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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, 2001
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. [X]
Aggregate market value of the Registrant's Common Shares held by
non-affiliates as of March 25, 2002 was approximately US$33,293,415. The number
of shares of the Registrant's Common Shares outstanding as of March 25, 2002 was
8,761,425.
TABLE OF CONTENTS
Item 1: Business..............................................................1
Item 2: Properties...........................................................20
Item 3: Legal Proceedings....................................................20
Item 4: Submission of Matters to a Vote of Security Holders..................20
Item 5: Market for Registrant's Common Equity And Related
Stockholder Matters................................................21
Item 6: Selected Financial Data..............................................24
Item 7: Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................25
Item 7A: Quantitative and Qualitative Disclosure About Market Risk...........40
Item 8: Financial Statements and Supplementary Data..........................41
Item 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure...............................................67
Item 10: Directors and Officers of the Registrant............................67
Item 11: Executive Compensation..............................................70
Item 12: Security Ownership of Certain Beneficial Owners and Management......75
Item 13: Certain Relationships and Related Transactions......................76
Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K.....76
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, the failure of MDSI to achieve anticipated levels of cost savings and
the risk that such cost reduction may adversely affect the ability of MDSI to
achieve its business objectives, the failure of MDSI to successfully execute its
business strategies, the effect of slowing United States and international
economies generally, as well as economic trends and conditions in the vertical
markets that MDSI serves, the effect of the risks associated with technical
difficulties or delays in product introductions and improvements, product
development, product pricing or other initiatives of MDSI's competitors, the
possibility that our potential customers will defer purchasing decisions due to
economic or other conditions or will purchase products offered by our
competitors, risks associated with litigation 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
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Period End US$0.6275 US$0.6666 US$0.6925 US$0.6504 US$0.6999
Average 0.6461 0.6740 0.6744 0.6715 0.7198
High 0.6714 0.6983 0.6925 0.7105 0.7487
Low 0.6227 0.6397 0.6535 0.6341 0.6945
On March 25, 2002 the noon buying rate was CDN$1.00 = US$0.6312 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
MDSI Mobile Data Solutions Inc. is a leading provider of mobile workforce
management solutions. MDSI's suite of applications improves customer service and
relationships, and reduces operating costs by empowering service companies to
optimally manage their mobile, field resources. The Company also provides all of
the professional services, wireless connectivity, and hosting capabilities
necessary to implement and support its solutions. Founded in 1993, MDSI has over
100 major customers worldwide with operations and support offices in the United
States, Canada, Europe and Australia. MDSI markets its solutions to a variety of
companies that have substantial field service organizations, primarily utilities
(electric, gas and water companies), telecommunications companies, and
cable/broadband companies, and to a much lesser extent to insurance companies
and commercial field service providers. MDSI's products are used by such
companies in conjunction with public and private wireless data communications
networks and mobile devices to provide comprehensive solutions for the
automation of business processes associated with the scheduling, dispatching and
management of a mobile workforce. Through the Company's Hosting and Information
Technology (IT) Services subsidiary, Connectria Corporation ("Connectria"), the
Company also provides hosting and IT services, including outsourcing and
consulting, to a wide variety of customers.
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
Field service organizations are confronted on a daily basis with the
difficult task of optimally assigning work requests to their mobile workforce,
dispatching the work to the field, monitoring the progress of the work,
responding to changing conditions, and measuring workforce performance. Common
workforce management problems include:
o Missed appointments;
o Unnecessary overtime;
o Repeat customer visits to get the job done right;
o Jobs that take too long to complete;
o Delayed status reports;
o Inadequate information collected from/supplied to the field;
o Redundant data entry work; and
o Excessive driving time.
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 commercial
field service. Businesses
-1-
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.
The Company believes that ongoing trends in the regulatory environment,
numerous technological advances and competitive pressures have reduced many of
these limitations and have provided, and will continue to provide a compelling
case for the adoption of mobile data solutions by field service organizations.
Deregulation has exposed the utility and telecommunications markets to new
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 providing services at lower costs
than ever are now widely available in North America, and similar networks are
available in Europe and Austral-Asia . 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 Company believes that these trends will
continue to increase the likelihood of adoption of mobile data solutions by
companies with field service organizations. See "Forward-Looking Statements."
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 field service organizations in targeted vertical markets to develop mobile
workforce management solutions that address the specific needs of businesses
within those vertical markets. MDSI's products enable these organizations to
effectively communicate with, manage and support their mobile workers in their
execution of work orders.
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 in-house applications. The most recent version of the
Company's software is also designed to be Internet-enabled, allowing service
companies' dispatchers and mobile technicians to use web browsers to interface
with the Company's software and enable the users to manage their work. For the
mobile user, that browser can be located on a variety of mobile devices, such as
a laptop, personal digital assistant, pager or web phone.
To effectively address a customer's mobile workforce management
requirements, MDSI combines its products with services, such as systems
implementation and integration, training and documentation, workforce management
assessments, consulting, and ongoing technical support and software maintenance.
Where appropriate, MDSI also provides third party products and services as part
of a complete mobile data solution.
-2-
Advantex r7
Advantex r7, the latest version of MDSI's mobile workforce management
product, is a feature-rich product that offers a comprehensive solution tailored
to address the specific mobile workforce management needs of MDSI's customers in
MDSI's target markets, including market-specific solutions for the utility
industry and the telecommunications industry. Advantex efficiently manages the
life cycle of a service work order and the days of the mobile workers who
execute them. It schedules service requests and, using complex business rules,
assigns them to the best available mobile resource. Advantex then dispatches
work order details to mobile resources who use the solution to process their
work throughout the day and send status updates and order completion information
back to the office all wirelessly, in real-time. This provides dispatchers,
supervisors and enterprise applications, such as call centres and customer
information systems, with up-to-date information to enable them to effectively
monitor and manage field service operations at all times.
Advantex is the result of more than ten years of development and has been
field validated by over 100 companies in the utility, telecommunications and
cable/broadband industries. Advantex uses global standards, such as CORBA
(Common Object Request Broker Architecture), Java, HTML, XML, WAP and Unicode,
and industry standard products, such as Oracle's database and BEA's
infrastructure tools, to deliver a solution that meets customers' needs for a
scalable, open and interoperable solution. Advantex has been implemented for
customers supporting as few as 70 and as many as 7,000 mobile workers. Advantex
can be offered as an "enterprise" solution delivered and implemented on the
customer's site, or as an ASP solution (Advantex ASP) hosted offsite. The
primary components of Advantex are:
o Advantex Scheduling--Books and manages appointments with customers and
automatically assigns work orders to mobile workers based on skill and
equipment match, location, availability, and priority.
o Advantex Dispatch--Allows dispatchers to monitor work orders and
workers. Allows dispatchers to view the field service information that
is most critical to them at any given moment, to manage work orders
(e.g., cancel, modify, dispatch), and to receive alerts for unusual
situations requiring dispatcher intervention (e.g., worker in jeopardy
of missing an appointment).
o Advantex Mobile--Enables mobile workers to receive work orders, view
work order information, track their status, enter work results, and
query company applications for additional information needed to
complete work. Promotes efficient workflow by providing the
information mobile workers need to do their work when they need it.
o Advantex Wireless--Provides wireless connectivity across public and
private networks, and wireless compression, encryption, and the
ability to work offline in "out of coverage" situations.
o Advantex Resources--Allows administrators to define resources that
perform work (e.g., mobile workers and crews) and their attributes
(e.g., work areas, skills, equipment), manage crew composition, define
shift rotations, and manage day-to-day technician availability (e.g.,
ad hoc adjustments for absences).
o Advantex Decision Support--Collects and archives data in a historical
database and allows it to be presented for easy-to-understand
reporting and trend analysis via a web-browser. Lets managers prepare
customized reports on key performance indicators to measure mobile
workforce performance.
o Advantex Compose--A configuration tool used to define a customer's
work practices and generate a customized Advantex system. Defines the
types of work the customer performs, the work order details, how the
work orders are presented to dispatchers and mobile workers, the forms
to be completed in the field, and the validation rules that apply to
work results entered in the field.
o Advantex Transaction Broker--Integrates Advantex with the customer's
enterprise applications (e.g., SAP, Siebel). Bundled with Advantex
when MDSI provides application integration services.
o Advantex Vehicle Tracking--Allows dispatchers to use maps and GPS
(Global Positioning System)-equipped vehicles to track in real-time
the location of mobile workers and their work orders and to execute a
wide variety of tasks directly from the map interface.
-3-
o Advantex Complex Orders-- Coordinates mobile workers working on
related orders. Parcels orders into individual tasks, manages task
assignment and dispatch, ensures that precedence relationships are
maintained, and monitors task status.
o Advantex Common Cause-- Allows dispatchers and managers to recognize
related trouble work orders and manage them as individual dispatched
work orders.
o Advantex Time Reporting--Allows mobile workers to allocate time to job
codes and to record time spent on other activities. Replaces
paper-based time reporting.
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. Contracts for the sale of MDSI's software typically include a
customer support and maintenance agreement, as well as professional services
such as implementation, systems integration, training and documentation, and may
also include workforce management assessments and audits and workforce
management consulting. The Company believes that providing these 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.
Professional Services
A professional services engagement usually lasts for six to twelve months
and involves working with the customer in defining, constructing and installing
the Advantex solution, as well as integrating it with the customer's other
software solutions ("enterprise applications") and training the client in how
best to use Advantex. The engagement generally occurs in three logical phases:
definition, construction, and installation.
o Definition--MDSI works with the customer to determine the customer's
preferred configuration for the Advantex system. A customer's Advantex
configuration will depend on a number of factors, including the types
of work the customer performs, the information associated with each
type of work order, how the customer would prefer information to be
presented to dispatchers and mobile workers (i.e., screen layouts) and
what information the customer intends to collect from the field (i.e.,
work results).
o Construction--MDSI configures the baseline Advantex software in
accordance with the customer's needs to create a finished product.
Once the Advantex system has been configured, MDSI tests the system at
its facilities to ensure that the configured system is ready to be
installed at the customer's site.
o Installation--MDSI installs Advantex at the customer's site. The
system is then tested until acceptance criteria are met. Upon
acceptance, the customer is ready to deploy the solution to the field
and begin rollout. The duration of the rollout period will depend on
several factors, including the length of time the customer wishes to
test the new system with a pilot group, the size of the customer's
mobile workforce, and the extent to which the practices the customer
has incorporated into the system are a departure from current
practices.
MDSI's depth of experience in the utility, telecommunications, and
cable/broadband industries allows it to integrate Advantex with customer
information systems, customer relationship management systems, billing systems
and outage management systems, among others. Whenever industry solutions such as
these are the source of work orders or the destination for work results, MDSI
offers application integration services. MDSI provides complete training
services and systems documentation that address the implementation and operation
of an Advantex mobile workforce management system.
MDSI also offers mobile workforce management practices assessment services,
to help customers assess where they stand against their peers, as well as mobile
workforce management consulting and training services, to enable customers to
make the most effective use of Advantex in their organizations to improve
customer satisfaction and increase operational efficiency. At December 31, 2001,
the Company had 172 professional services personnel, of whom 91 were located in
Canada, 74 in the United States and 7 in Copenhagen.
-4-
Customer Support
The Company believes that its ability to offer a high level of customer
support is critical to its success. The Company'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, which may be annual or on a multi-year basis, that take effect on
the expiration of the product warranty period, which is typically 90 days. At
December 31, 2001, the Company had 48 customer support personnel, of whom 33
were located in Canada, 11 in the United States and 4 in Copenhagen.
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, the Company has focused its attention on mid and large-sized
customers in the telecommunications, cable/broadband, and utilities (electric,
gas and water) markets. To a lesser extent, the Company has also served the
commercial field service and public safety markets, though recently the Company
decided to stop pursuing opportunities in the public safety market. See "Public
Safety" below. The Company evaluates new target markets for mobile workforce
management based upon their similarity to existing vertical markets in which the
Company has been successful, and upon the ability of the Company to utilize its
core competencies and proven technology to meet the needs of companies in these
new markets. The Company believes that its markets will grow, both in terms of
number of potential customers and revenues, in the future, particularly outside
North America. See "Forward-Looking Statements."
Utilities. The utilities market targeted by the Company primarily consists
of electric, gas and water companies in the United States, Canada, Europe and to
a lesser extent Austral-Asia. The Company has traditionally targeted the
distribution operations within a utility. The Company 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, the Company 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, electric and water utilities located in the United States, Canada,
Europe and Austral-Asia. MDSI believes that the total number of utilities with
more than 100 mobile workers (MDSI's typical target market) exceeds 400 in the
United States alone.
Telecommunications and Cable/Broadband. MDSI sells its Advantex product
into the telecommunications, and cable/broadband markets in the United States,
Canada, Europe and to a lesser extent Austral-Asia. Recently, the markets for
these services have been converging. For example, companies that used to provide
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). The wireline market in North America is comprised
of IXCs (Inter-exchange carriers), ILECs (Incumbent Local Exchange Carriers),
and CLECs (Competitive Local Exchange Carriers). In Europe, the national
telecommunication providers are referred to as PTT's (Post, Telephone &
Telegraph). MDSI has installed or has a contract to supply its products to
numerous telecommunication companies worldwide, including Belgacom S.A., Bravida
A.S.A, Eircom plc, and TDC Tele Danmark A/S. MDSI believes that the total number
of telecommunications companies and cable/broadband companies with more than 100
mobile workers (MDSI's typical target market) exceeds 300 and 100, respectively,
in the United States alone. Although, only a small percentage of
telecommunications companies have adopted mobile workforce management solutions,
MDSI believes that a number of major telecommunications companies are evaluating
the need for such a system, and that this market will grow as companies
implement new technology to improve their competitiveness, efficiency and
service levels as the worldwide deregulation of the telecommunications markets
continues to unfold. The Company anticipates, however, that continued economic
uncertainty in the telecommunications and cable/broadband markets will have an
adverse impact on software and services revenues in the short term. See
"Forward-Looking Statements."
-5-
Cable/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 MSOs (Multiple System Operators) 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 MSOs. 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 MSOs are increasingly
outsourcing some of their field technician work to specialty contractors, a
group where MDSI does not have market share, but one that could represent a
future opportunity. See "Forward-Looking Statements." MDSI has installed or has
a contract to supply its products to several major cable operators, including
Cox Communications Inc. and Adelphia Communications Corporation in the United
States and Rogers Cablesystems Ltd and Videotron in Canada.
Changes in the regulatory environment and technological developments, such
as satellite television have led to the introduction of significant competition
in the cable market. MDSI sees this enhanced level of competition as being very
positive for its business. MDSI believes that growing competition and the
introduction of new services will lead cable operators to adopt mobile data
solutions to improve their competitiveness, efficiency and level of customer
service. See "Forward-Looking Statements."
Commercial Field Service. The commercial field service market consists of a
large number of organizations who provide general field services as their
business. These organizations include companies engaged in the maintenance and
repair of IT/Networking services, office equipment, medical/scientific
equipment, industrial equipment, and HVAC (Heating, Ventilation and Air
Conditioning) systems, amongst others. To date, the Company has not focused its
primary attention on this market, but it has had some penetration. MDSI believes
that the total number of such companies with more than 100 mobile workers
(MDSI's typical target market) exceeds 3,500 in the United States alone.
For the commercial field service industry, MDSI is in the process of
developing a subset of Advantex that is primarily comprised of the Advantex
Wireless and Advantex Mobile components. MDSI anticipates integrating this
solution with field service products from other independent software vendors who
serve the commercial field service market, and offering the integrated solution
to the market through joint sales and marketing efforts.
Public Safety. During 2001, MDSI decided not to continue pursuing
opportunities in the public safety market, consisting of federal, state and
local agencies that provide police, fire, medical and other emergency services.
The Company had installed solutions for a limited number of customers, and the
market has not represented a material portion of MDSI's revenues. The Company is
currently in the process of evaluating alternatives for this business, including
divestiture and wind down of operations. The Company expects to complete the
process in the second half of 2002.
Customers
For the year ended December 31, 2001, MDSI's software and services revenues
were distributed approximately as follows: 35% from the telecommunications and,
cable/broadband market, 55% the utilities (electric, gas and water) market and
the remaining 10% from other markets. During the year ended December 31, 2001
the Company generated approximately 81% of its revenue from North America,
approximately 17% of its revenue from Europe, and the remaining 2% of its
revenue from other parts of the world, primarily Austral-Asia.
The Company's customers vary in size from small local companies to large
regional and international organizations. During the year ended December 31,
2001 the Company earned revenue from one customer that accounted for 12.7% of
overall revenue. The Company anticipates that revenue from this customer will
account for a smaller percentage of the Company's revenue in the future. The
Company did not earn revenue from any one customer that accounted for greater
than 10% of overall revenue during the year ended December 31, 2000 and during
the year ended December 31, 1999, one U.S. utility company accounted for 10.9%
of the Company's consolidated revenue. In the years ended December 31, 2001,
2000 and 1999, approximately 35.8%, 25.8% and 31.0%, respectively, of the
Company's consolidated revenue was attributable to five or fewer customers. The
Company believes that revenue derived from a limited number of customers will
continue to represent a significant portion of its consolidated revenue.
-6-
In the years ended December 31, 2001, 2000 and 1999, revenue derived from sales
outside of North America accounted for 18.3%, 20.0% and 22.1% of the Company's
total revenue, respectively. See "Note 12 of the Company's Consolidated
Financial Statements." Because the Company's revenue is dependent, in large
part, on significant contracts with a limited number of customers, the
percentage of the Company'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."
Product Development
The mobile workforce management industry is characterized by rapid
technological change and increasing user requirements. Accordingly, the Company
must be able to provide new functionality and to modify and enhance existing
functionality on a timely and continuing basis in order to be competitive. To
accomplish this objective, the Company's strategy is to utilize proven
technology to further enhance its existing products and to create new products.
Where appropriate, the Company may acquire complementary technology developed by
third parties for integration into the Company's products.
The Company 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 radio system design and implementation. MDSI believes that this combination
of expertise in multiple disciplines has allowed and will continue to allow the
Company to design and develop mobile workforce management solutions which can be
implemented in a timely and cost-effective manner.
As of December 31, 2001, MDSI's technical and engineering staff, supporting
product development, consisted of 100 employees, including 72 employees based at
its Richmond, British Columbia headquarters and 28 in the United States.
During the years ended December 31, 2001, 2000 and 1999, the Company's
total expenditures for product development were $8.1 million, $9.0 million and
$6.9 million, respectively, reflecting 13.9%, 14.7% and 11.8% of the Company's
revenue, respectively. Management believes that timely and continuing product
development is critical to the Company's success and plans to continue to
allocate significant resources to product development. See "Forward-Looking
Statements."
Sales and Marketing
The Company markets its products through a direct sales force as well as
through strategic remarketing and/or joint selling arrangements with independent
software vendors, and systems integrators.
Direct Sales Force. MDSI's sales personnel are knowledgeable about the
technological components of wireless applications and current industry and
enterprise-specific application issues. As part of its 2001 restructuring, the
Company organized its sales personnel by geographic market. The Company'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 the Company'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
-7-
the companies' products, and jointly identifying and jointly executing on sales
prospects for the integrated solution. For example, the Company has established
such a relationship with Siebel Systems Inc. In some cases, relationships have
been formalized through written agreements, while others remain informal.
Systems Integrators. MDSI also establishes strategic relationships with
systems integrators that work in the Company'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 LLP, Accenture LLP, PricewaterhouseCoopers LLP, CGI, and SchlumbergerSema,
amongst others. 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."
At December 31, 2001, the Company's sales, marketing and technical support
group consisted of 58 employees, with 26 based out of the Company's Richmond,
British Columbia facility, 20 based out of its Itasca, Illinois facility, 3
based out of its St. Louis, Missouri facility, and 9 based out of various other
international locations.
