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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, 2002
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]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes ___ No [X]
The aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold on Nasdaq as of the last business day of the registrant's most
recently completed second fiscal quarter, which was June 28,2002: $30,008,310
The number of shares of the Registrant's Common Shares outstanding as of
March 25, 2003 was 8,176,431.
TABLE OF CONTENTS
Item 1: Business..............................................................2
Item 2: Properties...........................................................21
Item 3: Legal Proceedings....................................................21
Item 4: Submission of Matters to a Vote of Security Holders..................22
Item 5: Market for Registrant's Common Equity And Related
Stockholder Matters................................................23
Item 6: Selected Financial Data..............................................26
Item 7: Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................27
Item 7A: Quantitative and Qualitative Disclosure About Market Risk...........42
Item 8: Financial Statements and Supplementary Data..........................42
Item 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure...............................................76
Item 10: Directors and Executive Officers of the Registrant..................77
Item 11: Executive Compensation..............................................80
Item 12: Security Ownership of Certain Beneficial Owners and Management......85
Item 13: Certain Relationships and Related Transactions......................86
Item 14: Controls and Procedures.............................................86
Item 15: Exhibits, Financial Statement Schedules and Reports on Form 8-K.....87
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: lengthy sales cycles, the Company's dependence upon large contracts
and relative concentration of customers, the failure of MDSI to maintain
anticipated levels of expenses in future periods and the risk that cost
reduction efforts adversely affect the ability of MDSI to achieve its business
objectives, the failure of MDSI to successfully execute its business strategies,
the effect of slow United States and international economies generally, the
threat or reality of war, 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, improvements,
implementations, 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
protection of intellectual property, risks associated with the collection of
accounts receivable, 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
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Period End US$0.6342 US$0.6275 US$0.6666 US$0.6925 US$0.6504
Average 0.6369 0.6461 0.6740 0.6744 0.6715
High 0.6656 0.6714 0.6983 0.6925 0.7105
Low 0.6175 0.6227 0.6397 0.6535 0.6341
On March 25, 2003 the noon buying rate was CDN$1.00 = US$0.6755. 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.
1
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 software 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 necessary to implement and support its
solutions. Founded in 1993, MDSI has approximately 100 major customers worldwide
with operations and support offices in the United States, Canada, and Europe.
MDSI markets its solutions to a variety of companies that have substantial field
service organizations, and focuses primarily upon utilities (electric, gas and
water companies), telecommunications companies, and cable/broadband companies.
MDSI's products are used by such companies in conjunction with various public
and private wireless data communications networks, mobile devices and server
hardware to provide comprehensive solutions for the automation of business
processes associated with the scheduling, dispatching and management of a mobile
workforce.
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 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 on paper, or through wireline solutions or
through 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 in these markets recognized
certain productivity benefits associated with
2
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 this initial low rate of adoption
was attributable to a number of factors including 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. In addition to
these factors, 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, Austral-Asia and Africa. 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 and completion 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' mobile technicians to use web browsers to interface with the
Company's software. 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.
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, the telecommunications industry, and the cable/broadband industry.
Advantex efficiently manages mobile workers and the work orders they execute. It
schedules work requests and, using complex business rules, assigns them to the
best available mobile worker. Advantex then dispatches work order details to
mobile workers 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. Advantex also determines the best sequence for mobile
workers to address their work orders and the best routes to travel between
assignments. This provides dispatchers, supervisors and enterprise applications,
such as call centers and customer information systems, with up-to-date
information to enable them to effectively monitor and manage field service
operations at all times.
3
Advantex is the result of more than ten years of development and has been
field validated by approximately 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, or is in the process of being implemented, for customers
supporting as few as 70 and as many as 13,000 users. 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 configured 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 Enterprise Connector--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.
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.
4
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 or other 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 sales of MDSI products
and services. See "Forward-Looking Statements."
Professional Services
A professional services engagement usually lasts for six to twelve months
and involves working with the customer in defining, configuring and installing
the Advantex solution, as well as integrating it with the customer's other
enterprise software solutions and training the client in how best to use
Advantex. The engagement generally occurs in three logical phases: definition,
configuration, 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 Configuration--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 other
mobile workforce management consulting services to enable customers to make the
most effective use of Advantex in their organizations to improve customer
satisfaction and increase operational efficiency.
