experience in performing operational support activities to include 24 x 7 system
monitoring, problem determination, problem resolution management, operating
system/system software version management, and backup and restore. MDSI also has
extensive experience in implementing system management environments using a
combination of both automated agents and polling mechanisms using major vendor's
system management platforms, in order to deliver maximum application
availability.
Customer Support
MDSI believes that its ability to offer a high level of customer support is
critical to its success. MDSI's customer support group provides MDSI customers
with telephone and on-line technical support as well as product updates. Most
MDSI customers enter into separate customer support agreements, typically on an
annual basis, that take effect on the expiration of the product warranty. At
December 31, 2000, MDSI had 58 customer support personnel, of whom 36 were
located in Canada, 18 in the United States and 4 in Copenhagen.
MDSI is also in the process of establishing a comprehensive 7-day by
24-hour customer service support center to provide various levels of customer
support for its eBusiness customers. MDSI is also conducting benchmarking
activities to assist in the design and operation of its data center. MDSI
intends to provide professional services in conjunction with the deployment of
its ASP offerings. These professional services personnel will draw upon the
experience of existing MDSI personnel and will assist in the configuration of
MDSI's systems to meet the needs of potential customers in the target markets.
Product Development
The mobile workforce management industry is characterized by rapid
technological change and increasing user requirements. Accordingly, MDSI must be
able to provide new products and to modify and enhance existing products on a
timely and continuing basis in order to be competitive. To accomplish this
objective, MDSI's strategy is to utilize proven technology to further enhance
its existing products and to create new products. Where appropriate, MDSI may
acquire or license complementary technology developed by third parties for
integration into MDSI's products.
MDSI believes that its highly qualified software development personnel
provide MDSI with a competitive advantage. MDSI personnel have considerable
experience and expertise in the development of mobile workforce management
applications specifically designed for use with a wireless data network, as well
as in the integration of these applications with a customer's corporate
information system. MDSI software product development personnel employ modular
software architecture, object-oriented software development and graphical user
interface design technologies to develop scaleable, modular, configurable
products. MDSI personnel have expertise in software technology, wireless and
wireline communications technologies, computer environments and corporate
information systems integration. They also have considerable expertise in the
design and development of specialized mobile computing devices, as well as radio
system design and implementation. MDSI believes that this combination of
expertise in multiple disciplines has allowed and will continue to allow MDSI to
design and develop mobile workforce management solutions which can be
implemented in a timely and cost-effective manner.
8
As of December 31, 2000, MDSI's technical and engineering staff, supporting
both product development and professional services, consisted of 346 employees,
including 224 employees based at its Richmond, British Columbia headquarters, 52
employees based primarily at its Itasca, Illinois facility, 65 employees based
at its St. Louis, Missouri facility and other locations in the United States and
5 in the United Kingdom.
During the years ended December 31, 2000, 1999 and 1998, MDSI's total
expenditures for product development were $9.0 million, $6.9 million and $5.8
million, respectively, reflecting 14.7%, 11.8% and 12.1% of MDSI's revenue,
respectively. Management believes that timely and continuing product development
is critical to MDSI's success and plans to continue to allocate significant
resources to product development. See "Forward-Looking Statements."
Sales and Marketing
MDSI markets its products through a direct sales force as well as through
strategic remarketing and/or joint selling arrangements with independent
software vendors, system integrators, vertical-market-focused ASP's, wireless
carriers and Internet service portals (or marketplaces).
Direct Sales Force. MDSI's sales personnel are knowledgeable about the
technological components of wireless applications and current industry and
enterprise-specific application issues. They work in teams that specialize in
each of the targeted vertical markets. MDSI's sales personnel employ their
expertise to develop long-term consultative relationships with customers in
order to identify the needs of the customer and provide specific and effective
solutions. To date, substantially all of MDSI's revenue has been generated by
direct sales activities.
Independent Software Vendors. MDSI establishes relationships with other
independent software vendors that sell complementary products, such as billing
or customer relationship management solutions, into MDSI's markets. The
relationships typically involve MDSI working with the vendors to establish a
standard integration of the companies' products, and jointly identifying and
jointly executing on sales prospects for the integrated solution. To date, MDSI
has established relationships with companies like Siebel Systems, Lucent
Technologies, SAP, and CES International. In some cases the relationships have
been formalized through written agreements, while others remain informal.
Systems Integrators. MDSI also establishes strategic relationships with
systems integrators that work in MDSI's markets to provide end-to-end solutions
on a customer-by-customer basis or as an integrated product offering for the
vertical market. In either case, MDSI works with the integrator to assist in the
sales process and to integrate MDSI's products with the other component software
pieces. To date, MDSI has worked with Cap Gemini, Ernst & Young, Accenture
(formerly Andersen Consulting), PricewaterhouseCoopers, CGI, and Convergent
Group. In some cases the relationships have been formalized through written
agreements, while others remain informal. In the future, MDSI intends to involve
these integrators in providing the implementation work surrounding customer
installations. See "Forward-Looking Statements."
9
Vertical Market ASPs. For its Advantex ASP product, MDSI intends to
establish relationships with other ASPs that offer complementary solutions. The
relationships will involve solution integration work, an interconnection of the
companies' ASP sites and arrangements surrounding sales of the integrated
solution. To date, MDSI has entered into one such relationship, with DriveLogic,
a company that is integrating an end-to-end ASP solution to automate the life
cycle of auto insurance claims, from initiation to settlement. MDSI's Advantex
ASP product will provide the workforce management and wireless connectivity
components of the total solution. DriveLogic is a subsidiary of CCC Information
Services, a leading provider of outsourced solutions, such as claims management,
to the auto insurance industry. See "Forward-Looking Statements."
Wireless Carriers. MDSI also intends to market its eBusiness applications
through wireless carriers. For these carriers, MDSI's products represent content
that could increase their customers' usage of their wireless networks, and make
customers less likely to switch to another wireless service provider. For
prospects identified by the wireless carrier, MDSI anticipates that its direct
sales force will play a significant role in the sales process. MDSI intends to
bundle the carrier's airtime and resell it to its eBusiness customers as part of
a total solution. To achieve these goals, MDSI must link the carriers' networks
to MDSI's wireless ASP site. To date, MDSI has entered into reseller
arrangements with Cingular Interactive L.P. (formerly BellSouth Wireless Data
L.P.), Motient Corporation, and AT&T Wireless Services Inc. Under these
arrangements, the parties intend to offer MDSI's eBusiness solutions jointly
with airtime from the carrier's network. MDSI and the carrier's intend to
jointly market the bundled products, initially to small and medium-sized
companies. See "Forward Looking Statements."
Online Service Marketplaces. MDSI intends to sell its eService products
through Web companies who create Internet marketplaces where sellers and buyers
of services can transact business online. MDSI's hosted eService products can be
integrated with a company's technology and linking sites to enable the
marketplace with the eService functionality (including online scheduling, order
assignment, order dispatching, and real-time, online tracking) and to offer that
functionality to the marketplaces' service company customers. To date, MDSI has
entered into agreements with two such Internet marketplaces, both in the home
services market, OurHouse.com Inc. ("OurHouse.com"), an Internet site for home
improvement, home services and how-to information, and ServiceMagic, Inc., an
Internet site for home improvement, home services and how-to information. As
part of its agreement with OurHouse.com, MDSI has made an investment of
approximately $500,000 in OurHouse.com. See "Forward-Looking Statements."
At December 31, 2000, MDSI's sales, marketing and technical support group
consisted of 70 employees, with 33 based out of MDSI's Richmond, British
Columbia facility, 19 based out of its Itasca, Illinois facility, 10 employees
based out of its St. Louis, Missouri facility, and 8 based out of various other
international locations.
Competition
The markets for mobile workforce management applications and wireless
connectivity software are highly competitive. Numerous factors affect MDSI
competitive position, including price, product features, product performance and
reliability, ease of use, product scalability, product availability on multiple
platforms (both server and mobile workstation), ability to implement mobile
workforce management solutions domestically and internationally while meeting
customer schedules, integration of products with other enterprise solutions,
availability of project consulting services and timely ongoing customer service
and support.
10
Within these markets, there are a small number of new ventures, either
small companies attempting to establish a business in this market or large
companies attempting to diversify their product offerings. MDSI expects such
competition to intensify as acceptance and awareness of mobile data
communications and technology continue. In addition, a small number of MDSI's
potential customers develop software solutions internally, thereby eliminating
the requirement for suppliers such as MDSI. Current or potential competitors may
establish cooperative arrangements among themselves or with third parties to
increase the ability of their products to address customer requirements.
Certain of MDSI's competitors have substantially greater financial,
technical, marketing and distribution resources than MDSI. As a result, they may
be able to respond more quickly to new or emerging technologies and changing
customer requirements, or to devote greater resources to the development and
distribution of existing products. There can be no assurance that MDSI will be
able to compete successfully against current or future competitors or alliances
of such competitors, or that competitive pressures faced by MDSI will not have a
material adverse effect on its business, financial condition, operating results
and cash flows.
MDSI believes that in the utility, telecommunications, cable and broadband
industry segments the most important competitive factors are the reputation of
the supplier and their proven record in implementing wireless data solutions.
MDSI primarily competes in the utility market with Utility Partners, L.C.,
Alterra Corp., M3i Systems, Inc. and iMedeon, Inc. MDSI has several competitors
in the telecommunications, cable and broadband markets, a few of which have
historical relationships with certain of the large telecommunications companies.
MDSI's primary competitor for telecommunications customers is Telcordia
(formerly Bellcore), and more recently ClickSoftware, Inc. (formerly IET) and
ViryaNet Ltd. In the cable and broadband markets, MDSI's primary competitors are
Telcordia, MobileForce Technologies, Inc. (formerly Ubiquinet, Inc), PointServe
(through its merger with Brazen Software, Inc.) and CSG Systems International.
MDSI believes that the principal competitive factors in the field service
market are the ability to improve the customer service aspects of an
organization's business and increase the productivity of service
representatives. In this market, MDSI's principal competitors are Astea
International Inc. and Metrix Inc., in addition to several larger enterprise
software companies, such as Clarify, Oracle, PeopleSoft and Siebel Systems,
which offer less comprehensive solutions.
MDSI primarily competes in the public safety market with Cerulean, PRC,
Tiberon Systems, and New World Systems. Many of MDSI's competitors have a more
established reputation in the public safety market. In many of the large public
safety opportunities, MDSI is a subcontractor to a large prime contractor
serving as the overall system integrator. MDSI is currently used as a
subcontractor for public safety installations by Motorola Inc. and TRW Inc.
MDSI believes that the principal competitive factors in the eBusiness
market are the integrity of MDSI's business model, and the financial viability
of the organization. MDSI will face competition from a number of existing
competitors and emerging Internet based competitors in the eBusiness field.
Existing competitors including iMedeon, ClickSoftware, FieldCentrix, and
eDispatch.com Wireless Data Inc. ("eDispatch"). MDSI believes that these
competitors are primarily targeting smaller-sized businesses with an ASP service
offering. These companies offer a "basic" scheduling and dispatch system. New
competitors targeting Internet intermediaries for the provision of scheduling
and/or dispatch software services include Microsoft WebAppoint, TimeTrade,
MegaTribe and X-Time. These competitors are specifically focused on
Internet-based scheduling and dispatching services for the growing general
services market, but do not currently offer a wireless solution. The competitive
landscape that MDSI's products face is complex since this market is in the
relatively early stages of development. By positioning itself as a wireless
Internet ASP, MDSI will also face competition from wireless infrastructure
providers such as Aether Systems, Inc. and Broadbeam Inc., and from managed IT
services providers such as Exodus Communications Inc. and Jamcracker Inc. MDSI
intends to compete with both types of competitors in the eBusiness solutions
market by leveraging on its track-record, its relationships and its product
history.
11
Employees
As of December 31, 2000, the Company had 564 full-time employees and
contractors, including 346 in technical and engineering, 70 in sales, marketing
and technical support, 58 customer support and 90 in management, finance and
administration. None of the Company's employees is represented by a labor union
and the Company believes its employee relations to be good. Subsequent to
December 31, 2000, the Company terminated 34 employee and contractor positions
in Canada and the United States in connection with a restructuring. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Risk Factors
MDSI's business is subject to the following risks. These risks also could
cause actual results to differ materially from results projected in any
forward-looking statement in this report.
Potential Fluctuations in Quarterly Operating Results
MDSI's results of operations have fluctuated in the past and are likely to
continue to fluctuate from period to period depending on a number of factors,
including the timing and receipt of significant orders, the timing of completion
of contracts, increased competition, changes in the demand for MDSI's products
and services, the cancellation of contracts, the timing of new product
announcements and introductions, changes in pricing policies by MDSI and its
competitors, delays in the introduction of products or enhancements by MDSI,
expenses associated with the acquisition of products or technology from third
parties, the mix of sales of MDSI's products and services and third party
products, seasonality of customer purchases, personnel changes, the mix of
international and North American revenue, tax policies, foreign currency
exchange rates and general economic conditions.
MDSI relies upon its ability to implement and integrate mobile workforce
management solutions on schedule and to the satisfaction of its customers. MDSI
from time to time has experienced certain implementation and other problems that
have delayed the completion of certain projects, including the failure of third
parties to deliver products or services on a timely basis and delays caused by
customers. Because MDSI currently recognizes revenue on a percentage of
completion method, delays in completion of certain contracts has caused delays
in recognition of revenue and, consequently, unanticipated fluctuations in
quarterly results. There can be no assurance that MDSI will be able to complete
current projects or implement future systems on a timely and cost effective
basis or that delays will not result in cancellations of contracts or result in
the imposition of substantial penalties. Any such material delay, cancellation
or penalty could have a material adverse effect upon MDSI's business, financial
condition, operating results and cash flows.
Because MDSI is unable to forecast with certainty the receipt of orders for
its products and services and MDSI's expense levels are relatively fixed and are
based, in part, upon its expectation of future revenue, if revenue levels fall
below expectations as a result of a delay in completing a contract, the
inability to obtain new contracts, the cancellation of an existing contract or
otherwise, operating results are likely to be adversely effected. As a result,
net income may be disproportionately affected because a relatively small amount
of MDSI's expenses vary with its revenue. In particular, MDSI plans to increase
its operating expenses to implement its e-Business strategy, expand its sales
and marketing operations, expand its distribution channels, fund greater levels
of research and development, broaden its customer support capabilities and
increase its administrative resources. MDSI is in the process of implementing
its e-Business strategy, which is designed to generate revenues on a
month-to-month or per-transaction basis. MDSI anticipates that costs associated
with implementing its e-Business strategy will increase MDSI's operating
expenses and may not be offset by ASP service revenue, if at all. There can be
no assurance that MDSI will effectively compete in this market or receive
sufficient revenues from its e-Business to offset such costs.
12
Based upon all of the foregoing factors, MDSI believes that its quarterly
revenue, direct expenses and operating results are likely to vary significantly
in the future, that period-to-period comparisons of the results of operations
are not necessarily meaningful and that such comparisons should not be relied
upon as an indication of future performance. MDSI may also choose to reduce
prices or increase spending in response to competition, or to pursue new market
opportunities. See "Forward-Looking Statements". If new competitors,
technological advances by existing competitors or other competitive factors
require MDSI to reduce its prices or invest significantly greater resources in
research and development efforts, MDSI's operating results in the future may be
adversely affected. There can be no assurance that MDSI will be able to grow in
future periods or that it will be able to sustain its level of total revenue or
its rate of revenue growth on a quarterly or annual basis. It is likely that in
some future quarter MDSI's operating results will be below the expectations of
public market analysts and investors. See "Forward Looking Statements". In such
event, the price of MDSI's Common Shares would likely be materially adversely
affected.
Since 1996, MDSI has been, and anticipates that from time to time it will
be, engaged to provide, in addition to its own products and services, third
party hardware, software and services, which MDSI purchases from vendors and
sells to its customers. For the years ended December 31, 2000, 1999 and 1998,
4.6%, 14.1% and 27.0%, respectively, of MDSI's revenue was attributable to third
party products and services. Because the revenue generated from the supply of
third party products and services may represent a significant portion of certain
contracts and the installation and rollout of third party products is generally
at the discretion of the customer, MDSI may, depending on the level of third
party products and services provided during a period, experience large quarterly
fluctuations in revenue. See "Forward Looking Statements". In addition, because
MDSI's gross margins on third party products and services are substantially
below gross margins historically achieved on revenue associated with MDSI
products and services, large fluctuations in quarterly revenue from the sale of
third party products and services will result in significant fluctuations in
direct costs, gross profits, operating results, cash flows and other items
expressed as a percentage of revenue.
Certain of the vertical markets targeted by MDSI include industries with
implementation requirements that vary seasonally. For example, utility companies
in North America generally have decreased implementation activity in winter
months when such utilities face their greatest consumer demand. As a result,
MDSI's results of operations may also vary seasonally, and such variation may be
significant.
Lengthy Sales Cycles for Advantex Products
The purchase of a mobile workforce management solution is often an
enterprise-wide decision for prospective customers and requires MDSI to engage
in sales efforts over an extended period of time and to provide a significant
level of education to prospective customers regarding the use and benefits of
such systems. Due in part to the significant impact that the application of
mobile workforce management solutions has on the operations of a business and
the significant commitment of capital required by such a system, potential
customers tend to be cautious in making acquisition decisions. As a result,
MDSI's products generally have a lengthy sales cycle ranging from several months
to several years. Consequently, if sales forecasted from a specific customer for
a particular quarter are not realized in that quarter, MDSI may not be able to
generate revenue from alternative sources in time to compensate for the
shortfall. The loss or delay of a large contract could have a material adverse
effect on MDSI's quarterly financial condition, operating results and cash
flows, which may cause such results to be less than analysts' expectations.
Moreover, to the extent that significant contracts are entered into and required
to be performed earlier than expected, operating results for subsequent quarters
may be adversely affected. In particular, MDSI has recently experienced an
increase in the time necessary to complete the negotiation and signing of
certain contracts with some of its larger customers.
Dependence on Large Contracts and Concentration of Customers
MDSI's revenue is dependent, in large part, on significant contracts from a
limited number of customers. During the years ended December 31, 2000, 1999 and
1998, approximately 25.8%, 31.0% and 30.2%, respectively, of MDSI's consolidated
revenue was attributable to five or fewer customers. During the years ended
December 31, 2000, 1999 and 1998, one customer accounted for 5.8%, 10.1% and
8.5%, respectively, of MDSI's consolidated revenue. MDSI believes that revenue
derived from current and future large customers will continue to represent a
significant portion of its total revenue. See "Forward Looking Statements". The
inability of MDSI to continue to secure and maintain a sufficient number of
large contracts would have a material adverse effect on MDSI's business,
financial condition, operating results and cash flows. Moreover, MDSI's success
will depend in part upon its ability to obtain orders from new customers, as
well as the financial condition and success of its customers and general
economic conditions.
13
The size of a contract for a particular customer can vary substantially
depending on whether MDSI is providing only its own products and services or is
also responsible for supplying third party products and services. MDSI
recognizes revenue using the percentage of completion method, which MDSI
calculates based on total costs incurred compared to total costs estimated by
MDSI for completion. Therefore, any significant increase in the costs required
to complete a project, or any significant delay in a project schedule, could
have a material adverse effect on that contract's profitability and because of
the size of each contract, on MDSI's overall results of operations. MDSI from
time to time has also experienced certain implementation and other problems that
have delayed the completion of certain projects, including the failure of third
parties to deliver products or services on a timely basis and delays caused by
customers. MDSI's contracts generally provide for payments upon the achievement
of certain milestones. Therefore, any significant delay in the achievement of
milestones on one or more contracts would affect the timing of MDSI's cash flows
and could have a material adverse effect on MDSI's business, financial
condition, operating results and cash flows. Any significant failure by MDSI to
accurately estimate the scope of work involved, plan and formulate a contract
proposal, effectively negotiate a favorable contract price, properly manage a
project or efficiently allocate resources among several projects could have a
material adverse effect on MDSI's business, financial condition, operating
results and cash flows.
Potential Fluctuations in Backlog
MDSI's backlog consists of a relatively small number of large contracts
relating to sales of its mobile workforce management and wireless connectivity
software and related equipment and services, and sales of third party products
and services. Due to the long, complex sales process and the mix of sales of
MDSI's products and services and third party products and services, MDSI's
backlog may fluctuate significantly from period-to-period. In addition, under
the terms of MDSI's contracts, MDSI's customers may elect to terminate their
contracts with MDSI at any time after notice to MDSI or to delay certain aspects
of installation. Due to the relative size of a typical contract compared to
MDSI's annual and quarterly revenue, a termination or installation delay of one
or more contracts could have a material adverse effect on MDSI's business,
financial condition, operating results and cash flows. Contracts for software
maintenance and support are generally renewable every year and are subject to
renegotiation upon renewal. There can be no assurance that MDSI's customers will
renew their maintenance contracts or that renewal terms will be as favorable to
MDSI as existing terms.
Limited Operating History; History of Losses; Increased Expenses
MDSI commenced operations in February 1993 and therefore has only a limited
operating history upon which an evaluation of its business and prospects can be
based. As of December 31, 2000, MDSI had an accumulated deficit of $9.7 million.
There can be no assurance of sustained profitability or that, MDSI will realize
revenue growth or be profitable on a quarterly or annual basis. In addition,
MDSI plans to increase its operating expenses to implement its e-Business
strategy, expand its sales and marketing operations, fund greater levels of
research and development, broaden its customer support capabilities and increase
its administration resources. A relatively high percentage of MDSI's expenses is
typically fixed in the short term as MDSI's expense levels are based, in part,
on its expectations of future revenue. To the extent that such expenses precede
or are not subsequently followed by increased revenue, MDSI's business,
financial condition, operating results and cash flows would be materially
adversely affected. In addition, in view of MDSI's recent revenue growth, the
rapidly evolving nature of its business and markets, MDSI's limited operating
history and the recent acquisitions, MDSI believes that period-to-period
comparisons of financial results are not necessarily meaningful and should not
be relied upon as an indication of future performance.