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 the Company's
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.
Within these markets, there are a number of competitors, either small
companies attempting to establish a business in this market or large companies
attempting to diversify their product offerings. The Company expects such
competition to intensify as acceptance and awareness of mobile data
communications and technology continue. In addition, some of the Company's
potential customers develop software solutions internally, which may delay or
eliminate the requirement for suppliers such as the Company. 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 the Company's competitors have substantially greater financial,
technical, marketing and distribution resources than the Company. 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 the Company will be able to compete successfully against current or future
competitors or alliances of such competitors, or that competitive pressures
faced by the Company will not have a material adverse effect on its business,
financial condition, operating results and cash flows.
The Company believes that in the utilities, telecommunications and,
cable/broadband industry segments the most important competitive factors are the
reputation of the supplier and its proven record in implementing wireless data
solutions. MDSI believes that its long and successful track record in these
markets gives it a competitive advantage in this regard. The Company primarily
competes in the utilities market with Utility Partners, L.C. (which recently
filed for bankruptcy protection under Chapter 11), M3i Systems, Inc. (which was
recently acquired by Cognicase, Inc.), Integraph Corporation and iMedeon, Inc.
(which has recently merged with ViryaNet Ltd.). The Company has several
competitors in the telecommunications and cable/broadband markets. The Company's
primary competitor for telecommunications customers is Telcordia Technologies
Inc. (formerly Bellcore), a company which has historical relationships with
certain of the large telecommunications companies, and more recently
ClickSoftware, Inc. (formerly IET) and ViryaNet Ltd., which the Company mostly
sees as competition for small accounts. In the cable/broadband market, the
Company's primary competitors are Telcordia, C-Cor.net Corp. (formerly
MobileForce Technologies, Inc.), PointServe Inc.(through its merger with Brazen
Software Inc.), CSG Systems International Inc., and Viryanet Ltd., again only
for small accounts.
-8-
The Company believes that the principal competitive factors in the
commercial 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, the Company's principal competitors are Astea
International Inc., Metrix Inc., and FieldCentrix Inc., in addition to several
larger enterprise software companies, such as Amdocs Limited (which recently
acquired the assets of Clarify), Oracle Corporation, PeopleSoft Inc, and Siebel
Systems Inc. which, to the Company's knowledge, offer less comprehensive
solutions and which MDSI currently sees as potential partners for expanding
their penetration in this market.
Hosting and IT Services
Background
In addition to its core mobile workforce management business, beginning in
early 2000 MDSI unveiled an eBusiness strategy whereby it planned to "rent"
hosted workforce management and wireless connectivity solutions over the
Internet from a wirelessly-enabled Application Service Provider (ASP) site. The
Company's eBusiness solutions included Advantex ASP, eService Manager, and
eService Mobile, as well as hosted versions of the Company's and third parties'
wireless middleware solutions which enable wireless communications over a
variety of wireless networks and mobile devices.
In connection with this strategy, in June 2000 MDSI acquired Connectria
Corporation, a provider of managed hosting and IT services to a wide variety of
customers. Connectria provided the hosting infrastructure for the Company's
eBusiness products as well as components of the technology behind the eService
products. MDSI intended to offer its eBusiness solutions either on a
subscription basis where customers would pay a monthly fee for their use, or on
a "per transaction" basis where customers would pay each time they used the
solutions.
Under a new senior management team in 2001, MDSI decided to put greater
focus on its core mobile workforce management business and consequently reduce
focus on the eBusiness strategy. This prompted corresponding organizational
changes. The Company transferred Advantex ASP to its core mobile workforce
management operations, where the Company's direct sales force offers it as an
alternative to an enterprise-installed solution. MDSI also stopped further
development and marketing efforts on its eService suite and hosted wireless
middleware solutions, though MDSI continues to serve existing customers of the
products. The eBusiness Division was then renamed Hosting and IT Services to
better reflect Connectria's core business, which generated and continues to
generate the majority of the Company's Hosting and IT Services revenue.
As a result of the Company's strategy to focus on its mobile workforce
management operations, the Company is currently evaluating strategic
alternatives with respect to its Hosting and IT Services business. The Company
currently expects to make a decision regarding this business unit by the second
half of 2002.
Services
The services of MDSI's Hosting and IT Services, essentially Connectria,
comprise outsourcing, hosting and consulting, and can range from complete
outsourcing of an IT department to providing turnkey IT projects.
Outsourcing: Customized IT Outsourcing Solutions leverage Connectria's Data
Centers, Network Operation Centers, and Application Development Centers, as well
as certain services performed on the customer's site. Such outsourcing allows
customers to focus on running their business instead of designing, building or
running their IT departments.
Hosting: Connectria provides customized hosting programs for clients that
require world-class data center operations. Connectria provides management
services for all major hardware platforms including mainframes, servers,
databases, application servers, operating systems, IP-based networks, storage
area networks and wireless networks. Connectria provides full operational
support including system and network monitoring, problem resolution, version
management, backup and restore, change control, capacity planning, performance
tuning and system programming.
-9-
Consulting: Connectria provides a variety of IT consulting services
including, application development, system and network engineering, and various
operations support services, such as help desk support, data center management
and network management.
Customers
MDSI provides Hosting and IT Services to numerous third parties primarily
located in the United States. The customers for these services are typically
medium to large sized businesses spanning all types of industries, that
outsource their computer hosting needs in order to increase efficiency, obtain
increased technical expertise, and reduce cost.
During the year ended December 31, 2001, one customer accounted for
approximately 54% (2000 - 37%; 1999 - 0%) of Hosting and IT Services revenues.
Competition
The Company believes that the principal competitive factors in the Hosting
and IT Services market are the integrity of the Company's business model, and
the financial viability of the organization. The Company again believes that its
track record in this business provides it with a competitive advantage. The
Company will face competition from managed IT services providers such as
Rackspace and Jamcracker Inc.
Employees
As of December 31, 2001, the Company had 448 full-time employees and
contractors, including 272 in technical and engineering, 58 in sales, marketing
and technical support, 48 customer support and 70 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.
Financial Information About Segments and Geographic Markets
For certain information regarding the Company's reportable segments and
geographic markets, see Note 12 to the consolidated financial statements
included in Item 8 of this Annual Report on Form 10-K.
Risk Factors
The Company'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
The Company'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, regulatory and other
developments in the Company's vertical markets, changes in the demand for the
Company's products and services, the cancellation of contracts, the timing of
new product announcements and introductions, changes in pricing policies by the
Company and its competitors, delays in the introduction of products or
enhancements by the Company, expenses associated with the acquisition of
products or technology from third parties, the mix of sales of the Company's
products and services and third party products, seasonality of customer
purchases, personnel changes, political and economic uncertainty, the mix of
international and North American revenue, tax policies, foreign currency
exchange rates and general economic and political conditions.
The Company believes that the events of September 11, 2001 and 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. The current
excess of supply in the telecommunications industry has adversely affected the
financial condition of many telecommunications companies worldwide. In addition,
current economic conditions and developments in the energy markets have had an
adverse
-10-
affect on the financial condition of energy and utility companies in certain
geographical areas of North America. The Company believes that these and other
factors have adversely affected demand for products and services offered by the
Company, as certain prospective and existing customers have delayed or deferred
purchasing decisions or have sought to terminate existing contracts for the
Company's products and services. The Company believes that these factors will
continue to affect demand for the Company's products and services in 2002,
particularly demand for software and related services. Such factors may also
increase the amount of doubtful accounts or adversely affect the likelihood of
collection of such accounts.
The Company relies upon its ability to implement and integrate mobile
workforce management solutions on schedule and to the satisfaction of its
customers. The Company 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, delays caused by customers and development delays. Because the
Company currently recognizes revenue on a percentage of completion method,
delays in completion of certain contracts have caused delays in recognition of
revenue and, consequently, unanticipated fluctuations in quarterly results. In
light of the Company's recent reduction in its work force, there can be no
assurance that the Company 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 the Company's business, financial condition,
operating results and cash flows.
Because the Company is unable to forecast with certainty the receipt of
orders for its products and services and the Company'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 affected. As
a result, net income may be disproportionately affected because a relatively
small amount of the Company's expenses vary with its revenue.
Based upon all of the foregoing factors, the Company 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. The Company 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 the Company to reduce its prices or invest significantly greater
resources in research and development efforts, the Company's operating results
in the future may be adversely affected. There can be no assurance that the
Company will be able to grow in future periods or that it will be able to
sustain its level of total revenue or achieve revenue growth on a quarterly or
annual basis. In fiscal 2001, the Company's revenue declined compared to the
same period in 2000. These recent declines have resulted from an economic slow
down in the vertical industries served by the Company. It is likely that in some
future quarter the Company's operating results will be below the expectations of
public market analysts and investors. See "Forward Looking Statements". In such
event, the market price of the Company's Common Shares would likely be
materially adversely affected.
Dependence on Third Party Products and Services
Since 1996, the Company 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 the Company purchases from vendors
and sells to its customers. For the years ended December 31, 2001, 2000 and
1999, 4.5%, 4.6%, and 14.1% respectively, of the Company's revenue was
attributable to third party products and services. As 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. See "Forward Looking
Statements". In addition, because the Company'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.
-11-
Lengthy Sales Cycles for Advantex Products
The purchase of a mobile workforce management solution is often a
significant purchase decision for prospective customers and requires the Company
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, the Company'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, the
Company 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 the Company'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, due to
economic conditions and developments in the Company's core markets, the Company
has experienced an increase in the time necessary to complete the negotiation
and signing of contracts with some of its customers.
Dependence on Large Contracts and Concentration of Customers
The Company's revenue is dependent, in large part, on significant contracts
from a limited number of customers. During the years ended December 31, 2001,
2000, and 1999, approximately 35.8%, 25.8%, and 31.0% respectively, of the
Company's consolidated revenue was attributable to five or fewer customers.
During the years ended December 31, 2001, 2000 and 1999, one customer accounted
for 12.7%, 5.8%, and 10.9% respectively, of the Company's consolidated revenue.
The Company 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 the Company to continue to
secure and maintain a sufficient number of large contracts would have a material
adverse effect on the Company's business, financial condition, operating results
and cash flows. Moreover, the Company'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.
The size of a contract for a particular customer can vary substantially
depending on whether the Company is providing only its own products and services
or is also responsible for supplying third party products and services. The
Company recognizes revenue using the percentage of completion method, which the
Company calculates based on total costs incurred compared to total costs
estimated by the Company 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 the Company's overall results of
operations. The Company 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. The Company'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 the Company's cash flows and could have a
material adverse effect on the Company's business, financial condition,
operating results and cash flows. Any significant failure by the Company 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 the Company's business, financial condition,
operating results and cash flows.
Potential Fluctuations in Backlog
The Company'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 the Company's products and services and third party products and
services, the Company's backlog may fluctuate significantly from
period-to-period. In addition, under the terms of the Company's contracts, the
Company's customers may elect to
-12-
terminate their contracts with the Company at any time after notice to the
Company or to delay certain aspects of installation. Due to the relative size of
a typical contract compared to the Company's annual and quarterly revenue, a
termination or installation delay of one or more contracts could have a material
adverse effect on the Company'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 the Company's customers will renew their maintenance contracts
or that renewal terms will be as favorable to the Company as existing terms.
The Company believes that unfavorable economic conditions and reduced
capital spending by existing and prospective customers may adversely affect
demand for the Company's products and services in 2002. In particular, service
providers, utilities companies and telecommunications companies in the North
America were impacted during the latter half of 2000 and during 2001. The
September 11, 2001 terrorist attacks and the resulting slow down in the U.S.
economy is expected to continue to delay purchasing and implementation
decisions. If the economic conditions in the United States and Canada worsen or
if a wider or global economic slowdown occurs, the Company may experience
reduced revenues, increased costs, reduced margins and increased risks
associated with the collection of customer receivables, any of which may have a
material adverse impact on its business, operating results, cash flows and
financial condition.
Seasonal Variations in Demand
Certain of the vertical markets targeted by the Company 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, the Company's results of operations may also vary seasonally, and such
variation may be significant.
Limited Operating History; History of Losses; Increased Expenses
The Company 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, 2001, the Company had an accumulated deficit of
$23.8 million. There can be no assurance that the Company will realize revenue
growth or be profitable on a quarterly or annual basis. The Company plans to
continue to contribute significant resources to its operating expenses related
to sales and marketing operations, to fund significant levels of research and
development, to broaden its customer support capabilities and to maintain its
administrative resources. A relatively high percentage of the Company's expenses
is fixed in the short term and the Company'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, the Company's business,
financial condition, operating results and cash flows could be materially
adversely affected. In addition, due to the rapidly evolving nature of its
business and markets, the Company's limited operating history and its recent
acquisitions, the Company 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
The Company may, when and if the opportunity arises, acquire other
products, technologies or businesses involved in activities, or having product
lines, that are complementary to the Company'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 the Company 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 the Company
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 acquired research and
development costs, all of which could materially and adversely affect the
Company's financial condition, results of operations and cash flows.
-13-
New Product Development
The Company expects that a significant portion of its future revenue will
be derived from the sale of newly introduced products, including Advantex r7,
and from enhancement of existing products. See "Forward-Looking Statements". The
Company'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 the Company 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 the Company 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, the
Company's business, financial condition, operating results and cash flows could
be materially adversely affected. In light of the difficulties inherent in
software development, the Company expects that it will experience delays in the
completion and introduction of new software products. For example, the time
required for the initial implementation and field testing of Advantex r7 was
greater than expected, which resulted in delays in commencement of certain
installations of the Advantex r7 product.
e-Business Investments
As part of MDSI's e-Business strategy, during 2000 the Company made
strategic investments in two private companies that have created Internet
marketplaces in an aggregate investment of approximately $2.5 million and made
advances to a third company of $0.5 million. During 2001, the Company recorded a
valuation allowance for the full costs of these investments. 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.
System Failures Could Lead to Significant Costs
The Company must protect its hosting services network infrastructure, its
equipment and its customers' equipment (including data) against damage from
human error, security breaches, power loss and other facility failures, fire,
earthquake, flood, telecommunications failure, sabotage, terrorist attacks,
vandalism and similar events. Despite the precautions the Company has taken, a
natural disaster or other unanticipated problems at one or more of its data
centers could result in interruptions in its hosting services or significant
damage to customer equipment. In addition, failure of any of its
telecommunications providers to provide consistent data communications capacity
or of other network providers to provide interconnection agreements could result
in service interruptions. Any damage to, or failure of, the Company's systems or
service providers could result in reductions in, or terminations of, services
supplied to the Company's customers, which could have a material adverse effect
on its business. If the Company incurs significant financial commitments to its
customers in connection with its failure to meet service level commitment
obligations as a result of system downtime or the loss of customer data, its
liability insurance may not be adequate to cover those expenses, and its results
of operations and financial condition may be adversely affected.
Litigation
The Company is a party to a suit filed 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. 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 approximately $3.5 million paid to MDSI in
addition to interest and attorneys' fees. In its consolidated balance sheet as
of December 31, 2001 and 2000, the Company has classified approximately $3.7
million in amounts due from Citizens, which amounts are subject to the suit, as
a long term receivable as of December 31, 2001. The Company has not recorded any
amounts due from Citizens as doubtful accounts and has not recorded any amounts
claimed by Citizens as a contingent or other liability of the Company as the
Company believes that is will recover all amounts owing to it. There can be no
assurance that the Company will be successful in the prosecution of its claim or
in the defense of Citizens' counter claim.
-14-
Management of Growth and Reduction of Workforce
Since its inception, the Company has experienced periods of 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 the
Company has grown from 9 employees in Canada in February 1993 to 448 employees
located in Canada, the United States and other international locations at
December 31, 2001. In addition, the acquisition of Connectria has increased the
number of products the Company supports and markets, as well as the number of
vertical markets into which it sells products and services. The Company also
recently expanded the geographical areas in which it operates.
In March and April, 2001, the Company made several announcements regarding
its intention to reduce the size of its work force by approximately 25% in
anticipation of reduced demand for its products and services due to the general
economic slowdown. If the Company resumes its growth in future periods, such
growth may place strains on its management, administrative, operational and
financial resources, as well as increased demands on its internal systems,
procedures and controls. There can be no assurance that the Company will be able
to effectively manage its operations or future growth and expansion into new
markets. Failure to do so could have a material adverse effect on the Company's
business, financial condition, operating results and cash flows.
Dependence on Key Personnel
The Company'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. Competition for qualified personnel is
intense, and in light of the Company's recent layoffs there can be no assurance
that the Company 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 if demand for the Company's products and
services increase. The loss of the services of any of the Company's senior
management or other key employees or the inability to retain the necessary
technical, sales and managerial personnel could have a material adverse effect
upon the Company's business, financial condition, operating results and cash
flows.
Dependence on Selected Vertical Markets
Prior to 1996, substantially all of the Company'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 the Company's revenue. In those years, the Company 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 the Company's
revenue. In 1999, the telecommunications market accounted for 48% of the
Company's revenue. In 2000 the telecommunications and cable/broadband markets
accounted for greater than 45% of the Company's revenue. In 2001 the utility
market accounted for 55% of the Company's revenue. The Company anticipates that
a significant portion of its future revenue will be generated by sales of
products to the telecommunications, cable/broadband and utility markets and that
recent economic developments and trends have adversely affected and may continue
to adversely affect levels of capital spending by companies in a variety of
industries, including the vertical markets MDSI serves. The Company believes
that these and other factors may cause potential and existing customers to delay
or defer purchasing decisions or seek to terminate or delay payment under
existing contracts for the Company's products and services. Such factors may
also increase the amount of doubtful accounts or adversely affect the likelihood
of collection of such accounts. See "Forward-Looking Statements." A decline in
demand for the Company's products in these markets as a result of economic
conditions, competition, technological change or otherwise, would have a
material adverse effect on the Company's business, financial condition,
operating results and cash flows. There can be no assurance that the Company
will be able to continue to diversify its product offerings or revenue base by
entering into new vertical markets.
-15-
Dependence on Marketing Relationships
The Company's products are marketed by the Company's direct field sales
force as well as by third parties that act as lead generators or with whom the
Company acts together as a co-marketer or co-seller. The Company's existing
agreements with such partners are nonexclusive and may be terminated by either
party without cause. Such organizations are not within the control of the
Company, are not obligated to purchase products from the Company and may also
represent and sell competing products. There can be no assurance that the
Company's existing partners will continue to provide the level of services and
technical support necessary to provide a complete solution to the Company's
customers or that they will not emphasize their own or third-party products to
the detriment of the Company's products. The loss of these partners, the failure
of such parties to perform under agreements with the Company or the inability of
the Company to attract and retain new resellers with the technical, industry and
application experience required to market the Company's products successfully
could have a material adverse effect on the Company's business, financial
condition, operating results and cash flows. The Company 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 the Company'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
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.
The Company primarily competes in the utilities market with Utility
Partners, L.C. (which recently filed for bankruptcy protection under Chapter
11), M3i Systems, Inc. (which was recently purchased by Cognicase, Inc.),
Integraph Corporation and iMedeon, Inc (which has recently merged with ViryaNet
Ltd.). The Company has several competitors in the telecommunications and
cable/broadband markets. The Company's primary competitor for telecommunications
customers is Telcordia Technologies Inc. (formerly Bellcore), a company which
has historical relationships with certain of the large telecommunications
companies, and more recently ClickSoftware, Inc. (formerly IET) and ViryaNet
Ltd., which the Company mostly sees as competition for small accounts. In the
cable/broadband market, the Company's primary competitors are Telcordia,
C-Cor.net Corp. (formerly MobileForce Technologies, Inc.), PointServe
Inc.(through its merger with Brazen Software Inc.), CSG Systems International
Inc., and Viryanet Ltd., again only for small accounts.