5
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 from
the acceptance of Advantex.
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 utilities (electric, gas and water), telecommunications, and
cable/broadband markets. In total, MDSI believes that there are approximately
1.8 million mobile workers worldwide in its traditional markets, split
approximately evenly amongst North America, Western Europe, and certain other
commercially viable geographical markets in the rest of the world. During 2002,
the Company launched a product, MDSI Ideligo, to serve field service workforces
outside the Company's core markets. Within these markets, MDSI believes that
there are approximately 6.9 million mobile workers worldwide, split
approximately evenly amongst North America, Western Europe, and certain other
commercially viable geographical markets in the rest of the world. See "Other
Field Service Markets" 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."
During 2002, the Company stopped pursuing opportunities in the public safety
market. See "Public Safety" below.
Utilities. The utilities market targeted by the Company consists of
electric, gas and water companies worldwide, most notably in the United States,
Canada, Europe and to a lesser extent South America, Austral-Asia and Africa.
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 70 electric, gas 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 300 in the United States alone.
Telecommunications and Cable/Broadband. MDSI sells its Advantex product
into the telecommunications, and cable/broadband markets worldwide, most notably
in the United States, Canada, Europe and to a lesser extent in Africa,
Austral-Asia and South America. 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
6
telecommunication companies worldwide, including Belgacom S.A., Bravida A.S.A,
eircom P.L.C., TDC Tele Danmark A/S and TELKOM South Africa Limited. 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."
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. 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."
Other Field Service Markets. There are a large number of companies outside
MDSI's traditional markets that employ field service workforces, such as
security companies, office equipment companies, home appliance companies, as
well as many other organizations that contract field services as their primary
business, such as companies engaged in the maintenance and repair of oil wells,
IT/Networking services, 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 these markets. 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 this opportunity, MDSI has developed a subset of Advantex, called MDSI
ideligo, that is primarily comprised of the Advantex Wireless and Advantex
Mobile components. MDSI ideligo wirelessly communicates data in real-time
between the field and enterprise applications, automates workflow, and lets
field workers be more efficient and productive. Initially, MDSI has integrated
MDSI ideligo with Siebel Systems' Field Service application. Together, MDSI and
Siebel Systems Inc. have won one new customer, Texas-based Key Energy Services,
and have approached several additional prospects. MDSI anticipates integrating
MDSI ideligo with field service products from other independent software
vendors.
Public Safety. The Public Safety market consists of federal, state and
local agencies that provide police, fire, medical and other emergency services.
During 2001, MDSI ceased pursuing opportunities in the market and in 2002
reached an agreement with Datamaxx Applied Technologies, Inc. of Tallahassee,
Florida, granting Datamaxx exclusive license rights to MDSI's Public Safety
products in the North American public safety market and non-exclusive license
rights for such products outside North America. MDSI had installed solutions for
a limited number of customers, and the market has not represented a material
portion of MDSI's revenues.
7
Customers
For the year ended December 31, 2002, MDSI's software and services revenues
were distributed approximately as follows: 65% from the utilities (electric, gas
and water) market, 33% from the telecommunications and, cable/broadband market,
and the remaining 2% from other markets. During the year ended December 31, 2002
the Company generated approximately 68% of its revenue from North America,
approximately 30% of its revenue from Europe, Middle East and Africa, and the
remaining 2% of its revenue from other parts of the world.
The Company's customers vary in size from small local companies to large
regional and international organizations. During the year ended December 31,
2002, TELKOM South Africa Limited accounted for 10.1% of MDSI's overall revenue.
The Company anticipates that revenue from this customer will account for a
larger percentage of revenue in 2003. During the year ended December 31, 2001,
eircom P.L.C. accounted for 11.9% of MDSI overall revenue. 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. In the years ended
December 31, 2002, 2001, and 2000 , approximately 30.7%, 29.8%, and 30.6%,
respectively, of the Company's consolidated revenue was attributable to five or
fewer customers. The Company believes that this percentage will increase in 2003
and that revenue derived from a limited number of customers will continue to
represent a significant portion of its consolidated revenue.