Integration of Acquisitions
MDSI may, when and if the opportunity arises, acquire other products,
technologies or businesses involved in activities, or having product lines, that
are complementary to MDSI's business. Acquisitions involve numerous risks,
including difficulties in the assimilation of the operations, technologies and
products of the acquired companies, the diversion of management's attention from
other business concerns, risks associated with entering markets or conducting
operations with which MDSI has no or limited direct prior experience and the
potential loss of key employees of the acquired company. Moreover, there can be
no assurance that any anticipated benefits of an acquisition will be realized.
Future acquisitions by MDSI could result in potentially dilutive issuance's of
equity securities, the incurrence of debt and contingent liabilities,
amortization of expenses related to goodwill and other intangible assets and
write-off of restructuring costs and acquired research and development costs,
all of which could materially and adversely affect MDSI's financial condition,
results of operations and cash flows.
14
New Product Development
MDSI expects that a significant portion of its future revenue will be
derived from the sale of newly introduced products, including Advantex r7,
Advantex ASP, eService Manager, and from enhancement of existing products.
MDSI's success will depend in part upon its ability to enhance its current
products on a timely and cost-effective basis and to develop new products that
meet changing market conditions, including changing customer needs, new
competitive product offerings and enhanced technology. There can be no assurance
that MDSI will be successful in developing and marketing on a timely and
cost-effective basis new products and enhancements that respond to such changing
market conditions. If MDSI is unable to anticipate or adequately respond on a
timely or cost-effective basis to changing market conditions, to develop new
software products and enhancements to existing products, to correct errors on a
timely basis or to complete products currently under development, or if such new
products or enhancements do not achieve market acceptance, MDSI's business,
financial condition, operating results and cash flows could be materially
adversely affected. In light of the difficulties inherent in software
development, MDSI has experienced, and expects that it will experience, delays
in the completion and introduction of new software products, such as Advantex
r7. The increased time required for the initial implementation and field testing
of a new version of software has resulted in delays in commencement of
additional installations of the Advantex r7 product. MDSI completed its first r7
installation in the first quarter of 2001, and anticipates it will complete an
additional installation of the Advantex r7 product during the second quarter of
2001. See "Forward-Looking Statements".
e-Business Development
MDSI intends to provide access to its mobile workforce management and
wireless connectivity application software products over the Internet from a
wirelessly-enabled ASP site on a subscription or "per transaction" basis.
Currently MDSI derives e-Business revenue from consulting and hosting services,
and there can be no assurance that MDSI will realize significant revenues from
its new e-Business products. MDSI's e-Business products are targeted at Internet
intermediaries who offer a wide range of services, including home services to
consumers and small and medium-sized businesses. MDSI anticipates that its
operating expenses will increase as MDSI establishes a comprehensive 7 day, 24
hour customer service support center to provide various levels of customer
support for its e-Business customers and increases its development and marketing
efforts. MDSI does not currently have any e-Business customers, operating on a
commercial basis although field trials have commenced, and there can be no
assurance that MDSI will successfully implement its e-Business strategy. There
also can be no assurance that MDSI will be able to compete successfully against
current or future competitors or alliances of such competitors, or that
competitive pressures faced by MDSI will not materially adversely affect its
business, financial condition, operating results and cash flows.
As part of MDSI's eBusiness strategy, MDSI has made strategic investments
in two private companies that have created Internet marketplaces. At December
31, 2001, MDSI has made an aggregate investment of approximately $2.5 million in
such companies. There can be no assurance that such entities will be
commercially successful or that MDSI will be able to recover or realize a return
on its investment in such companies.
Management of Growth
Since its inception, MDSI has experienced rapid growth in product sales,
personnel, research and development activities, number and complexity of
products, the number and geographic focus of its targeted vertical markets and
product distribution channels. The total number of employees of MDSI has grown
from nine employees in Canada in February 1993 to 564 employees located in
Canada, the United States and other international locations at December 31,
2000. In addition, the recent acquisition of Connectria has increased the number
of products MDSI supports and markets, as well as the number of vertical markets
into which it sells products. MDSI has also recently expanded the geographical
areas in which it operates. MDSI believes that continued growth in the number
and complexity of products and in the number of personnel will be required to
maintain MDSI's competitive position. MDSI's rapid growth, coupled with the
rapid evolution of MDSI's markets, has placed, and is likely to continue to
place, significant strains on its management, administrative, operational and
financial resources, as well as increased demands on its internal systems,
procedures and controls. MDSI's ability to manage recent and future growth will
require MDSI to continue to improve its financial and management controls,
reporting systems and procedures on a timely basis, to implement new systems as
necessary and to expand, train, motivate and manage its sales and technical
personnel. There can be no assurance that MDSI will be able to manage its growth
successfully. Failure to do so could have a material adverse effect on MDSI's
business, financial condition, operating results and cash flows.
15
Dependence on Key Personnel
MDSI's performance and future operating results are substantially dependent
on the continued service and performance of its senior management and key
technical and sales personnel. MDSI intends to hire a significant number of
additional technical and sales personnel in the next year. See "Forward-Looking
Statements." Competition for such personnel is intense, and there can be no
assurance that MDSI can retain its key technical, sales and managerial employees
or that it will be able to attract or retain highly-qualified technical and
managerial personnel in the future. The loss of the services of any of MDSI's
senior management or other key employees or the inability to attract and retain
the necessary technical, sales and managerial personnel could have a material
adverse effect upon MDSI's business, financial condition, operating results and
cash flows.
Dependence on Selected Vertical Markets
Prior to 1996, substantially all of MDSI's revenue was derived from the
sale of products and services to customers in the utility market. For the years
ended December 31, 1997 and 1996, the utility market accounted for greater than
50% of MDSI's revenue. In those years, MDSI sought to reduce its reliance on the
utility market by developing or acquiring compatible products for organizations
with mobile workforces in other vertical markets. In 1998, the utility market
accounted for greater than 40% of MDSI's revenue. In 1999, the
telecommunications market accounted for 48% of MDSI's revenue. In 2000, the
telecommunications and cable markets accounted for greater than 45% of MDSI's
revenue. MDSI anticipates that a significant portion of its future revenue will
be generated by sales of products to the telecommunications market. See
"Forward-Looking Statements." The Company believes that recent economic
developments and trends have adversely affected and may continue to affect
levels of capital spending by companies in a variety of industries, including
telecommunications and broadband. In addition, current economic conditions and
developments in the energy markets may have an adverse affect on the financial
condition of energy and utility companies in certain geographic areas of North
America. The Company anticipates that such economic conditions and regulatory
trends may affect demand in 2001 for the products and services offered by the
Company. A decline in demand for MDSI's products in the telecommunications,
utilities or other markets as a result of economic conditions, regulatory
trends, competition, technological change or otherwise, would have a material
adverse effect on MDSI's business, financial condition, operating results and
cash flows. There can be no assurance that MDSI will be able to continue to
diversify its product offerings or revenue base by entering into new vertical
markets.
Dependence on Marketing Relationships
MDSI's products are marketed by MDSI's direct field sales force as well as
by resellers. There can be no assurance that MDSI's existing resellers will
continue to provide the level of services and technical support necessary to
provide a complete solution to MDSI's customers or that they will not emphasize
their own or third-party products to the detriment of MDSI's products. The loss
of these resellers, the failure of such parties to perform under agreements with
MDSI or the inability of MDSI to attract and retain new resellers with the
technical, industry and application experience required to market MDSI's
products successfully could have a material adverse effect on MDSI's business,
financial condition, operating results and cash flows. MDSI expects that it may
enter into certain joint ventures in order to facilitate its expansion into
other vertical markets and geographic areas. See "Forward Looking Statements".
To the extent that such joint ventures are not successful, there could be a
material adverse effect on MDSI's business, financial condition, operating
results and cash flows.
MDSI intends to market its e-Business products through a direct sales
force, and through marketing relationships with ASP's that are offering
end-to-end suites of operating solutions to MDSI's targeted vertical markets,
wireless carriers and operators of Internet sites that aggregate smaller service
providers for home services. There can be no assurance that MDSI's e-Business
solutions will be compatible with these marketing partners or that they will not
emphasize their own or third-party products to the detriment of MDSI's products.
MDSI's failure to enter into marketing relationships, the failure of the parties
to perform under these agreements or the inability of MDSI to provide effective
e-Business solutions successfully could have a material adverse effect on MDSI's
business, financial condition, operating results and cash flows.
Competition
The markets for mobile workforce management applications, wireless
connectivity software, mobile data network equipment and mobile computing
devices are highly competitive. Numerous factors affect MDSI's competitive
position, including price, product features, product performance and
reliability, ease of use, product scalability, product availability on multiple
platforms (server, wireless carrier, and mobile workstation), ability to
implement mobile workforce management solutions domestically and internationally
while meeting customer schedules, integration of products with other enterprise
solutions, availability of project consulting services and timely ongoing
customer service and support. Within these markets, there are a small number of
new ventures, either small companies attempting to establish a business in this
market or large companies attempting to diversify their product offerings. MDSI
16
expects such competition to intensify as acceptance and awareness of mobile data
communications and technology continue. See "Forward Looking Statements". In
addition, a small number of MDSI's potential customers develop software
solutions internally, thereby eliminating the requirement for suppliers such as
MDSI. Current or potential competitors may establish cooperative arrangements
among themselves or with third parties to increase the ability of their products
to address customer requirements. Certain of MDSI's competitors have
substantially greater financial, technical, marketing and distribution resources
than MDSI. As a result, they may be able to respond more quickly to new or
emerging technologies and changing customer requirements, or to devote greater
resources to the development and distribution of existing products. There can be
no assurance that MDSI will be able to compete successfully against current or
future competitors or alliances of such competitors, or that competitive
pressures faced by MDSI will not materially adversely affect its business,
financial condition, operating results and cash flows. MDSI primarily competes
in the utility market with Utility Partners, L.C., Alterra Corp., M3i Systems,
Inc. and iMedeon, Inc. MDSI has several competitors in the telecommunications,
cable and broadband markets, a few of which have historical relationships with
certain of the large telecommunications companies. MDSI's primary competitor for
telecommunications customers is Telcordia (formerly Bellcore), and more recently
ClickSoftware, Inc (formerly IET) and ViryaNet Ltd. MDSI's principal competitors
in the cable and broadband markets are Telcordia, MobileForce Technologies, Inc.
(formerly Ubiquinet, Inc.), Pointserve (through its merger with Brazen Software,
Inc.), and CSG Systems International. In the general field service market,
MDSI's principal competitors are Astea International Inc. and Metrix Inc., in
addition to several larger enterprise software companies, such as Clarify,
Oracle, PeopleSoft and Siebel Systems, which offer less comprehensive solutions.
In the public safety market, MDSI's principal competitors are Cerulean, PRC,
Tiberon Systems and New World Systems.
MDSI will face competition from a number of existing competitors and
emerging Internet-based competitors in the eBusiness field. Existing competitors
including iMedeon, ClickSoftware, FieldCentrix and eDispatch. MDSI believes that
these competitors are primarily targeting smaller-sized businesses with an ASP
service offering. These companies offer a "basic" scheduling and dispatch
system. New competitors targeting Internet intermediaries for the provision of
scheduling and/or dispatch software services include Microsoft WebAppoint,
TimeTrade, MegaTribe and X-Time. These competitors are specifically focused on
Internet-based scheduling and dispatching services for the growing general
services market, but do not currently offer a wireless solution. The competitive
landscape that MDSI's products face is complex since this market is in the
relatively early stages of development. By positioning itself as a wireless
Internet ASP, MDSI will also face competition from wireless infrastructure
providers such as Aether Systems, Inc. and Broadbeam Inc., and finally from
managed IT services providers such as Exodus Communications Inc. and Jamcracker
Inc.
Risk of Product Defects
Software products, including those offered by MDSI, from time-to-time
contain undetected errors or failures. There can be no assurance that, despite
testing by MDSI and by current and potential customers, errors will not be found
in MDSI's products. Such errors could result in loss of or delay in market
acceptance of MDSI's products, which could have a material adverse effect on
MDSI's business, financial condition, operating results and cash flows.
Proprietary Technology
MDSI's success is dependent on its ability to protect its intellectual
property rights. MDSI relies principally upon a combination of copyright,
trademark, trade secret and patent laws, non-disclosure agreements and other
contractual provisions to establish and maintain its rights. To date, MDSI has
been granted trademark registrations or has registrations pending in the United
States, Canada and the European Community for the MDSI, Advantex, Wireless@work
and Compose marks. Other than several patents pending for certain technology,
MDSI has not generally sought patent protection for its products. As part of its
confidentiality procedures, MDSI generally enters into nondisclosure and
confidentiality agreements with each of its key employees, consultants,
distributors, customers and corporate partners, to limit access to and
distribution of its software, documentation and other proprietary information.
There can be no assurance that MDSI's efforts to protect its intellectual
property rights will be successful. Despite MDSI's efforts to protect its
intellectual property rights, unauthorized third parties, including competitors,
may be able to copy or reverse engineer certain portions of MDSI's software
products, and use such copies to create competitive products. Policing the
unauthorized use of MDSI's products is difficult, and, while MDSI is unable to
determine the extent to which piracy of its software products exists, software
piracy can be expected to continue. In addition, the laws of certain countries
in which MDSI's products are or may be licensed do not protect its products and
intellectual property rights to the same extent as do the laws of Canada and the
United States. As a result, sales of products by MDSI in such countries may
17
increase the likelihood that MDSI's proprietary technology is infringed upon by
unauthorized third parties. In addition, because third parties may attempt to
develop similar technologies independently, MDSI expects that software product
developers will be increasingly subject to infringement claims as the number of
products and competitors in MDSI's industry segments grow and the functionality
of products in different industry segments overlaps. See "Forward Looking
Statements". Although MDSI believes that its products do not infringe on the
intellectual property rights of third parties, there can be no assurance that
third parties will not bring infringement claims (or claims for indemnification
resulting from infringement claims) against MDSI with respect to copyrights,
trademarks, patents and other proprietary rights. Any such claims, whether with
or without merit, could be time consuming, result in costly litigation and
diversion of resources, cause product shipment delays or require MDSI to enter
into royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to MDSI or at all. A claim of
product infringement against MDSI and failure or inability of MDSI to license
the infringed or similar technology could have a material adverse effect on
MDSI's business, financial condition, operating results and cash flows.
Dependence on Third Parties
Certain contracts require MDSI to supply, coordinate and install third
party products and services. MDSI believes that there are a number of acceptable
vendors and subcontractors for most of its required products, but in many cases,
despite the availability of multiple sources, MDSI may select a single source in
order to maintain quality control and to develop a strategic relationship with
the supplier or may be directed by a customer to use a particular product. The
failure of a third party supplier to provide a sufficient supply of parts and
components or products and services in a timely manner could have a material
adverse effect on MDSI's results of operations. In addition, any increase in the
price of one or more of these products, components or services could have a
material adverse effect on MDSI's business, financial condition, operating
results and cash flows. Additionally, under certain circumstances, MDSI supplies
products and services to a customer through a larger company with a more
established reputation acting as a project manager or systems integrator. In
such circumstances, MDSI has a sub-contract to supply its products and services
to the customer through the prime contractor. In these circumstances, MDSI is at
risk that situations may arise outside of its control that could lead to a
delay, cost over-run or cancellation of the prime contract which could also
result in a delay, cost over-run or cancellation of MDSI's sub-contract. The
failure of a prime contractor to supply its products and services or perform its
contractual obligations to the customer in a timely manner could have a material
adverse effect on MDSI's financial condition, results of operations and cash
flows.
Exchange Rate Fluctuations
Because MDSI's reporting currency is the United States dollar, its
operations outside the United States face additional risks, including
fluctuating currency values and exchange rates, hard currency shortages and
controls on currency exchange. MDSI has operations outside the United States and
is hedged, to some extent, from foreign exchange risks because of its ability to
purchase, develop and sell in the local currency of those jurisdictions. In
addition, MDSI does enter into foreign currency contracts under certain
circumstances to reduce MDSI's exposure to foreign exchange risks. There can be
no assurance, however, that the attempted matching of foreign currency receipts
with disbursements or hedging activities will adequately moderate the risk of
currency or exchange rate fluctuations which could have a material adverse
effect on MDSI's business, financial condition, operating results and cash
flows. In addition, to the extent MDSI has operations outside the United States,
MDSI is subject to the impact of foreign currency fluctuations and exchange rate
charges on MDSI's reporting in its financial statements of the results from such
operations outside the United States.
18
Risks Associated with International Operations
In the years ended December 31, 2000, 1999 and 1998 revenue derived from
sales outside of North America accounted for approximately 20.0%, 22.1% and
3.1%, respectively of MDSI's total revenue. Because MDSI's revenue is dependent,
in large part, on significant contracts with a limited number of customers, the
percentage of MDSI's revenues that is derived from sales outside of North
America has fluctuated, and may continue to fluctuate, from period-to-period.
MDSI believes that its continued growth and profitability will require
additional expansion of its sales in foreign markets, and that revenue derived
from international sales will account for a significant percentage of MDSI's
revenue for the foreseeable future. This expansion has required and will
continue to require significant management attention and financial resources.
The inability of MDSI to expand international sales in a timely and
cost-effective manner could have a material adverse effect on MDSI's business,
financial condition, operating results and cash flows. There are a number of
risks inherent in MDSI's international business activities, including changes in
regulatory requirements, tariffs and other trade barriers, costs and risks of
localizing products for foreign markets, longer accounts receivable payment
cycles, difficulties in collecting payments, reduced protection for intellectual
property, potentially adverse tax consequences, limits on repatriation of
earnings, the burdens of complying with a wide variety of foreign laws,
nationalization, war, insurrection, terrorism and other political risks and
factors beyond MDSI's control. Fluctuations in currency exchange rates could
adversely affect sales denominated in foreign currencies and cause a reduction
in revenue derived from sales in a particular country. In addition, revenue of
MDSI earned abroad may be subject to taxation by more than one jurisdiction,
thereby adversely affecting MDSI's earnings. There can be no assurance that such
factors will not materially adversely affect MDSI's future international sales
and, consequently, MDSI's business, financial condition operating results and
cash flows.
Product Liability
The license and support of products by MDSI may entail the risk of exposure
to product liability claims. A product liability claim brought against MDSI or a
third party that MDSI is required to indemnify, whether with or without merit,
could have a material adverse effect on MDSI's business, financial condition,
operating results and cash flows. MDSI carries insurance coverage for product
liability claims which it believes to be adequate for its operations.
Concentration of Stock Ownership; Anti-Takeover Effects; Investment Canada Act
MDSI's directors, officers and their respective affiliates, in the
aggregate, beneficially own approximately 29.9% of the outstanding Common
Shares. As a result, these shareholders, if acting together, may be able to
exercise significant influence over MDSI and many matters requiring shareholder
approval, including the election of directors and approval of significant
corporate transactions. Such concentration of ownership may under certain
circumstances also have the effect of delaying, deferring or preventing a change
in control of MDSI.
An investment in the Common Shares of MDSI which results in a change of
control of MDSI may, under certain circumstances, be subject to review and
approval under the Investment Canada Act if the party or parties acquiring
control is not a Canadian person (as defined therein). Therefore, the Canadian
regulatory environment may have the effect of delaying, deferring or preventing
a change in control of MDSI.
MDSI is organized under the laws of Canada and, accordingly, is governed by
the Canada Business Corporations Act "CBCA". The CBCA differs in certain
material respects from laws generally applicable to United States corporations
and shareholders, including the provisions relating to interested directors,
mergers and similar arrangements, takeovers, shareholders' suits,
indemnification of directors and inspection of corporate records.
19
In December 1998, MDSI implemented a stock rights plan (the "Plan").
Pursuant to the Plan, shareholders of record on December 17, 1998 received a
dividend of one right to purchase, for CDN$140, one Common Share of MDSI. The
rights are attached to MDSI's Common Shares and will also become attached to
Common Shares issued in the future. The rights will not be traded separately and
will not become exercisable until the occurrence of a triggering event, defined
as an accumulation by a single person or group of 20% or more of MDSI's Common
Shares. After a triggering event, the rights will detach from the Common Shares.
If MDSI is then merged into, or is acquired by, another corporation, MDSI may
either (i) redeem the rights or (ii) permit the rights holder to receive in the
merger Common Shares of MDSI or of the acquiring company equal to two times the
exercise price of the right (i.e., CDN $280). In the latter instance, the rights
attached to the acquirer's stock become null and void. The effect of the rights
program is to make a potential acquisition of MDSI more expensive for the
acquirer if, in the opinion of MDSI's Board of Directors, the offer is
inadequate. While MDSI is not aware of any circumstance that might result in the
acquisition of a sufficient number of shares of MDSI's Common Shares to trigger
distribution of the Rights, existence of the Rights could discourage offers for
MDSI's stock that may exceed the current market price of the stock, but that the
Board of Directors deems inadequate.
As a result of being a reporting issuer in certain provinces of Canada,
MDSI is required to file certain reports in such jurisdictions. As part of such
reports, MDSI is required to file consolidated financial statements prepared in
accordance with generally accepted accounting principles as applied in Canada
("Canadian GAAP"). Canadian and US GAAP differ in certain respects, including
the treatment of certain reorganization costs, acquired research and development
costs, and treatment of business combinations. As a result, MDSI's Consolidated
Financial Statements included in this report may differ materially from the
financial statements filed by MDSI in Canada.
Market for the Common Shares; Potential Volatility of Stock Price
The trading prices of the Common Shares have been subject to wide
fluctuations since trading of MDSI's shares commenced in December 1995. There
can be no assurance that the market price of the Common Shares will not
significantly fluctuate from its current level. The market price of the Common
Shares may be subject to wide fluctuations in response to quarterly variations
in operating results, announcements of technological innovations or new products
by MDSI or its competitors, changes in financial estimates by securities
analysts, or other events or factors. In addition, the financial markets have
experienced significant price and volume fluctuations for a number of reasons,
including the failure of the operating results of certain companies to meet
market expectations that have particularly affected the market prices of equity
securities of many high-technology companies that have often been unrelated to
the operating performance of such companies. These broad market fluctuations, or
any industry-specific market fluctuations, may adversely affect the market price
of the Common Shares. In the past, following periods of volatility in the market
price of a company's securities, securities class action litigation has often
been instituted against such a company. Such litigation, whether with or without
merit, could result in substantial costs and a diversion of management's
attention and resources, which would have a material adverse effect on MDSI's
business, financial condition, operating results and cash flows.