The Company believes that the principal competitive factors in the
commercial 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, the Company's principal competitors are Astea
International Inc., Metrix Inc., and FieldCentrix Inc., in addition to several
larger enterprise software companies, such as Amdocs Limited who recently
acquired the assets of Clarify, Oracle Corporation, PeopleSoft Inc., and Siebel
Systems Inc. which, to the Company's
-16-
knowledge, offer less comprehensive solutions and which MDSI currently sees as
potential partners for expanding their penetration in this market.
Risk of Product Defects
Software products, including those offered by the Company, from
time-to-time contain undetected errors or failures. There can be no assurance
that, despite testing by the Company and by current and potential customers,
errors will not be found in the Company's products. Such errors could result in
loss of or delay in market acceptance of the Company's products, which could
have a material adverse effect on the Company's business, financial condition,
operating results and cash flows.
Proprietary Technology
The Company's success is dependent on its ability to protect its
intellectual property rights. The Company 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,
the Company 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 trademarks. MDSI has also filed United
States and international patent applications covering various aspects of its
technology. As part of its confidentiality procedures, the Company 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 the Company's efforts to protect its
intellectual property rights will be successful. Despite the Company's efforts
to protect its intellectual property rights, unauthorized third parties,
including competitors, may be able to copy or reverse engineer certain portions
of the Company's software products, and use such copies to create competitive
products. Policing the unauthorized use of the Company's products is difficult,
and, while the Company 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 the Company'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 the Company in such countries may increase the likelihood
that the Company's proprietary technology is infringed upon by unauthorized
third parties. In addition, because third parties may attempt to develop similar
technologies independently, the Company expects that software product developers
will be increasingly subject to infringement claims as the number of products
and competitors in the Company's industry segments grow and the functionality of
products in different industry segments overlaps. See "Forward-Looking
Statements". Although the Company 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 the Company 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 the Company to enter into royalty or licensing agreements. Such royalty
or licensing agreements, if required, may not be available on terms acceptable
to the Company or at all. A claim of product infringement against the Company
and failure or inability of the Company to license the infringed or similar
technology could have a material adverse effect on the Company's business,
financial condition, operating results and cash flows.
Dependence on Third Parties
Certain contracts require the Company to supply, coordinate and install
third party products and services. The Company 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, the Company 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 the Company'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 the
Company's business, financial condition, operating results and cash flows.
Additionally, under certain circumstances, the Company 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
-17-
such circumstances, the Company has a sub-contract to supply its products and
services to the customer through the prime contractor. In these circumstances,
the Company 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 the Company'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 the Company's financial
condition, results of operations and cash flows.
Exchange Rate Fluctuations
Because the Company's reporting and functional 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. The Company 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, the Company does enter into foreign currency
contracts under certain circumstances to reduce the Company'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 the Company's business, financial
condition, operating results and cash flows. In addition, to the extent the
Company has operations outside the United States, the Company is subject to the
impact of foreign currency fluctuations and exchange rate charges on the
Company's reporting in its financial statements of the results from such
operations outside the United States.
Risks Associated with International Operations
In the years ended December 31, 2001, 2000, and 1999 revenue derived from
sales outside of North America accounted for approximately 18.3%, 20.0%, and
22.1%, respectively, of the Company's total revenue. Because the Company's
revenue is dependent, in large part, on significant contracts with a limited
number of customers, the percentage of the Company's revenues that is derived
from sales outside of North America has fluctuated, and may continue to
fluctuate, from period-to-period. The Company believes that its ability to grow
and be profitable will require additional expansion of its sales in foreign
markets, and that revenue derived from international sales will account for a
significant percentage of the Company's revenue for the foreseeable future. This
expansion has required and will continue to require significant management
attention and financial resources. The inability of the Company to expand
international sales in a timely and cost-effective manner could have a material
adverse effect on the Company's business, financial condition, operating results
and cash flows. There are a number of risks inherent in the Company'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 the
Company'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 the Company
earned abroad may be subject to taxation by more than one jurisdiction, thereby
adversely affecting the Company's earnings. There can be no assurance that such
factors will not materially adversely affect the Company's future international
sales and, consequently, the Company's business, financial condition, operating
results and cash flows.
Product Liability
The license and support of products by the Company may entail the risk of
exposure to product liability claims. A product liability claim brought against
the Company or a third party that the Company is required to indemnify, whether
with or without merit, could have a material adverse effect on the Company's
business, financial condition, operating results and cash flows. The Company
carries insurance coverage for product liability claims which it believes to be
adequate for its operations.
-18-
Concentration of Stock Ownership; Anti-Takeover Effects; Investment Canada Act
The Company's directors, officers and their respective affiliates, in the
aggregate, beneficially own approximately 25.8% of the outstanding Common
Shares. As a result, these shareholders, if acting together, may be able to
exercise significant influence over the Company 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 the Company.
An investment in the Common Shares of the Company which results in a change
of control of the Company 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 the Company.
The Company 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.
In December 1998, the Company 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 the Company.
The rights are attached to the Company'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
the Company's Common Shares. After a triggering event, the rights will detach
from the Common Shares. If the Company is then merged into, or is acquired by,
another corporation, the Company may either (i) redeem the rights or (ii) permit
the rights holder to receive in the merger Common Shares of the Company 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 the Company more expensive for the acquirer if, in the opinion of
the Company's Board of Directors, the offer is inadequate. While the Company is
not aware of any circumstance that might result in the acquisition of a
sufficient number of shares of the Company's Common Shares to trigger
distribution of the Rights, existence of the Rights could discourage offers for
the Company'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, the
Company is required to file certain reports in such jurisdictions. As part of
such reports, the Company 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, the
Company's Consolidated Financial Statements included in this report will differ
materially from the financial statements filed by the Company 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 the Company'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 the Company 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
-19-
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' attention and resources, which would have a material
adverse effect on the Company'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 lease
expires on November 30, 2008 with two options to renew for five years each. The
Company has sub-let approximately 22,000 square feet of this space until
December 31, 2003. 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 has sub-let approximately 17,600 feet of this
space until November 30, 2004. The Company also maintains an office in St.
Louis, Missouri. The St. Louis office lease is for approximately 7,700 feet and
terminates on December 31, 2006. Properties under lease in Richmond and Itasca
are used for its Field Service segment, and the property in St. Louis is
utilized by the Company's Hosting and IT Service segment. The Company believes
that the current office space under lease less the current subleased portions is
adequate to meet its needs for the foreseeable future.
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 of
approximately $3.7 million. 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 of
approximately $3.5 million in addition to interest and attorneys' fees. At
Citizens request the parties held a mediation on April 2, 2001. Mediation was
not successful and both parties have begun discovery. MDSI disputes Citizens'
claims and intends to pursue the lawsuit vigorously.
From time to time, the Company is a party to litigation and claims incident
to the ordinary course of its business. While the results of litigation and
claims cannot be predicted with certainty, the Company believes that the final
outcome of such matters will not have a material adverse effect on the Company's
business, financial condition, operating results and cash flows.
Item 4: Submission of Matters to a Vote of Security Holders
Not applicable.
-20-
Part II
Item 5: Market for Registrant's Common Equity and Related Stockholder Matters
Price Range of Common Shares
The Company's Common Shares began trading on The Toronto Stock Exchange and
on the Montreal Exchange under the symbol "MMD" on December 20, 1995 and began
trading on the Nasdaq National Market System under the symbol "MDSIF" on
November 26, 1996. The Company changed its Nasdaq National Market System trading
symbol to "MDSI" in April 1999. In December 1999, the Company's listing on the
Montreal Exchange was automatically withdrawn as part of a restructuring plan of
the Canadian stock exchanges. Prior to December 20, 1995, there was no public
market for the Common Shares. The following table sets forth, for the periods
indicated, the high and low sale prices for the Common Shares as reported on The
Toronto Stock Exchange and the Nasdaq National Market System with their
equivalent U.S. dollar amounts where applicable.
The Toronto Stock Exchange Nasdaq National Market
----------------------------------------- ----------------------------
US$(1) CDN$ US$ US$
--------------------- ----------------- ------------- -------------
High Low High Low High Low
--------- ---------- -------- ------- ------------- -------------
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
2001
First Quarter...................... 11.13 5.07 17.00 7.75 11.25 4.88
Second Quarter..................... 6.32 4.05 9.75 6.25 6.20 4.00
Third Quarter...................... 5.02 2.26 7.75 3.50 5.29 2.23
Fourth Quarter..................... 5.03 2.66 7.95 4.20 5.08 2.71
- ----------
(1) US dollar amounts have been translated using the average noon buying rate
for Canadian dollars for the relevant quarter. See "Exchange Rates."
Shareholders
As of December 31, 2001 the Company had approximately 305 shareholders of
record (including nominees and brokers holding street accounts), 78 shareholders
of whom had addresses in the United States and who held 5,560,822 Common Shares,
or 64.1 % of the Company's outstanding Common Shares.
Dividends
The Company has never paid dividends on its Common Shares. 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.
Recent Sales of Unregistered Securities
The Company did not issue any unregistered securities during the fiscal
year ended December 31, 2001.
-21-
Exchange Controls
There are no government laws, decrees or regulations in Canada which
restrict the export or import of capital or which affect the remittance of
dividends, interest or other payments to non-resident holders of the Company's
Common Shares. Any remittances of dividends to United States residents and to
other non-residents are, however, subject to withholding tax. See "Taxation"
below.
Taxation
Canadian Federal Income Taxation
We consider that the following summary fairly describes in general the
principal Canadian federal income tax consequences applicable to a holder of our
common shares who at all times deals at arm's length with us, who holds all
common shares as capital property, who is resident in the United States, who is
not a resident of Canada and who does not use or hold, and is not deemed to use
or hold, his common shares of MDSI Mobile Data Solutions Inc. in connection with
carrying on a business in Canada (a "non-resident holder"). It is assumed that
the common shares will at all material times be listed on a stock exchange that
is prescribed for purposes of the Income Tax Act (Canada) (the "ITA") and
regulations thereunder. The Canadian federal income tax consequences applicable
to holders of the Company's common shares will not change if we are deemed
inactive by the Toronto Stock Exchange. Investors should however be aware that
the Canadian federal income tax consequences applicable to holders of the
Company's common shares will change if we cease to be listed on a prescribed
stock exchange like the Toronto Stock Exchange. Accordingly, holders and
prospective holders of our common shares should consult with their own tax
advisors with respect to the income tax consequences of them purchasing, owning
and disposing of the Company's common shares should the Company cease to be
listed on a prescribed stock exchange.
This summary is based upon the current provisions of the ITA, the
regulations thereunder, the Canada-United States Tax Convention as amended by
the Protocols thereto (the "Treaty") as at the date of the registration
statement and the currently publicly announced administrative and assessing
policies of the Canada Customs and Revenue Agency (the "CCRA"). This summary
does not take into account Canadian provincial income tax consequences. This
description is not exhaustive of all possible Canadian federal income tax
consequences and does not take into account or anticipate any changes in law,
whether by legislative, governmental or judicial action. This summary does,
however, take into account all specific proposals to amend the ITA and
regulations thereunder, publicly announced by the Government of Canada to the
date hereof.
This summary does not address potential tax effects relevant to the Company
or those tax considerations that depend upon circumstances specific to each
investor. Accordingly, holders and prospective holders of our common shares
should consult with their own tax advisors with respect to the income tax
consequences to them of purchasing, owning and disposing of the Company's common
shares.
Dividends
The ITA provides that dividends and other distributions deemed to be
dividends paid or deemed to be paid by a Canadian resident corporation (such as
MDSI Mobile Data Solutions Inc.) to a non-resident of Canada shall be subject to
a non-resident withholding tax equal to 25% of the gross amount of the dividend
or deemed dividend. Provisions in the ITA relating to dividend and deemed
dividend payments and gains realized by non-residents of Canada, who are
residents of the United States, are subject to the Treaty. The Treaty may reduce
the withholding tax rate on dividends as discussed below.
Article X, of the Treaty as amended by the US-Canada Protocol ratified on
December 16, 1997 provides a 5% withholding tax on gross dividends or deemed
dividends paid to a United States corporation which beneficially owns at least
10% of our voting stock paying the dividend. In cases where dividends or deemed
dividends are paid to a United States resident (other than a corporation) or a
United States corporation which beneficially owns less than 10% of our voting
stock, a withholding tax of 15% is imposed on the gross amount of the dividend
or deemed dividend paid. The Company will be required to withhold any such tax
from the dividend and remit the tax directly to CCRA for the account of the
investor.
-22-
The reduction in withholding tax from 25%, pursuant to the Treaty, will not
be available:
(a) if the shares in respect of which the dividends are paid formed part
of the business property or were otherwise effectively connected with
a permanent establishment or fixed base that the holder has or had in
Canada within the 12 months preceding the disposition, or
(b) the holder is a U.S. LLC which is not subject to tax in the U.S.
The Treaty generally exempts from Canadian income tax dividends paid to a
religious, scientific, literary, educational or charitable organization or to an
organization exclusively administering a pension, retirement or employee benefit
fund or plan, if the organization is resident in the U.S. and is exempt from
income tax under the laws of the U.S.
Capital Gains
A non-resident holder is not subject to tax under the ITA in respect of a
capital gain realized upon the disposition of our share unless the share
represents "taxable Canadian property" to the holder thereof. The Company's
Common shares will be considered taxable Canadian property to a non-resident
holder only if:
(a) the non-resident holder,
(b) persons with whom the non-resident holder did not deal at arm's
length, or
(c) the non-resident holder and persons with whom he did not deal at arm's
length,
owned not less than 25% of the Company's issued shares of any class or
series at any time during the five year period preceding the disposition. In the
case of a non-resident holder to whom the Company's shares represent taxable
Canadian property and who is resident in the United States, no Canadian taxes
will generally be payable on a capital gain realized on such shares by reason of
the Treaty unless:
(a) the value of such shares is derived principally from real property
(including resource property) situated in Canada,
(b) the holder was resident in Canada for 120 months during any period of
20 consecutive years preceding, and at any time during the 10 years
immediately preceding, the disposition and the shares were owned by
him when he ceased to be a resident of Canada,
(c) they formed part of the business property or were otherwise
effectively connected with a permanent establishment or fixed base
that the holder has or had in Canada within the 12 months preceding
the disposition, or
(d) the holder is a U.S. LLC which is not subject to tax in the U.S.
If subject to Canadian tax on such a disposition, the taxpayer's capital
gain (or capital loss) from a disposition is the amount by which the taxpayer's
proceeds of disposition exceed (or are exceeded by) the aggregate of the
taxpayer's adjusted cost base of the shares and reasonable expenses of
disposition. For Canadian income tax purposes, the "taxable capital gain" is
equal to one-half of the capital gain.
-23-
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, 2001, 2000 and 1999 and the consolidated
balance sheet data at December 31, 2001 and 2000 are derived from and are
qualified by reference to the Company's audited consolidated financial
statements. Segmented information regarding the Company's two business segments
for the fiscal years ended December 31, 2001, 2000 and 1999 is provided in Note
12 to such 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,
---------------------------------------------------------------------
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
(in thousands, except per share data)
Statement of Operations Data:
Revenue $ 58,120 $ 61,542 $ 58,571 $ 48,363 $ 38,523
Gross profit 26,870 33,487 31,253 24,423 20,290
Operating income (loss) (11,687) 857 7,923 6,079 (1,086)
Net income (loss) from continuing (14,107) (159) 5,019 4,309 (2,517)
operations for the year
(1)(2)(3)(4)
Diluted earnings (loss) per common
share $ (1.64) $ (0.07) $ 0.13 $ 0.5 $ (1.30)
Weighted average shares outstanding 8,623 8,527 9,101 7,563 6,754
As at December 31,
---------------------------------------------------------------------
Balance Sheet Data: 2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
Cash and cash equivalents $ 13,692 $ 13,238 $ 14,613 $ 3,606 $ 93
Working capital 12,734 25,565 24,084 9,073 6,563
Total assets 44,577 60,781 50,443 38,522 28,529
Non-current liabilities 1,623 4,380 2,838 2,927 4,224
Stockholders' equity 24,475 38,177 35,537 20,596 16,688
- -------------
(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 year ended December 31, 1997 includes non-recurring
charges of $7,200,146 as a result of acquired research and development
costs relating to the acquisitions of Alliance Systems, Incorporated in
April 1997.
(3) Operating income for the year ended December 31, 2000 includes a one time
charge of $1,691,028 to account for one time cost of merger with
Connectria.
(4) Net loss for the year ended December 31, 2001 includes non-recurring
charges of $6,105,927 with respect to restructuring of certain operations,
$2,749,992 for the impairment in valuation of investments in three private
companies, $1,558,578 for the impairment in valuation of intangible assets
acquired on acquisition of Alliance Systems Incorporated, $165,000 for the
impairment in valuation of a commercial web site domain name, and
$3,189,263 for bad debts with respect to several doubtful accounts.
-24-
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 section
entitled "Restructuring", the fifth and sixth paragraphs under "Field Service
Business", the sections entitled "Recent Accounting Pronouncements" and
"Critical Accounting Policies and Significant Estimates", the subsections
entitled "Revenue", "Sales and Marketing", "General and Administrative",
"Provision for Doubtful Accounts" and "Income Taxes" in "Year ended December 31,
2001 Compared to the Year ended December 31, 2000", the subsection entitled
"Revenue" in "Year ended December 31, 2000 Compared to the Year ended December
31, 1999", the third, fourth, eighth and ninth paragraphs under "Liquidity and
Capital Resources" and the section entitled "Derivative Financial Instruments"
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," 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, "Quantitative and Qualitative Disclosure About 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 and,
cable/broadband 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)
hosting and information technology services such as the provision of consulting
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.
Restructuring
The Company believes that economic conditions 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. The current excess supply of capacity in the telecommunications
industry has adversely affected the financial condition of many
telecommunications companies worldwide. In addition, economic conditions and
developments in the energy markets have had an adverse effect on the financial
condition of energy and utility companies in certain geographic areas of North
America. The Company believes that these and other factors have adversely
affected demand for products and services offered by the Company, as certain
prospective and existing customers have delayed or deferred purchasing decisions
or have sought to terminate existing contracts for the Company's products and
services. The Company believes that these factors will continue to affect demand
for the Company's products and services in 2002, particularly software and
services. Such factors may also increase the amount of doubtful accounts or
adversely affect the likelihood of collection of such accounts.
In order to address the uncertainties caused by these economic trends, MDSI
announced in March 2001 its intention to reduce its operating expenses through
workforce reductions and other measures. These measures have been gradually
implemented with incremental reductions in costs each quarter, and are expected
to result in an estimated $2.9 million in cost reductions per quarter by the end
of 2002. The Company had previously announced that
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it expected to fully realize the savings from its restructuring by the end of
the first quarter of 2002; however, due to delays in the disposition of the
Company's public safety operations, the Company expects that it will now reach
its cost reduction goal by the end of 2002. A majority of the savings are
expected to be realized by reduced salary and payroll costs, and the remaining
savings are expected to be realized from the subleasing of excess space, and a
reduction in discretionary spending. To date the Company has realized quarterly
savings of approximately $2.5 million, which represents the reduction in the
Company's quarterly expenses from the first quarter of 2001 to the first quarter
of 2002. The Company expects that the remaining $0.4 million will be realized
through the wind down or sale of the Company's public safety group, and through
regular attrition in the rest of the organization. There can be no assurance
that the reduction in work force and related restructuring efforts will result
in the anticipated cost reductions or that the work force reductions and other
measures will not have a material adverse affect on the Company's business
operations.