In the years ended December 31, 2002, 2001, and 2000, revenue derived from
sales outside of North America accounted for 31.7%, 23.8%, and 23.6% of the
Company's total revenue, respectively. See "Note 10 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. 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.
During the fiscal years ended December 31, 2002, 2001 and 2000, the Company's
research and development expenses were $5.5 million, or 14.2% of revenue, $7.3
million, or 16.2% of revenue, and $8.2 million, or 15.8% of revenue,
respectively. 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."
8
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 and the vendors establishing a standard
integration of their products, then jointly identifying and executing on sales
prospects for the integrated solution. The Company has established such a
relationship for its MDSI ideligo product 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, IBM Business Consulting Services, CGI Group Inc., and
SchlumbergerSema, a business segment of Schlumberger Limited, 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."
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
9
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 emerged from Chapter 11 bankruptcy), CGI Group
Inc. (via its acquisition of Cognicase, Inc., that owned MDSI competitor M3i
Systems, Inc.), Intergraph Corporation, Axiom Corporation, Oracle Corporation,
Itron Inc. (via its acquisition of e-Mobile Data Inc.) and 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., a company that has historical relationships with
certain of the large telecommunications companies. Other competitors include
ClickSoftware, Inc., ViryaNet Ltd., which the Company mostly sees competing for
small accounts, and more recently Accenture FFE. In the cable/broadband market,
the Company's primary competitors are Telcordia Technologies Inc., C-Cor.net
Corp., PointServe Inc., CSG Systems International Inc., Viryanet Ltd., again
mostly for small accounts, and more recently Accenture FFE.
The Company believes that the principal competitive factors in other field
service markets are the ability to improve the customer service aspects of an
organization's business and increase the productivity of service
representatives. In this market, MDSI sells a wireless enablement product,
called MDSI ideligo, that is a subset of Advantex. MDSI ideligo provides a
mobile extension of selected field service application vendors' solutions. The
initial implementation has been with Siebel Systems' Field Service offering.
Other wireless enablement products are offered by Aether Systems Inc., Antenna
Systems, Broadbeam Corporation, Everypath Inc., Extended Systems Incorporated
and IBM, as well as a variety of other newer competitors. Also serving the
commercial field service market are enterprise application solution providers,
such as 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. MDSI believes that these enterprise application
vendors offer less comprehensive wireless enablement solutions than MDSI, and
are consequently potential partners for expanding MDSI's penetration in this
market.
Hosting and IT Services
In June 2000, the Company acquired all of the outstanding share capital of
Connectria Corporation, a Missouri corporation, for aggregate consideration of
845,316 Common Shares and the assumption of 583,037 stock options. The business
combination was accounted for under the pooling of interests method of
accounting. Connectria became the Company's Hosting and IT Services subsidiary.
In June 2002, as part of management's strategy to return MDSI's focus to mobile
workforce management in the Company's traditional markets, MDSI entered into an
Exchange Agreement to return ownership of Connectria to its former principal
shareholders, Richard S. Waidmann and Eric Y. Miller. The services of MDSI's
Hosting and IT Services comprised outsourcing, hosting and consulting, and
ranged from complete outsourcing of an IT department to providing turnkey IT
projects. Connectria's results of operations for 2002, 2001 and 2000 are
summarized in MDSI's Consolidated Statements of Operations as Income (Loss) From
Discontinued Operations. See Note 2 of the Company's Consolidated Financial
Statements for more detail regarding this transaction. Except as otherwise
indicated, the financial information in this Annual Report on Form 10-K excludes
the results of discontinued operations. The Company now operates as a single
business segment.
Employees
As of December 31, 2002, the Company had 325 full-time employees, including
134 in operations (including professional services, customer support and
operations management), 91 in product development and product management, 55 in
sales and marketing (including employees working on the Company's MDSI ideligo
10
initiative), and 45 in 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 10 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 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 cost in the 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, difficulties in collection of receivables, the
timing of new product announcements and introductions, difficulties encountered
in the protection of intellectual property rights, 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 economic and political 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 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. While the Company believes that economic conditions in
certain of its vertical markets show signs of improvement, the Company believes
that economic and political conditions and general trends are likely to continue
to affect demand for the Company's products and services in 2003, 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
11
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 2002, the Company's revenue declined compared to the
same period in 2001. 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, 2002, 2001 and
2000, 6.4%, 5.5%, and 3.4% 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.