Item 2: Properties
The Company occupies approximately 92,000 square feet of leased office
space at its headquarters in Richmond, British Columbia for its product
development, marketing, support, administration and sales operations. The
Company has sub-let approximately 16,500 of this space until June 30, 2001. The
lease expires on November 30, 2008 with two options to renew for five years
each. The Company also maintains an office in Itasca, Illinois. The Itasca
office lease is for approximately 29,000 square feet and terminates on November
30, 2009. The Company also maintains an office in St. Louis, Missouri. The St.
Louis office lease is for approximately 15,000 square feet and terminates on
December 31, 2001.
20
Item 3: Legal Proceedings
MDSI Mobile Data Solutions Inc. v. Citizens Telecom Services Co. L.L.C. - U.S.
District Court, Texas District Court Collin County - 366 Judicial District
(Docket No. 366-01914-00)
On November 22, 2000, MDSI filed suit in Texas District Court Collin County
against Citizens Telecom Services Co. L.L.C., generally alleging that Citizens
breached a series of contracts dated October 15, 1998. The suit alleges that
Citizens has wrongfully terminated the contracts and failed to pay sums due. The
suit seeks damages, interest and attorneys' fees. In late February 2001,
Citizens filed an answer and counter claim alleging that MDSI breached the
contracts, justifying Citizens' termination of the contracts and entitling
Citizens to repayment of all sums paid to MDSI in addition to interest and
attorneys' fees. Citizens requested and MDSI agreed to mediate the dispute.
Mediation is scheduled to begin on April 2, 2001. MDSI disputes Citizens' claims
and intends to pursue the lawsuit vigorously.
From time to time, the Company is a party to litigation and claims incident
to the ordinary course of its business. While the results of litigation and
claims cannot be predicted with certainty, the Company believes that the final
outcome of such matters will not have a material adverse effect on the Company's
business, financial condition, operating results and cash flows.
Item 4: Submission of Matters to a Vote of Security Holders
Not applicable.
Part II
Item 5: Market for Registrant's Common Equity And Related Stockholder Matters
Price Range of Common Shares
The Company's Common Shares began trading on The Toronto Stock Exchange
and on the Montreal Exchange under the symbol "MMD" on December 20, 1995 and
began trading on the NASDAQ National Market System under the symbol "MDSIF" on
November 26, 1996. The Company changed its NASDAQ National Market System trading
symbol to "MDSI" in April 1999. In December 1999, the Company's listing on the
Montreal Exchange was automatically withdrawn as part of a restructuring plan of
the Canadian stock exchanges. Prior to December 20, 1995, there was no public
market for the Common Shares. The following table sets forth, for the periods
indicated, the high and low sale prices for the Common Shares as reported on The
Toronto Stock Exchange and the NASDAQ National Market System with their
equivalent U.S. dollar amounts where applicable.
The Toronto Stock Exchange NASDAQ National Market
---------------------------------------------------- ------------------------
US$(1) CDN$ US$ US$
---------------------- ------------------------ ---------- ---------
High Low High Low High Low
---------- -------- ---------- -------- ---------- --------
1999
First Quarter...................... 21.66 12.63 32.75 19.10 21.50 12.63
Second Quarter..................... 19.01 15.28 28.00 22.50 19.88 14.88
Third Quarter...................... 18.17 11.51 27.00 17.10 18.38 11.38
Fourth Quarter..................... 26.14 12.34 38.50 18.15 26.50 12.25
2000
First Quarter...................... 87.84 18.58 130.00 27.50 90.00 19.00
Second Quarter..................... 64.00 19.96 93.00 29.00 64.94 18.28
Third Quarter...................... 24.53 10.60 36.35 15.70 24.31 10.31
Fourth Quarter..................... 13.11 6.59 20.00 10.05 13.13 6.38
- ----------
(1) US dollar amounts have been translated using the average noon buying rate
for Canadian dollars for the relevant quarter. See "Exchange Rates."
21
As of December 31, 2000 the Company had approximately 188 shareholders of
record (including nominees and brokers holding street accounts), 83 shareholders
of whom had addresses in the United States and who held 5,489,419 Common Shares,
or 63.7% of the Company's outstanding Common Shares.
The Company has never paid dividends on its Common Stock. The Company
currently intends to retain earnings for use in its business and does not
anticipate paying any dividends in the foreseeable future. The Company's current
bank credit agreement prohibits the payment of dividends without prior consent
of the lender.
Item 6: Selected Financial Data
The following selected consolidated financial data of the Company is
qualified in its entirety by reference to and should be read in conjunction with
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the consolidated financial statements and notes thereto
included elsewhere in this report. The consolidated statements of operations
data for the years ended December 31, 2000, 1999 and 1998 and the consolidated
balance sheet data at December 31, 2000 and 1999 are derived from and are
qualified by reference to the Company's audited consolidated financial
statements. This selected consolidated financial data is presented in conformity
with generally accepted accounting principles in the United States.
Years ended December 31,
-----------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
---------------- ---------------- --------------- -----------------------------------
(in thousands, except per share data)
Statement of Operations Data:
Revenue $ 61,542 $ 58,571 $ 48,363 $ 38,523 $ 23,397
Gross profit 33,487 31,253 24,423 20,290 9,865
Operating income (loss)(3) 857 7,923 6,079 (1,086) 2,434
Net income (loss) for the years(1)(2) (554) 1,146 3,776 (8,299) (4,408)
Diluted earnings (loss) per common $ (0.07) $ 0.13 $ 0.5 $ (1.30) $ (0.91)
share
Weighted average shares outstanding 8,526 9,101 7,563 6,754 4,855
At December 31,
-----------------------------------------------------------------------------------------
Balance Sheet Data: 2000 1999 1998 1997 1996
---------------- ---------------- --------------- -----------------------------------
Cash and cash equivalents $ 13,238 $ 14,613 $ 3,606 $ 93 $ 14,752
Working capital 25,565 24,084 9,073 6,563 16,517
Total assets 60,781 50,443 38,522 28,529 33,271
Non-current liabilities 4,380 2,838 2,927 4,224 6,304
Stockholders' equity 38,177 35,537 20,596 16,688 19,592
- ---------
(1) Net loss for the year ended December 31, 1997, includes non-recurring
charges of $4,585,984, including $824,280 with respect to restructuring
certain operations and $3,761,704 due to changes in estimates to complete
certain contracts entered into by its UK operations which existed prior to
the Company's acquisition of Mobile Data Solutions (UK) Ltd. ("MDSI UK").
(2) Net loss for the years ended December 31, 1997 and 1996 includes
non-recurring charges of $7,200,146 and $6,229,726 as a result of acquired
research and development costs relating to the acquisitions of Alliance
Systems, Incorporated and MDSI UK in April 1997 and June 1996,
respectively.
(3) Operating income for the year ended December 31, 2000 include a one time
charge of $1,691,028 to account for one time cost of merger with
Connectria.
22
Item 7: Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion contains "forward looking statements" within the
meaning of Section 21E of the Securities Exchange Act of 1934. The fourth
paragraph under "Revenue", and the paragraphs entitled "Research and
Development", "Sales and Marketing" , and "General and Administrative" , in the
section entitled "Year ended December 31, 2000 Compared to the Year ended
December 31, 1999" contain forward looking statements. Actual results could
differ materially from those projected in the forward looking statements as a
result of the Company's ability to accelerate or defer operating expenses,
achieve revenue in a particular period, hire new personnel and other factors set
forth under "Business-Risk Factors" in Item 1 of this Annual Report on Form
10-K. In particular, note the Business-Risk Factors entitled "Potential
Fluctuations in Quarterly Operating Results", "Lengthy Sales Cycles",
"Dependence on Large Contracts and Concentration of Customers", "Limited
Operating History; Increased Expenses", "Integration of Acquisitions,"
"eBusiness Development" and "Competition."
Unless otherwise noted, all financial information in this report is
expressed in the Company's functional currency, United States dollars. See item
7A - "Market Risk".
Overview
MDSI develops, markets, implements and supports mobile workforce management
and wireless connectivity software for use by a wide variety of companies that
have substantial mobile workforces, such as utilities, telecommunications
companies, cable companies and insurance companies. MDSI's products are used by
such companies in conjunction with public and private wireless data
communications networks to provide comprehensive solutions for the automation of
business processes associated with the scheduling, dispatching and management of
a mobile workforce. The Company's products are designed to provide a
cost-effective method for companies with mobile workers to utilize data
communications to communicate with such workers, and for such workers to
interface on a real-time basis with their corporate information systems. MDSI
also provides hosting and related professional services.
The Company's revenue is derived from (i) software and services, consisting
of the licensing of software and provision of related services, including
project management, installation, integration, customization and training; (ii)
e-Business services such as the provision of consulting and hosting services,
the provision of application services, and provision of online service
management solutions; (iii) third party products and services, consisting of the
provision of non-MDSI products and services as part of the total contract and
(iv) maintenance and support, consisting of the provision of after-sale support
services as well as hourly, annual or extended maintenance contracts.
The Company believes that recent economic developments and trends have
adversely affected and may continue to affect levels of capital spending by
companies in a variety of industries, including companies in the vertical
markets that the Company serves. In addition, current economic conditions and
developments in the energy markets may have an adverse affect on the financial
condition of energy and utility companies in certain geographic areas of North
America. The Company anticipates that such economic conditions and regulatory
trends may affect demand in 2001 for the products and services offered by the
Company. A decline in demand for MDSI's products in these markets as a result of
economic conditions, or otherwise, may have a material adverse effect on MDSI's
business, financial condition, operating results and cash flows. In order to
address the potential uncertainties caused by these economic trends, MDSI has
taken measures to reduce its operating expenses through workforce reductions and
other measures. In connection with this restructuring, on March 30, 2001, MDSI
terminated 34 employee and contractor positions in Canada and the United States
and will record a one-time charge of approximately $1.2 million in the first
quarter of 2001. See "Forward Looking Statements."
Field Service Business
The implementation of a complete mobile data solution requires a wireless
data communications network, a land-based data communications network, mobile
computing devices integrated with wireless data communication modems, host
computer equipment, industry specific application software such as MDSI's
Advantex products, wireless connectivity software and a variety of services to
manage and install these components, integrate them with an organization's
existing computer systems and configure or customize the software to meet
customer requirements. Frequently, in the Company's larger contracts only a
limited number of the mobile computing devices and in-vehicle equipment are
installed initially, with the balance implemented over a rollout period that may
extend up to one year or more. Where increases in mobile work forces require, or
where additional departments of mobile workers are added, additional mobile
computing devices may be installed.
23
Revenue for software and services has historically accounted for a
substantial portion of the Company's revenue. Typically, the Company enters into
a fixed price contract with a customer for the licensing of selected software
products and the provision of specific services that are generally performed
within six to twelve months. Pricing for these contracts includes license fees
as well as a fee for professional services. The Company generally recognizes
total revenue for software and services associated with a contract using a
percentage of completion method based on the total costs incurred over the total
estimated costs to complete the contract.
The Company's customers typically enter into ongoing maintenance agreements
that provide for maintenance and technical support services for a period
commencing after expiration of the initial warranty period. Maintenance
agreements typically have a term of twelve months and are invoiced either
annually or monthly. Revenue for these services is recognized ratably over the
term of the contract.
The Company is periodically called on to provide, in addition to MDSI
products and services, certain third party products, such as host computer
hardware and operating system software, and mobile computing. The Company
recognizes revenue of the supply on third party hardware upon transfer of title
to the customer. The Company recognizes revenue on the supply on third party
services using a percentage of completion method based on the costs incurred
over the total estimated cost to complete the third party services contract.
The Company believes that it will often supply some portion of third party
products and services to customers where it is successful in selling its own
products and services. There can be no assurance, however, that any contracts
entered into by the Company to supply third party software and products in the
future will represent a substantial portion of revenue in any future period.
Since the revenue generated from the supply of third party products and services
may represent a significant portion of certain contracts and the installation
and rollout of third party products is generally at the discretion of the
customer, the Company may, depending on the level of third party products and
services provided during a period, experience large quarterly fluctuations in
revenue.
The Company's revenue is dependent, in large part, on significant contracts
from a limited number of customers. As a result, any substantial delay in the
Company's completion of a contract, the inability of the Company to obtain new
contracts or the cancellation of an existing contract by a customer could have a
material adverse effect on the Company's results of operations. Some of the
Company's contracts are cancelable upon notice by the customer. The loss of
certain contracts could have a material adverse effect on the Company's
business, financial condition, operating results and cash flows. As a result of
these and other factors, the Company's results of operations have fluctuated in
the past and may continue to fluctuate from period-to-period.
During the second quarter of 2000, the Company announced version r7 of its
Advantex product, and it is currently in the implementation phase of its first
contracts using version r7. The increased time required for the initial
implementation and field testing of a new version of software has resulted in
delays in commencement of additional installations of the Advantex r7 product.
Such delays have increased the Company's costs of completing Advantex r7
installations and have affected the timing of the Company's recognition of
revenue from such contracts. The Company completed its first r7 installation in
the first quarter of 2001, and anticipates that it will complete its second
installation of the Advantex r7 product in the second quarter of 2001.
24
e-Business
The Company launched its e-Business division in February 2000 to develop
internet-based business solutions for companies of varying sizes, in the general
services market. Like the Company's other Advantex mobile workforce management
applications, the Company's e-Business solutions will allow companies to empower
mobile workers by providing a reliable wireless link to enterprise or Internet
applications. Customers of service providers that use the Company's e-Business
solutions will be able to purchase, schedule, confirm and track service
appointments online without human intervention, providing convenience and
flexibility 24 hours a day, 7 days a week.
The Company intends to offer its e-Business solutions through four
channels: sites that aggregate service providers, wireless carriers, major
vertical-focused ASPs (Application Service Providers), and directly to service
providers. On June 1, 2000, the Company acquired Connectria Corporation, based
in St. Louis, Missouri, which currently provides consulting and Internet hosting
services for third-party applications. The Company has announced several
alliances that are expected to further its e-Business strategy. The Company
launched its scheduling and dispatch application, eServiceManager (formerly
ServeClick), on an ASP basis to service providers in the fourth quarter of 2000.
The Company's e-Business model is expected to allow companies to use MDSI
products and services on a subscription or transaction fee basis, rather than
license and host these MDSI products themselves. The Company believes that its
e-Business solutions subscription and transaction fee programs is an attractive
solution for small or medium-sized companies that can benefit from MDSI's
workforce management and scheduling applications, without the financial or
information technology investment required to license and implement MDSI's
on-site solutions. Currently, the Company's e-Business revenue is derived from
providing managed services, which include managed application services, managed
network services, managed data center services, and managed hosting services.
The Company also earns revenues by providing eBusiness consulting services.
The future success of the Company's e-Business development strategy will
depend on the Company's ability to develop and implement the technology related
to its e-Business solutions; the Company's ability to enter into contracts with
service providers, service portals and ASP's; and the adoption of the Company's
e-Business solutions by service providers and their customers. Growth in the
Company's e-Business revenue is anticipated to be derived primarily from
transaction fees generated by customer and service provider use of the
e-Business scheduling solutions. The Company has not generated material revenues
from fees associated with its e-Business scheduling solutions and there can be
no assurance that the Company's e-Business division will generate material
revenues from these solutions in future periods.
Effects of Acquisitions
On June 1, 2000, the Company acquired all of the issued and outstanding
shares of Connectria, an ASP and provider of online service management solutions
for service companies. The Company issued 845,316 common shares and assumed
583,037 employee stock options in exchange for all of the outstanding stock and
options of Connectria. Merger related expenses of $1,691,028 are included in the
cost of merger for fiscal 2000. The transaction is accounted for under the
pooling of interest method of accounting and all historical financial
information contained herein has been restated to include combined results of
operations, financial position and cash flows of Connectria.
25
The Company has a limited history of operations on a combined basis with
Connectria. In addition, since the acquisition of Connectria, the Company has
restructured certain aspects of this operation. As a result, the financial
information presented in this Annual Report is not indicative of the results
that would have been obtained had the acquisitions occurred prior to the
commencement of the periods covered herein, and such information should not be
relied upon as an indication of future performance.
Disposition of Transportation Business Unit
In February 1999, the Company's Board of Directors approved a plan to
dispose of the delivery segment of its business ("Transportation Business
Unit"). Effective June 1, 1999, the Company completed the sale of the
Transportation Business Unit to Digital Dispatch Systems, Inc. ("DDS"), a
supplier of dispatch systems to the taxi market for proceeds of $3,805,746. The
proceeds comprised of common shares of DDS, representing an 11% interest in DDS,
and a promissory note in the principal amount of $331,455, due January 1, 2001,
bearing interest at 8% per annum. During the year ended December 31, 2000, DDS
exercised its option to buyback the DDS shares that MDSI received as
compensation on the sale of the Transportation Business Unit. Proceeds on sale
of the DDS shares were $3,273,392.
Under the terms of the agreement between the Company and DDS, the Company
has retained certain assets and liabilities of the discontinued operations. The
Company expects that it will liquidate these assets and liabilities by the
second quarter of 2001. As a result of the Company's decision to dispose of its
Transportation Business Unit, the Transportation Business Unit has been
classified as a discontinued operation and the results of operation, financial
position and cash flow for this segment have been segregated from those of
continuing operations. The following discussion and analysis of the Company's
results of operations excludes the Transportation Business Unit for the current
and corresponding prior period.
The Company's net loss of $0.6 million for the year ended December 31, 2000
was comprised of a $0.2 million after-tax loss from continuing operations and an
after-tax loss of $0.4 million on discontinued operations. There is no tax
effect on the loss on discontinued operations. The discontinued operating loss
includes not only the results of operations but also foreign exchange losses and
provisions against contracts to the measurement date of February 25, 1999. The
loss on disposal includes the operating results from the measurement date to the
effective date, the costs of disposal, severance costs, and the estimated costs
to complete the remaining Transportation Business Unit contract.
26
Results of Operations
The following table sets forth, for the years indicated, certain components
of the selected financial data of the Company:
Years ended December 31,
------------------------------------------------------------
2000 1999 1998
------------ ------------ ------------
(in thousands)
Revenue:
Software and services................ $ 41,338 $ 39,912 $ 28,729
eBusiness ........................... 8,463 4,845 2,734
Maintenance and support.............. 8,888 5,566 3,841
Third party products and services ... 2,853 8,248 13,059
------------ ------------ ------------
61,542 58,571 48,363
Direct costs............................ 28,055 27,318 23,940
------------ ------------ ------------
Gross profit............................ 33,487 31,253 24,423
------------ ------------ ------------
Operating expenses:
Research and development............. 9,049 6,902 5,841
Sales and marketing.................. 12,914 9,370 7,830
General and administrative........... 7,699 6,779 4,418
Amortization of intangible assets.... 292 279 255
Costs of merger...................... 1,691 -- -
Provision for doubtful accounts...... 985 -- -
------------ ------------ ------------
32,630 23,330 18,344
------------ ------------ ------------
Operating income (loss)................. 857 7,923 6,079
Other income (loss)..................... (525) (760) 39
------------ ------------ ------------
Income (loss) before provision for 332 7,163 6,118
income taxes............................
Provision for income taxes.............. (492) (2,144) (1,809)
------------ ------------ ------------
(Loss) income for continuing operations (159) 5,019 4,309
------------ ------------ ------------
(Loss) from discontinued operations (395) (3,873) (532)
------------ ------------ ------------
Net (loss) income for the year.......... $ (554) $ 1,146 $ 3,776
============ ============ ============
27
The following table sets forth, for the years indicated, certain components
of the selected financial data of the Company as a percentage of total revenue.
Years ended December 31,
------------------------------------------------------------
2000 1999 1998
------------ ------------ ------------
Revenue:
Software and services.................... 67.2% 68.1% 59.4%
e-Business............................ 13.8 8.3 5.7
Third party products and services..... 4.6 14.1 27.0
Maintenance and support............... 14.4 9.5 7.9
------------ ------------ ------------
100.0 100.0 100.0
Direct costs............................. 45.6 46.6 49.5
------------ ------------ ------------
Gross profit............................. 54.4 53.4 50.5
------------ ------------ ------------
Operating expenses:
Research and development.............. 14.7 11.8 12.1
Sales and marketing................... 21.0 16.0 16.2
General and administrative............ 12.5 11.5 9.1
Costs of merger....................... 2.7 -- --
Provision for doubtful accounts....... 1.6 -- --
Amortization of intangible assets..... 0.5 0.5 0.5
------------ ------------ ------------
53.0 39.8 37.9
------------ ------------ ------------
Operating income (loss).................. 1.4 13.6 12.6
Other income (loss)...................... (0.9) (1.3) 0.0
------------ ------------ ------------
Income (loss) before provision for 0.5 12.3 12.6
income taxes.............................
Provision for income taxes............... (0.8) (3.7) (3.7)
------------ ------------ ------------
(Loss) income from continuing operations. (0.3) 8.6 8.9
(Loss) from discontinued operations...... (0.6) (6.6) (1.1)
------------ ------------ ------------
Net (loss) income for the year........... (0.9)% 2.0% 7.8%
============ ============ ============
28
Year ended December 31, 2000 Compared to the Year ended December 31, 1999
Revenue - Revenue increased by $3.0 million (5.1%) for the year ended
December 31, 2000, compared to the year ended December 31, 1999. The increase
was primarily due to the increase in software and services, eBusiness and
maintenance, which was partially offset by a decrease in the revenue earned from
third party products and services. The Company believes that recent economic
developments and trends have adversely affected, and may continue to affect,
levels of capital spending by companies in a variety of industries, including
telecommunications and broadband. In addition, current economic conditions and
developments in the energy markets may have an adverse affect on the financial
condition of energy and utility companies in certain geographic areas of North
America. The Company anticipates that such economic conditions and regulatory
trends may affect demand in 2001 for the products and services offered by the
Company. See "Forward Looking Statements."