In connection with this restructuring, on March 30, 2001, MDSI terminated
34 employee and contractor positions in Canada and the United States. On May 11,
2001, the Company continued the restructuring by announcing the elimination of
an additional 115 positions, which in combination with the workforce reductions
of March 30, 2001 amounted to approximately 25% of MDSI's staff as of March 30,
2001. The Company recorded a one-time charge of $1.2 million in the first
quarter of 2001 relating to the workforce reductions, and leasing of excess
office space. The Company also recorded an additional charge of approximately
$4.9 million in the second quarter of 2001 relating to elimination of 115
positions, leasing of excess office space, and fixed asset write-downs announced
on May 11, 2001. A breakdown of the nature of the charges and the costs incurred
to date is as follows:
Total Restructuring
Charge
-------------------
Workforce reduction $3,375,000
Provision for excess office space 1,861,000
Non cash writedown of capital assets 563,780
Other 306,147
-------------------
Total restructuring charges 6,105,927
Cumulative draw-downs (2,972,267)
-------------------
Accrued restructuring charges as December 31, 2001 $3,133,660
===================
For the year ended December 31, 2001, the Company recorded a total of $6.1
million in restructuring charges, taken in connection with a corporate
reorganization designed to reduce the Company's operating costs and increase
efficiency by rationalizing staffing levels and modifying staff reporting
relationships.
Workforce reduction charges of $3.4 million were taken relating to
severance and continued benefits for the elimination of 149 positions across all
operating departments and segments of the organization. As of December 31, 2001,
the provision balance has been drawn down by cash payments of approximately $2.0
million. The remaining provision of $1.4 million is for terminated employees
receiving payments over time, or existing employees notified of their
termination to occur at a future date, and is expected to be utilized by the
second half of 2002.
The provision for excess office space of $1.9 million for the year ended
December 31, 2001, relates to surplus office space under long term lease by the
Company at two locations, one of which the Company has entered into fixed cost
lease arrangements expiring in 2004. The Company has incurred approximately $0.4
million of cash costs relating to this provision leaving an accrual of $1.5
million remaining as at December 31, 2001. The Company expects that the charge
will be fully drawn down not later than the time the lease expires in the fourth
quarter of 2004.
Due to the elimination of 149 positions, certain capital assets belonging
to the Company have been declared surplus and a charge of $0.6 million has been
recorded to reflect the difference between the previous carrying value and the
estimated fair market value, net of disposal costs. As at December 31, 2001, the
full amount of the charge has been applied to the assets to value them at their
estimated net realizable value. These assets are expected to be disposed of by
the end of 2002.
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The Company has recorded a $0.3 million charge for the year ended December
31, 2001 for other items including, costs of outplacement services, and legal
and consulting fees related to the restructuring. As at December 31, 2001, the
Company has incurred cash costs of approximately $0.1 million in connection with
these charges, leaving a provision of $0.2 million. The Company expects to fully
draw down this provision by the end of the second half of 2002.
Field Service Business
The implementation of a complete mobile data solution requires a wireless
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.
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 one to three years and are invoiced either
annually or monthly. Revenue for these services is recognized ratably over the
term of the contract.
The Company is periodically required 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 devices. The
Company recognizes revenue on the supply of third party hardware upon transfer
of title to the customer. The Company recognizes revenue on the supply of 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 periodically supply 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 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.
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Hosting and Information Technology (IT) Services (formerly e-Business)
During the year ended December 31, 2001 the Company realigned its internal
structure. As a result of this realignment, the Company now considers its
Advantex ASP product line part of its Field Service segment, and has renamed the
segment previously know as "e-Business", to "Hosting and IT Services" to better
reflect the nature of the business activity in this segment.
The Company's Hosting and IT Services operations 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. The Company's Hosting and IT Services operations can also
outsource a customer's networking needs and provide management of its office
LAN/WAN and Internet connections. The Company's Hosting and IT Services
facilities and staff provide the physical environment and engineering support
necessary to keep these technologies operating effectively. The Company also
provides a variety of IT consulting services, including application development,
system and network engineering, and various operations support services, such as
help desk support, data center management and network management.
As part of its Hosting and IT Services operations, the Company launched its
eService Manager TM product in the fourth quarter of 2000. The eService Manager
application enables consumers to book appointments with service providers online
and allows the service provider's call-takers to schedule appointments in
response to orders by consumers via the telephone. To date the Company has not
generated material revenues from fees associated with its eService Manager
scheduling solution and the Company has announced that in the interest of
controlling costs, it would not expend additional resources to develop further
functionality for this product. There can be no assurance that the product will
generate material revenues in future periods.
Effects of Acquisitions
On June 1, 2000, the Company acquired all of the issued and outstanding
shares of Connectria, an application service provider, and provider of
information technology services. 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 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 combined results of operations, financial position and cash flows of
Connectria.
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 historical
financial information presented in this report is not indicative of the results
that would have been obtained had the acquisition 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 were comprised of common shares of DDS, representing an 11% interest in
DDS, and a promissory note in the principal amount of $331,455 ($500,000 CDN),
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. The note, with interest, was
paid in the first quarter of 2001.
Under the terms of the agreement between the Company and DDS, the Company
retained certain assets and liabilities of the discontinued operations. The
Company liquidated all remaining assets and liabilities relating to the
Transportation Business Unit as of the second quarter of 2001.
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As a result of the Company's disposal 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 periods.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations." SFAS 141 requires the purchase method of accounting for business
combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. The Company does not believe that the adoption of
SFAS 141 will have a significant impact on its financial statements.
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which is effective
January 1, 2002. SFAS 142 requires, among other things, the discontinuance of
goodwill amortization. In addition, the standard includes provisions for the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the identification of reporting units for purposes of assessing potential future
impairments of goodwill. SFAS 142 also requires the Company to complete a
transitional goodwill impairment test six months from the date of adoption. The
Company does not believe that the adoption of SFAS 142 will have a significant
impact on its financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This statement supersedes FASB Statement No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." This Statement also amends ARB No. 7, "Consolidated Financial
Statements," to eliminate the exception to consolidation for a subsidiary for
which control is likely to be temporary. This Statement requires that one
accounting model be used for long-lived assets to be disposed of by sale,
whether previously held and used or newly acquired. This Statement also broadens
the presentation of discontinued operations to include more disposal
transactions. The provisions of this Statement are required to be adopted by the
Company at the beginning of fiscal 2002. The Company has not determined the
impact, if any, the adoption of this statement will have on its financial
position or results of operations.
Critical Accounting Policies and Significant Estimates
The significant accounting policies are outlined within Note 1 to the
Financial Statements. Some of those accounting policies require the Company to
make estimates and assumptions that affect the amounts reported by the Company.
The following items require the most significant judgment and involve complex
estimation:
Restructuring Charges
As part of the restructuring charge, $3.4 million was recorded for
workforce reduction. In calculating the total charge, the Company was required
to estimate the timing and amounts to be paid to its terminated employees. As
some employees have been informed of their planned termination, but the final
date is still uncertain, should the Company's assumptions be incorrect, the
actual cost may be materially different from the Company's estimates.
In calculating the cost to dispose of excess facilities the Company was
required to estimate for each location the amount to be paid in lease
termination payments, the future lease and operating costs to be paid until the
lease is terminated, and the amount, if any, of sublease revenues. This required
estimating the timing and costs of each lease to be terminated, the amount of
operating costs, and the timing and rate at which the Company might be able to
sublease the site. From the estimates for these costs the Company performed an
assessment of the affected facilities and considered the current market
conditions for each site. A charge of $1.9 million was recorded for the
restructuring of excess facilities as part of the restructuring plan. The
Company's assumptions on either the lease termination
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payments, operating costs until terminated, or the offsetting sublease revenues
may be proven incorrect and actual cost may be materially different from the
estimates.
Accounts Receivable
The Company periodically reviews the collectability of its accounts
receivable balances. Where significant doubt exists with regards to the
collection of a certain receivable balance, an allowance and charge to the
income statement is recorded. At December 31, 2001, the allowance for doubtful
accounts was $3.9 million and a provision for doubtful accounts of $3.2 million
was recorded in the income statement for the year. The Company intends to
continue vigorously pursuing these accounts. If future events indicate
additional collection issues, the Company may be required to record an
additional allowance for doubtful accounts.
Revenue Recognition - Percentage Completion
The Company uses estimates based on inputs to determine the percentage
completion of its contracts and thus its revenue recognition. These estimates
and contracts are reviewed regularly and are adjusted to meet the Company's best
estimate at the time. The Company's assumptions used to form these estimates may
be proven to be erroneous and materially different outcomes may result.
Income Taxes
The Company has incurred losses and other costs that can be applied against
future taxable earnings to reduce the tax liability on those earnings. As the
Company is uncertain of realizing the future benefit of those losses and
expenditures, the Company has recorded a valuation allowance against most
non-capital loss carry forwards, and other deferred tax assets arising from
differences in tax and accounting bases. Actual results may be materially
different from the current estimate.
Intangible Assets
As part of the Company's restructuring plan, the Company determined that an
impairment in the value of goodwill that resulted from the acquisition of
Alliance Systems, Inc. had occurred. A valuation allowance was recorded of $1.6
million, equal to the remaining net book value. The Company also discontinued
development of its e-Service Manager product line during the year. A valuation
allowance of $0.2 million was recorded to remove the remaining net book value.
MDSI estimated the future cash flows of the above operations in light of the
continued weak industry conditions, and lower market growth expectations.
Investments and Advances
MDSI have invested in or advanced funds to private companies, which the
Company reviews periodically to determine if there has been a non-temporary
decline in the market value of those investments and advances below the carrying
value. The assessment of fair market value is made based on the market value
trends of similar public companies, the current business performance of the
companies in which MDSI has invested, and if available, the estimated future
market potential of the companies. MDSI recorded an impairment of the
investments in private companies and advances of $2.7 million during 2001. This
resulted in a full allowance against the recorded costs of the investments and
advances.
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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, (in thousands of dollars)
--------------------------------------------------
2001 2000 1999
------------- ------------- ------------
Revenue:
Software and services..................... $31,731 $41,338 $39,912
Hosting & information technology services 13,565 8,463 4,845
Maintenance and support................... 10,187 8,888 5,566
Third party products and services ........ 2,637 2,853 8,248
------------- ------------- ------------
58,120 61,542 58,571
Direct costs................................. 31,250 28,055 27,318
------------- ------------- ------------
Gross profit................................. 26,870 33,487 31,253
------------- ------------- ------------
Operating expenses:
Research and development.................. 8,084 9,049 6,902
Sales and marketing....................... 12,430 12,914 9,370
General and administrative................ 6,924 7,699 6,779
Restructuring charge...................... 6,106 -- --
Amortization and provision for valuation
of intangible assets................... 1,824 292 279
Costs of merger........................... -- 1,691 --
Provision for doubtful accounts........... 3,189 985 --
------------- ------------- ------------
38,557 32,630 23,330
Operating (loss) income...................... (11,687) 857 7,923
Valuation allowance on investments........... (2,750) -- --
Other expense ............................... (191) (525) (760)
------------- ------------- ------------
(Loss) income before provision for income
taxes...................................... (14,628) 332 7,163
Recovery of (provision for) income taxes..... 521 (492) (2,144)
------------- ------------- ------------
(Loss) income for continuing operations (14,107) (159) 5,019
------------- ------------- ------------
(Loss) from discontinued operations -- (395) (3,873)
------------- ------------- ------------
Net (loss) income for the year............... $(14,107) $ (554) $ 1,146
============= ============= ============
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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,
------------------------------------------------
2001 2000 1999
------------- ------------- ------------
Revenue:
Software and services......................... 54.6% 67.2% 68.1%
Hosting & information technology services . 23.4 13.8 8.3
Third party products and services.......... 4.5 4.6 14.1
Maintenance and support.................... 17.5 14.4 9.5
------------- ------------- ------------
100.0 00.0 100.0
Direct costs.................................. 53.8 45.6 46.6
------------- ------------- ------------
Gross profit.................................. 46.2 54.4 53.4
------------- ------------- ------------
Operating expenses:
Research and development................... 13.9 14.7 11.8
Sales and marketing........................ 21.4 21.0 16.0
General and administrative................. 11.9 12.5 11.5
Restructuring charge....................... 10.5 -- --
Amortization and provision for valuation
of intangible assets..................... 3.1 0.5 0.5
Costs of merger............................ -- 2.7 --
Provision for doubtful accounts............ 5.5 1.6 --
------------- ------------- ------------
66.3 53.0 39.8
------------- ------------- ------------
Operating (loss) income....................... (20.1) 1.4 13.6
Valuation allowance on investments............ (4.7) -- --
Other expense................................. (0.3) (0.9) (1.3)
------------- ------------- ------------
(Loss) income before provision for income
taxes......................................... (25.1) 0.5 12.3
Recovery of (provision for) income taxes...... 0.9 (0.8) (3.7)
------------- ------------- ------------
(Loss) income from continuing operations...... (24.2) (0.3) 8.6
(Loss) from discontinued operations........... -- (0.6) (6.6)
------------- ------------- ------------
Net (loss) income for the year................ (24.2)% (0.9)% 2.0%
============= ============= ============
Year ended December 31, 2001 Compared to the Year ended December 31, 2000
Revenue. Revenue decreased by $3.4 million (5.6%) for the year ended
December 31, 2001, compared to the year ended December 31, 2000. The decrease
was primarily due to the decrease in the revenue earned from software and
services, which was partially offset by an increase in the revenue earned from
hosting and information technology (IT) services and maintenance and support.
Software and services revenue decreased by $9.6 million (23.2%) for the
year ended December 31, 2001, compared to the year ended December 31, 2000. The
Company believes its software and service revenues were adversely impacted by
customers postponing purchasing decisions. Customer delays in making purchasing
decisions and reductions in expenditures resulted in fewer customer contracts
and lower than anticipated revenues from the implementation of those customer
contracts in the year ended December 31, 2001 as compared to the year ended
December 31, 2000. The Company anticipates that continued economic uncertainty
in the telecommunications and utility markets will continue to have an adverse
impact on software and services revenues in future periods. See "Forward-Looking
Statements".
Hosting and IT services (formerly e-Business) revenues primarily consist of
sales by the Company's subsidiary, Connectria. Revenue for the year ended
December 31, 2001 was $13.6 million as compared to $8.5 million for the year
ended December 31, 2000, an increase of 60%. Connectria's revenues in both
periods consisted primarily of revenues from consulting and hosting services.
Hosting and IT service revenues are dependent on a
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small number of significant contracts. One contract in particular accounted for
approximately 54% of total hosting and IT services revenues for the year ended
December 31, 2001 as compared to approximately 37.8% of total hosting and IT
services revenues for the year ended December 31, 2000. The Company anticipates
that continued economic uncertainty in the hosting and IT services markets will
have an adverse impact on hosting and IT services revenues in future periods.
See "Forward-Looking Statements".
Maintenance and support revenue was $10.2 million for the year ended
December 31, 2001, compared to $8.9 million for the year ended December 31,
2000, an increase of 14.6%. The Company believes maintenance and support revenue
has increased and will continue to increase as the Company's installed customer
base increases.
Third party products and services revenue decreased by $0.2 million (7.6%)
for the year ended December 31, 2001, compared to the year ended December 31,
2000. Third party products and services revenue is primarily earned from certain
customers in the utilities 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. The Company expects that 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.
Direct Costs. Direct costs were 53.8% of revenue for the year ended
December 31, 2001, compared to 45.6% for the year ended December 31, 2000.
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 equipment purchased for sale to third parties. Labor costs include
direct payroll, benefits and overhead charges. The increase in proportion of
direct costs to revenue relates to the Company incurring a certain level of
fixed costs. As a result of such fixed costs, the decrease in software and
services revenues during 2001 was not completely offset by the decrease in
software and services direct costs and the percentage of direct costs increased.
In addition, a greater portion of the Company's revenue was derived from lower
margin Hosting and IT Services revenue during the year ended December 31, 2001,
which results in higher direct costs as a percentage of revenue compared to the
year ended December 31, 2000.
Gross Margins. Gross margins were 46.2% of revenue for the year ended
December 31, 2001, compared to 54.4% for the year ended December 31, 2000. The
change in profit margin relates to the change in the mix in revenues. The
proportion of revenue derived from lower margin Hosting and IT services
increased in 2001 compared to 2000. Gross margins were also impacted by the
Company's fixed costs. As a result, the decrease in software and services
revenues during 2001 was not completely offset by the decrease in software and
service direct costs, and gross margins decreased.
Research and Development. Research and development expenses were $8.1
million, or 13.9% of revenue, for the year ended December 31, 2001, compared to
$9.0 million, or 14.7% of revenue, for the year ended December 31, 2000. The
10.7% decrease in research and development expenses in 2001 was a result of the
substantial completion of the Company's new version of its Advantex software
during the year ended December 31, 2000, and the elimination of research and
development expenditures related to its e-Service manager product which was
discontinued in 2001. As a result, the Company did not expend as many resources
on research and development in 2001 as in 2000. The Company intends to continue
committing a significant portion of its product revenues to enhance existing
products and develop new products. See "Forward-Looking Statements".
Sales and Marketing. Sales and marketing expenses were $12.4 million or
21.4% of revenue for the year ended December 31, 2001 and $12.9 million or 21.0%
of revenue for the year ended December 31, 2000. This represents a decrease of
$0.5 million (3.8%). The decrease was due to the Company's restructuring and
cost control effort which resulted in a decrease in the discretionary spending
surrounding sales and marketing activities. The Company anticipates that the
dollar amounts of its sales and marketing expenses will increase as a result of
the Company's commitment to its international marketing effort. See
"Forward-Looking Statements".
General and Administrative. General and administrative expenses were $6.9
million, or 11.9% of revenue, for the year ended December 31, 2001 and $7.7
million, or 12.5% of revenue, for the year ended December 31, 2000. This
decrease was due primarily to the Company's restructuring and discretionary
spending controls instituted during the year ended December 31, 2001. The
Company expects that its general and administrative expenses will remain stable
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in the future as the Company continues to seek efficiencies while continuing to
support the Company's operations. See "Forward-Looking Statements".
Amortization and Provision for Valuation of Intangible Assets. Amortization
and impairment charges for intangible assets for the year ended December 31,
2001 increased $1.5 million as compared to the year ended December 31, 2000. The
increase in amortization is a result of a determination by the Company that an
impairment in the value of the goodwill acquired on the acquisition of Alliance
Systems Inc. had occurred during the year ended December 31, 2001. The Company
determined an impairment had occurred due to poor current and forecasted
performance in the acquired company's business. As a result of this impairment,
the Company wrote off the remaining goodwill of $1.6 million relating to the
acquisition of Alliance Systems Inc. during the year ended December 31, 2001.
The Company also determined that there was an impairment in value regarding a
web site domain name (eservice.com) during the year ended December 31, 2001. As
a result of the Company not pursuing it's e-Service suite of products, the
domain name's value was written down to zero which resulted in a $165,000
valuation allowance being recorded for the year ended December 31, 2001.
Costs of Merger. During the year ended December 31, 2000, the Company
completed its acquisition of Connectria. This transaction was 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, 2001, a provision for $3.2 million with
respect to doubtful accounts. The Company intends to vigorously pursue
collection of these accounts; however due to uncertainty with regard to these
customers' financial conditions, the Company determined that it would be prudent
to record an allowance to address the uncertainty regarding collection of
amounts due.