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
12
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 the Company's or 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, 2002,
2001, and 2000, approximately 30.7%, 29.8%, and 30.6% respectively, of the
Company's consolidated revenue was attributable to five or fewer customers.
During the year ended December 31, 2002, TELKOM South Africa Limited accounted
for 10.1% of the Company's consolidated revenue. During the year ended December
31, 2001, eircom P.L.C. accounted for 11.9% of the Company's consolidated
revenue. During the year ended December 31, 2000, no single customer accounted
for 10% or more 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, effectively
negotiate the specifications for a workforce management system, 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 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.
13
The Company believes that unfavorable economic conditions and reduced
capital spending by existing and prospective customers have and may continue to
adversely affect demand for the Company's products and services in 2003. In
particular, service providers, utilities companies and telecommunications
companies in North America have been impacted since the latter half of 2000.
While the Company believes that economic conditions in certain of its vertical
markets show signs of improvement, the Company believes that economic conditions
and general trends are likely 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.
History of Losses and Fixed Operating Expenses
As of December 31, 2002, the Company had an accumulated deficit of $25.2
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
are 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 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, 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.
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
14
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.
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 counterclaims 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 addition, Citizens' counterclaims
allege fraud, negligent misrepresentation, breach of express warranty and breach
of implied warranties. Citizens seeks actual, special, incidental and
consequential damages associated with these claims, in addition to punitive
damages, interest and attorneys' fees. In March 2003, Citizens submitted an
expert report estimating that Citizens had incurred approximately $6.1 million
in damages due to lost productivity and direct costs, and that Citizens may be
entitled to additional contractual penalties from MDSI of approximately $1.1
million. On March 5, 2003, the court granted Citizens' motion for summary
judgment, dismissing MDSI's claims for lack of sufficient evidence of damages.
MDSI filed a motion for reconsideration of this ruling. On March 26, 2003, the
court denied MDSI's motion for reconsideration. MDSI cannot assure you that it
will be successful in reinstituting its claim for damages or that, if
successful, it will be able to recover on its claims at trial. Further, although
the court has granted MDSI's motion for partial summary judgment on Citizens'
breach of the professional services agreement, and MDSI believes that it will
successfully defend against Citizens' counterclaims, there can be no assurance
that MDSI will be successful in the defense of Citizens' counterclaims.
In its consolidated balance sheet as of December 31, 2002 and 2001, MDSI
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,
2002. MDSI has recorded $1.0 million of such amounts as doubtful accounts and
has not recorded any amounts claimed by Citizens as a contingent or other
liability of MDSI. If MDSI is not successful in its claims against Citizens,
MDSI may need to take a $2.7 million dollar charge to earnings. Additionally, if
MDSI is made to refund monies collected under the contract, MDSI may need to
take a further $3.5 million dollar charge to income to reflect this refund. If
the customer is successful in any fraud, negligent misrepresentation, breach of
express warranty or breach of implied warranties claims, the Company may need to
take an additional charge to earnings to the extent of the judgment. MDSI
believes that any amounts that it is required to pay to Citizens would be an
insured loss that is covered by insurance, other than any amounts that it is
required to pay to Citizens as a result of fraud or other intentional
misconduct. There is currently no provision in MDSI's financial statements to
address any refund or other payment to Citizens as MDSI views this to be an
unlikely event. If MDSI is not successful in the Citizens litigation, the loss
may have a material adverse impact on MDSI's business, results of operations,
financial condition or liquidity.
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 325 employees
located in Canada, the United States and
15
other international locations at December 31, 2002. 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. In July
2002, the Company completed the sale of its subsidiary Connectria Corporation,
reducing the size of its work force by 71 employees. 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 54% of the
Company's revenue. In 2000 the telecommunications and cable/broadband markets
accounted for greater than 53% of the Company's revenue. In 2002 and 2001 the
utility market accounted for 65% and 70% respectively 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 utility, telecommunications, and
cable/broadband 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 or continue to
earn revenue in current markets.