Software and services revenue increased by $1.4 million (3.6%) for the year
ended December 31, 2000,compared to the year ended December 31, 1999. In 1999,
certain of the Company's customers delayed or deferred purchasing decisions due
to the year 2000 issue, resulting in lower revenues for the Company in the
fourth quarter of 1999. The Company did not experience a similar slowdown in the
fourth quarter of 2000 and the resulting revenue growth in that quarter
substantially accounts for the year over year increase in revenues.
e-Business revenues primarily consist of sales by the Company's newly
acquired subsidiary, Connectria. e-Business revenue for the year ended December
31, 2000 was $8.5 million compared to $4.8 million for the year ended December
31, 1999. Connectria's revenues in both periods consisted primarily of revenues
from consulting and hosting services. There can be no assurance that the Company
will realize material revenues from its new eBusiness product offering. The
increase in period-to-period revenues is a result of the increased business
growth and expansion within the e-Business market segment, and is not
attributable to one particular contract.
Third party products and services revenue decreased by $5.4 million (65.4%)
for the year ended December 31, 2000, compared to the year ended December 31,
1999. Third party products and services revenue is primarily earned from certain
customers in the utility market pursuant to agreements under which the Company
provides third party products and services, typically host computer equipment
and mobile computing devices, as part of the installation of software and
provision of services. Revenue from deliveries of third party products and
services will fluctuate from period to period given the timing of certain
contracts and the rollout schedules which are established primarily by the
customers. Accordingly, this will result in large fluctuations in revenue,
direct costs, gross profits and income from operations from one period to
another.
Maintenance and support revenue was $8.9 million for the year ended
December 31, 2000, compared to $5.6 million for the year ended December 31,
1999, an increase of 59.7%. Typically, maintenance and support revenue will
increase with the increase in the level of the Company's installed customer
base.
Direct Costs. Direct costs were 45.6% of revenue for the year ended
December 31, 2000, compared to 46.6% for the year ended December 31, 1999.
Direct costs include labor and other costs directly related to a project
including those related to the provision of services and support, and costs
related to host equipment and mobile devices on behalf of third party product
sales. Labor costs include direct payroll, benefits and overhead charges. The
decrease in proportion of direct costs to revenue relates primarily to the
decrease in third -party products and services, which have higher direct costs.
Gross Margins. Gross margins were 54.4% of revenue for the year ended
December 31, 2000, compared to 53.4% for the year ended December 31, 1999. The
change in profit margin relates to the change in the mix in revenues. The
proportion in revenue of lower margin third-party products and services
decreased in 2000 compared to 1999.
Research and Development. Research and development expenses were $9.0
million, or 14.7% of revenue, for the year ended December 31, 2000, compared to
$6.9 million, or 11.80% of revenue, for the year ended December 31, 1999. The
31.1% increase in research and development expenses in 2000 was a result of the
continued development and enhancement of the Company's Advantex products
(enterprise and ASP versions, and wireless bundles), as well as development of
the Company's eService offering. The Company intends to continue committing a
significant portion of its product revenues to enhance existing products and
develop new products, resulting in an anticipated increase in the dollar amounts
of research and development expenses.
29
Sales and Marketing. Sales and marketing expenses were $12.9 million or
21.0% of revenue for the year ended December 31, 2000 and $9.4 million or 16.0%
of revenue for the year ended December 31, 1999. This represents an increase of
$3.5 million (37.8%) as compared to 1999. The increase was due to an increase in
marketing, sales and technical support personnel supporting the Company's
increased product offerings, including Advantex r7 and e-Business initiatives.
The Company anticipates that the dollar amounts of its sales and marketing
expenses will continue to increase as the result of the Company's commitment to
its international marketing effort.
General and Administrative. General and administrative expenses were $7.7
million, or 12.5% of revenue, for the year ended December 31, 2000 and $6.8
million, or 11.5% of revenue, for the year ended December 31, 1999. This
increase was due primarily to the hiring of additional accounting and
administrative personnel to support the Company's growth. The Company expects
that its general and administrative expenses will increase in the future as the
Company expands its staffing, information systems and other administrative costs
to support its expanding operations.
Costs of merger. During the year ended December 31, 2000, the Company
completed its acquisition of Connectria. This transaction has been accounted for
under the pooling of interests method. During the year ended December 31, 2000,
the Company incurred one time acquisition costs of approximately $1.7 million.
Provision for doubtful accounts. The Company has included in its operating
results for the year ended December 31, 2000, a provision for $985,000 with
respect to a doubtful account. The Company believes that its position in the
matter is strong and intends to vigorously pursue collection. The Company has
filed an action seeking payment of the full contract amount and the customer has
filed an answer and counterclaim. The customer has requested, and the Company
has agreed, to mediate the dispute. See "Legal Proceedings".
Other Income (expense). Other income (expense) was $(0.5) million for the
year ended December 31, 2000, compared to $(0.8) million for the year ended
December 31, 1999. Substantially all of other income (expense) relates to
interest income on cash and short term deposits, interest expense on capital
leases, and fluctuations in foreign currency denominated assets and liabilities.
Income Taxes. The Company provided for income taxes on earnings for the
year ended December 31, 2000 at the rate of 26.9%, after adjusting for the
amortization of intangible assets. The Company's effective tax rate reflects the
application of certain operating loss carry forwards against taxable income and
the blended effect of Canadian, US, and other foreign jurisdictions' tax rates.
Year ended December 31, 1999 Compared to the Year ended December 31, 1998
Revenue - Revenue increased by $10.2 million (21.1%) for the year ended
December 31, 1999, compared to the year ended December 31, 1998. This increase
is primarily due to the increase in software and services and was partially
offset by a decrease in the revenue earned from third party products and
services.
Software and services revenue increased by $11.2 million (38.9%) for the
year ended December 31, 1999, compared to the year ended December 31, 1998. This
increase was due to an 92% increase in the revenues earned from customers in the
telecommunications markets.
e-Business revenues materially consist of sales by the Company's newly
acquired subsidiary, Connectria. e-Business revenue for the year ended December
31, 1999 was $4.8 million compared to $2.7 million for the year ended December
31, 1998. Connectria's revenues in both periods consisted primarily of revenues
from consulting and hosting services. The increase in period-to-period revenues
is a result of the increased business growth and expansion within the e-Business
market segment, and is not attributable to one particular contract.
30
Third party products and services revenue decreased by $4.8 million (36.8%)
for the year ended December 31, 1999, compared to the year ended December 31,
1998. Third party products and services revenue is primarily earned from certain
customers in the utility market pursuant to agreements under which the Company
provides third party products and services, typically host computer equipment
and mobile computing devices, as part of the installation of software and
provision of services. Revenue from deliveries of third party products and
services will fluctuate from period to period given the timing of certain
contracts and the rollout schedules which are established primarily by the
customers. Accordingly, this will result in large fluctuations in revenue,
direct costs, gross profits and income from operations from one period to
another.
Maintenance and support revenue was $5.5 million for the year ended
December 31, 1999, compared to $3.8 million for the year ended December 31,
1998, an increase of 44.9%. Maintenance and support revenue has increased
primarily due to the increased growth in the Company's installed customer base.
Such revenue is expected to fluctuate as it corresponds to the level of software
and services revenue the Company is engaged to provide in support of its
installations.
Direct Costs - Direct costs were 46.6% of revenue for the year ended
December 31, 1999, compared to 49.5% for the year ended December 31, 1998.
Direct costs include labor and other costs directly related to a project
including those related to the provision of services and support, and costs
related to host equipment and mobile devices on behalf of third party product
sales. Labor costs include direct payroll, benefits and overhead charges. The
decrease in proportion of direct costs to revenue relates primarily to the
decrease third -party products and services, which have higher direct costs.
Gross Margins. Gross margins were 53.4% of revenue for the year ended
December 31, 1999, compared to 50.5% for the year ended December 31, 1998. The
change in profit margin relates to the change in the mix in revenues. The
proportion in revenue of lower margin third-party products and services
decreased in 1999 compared to 1998.
Research and Development. Research and development expenses were $6.9
million, or 11.8% of revenue, for the year ended December 31, 1999, compared to
$5.8 million, or 12.1% of revenue, for the year ended December 31, 1998. The
18.2% increase in research and development expenses in 1999 is a result of the
continued development and enhancement of the Company's Advantex and e-Business
products. The Company anticipates continuing to commit a significant portion of
its product revenues to enhancement of existing products and the development of
new products, resulting in an anticipated increase in the dollar amounts of
research and development expenses.
Sales and Marketing. Sales and marketing expenses were $9.4 million or
16.0% of revenue for the year ended December 31, 1999 and $7.8 million or 16.3%
of revenue for the year ended December 31, 1998. This represents an increase of
$1.5 million (19.7%) as compared to 1998. The increase was primarily due to an
increase in marketing, sales and technical support personnel to support the
Company's increased marketing activities worldwide. The Company anticipates that
the dollar amounts of its sales and marketing expenses will continue to increase
as the result of the Company's commitment to its international marketing effort.
General and Administrative. General and administrative expenses were $6.8
million, or 11.5% of revenue, for the year ended December 31, 1999 and $4.4
million, or 9.1% of revenue, for the year ended December 31, 1998. This increase
was due primarily to the hiring of additional accounting and administrative
personnel to support the Company's growth. The Company expects that its general
and administrative expenses will increase in the future as the Company expands
its staffing, information systems and other administrative costs to support its
expanding operations.
31
Other Income. Other income was ($0.8) million for the year ended December
31, 1999 as compared to $0.0 million for the year ended December 31, 1998.
Substantially all of other income relates to interest income on cash and short
term deposits, interest expense on capital leases and fluctuations in the
currencies of the Company's foreign operations.
Income Taxes. The Company provided for income taxes on earnings for the
year ended December 31, 1999 at the rate of 28.8%, after adjusting for the
amortization of intangible assets. The Company's effective tax rate reflects the
application of certain operating loss carry forwards against taxable income and
the blended effect of Canadian, US, and other foreign jurisdictions' tax rates.
Quarterly Results of Operations
The following table sets forth certain unaudited statement of operations
data for each of the eight quarters beginning January 1, 1999 and ending
December 31, 2000 as well as the percentage of the Company's revenue represented
by each item. The unaudited financial statements have been prepared on the same
basis as the audited financial statements contained herein and include all
adjustments, consisting only of normal recurring adjustments, that the Company
considers necessary to present fairly this information when read in conjunction
with the Company's audited financial statements and the notes thereto appearing
elsewhere in this report. In view of the Company's recent growth, its recent
acquisitions and other factors, the Company believes that quarterly comparisons
of its financial results are not necessarily meaningful and should not be relied
upon as an indication of future performance.
Three Months Ended
------------------
2000 1999
---------------------------------------------- -------------------------------------------------
Dec. 31 Sep. 30 June 30 Mar. 31 Dec. 31 Sep. 30 June 30 Mar. 31
--------- --------- --------- --------- --------- --------- --------- --------
(Unaudited, in thousands)
Statement of Operations Data:
Revenue:
Software and services $11,729 $10,430 $ 9,509 $ 9,669 $10,166 $10,543 $10,456 $ 8,748
e-Business 3,574 1,849 1,551 1,489 1,168 1,247 1,325 1,105
Third party products and 709 964 653 529 1,084 1,609 1,786 3,770
services
Maintenance and support 2,595 2,296 1,973 2,024 1,571 1,686 1,299 1,009
--------- --------- --------- --------- --------- --------- --------- --------
18,607 15,539 13,686 13,711 13,989 15,085 14,866 14,632
Direct costs 8,577 7,632 6,297 5,551 6,180 7,025 6,633 7,480
--------- --------- --------- --------- --------- --------- --------- --------
Gross profit 10,030 7,907 7,389 8,160 7,809 8,060 8,233 7,152
--------- --------- --------- --------- --------- --------- --------- --------
Operating expenses:
Research and development 2,481 2,254 2,275 2,039 1,706 1,836 1,739 1,621
Sales and marketing 3,664 3,059 3,365 2,825 2,211 2,017 2,546 2,596
General and administrative 1,708 1,806 2,079 2,114 1,939 1,530 1,663 1,647
Amortization of intangible 89 68 68 70 70 70 70 70
assets
Cost of Merger/ Restructuring (385) - 2,076 - - - - -
Provision for doubtful 985 - - - - - - -
accounts
--------- --------- --------- --------- --------- --------- --------- --------
8,542 7,187 9,863 7,048 5,926 5,453 6,018 5,934
--------- --------- --------- --------- --------- --------- --------- --------
Operating income (loss) 1,488 720 (2,474) 1,112 1,883 2,607 2,215 1,218
Other (loss) income (214) 89 (177) (212) (308) 44 (333) (162)
--------- --------- --------- --------- --------- --------- --------- --------
Income (loss) before income
tax provision 1,274 809 (2,651) 900 1,575 2,651 1,882 1,056
Provision for income taxes (110) (263) 172 (291) (475) (811) (573) (284)
--------- --------- --------- --------- --------- --------- --------- --------
Income (loss) from continuing
operations 1,164 546 (2,479) 609 1,100 1,840 1,309 772
Loss from discontinued
operations (395) - - - - - - (3,873)
--------- --------- --------- --------- --------- --------- --------- --------
Net income (loss) for the
period $ 769 $ 546 $(2,479) $ 609 $ 1,100 $ 1,840 $ 1,309 $(3,101)
========= ========= ========= ========= ========= ========= ========= ========
32
The following table sets forth, for the periods indicated, certain
components of the selected financial data of the Company as a percentage of
total revenue:
Three Months Ended
------------------
2000 1999
--------------------------------------------- ------------------------------------------------
Dec. 31 Sept. 30 June 30 March 31 Dec. 31 Sept. 30 June 30 March 31
--------- ---------- ---------- ----------- --------- --------- ---------- -----------
Revenue:
Software and services 63.0% 67.1% 69.5% 70.5% 72.6% 69.9% 70.3% 59.8%
E-Business 19.2 11.9 11.3 10.8 8.4 8.2 8.9 7.5
Third party products and services 3.8 6.2 4.8 3.9 7.8 10.7 12.0 25.8
Maintenance and support 14.0 14.8 14.4 14.8 11.2 11.2 8.8 6.9
----------- --------- ---------- ----------- ---------- ---------- ---------- -----------
100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Direct costs 46.1 49.1 46.0 40.5 44.2 46.6 44.6 51.1
----------- --------- ---------- ----------- ---------- ---------- ---------- -----------
Gross profit 53.9 50.9 54.0 59.5 55.8 53.4 55.4 48.9
----------- --------- ---------- ----------- ---------- ---------- ---------- -----------
Operating expenses:
Research and development 13.3 14.5 16.6 14.9 12.2 12.2 11.7 11.1
Sales and marketing 19.7 19.7 24.6 20.6 15.8 13.4 17.1 17.7
General and administrative 9.2 11.6 15.2 15.4 13.9 10.1 11.2 11.3
Amortization of intangible assets 0.5 0.4 0.5 0.5 0.5 0.5 0.5 0.5
Cost of Merger/Restructuring (2.1) - 15.2 - - - - -
Allowance for doubtful accounts 5.3 - - - - - - -
----------- --------- ---------- ----------- ---------- ---------- ---------- -----------
45.9 46.2 72.1 51.4 42.4 36.2 40.5 40.6
----------- --------- ---------- ----------- ---------- ---------- ---------- -----------
Operating income (loss) 8.0 4.7 (18.1) 8.1 13.4 17.2 14.9 8.3
Other (loss) income (1.2) 0.5 (1.3) (1.6) (2.2) 0.3 (2.2) (1.1)
----------- --------- ---------- ----------- ---------- ---------- ---------- -----------
Income (loss) before income tax 6.8 5.2 (19.4) 6.5 11.2 17.5 12.7 7.2
provision
----------- --------- ---------- ----------- ---------- ---------- ---------- -----------
Recovery of (provision for) (0.6) (1.7) 1.3 (2.1) (3.4) (5.3) (3.9) (1.9)
income taxes
----------- --------- ---------- ----------- ---------- ---------- ---------- -----------
Income (loss) from continuing 6.2 3.5 (18.1) 4.4 7.8 12.2 8.8 5.3
operations
Loss from discontinued operations (2.1) - - - - - - (26.5)
=========== ========= ========== =========== ========== ========== ========== ===========
Net income (loss) for the period 4.1% 3.5% (18.1)% 4.4% 7.8% 12.2% 8.8% (21.2)%
=========== ========= ========== =========== ========== ========== ========== ===========
Liquidity and Capital Resources
The Company finances its operations, acquisitions and capital expenditures
with cash generated from operations, loans, private placements and public
offerings of its securities. At December 31, 2000, the Company had cash and cash
equivalents of $13.2 million and working capital of $25.6 million.
Cash provided by (used in) operating activities was $(1.2) million, $1.6
million and $6.4 million, respectively for the years ended December 31, 2000,
1999 and 1998. The $1.2 million of cash used by operating activities in 2000 was
comprised of $159,000 net loss, non-cash charges of $3.2 million and $(4.2)
million of changes to non-cash working capital items. The changes to working
capital items include a $2.7 million increase in trade receivables, a $6.6
million increase in unbilled receivables, a $0.3 million decrease in prepaid
expenses a $1.0 million increase in accrued liabilities, a $1.7 million increase
in trade payables, a $0.5 decrease in taxes payable and a $3.2 million increase
in deferred revenue. Unbilled accounts receivable arise where the Company has
earned revenue on a project though has yet to complete specific billing
milestones under the terms of the applicable contract. Deferred revenue arises
where the Company has achieved a billing milestone under a customer contract but
has yet to recognize all of the revenue billed due to the percentage of
completion under the contract.
33
The Company has included in its operating results for the year ended
December 31, 2000 a provision for $985,000 with respect to a doubtful account.
The Company believes that it is entitled to payment of the full contract amount
and intends to vigorously pursue collection. The Company has filed an action
seeking payment of the full contract amount and the customer has filed an answer
and counterclaim. The customer has requested, and the Company has agreed, to
mediate the dispute. See "Legal Proceedings."
Cash provided by financing activities was $5.8 million, $13.8 million and
$2.1 million, respectively, during the years ended December 31, 2000, 1999 and
1998. The cash provided by financing activities in 2000 comprised $2.3 million
in capital leases and $3.5 million from the issue of common shares partially
offset by a $17,000 repayment of long-term debt. During 2000, the $3.5 million
received on shares issued was made up of proceeds on exercise of stock options
of $3.3 million and purchases by employees under the Company's share purchase
plan of $185,000.
Cash used in investing activities was $6.0 million, $4.3 million, $2.0
million, respectively, for the years ended December 31, 2000, 1999 and 1998.
Total investing activity in 2000 primarily consisted of $6.9 million for the
purchase of capital equipment, including computer hardware and software for use
in research and development activities, the growth of the e-Business operations,
and to support the growth of the Company's corporate information systems. In
addition, the Company received $3.3 million in proceeds on sale of its interest
in Digital Dispatch Systems, Inc. and made investments in two private companies
for $2.5 million.
Existing sources of liquidity at December 31, 2000 include $13.2 million of
cash and cash equivalents and funds available under the Company's operating line
of credit. At the year ended December 31, 2000, the Company's borrowing capacity
under the line of credit was CDN$8 million. Under the terms of the agreement,
borrowings and letters of credit under the line are limited to 60% to 90% of
eligible accounts receivable. Borrowings accrue interest at the bank's prime
rate plus 0.5%. At December 31, 2000, the Company was not using this line of
credit.
The Company believes that future cash flows from operations and its
borrowing capacity under the operating line of credit will provide sufficient
funds to meet cash requirements for at least the next twelve months.
Commensurate with its past and expected future growth, the Company may increase,
from time to time, its borrowing facility under its operating line of credit to
support its operations. The Company has no material additional commitments other
than capital and operating leases. Future growth or other investing activities
may require the Company to obtain additional equity or debt financing, which may
or may not be available on attractive terms, or at all, or may be dilutive to
current or future shareholders.
Derivative Financial Instruments
It is the policy of the Company not to enter into derivative financial
instruments for trading purposes. The Company does enter into foreign currency
forward exchange contracts in the ordinary course of business to protect itself
from adverse currency rate fluctuations on certain firm foreign currency
transactions. The Company may also utilize foreign currency exchange contracts
to hedge net assets or liabilities denominated in foreign currencies. These
contracts are generally for eighteen months or less. Gains or losses relating to
hedging firm commitments are deferred and included in the measurement of the
foreign currency transaction subject to the hedge.
The Company's foreign currency forward contracts are executed with credit
worthy banks and are denominated in currencies of major industrial countries. As
at December 31, 2000, the Company had no foreign currency forward contracts
outstanding.
34
Item 7A: Quantitative and Qualitative Disclosure About Market Risk
The Company's primary market risk is foreign currency exchange rates. The
Company has established procedures to manage sensitivity to foreign currency
exchange rate market risk. These procedures include the monitoring of the
Company's net exposure to each foreign currency and the use of foreign currency
forward contracts to hedge firm exposures to currencies other than United States
dollars. The Company has operations in the Canada and Europe in addition to its
United States operations and except as noted below did not hedge these exposures
in 2000. However, the Company may from time-to-time hedge any net exposure to
currencies other than the United States dollar.
The Company has entered into foreign currency forward contracts in respect
of net expenses under customer contracts to the Belgium Franc and the United
Kingdom Sterling Pound (UK Sterling) during 1999. The Company sold 104,000,000
Belgium Francs on October 31, 2000 for $2.8 million and sold 350,000 and 180,000
UK Sterling for $544,000 and $278,000 on May 22, 2000 and September 29, 2000,
respectively.
As of December 31, 2000, the potential reduction in future earnings from a
hypothetical instantaneous 10% change in quoted foreign currency exchange rates
applied to the foreign currency sensitive contracts and assets would be
approximately $3.3 million. The foreign currency sensitivity model is limited by
the assumption that all foreign currencies, to which the Company is exposed,
would simultaneously change by 10%. Such synchronized changes are unlikely to
occur. The sensitivity model does not include the inherent risks associated with
anticipated future transactions denominated in foreign currencies or future
forward contracts entered into for hedging purposes.
The Company does not have any material exposure to interest or commodity
risks. The Company is exposed to economic and political changes in international
markets where the Company competes such as inflation rates, recession, foreign
ownership restrictions and other external factors over which the Company has no
control; domestic and foreign government spending, budgetary and trade policies.