Operating (loss) Income. Operating loss for the year ended December 31,
2001 was ($11.7) million, compared to operating income of $0.9 million for the
year ended December 31, 2000. The decrease in operating income was mainly due to
restructuring charges of $6.1 million, provision for doubtful accounts of $3.2
million and a write off of intangible assets of $1.5 million taken in fiscal
2001. The operating loss for fiscal 2001 was made up of a loss from the
Company's field service segment of ($11.4) and a loss from the Hosting and IT
Services segment of ($0.3) million. During the year ended December 31, 2000,
operating income of $0.9 million was made up of $2.8 million in operating income
from the field service segment, offset by a ($1.9) million operating loss in the
Hosting and IT Services segment. The decrease in operating income in the field
service segment of ($14.6) million was primarily due to the one time charges
referred to previously, and a decrease of revenue in the segment of $7.3 million
in 2001 as compared to 2000. The increase in operating income in the Hosting and
IT Services segment of $1.6 million was primarily due to merger expenses of $1.7
million incurred in 2000 with respect to the Company's merger with Connectria
Corporation. These costs were not repeated in 2001, resulting in an increase in
operating income.
Valuation Allowance on Investments. As part of its former e-Business
strategy, the Company invested in or advanced funds to three private companies
in 2000. As a result of significant uncertainty over the future realization of
any return on investment or capital, the Company has recorded a valuation
allowance equal to the full cost of the investments during the year ended
December 31, 2001.
Other Income (expense). Other income (expense) was $(0.2) million for the
year ended December 31, 2001, compared to $(0.5) million for the year ended
December 31, 2000. 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 recovery of income taxes on losses
for the year ended December 31, 2001 at the rate of 4.1%, after adjusting for
the amortization and impairment 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. Since the Company has incurred a loss during the
period and it is not more likely than not that the Company will be able to
utilize the benefits of these losses, the Company did not record a full recovery
of income tax expense during the year ended December 31, 2001.
-34-
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, hosting and
information technology services and maintenance which was partially offset by a
decrease in the revenue earned from third party products and services.
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. The
Company believes this increase was due to the Company experiencing a year
2000-related slowdown in 1999 that was not repeated in 2000. The resulting
revenue growth in the fourth quarter of 2000 substantially accounts for the year
over year increase in revenues.
Hosting and IT services revenues primarily consist of sales by the
Company's subsidiary, Connectria. Hosting and IT services 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. The increase in
period-to-period revenues is a result of the increased business growth and
expansion within the Hosting and IT services market segment, and is not
attributable to one particular contract.
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.
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 utilities market. 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. The Company
expects that 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.
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 equipment purchased for sale to third parties. 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 11.8% 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, as
well as development of the Company's eService manager offering
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 Hosting and IT services
initiatives.
-35-
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.
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 intends to vigorously pursue
collection of this account, however, due to uncertainty with regards to
collection the Company determined that it would be prudent to record an
allowance to address this uncertainty.
Operating (loss) Income. Operating income for the year ended December 31,
2000 was $0.9 million, compared to operating income of $7.9 million for the year
ended December 31, 1999. The decrease in operating income was mainly due to an
increase in research and development and sales and marketing expenses, as
described above, a provision for doubtful accounts of $1.0 million and merger
related expenses of $1.7 million being incurred in the year ended December 31,
2000. The operating income for fiscal 2000 was made up of $2.8 million from the
Company's field service segment and a loss in the Hosting and IT Services
segment of ($1.9) million. During the year ended December 31, 1999 operating
income of $7.9 million was made up of $7.8 million in operating income from the
field service segment, and $0.1 million operating income in the Hosting and IT
Services segment. The decrease in operating income in the field service segment
of ($5.0) million was primarily due to the increase in research and development
and sales and marketing costs in fiscal 2000 compared to prior year, and an
allowance for doubtful accounts of $1.0 million recorded in 2000. The decrease
in operating income in the Hosting and IT Services segment of $2.0 million was
primarily due to merger expenses of $1.7 million incurred in 2000 with respect
to the Company's merger with Connectria Corporation. No costs of this nature
were recorded in 1999.
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.
-36-
Quarterly Results of Operations
The following table sets forth certain unaudited statement of operations
data for each of the eight quarters beginning January 1, 2000 and ending
December 31, 2001 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 restructuring, 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
2001 2000
------------------------------------ ------------------------------------
Dec. 31 Sep. 30 June 30 Mar. 31 Dec. 31 Sep. 30 June 30 Mar. 31
------- ------- ------- ------- ------- ------- ------- -------
(Unaudited, in thousands of dollars)
Statement of Operations Data:
Revenue:
Software and services $7,332 $7,282 $7,714 $9,403 $11,729 $ 10,430 $ 9,509 $ 9,669
Hosting & information technology services 2,794 2,782 3,485 4,504 3,574 1,849 1,551 1,489
Third party products and services 815 295 380 1,147 709 964 653 529
Maintenance and support 2,649 2,647 2,434 2,457 2,595 2,296 1,973 2,024
---------------------------------------------------------------------------
13,590 13,006 14,013 17,511 18,607 15,539 13,686 13,711
Direct costs 7,267 6,716 7,470 9,797 8,577 7,632 6,297 5,551
---------------------------------------------------------------------------
Gross profit 6,323 6,290 6,543 7,714 10,030 7,907 7,389 8,160
---------------------------------------------------------------------------
Operating expenses:
Research and development 1,492 1,899 2,149 2,544 2,481 2,254 2,275 2,039
Sales and marketing 2,590 2,654 3,721 3,465 3,664 3,059 3,365 2,825
General and administrative 1,754 1,709 1,758 1,703 1,708 1,806 2,079 2,114
Amortization and provision for valuation of
intangible assets 165 11 11 1,637 89 68 68 70
Cost of Merger/ Restructuring - - 4,906 1,200 (385) - 2,076 -
Provision for doubtful accounts 1,987 - - 1,202 985 - - -
---------------------------------------------------------------------------
7,988 6,273 12,545 11,751 8,542 7,187 9,863 7,048
---------------------------------------------------------------------------
Operating (loss) income (1,669) 17 (6,002) (4,037) 1,488 720 (2,474) 1,112
Valuation allowance on investments - - - (2,750) - - - -
---------------------------------------------------------------------------
Other income (expense) 109 71 (6,311) (60) (214) 89 (177) (212)
---------------------------------------------------------------------------
(Loss) income before income tax provision (1,556) 87 (6,313) (6,847) 1,274 809 (2,651) 900
(Provision for) recovery of income taxes (149) (45) 23 693 (110) (263) 172 (291)
---------------------------------------------------------------------------
(Loss) income from continuing operations (1,705) 42 (6,290) (6,154) 1,164 546 (2,479) 609
Loss from discontinued operations - - - - (395) - - -
---------------------------------------------------------------------------
Net (loss) income for the period $(1,705) $42 $(6,290) $(6,154) $ 769 $ 546 $(2,479) $ 609
===========================================================================
-37-
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
------------------
2001 2000
---------------------------------------- ---------------------------------------
Dec. 31 Sep. 30 June 30 Mar. 31 Dec. 31 Sep. 30 June 30 Mar. 31
------- ------- ------- ------- ------- ------- ------- -------
Revenue:
Software and services 54.0% 56.0% 55.0% 53.7% 63.0% 67.1% 69.5% 70.5%
Hosting & information technology services 20.5 21.4 24.9 25.7 19.2 11.9 11.3 10.8
Third party products and services 6.0 2.3 2.7 6.6 3.8 6.2 4.8 3.9
Maintenance and support 19.5 20.3 17.4 14.0 14.0 14.8 14.4 14.8
-----------------------------------------------------------------------------------
100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Direct costs 53.5 51.7 53.3 55.9 46.1 49.1 46.0 40.5
-----------------------------------------------------------------------------------
Gross profit 46.5 48.3 46.7 44.1 53.9 50.9 54.0 59.5
-----------------------------------------------------------------------------------
Operating expenses:
Research and development 11.0 14.6 15.3 14.5 13.3 14.5 16.6 14.9
Sales and marketing 19.1 20.4 26.6 19.8 19.7 19.7 24.6 20.6
General and administrative 12.9 13.1 12.5 9.7 9.2 11.6 15.2 15.4
Amortization and provision for valuation of
intangible assets 1.2 0.1 0.1 9.4 0.5 0.4 0.5 0.5
Cost of merger/restructuring - - 35.0 6.9 (2.1) - 15.2 -
Allowance for doubtful accounts 14.6 - - 6.9 5.3 - - -
-----------------------------------------------------------------------------------
58.8 48.2 89.5 67.2 45.9 46.2 72.1 51.4
-----------------------------------------------------------------------------------
Operating (loss) income (12.3) 0.1 (42.8) (23.1) 8.0 4.7 (18.1) 8.1
Valuation allowance on investments - - - (15.7) - - - -
Other income (expense) 0.8 0.5 (2.2) (0.3) (1.2) 0.5 (1.3) (1.6)
-----------------------------------------------------------------------------------
(Loss) income before income tax provision (11.5) 0.6 (45.0) (39.1) 6.8 5.2 (19.4) 6.5
-----------------------------------------------------------------------------------
(Provision for) recovery of income taxes (1.1) (0.3) 0.1 4.0 (0.6) (1.7) 1.3 (2.1)
-----------------------------------------------------------------------------------
(Loss) income from continuing operations (12.6) 0.3 (44.9) (35.1) 6.2 3.5 (18.1) 4.4
Loss from discontinued operations - - - - (2.1) - - -
-----------------------------------------------------------------------------------
Net (loss) income for the period (12.6)% 0.3% (44.9)% (35.1)% 4.1% 3.5% (18.1)% 4.4%
===================================================================================
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, 2001, the Company had cash and cash
equivalents of $13.7 million (2000 - $13.2 million) and working capital of $12.7
million (2000 - $25.6 million).
Cash provided by (used in) operating activities was $3.7 million, $(1.2)
million and $1.6 million, respectively, for the years ended December 31, 2001,
2000 and 1999. The $3.7 million of cash provided by operating activities in 2001
was comprised of $14.1 million net loss, non-cash charges of $8.9 million, and
$8.9 million of changes to non-cash working capital items. The changes to
working capital items include a $2.3 million decrease in trade receivables, a
$7.9 million decrease in unbilled receivables, a $0.6 million increase in
prepaid expenses a $2.1 million increase in accrued liabilities, a $1.0 million
decrease in trade payables, a $1.5 million decrease in taxes payable and a $0.2
million decrease in deferred revenue. Unbilled accounts receivable arise where
the Company has earned revenue on a project and has not completed specific
billing milestones under the terms of the applicable contract. Deferred revenue
arises
-38-
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.
The Company has included in its operating results for the year ended
December 31, 2001 a provision for $3.2 million with respect to doubtful
accounts. The Company intends to vigorously pursue collection of these accounts,
however, due to uncertainty with regards to these customers' financial
conditions, the Company determined that it would be prudent to record an
allowance to address the uncertainty regarding collection of amounts due.
The Company is currently involved in a dispute with a customer, and as a
result has reclassified $3.7 million in accounts receivable as long term as the
Company determined it is not likely to collect the amounts within one year. The
Company is currently involved in litigation to collect the amounts due. See Item
3 "Legal Proceedings", for further discussion. The Company believes that its
position in the matter is strong and intends to vigorously pursue collection,
but due to uncertainty regarding timing of collection has elected to classify
the receivable as long term. If the Company is unsuccessful in collection of
amounts due, or is made to refund monies previously collected under the
contract, the Company's liquidity and working capital would be adversely
affected.
Cash (used in) provided by financing activities was $(2.0) million, $5.8
million and $13.8 million, respectively, during the years ended December 31,
2001, 2000 and 1999. The cash used in financing activities in 2001 comprised
$(2.0) million in repayment of capital leases and $(28,000) repayment of
long-term debt partially offset by $0.1 million from the issuance of common
shares.
Cash used in investing activities was $1.7 million, $6.0 million, and $4.3
million, respectively, for the years ended December 31, 2001, 2000 and 1999.
Total investing activity in 2001 primarily consisted of $2.2 million for the
purchase of capital equipment, including computer hardware and software for use
in research and development activities, the growth of the hosting and IT
services operations, and to support the growth of the Company's corporate
information systems. In addition, the Company received $0.3 million in proceeds
on maturity of its note receivable from Digital Dispatch Systems, Inc., and $0.1
million from a customer lease.
Existing sources of liquidity at December 31, 2001 include $13.7 million of
cash and cash equivalents and funds available under the Company's operating line
of credit. At the year ended December 31, 2001, the Company's borrowing capacity
under the line of credit was $10 CDN million. Under the terms of the agreement,
borrowings and letters of credit under the line are limited to 75% to 90% of
eligible accounts receivable. Borrowings accrue interest at the bank's prime
rate plus 0.5%. At December 31, 2001, the Company was not using this line of
credit.
The Company believes that the principal source of its liquidity is
operating cash flow. Certain circumstances including a reduction in the demand
for the Company's products, an increase in the length of the sales cycle for the
Company's products, an increase in operating costs, unfavorable results of
litigation, or general economic slowdowns could have a material impact on the
Company's operating cash flow and liquidity. See "Business - Risk Factors" and
"Forward Looking Statements".
The Company believes that future cash flows from operations and its
borrowing capacity under the operating line of credit combined with current cash
balances 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.
-39-
As at December 31, 2001 the Company had the following contractual
obligations and commercial commitments:
Payments Due by Period
Contractual ----------------------
Obligations
-----------
Total Less Than One 1-3 Years 4-5 Years After 5
Year Years
------------ ------------- ------------ ----------- ----------
Capital Lease $ 4,587,504 $2,839,442 $1,748,062 - -
Obligations
Operating Leases $ 9,225,654 1,476,768 $3,324,835 $2,386,807 $2,037,244
Total Contractual $13,813,158 $4,316,210 $5,072,897 $2,386,807 $2,037,244
Obligations
In addition to these commercial commitments the Company has also provided,
as performance bonds, an irrevocable revolving letter of credit in the amount of
EUR 751,623 ($665,801) expiring May 31, 2003, and an additional letter of credit
in the amount of EUR 75,855 ($66,752) expiring February 28, 2003. The Company
has pledged an amount equal to the letters of credit and guarantee against its
operating line of credit as security.
Derivative Financial Instruments
The Company generates a significant portion of sales from sales to
customers located outside the United States, principally in Canada and Europe.
Canadian sales are made mostly by the Company and on occasion are denominated in
Canadian dollars. International sales are made mostly from a foreign subsidy and
are typically denominated in either U.S. dollars or Euros. The Company's
international business is subject to risks typical of an international business
including, but not limited to: differing economic conditions, changes in
political climate, differing tax structures, other regulations and restrictions,
and foreign exchange rate volatility. Accordingly, the Company's future results
could be materially adversely impacted by changes in these or other factors. The
Company may enter into foreign exchange forward contracts to offset the impact
of currency fluctuations on certain nonfunctional currency assets and
liabilities, primarily denominated in the Canadian dollar, Euro and British
pound. The foreign exchange forward contracts the Company enters into generally
have original maturities ranging from three to eighteen months. The Company does
not enter into foreign exchange forward contracts for trading purposes, and does
not expect gains or losses on these contracts to have a material impact on the
Company's financial results.
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, 2001, and 2000 the Company had no foreign currency forward
contracts outstanding.
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 Canada and Europe in addition to its
United States operations and did not hedge these exposures in 2001. However, the
Company may from time-to-time hedge any net exposure to currencies other than
the United States dollar.
As of December 31, 2001, 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 $3.4 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.
-40-
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
The financial statements listed under the heading "(a)(1) Financial
Statements" of Item 14 herein, are included immediately following this page.
-41-
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, 2001 and 2000 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, 2001. 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, 2001
and 2000 and the results of its operations and cash flows for each of the years
in the three year period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America.
On February 1, 2002, we reported separately to the Board of Directors and
Shareholders of MDSI Mobile Data Solutions Inc. on consolidated financial
statements for the same periods prepared in accordance with generally accepted
accounting principles in Canada.
/s/ Deloitte & Touche LLP
Chartered Accountants
Vancouver, British Columbia
February 1, 2002
-42-
MDSI MOBILE DATA SOLUTIONS INC.
Consolidated Balance Sheets
(Expressed in United States dollars)
As at December 31,
2001 2000
----------- -----------
Assets
Current assets
Cash and cash equivalents $13,691,714 $13,238,081
Accounts receivable, net
Trade (net of allowance for doubtful accounts of
$3,933,287; 2000 - $985,000) 10,764,038 16,821,925
Unbilled 4,331,924 12,184,446
Prepaid expenses and other assets (note 10) 2,059,082 1,411,200
Income taxes receivable 366,506 -
Lease receivable (note 3) - 133,723
----------- -----------
Total current assets 31,213,264 43,789,375
Investments and advances, at cost (net of valuation allowance:
2001 - $2,999,992; 2000 - $250,000) (note 4) - 3,081,447
Capital assets, net (note 5) 9,249,055 11,097,497
Long term receivable (note 11(c)) 3,749,860 -
Deferred income taxes (note 9) 364,640 347,350
Intangible assets, net (note 6) - 1,824,057
----------- -----------
44,576,819 60,139,726
Assets of discontinued operations (note 16) - 641,405
----------- -----------
Total assets $44,576,819 $60,781,131
=========== ===========
Liabilities and stockholders' equity
Current liabilities
Accounts payable $2,451,853 $3,444,457
Accrued liabilities (note 15) 5,685,905 3,625,591
Income taxes payable - 1,091,164
Deferred revenue 7,713,068 7,901,837
Current portion of long-term debt (note 7) 39,041 66,968
Current obligations under capital lease (note 11(a)) 2,589,320 2,094,637
----------- -----------
Total current liabilities 18,479,187 18,224,654
Obligations under capital leases (note 11(a)) 1,622,879 4,156,486
----------- -----------
20,102,066 22,381,140
Liabilities of discontinued operations (note 16) - 223,024
----------- -----------
Total liabilities 20,102,066 22,604,164
Stockholders' equity
Common stock (note 8)
Authorized:
Unlimited common shares with no par value
Issued:
2001: 8,676,020 shares; 2000: 8,612,453 shares 48,519,060 48,416,502
Additional paid-up capital 522,621 220,700
Treasury stock (13,475 shares) (85,043) (85,043)
Accumulated other comprehensive (loss) (690,104) (690,104)
Deficit (23,791,781) (9,685,088)
----------- -----------
24,474,753 38,176,967
----------- -----------
Total liabilities and stockholders' equity $44,576,819 $60,781,131
=========== ===========
Commitments and contingencies (note 11)
See accompanying notes to the consolidated financial statements
-43-
MDSI MOBILE DATA SOLUTIONS INC.