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
16
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 emerged from Chapter 11 bankruptcy), CGI Group
Inc. (via its acquisition of Cognicase, Inc., that owned MDSI competitor M3i
Systems, Inc.), Intergraph Corporation, Axiom Corporation, Oracle Corporation,
Itron Inc. (via its acquisition of e-Mobile Data Inc.) and 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., a company that has historical relationships with
certain of the large telecommunications companies. Other competitors include
ClickSoftware, Inc., ViryaNet Ltd., which the Company mostly sees competing for
small accounts, and more recently Accenture FFE. In the cable/broadband market,
the Company's primary competitors are Telcordia Technologies Inc., C-Cor.net
Corp., PointServe Inc., CSG Systems International Inc., Viryanet Ltd., again
only for small accounts, and more recently Accenture FFE.
The Company believes that the principal competitive factors in other field
service markets are the ability to improve the customer service aspects of an
organization's business and increase the productivity of service
representatives. In this market, MDSI sells a wireless enablement product,
called MDSI ideligo, that is a subset of Advantex. MDSI ideligo provides a
mobile extension of selected field service application vendors' solutions. The
initial implementation has been with Siebel Systems' Field Service offering.
Other wireless enablement products are offered by Aether Systems Inc., Antenna
Systems, Broadbeam Corporation, Everypath Inc., Extended Systems Incorporated
and IBM, as well as a variety of other newer competitors. Also serving the
commercial field service market are enterprise application solution providers,
such as 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. MDSI believes that these
17
enterprise application vendors offer less comprehensive wireless enablement
solutions than MDSI, and are consequently potential partners for expanding
MDSI's penetration in this market.
Risk of Product Defects and Implementation Failure
Software products, including those offered by the Company, contain
undetected errors or omissions. Software products, when implemented, installed,
configured and customized, may also fail to perform according to customer
expectations due to the failure by the customer to properly specify its system
requirements, failure by the customer to properly operate or interact with the
system, operator error, technical problems associated with the customer's host
system, or the resistance of the customer's workforce to the adoption of new
technology. In addition, software products may fail to perform according to
expectations due to the failure by the Company to properly design the system to
operate in the environment, infrastructure or communications network in which
the product is to be used. There can be no assurance that, despite testing by
the Company and by current and potential customers, that the Company's products
will be free of errors or that such products will perform according to
expectations with respect to response time, ability to communicate over multiple
networks, scalability, stability and ease of use. Such errors and failures could
result in loss of or delay in market acceptance of the Company's products, the
cancellation of contracts or the imposition of substantial penalties, any of
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 several
patent applications in the United States and internationally covering various
aspects of its technology, and has recently been granted a US patent for certain
aspects of Compose. The earliest of these applications has been granted and will
be issued as a U.S. patent, and the remainder are pending a substantive
examination. 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, the risk of 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 may 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
18
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 or employ subcontractors. 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 or subcontractor to provide a sufficient and reliable 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 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, 2002, 2001, and 2000 revenue derived from
sales outside of North America accounted for approximately 31.7%, 23.8%, and
23.6%, 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
19
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.
As a result of the international scope of the Company's operations, the
Company's business is carried out under an international corporate structure
that has been designed in part to optimize tax savings to the Company. The
effectiveness of this international corporate structure from a tax perspective,
and the corresponding risk of any negative financial impact on the Company from
the imposition of tax liability on the Company in the event such structure is
not effective, depends on the quality of the Company's internal compliance and
implementation procedures, as well as external regulatory factors such as
investigations, audits and decisions by tax officials and changes in tax laws,
regulations and policies.
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. See "forward looking statements."
Anti-Takeover Effects; Investment Canada Act
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 (the "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.
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, and acquired research
and development costs. As a result, the Company's Consolidated Financial
Statements included in this report may differ materially from the financial
statements filed by the Company in Canada.
20
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 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 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
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 payment of the contract balance, plus
other damages, interest and attorneys' fees. In late February 2001, Citizens
filed an answer and counterclaim 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 began discovery.
In October 2002, Citizens filed amended counterclaims alleging fraud, negligent
misrepresentation, breach of express warranty and breach of implied warranties.
Citizens seeks all actual, special, incidental and consequential damages
associated with these claims, in addition to punitive damages, interest and
attorneys' fees. In March 2003, Citizens submitted an expert report estimating
that Citizens had incurred approximately $6.1 million in damages due to lost
productivity and direct costs, and that Citizens may be entitled to additional
contractual penalties from MDSI of approximately $1.1 million. MDSI disputes
these claims and believes them to be without merit.