Item 8: Financial Statements and Supplementary Data
Reference is made to the financial statements listed under the heading
"(a)(1) Financial Statements" of Item 14 herein, which financial statements are
incorporated herein by reference in response to this Item 8.
Item 9: Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
35
Part III
Item 10: Directors and Officers of the Registrant
The following table sets forth certain information concerning the Company's
executive officers, officers, key employees and directors as of December 31,
2000.
Name Age Position
- -------------------------------------------- ------- ----------------------------------------------------------------------------
Executive Officers
Erik Dysthe(1)........................... 63 Chairman of the Board and Director
Kenneth R. Miller(2)(3).................. 45 Chief Executive Officer and Director
Robert G. Cruickshank.................... 50 President, Chief Operating Officer and Director
Verne D. Pecho........................... 57 Vice President - Finance and Administration and Chief Financial Officer
Richard S. Waidmann(4)..................... 39 Senior Vice-President and General Manager, eServices Division and Director
Officers and Key Employees
Simon Backer............................. 45 Senior Vice President and General Manager, Wireless Services
Douglas Engerman ........................ 44 Senior Vice President - Project Implementation & Customer Support
Eric Y. Miller (5)....................... 42 Senior Vice President and General Manager, ASP Division
Tommy Lee................................ 37 Senior Vice President - Product Development
Gene Mastro ............................. 53 Senior Vice President - Sales
Rodney Neumann .......................... 38 Senior Vice President - Business Development
Paul Ballinger .......................... 53 Vice President and Chief Information Officer
M. Greg Beniston......................... 43 Vice President - Legal and Corporate Secretary
Glenn Y. Kumoi........................... 38 Vice President and Chief Legal Officer
Ronald P. Toffolo........................ 50 Vice President - Human Resources
David Haak............................... 39 Vice President - Sales, Americas
Directors
Gerald F. Chew (3)(6)(7)................. 40 Director
Bruno Ducharme (6)(7).................... 42 Director
Robert C. Harris, Jr. (3)(6)............. 54 Director
John T. McLennan (6) .................... 55 Director
Terrence P. McGarty (6)(7)............... 57 Director
Marc Rochefort (6)....................... 53 Director
- ---------------------
(1) Mr. Dysthe was appointed Chief Executive Officer on March 26, 2001.
(2) Mr. Miller resigned as Chief Executive Officer on March 26, 2001, and
continues to serve as a director.
(3) Member of Compensation Committee.
(4) Appointed as a director and officer on June 1, 2000.
(5) Appointed as an officer on June 1, 2000.
(6) Member of Corporate Governance and Nominating Committee.
(7) Member of Audit Committee.
36
Erik Dysthe has served as Chairman of the Company since its inception. Mr.
Dysthe was appointed Chief Executive Officer of the Company in March 2001. He
also served as Chief Executive Officer of the Company from its inception to
November 1998 and President from its inception until February 1996. From July
1989 to March 1992, Mr. Dysthe was Vice President of Marketing and Sales at
Orcatron Systems.
Kenneth R. Miller has served as a director of the Company since 1995, and
as the Company's Chief Executive Officer from December 1998 to March 2001. From
1995 to 1998, Mr. Miller held various senior management positions within the
Company, including President, Vice President - Finance, Chief Financial Officer
and Corporate Secretary. Since May 1995, Mr. Miller has served as a director of
Avcan Global Systems Inc. From 1987 to the present, Mr. Miller has served as
President and Chief Executive Officer of Southview Equities Ltd., a private
investment company of which Mr. Miller is a controlling shareholder.
Robert G. Cruickshank has served as the Company's President and Chief
Operating Officer since February 1999 and as a director since February 2000. Mr.
Cruickshank has over 28 years experience in the telecommunications industry with
Telus (formerly, BC Telephone Company), where he held a number of senior
management positions, including Senior Vice President, Sales and Customer
Service from 1997 to 1999 and President of BC Tel Mobility from 1992 to 1997.
Verne D. Pecho has served as Vice President - Finance and Administration
and Chief Financial Officer of the Company since June 1996. From June 1995 to
June 1996, Mr. Pecho was an independent consultant. From September 1992 to June
1995, Mr. Pecho was Executive Vice President and Chief Financial Officer of
Versacold Corporation. Mr. Pecho was appointed a director of Datawave Systems
Inc. as of February 2000.
Richard S. Waidmann was appointed as a director and as Senior Vice
President and General Manager, eServices Division of the Company on June 1,
2000. From 1996 to May 2000, Mr. Waidmann was President, Chairman and CEO of
Connectria. Mr. Waidmann has over 17 years experience in the information
technology industry where he has held a number of executive management,
marketing and business development positions with NCR Corporation, AT&T, and
Maryville Technologies prior to founding Connectria.
Simon Backer has served as Senior Vice President and General Manager,
Wireless Services of the Company since June 2000. Prior to that he was Senior
Vice President - eBusiness Operations since October 1999. From August 1999 to
August 1998 he served as Senior Vice President and General Manager,
Transportation and from August 1997 to February 1999, Mr. Backer was Vice
President - Customer Engineering. Between 1997 and 1998 he was President and CEO
of Retix Wireless Inc. From 1984 to 1996, Mr. Backer held numerous positions of
progressive responsibility at Motorola's Wireless Data Group (formerly MDI),
culminating in his appointment as Director of Architecture in 1996.
Douglas Engerman has served as Senior Vice President Project Implementation
and Customer Support of the Company since June 2000 and as Senior Vice President
Operations since October 1999. Prior to that he was Vice President - Utilities
since November 1998. From July 1997 to October 1998 he was Vice President -
Sales of MDSI USA. From 1989 to 1997, he was Executive Vice President at
Alliance Systems, Incorporated and was responsible for Sales and Marketing.
Eric Y. Miller has served as Senior Vice President and General Manager, ASP
Division of the Company since June 2000. From 1998 to May 2000, Mr. Miller was
Vice President Sales of Connectria. Mr. Miller has over 20 years experience in
the information technology industry where he has held a number of executive
sales and management positions with NCR Corporation and AT&T.
Tommy Lee has served as Senior Vice President - Product Development since
March 1999, and as Vice President - Product Development since 1997. From
inception of the Company to 1997, Mr. Lee served in various technical positions,
including Director - Product Development and Software Development Manager.
Between 1988 and 1995, Mr. Lee was a member of the scientific and engineering
staff at McDonald, Dettwiler and Associates Ltd.
37
Gene Mastro has served as Senior Vice President - Sales of the Company
since October 1999. From November 1997 to September 1999, Mr. Mastro was Vice
President Sales, Telecommunications of the Company. Form November 1988 to
October 1997, Mr. Mastro held various senior sales management positions at
Computer Sciences Corporation, most recently as Vice President Sales -
Communications Industry Division. From 1974 to 1988 he held various sales
management positions with IBM, Exxon and Chemical (Chase Manhattan) Bank.
Rodney Neumann has served as Senior Vice President - Business Development
of the Company since February 2000. From 1998 to February 2000, Mr. Neumann was
a Vice President and General Manager at Kelman Technologies Inc. From 1986 to
1998, he held various technical and managerial positions at Telus including
Director of Enhanced Services responsible for its unregulated Internet and
Ecommerce data communication services.
Paul Ballinger has served as Vice President and Chief Information Officer
since November 1999. From September 1993 to March 1999, Mr. Ballinger held a
number of senior management positions at Telus (formerly BC Telephone Company),
including Vice President and General Manager, Enhanced Services and Vice
President, Business Design & Support. From 1991 to 1993, Mr. Ballinger was
Director, Management Consulting with DMR Group.
M. Greg Beniston has served as Vice President - Legal and Corporate
Secretary of the Company since March 1996. He also served as General Counsel and
Corporate Secretary of General Hydrogen Corporation from 2000 to present. From
1993 to 2000, Mr. Beniston served as Corporate Counsel and Secretary of Xillix
Technologies Corp. From 1988 to 1993, Mr. Beniston was a lawyer at the firm of
Russell & DuMoulin (now Fasken Martineau DuMoulin), Barristers and Solicitors in
Vancouver, British Columbia.
Glenn Y. Kumoi has served as Vice President - Chief Legal Officer of the
Company since October 1999. From December 1998 to October 1999, Mr. Kumoi was
Vice President - General Counsel of the Company. From April 1997 to November
1998, Mr. Kumoi served as Vice President - Customer Contracts of the Company.
From 1994 to 1996, Mr. Kumoi was a lawyer at the firm of Wedge and Company,
Computer Law in Vancouver, British Columbia. From 1991 to 1994, Mr. Kumoi was a
lawyer at the firm of Richards, Buell, Sutton, Barristers and Solicitors in
Vancouver, British Columbia. Mr. Kumoi is also a director of eTVtech.com
Communications Inc.
Ronald P. Toffolo has served as Vice President - Human Resources since
March 1999. Between 1997 and 1998, he was Director of Human Resources. From 1985
to 1997, Mr. Toffolo held various human resources management positions at
Canadian Airlines International Ltd.
David Haak has served as Vice President, Sales - Americas of the Company
since November 2000 and as Vice President, Sales - North America since June
1999. Prior to that he was Vice President, Sales - Utilities since January of
1999. Prior to joining the Company Mr. Haak was employed by IBM Corporation
where he held a number of sales, marketing and management positions during his
11-year tenure.
Gerald F. Chew has served as a director of the Company since December 1995.
Mr. Chew was Executive Vice President of Ancora Capital & Management Group, LLC
from 1998 to 2000. From August 1996 to February 1997, he was Chief Operating
Officer of SpotMagic, Inc. From November 1992 to July 1996, Mr. Chew served as
Executive Director of Strategy Development for U S WEST, Inc. He also serves as
a director of Raining Data Corporation (formerly, Omnis Technology Corp.)
38
Bruno Ducharme has served as a director of the Company since May 1996. Mr.
Ducharme is currently President and Chief Executive Officer of Telesystem
International Wireless Services Inc. and Executive Vice-President of Telesystem
Ltd. Mr. Ducharme has held various senior management positions within the
Telesystem group of companies since its inception in 1991.
Robert C. Harris, Jr. has served as a director of the Company since
December 1995. Mr. Harris is currently Senior Managing Director of Bear Stearns
& Co., Inc. Mr. Harris was a co-founder and Managing Director of Unterberg
Harris from May 1989 until November, 1997. Mr. Harris also serves as a director
of N2K, Inc. and a number of private companies.
John T. McLennan has served as a director of the Company since February
1998. Mr. McLennan has served as the Vice Chairman and Chief Executive Officer
of AT&T Canada Inc. since May 2000 and was President and Chief Executive Officer
of Bell Canada from 1994 to 1997. He is also currently the President of Jenmark
Consulting Inc. Mr. McLennan also serves as a director of Hummingbird
Communications Ltd., E-Cruiter.com Inc., Leitch Technology Corporation and
Amdocs Limited.
Terrence P. McGarty has served as a director of the Company since December
1995. Mr. McGarty is currently Chairman and Chief Executive Officer of Zephyr
Telecommunications, Inc. He also served as Chairman and Chief Executive Officer
of The Telmarc Group, Inc. from 1992 to 1998.
Marc Rochefort has served as a director of the Company since June 1996. Mr.
Rochefort has been a partner at the law firm of Desjardins Ducharme Stein Monast
in Montreal, Quebec since May 1993. From March 1989 to April 1993, Mr. Rochefort
was a partner at the law firm of Clark Lord Rochefort Fortier. Mr. Rochefort
also serves as a director of Mont Saint-Sauveur International Inc., as well as
numerous other private companies.
Board of Directors
Each member of the Board of Directors is elected annually and holds office
until the next annual meeting of shareholders or until his successor has been
elected or appointed, unless his office is earlier vacated in accordance with
the Bylaws of the Company or the provisions of the CBCA. Officers serve at the
discretion of the Board and are appointed annually. The Company's Board of
Directors currently has three committees, the Audit Committee, the Corporate
Governance and Nominating Committee and the Compensation Committee.
Committees of the Board of Directors
The Audit Committee recommends independent accountants to the Company to
audit the Company's financial statements, discusses the scope and results of the
audit with the independent accountants, reviews the Company's interim and
year-end operating results with the Company's executive officers and the
Company's independent accountants, considers the adequacy of the internal
accounting controls, considers the audit procedures of the Company and reviews
the non-audit services to be performed by the independent accountants. The
members of the Audit Committee are Terrence P. McGarty, Gerald F. Chew and Bruno
Ducharme.
The Corporate Governance and Nominating Committee monitors and assesses the
corporate governance system in place in the Company, develops corporate
disclosure and insider trading policies, and monitors the effectiveness of the
Board of Directors, its size and composition, its committees and the individual
performance of its directors. The Corporate Governance and Nominating Committee
also identifies and recommends potential appointees to the Board of Directors,
reviews the adequacy of directors and officers third-party liability coverage,
ensures that annual strategic planning process and review is carried out and
approves appropriate orientation and education
39
programs for new directors. The members of the Corporate Governance and
Nominating Committee are Marc Rochefort, Gerald F. Chew, Robert C. Harris, Jr.,
John T. McLennan, Terrence P. McGarty and Bruno Ducharme.
The Compensation Committee reviews and recommends the compensation
arrangements for the executive officers of the Company and administers the
Company's stock option and stock purchase plans. The members of the Compensation
Committee are Robert C. Harris, Jr., Gerald F. Chew and Kenneth R. Miller.
Section 16 (a) Beneficial Ownership Reporting Compliance
The Company is a foreign private issuer and, as such, its insiders are not
required to file reports under Section 16(a).
Item 11: Executive Compensation
Report of the Compensation Committee
The Company's compensation program for all executive officers is
administered by the Compensation Committee of the Board of Directors which is
composed of two non-employee directors and one-employee director. The
compensation of the Chairman, Chief Executive Officer (CEO) and the President
and Chief Operating Officer (COO) is determined by the Compensation Committee.
The Chairman and the CEO had variable components to their compensation in the
past financial year based on certain performance criteria. With respect to
compensation for executive officers other than the Chairman, the CEO or the
President and COO, the Board of Directors reviews a compensation proposal
prepared by the CEO and the President and COO, and approved by the Compensation
Committee.
Objectives
The primary objectives of the Company's executive compensation program are
to enable the Company to attract, motivate and retain outstanding individuals
and to align their success with that of the Company's shareholders through the
achievement of strategic corporate objectives and creation of shareholder value.
The level of compensation paid to an individual is based on the individual's
overall experience, responsibility and performance. The Company's executive
compensation program consists of a base salary, performance bonuses and stock
options. The Company furnishes other benefits to certain of its officers and
other employees.
Chief Executive Officers, Executive Officers and Key Employees
There are currently 23 executive officers of the Company, including the
Chief Executive Officer. For purposes of this section, "executive officer" of
the Company means an individual who at any time during the year was the Chairman
or a Vice-Chairman of the board of directors, where such person performed the
functions of such office on a full-time basis; the President; any Vice-President
in charge of a principal business unit such as sales, finance or production; any
officer or key employee of the Company or of a subsidiary of the Company, and
any other person who performed a policy-making function in respect of the
Company.
Employment Agreements
The Company has entered into employment agreements with each of its Named
Executive Officers (as hereinafter defined), providing for base salaries and
incentive plan bonuses as approved by the Board of Directors of the Company,
medical and dental benefits and reimbursement for certain expenses approved by
the Company.
40
Termination Arrangements
The Company may terminate any of its officers for cause without any payment
of any kind of compensation, except for such compensation earned to the date of
such termination. The Company may terminate any of its officers without cause by
giving notice and upon payment of all salary and bonuses owing up to the date of
termination and a lump sum termination payment equal to amounts ranging up to
two times base annual salary and current bonus. Any officer may terminate their
employment with the Company at any time by giving four, or in certain cases,
eight weeks written notice, to the Board of Directors of the Company. The
employment agreements of certain officers, including Messrs. Miller and
Cruickshank, provide that in the event of a takeover or change of control of the
Company, they may elect to terminate their employment and receive, in addition
to compensation earned to the date of their termination, a lump sum payment
equal to their annual base salary, and in the case of Messrs. Miller and
Cruickshank, two times their annual base salary and current bonus. If such
officers are terminated by the Company within two years after such takeover or
change in control, they are also entitled to compensation earned to the date of
termination and a lump-sum payment equal to their annual base salary, and in the
case of Messrs. Miller and Cruickshank, two times their annual base salary and
current bonus. The Company's employment agreement with certain of its officers
also provide for the acceleration of options in the event of termination without
cause, and in certain cases, in the event of a takeover or change in control of
the Company.
Pension Arrangements
The Company and its subsidiaries do not have any pension arrangements in
place for the Named Executive Officers or any other officers.
Summary Compensation Table
The following table sets forth all compensation paid in respect of the
individuals who were, at any time during the 2000, 1999 and 1998 financial years
of the Company, Chief Executive Officer of the Company or its subsidiaries and
the four most highly compensated executive officers among the Company and its
subsidiaries (collectively "Named Executive Officers"):
41
Annual Compensation
------------------------------------------- Long Term
Compensation Awards
--------------------
Other Annual Securities Under
Years Ending Salary Bonus Compensation Options
Name and Principal Position December 31 ($) ($) ($) (#)
- --------------------------------------------------- --------------- -------------- ------------- -------------- --------------------
Kenneth R. Miller 2000 203,879 24,465 N/A 100,000
Chief Executive Officer 1999 185,460 29,674 N/A Nil
1998 121,294 Nil N/A 150,000
Robert G. Cruickshank 2000 177,931 21,352 N/A 25,000
President and Chief Operating Officer 1999 157,641 25,897 N/A 25,000
1998 N/A N/A N/A 100,000
David Haak 2000 120,000 81,568 N/A Nil
Vice President Sales, Americas 1999 120,000 10,000 N/A 15,000
1998 N/A N/A N/A N/A
Gene Mastro 2000 190,000 17,100 N/A Nil
Senior Vice President, Sales 1999 166,397 237,625 N/A 35,000
1998 160,007 Nil N/A Nil
Douglas Engerman 2000 150,000 13,500 N/A Nil
Senior Vice President, Project Implementation and 1999 135,207 74,808 N/A 5,000
Customer Support 1998 134,991 125,491(1) N/A 30,000
- --------------------------------
(1) Non-recurring bonus paid to Mr. Engerman in connection with the Company's
acquisition of Alliance Systems, Incorporated.
Stock Options
The following table sets forth stock options granted by the Company during
the financial year ended December 31, 2000 to any of the Named Executive
Officers:
Option Grants During the Financial Year Ended December 31, 2000
Name Securities % of Total Exercise or Market Value of
Under Options Options Base Price Securities
Granted (#) Grantedto ($/Security) Underlying Expiration Date
employees in Options on the
Financial Year Date of Grant
($/Security)
- ------------------------------------------------------------------------------------------------------------------------------------
Kenneth R. Miller 100,000 21.5% $25.00 $25.00 January 1, 2005
Chief Executive Officer
Robert G. Cruickshank 25,000 5.4% $25.00 $25.00 January 1, 2005
President and Chief Operating Officer
David Haak - - - - -
Vice President Sales, Americas
Gene Mastro - - - - -
Senior Vice President, Sales
Douglas Engerman - - - - -
Senior Vice President, Project
Implementation and Customer Support
42
The following table sets forth details of each exercise of stock options
during the financial year ended December 31, 2000 by any of the Named Executive
Officers, and the financial year end value of unexercised options on an
aggregate basis:
Aggregated Options Exercised During the Financial Year Ended December 31,
2000 and Financial Year-End Option Values
Name Securities Aggregate Unexercised Options Value of Unexercised in the
Acquired on Value At FY-End (#) Money-Options at FY-End
Exercise (#) Realized ($) Exercisable/ ($) Exercisable/
Unexercisable Unexercisable (1)
- ------------------------------------------------------------------------------------------------------------------------------------
Kenneth R. Miller Nil Nil 244,721(exercisable) $0(exercisable)
Chief Executive Officer 77,779(unexercisable) $0(unexercisable)
Robert G. Cruickshank Nil Nil 69,166(exercisable) $0(exercisable)
President and Chief Operating Officer 80,834(unexercisable) $0(unexercisable)
David Haak Nil Nil 12,361(exercisable) $0(exercisable)
Vice President Sales, Americas 2,639(unexercisable) $0(unexercisable)
Gene Mastro 16,500 503,363 29,055(exercisable) $0(exercisable)
Senior Vice President, Sales 19,445(unexercisable) $0(unexercisable)
Douglas Engerman Nil Nil 26,388(exercisable) $0(exercisable)
Senior Vice President, Project 8,612(unexercisable) $0(unexercisable)
Implementation and Customer Support
- --------------------------
(1) Based on NASDAQ closing price of $7.88 on December 31, 2000.
(2) Includes Options to purchase common shares within 60 days after December
31, 2000.
Compensation of Directors
During the latest fiscal year, the Company paid its outside directors a
meeting stipend of $2,500 for each board meeting they attended in person and
$1,000 for certain committee meetings. During the financial year ended December
31, 2000, the directors of the Company received aggregate cash compensation of
$88,000 for their services. The Directors were also reimbursed for actual
expenses reasonably incurred in connection with the performance of their duties
as Directors.
Directors were also eligible to receive stock options issued pursuant to
the Company's Stock Option Plan and in accordance with rules and policies of The
Toronto Stock Exchange. On June 21, 2000, seven Directors were each granted
3,000 stock options with vesting over two years at an exercise price of $27.
These stock options are subject to the grantee being a Director on the date of
vesting.
43
Item 12: Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information known to the Company
with respect to the beneficial ownership of its Common Shares as of December 31,
2000, by (i) each person known by the Company to be the beneficial owner of more
than 5% of the outstanding Common Shares, (ii) each director of the Company,
(iii) each Named Executive Officer, and (iv) all directors and officers as a
group. Except as otherwise indicated, the Company believes that the beneficial
owners of the Common Shares listed below, based on information furnished by such
owners, have sole investment and voting power with respect to such shares,
subject to community property laws where applicable.