Consolidated Statements of Operations
(Expressed in United States dollars)
Years ended December 31,
-----------------------------------------------------
2001 2000 1999
----------- ----------- -----------
Revenue
Software and services $31,731,309 $41,338,221 $39,912,480
Hosting & information technology services 13,564,763 8,463,069 4,845,183
Maintenance and support 10,186,907 8,887,737 5,565,499
Third party products and services 2,637,314 2,853,452 8,248,264
----------- ----------- -----------
58,120,293 61,542,479 58,571,426
----------- ----------- -----------
Direct costs 31,250,063 28,055,450 27,317,935
----------- ----------- -----------
Gross profit 26,870,230 33,487,029 31,253,491
----------- ----------- -----------
Operating expenses
Research and development 8,084,378 9,048,819 6,902,380
Sales and marketing 12,429,512 12,914,221 9,370,324
General and administrative 6,923,713 7,699,019 6,778,503
Restructuring charge (note 15) 6,105,927 - -
Amortization and provision for valuation of
intangible assets 1,824,057 291,916 279,240
Costs of merger - 1,691,028 -
Provision for doubtful accounts 3,189,263 985,000 -
----------- ----------- -----------
38,556,850 32,630,003 23,330,447
----------- ----------- -----------
Operating (loss) income (11,686,620) 857,026 7,923,044
Valuation allowance on investments (note 4) (2,749,992) - -
Other expense (191,456) (524,862) (759,549)
----------- ----------- -----------
(Loss) income from continuing operations before
tax provision (14,628,068) 332,164 7,163,495
----------- ----------- -----------
Recovery of (Provision for) income taxes from
continuing operations (note 9) 521,375 (491,542) (2,144,424)
----------- ----------- -----------
(Loss) income from continuing operations (14,106,693) (159,378) 5,019,071
Loss from discontinued operations (note 16) - (395,022) (3,872,683)
----------- ----------- -----------
Net (loss) income for the year ($14,106,693) ($554,400) $1,146,388
=========== =========== ===========
(Loss) earnings per common share
(Loss) earnings from continuing operations
Basic ($1.64) ($0.02) $0.62
=========== =========== ===========
Diluted ($1.64) ($0.02) $0.55
=========== =========== ===========
Net (loss) earnings
Basic ($1.64) ($0.07) $0.14
=========== =========== ===========
Diluted ($1.64) ($0.07) $0.13
=========== =========== ===========
Weighted average shares outstanding
Basic 8,623,296 8,526,723 8,080,022
=========== =========== ===========
Diluted 8,623,296 8,526,723 9,100,711
=========== =========== ===========
See accompanying notes to the consolidated financial statements
-44-
MDSI MOBILE DATA SOLUTIONS INC.
Consolidated Statements of Stockholders' Equity
(Expressed in United States dollars)
Accumulated
Common Stock Additional Other
------------------------ Paid Treasury Comprehensive
Shares Amount Up Capital Stock Loss Deficit Total
----------- ----------- ---------- --------- -------------- ---------- ----------
Balance, January 1, 1999 7,386,853 $32,797,978 $ 220,700 $(85,043) $(2,207,170) $(10,130,076) $20,596,389
Issued on exercise of 215,980 2,112,793 - - - - 2,112,793
stock options
Issuance of share 20,619 7,500 - - - - 7,500
capital
Issued under stock 28,144 271,009 - - - - 271,009
purchase plan (Note 8(b))
Dividends paid - - - - - (147,000) (147,000)
Change in foreign - - - - 1,777,732 - 1,777,732
exchange fluctuations
Issued on public 575,000 9,772,479 - - - - 9,772,479
offering (Note 8(c))
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 369,236 3,268,972 - - - - 3,268,972
stock options
Issued under stock 16,621 185,771 - - - - 185,771
purchase plan (Note 8(b))
Change in foreign - - - - (260,666) - (260,666)
exchange fluctuations
Net loss 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
Issued on exercise of 63,567 102,558 - - - - 102,558
stock options
Stock based compensation - - 301,921 - - - 301,921
charge
Net loss for the year - - - - - (14,106,693) (14,106,693)
----------------------------------------------------------------------------------------------------
Balance, December 31, 2001 8,676,020 $48,519,060 $ 522,621 $(85,043) $(690,104) $(23,791,781) $24,474,753
====================================================================================================
See accompanying notes to the consolidated financial statements
-45-
MDSI MOBILE DATA SOLUTIONS INC.
Consolidated Statements of Cash Flows
(Expressed in United States dollars)
Years ended December 31,
---------------------------------------------------
2001 2000 1999
-------------- -------------- --------------
Cash flows from operating activities
Net (loss) income from continuing operations for the year $ (14,106,693) $ (159,378) $ 5,019,071
Items not affecting cash:
Depreciation, amortization and provision for valuation of 5,262,704 2,946,950 1,622,927
intangible assets
Write down in value of surplus capital assets 563,780 - -
Valuation allowance on investments 2,749,992 - -
Deferred income taxes (17,290) 230,077 84,616
Stock based compensation charge 301,921 - -
Changes in non-cash operating working capital items (Note 13) 8,933,938 (4,215,903) (5,147,589)
-------------- -------------- --------------
Net cash provided by (used in) operating activities 3,688,352 (1,198,254) 1,579,025
-------------- -------------- --------------
Cash flows from financing activities
Issuance of common shares 102,558 3,454,743 12,163,781
Payment of dividends - - (147,000)
Repayment of long-term debt (27,927) (17,366) (293,366)
(Repayment of) proceeds from capital leases (2,038,924) 2,329,509 2,038,965
-------------- -------------- --------------
Net cash provided by (used in) financing activities (1,964,293) 5,766,886 13,762,380
-------------- -------------- --------------
Cash flows from investing activities
Repayment of lease receivable 133,723 386,860 395,139
Acquisition of investments - (2,518,225) (301,143)
Proceeds on sale of investments 331,455 3,273,392 -
Acquisition of intangible asset - (220,000) -
Acquisition of capital assets (2,153,985) (6,882,460) (4,443,711)
-------------- -------------- --------------
Net cash used in investing activities (1,688,807) (5,960,433) (4,349,715)
-------------- -------------- --------------
Net cash provided by (used in) continuing operations 35,252 (1,391,801) 10,991,690
Net cash provided by (used in) discontinued operations (note 16) 418,381 277,625 (1,762,058)
-------------- -------------- --------------
Net cash inflow (outflow) 453,633 (1,114,176) 9,229,632
Effects of foreign exchange fluctuations on cash - (260,666) 1,777,732
Cash and cash equivalents, beginning of year 13,238,081 14,612,923 3,605,559
-------------- -------------- --------------
Cash and cash equivalents, end of year $13,691,714 $ 13,238,081 $ 14,612,923
=============== ============== ==============
Supplemental disclosure of cash flow information
Cash payments for interest $387,773 $ 363,159 $ 148,798
=============== ============== ==============
Cash payments for taxes $326,694 $ 649,577 $ 2,110,283
=============== ============== ==============
See accompanying notes to the consolidated financial statements
-46-
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 effective June 1, 1999
(note 16). 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 $331,455 ($500,000 CDN) 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. The promissory note was
settled for its face value during the first quarter of 2001.
See accompanying notes to the consolidated financial statements
-47-
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2001, 2000 and 1999
(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 its 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 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 (Deferral of the Effective Date of a Provision of SOP
97-2, Software Revenue Recognition) (SOP 98-4) and Statement of
Position 98-9 (Modification of SOP 97-2, Software Revenue Recognition,
With Respect to Certain Transactions) (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.
-48-
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2001, 2000 and 1999
(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) Hosting and Information Technology Services
Hosting and Information Technology Services 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) 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 to three years.
(iv) Third party products and services
Revenue from sales of third party products and services is
recognized on delivery of the products or services.
(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 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.
(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
-49-
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2001, 2000, and 1999
(Expressed in United States dollars)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
(f) Intangible Assets (Continued)
line basis over a five year period. Management regularly reviews the
carrying value of the intangible assets for evidence of any impairment
in value by reference to expected future cash flows (note 6).
(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. Current 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 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 other
comprehensive income (loss).
Comprehensive income for the period can be summarized as follows:
Year ended December 31,
--------------------------------------------------------
2001 2000 1999
--------------- --------------- ---------------
Net income from continuing
operations $(14,106,093) $(159,378) $5,019,071
Other Comprehensive items
- Translation adjustment - (260,666) 1,777,732
--------------- --------------- ---------------
Comprehensive net income for
the year $(14,106,093) $(420,044) $6,796,803
================= ================== ==================
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.
-50-
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2001, 2000, and 1999
(Expressed in United States dollars)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
(g) Foreign exchange; Reporting and Functional currency (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.
(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 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 2001, 2000 and 1999 is as follows:
Net (Loss) (Loss)
Income Shares Earnings
(Numerator) (Denominator) Per Share
----------------------------------------------------
2001
Basic $ (14,106,693) 8,623,296 $ (1.64)
Effect of stock options - -
----------------------------------------------------
Diluted $ (14,106,693) 8,623,296 $ (1.64)
====================================================
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
====================================================
-51-
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2001, 2000, and 1999
(Expressed in United States dollars)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
(j) Earnings (loss) per common share (continued)
Options and warrants to purchase 2,056,361, 2,313,944, and 63,000
shares of common stock were outstanding during fiscal 2001, 2000 and
1999 respectively, but were not included in the computation of diluted
EPS because of either the net loss in fiscal 2001 and 2000, or because
the options exercise prices were greater than the average market
prices of the common stock, and therefore, their effect would be
antidilutive.
(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. As at
December 31, 2001 and December 31, 2000 the Company had no forward
transactions open.
(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 of the common stock option at the date granted.
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.
2001 2000 1999
------------- ------------ ------------
Net income (loss) for the year $(16,189,425) $(6,521,603) $(2,818,180)
------------- ------------ ------------
Fully diluted income (loss) per common share $(1.87) $(0.76) $(0.35)
============= ============ ============
Using the fair value method for stock-based compensation, additional
compensation costs of approximately $2,085,732 would have been
recorded for the year ended December 31, 2001 (2000 - $5,967,203 and
1999 - $3,964,568 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 96% (2000 - 81% and 1999 -
65% respectively) and a weighted average annualized risk free interest
rate at 3.70% (2000 - 7.00% and 1999 - 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
-52-
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2001, 2000, and 1999
(Expressed in United States dollars)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
(m) Stock-based compensation (continued)
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 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. Other than comprehensive income
resulting from changes in reporting currency (note 1 (g)) the Company
had no other source of comprehensive income. Tax effects of
comprehensive income or loss are not considered material for any
period.
(o) 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 Hosting and
Information Technology Services and has reported in accordance with
SFAS 131 in note 12.
(p) Accounting for derivative instruments and hedging activities
Effective January 1, 2001, the Company adopted SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities (SFAS
133), and the corresponding amendments under SFAS No. 138, Accounting
for Certain Derivative Instruments and Certain Hedging Activities - an
amendment of SFAS No. 133 (SFAS 138). SFAS 133 requires that all
derivative financial instruments be recognized in the financial
statements and measured at fair value regardless of the purpose or
intent for holding them. If the derivative is designated as a fair
value hedge, changes in the fair value of the derivative and of the
hedged item attributable to the hedged risk are recognized in net
earnings (loss). If the derivative is designated as a cash flow hedge,
the effective portions of changes in the fair value of the derivative
are recorded in other comprehensive income (loss) ("OCI") and are
recognized in net earnings (loss) when the hedged item affects net
earnings (loss). Ineffective portions of changes in the fair value of
cash flow hedges are recognized in net earnings (loss). If the
derivative used in an economic hedging relationship is not designated
in an accounting hedging relationship, changes in the fair value of
the derivative are recognized in net earnings (loss). The adoption of
this statement, has not had a significant effect on the Company's
financial position or results of operations.
-53-
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2001, 2000, and 1999
(Expressed in United States dollars)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
(q) 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.
(r) Recent accounting pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS 141"),
"Business Combinations." SFAS 141 requires the purchase method of
accounting for business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interests method. The Company does not
believe that the adoption of SFAS 141 will have a significant impact
on its financial statements.
In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible
Assets", which is effective January 1, 2002. SFAS 142 requires, among
other things, the discontinuance of goodwill amortization. In
addition, the standard includes provisions for the reclassification of
certain existing recognized intangibles as goodwill, reassessment of
the useful lives of existing recognized intangibles, reclassification
of certain intangibles out of previously reported goodwill and the
identification of reporting units for purposes of assessing potential
future impairments of goodwill. SFAS 142 also requires the Company to
complete a transitional goodwill impairment test six months from the
date of adoption. The Company does not believe that the adoption of
SFAS 142 will have a significant impact on its financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. This statement supersedes FASB Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," and the accounting and reporting provisions
of APB Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." This Statement also amends ARB No. 7, "Consolidated
Financial Statements," to eliminate the exception to consolidation for
a subsidiary for which control is likely to be temporary. This
Statement requires that one accounting model be used for long-lived
assets to be disposed of by sale, whether previously held and used or
newly acquired. This Statement also broadens the presentation of
discontinued operations to include more disposal transactions. The
provisions of this Statement are required to be adopted by the Company
at the beginning of fiscal 2002. The Company has not determined the
impact, if any, the adoption of this statement will have on its
financial position or results of operations.
-54-
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2001, 2000, and 1999
(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, which operates as 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.
3. LEASE RECEIVABLE
During the year ended December 31, 1999 the Company entered into a
sales-type lease with a customer. The lease had an effective interest rate
of 5.5% and was payable in equal monthly installments with a term of 36
months. As at December 31, 2001 the lease has been settled and no amounts
remain outstanding (2000 - $133,723).
4. INVESTMENTS AND ADVANCES
2001 2000
------------ -----------
Investment in private companies, at cost 2,499,992 2,499,992
Promissory note (note 16) - 331,455
Other advances 500,000 500,000
Less: Valuation allowance (2,999,992) (250,000)
------------ -----------
Total Investments $ - $3,081,447
============ ===========
During the year ended December 31, 2000 the Company made equity investments
of $2,499,992 in two private companies and made advances to a third Company
of $500,000. These investments do not represent significant influence in
the companies and at December 31, 2000 were valued at cost which was the
valuation as at the latest round of financing.
As a result of significant uncertainty over the future realization of any
return on investment or capital, the Company has recorded a valuation
allowance equal to the full cost of the investments and advances during the
year ended December 31, 2001.
During the year ended December 31, 2001, Digital Dispatch Systems Inc.
repaid the promissory note received as partial consideration on the sale of
the Company's Transportation Business Unit to Digital Dispatch Systems Inc.
(note 16).
-55-
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2001, 2000, and 1999
(Expressed in United States dollars)
5. CAPITAL ASSETS
2001 2000
------------- -------------
Computer hardware and software $ 14,018,951 $ 12,433,244
Furniture and fixtures 2,554,992 2,365,795
Leasehold improvements 726,832 708,667
Vehicles 50,905 50,905
------------- -------------
17,351,680 15,558,611
Less: accumulated amortization (8,102,625) (4,461,114)
------------- -------------
$ 9,249,055 $ 11,097,497
============= =============
As at December 31, 2001 the Company has entered into capital lease
arrangements for Capital Assets in the amount of $13,074,715 (2000 -
$11,595,272) and recorded accumulated amortization of $6,028,756 (2000 -$
3,326,083) relating to these assets (note 11(a)).
6. INTANGIBLE ASSETS
2001 2000
------------- -------------
Goodwill $ 2,615,751 $ 2,615,751
Commerical web site domain name 220,000 220,000
Less: accumulated amortization and provision for valuation (2,835,751) (1,011,694)
------------- -------------
$ - $ 1,824,057
============= =============
In connection with the Company's announced restructuring (note 15), the
Company determined that an impairment in the value of Goodwill that arose
on acquisition of Alliance Systems Inc., had occurred during the year ended
December 31, 2001. The Company determined an impairment had occurred due to
poor current and forecasted performance in the acquired Company's business.
As a result of this impairment the Company has taken a valuation allowance
in its field service business segment of $1,558,578 which was equal to the
remaining net book value of the Goodwill.
During the year ended December 31, 2001 the Company announced that it would
not direct future resources to develop its e-Service Manager product line.
As a result the Company has taken a valuation allowance in its Hosting and
IT business segment of $165,000 which was equal to the remaining value of
the commercial web site domain name purchased to support the e-Service
Manager product.
7. LONG-TERM DEBT
2001 2000
------------ ----------
Term loan, secured by general accounts receivable, $ - $ 27,927
inventory and equipment, repayable in blended payments
of $4,722, bearing interest at 8.25%
Stockholders (i) 39,041 39,041
Less: Current Portion of Long Term Debt (39,041) (66,968)
------------ ----------
$ - $ -
============ ==========
(i) Stockholders
The amounts owing to stockholders are unsecured, non-interest bearing
and without specific terms for repayment.
-56-
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2001, 2000, and 1999
(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 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
Granted - 711,765 711,765 4.18
Exercised (54,123) (9,444) (63,567) 1.61
Cancelled (52,980) (852,801) (905,781) 14.50
--------------------------------------------------------
Outstanding at December 31, 2001 427,143 1,629,218 2,056,361 $ 6.62
-57-
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2001, 2000 and 1999
(Expressed in United States dollars)
8. STOCKHOLDERS' EQUITY (Continued)
The following table summarizes information concerning options
outstanding at December 31, 2001:
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, 2001 (months) Price 31, 2001 Price
--------------- ----------- ---------- -------- ---------- --------
$0-$6.75 1,100,692 59.4 $ 2.65 601,117 $ 1.59
$6.80-$13.35 884,151 30.4 10.61 641,875 10.55
$13.40-$20.00 54,801 42.9 15.11 50,097 15.04
$20.05-$36.20 16,717 48.1 26.31 11,870 25.16
----------- ---------- -------- ---------- --------
2,056,361 46.4 $ 6.62 1,304,959 $ 6.73
=========== ========== ======== ========== ========
At December 31, 2000 and 1999 under the combined MDSI and Connectria
option plans, 1,441,280 and 1,405,979 options were exercisable at a
weighted average exercise price of $8.31 and $7.21, 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 $6,289 ($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, 2001, nil (2000 - 16,621; 1999 - 28,144) common
shares were issued under this Plan.
(c) 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).
-58-
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2001, 2000, and 1999
(Expressed in United States dollars)
8. STOCKHOLDERS' EQUITY (Continued)
(d) 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:
2001 2000 1999
------------ ------------ ------------
Current:
Canada $ - $ 49,500 $ 539,552
Foreign 504,085 (310,965) (2,560,256)
------------ ------------ ------------
Total current recovery of (provision for) income taxes
from continuing operations 504,085 (261,465) (2,020,704)
------------ ------------ ------------
Deferred:
Canada - 92,870 (468,896)
Foreign 17,290 (322,947) 345,176
------------ ------------ ------------
Total deferred (recovery of) provision for income taxes
from continuing operations 17,290 (230,077) (123,720)
------------ ------------ ------------
Recovery of (provision for) income taxes
from continuing operations $ 521,375 $ (491,542) $ (2,144,424)
============ ============ ============
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) income before tax provision due to the following:
2001 2000 1999
------------ ------------ ------------
Statutory tax rate 44.6% 45.6% 45.0%
Recovery of (provision for) income taxes from
continuing operations computed at statutory rate $ 6,524,118 $ (151,466) $(3,223,573)
Tax losses and (benefits) not recognized in the period
that the benefit arose (6,146,297) (684,949) (514,328)
Lower effective rate on earnings of foreign subsidiaries 1,265,093 853,058 1,695,856
Amortization and write-down of intangible assets
not deductible for tax (813,529) (127,333) (117,710)
Other permanent differences (308,010) (380,852) 15,331
------------ ------------ ------------
Recovery of (provision for) income taxes
from continuing operations $ 521,375 $ (491,542) $(2,144,424)
============ ============ ============
-59-
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2001, 2000, and 1999
(Expressed in United States dollars)
9. INCOME TAXES (continued)
The principal components of the deferred portion of the provision for
income taxes are as follows:
2001 2000 1999
------------ ------------ ------------
Depreciation $ 807,765 $ (349,067) $ 265,315
Deferred revenue 756,867 969,689 (201,992)
Operating loss carry forwards - (361,160) (572,557)
Other (1,547,342) (489,539) 385,514
------------ ------------ ------------
Total deferred provision for income taxes $ 17,290 $ (230,077) $ (123,720)
============ ============ ============
The approximate tax effect of each type of temporary difference that gave
rise to the Company's deferred tax assets are as follows:
2001 2000
------------- -------------
Operating loss carryforwards $ 4,334,951 $ 1,793,482
Deferred revenue 1,254,279 497,412
Capital assets & intangibles 341,323 (163,286)
Reserves and accrued expenses 2,889,075 1,219,172
Other 241,456 347,969
------------- -------------
9,061,084 3,694,749
Less: Valuation allowance (8,696,444) (3,347,399)
------------- -------------
Net non current deferred tax asset $ 364,640 $ 347,350
============= =============
At December 31, 2001, the Company has the following loss carry-forwards
available for tax purposes:
Country Amount Expiry
------- ------ ------
Canada $ 8,500,000 2005 through 2008
US $ 1,400,000 2020 through 2021
-60-
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2001, 2000, and 1999
(Expressed in United States dollars)
10. RELATED PARTY TRANSACTIONS
Related party transactions and balances not disclosed elsewhere in these
financial statements include advisory fees expensed during the year ended
December 31, 2001 of $280,000 (2000 - $45,000; 1999 - $0;) paid to
companies controlled by two directors of MDSI.