On March 5, 2003, the court granted Citizens' motion for summary judgment,
dismissing MDSI's claims for lack of sufficient evidence of damages. MDSI filed
a motion for reconsideration of this ruling. On March 26, 2003, the court denied
MDSI's motion.
On March 26, 2003, the court granted MDSI's motion for partial summary
judgment, finding that Citizens breached the professional services agreement by
wrongfully terminating the agreement.
21
MDSI has tendered the prosecution of its claim and the defense of Citizen's
counterclaims to Chubb Insurance Company. Chubb has accepted the claims under a
reservation of rights. MDSI believes that any amounts that it is required to pay
to Citizens would be an insured loss that is covered by insurance, other than
any amounts that it is required to pay to Citizens as a result of fraud or other
intentional misconduct. See "Forward-Looking Statements".
The scheduled trial date for this matter is April 7, 2003 in Texas District
Court Collin County. MDSI believes that it has various defenses against
Citizen's claims, and it intends to vigorously pursue these defenses as
appropriate. MDSI also believes that its claims against Citizens are strong and
it intends to vigorously pursue its claims for damages, on appeal, if necessary.
If, contrary to MDSI's expectations, MDSI is not successful in the Citizens
litigation, the loss may have a material adverse impact on MDSI's business,
results of operations, financial condition or liquidity. See "Business-Risk
Factors-Litigation" and "Forward-Looking Statements".
From time to time, the Company is a party to other 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, results of operations, financial condition or liquidity.
Item 4: Submission of Matters to a Vote of Security Holders
Not applicable.
22
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
---------- ---------- ---------- ---------- ---------- ----------
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
2002
First Quarter............. 4.29 3.31 6.76 5.22 4.25 3.40
Second Quarter............ 3.93 3.10 6.21 4.87 3.95 3.05
Third Quarter............. 3.48 2.83 5.50 4.47 3.62 2.87
Fourth Quarter............ 3.55 2.82 5.60 4.44 3.60 2.78
- ----------
(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, 2002 the Company had approximately 190 shareholders of
record, 77 shareholders of whom had addresses in the United States and who held
4,998,896 Common Shares, or 61.1% 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, 2002.
23
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.
24
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 are
effectively connected with a permanent establishment or fixed base
that the holder has in Canada, 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 25% or more 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 the disposition, the holder was
resident in Canada 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.
25
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, 2002, 2001 and 2000 and the consolidated
balance sheet data at December 31, 2002 and 2001 are derived from and are
qualified by reference to the Company's audited consolidated financial
statements. This selected consolidated financial data is presented in conformity
with generally accepted accounting principles in the United States.
Years ended December 31,
2002 2001 2000 1999 1998
------------- ------------- ------------- ------------- -------------
(In thousands, except per share data)
Statement of Operations Data:
Revenue $ 38,735 $ 44,706 $ 52,000 $ 52,157 $ 44,866
Gross profit 21,716 23,658 30,919 29,606 23,458
Operating (loss) income (2,409) (11,402) 1,060 7,781 5,944
(Loss) income from continuing
operations for the year (1)(2) (1,536) (13,454) 127 4,877 4,173
Diluted (loss) earnings per common
share $ (0.17) $ (1.64) $ (0.07) $ 0.13 $ 0.50
Weighted average shares outstanding 8,481 8,623 8,527 9,101 7,563
Balance Sheet Data: 2002 2001 2000 1999 1998
------------- ------------- ------------- ------------- -------------
Cash and cash equivalents $ 11,017 $ 13,176 $ 12,865 $ 14,750 $ 3,456
Working capital 9,364 11,918 24,084 23,783 8,637
Total assets 37,705 44,577 61,028 50,443 38,522
Non-current liabilities 1,914 3,050 6,738 3,399 3,945
Stockholders' equity 20,533 24,475 38,177 35,537 20,596
- ----------
(1) 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
$2,938,195 for bad debts with respect to several doubtful accounts.
(2) Net income from continuing operations for the year ended December 31, 2000
includes non-recurring charges of $1,691,028 for costs of merger with
respect to the Company's merger with Connectria, and $985,000 for bad debts
with respect to one doubtful account.