Number of Shares % of total Shares
Directors, Named Executive Officers and 5% Shareholders(1) Beneficially Owned
Owned(2)
- ------------------------------------------------------------------------------------------ ---------------------------
Erik Dysthe(3) ................................................. 407,945 4.7
Kenneth R. Miller(4)............................................ 489,883 5.7
Richard S. Waidmann(5).......................................... 687,250 8.0
David Haak(6) .................................................. 16,861 *
Gene Mastro (7) ................................................ 29,055 *
Doug Engerman(8)................................................ 69,650 *
Gerald F. Chew(9)............................................... 36,905 *
Bruno Ducharme(10).............................................. 12,873 *
Robert C. Harris, Jr. (11)...................................... 90,203 1.1
Terrence P. McGarty(12)......................................... 26,043 *
Marc Rochefort(13).............................................. 21,873 *
John T. McLennan(14)............................................ 33,873 *
Robert G. Cruickshank(15) ...................................... 69,166 *
------------------- ---------------------------
All Directors, Named Executive Officers and Officers as a group 2,584,497 29.9
(29 persons) (16)............................................
------------------- ---------------------------
5% Shareholders:
Kern Capital Management (17) 1,194,000 13.9%
114 West 47th Street
New York, NY
- ----------------
* Represents beneficial ownership of less than 1% of the Common Shares.
(1) Unless otherwise indicated, the address of each beneficial owner is that of
the Company.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, based on factors including voting and
investment power with respect to shares. Common Shares subject to options
currently exercisable, or exercisable within 60 days after December 31,
2000, are deemed outstanding for computing the percentage ownership of the
person holding such options, but are not deemed outstanding for computing
the percentage ownership for any other person. Applicable percentage
ownership based on aggregate Common Shares outstanding as of December 31,
2000, together with the applicable options of such shareholder.
(3) Includes 301,098 Common Shares held by Erik Dysthe Holdings Co. and options
to purchase 58,901 Common Shares exercisable within 60 days after December
31, 2000 held by Mr. Dysthe individually.
(4) Includes 167,055 Common Shares held by 535760 B.C. Ltd., a company 100%
owned Mr. Miller and options to purchase 244,721 Common Shares exercisable
within 60 days of December 31, 2000.
(5) Includes options to purchase 137,450 Common shares exercisable within 60
days after December 31, 2000.
(6) Includes options to purchase 12,361 Common Shares exercisable within 60
days after December 31, 2000.
(7) Represents options to purchase 29,055 Common Shares exercisable within 60
days of December 31, 2000.
(8) Represents options to purchase 26,388 Common Shares exercisable within 60
days of December 31, 2000.
(9) Includes options to purchase 24,873 Common Shares exercisable within 60
days after December 31, 2000.
(10) Represents options to purchase 12,873 Common Shares exercisable within 60
days after December 31, 2000.
44
(11) Includes options to purchase 39,873 Common Shares exercisable within 60
days after December 31, 2000.
(12) Includes 1,170 Common Shares held by The Telmarc Group Inc., a company
controlled by Mr. McGarty, and options to purchase 24,873 Common Shares
exercisable within 60 days after December 31, 2000.
(13) Includes options to purchase 11,248 Common Shares exercisable within 60
days after December 31, 2000.
(14) Represents options to purchase 33,873 Common Shares exercisable within 60
days after December 31, 2000.
(15) Represents options to purchase 69,166 Common Shares exercisable within 60
days after December 31, 2000.
(16) Includes options to purchase 944,769 Common Shares exercisable within 60
days after December 31, 2000.
(17) Beneficially owned by Robert E. Kern, Jr. and David G. Kern.
Item 13: Certain Relationships and Related Transactions
In April 1996, the Company entered into an employment agreement with Erik
Dysthe, the Company's Chairman. In December 1998, the Company entered into an
employment agreement with Kenneth R. Miller, the Company's Chief Executive
Officer. In February 1999, the Company entered into an employment agreement with
Robert G. Cruickshank, the Company's President and Chief Operating Officer. See
Item 11 - "Executive Compensation".
In August 2000, the Company retained Gerald Chew, a director of the
Company, to provide consulting services, in his capacity as a director, to the
Company related to corporate development activities. During the year ended
December 31, 2000, the Company paid Mr. Chew consulting fees in the amount of
$45,000.
On June 1, 2000, MDSI acquired Connectria Corporation under an agreement
and plan of reorganization. Richard S. Waidmann, currently a director and Senior
Vice-President and General Manager, eServices Division of MDSI, and Eric Y.
Miller, MDSI's Senior Vice President and General Manager, ASP Division, were
executive officers of Connectria and held approximately 97.6% of the outstanding
shares of Connectria Common Stock. At the time of the acquisition, Mr. Waidmann
and Mr. Miller were at arms' length to MDSI. In connection with the acquisition,
Mr. Waidmann and Mr. Miller received 549,800 and 274,900 MDSI common shares,
respectively, as consideration for their Connectria shares of common stock. In
addition, MDSI assumed options granted by Connectria to its employees. Mr.
Waidmann and Mr. Miller received options exercisable to acquire 137,450 and
68,725 MDSI common shares, respectively. MDSI also agreed to appoint Mr.
Waidmann as a director and Senior Vice-President and General Manager, eServices
Division to MDSI, and Mr. Miller as MDSI's Senior Vice President and General
Manager, ASP Division. Each of Mr. Waidmann and Miller were parties to the
agreement and plan of reorganization. MDSI filed a current report on Form 8-K to
report the transaction on June 15, 2000, as amended August 14, 2000.
The Company has granted options to certain of its directors and executive
officers. See Item 11 - "Executive Compensation". The Company believes that all
of the transactions set forth above were made on terms no less favorable to the
Company than could have been obtained from unaffiliated third parties. All
future transactions, including loans, between the Company and its officers,
directors, principal shareholders and their affiliates will be approved by a
majority of the Board of Directors, including a majority of the independent and
disinterested directors, and will continue to be on terms no less favorable to
the Company than could be obtained from unaffiliated third parties.
45
Part IV
Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K.
The following financial statements of the Registrant and the Report of
Independent Auditors thereon are included herewith in response to Item 8 above.
(a) 1. Consolidated Financial Statements
Report of Independent Auditors
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
2. Consolidated financial statement schedules and Report of
Independent Auditors are included as follows:
SCHEDULE II
MDSI MOBILE DATA SOLUTIONS INC.
Valuation and Qualifying Accounts
(Expressed in United States Dollars)
Balance,
Beginning of Additions, Application/Write-off Balance,
Period During Period During Period End of Period
------ ------------- ------------- -------------
Allowance for doubtful accounts
Year ended December 31, 2000 $ -- $ 985,000 $ -- $ 985,000
Year ended December 31, 1999 144,541 -- (144,541) --
Year ended December 31, 1998 164,059 -- (919,518) 144,541
Provision against investments and advances
Year ended December 31, 2000 -- 250,000 -- 250,000
Year ended December 31, 1999 -- -- -- --
Year ended December 31, 1998 -- -- -- --
Deferred income tax valuation allowance
Year ended December 31, 2000 -- 1,825,049 -- 1,825,049
Year ended December 31, 1999 877,891 -- (877,891) --
Year ended December 31, 1998 2,929,197 -- (2,051,306) 877,891
3. Exhibits:
The following Exhibits are filed as part of this report:
Exhibit
Number Description
------ -----------
2.1(3) Agreement and Plan of Merger dated April 17, 1997 among the
Company, MDSI Acquisition Corp., Alliance, Geoffrey Engerman
and Doug Engerman (previously filed as Exhibit 2.2)
3.1(1) Articles of Incorporation of the Company
3.2(1) Articles of Amendments of the Company
3.3(1) By-laws of the Company
4.1(1) Form of Common Share Certificate 1996 Stock Option Plan
10.1(1)(2) 1997 Stock Option Plan
10.2(2)(4) 1998 Stock Option Plan
10.3(2)(4) Stock Purchase Plan
10.4(2)(6) Stock Purchase Plan
10.5(2)(6) 1999 Stock Option Plan
10.6(2)(7) 1998 Stock Option Plan for Connectria Corporation (formerly,
Catalyst Solutions Group, Inc.)
46
Exhibit
Number Description
------ -----------
10.7(2)(8) 2000 Stock Option Plan
10.8(1) Form of Indemnification Agreement between the Company and
certain officers of the Company (previously filed as Exhibit
10.4)
10.9(1) Promissory Note dated January 2, 1996 granted by the Company
and TelSoft in favor of Killean Consulting Inc. (previously
filed as Exhibit 10.8)
10.10(1) Promissory Note dated January 2, 1996 granted by the Company
and TelSoft in favor of 382904 B.C. Ltd. (previously filed
as Exhibit 10.8)
10.11(1) Employment Agreement dated April 1, 1996 between the Company
and Erik Dysthe (previously filed as Exhibit 10.18)
10.12(1) Lease dated September 25, 1997 between Sun Life Assurance
Company of Canada and the Company (previously filed as
Exhibit 10.20)
10.13(1) Lease dated June 2, 1989 between Corporate Woods Associates
and Service Systems International Limited and subsequent
amendments (previously filed as Exhibit 10.23)
10.14(1) Lease dated April 8, 1993 between Cambridge Scanning Company
Limited and Spectronics Micro Systems Limited (previously
filed as Exhibit 10.25)
10.15(3)(2) Employment Agreement dated February 1, 1999 between the
Company and Robert G. Cruickshank
10.16(3)(2) Employment Agreement dated February 1, 1999 between the
Company and Kenneth R. Miller
10.17(6) Master Purchase and Sale Agreement dated June 1, 1999
between Digital Dispatch Systems Inc. and the Company
(without schedules or exhibits)*
10.18(9) Agreement and Plan of Reorganization, dated as of May 9,
2000, among MDSI, MDSI Acquisition Corporation, Connectria
and Certain Principal Shareholders.*
10.19(9) Form of Voting, Lockup and Registration Rights Agreement
among MDSI, MDSI Acquisition Corporation, Connectria and
Certain Principal Shareholders.
21.1 List of the Company's Subsidiaries.
23.1 Consent of Deloitte & Touche LLP.
----------
(1) Previously filed as exhibits with the same corresponding number with the
Registrants' Registration Statement on Form F-1 (Registration No. J33-5872)
and amendments numbers 1 and 2 thereto, filed with the Securities and
Exchange Commission on October 28, 1996, November 13, 1996 and November 25,
1996, respectively.
(2) This document has been identified as a management contract or compensatory
plan or arrangement.
(3) Previously filed as an exhibit to Registrant's Registration Statement on
Form F-4.
(4) Previously filed as exhibits with the same corresponding number with the
Registrant's Form 10-K for the year ended December 31, 1998.
(5) Previously filed as exhibits with the same corresponding number with the
Registrant's Form 10-Q for the quarterly period ended September 30, 1999.
(6) Previously filed as exhibits with the same corresponding number with the
Registrant's Form 10-K for the year ended December 31, 1999.
(7) Previously filed as exhibits with the Registrant's Registration Statement
on Form S-8 filed on July 12, 2000.
(8) Previously filed as exhibits with the Registrant's Registration Statement
on Form S-8 filed on November 22, 2000.
(9) Previously filed as exhibits with the Registrant's Current Report on Form
8-K filed on June 15, 2000.
* The Company agrees to supplementally furnish a copy of any omitted schedule
or exhibit to the Securities and Exchange Commission upon request.
(b) Report on Form 8-K
None.
47
MDSI MOBILE DATA SOLUTIONS INC.
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors...................................... F-2
Consolidated Balance Sheets......................................... F-3
Consolidated Statements of Operations............................... F-4
Consolidated Statements of Stockholders' Equity..................... F-5
Consolidated Statements of Cash Flows............................... F-6
Notes to the Consolidated Financial Statements...................... F-8
F-1
Report of Independent Auditors
To the Board of Directors and Shareholders
of MDSI Mobile Data Solutions Inc.
We have audited the accompanying consolidated balance sheets of MDSI Mobile Data
Solutions Inc. as at December 31, 2000 and 1999 and the related consolidated
statements of operations, stockholders' equity and cash flows for the each of
the years in the three year period ended December 31, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform an audit to obtain reasonable assurance whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 2000
and 1999 and the results of its operations and cash flows for each of the years
in the three year period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Chartered Accountants
Vancouver, British Columbia
February 13, 2001
F-2
MDSI MOBILE DATA SOLUTIONS INC.
Consolidated Balance Sheets
(Expressed in United States dollars)
At December 31,
---------------------------------------
2000 1999
----------------- ------------------
Assets
Current assets
Cash and cash equivalents $13,238,081 $14,612,923
Accounts receivable, net
Trade (net of allowance for doubtful accounts of $985,000; 1999 - $0) 16,821,925 14,147,011
Unbilled 12,184,446 5,595,902
Prepaid expenses and other assets (note 10) 1,411,200 1,121,580
Deferred income taxes (note 9) - 287,443
Current portion of lease receivable (note 3) 133,723 386,861
----------------- ------------------
Total current assets 43,789,375 36,151,720
Lease receivable (note 3) - 133,723
Investments and advances, at cost (note 4) 3,081,447 4,140,457
Capital assets, net (note 5) 11,097,497 6,858,747
Long term deferred taxes (note 9) 347,350 289,984
Intangible assets, net (note 6) 1,824,057 1,907,297
----------------- ------------------
60,139,726 49,481,928
Assets of discontinued operations (note 15) 641,405 960,610
----------------- ------------------
Total assets $60,781,131 $50,442,538
================= ==================
Liabilities and stockholders' equity
Current liabilities
Accounts payable $3,444,457 $1,760,644
Accrued liabilities 3,625,591 2,655,523
Income taxes payable 1,091,164 1,567,671
Deferred revenue 7,901,837 4,742,038
Current portion of long-term debt (note 7) 66,968 52,153
Current obligations under capital lease (note 11) 2,094,637 1,289,208
----------------- ------------------
Total current liabilities 18,224,654 12,067,237
Obligations under capital leases (note 11) 4,156,486 2,632,406
Long term debt (note 7) - 32,181
----------------- ------------------
22,381,140 14,731,824
Liabilities of discontinued operations (note 15) 223,024 173,424
----------------- ------------------
Total liabilities 22,604,164 14,905,248
----------------- ------------------
Stockholders' equity
Common stock (note 8)
Authorized:
Unlimited common shares with no par value Issued:
2000: 8,612,453 shares; 1999: 8,226,596 shares 48,416,502 44,961,759
Additional paid-up capital 220,700 220,700
Treasury stock (13,475 shares) (85,043) (85,043)
Comprehensive (loss) (690,104) (429,438)
(Accumulated deficit) (9,685,088) (9,130,688)
----------------- ------------------
38,176,967 35,537,290
----------------- ------------------
Total liabilities and stockholders' equity $60,781,131 $50,442,538
================= ==================
Commitments and contingencies (note 11)
See accompanying notes to the consolidated financial statements
F-3
MDSI MOBILE DATA SOLUTIONS INC.
Consolidated Statements of Operations
(Expressed in United States dollars)
Years ended December 31,
----------------------------------------------------
2000 1999 1998
------------ ------------ ------------
Revenue
Software and services $41,338,221 $39,912,480 $28,729,022
e-Business 8,463,069 4,845,183 2,733,917
Maintenance and support 8,887,737 5,565,499 3,841,225
Third party products and services 2,853,452 8,248,264 13,059,154
------------ ------------ ------------
61,542,479 58,571,426 48,363,318
Direct costs 28,055,450 27,317,935 23,940,498
------------ ------------ ------------
Gross profit 33,487,029 31,253,491 24,422,820
------------ ------------ ------------
Operating expenses
Research and development 9,048,819 6,902,380 5,840,730
Sales and marketing 12,914,221 9,370,324 7,829,946
General and administrative 7,699,019 6,778,503 4,418,343
Amortization of intangible assets 291,916 279,240 254,893
Costs of merger 1,691,028 - -
Provision for doubtful accounts 985,000 - -
------------ ------------ ------------
32,630,003 23,330,447 18,343,912
------------ ------------ ------------
Operating income 857,026 7,923,044 6,078,908
Other income (expense) (524,862) (759,549) 38,887
------------ ------------ ------------
Income before tax provision 332,164 7,163,495 6,117,795
Provision for income taxes (note 9) (491,542) (2,144,424) (1,809,087)
------------ ------------ ------------
Income (loss) from continuing operations (159,378) 5,019,071 4,308,708
Income (loss) from discontinued operations (note 15) (395,022) (3,872,683) (532,302)
------------ ------------ ------------
Net income (loss) for the year ($554,400) $1,146,388 $3,776,406
============ ============ ============
Earnings (loss) per common share
Earnings(loss) from continuing operations
Basic ($0.02) $0.62 $0.61
============ ============ ============
Diluted ($0.02) $0.55 $0.57
============ ============ ============
Net earnings (loss)
Basic ($0.07) $0.14 $0.54
============ ============ ============
Diluted ($0.07) $0.13 $0.50
============ ============ ============
Weighted average shares outstanding
Basic 8,526,723 8,080,022 7,050,296
============ ============ ============
Diluted 8,526,723 9,100,711 7,563,444
============ ============ ============
See accompanying notes to the consolidated financial statements
F-4
MDSI MOBILE DATA SOLUTIONS INC.
Consolidated Statements of Stockholders' Equity
(Expressed in United States dollars)
Common Stock Additional
------------------------------ Paid Treasury Comprehensive
Shares Amount Up Capital Stock Loss Deficit Total
------------ ------------- ------------- ------------ -------------- ------------- ------------
Balance, January 1, 1998 6,597,186 $31,661,556 $ - $ (85,043) $ (982,099) $(13,906,482) $16,687,932
Issued on exercise of
stock options 32,844 301,811 - - - - 301,811
Issuance of share capital 687,304 139,000 - - - - 139,000
Issued under stock
purchase plan (Note 8) 17,919 203,963 - - - - 203,963
Stock based compensation - - 220,700 - - - 220,700
Change in foreign
exchange fluctuations - - - - (1,225,071) - (1,225,071)
Issued on conversion of
warrants (Note 8) 51,600 491,648 - - - - 491,648
Net income for the year - - - - - 3,776,406 3,776,406
------------ ------------- ------------- ------------ -------------- ------------- ------------
Balance, December 31, 1998 7,386,853 32,797,978 220,700 (85,043) (2,207,170) (10,130,076) 20,596,389
Issued on exercise of
stock options 215,980 2,112,793 - - - - 2,112,793
Issuance of share capital 20,619 7,500 - - - - 7,500
Issued under stock
purchase plan (Note 8) 28,144 271,009 - - - - 271,009
Dividends paid - - - - - (147,000) (147,000)
Change in foreign
exchange fluctuations - - - - 1,777,732 - 1,777,732
Issued on public
offering (Note 8) 575,000 9,772,479 - - - - 9,772,479
Net income for the year - - - - - 1,146,388 1,146,388
------------ ------------- ------------- ------------ -------------- ------------- ------------
Balance, December 31, 1999 8,226,596 44,961,759 220,700 (85,043) (429,438) (9,130,688) 35,537,290
Issued on exercise of
stock options 369,236 3,268,972 - - - - 3,268,972
Issued under stock
purchase plan (Note 8) 16,621 185,771 - - - - 185,771
Change in foreign
exchange fluctuations - - - - (260,666) - (260,666)
Net income for the year - - - - - (554,400) (554,400)
------------ ------------- ------------- ------------ -------------- ------------- ------------
Balance, December 31, 2000 8,612,453 $48,416,502 $ 220,700 $ (85,043) $ (690,104) $ (9,685,088) $38,176,967
============ ============= ============= ============ ============== ============= ============
See accompanying notes to the consolidated financial statements
F-5
MDSI MOBILE DATA SOLUTIONS INC.
Consolidated Statements of Cash Flows
(Expressed in United States dollars)
Years ended December 31,
-----------------------------------------------------
2000 1999 1998
--------------- -------------- --------------
Cash flows from operating activities
Net income (loss) from continuing operations for the year $ (159,378) $ 5,019,071 $ 4,308,708
Items not affecting cash:
Depreciation and amortization 2,946,950 1,622,927 919,421
Deferred income taxes 230,077 84,616 802,740
Additional paid up capital - - 220,700
Changes in non-cash operating working capital items (Note 13) (4,215,903) (5,147,589) 191,981
--------------- -------------- --------------
Net cash (used in) provided by operating activities (1,198,254) 1,579,025 6,443,550
--------------- -------------- --------------
Cash flows from financing activities
Issuance of common shares 3,454,743 12,163,781 1,136,422
Payment of dividends - (147,000) -
Repayment of long-term debt (17,366) (293,366) 20,139
Proceeds from (repayment of) capital leases 2,329,509 2,038,965 945,909
--------------- -------------- --------------
Net cash provided by (used in) financing activities 5,766,886 13,762,380 2,102,470
--------------- -------------- --------------
Cash flows from investing activities
Long term lease receivable repayment 386,860 395,139 -
Acquisition of investments (2,518,225) (301,143) -
Proceeds on sale of investments 3,273,392 - -
Acquisition of intangible asset (220,000) - -
Acquisition of capital assets (6,882,460) (4,443,711) (1,969,895)
--------------- -------------- --------------
Net cash used in investing activities (5,960,433) (4,349,715) (1,969,895)
-------------- ------------------- ------------------
Net cash (used in) provided by continuing operations (1,391,801) 10,991,690 6,576,125
Net cash provided by (used in) discontinued operations 277,625 (1,762,058) (1,838,389)
--------------- -------------- --------------
Net cash (outflow) inflow (1,114,176) 9,229,632 4,737,736
Effects of foreign exchange fluctuations on cash (260,666) 1,777,732 (1,225,071)
Cash and cash equivalents, beginning of year 14,612,923 3,605,559 92,894
--------------- -------------- --------------
Cash and cash equivalents, end of year $ 13,238,081 $ 14,612,923 $ 3,605,559
=============== ============== ==============
Supplemental disclosure of cash flow information
Cash payments for interest $ 363,159 $ 148,798 $ 100,773
=============== ============== ==============
Cash payments for taxes $ 649,577 $ 2,110,283 $ 151,802
=============== ============== ==============
See accompanying notes to the consolidated financial statements
F-6
MDSI MOBILE DATA SOLUTIONS INC.