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, 2001 the full
amount of the note was outstanding, and is included in prepaid expenses and
other assets.
11. COMMITMENTS AND CONTINGENCIES
(a) Capital and operating leases
At December 31, 2001, future minimum payments under capital and
non-cancelable operating leases for office space and computer
equipment are as follows:
Capital Operating
leases leases
------------- -------------
2002 $ 2,839,442 $ 1,476,768
2003 1,643,060 1,420,492
2004 105,002 1,904,343
2005 - 1,270,533
2006 - 1,116,274
Therafter - 2,037,244
------------- -------------
Total minimum lease payments 4,587,504 $ 9,225,654
=============
Less: amount representing interest (375,305)
-------------
Present value of net minimum lease payments 4,212,199
Less: current portion (2,589,320)
-------------
$ 1,622,879
=============
Rent expense for the year ended December 31, 2001 in respect of
operating leases for office space was $2,076,503 (2000 - $2,148,310;
1999 - $2,232,448).
(b) Line and letters of credit
The Company has an operating line of credit with a Canadian commercial
bank to borrow up to $10,000,000 CDN (2000 - $8,000,000 CDN) which
bears interest at prime plus 0.5%. As at December 31, 2001, the
Company was not, except as noted below, utilizing the operating line
of credit.
The Company has provided, as performance bonds, an irrevocable
revolving letter of credit in the amount of EUR 751,623 (USD $665,801)
expiring May 31, 2003, and an additional letter of credit in the
amount of EUR 75,855 (USD $66,752) expiring February 28, 2003. The
Company has pledged an amount equal to the letters of credit and
guarantee against its operating line of credit as security.
-61-
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2001, 2000, and 1999
(Expressed in United States dollars)
11. COMMITMENTS AND CONTINGENCIES (continued)
(c) Contingency
The Company is involved in a dispute with a customer. The Company has
filed suit against the customer alleging that the customer had
breached a series of contracts, and failed to pay sums due. The
customer has filed an answer and counter claim alleging the Company
breached the contracts, entitling the customer to repayment of all
sums paid to the Company of approximately $3.5 million. The Company
believes that its position in the matter is strong and intends to
vigorously pursue collection. The Company expects that collection of
monies due from the customer is not likely to occur within one year
and as a result has reclassified the amounts due from the customer of
$3,749,860 from current to long term receivable.
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.
12. SEGMENTED INFORMATION
In 1997, the Company adopted Statement of Financial Accounting Standards
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 16). As a result the Company
had only one operating segment.
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 reports its operations in two business segments, Field Service
and Hosting and IT services (formerly "e-Business").
On June 1, 2000 the company completed its merger with Connectria (note 2).
As Connectria is considered part of the Company's Hosting and Information
Technology (IT) Services operating segment and the transaction has been
treated using the pooling of interests method, the Company has reflected
the merger by segregating the Hosting and IT Services segment for all
comparable periods.
During the year ended December 31, 2001, the Company realigned its internal
operating structure. As a result of this realignment, the Company now
considers its Advantex and Wireless ASP product lines part of its Field
Service segment, and has renamed the segment previously know as
"e-Business", "Hosting and IT Services" to better reflect the nature of the
business activity in this segment. As a result of the realignment, certain
figures previously classified as Hosting and IT Services (e-Business) have
been reclassified to the Field Service segment. For year ended December 31,
2000, the reclassification results in the following changes in Hosting and
IT Services segment (and a corresponding change in Field Service):
depreciation and amortization decreased by $156,280, long lived assets
decreased by $279,965, capital expenditures decreased by $133,515, and
operating earnings increased by $1,529,052. There is no effect of the
reclassification on revenues.
-62-
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2001, 2000, and 1999
(Expressed in United States dollars)
12. SEGMENTED INFORMATION (continued)
Business Segments
2001 2000 1999
--------------------------------------------------------------------------------------------------------------
Hosting Hosting Hosting
Field and IT Field and IT Field and IT
Service Services(1) Total Service Services(1) Total Service Services(1) Total
------- ----------- ----- ------- ----------- ----- ------- ----------- -----
Revenue $44,705,603 $13,414,690 $58,120,293 $51,999,988 $9,542,491 $61,542,479 52,157,025 $6,414,401 $58,571,426
Operating
earnings (loss) (11,418,153) (268,467) (11,686,620) 2,751,218 (1,894,192) 857,026 7,781,006 142,038 7,923,044
Depreciation
amortization
and provision
for valuation
of intangible
asset 4,346,019 916,685 5,262,704 2,755,869 191,081 2,946,950 1,519,305 103,622 1,622,927
Long lived
assets(2) 7,614,223 1,634,832 9,249,055 11,738,968 4,264,033 16,003,001 12,568,124 472,100 13,040,224
Capital
Expenditures 1,317,095 836,890 2,153,985 5,396,528 1,485,932 6,882,460 4,404,253 39,458 4,443,711
(1) The Hosting and IT Services operating segment also includes revenues from
third-party products and services.
(2) Long lived assets consist of the lease receivable, investments, capital and
intangible assets.
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:
2001 2000 1999
----------------------------- ----------------------------- -----------------------------
Long-lived Long-lived Long-lived
Revenue assets Revenue assets Revenue assets
------------ ------------ ------------ ------------ ------------ ------------
Canada $ 1,374,365 $ 6,789,712 $ 1,688,704 $ 8,731,563 $ 1,670,098 $ 9,037,747
United States 46,116,595 2,401,255 47,564,765 7,202,636 43,956,585 3,923,429
Europe 9,594,137 57,416 8,713,390 66,946 11,426,532 73,521
Asia and Other 1,035,196 672 3,575,620 1,856 1,518,211 5,527
------------ ------------ ------------ ------------ ------------ ------------
$58,120,293 $ 9,249,055 $61,542,479 $16,003,001 $58,571,426 $13,040,224
============ ============ ============ ============ ============ ============
Major customers
During the year ended December 31, 2001 the Company earned revenue
from one customer of $7,378,137. For 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.
-63-
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2001, 2000 and 1999
(Expressed in United States dollars)
13. CHANGES IN NON-CASH OPERATING WORKING CAPITAL ITEMS
2001 2000 1999
------------- ------------- -------------
Accounts receivable $10,160,549 $ (9,263,458) $ (2,559,073)
Prepaid expenses and other assets (647,882) (289,619) 1,134,442
Income taxes payable / receivable (1,457,670) (476,507) (22,860)
Accounts payable and accrued liabilities 1,067,710 2,653,882 (3,677,261)
Deferred revenue (188,769) 3,159,799 (22,837)
------------- ------------- -------------
$ 8,933,938 $ (4,215,903) $ (5,147,589)
============= ============= =============
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,
concentrations of credit risk are considered to be minimal.
15. RESTRUCTURING CHARGE
On March 30, 2001, the Company, in response to uncertain economic
conditions and poor financial performance, announced a restructuring plan
approved by the Company's Board of Directors designed to reduce operating
costs that resulted in the elimination of 34 full time and contractor
positions. On May 11, 2001, the Company announced a Board approved update
to this plan which resulted in the elimination of an additional 115
positions. As part of this restructuring, the Company recorded a charge to
earnings of $6.1 million in the year ended December 31, 2001. These charges
were reflected in the "restructuring charge" line item of the Company's
Consolidated Statement of Operations. A breakdown of the nature of the
charges and the costs incurred to date is as follows:
Total Restructuring
Charge
-------------------
Workforce reduction $ 3,375,000
Provision for excess office space 1,861,000
Non cash writedown of capital assets 563,780
Other 306,147
-------------------
Total restructuring charges 6,105,927
Cumulative draw-downs (2,972,267)
-------------------
Accrued restructuring charges included in accrued
liabilities at December 31, 2001 $3,133,660
===================
-64-
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2001, 2000 and 1999
(Expressed in United States dollars)
15. RESTRUCTURING CHARGE (continued)
For the year ended December 31, 2001 the Company recorded a total of $6.1
million in restructuring charges, taken in connection with a corporate
reorganization designed to reduce the Company's operating costs and
increase efficiency by rationalizing staffing levels and modifying staff
reporting relationships. The Company expects to use existing cash balances
and cash flow from operations in order to fund these charges.
Workforce reduction charges of $3.4 million were taken relating to
severance and continued benefits for the elimination of 149 positions
across all operating departments and segments of the organization. As of
December 31, 2001, the provision balance has been drawn down by cash
payments of approximately $2.0 million. The remaining provision of $1.4
million for terminated employees receiving payments over time, or existing
employees notified of their termination to occur at a future date is
expected to be utilized by the second half of 2002.
The provision for excess office space of $1.9 million for the year ended
December 31, 2001, relates to surplus office space under long term lease by
the Company at two locations, one of which the Company has entered into
fixed cost lease arrangements expiring in 2004. The Company has incurred
approximately $0.4 million of cash costs relating to this provision leaving
an accrual of $1.5 million remaining as at December 31, 2001. The Company
expects that the charge will be fully drawn down no later than the time the
lease expires in the fourth quarter of 2004.
Due to the elimination of 149 positions, certain capital assets belonging
to the Company have been declared surplus and a charge of $0.6 million has
been recorded to reflect the difference between the previous carrying value
and the estimated fair market value, net of disposal costs. As at December
31, 2001, the full amount of the charge has been applied to the assets to
value them at their estimated net realizable value. These assets are
expected to be disposed of by the second half of 2002.
The Company has recorded a $0.3 million charge for the year ended December
31, 2001 for other items including, costs of outplacement services, and
legal and consulting fees. As at December 31, 2001, the Company has
incurred cash costs of approximately $0.1 million in connection with these
charges, leaving a provision of $0.2 million. The Company expects to fully
draw down this provision by the end of the second half of 2002.
16. 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%, $331,455 ($500,000 CAD) promissory note due
January 1, 2001.
For the year ended December 31, 1999, the Company recorded a one-time
charge of $3,872,683 concurrent with the decision to discontinue the
Transportation Business Unit 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 .
During the year ended December 31, 2001 all outstanding assets and
liabilities of the discontinued operation have been settled with no further
charge to earnings.
-65-
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2001, 2000, and 1999
(Expressed in United States dollars)
16. 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, 2001 December 31, 2000 December 31, 1999
---------------- ----------------- -----------------
Revenues $ - $ - $ 2,652,152
Loss before income taxes (1,571,821)
Income tax - - -
----------------- ----------------- -----------------
Operating loss to measurement date - - (1,571,821)
Estimated loss on disposal
(net of nil income taxes) - (395,022) (2,300,862)
----------------- ----------------- -----------------
Loss from discontinued operations $ - $ (395,022) $ (3,872,683)
================= ================== =================
Financial position of discontinued operations
December 31, 2001 December 31, 2000 December 31, 1999
----------------- ----------------- -----------------
Current assets $ - $ 641,405 $ 960,610
Long term assets - - -
----------------- ----------------- -----------------
Total assets of discontinued operations - 641,405 960,610
----------------- ----------------- -----------------
Current liabilities - 223,024 173,424
Long term liabilities - - -
----------------- ----------------- -----------------
Total liabilities of discontinued operations $ - $ 223,024 $ 173,424
================= ================== =================
Cash flow of discontinued operations
December 31, 2001 December 31, 2000 December 31, 1999
----------------- ----------------- -----------------
Operating activities $ 418,381 $ 277,625 $ (1,655,510)
Investing activities - - (106,548)
Financing activities - - -
----------------- ----------------- -----------------
Cash provided by (used for) discontinued
operations $ 418,381 $ 277,625 $ (1,762,058)
================= ================== =================
-66-
Item 9: Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
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,
2001.
Name Age Position
- ------------------------------------- ------- ------------------------------------------------------------------------
Executive Officers
Erik Dysthe(1)...................... 64 Chairman of the Board, Director and Chief Executive Officer
Gerald F. Chew(2)................... 41 President and Chief Operating Officer
Peter H. Rankin(3) ................. 45 Executive Vice President, Operations
Verne D. Pecho...................... 58 Vice President - Finance and Administration and Chief Financial Officer
Richard S.Waidmann.................. 40 Executive Vice-President, Hosting and IT Services
Officers and Key Employees
Simon Backer........................ 46 Senior Vice President - Wireless Services
Cyril Tordiffe...................... 50 Senior Vice President - Project Implementation
Eric Y. Miller ...................... 43 Senior Vice President, Hosting and IT Services
Tommy Lee........................... 38 Senior Vice President - Product Development
Gene Mastro ........................ 54 Senior Vice President - Worldwide Sales
Warren Cree......................... 42 Senior Vice President - Product Management
M. Greg Beniston.................... 44 Vice President - Legal and Corporate Secretary
Glenn Y. Kumoi...................... 39 Managing Director -Europe Middle East and Africa
Ronald P. Toffolo................... 50 Vice President - Human Resources
David Haak.......................... 40 Vice President - Sales, Americas
Directors
Peter Ciceri (5)(6)................. 46 Director
Robert C. Harris, Jr. (4)(5)........ 55 Director
Terrence P. McGarty (5)(6).......... 58 Director
Marc Rochefort (4)(5)............... 54 Director
David R. Van Valkenburg(4)(5)(6).... 59 Director
- --------------------------------------------------------------------------------
(1) Mr. Dysthe was appointed Chief Executive Officer on March 26, 2001, and
President on March 15, 2002.
(2) Mr. Chew resigned as President and Chief Operating Officer on March 15,
2002.
(3) Mr. Rankin was appointed Executive Vice President, Operations May 7, 2001.
(4) Member of Compensation Committee.
(5) Member of Corporate Governance and Nominating Committee.
(6) Member of Audit Committee.
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 and
President in March 2002. He also served as Chief Executive Officer of the
Company from its inception to November 1998 and President from its inception
until February 1996. Mr. Dysthe also serves as a director of Avcan Systems Inc.
Gerald F. Chew has served as President and Chief Operating Officer of the
Company from April 2001 until his resignation on March 15, 2002. He also served
as a director of the Company from December 1995 to April 2001. 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
-67-
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.)
Peter H. Rankin has served as Executive Vice President - Operations of the
Company since May 2001. From May 1997 to April 2001, Mr. Rankin was an
independent consultant. From February 1996 to May 1997, he served as Senior Vice
President - Operations of the Company. From July 1995 to February 1996, Mr.
Rankin was Vice President - Product Management of MDSI Mobile Data Solutions
Canada Inc. and from February 1993 to June 1995, he was Vice President -
Technology of MDSI Mobile Data Solutions Canada Inc.
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.
Richard S. Waidmann has served as Executive Vice President, Hosting and IT
Services of the Company from June 1, 2000. Mr. Waidmann also served as a
director of the Company from June 1, 2000 to June 28, 2001. From 1996 to May
2000, Mr. Waidmann was President, Chairman and CEO of Connectria Corporation.
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 - Wireless Services of the
Company since June 2000. Prior to that he was Senior Vice President - eBusiness
Operations since October 1999. From August 1998 to August 1999 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.
Cyril Tordiffe has served as Senior Vice President - Project Implementation
of the Company since July 2001 and as a Vice President - Operations, Australia
between January 2001 and June 2001. From 1999 to 2000, he was Vice President -
Implementation Engineering. From 1995 to 1998, Mr. Tordiffe was Vice President -
Project Implementation and Customer Support, Utilities Division. From the
Company's inception in 1993 to 1994, he held various senior project management
positions at the Company. Mr. Tordiffe has over 20 years of experience in the
information technology industry covering operations, project management, systems
analysis and application programming.
Eric Y. Miller has served as Senior Vice President, Hosting and IT Services
of the Company since June 2000. From 1998 to May 2000, Mr. Miller was Vice
President Sales of Connectria Corporation. 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.
Gene Mastro has served as Senior Vice President - Worldwide Sales of the
Company since October 1999. From November 1997 to September 1999, Mr. Mastro was
Vice President Sales, Telecommunications of the Company. From 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.
Warren Cree has served as Senior Vice President - Products of the Company
since October 2001. Prior to this he held numerous positions of progressive
responsibility in product management for the Company since September 1999. Mr.
Cree also served as Manager, Application Engineering of the Company from its
inception to August 1999.
-68-
Between 1989 and 1994, he was a member of the scientific and engineering staff
at McDonald, Dettwiler and Associates Ltd.
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 April 1999 to May 2001.
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 Managing Director - Europe Middle East and
Africa of the Company since May 2001. Prior to that he was 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.
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.
David R. Van Valkenburg has served as a director of the Company since June
2001. Mr. Van Valkenburg is currently Chairman of Balfour Associates, Inc. From
1999 to 2000, he was Executive Vice President of MediaOne Group, Inc., and from
1996 to 1999 he was Executive Vice President, MediaOne International. From 1994
to 1995, Mr. Van Valkenburg was Senior Vice President, Multimedia Group,
MediaOne Group Inc. He also serves as a director of Harmonic, Inc.
Peter Ciceri has served as a director of the Company since June 2001. Mr.
Ciceri is currently an Executive in Residence at the University of British
Columbia. From 2000 to 2001, he was President of Rogers Telecom, Inc. and from
1996 to 2000 he was President and Managing Director of Compaq Canada Ltd. and
Vice-President Compaq Computer Corporation (US). Mr. Ciceri also serves as a
director of Sierra Wireless, Inc.
Robert C. Harris, Jr. has served as a director of the Company since
December 1995. Mr. Harris is currently Senior Managing Director, Vice Chairman,
Technology Investment Banking 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 SoftNet Systems, Inc.,
Marex, Inc., and a number of private companies.
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.
-69-
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, Peter Ciceri and David
Van Valkenburg.
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 programs for new directors. The
members of the Corporate Governance and Nominating Committee are Marc Rochefort,
Robert C. Harris, Jr. Peter Ciceri, David Van Valkenburg and Terrence P.
McGarty.
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., Marc Rochefort and David Van Valkenburg.
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. From
January 1, 2001 until June 28, 2001, the Compensation Committee was composed of
two non-employee directors and Kenneth Miller, who served as the Company's Chief
Executive Officer (CEO) until March 26, 2001. Since June 28, 2001, the
Compensation Committee has been composed of three non-employee directors. During
fiscal 2001, the compensation of Erik Dysthe, the Chairman and since March 26,
2001 the CEO of the Company, Kenneth Miller, the CEO of the Company until March
26, 2001, and Gerald Chew, the President and Chief Operating Officer (COO) of
the Company was determined by the Compensation Committee. Erik Dysthe, Gerald
Chew and Kenneth Miller 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 and CEO or the
President and COO, the Board of Directors reviews a compensation proposal
prepared by the Chairman and 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
-70-
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 16 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.
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 his or
her 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 Mr. Dysthe, 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. The Company's employment agreements 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 (as defined below) or any other officers.