26
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 first and
sixth paragraphs under "Restructuring", the first and fifth paragraphs under
"Field Service Business", the sections entitled "Recent Accounting
Pronouncements" and "Critical Accounting Policies and Significant Estimates",
the subsections entitled "Revenue", "Direct Costs", "Gross Margins", "Research
and Development", "Sales and Marketing", "General and Administrative" and
"Income (loss) from Discontinued Operations", in "Year ended December 31, 2002
Compared to the Year ended December 31, 2001, and the fourth, eighth, ninth and
eleventh paragraphs under "Liquidity and Capital Resources". 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 for Advantex
Products", "Dependence on Large Contracts and Concentration of Customers",
"History of Losses and Fixed Expenses", "Integration of Acquisitions,"
"Litigation" 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.
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, configuration, customization and
training; (ii) maintenance and support, consisting of the provision of
after-sale support services as well as hourly, annual or extended maintenance
contracts; and (iii) third party products and services, consisting of the
provision of non-MDSI products and services as part of the total contract.
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. While the Company believes that economic conditions in certain of its
vertical markets show signs of improvement, the Company believes that economic
and political conditions and general trends are likely to continue to affect the
demand for the Company's products and services in 2003, 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.
27
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 were expected
to result in an estimated $2.9 million in cost reductions per quarter by the end
of 2002. A majority of the savings have been realized by reduced salary and
payroll costs, and the remaining savings have been realized from the subleasing
of excess space, and a reduction in discretionary spending. As a result of the
sale of the public safety operations during the second quarter of 2002, the
Company has exceeded the estimated quarterly savings. There can be no assurance
that the workforce 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 write-down of capital assets 563,780
Other 306,147
-------------------
Total restructuring charges 6,105,927
Cumulative draw-downs (4,848,592)
-------------------
Accrued restructuring charges as at December 31, 2002 $ 1,257,335
===================
During the year ended December 31, 2002 the Company made cash payments of
$1,876,325 relating to the restructuring accruals.
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 2002,
the provision balance has been fully drawn down by cash payments with no
additional amounts expected to be paid out.
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, where the Company has entered into fixed cost lease
arrangements, with agreements extending up to 2004. The Company has incurred
approximately $0.6 million of cash costs relating to this provision leaving an
accrual of $1.3 million as at December 31, 2002. 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 2002, the
full amount of the charge has been applied to the assets to value them at their
estimated net realizable value.
28
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, 2002, the Company has incurred cash costs of
approximately $0.3 million against this provision, with no additional amounts
expected to be paid out.
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 workforces require or where additional departments of mobile workers are
added, additional mobile computing devices may be installed, which may result in
additional revenue for the Company. See "Forward-Looking Statements."
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, quarterly, 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 and software
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.
During 2001, MDSI decided not to continue pursuing opportunities in the
Public Safety market. These opportunities consisted 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 this
market did not represent a material portion of MDSI's revenues. On May 24, 2002
the Company entered into an agreement with Datamaxx Applied Technologies Inc.
("Datamaxx"), granting exclusive license to Datamaxx for MDSI's Public Safety
products in North America, and non exclusive license rights for these products
outside North America. The Company also assigned its existing contracts in the
Public Safety market to Datamaxx. MDSI will receive royalty payments under the
agreement for any license and implementation revenue earned by Datamaxx in
relation to the licensed products, subject to a maximum royalty payout of
$1,500,000. As a result of this licensing agreement, the
29
Company has now exited the Public Safety market, and all employees related to
the Public Safety market were terminated prior to June 30, 2002.
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.