Consolidated Statements of Cash Flows
(Expressed in United States dollars)
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING AND FINANCING ACTIVITIES
In February 1999, the Company adopted a plan to dispose of the
Transportation Business Unit which was completed on June 1, 1999. The
Company disposed of the Transportation Business Unit for proceeds of
$3,839,267 comprised of common shares representing an 11% interest in
Digital Dispatch Systems, Inc. (DDS) and a promissory note in the principal
amount of $346,741, due January 1, 2001 and bearing an interest rate of 8%
per annum. During the year ended December 31, 2000 DDS exercised its option
to buyback the DDS shares that MDSI received as compensation on the sale of
the Transportation Business Unit. Proceeds on sale of the DDS shares were
$3,164,350.
During the year ended December 31, 1998, the Company leased certain
computer equipment to a customer. The transaction was accounted for as a
sales-type lease with a discounted present value of $915,686 at December
31,1998. The equipment purchase was financed by capital lease, which had a
balance of $780,808 at December 31, 1998. As at December 31, 2000 the
balance outstanding on the lease was $133,723.
See accompanying notes to the consolidated financial statements
F-7
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2000, 1999 and 1998
(Expressed in United States dollars)
1. SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in accordance with generally
accepted accounting principles in the United States and reflect the
following significant accounting policies:
(a) Basis of presentation
These consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, and are presented in United
States dollars. All intercompany balances and transactions have been
eliminated.
(b) Nature of operations
The Company develops, markets and supports wireless mobile data
communication software products for use in the mobile service
industry. The Company is also a provider of managed application
services through it's newly acquired subsidiary, Connectria
Corporation (note 2).
(c) Research and development
Research and development costs related to software are expensed as
incurred unless a project meets the specified criteria for
capitalization in accordance with Statement of Financial Accounting
Standard No. 86 Accounting for the Costs of Computer Software to be
Sold, Leased or Otherwise Marketed. Acquired research and development
costs related to software are charged to earnings on acquisition if
there is no alternative future use and technological feasibility has
not been established.
(d) Revenue recognition
In December 1999, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin ("SAB") 101, Revenue Recognition in
Financial Statements which provides guidance related to revenue
recognition based on interpretations and practices followed by the
SEC. SAB 101 requires companies to report any changes in revenue
recognition as a cumulative change in accounting principle at the time
of implementation in accordance with Accounting Principles Board
Opinion 20 "Accounting Changes." The Company adopted SAB 101 for the
Company's Year ended December 31, 2000. Based on the Company's
interpretation of SAB 101, the Company believes its current revenue
recognition policies are consistent with SAB 101 and there has been no
material impact on the Company's financial position or results of
operations.
Statement of Position 97-2 (Software Revenue Recognition) (SOP 97-2),
was issued in October 1997 by the American Institute of Certified
Public Accountants (AICPA) and was amended by the Statement of
Position 98-4 (SOP 98-4) and Statement of Position 98-9 (SOP 98-9).
The Company adopted SOP 97-2 effective for the Company's year ended
December 31, 1998. Based upon our interpretation of SOP 97-2, SOP 98-4
and SOP 98-9, the Company believes its current revenue recognition
policies and practices are consistent with SOP 97-2, SOP 98-4, and SOP
98-9.
F-8
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2000, 1999 and 1998
(Expressed in United States dollars)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Company's revenue is derived primarily from the following sources:
(i) Software and services
Revenue related to software and services, including software
licenses, is generally recognized on a percentage of completion
basis, representing costs incurred relative to total estimated
costs. Where the Company has contracted to deliver software
without significant production, modification or customization
required, revenue is recognized upon delivery if the fee is
determinable and there is reasonable assurance of collection.
Provisions for estimated losses on contracts are recorded when
identifiable.
(ii) e-Business
e-Business revenue consists of the provision of managed services,
which include managed application services, managed network
services, managed data center services, and managed hosting
services. Revenue from these services is recognized as the
service is provided, where no future commitment exists.
(iii)Third party products and services and terminals and
infrastructure
Revenue from sales of third party products and services and
terminals and infrastructure is recognized on delivery of
products.
(iv) Maintenance and support
Revenue related to maintenance agreements for supporting and
maintaining the Company's products are recognized rateably over
the term of the agreement, which is generally one year.
(e) Capital assets
Capital assets are recorded at cost. Depreciation is charged to
operations over the estimated useful lives of the assets as follows:
Computer hardware and software 30% declining balance
Furniture and fixtures 20% declining balance
Leasehold improvements lesser of lease term or useful
life, generally five years
Vehicle 20% declining balance
The carrying value of capital assets is reviewed on a regular basis
for any permanent impairment in value. An impairment loss would be
recognized when estimates of future cash flows expected to result from
the use of an asset and its eventual disposition are less than its
carrying amount. To date, no such impairment has been indicated.
(f) Intangible Assets
Intangible assets consist of goodwill arising on the acquisition of
Alliance Systems Inc., and the purchase of a commercial web-site
domain name. Goodwill arising on the acquisition of Alliance is
amortized on a straight-line basis over ten years. The commercial
web-site domain name is being amortized on a straight line basis over
a five year period. Management regularly reviews the carrying value of
the intangible assets for evidence of any permanent impairment in
value by reference to expected future cash flows. To date, no
impairment has been indicated.
F-9
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2000, 1999, and 1998
(Expressed in United States dollars)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
(g) Foreign exchange; Reporting and Functional currency
Foreign exchange
The accounts of the Company and its foreign subsidiaries are expressed
in United States dollars, its functional currency. Monetary assets and
liabilities denominated in foreign currencies are translated at the
rate in effect at the balance sheet date. Other balance sheet items
and revenues and expenses are translated at the rates prevailing on
the respective transaction dates. Translation gains and losses
relating to current monetary items and revenue and expenses
denominated in foreign currencies are included in income.
Reporting currency
The Company changed its reporting currency to the United States dollar
effective January 1, 2000. The change in reporting currency was made
to improve investors' ability to compare the Company's results with
those of most other publicly traded businesses in the industry. These
consolidated financial statements and those amounts previously
reported in Canadian dollars have been translated from Canadian
dollars to United States dollars by translating assets and liabilities
at the rate in effect at the respective balance sheet dates and
revenues and expenses at the average rate for the reporting periods.
Any resulting foreign exchange gains and losses are recorded as a
separate component of stockholder's equity and described as
comprehensive income (loss).
Comprehensive income for the period can be summarized as follows:
Year ended December 31,
-------------------------------------------
2000 1999 1998
---------- ---------- -----------
Net income from $(159,378) $5,019,071 $ 4,308,708
continuing operations
Comprehensive items
- Translation (260,666) 1,777,732 (1,225,071)
adjustment
---------- ---------- -----------
Comprehensive net $(420,044) $6,796,803 $(3,083,637)
income for the year
========== ========== ============
Functional currency
As at June 1, 2000 the Company and its subsidiaries adopted the United
States. dollar as their primary currency of measurement. The change in
the Company's currency of measurement was made due to the Company's
business combination with Connectria Corporation ("Connectria") (note
2) and the resulting increase in the Company's sales and costs
denominated in United States dollars. The business combination with
Connectria as well as the Company incurring an increasing amount of
United States dollar denominated expenditures as a percentage of
overall expenditures and an increase in the generation of cash flows
from sales in United States dollars resulted in the change of the
Company's currency of measurement to the United States dollar.
F-10
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2000, 1999, and 1998
(Expressed in United States dollars)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
As a result of the change in the currency of measurement, the
Company's foreign currency risk has changed from United States dollar
denominated monetary assets and liabilities to non-United States
dollar denominated monetary assets and liabilities and the risk of the
impact of exchange rate changes relative to the United States dollar.
The ultimate effects of the change on the Company's financial position
and results of operations will only be determinable in the future
based on exchange rate changes that occur in such periods.
(h) Income taxes
The Company accounts for income taxes using the asset and liability
method. Under this method, deferred income taxes are recorded for the
temporary differences between the financial reporting basis and tax
basis of the Company's assets and liabilities. These deferred taxes
are measured by the provisions of currently enacted tax laws. A
valuation allowance is recognized to the extent the recoverability of
future income tax assets is not considered likely.
(i) Investments
The Company accounts for investments on a cost basis. Any impairment
in value that is determined to be other than temporary is charged to
earnings.
(j) Earnings (loss) per common share
Basic earnings per share is computed by dividing net income (loss)
available to common shareholders by the weighted average number of
common shares outstanding for the period. Diluted earnings per share
reflects the potential dilution of securities by including other
common share equivalents in the weighted average number of common
shares outstanding for a period, if dilutive. Common equivalent shares
consist of common shares issuable upon the conversion of the special
warrants (using the if-converted method) and incremental shares
issuable upon the exercise of stock options and share purchase
warrants (using the treasury stock method).
A reconciliation of net income (loss) per common share and the
weighted average shares used in the earnings per share ("EPS")
calculations for fiscal years 2000, 1999 and 1998 is as follows:
Net (Loss) Loss
Income Shares (Earnings)
(Numerator) (Denominator) Per Share
----------------- ----------------- ----------------
2000
- ----
Basic $ (554,400) 8,526,723 $ (0.07)
Effect of stock options - -
----------------- ----------------- ----------------
Diluted $ (554,400) 8,526,723 $ (0.07)
================= ================= ================
1999
- ----
Basic $ 1,146,388 8,080,022 $ 0.14
Effect of stock options 1,020,689 (0.01)
----------------- ----------------- ----------------
Diluted $ 1,146,388 9,100,711 $ 0.13
================= ================= ================
1998
- ----
Basic $ 3,776,406 7,050,296 $ 0.54
Effect of stock options 507,943 (0.04)
Effect of share purchase warrants 5,205 -
----------------- ----------------
Diluted $ 3,776,406 7,563,444 $ 0.50
================= ================= ================
F-11
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2000, 1999, and 1998
(Expressed in United States dollars)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
(j) Earnings (loss) per common share (continued)
Options and warrants to purchase 2,313,944, 63,000 and 95,000 shares
of common stock were outstanding during fiscal 2000, 1999 and 1998
respectively, but were not included in the computation of diluted EPS
because of either the net loss in fiscal 2000, or because the options
exercise prices were greater than the average market prices of the
common stock, and therefore, their effect would be anitidilutive.
(k) Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting periods. Estimates are used for, but
not limited to, the accounting for doubtful accounts, amortization,
determination of net recoverable value of assets, revenue recognized
on long-term contracts, taxes and contingencies. Actual results could
differ from those estimates.
(l) Derivatives
From time to time the Company may attempt to hedge its position with
respect to currency fluctuations on specific contracts. This is
generally accomplished by entering into forward contracts. Related
costs are realized as the forward contracts are settled. The Company
had no forward transactions open at year end.
(m) Stock-based compensation
The Company accounts for stock-based compensation using the intrinsic
value based method whereby compensation cost is recorded for the
excess, if any, of the quoted market price of the common share over
the exercise price at the date granted for all common stock options.
As at December 31, 2000, no compensation cost has been recorded for
any period under this method.
The following pro forma financial information presents the net income
(loss) for the year and income (loss) per common share had the Company
adopted Statement of Financial Accounting Standard No. 123 (SFAS 123)
Accounting for Stock-based Compensation.
2000 1999 1998
---------------- -------------- -----------------
Net income (loss) for the year $(6,521,603) $(2,818,180) $1,120,823
---------------- -------------- -----------------
Fully diluted income (loss) per common share $(0.76) $(0.35) $0.15
================ ============== =================
Using the fair value method for stock-based compensation, additional
compensation costs of approximately $5,967,203 would have been
recorded for the year ended December 31, 2000 (1999 - $3,964,568 and
1998 - $2,655,583, respectively). This amount is determined using an
option pricing model assuming no dividends are to be paid, an average
vesting period of three years, a weighted average annualized
volatility of the Company's share price of 81% (1999 - 65% and 1998 -
56% respectively) and a weighted average annualized risk free interest
rate at 7% (1999 - 5.00% and 1998 - 5.00% respectively).
In March 2000, the Financial Accounting Standards Board ("FASB")
issued FASB interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation - an interpretation of APB
Opinion No. 25" ("FIN 44"). FIN 44 clarifies the application of APB
Opinion No. 25 and among other issues clarifies the following: the
definition of an employee for purposes of applying APB Opinion No. 25,
the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequences of various
modifications to the terms of the previously fixed
F-12
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2000, 1999, and 1998
(Expressed in United States dollars)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
(m) Stock-based compensation (continued)
stock options or awards, and the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 covers specific
events that occurred after either December 15, 1998 or January 12,
2000. The Company adopted FIN 44 in the third quarter of fiscal 2000
and there was no material effect on the consolidated financial
position, results of operations or cash flows.
(n) Comprehensive income
The Company reports comprehensive income or loss in accordance with
the provisions of SFAS No. 130, "Reporting Comprehensive Income." SFAS
No. 130 establishes standards for reporting comprehensive income and
its components in financial statements. Comprehensive income or loss,
as defined, includes all changes in equity (net assets) during a
period from non-owner sources. Tax effects of comprehensive income or
loss are not considered material for any period.
(p) Segmented information
SFAS 131, "Disclosures About Segments of an Enterprise and Related
Information," established new standards for the reporting of segmented
information in annual financial statements and requires the reporting
of certain selected segmented information on interim reports to
shareholders. In accordance with SFAS 131 the Company has determined
that it has two reportable segments, Field Service, and e-Business and
has reported in accordance with SFAS 131 in note 12.
(q) Accounting for derivative instruments and hedging activities
In June 1998, the Financial Accounting Standards Board issued
Statement No. 133 (SFAS 133), Accounting for Derivative Instruments
and Hedging Activities, which standardizes the accounting for
derivative instruments and is effective for all fiscal quarters of all
fiscal years beginning after June 15, 1999. The Company adopted SFAS
No. 133 in the third quarter of the year ended December 31, 2000 in
accordance with SFAS No. 137 which delayed the required implementation
of SFAS No. 133 for one year. The adoption of this statement, which
requires the accounting recognition of derivatives at fair value, has
not had a significant effect on the Company's financial position or
results of operations.
(r) Cash and cash equivalents
Cash and cash equivalents consist of cash on hand, deposits in banks
and highly liquid investments with an original maturity of three
months or less.
F-13
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2000, 1999, and 1998
(Expressed in United States dollars)
2. ACQUISITIONS
Connectria Corporation
On June 1, 2000 the Company acquired all of the issued and outstanding
shares of Connectria Corporation ("Connectria"), a privately held company
based in St. Louis Missouri, that is an application service provider (ASP)
and provider of online service management solutions for service companies.
The Company issued 845,316 common shares, and 583,037 employee stock
options to acquire common shares of the Company in exchange for all of the
outstanding stock and options of Connectria. Merger related expenses of
$1,691,028 are included in the Cost of merger for the year ended December
31, 2000. The transaction is accounted for under the pooling of interest
method of accounting and all historical financial information contained
herein has been restated to include the combined results of operations,
financial position and cash flows of Connectria.
Separate results of the operations for the periods prior to the merger with
Connectria are outlined below.
December 31,
-------------------------------------------------
2000 1999 1998
-------------- ------------- --------------
Revenue:
MDSI Mobile Data Solutions Inc. through March 31, 2000 $ 12,191,232 $52,157,025 $44,866,399
Connectria Corporation through March 31, 2000 1,519,689 6,414,401 3,496,919
MDSI Mobile Data Solutions Inc. subsequent to March 31, 2000 47,831,558 - -
-------------- ------------- --------------
Combined Revenue $ 61,542,479 $58,571,426 $48,363,318
-------------- ------------- --------------
Net Income:
MDSI Mobile Data Solutions Inc. through March 31, 2000 $ 612,495 $1,004,350 $3,641,096
Connectria Corporation through March 31, 2000 (2,991) 142,038 135,310
MDSI Mobile Data Solutions Inc. subsequent to March 31, 2000 (1,163,904) - -
-------------- ------------- --------------
Combined Net Income $ (554,400) $1,146,388 $3,776,406
-------------- ------------- --------------
Other changes in Stockholders' Equity:
MDSI Mobile Data Solutions Inc. through March 31, 2000 $(260,666) $1,777,732 $(1,225,071)
Connectria Corporation through March 31, 2000 - - -
MDSI Mobile Data Solutions Inc. subsequent to March 31, 2000 - - -
-------------- ------------- --------------
Combined changes in Stockholders' Equity $(260,666) $1,777,732 $(1,225,071)
-------------- ------------- --------------
3. LEASE RECEIVABLE
The Company has entered into a sales-types lease with a customer. The lease
has an effective interest rate of 5.5% and is payable in equal monthly
installments with a term of 36 months. As at December 31, 2000 the lease
has a remaining life of 4 months.
F-14
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2000, 1999, and 1998
(Expressed in United States dollars)
4. INVESTMENTS AND ADVANCES
2000 1999
------------ ------------
Investment in Digital Dispatch Systems, Inc (note 15) $ - $ 3,492,526
Investment in private companies, at cost 2,499,992 -
Promissory note (note 15) 331,455 346,741
Other advances 250,000 301,190
------------ ------------
Total Investments $3,081,447 $ 4,140,457
============ ============
During the year ended December 31, 2000 the Company made equity investments
of $2,499,992 in two private companies. These investments do not represent
significant influence in the companies and are valued at cost which is the
valuation as at the latest round of financing.
During the year ended December 31, 2000, Digital Dispatch Systems Inc.
exercised their right under the Transportation Business Unit sale agreement
to repurchase the common shares the Company had received for consideration
in the sale of its Transporation Business Unit to Digital Dispatch Systems
Inc. The Company received proceeds of $3,164,350 on the sale of its shares.
The resulting loss has been accounted for through the Company's provision
for discontinued operations (note 15). Subsequent to year end the
promissory note was repaid to the Company.
5. CAPITAL ASSETS
2000 1999
------------- -------------
Computer hardware and software $ 12,433,244 $ 6,302,262
Furniture and fixtures 2,365,795 1,990,447
Vehicles 50,905 50,905
Leasehold improvements 708,667 332,538
------------- -------------
15,558,611 8,676,152
Less: accumulated amortization (4,461,114) (1,817,405)
------------- -------------
$ 11,097,497 $ 6,858,747
============= =============
As at December 31, 2000 the Company has entered into capital lease
arrangements for Capital Assets in the amount of $11,595,272 (1999 -
$5,224,606) and recorded accumulated amortization of $3,326,083 (1999 -
1,052,200) relating to these assets (note 11).
6. INTANGIBLE ASSETS
2000 1999
-------------- -------------
Goodwill $ 2,615,751 $ 2,615,751
Commerical web site domain name 220,000 -
Less: accumulated amortization (1,011,694) (708,454)
-------------- -------------
$ 1,824,057 $ 1,907,297
============== =============
During the year ended December 31, 2000 the Company purchased the rights to
use the domain name eservice.com for use with its eservice manager product.
F-15
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2000, 1999, and 1998
(Expressed in United States dollars)
7. LONG-TERM DEBT
2000 1999
------------ ------------
Term loan, secured by general accounts receivable, 27,927 $ 84,334
inventory and equipment, repayable in blended payments
of $4,722, bearing interest at 8.25%
Stockholders (i) 39,041 -
Less: Current Portion Long Term Debt (66,968) (52,153)
------------ ------------
$ - $ 32,181
============ ============
(i) Stockholders
The amounts owing to stockholders are unsecured, non-interest bearing
and without specific terms for repayment.
F-16
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2000, 1999, and 1998
(Expressed in United States dollars)
8. STOCKHOLDERS' EQUITY
(a) Stock options
The Company adopted its Stock Option Plan to provide options to
purchase common shares of the Company for its employees, officers,
directors and consultants. The options granted pursuant to the Stock
Option Plan are exercisable at a price which is equal to the fair
market value, of the common shares at the time the options are
granted, the options typically vest over a three year period and the
term of the option is typically five years. The maximum number of
common shares reserved for issuance under the Stock Option Plan,
including current options outstanding, is 2,400,000 common shares.
Upon acquisition of Connectria (Note 2) the Company assumed certain
obligations under the Connectria Stock Option Plan, and all future
option issuance will occur under the MDSI Plan. The vesting period on
the Connectria options is between zero and three years, and the term
of the options is 10 years. The resulting position of the two Stock
Option plans is as follows:
Connectria Plan MDSI Plan Total Weighted
Number of Number of Number of Average
Shares Shares Shares Price
--------------------------------------------------------------------
Outstanding at January 1, 1998 - 978,518 978,518 $ 12.93
Granted 492,110 1,112,750 1,604,860 7.91
Exercised - (32,844) (32,844) 9.30
Cancelled - (403,218) (403,218) 15.98
-------------------------------------------------------
Outstanding at December 31, 1998 492,110 1,655,206 2,147,316 8.15
Granted 55,947 561,500 617,447 12.73
Exercised - (215,980) (215,980) 9.93
Cancelled - (102,192) (102,192) 10.61
-------------------------------------------------------
Outstanding at December 31, 1999 548,057 1,898,534 2,446,591 9.49
Granted 34,980 430,554 465,534 16.08
Exercised (48,791) (235,899) (284,690) 8.64
Cancelled - (313,491) (313,491) 12.08
-------------------------------------------------------
Outstanding at December 31, 2000 534,246 1,779,698 2,313,944 $ 10.32
=======================================================
F-17
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2000, 1999 and 1998
(Expressed in United States dollars)
8. STOCKHOLDERS' EQUITY (Continued)
The following table summarizes information concerning options outstanding
at December 31, 2000:
Options Outstanding Options Exercisable
------------------------------------ ----------------------
Weighted
Number Average Number
Outstanding Remaining Weighted Exercisable Weighted
as of Contractual Average as of Average
Range of December Life Exercise December Exercise
Exercise Prices 31, 2000 (months) Price 31, 2000 Price
--------------- ------------- ------------ ---------- ------------ ----------
$0-$6.75 455,495 91.5 $ 0.47 426,778 $ 0.24
$6.80-$13.35 1,365,376 37.21 10.94 831,451 10.44
$13.40-$20.00 342,608 44.22 14.37 183,051 14.18
$20.05-$36.20 150,465 50.76 25.32 - -
------------- ------------ ---------- ------------ ----------
2,313,944 49.82 $ 10.32 1,441,280 $ 8.31
============= ============ ========== ============= ==========
At December 31,1999 and 1998 under the combined MDSI and Connectria option
plans, 1,405,979 and 985,446 options were exercisable at a weighted average
exercise price of $7.21 and $6.36 respectively.