-71-
Summary Compensation Table
The following table sets forth all compensation paid during the fiscal
years ended December 31 2001, 2000 and 1999 in respect of each individual who,
at any time during fiscal 2001, served as the Company's Chief Executive Officer,
the four most highly compensated executive officers for fiscal 2001 who were
serving as executive officers as at December 31, 2001 and an individual who
would have been among the foregoing but for the fact that such individual was
not employed by the Company at December 31, 2001 (collectively "Named Executive
Officers"):
Annual Compensation Long Term
Compensation
Awards
---------------------
Other Annual Securities Under
Years Ending Salary Bonus Compensation Options
Name and Principal Position December 31 ($) ($) ($) (#)
- ----------------------------------------------------------------------------------------------------------------------------
Erik Dysthe 2001 123,011 - N/A 10,000
Chairman & Chief Executive Officer 2000 25,953(1) - N/A 3,000
1999 134,686 - N/A nil
- ----------------------------------------------------------------------------------------------------------------------------
Kenneth R. Miller (2) 2001 57,007 15,636 N/A 65,000
Chief Executive Officer 2000 203,879 24,465 N/A 100,000
1999 185,460 29,674 N/A Nil
- ----------------------------------------------------------------------------------------------------------------------------
Robert G. Cruickshank(3) 2001 65,565 13,646 390,903(4) 25,000
President and Chief Operating Officer 2000 177,931 21,352 N/A 25,000
1999 157,641 25,897 N/A 25,000
- ----------------------------------------------------------------------------------------------------------------------------
David Haak 2001 134,000 81,241 N/A 5,000
Vice President Sales, Americas 2000 120,000 81,568 N/A Nil
1999 120,000 10,000 N/A 15,000
- ----------------------------------------------------------------------------------------------------------------------------
Gene Mastro 2001 246,090 106,173 N/A 10,000
Senior Vice President, Sales 2000 190,000 17,100 N/A Nil
1999 166,397 237,625 N/A 35,000
- ----------------------------------------------------------------------------------------------------------------------------
Richard S. Waidmann(5) 2001 140,000 8,400 - -
Executive Vice President, Hosting 2000 100,770 8,400 - -
and IT Services 1999 52,000 - - -
- ----------------------------------------------------------------------------------------------------------------------------
Eric Y. Miller(5) 2001 140,000 8,400 - -
Senior Vice President, Hosting and 2000 108,846 8,400 - -
IT Services 1999 80,304 - - -
- ----------------------------------------------------------------------------------------------------------------------------
(1) Represents compensation received by Mr. Dysthe in his capacity as Chairman
of the Board and a director of the Company.
(2) Excludes consulting fees paid to a Company controlled by Mr. Miller. See
"Item 13: Certain Relationship and Related Transactions" for details.
Includes salary earned until Mr. Miller's resignation on March 26, 2001.
(3) Includes salary earned until Mr. Cruickshank's resignation on April 20,
2001.
(4) Represents severance paid to Mr. Cruickshank in April 2001.
(5) Includes compensation paid by Connectria Corporation prior to its
acquisition by the Company on June 1, 2000.
-72-
Stock Options
The following table sets forth stock options granted by the Company during
the fiscal year ended December 31, 2001 to any of the Named Executive Officers:
Option Grants During the Fiscal Year Ended December 31, 2001
Market Value
% of Total of Securities
Securities Options Underlying
Under Granted to Exercise or Options on the
Options Employees in Base Price Date of Grant Expiration Date
Name Granted(#) Fiscal Year ($/Security) ($/Security)
- -------------------------------------------------------------------------------------------------------------------------
Erik Dysthe 10,000 1.7% $5.43 $5.43 March 19, 2006
Chairman & Chief Executive Officer ($8.40 Cdn) ($8.40 Cdn)
- -------------------------------------------------------------------------------------------------------------------------
Kenneth R. Miller 65,000 11.0% $4.32 $4.32 April 30, 2003
Chief Executive Officer ($6.70 Cdn) ($6.70 Cdn)
- -------------------------------------------------------------------------------------------------------------------------
Robert G. Cruickshank 25,123 4.2% $4.32 $4.32 April 30, 2003
President and Chief Operating ($6.70 Cdn) ($6.70 Cdn)
Officer
- -------------------------------------------------------------------------------------------------------------------------
David Haak 5,000 0.8% $3.00 $3.00 August 22, 2006
Vice President Sales, Americas
- -------------------------------------------------------------------------------------------------------------------------
Gene Mastro 10,000 1.7% $3.00 $3.00 August 22, 2006
Senior Vice President, Sales
- -------------------------------------------------------------------------------------------------------------------------
Richard S. Waidmann Nil Nil Nil Nil Nil
Executive Vice President, Hosting
and IT Services
- ----------------------------------------------------------------------------------------------------------------------------
Eric Y. Miller Nil Nil Nil Nil Nil
Senior Vice President, Hosting and
IT Services
- ----------------------------------------------------------------------------------------------------------------------------
-73-
The following table sets forth details of each exercise of stock options
during the fiscal year ended December 31, 2001 by any of the Named Executive
Officers, and the fiscal year end value of unexercised options on an aggregate
basis:
Aggregated Options Exercised During the Fiscal Year Ended December 31, 2001 and Fiscal Year-End
Option Values
Unexercised Options
At FY-End (#) Value of Unexercised in the
Securities Aggregate Exercisable/ Money-Options at FY-End
Acquired on Value Unexercisable ($) Exercisable/
Name Exercise (#) Realized($) Unexercisable (1)
- -------------------------------------------------------------------------------------------------------------------------
Erik Dysthe Nil Nil 70,124 (exercisable) $0(exercisable)
Chairman & Chief Executive Officer 376 (unexercisable) $0(unexercisable)
- -------------------------------------------------------------------------------------------------------------------------
Kenneth R. Miller Nil Nil 65,000 (exercisable) $0(exercisable)
Chief Executive Officer nil (unexercisable) $0(unexercisable)
- -------------------------------------------------------------------------------------------------------------------------
Robert G. Cruickshank Nil Nil 25,000 (exercisable) $0(exercisable)
President and Chief Operating nil (unexercisable) $0(unexercisable)
Officer
- -------------------------------------------------------------------------------------------------------------------------
David Haak Nil Nil 16,944 (exercisable) $0(exercisable)
Vice President Sales, Americas 5,000 (unexercisable) $2,550 (unexercisable)
- -------------------------------------------------------------------------------------------------------------------------
Gene Mastro Nil Nil 40,722 (exercisable) $0(exercisable)
Senior Vice President, Sales 17,778 (unexercisable) $5,100(unexercisable)
- -------------------------------------------------------------------------------------------------------------------------
Richard S. Waidmann Nil Nil 137,450 (exercisable) $431,593 (exercisable)
Executive Vice President, Hosting nil (unexercisable) $0(unexercisable)
and It Services
- ----------------------------------------------------------------------------------------------------------------------------
Eric Y. Miller Nil Nil 68,725 (exercisable) $215,797 (exercisable)
Senior Vice President, Hosting and nil (unexercisable) $0(unexercisable)
IT Services -
- ----------------------------------------------------------------------------------------------------------------------------
(1) Based on Nasdaq closing price of $3.51 on December 31, 2001.
(2) Includes options to purchase common shares within 60 days after December
31, 2001.
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 fiscal year ended December 31,
2001, the directors of the Company received aggregate cash compensation of
$55,500 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 March 19, 2001, two Directors were each granted
option to acquire 15,000 common shares and one Director was granted options to
acquire 30,000 common shares. All March 19, 2001 stock options were granted at
an exercise price of $5.31 per share with immediate vesting. On June 28, 2001,
two Directors were each granted options to acquire 3,000 common shares; one
Director was granted options to acquire 7,375 common shares; one Director was
granted options to acquire 15,000 common shares; and one Director was granted
options to acquire 30,000 common shares. All June 28, 2001 stock options were
granted at an exercise price of $4.39 per share, vest over three years and are
subject to the grantee being a Director on the date of vesting.
-74-
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,
2001, 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
Directors, Named Executive Officers and 5% Shareholders(1) Beneficially % of total Shares
Owned(2) Owned
- ------------------------------------------------------------ ----------------- -----------------
Erik Dysthe(3) ............................................. 445,018 5.1
Kenneth R. Miller(4)........................................ 200,162 2.3
Robert G. Cruickshank(5) .................................. 25,123 *
David Haak(6) .............................................. 24,444 *
Gene Mastro (7) ............................................ 40,722 *
Richard S. Waidmann(8)...................................... 687,250 7.8
Eric Y. Miller(9)........................................... 343,625 3.9
Robert C. Harris, Jr. (10).................................. 92,620 1.1
Terrence P. McGarty(11)..................................... 28,460 *
David R. Van Valkenburg(12)................................. 21,666 *
Peter Ciceri(13)............................................ 3,333 *
Marc Rochefort(14).......................................... 10,262 *
----------------- -----------------
All Directors, Named Executive Officers and Officers as a 2,258,396 25.8%
group (24 persons) (15).....................................
----------------- -----------------
5% Shareholders:
Kern Capital Management (16)................................ 1,182,100 13.6%
114 West 47th Street, Suite 1926
New York, NY, 10036
- -------------------------------
* 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 at December 31, 2001, or exercisable within 60 days
after December 31, 2001, 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, 2001, together with the applicable options
of such shareholder.
(3) Includes 326,894 Common Shares held by Erik Dysthe Holdings Co. and options
to purchase 70,124 Common Shares exercisable within 60 days after December
31, 2001 held by Mr. Dysthe individually.
(4) Includes 37,256 Common Shares held by 535760 B.C. Ltd., a company 100%
owned Mr. Miller and options to purchase 65,000 Common Shares exercisable
within 60 days of December 31, 2001.
(5) Includes options to purchase 25,000 Common shares exercisable within 60
days after December 31, 2001.
(6) Includes options to purchase 16,944 Common Shares exercisable within 60
days after December 31, 2001.
(7) Represents options to purchase 40,722 Common Shares exercisable within 60
days of December 31, 2001.
(8) Includes options to purchase 137,450 Common Shares exercisable within 60
days after December 31, 2001.
(9) Includes options to purchase 68,725 Common Shares exercisable within 60
days after December 31, 2001.
(10) Includes options to purchase 42,290 Common Shares exercisable within 60
days after December 31, 2001.
(11) Includes 1,170 Common Shares held by The Telmarc Group Inc., a company
controlled by Mr. McGarty, and options to purchase 27,290 Common Shares
exercisable within 60 days after December 31, 2001.
(12) Includes options to purchase 6,666 Common Shares exercisable within 60 days
after December 31, 2001.
(13) Represents options to purchase 3,333 Common Shares exercisable within 60
days after December 31, 2001.
(14) Represents options to purchase 10,262 Common Shares exercisable within 60
days after December 31, 2001.
(15) Includes options to purchase 711,615 Common Shares exercisable within 60
days after December 31, 2001.
(16) Beneficially owned by Robert E. Kern Jr. and David G. Kern.
-75-
Item 13: Certain Relationships and Related Transactions
In March 2001, the Company entered into an employment agreement with Erik
Dysthe, then the Company's Chairman. In April 2001, the Company entered into an
employment agreement with Gerald F. Chew, then the Company's President and Chief
Operating Officer. In May 2001, the Company entered into an employment agreement
with Peter H. Rankin, the Company's Executive Vice President - Operations. See
Item 11 - "Executive Compensation".
In March 2001, the Company retained 535760 B.C. Ltd., a private company
controlled by Kenneth R. Miller, the former CEO of the Company, to provide
consulting services to the Company related to corporate development activities.
During the year ended December 31, 2001, the Company paid to 535760 B.C. Ltd.
consulting fees in the amount of $205,000.
The Company retained Gerald Chew, a director of the Company, to provide
cosulting services to the Company related to corporate development activities.
During the year ended December 31, 2001, the Company paid Mr. Chew consulting
fees in the amount of $75,000.
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.
PART IV
Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Consolidated Financial Statements
The following financial statements of the Registrant and the Report of
Independent Auditors thereon are included herewith in response to Item 8 above.
Page
----
Report of Independent Auditors ......................................36
Consolidated Balance Sheets .........................................37
Consolidated Statements of Operations ...............................38
Consolidated Statements of Changes in Stockholders' Equity ..........39
Consolidated Statements of Cash Flows ...............................40
Notes to the Consolidated Financial Statements ......................42
2. Financial Statement Schedules
The financial statement schedules required to be filed by Item 8 and Item
14(d) are included immediately following this page.
-76-
SCHEDULE II
MDSI MOBILE DATA SOLUTIONS INC.
Valuation and Qualifying Accounts
(Expressed in United States Dollars)
Balance, Additions,
Beginning of During Application/Write- Balance, End
Period Period off During Period of Period
------------ ---------- ------------------ ------------
Allowance for doubtful accounts
Year ended December 31, 2001 985,000 3,189,263 240,976 3,933,287
Year ended December 31, 2000 - 985,000 - 985,000
Year ended December 31, 1999 144,541 -- (144,541) --
Provision against investments and
advances
Year ended December 31, 2001 250,000 2,749,992 -- 2,999,992
Year ended December 31, 2000 -- 250,000 -- 250,000
Year ended December 31, 1999 -- -- -- --
Deferred income tax valuation
allowance
Year ended December 31, 2001 1,825,049 6,871,395 -- 8,696,444
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
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
10.1(1)(2) 1996 Stock Option Plan
10.2(2)(4) 1997 Stock Option Plan
10.3(2)(4) 1998 Stock Option Plan
10.4(2)(5) 2000 Stock Purchase Plan
10.5(2)(5) 1999 Stock Option Plan
10.6(2)(6) 1998 Stock Option Plan for Connectria Corporation (formerly,
Catalyst Solutions Group, Inc.)
10.7(2)(7) 2000 Stock Option Plan
10.8(1) Form of Indemnification Agreement between the Company and
certain officers of the Company
10.9(1)(2) Employment Agreement dated April 1, 1996 between the Company
and Erik Dysthe
10.10(1) Lease dated September 25, 1997 between Sun Life Assurance
Company of Canada and the Company
10.11(1) Lease dated April 8, 1993 between Cambridge Scanning Company
Limited and Spectronics Micro Systems Limited
10.12(5) Master Purchase and Sale Agreement dated June 1, 1999
between Digital Dispatch Systems Inc. and the Company
(without schedules or exhibits)*
-77-
Exhibit
Number Description
------ -----------
10.13(8) Agreement and Plan of Reorganization, dated as of May 9,
2000, among MDSI, MDSI Acquisition Corporation, Connectria
and Certain Principal Shareholders*
10.14(8) Form of Voting, Lockup and Registration Rights Agreement
among MDSI, MDSI Acquisition Corporation, Connectria and
Certain Principal Shareholders
10.15(2)(9) Employment Agreement dated March 26, 2001 between the
Company and Erik Dysthe
10.16(2)(9) Employment Agreement dated April 24, 2001 between the
Company and Gerald F. Chew
10.17(2)(9) Employment Agreement dated May 7, 2001 between the Company
and Peter H. Rankin
10.18 Lease dated October 12, 2001 between Crown Diversified
Industries Corporation and Connectria Corporation a
subsidiary of the Company
10.19 Lease dated May 14, 1999 between California Public
Employees' Retirement System and Mobile Data Solutions Inc.
a subsidiary of the Company
10.20 Amending Agreement dated December 1, 1998 between Sun Life
Assurance Company of Canada and the Company
10.21(2) Employment Agreement dated May 9, 2001 between the Company
and Richard S. Waidmann
10.22(2) Employment Agreement dated May 9, 2001 between the Company
and Eric Y. Miller
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-K for the year ended December 31, 1999.
(6) Previously filed as exhibits with the Registrant's Registration Statement
on Form S-8 filed on July 12, 2000.
(7) Previously filed as exhibits with the Registrant's Registration Statement
on Form S-8 filed on November 22, 2000.
(8) Previously filed as exhibits with the Registrant's Current Report on Form
8-K filed on June 15, 2000.
(9) Previously filed as exhibits with the Registrant's Form 10-Q for the
quarterly period ended September 30, 2001.
* 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.
-78-
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.
March 26, 2002.
MDSI MOBILE DATA SOLUTIONS INC.
By: /s/ Erik Dysthe
---------------------------------------
Erik Dysthe, President and Chief
Executive Officer, Chairman of the
Board and Director
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 President and Chief Executive
- --------------------------- Officer, Chairman of the Board
Erik Dysthe and Director (Principal Executive March 26, 2002
Officer)
/s/ Verne D. Pecho Vice President - Finance and
- --------------------------- Administration and Chief Financial
Verne D. Pecho Officer (Principal Financial and
Accounting Officer) March 26, 2002
/s/ Peter Ciceri
- ---------------------------
Peter Ciceri Director March 26, 2002
/s/ Robert C. Harris, Jr.
- ---------------------------
Robert C. Harris, Jr. Director March 26, 2002
/s/ Terrence P. McGarty
- ---------------------------
Terrence P. McGarty Director March 23, 2002
/s/ Marc Rochefort
- ---------------------------
Marc Rochefort Director March 26, 2002
/s/ David R. Van Valkenburg
- ---------------------------
David R. Van Valkenburg Director (Authorized U.S.
Representative) March 26, 2002
-79-
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
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
10.1(1)(2) 1996 Stock Option Plan
10.2(2)(4) 1997 Stock Option Plan
10.3(2)(4) 1998 Stock Option Plan
10.4(2)(5) 2000 Stock Purchase Plan
10.5(2)(5) 1999 Stock Option Plan
10.6(2)(6) 1998 Stock Option Plan for Connectria Corporation (formerly,
Catalyst Solutions Group, Inc.)
10.7(2)(7) 2000 Stock Option Plan
10.8(1) Form of Indemnification Agreement between the Company and
certain officers of the Company
10.9(1)(2) Employment Agreement dated April 1, 1996 between the Company
and Erik Dysthe
10.10(1) Lease dated September 25, 1997 between Sun Life Assurance
Company of Canada and the Company
10.11(1) Lease dated April 8, 1993 between Cambridge Scanning Company
Limited and Spectronics Micro Systems Limited
10.12(5) Master Purchase and Sale Agreement dated June 1, 1999
between Digital Dispatch Systems Inc. and the Company
(without schedules or exhibits)*
10.13(8) Agreement and Plan of Reorganization, dated as of May 9,
2000, among MDSI, MDSI Acquisition Corporation, Connectria
and Certain Principal Shareholders*
10.14(8) Form of Voting, Lockup and Registration Rights Agreement
among MDSI, MDSI Acquisition Corporation, Connectria and
Certain Principal Shareholders
10.15(2)(9) Employment Agreement dated March 26, 2001 between the
Company and Erik Dysthe
10.16(2)(9) Employment Agreement dated April 24, 2001 between the
Company and Gerald F. Chew
10.17(2)(9) Employment Agreement dated May 7, 2001 between the Company
and Peter H. Rankin
10.18 Lease dated October 12, 2001 between Crown Diversified
Industries Corporation and Connectria Corporation a
subsidiary of the Company
10.19 Lease dated May 14, 1999 between California Public
Employees' Retirement System and Mobile Data Solutions Inc.
a subsidiary of the Company
10.20 Amending Agreement dated December 1, 1998 between Sun Life
Assurance Company of Canada and the Company
10.21(2) Employment Agreement dated May 9, 2001 between the Company
and Richard S. Waidmann
10.22(2) Employment Agreement dated May 9, 2001 between the Company
and Eric Y. Miller
Exhibit
Number Description
------ -----------
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-K for the year ended December 31, 1999.
(6) Previously filed as exhibits with the Registrant's Registration Statement
on Form S-8 filed on July 12, 2000.
(7) Previously filed as exhibits with the Registrant's Registration Statement
on Form S-8 filed on November 22, 2000.
(8) Previously filed as exhibits with the Registrant's Current Report on Form
8-K filed on June 15, 2000.
(9) Previously filed as exhibits with the Registrant's Form 10-Q for the
quarterly period ended September 30, 2001.
* The Company agrees to supplementally furnish a copy of any omitted schedule
or exhibit to the Securities and Exchange Commission upon request.