(b) Stock purchase plan
The Company has established a voluntary stock compensation arrangement
for its full and part-time employees to purchase common shares of the
Company by way of payroll deductions for a maximum of $6,666 ($10,000
CDN) for each employee per year. The subscription price of common
shares purchased under the Stock Purchase Plan is determined based
upon a weighted average market price of the Company's common shares
each quarter, less 15%. The Company has reserved 100,000 common shares
for issuance pursuant to the Stock Purchase Plan. During the year
ended December 31, 2000, 16,621 (1999 - 28,144; 1998 - 17,919) common
shares were issued under this Plan.
(c) Special warrants and share purchase warrants
In June 1996, the Company issued 280,000 special warrants through a
private placement for net proceeds of $2,873,489 (net of issue costs
of $21,962). Each special warrant was exchangeable, without further
payment or additional consideration, into one common share and one
share purchase warrant. During the year ended December 31, 1997,
280,000 common shares and 280,000 share purchase warrants were issued
on the conversion of special warrants. During the year ended December
31, 1998, 258,000 share purchase warrants were exercised to purchase
51,600 common shares for proceeds of $491,648.
(d) Stock transactions
On January 29, 1999, the Company completed a public offering for the
sale and issue of 575,000 common shares at a price of $18.40 per share
for net proceeds of $9,772,479 (net of offering costs of $809,279).
(e) Alliance employee stock ownership plan
Prior to the Company's acquisition of Alliance Systems Incorporated in
1997, the Alliance employees participated in an employee stock
ownership plan (the ESOP). Upon the Company's acquisition of Alliance,
the remaining unallocated shares held by the ESOP were allocated to
employees. At December 31, 2000, 2,847 shares of the Company were held
by the ESOP of which all have vested and are in the process of being
distributed.
F-18
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2000, 1999, and 1998
(Expressed in United States dollars)
8. STOCKHOLDERS' EQUITY (Continued)
(f) Connectria stock option plan
Upon the Company's acquisition of Connectria (Note 2), the Company
agreed to assume the outstanding stock options of the Connectria Stock
option plan. The assumed options are listed separately in the
outstanding option table (note 8(a)).
(g) Shareholder rights plan
At the Annual General Meeting on May 6, 1999, the Company's
shareholders' approved the adoption of a Shareholder Rights Plan,
similar to those adopted by other Canadian companies. Under the terms
of the Plan, rights are attached to the common shares of the Company.
These rights become marketable and exercisable only after certain
specified events related to the acquisition of, or announcement of an
intention to acquire 20% or more of the outstanding common shares of
the Company.
9. INCOME TAXES
The provision for income taxes consists of the following:
2000 1999 1998
----------- ------------- --------------
Current:
Canada $ 49,500 $ 539,552 $ (1,242,813)
Foreign (310,965) (2,560,256) 150,329
----------- ------------- --------------
Total current provision for income taxes (261,465) (2,020,704) (1,092,484)
----------- ------------- --------------
Deferred:
Canada 92,870 (468,896) 394,370
Foreign (322,947) 345,176 (1,110,973)
----------- ------------- --------------
Total deferred provision for income taxes (230,077) (123,720) (716,603)
----------- ------------- --------------
Provision for income taxes $ (491,542) $ (2,144,424) $ (1,809,087)
=========== ============= ==============
F-19
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2000, 1999, and 1998
(Expressed in United States dollars)
9. INCOME TAXES (continued)
The provision for income taxes reported differs from the amounts computed
by applying the cumulative Canadian Federal and provincial income tax rates
to the loss before tax provision due to the following:
2000 1999 1998
-------------- ---------------- -------------
Statutory tax rate 45.6% 45.0% 45.0%
Provision for income taxes computed
at statutory rate $ (151,466) $(3,223,573) $ (2,753,008)
Tax losses and (benefits) not recognized in the period
that the benefit arose (684,949) (514,328) 538,740
Lower effective rate on earnings of foreign subsidiaries 853,058 1,695,856 713,341
Amortization of intangibles not deductible for tax
purposes (127,333) (117,710) (114,702)
Other permanent differences (380,852) 15,331 (193,458)
-------------- ---------------- -------------
Provision for income taxes $ (491,542) $(2,144,424) $ (1,809,087)
============== ================ ==============
The principal components of the deferred portion of the provision for
income taxes are as follows:
2000 1999 1998
--------------- -------------- ------------
Depreciation $ (349,067) $ 265,315 $ -
Deferred revenue 969,689 (201,992) (751,766)
Operating loss carry forwards (361,160) (572,557) 75,806
Other (489,539) 385,514 (40,644)
--------------- -------------- ------------
Total deferred provision for income taxes $ (230,077) $(123,720) $(716,603)
=============== ============== ============
F-20
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2000, 1999, and 1998
(Expressed in United States dollars)
9. INCOME TAXES (Continued)
The approximate tax effect of each type of temporary difference that gave
rise to the Company's deferred tax assets are as follows:
2000 1999
-------------- -------------
Current
Operating loss carry forwards $ - $ 287,443
Less: valuation allowance - -
-------------- -------------
Net current deferred tax asset $ - $ 287,443
============== =============
2000 1999
-------------- -------------
Non-current
Operating loss carry forwards $ 1,825,049 $ -
Depreciation 69,292 418,359
Other 278,058 (128,375)
-------------- -------------
2,172,399 289,984
Less: valuation allowance (1,825,049) -
-------------- -------------
Net non-current deferred tax asset $ 347,350 $ 289,984
============== =============
At December 31, 2000 , the Company has the following loss carry-forwards
available for tax purposes:
Country Amount Expiry
------- ------ ------
Canada $ 3,200,000 2004, through 2007
US $ 900,000 2020
10. RELATED PARTY TRANSACTIONS
Related party transactions and balances not disclosed elsewhere in these
financial statements include advisory fees expensed during the year of
$45,000 (1999 - $0; 1998 - $0) paid to a company controlled by a director
during the year ended December 31, 2000.
The Company issued a promissory note receivable to a director and officer
of the company on June 28, 2000 for $150,000. The note bears interest at a
rate of 6.75% and is payable on demand. As at December 31, 2000 the full
amount of the note was outstanding, and is included in prepaid expenses and
other assets.
F-21
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2000, 1999, and 1998
(Expressed in United States dollars)
11. COMMITMENTS AND CONTINGENCIES
(a) Capital and operating leases
At December 31, 2000, future minimum payments under capital and
non-cancelable operating leases for office space and computer
equipment are as follows:
Capital Operating
leases leases
---------------- ----------------
2001 $ 3,031,090 $ 1,466,177
2002 2,423,567 1,202,799
2003 1,389,455 1,196,384
2004 9,431 1,286,953
2005 - 1,283,001
Thereafter - 3,749,627
---------------- ----------------
Total minimum lease payments 6,853,543 $ 10,184,941
================
Less: amount representing interest (602,420)
---------------
Present value of net minimum lease payments 6,251,123
Less: current portion (2,094,637)
---------------
$ 4,156,486
===============
Rent expense for the year ended December 31, 2000 in respect of
operating leases for office space was $2,148,310 (1999 - $2,232,448;
1998 - $2,185,401).
(b) Line and letters of credit
The Company has an operating line of credit with a Canadian commercial
bank to borrow up to $8,000,000 CDN which bears interest at prime plus
0.5%. As at December 31, 2000, the Company was not utilizing the
operating line of credit. The Company also has a $250,000 line of
credit with a United States commercial bank to borrow up to $250,000
that bears interest at 8.75%. As at December 31, 2000 the Company had
utilized $247,000 of this facility.
The Company has provided, as performance bonds, an irrevocable
revolving letter of credit in the amount of Belgian Franc 60,640,800
(USD $1,510,428) maturing May 28, 2001, and an additional letter of
credit in the amount of Belgium Franc 3,060,000 (USD $76,218) expiring
August 30, 2001. The Company has pledged an amount equal to the
letters of credit and guarantee against its operating line of credit
as security.
(c) Contingency
The Company has included in its operating results for the year ended
December 31, 2000 a provision for $985,000 with respect to a doubtful
account. The Company believes that its' position in the matter is
strong and intends to vigorously pursue collection. The Company has
filed an action seeking payment of the full contract amount and the
customer has filed an answer and counterclaim. The customer has
requested mediation of the dispute and the Company has agreed.
F-22
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2000, 1999, and 1998
(Expressed in United States dollars)
12. SEGMENTED INFORMATION
In 1997, the Company adopted the Financial Accounting Standards Board
statement No.131 (SFAS 131) requiring disclosure of a company's business
segments. In 1998, the Company reported two business segments - Field
Service and Delivery based on the differing capabilities of the software
and hardware platforms offered to customers. In February 1999, the
Company's Board of Directors approved a plan to dispose of its Delivery
Segment which was subsequently sold effective June 1, 1999 (note 15). As a
result the Company does not provide a detailed breakdown of the Delivery
segments other than provided by its general purpose financial statements.
On February 1, 2000, the Company announced its intentions to sell its
products of mobile workforce management and wireless connectivity
application software over the internet from a wirelessly-enabled
Applications Service Provider ("ASP") site. As a result of this decision
the Company again reports its operations in two business segments, Field
Service and E-Business.
On June 1, 2000 the company completed its merger with Connectria
Corporation (note 2). As Connectria is considered part of the Company's
e-Business operating segment and the transaction has been treated using the
pooling of interests method, the Company has reflected the merger by
segregating the e-Business segment for all comparable periods.
Substantially all of the Company's e-Business revenue is currently derived
from Connectria's professional and hosting services.
Business Segments
2000 1999 1998
------------------------------------- ------------------------------------- -------------------------------------
Field Field Field
Service e-Business(1) Total Service e-Business(1) Total Service e-Business(1) Total
---------- ------------- ----------- ---------- ------------- ----------- ----------- ------------ ----------
Revenue $51,999,988 $ 9,542,491 $61,542,479 $52,157,025 $6,414,401 $58,571,426 $44,866,399 $ 3,496,919 $48,363,318
Operating
earnings (loss) 4,280,270 (3,423,244) 857,026 7,781,006 142,038 7,923,044 5,943,598 135,310 6,078,908
Depreciation &
Amortization 2,599,589 347,361 2,946,950 1,519,305 103,622 1,622,927 876,073 43,348 919,421
Long lived
assets 11,459,003 4,543,998 16,003,001 12,568,124 472,100 13,040,224 5,934,053 235,185 6,169,238
Capital
Expenditures 5,263,013 1,619,447 6,882,460 4,404,253 39,458 4,443,711 1,772,885 197,010 1,969,895
(1) The e-Business operating segment also includes revenues from third-party
products and services.
F-23
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2000, 1999, and 1998
(Expressed in United States dollars)
12. SEGMENTED INFORMATION (continued)
Geographic information
The Company earned revenue from sales to customers and has long-lived
assets, including capital assets and goodwill, in the following geographic
locations:
2000 1999 1998
-------------------------------- -------------------------------- ------------------------------
Long-lived Long-lived Long-lived
Revenue assets Revenue assets Revenue assets
--------------- ---------------- --------------- ---------------- ------------- ---------------
Canada $ 1,688,704 $ 8,731,563 $ 1,670,098 $ 9,037,747 $ 1,995,028 $ 2,234,324
United States 47,564,765 7,202,636 43,956,585 3,923,429 44,852,871 3,889,766
Europe 8,713,390 66,946 11,426,532 73,521 1,281,597 36,295
Asia and Other 3,575,620 1,856 1,518,211 5,527 - 8,853
South America - - - - 233,822 -
--------------- ---------------- --------------- ---------------- ------------- ---------------
$ 61,542,479 $16,003,001 $ 58,571,426 $13,040,224 $48,363,318 $ 6,169,238
=============== ================ =============== ================ ============= ===============
Long-lived assets consist of the lease receivable, investments,
capital and intangible assets.
Major customers
During the year ended December 31, 2000, the Company did not earn revenue
from one customer that accounted for greater than 10% of overall revenue.
For the year ended December 31, 1999 the Company earned revenue from one
customer of $6,358,798 and in 1998 one customer accounted for revenue of
$4,097,428. No other single customer accounted for more than 10% of total
revenue.
13. CHANGES IN NON-CASH OPERATING WORKING CAPITAL ITEMS
2000 1999 1998
-------------- -------------- --------------
Accounts receivable $ (9,263,458) $ (2,559,073) $ (5,198,090)
Prepaid expenses and other assets (289,619) 1,134,442 (1,618,786)
Income taxes payable (476,507) (22,860) 1,590,531
Accounts payable and accrued liabilities 2,653,882 (3,677,261) 2,600,949
Deferred revenue 3,159,799 (22,837) 2,817,377
-------------- -------------- --------------
$ (4,215,903) $ (5,147,589) $ 191,981
============== ============== ==============
F-24
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2000, 1999 and 1998
(Expressed in United States dollars)
14. FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, accounts receivable, lease
receivable, investments and advances, accounts payable, accrued
liabilities, long term debt, capital lease obligations and assets and
liabilities from discontinued operations reflected in the balance sheets
approximate their respective fair values.
The Company's revenues have historically been dependent on large contracts
from a limited number of customers in the utility, telecommunications and
cable sectors. However, as these customers are geographically dispersed and
bad debts have not been significant, concentrations of credit risk are
considered to be minimal.
15. DISCONTINUED OPERATIONS
In February 1999, the Company's Board of Directors approved a plan for the
sale of the Transportation Business Unit which developed mobile workforce
software for the taxi, courier and roadside recovery markets. The
disposition was completed June 24, effective June 1, 1999, for proceeds of
$3,839,267. The proceeds comprised common shares representing an 11%
interest in Digital Dispatch Systems Inc., a supplier of dispatch systems
to the taxi market, and an 8%, $346,741 promissory note due January 1,
2001.
For the year ended December 31, 1999, the Company recorded a one-time
charge of $3,872,684 concurrent with the decision to discontinue the
Delivery segment of the Company's business. Certain contracts were retained
for completion during the year 2000. The estimated cost to complete these
contracts was included in the one-time charge. During the year ended
December 31, 2000 the Company recorded an additional $395,022 charge in
order to account for additional costs to complete the retained contracts,
and the loss realized on sale of shares in Digital Dispatch Systems Inc.,
taken as consideration on sale of the Company's Transportation Business
Unit (note 4).
F-25
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2000, 1999, and 1998
(Expressed in United States dollars)
15. DISCONTINUED OPERATIONS (Continued)
This business is accounted for as a discontinued operation and for
reporting purposes the results of operations, financial position and cash
flow are segregated from those of continuing operations for the current and
prior periods. The Company has included in the results of the discontinued
operation, the sale proceeds, the costs of disposition, the results of
operations from the measurement date to the disposal date and an estimate
of the costs to complete the remaining contract.
December 31, 2000 December 31, 1999 December 31, 1998
----------------- ----------------- -----------------
Revenues $ - $ 2,652,152 $ 10,775,239
Loss before income taxes (1,571,821) (622,340)
Income tax - - 90,03
8
----------------- ----------------- -----------------
Operating loss to measurement date (1,571,821) (532,302)
Estimated loss on disposal
(net of nil income taxes) (395,022) (2,300,862) -
----------------- ----------------- -----------------
Loss from discontinued operations $ (395,022) $ (3,872,683) $ (532,302)
================= ================= ==================
Financial position of discontinued operations
December 31, 2000 December 31, 1999 December 31, 1998
----------------- ----------------- -----------------
Current assets $ 641,405 $ 960,610 $ 6,371,232
Long term assets - - 1,909,440
----------------- ----------------- -----------------
Total assets of discontinued
operations 641,405 960,610 8,280,672
----------------- ----------------- -----------------
Current liabilities 223,024 173,424 1,543,547
Long term liabilities - - -
----------------- ----------------- -----------------
Total liabilities of discontinued
operations $ 223,024 $ 173,424 $ 1,543,547
================= ================= =================
Cash flow of discontinued operations
December 31, 2000 December 31, 1999 December 31, 1998
----------------- ----------------- -----------------
Operating activities $ 277,626 $ (1,655,510) $ (1,789,065)
Investing activities - (106,548) (49,324)
Financing activities - - -
----------------- ----------------- -----------------
Cash provided by (used for)
discontinued operations $ 277,626 $ (1,762,058) $ (1,838,389)
================= ================= =================
F-26
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, MDSI Mobile Data Solutions Inc. has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
April 2, 2001.
MDSI MOBILE DATA SOLUTIONS INC.
By: /S/ ERIK DYSTHE
------------------------------------
Erik Dysthe, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report to be signed by the following persons on behalf of MDSI Mobile Data
Solutions Inc. in the capacities and on the dates indicated.
Signature Title Date
/S/ERIK DYSTHE Chief Executive Officer, April 2, 2001
- ------------------------- Chairman of the Board and
Erik Dysthe Director (Principal Executive
Officer)
/S/ ROBERT G. CRUICKSHANK President, Chief Operating April 2, 2001
- ------------------------- Officer and Director
Robert G. Cruickshank
/S/ VERNE D. PECHO Vice President - Finance and April 2, 2001
- ----------------------- Administration and Chief
Verne D. Pecho Financial Officer (Principal
Financial and Accounting Officer)
/S/ KENNETH R. MILLER Director April 2, 2001
- -----------------------
Kenneth R. Miller
/S/ GERALD F. CHEW Director April 2, 2001
- ---------------------- (Authorized U.S. Representative)
Gerald F. Chew
- --------------------- Director
Bruno Ducharme
- -------------------- Director
Robert C. Harris, Jr.
- -------------------- Director
Terrence P. McGarty
/S/ MARC ROCHEFORT Director April 2, 2001
- ---------------------
Marc Rochefort
- --------------------- Director
John T. McLennan
/S/ RICHARD S. WAIDMANN Senior Vice President and April 2, 2001
- -------------------- General Manager, eServices
Richard S. Waidmann Division and Director
EXHIBIT INDEX
-------------
Exhibit
Number Description
------ -----------
2.1(3) Agreement and Plan of Merger dated April 17, 1997 among the
Company, MDSI Acquisition Corp., Alliance, Geoffrey Engerman
and Doug Engerman (previously filed as Exhibit 2.2)
3.1(1) Articles of Incorporation of the Company
3.2(1) Articles of Amendments of the Company
3.3(1) By-laws of the Company
4.1(1) Form of Common Share Certificate 1996 Stock Option Plan
10.1(1)(2) 1997 Stock Option Plan
10.2(2)(4) 1998 Stock Option Plan
10.3(2)(4) Stock Purchase Plan
10.4(2)(6) Stock Purchase Plan
10.5(2)(6) 1999 Stock Option Plan
10.6(2)(7) 1998 Stock Option Plan for Connectria Corporation (formerly,
Catalyst Solutions Group, Inc.)
10.7(2)(8) 2000 Stock Option Plan
10.8(1) Form of Indemnification Agreement between the Company and
certain officers of the Company (previously filed as Exhibit
10.4)
10.9(1) Promissory Note dated January 2, 1996 granted by the Company
and TelSoft in favor of Killean Consulting Inc. (previously
filed as Exhibit 10.8)
10.10(1) Promissory Note dated January 2, 1996 granted by the Company
and TelSoft in favor of 382904 B.C. Ltd. (previously filed
as Exhibit 10.8)
10.11(1) Employment Agreement dated April 1, 1996 between the Company
and Erik Dysthe (previously filed as Exhibit 10.18)
10.12(1) Lease dated September 25, 1997 between Sun Life Assurance
Company of Canada and the Company (previously filed as
Exhibit 10.20)
10.13(1) Lease dated June 2, 1989 between Corporate Woods Associates
and Service Systems International Limited and subsequent
amendments (previously filed as Exhibit 10.23)
10.14(1) Lease dated April 8, 1993 between Cambridge Scanning Company
Limited and Spectronics Micro Systems Limited (previously
filed as Exhibit 10.25)
10.15(3)(2) Employment Agreement dated February 1, 1999 between the
Company and Robert G. Cruickshank
Exhibit
Number Description
------ -----------
10.16(3)(2) Employment Agreement dated February 1, 1999 between the
Company and Kenneth R. Miller
10.17(6) Master Purchase and Sale Agreement dated June 1, 1999
between Digital Dispatch Systems Inc. and the Company
(without schedules or exhibits)*
10.18(9) Agreement and Plan of Reorganization, dated as of May 9,
2000, among MDSI, MDSI Acquisition Corporation, Connectria
and Certain Principal Shareholders.*
10.19(9) Form of Voting, Lockup and Registration Rights Agreement
among MDSI, MDSI Acquisition Corporation, Connectria and
Certain Principal Shareholders.
21.1 List of the Company's Subsidiaries.
23.1 Consent of Deloitte & Touche LLP.
- ----------
(1) Previously filed as exhibits with the same corresponding number with the
Registrants' Registration Statement on Form F-1 (Registration No. J33-5872)
and amendments numbers 1 and 2 thereto, filed with the Securities and
Exchange Commission on October 28, 1996, November 13, 1996 and November 25,
1996, respectively.
(2) This document has been identified as a management contract or compensatory
plan or arrangement.
(3) Previously filed as an exhibit to Registrant's Registration Statement on
Form F-4.
(4) Previously filed as exhibits with the same corresponding number with the
Registrant's Form 10-K for the year ended December 31, 1998.
(5) Previously filed as exhibits with the same corresponding number with the
Registrant's Form 10-Q for the quarterly period ended September 30, 1999.
(6) Previously filed as exhibits with the same corresponding number with the
Registrant's Form 10-K for the year ended December 31, 1999.
(7) Previously filed as exhibits with the Registrant's Registration Statement
on Form S-8 filed on July 12, 2000.
(8) Previously filed as exhibits with the Registrant's Registration Statement
on Form S-8 filed on November 22, 2000.
(9) Previously filed as exhibits with the Registrant's Current Report on Form
8-K filed on June 15, 2000.
* The Company agrees to supplementally furnish a copy of any omitted schedule
or exhibit to the Securities and Exchange Commission upon request.