Disposition of Hosting and Information Technology (IT) Services Business Segment
In June 2002, MDSI adopted a plan for sale and entered into an agreement to
sell its Hosting and IT Services business segment, Connectria Corporation
(Connectria) to former Connectria shareholders who were both shareholders and
employees of the Company. The transaction closed in July 2002. Pursuant to the
terms of the agreement, the Company received from the former Connectria
shareholders 824,700 shares that had a market value of approximately $2.8
million and the cancellation of 103,088 previously issued stock options of MDSI
as consideration for Connectria. In addition to the share consideration, a
wholly-owned subsidiary of MDSI also received a warrant allowing it to purchase
up to 50,380 shares of Series A Nonvoting Preferred Stock of Connectria at a
price of $50 per share exercisable for a period of five years. The Series A
Nonvoting Preferred Stock of Connectria has a face value of $100 per share,
bears a dividend of five percent per annum, bears a liquidation preference equal
to the face value, may be redeemed at Connectria's option at any time, and must
be redeemed by Connectria upon a capital infusion of $10 million or greater. In
addition MDSI has advanced Connectria $500,000, consisting of a loan in the
principal amount of $250,000 with a two year term, bearing interest at 5%, and
$250,000 for prepaid hosting services. On closing, the Company realized a small
gain as a result of the disposition of Connectria.
As a result of its decision to dispose of Connectria, MDSI has treated this
business segment as a discontinued operation and the results of operations,
financial position and changes in 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 Connectria for the
current and corresponding prior periods.
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 promissory 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 during the year ended December 31, 2001.
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 corresponding prior periods.
30
Recent Accounting Pronouncements
In June 2002, the FASB issued SFAS No. 146 ("SFAS 146"), "Accounting for
Costs Associated with Exit or Disposal Activities". SFAS 146 requires that the
liability for a cost associated with an exit or disposal activity be recognized
at its fair value when the liability is incurred. Under previous guidance, a
liability for certain exit costs was recognized at the date that management
committed to an exit plan, which was generally before the actual liability had
been incurred. As SFAS 146 is effective only for exit or disposal activities
initiated after December 31, 2002, adoption of this statement will not impact
the Company's financial statements for fiscal 2002 but will affect the
accounting and recognition of any future restructuring costs.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN45). FIN 45 requires that upon
issuance of a guarantee, a guarantor must recognize a liability for the fair
value of an obligation assumed under a guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
recognition provisions of FIN 45 will be effective for any guarantees that are
issued or modified after December 31, 2002. The Company is currently evaluating
the effects of FIN 45; however, it does not expect that the adoption will have a
material impact on the Company's results of operations or financial position.
In December 2002, the FASB issued Statement of Financial Accounting
Standard No. 148 (SFAS 148), "Accounting for Stock-Based Compensation -
Transition and Disclosure". SFAS 148 provides alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. SFAS 148 also requires prominent disclosure
in the "Summary of Significant Accounting Policies" of both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. SFAS 148 is
effective for the Company's 2002 fiscal year. Adoption this statement will
affect the frequency of the Company's disclosure, but will not impact the
Company's results of operation or financial position until the Company changes
to the fair value method of accounting for stock-based employee compensation.
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
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 payments, operating costs
until terminated, or the offsetting sublease revenues may be proven incorrect
and actual cost may be materially different from the estimates.
31
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, 2002, the allowance for doubtful
accounts was $3.5 million. 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 software and service implementation contracts and thus its
revenue recognition. Under the percentage-of-completion method, sales and gross
profit are recognized as the work is performed based on the relationship between
costs incurred and the total estimated costs of completion. These estimates and
contracts are reviewed regularly and are adjusted prospectively to reflect the
Company's best estimate at the time. Provision for estimated losses on contracts
are recorded when identifiable. 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, during the year ended December
31, 2001 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.
Investments and Advances
During the year ended December 31, 2000 MDSI 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. During the year ended December 31, 2002
one of the Companies in which MDSI had made an $500,000 equity investment was
liquidated, with no net proceeds being realized by MDSI. As a result MDSI has
written off the investment of $500,000 against the valuation allowance set up
during the year ended December 31, 2001.
32
Contingencies
The Company is involved in a dispute with Citizens Telcom Services Co.,
L.L.C. The Company has filed suit against Citizens alleging that Citizens had
breached a series of contracts, and failed to pay sums due. Citizens has filed
an answer and counterclaim alleging the Company breached the contracts,
entitling Citizens to repayment of all sums paid to the Company of approximately
$3.5 million. In addition, Citizens' counterclaims allege fraud, negligent
misrepresentation, breach of express warranty and breach of implied warranties.
Citizens seeks all actual, special, incidental and consequential damages
associated with these claims, in addition to punitive damages, interest and
attorneys' fees. In March 2003, Citizens submitted an expert report estimating
that Citizens had incurred approximately $6.1 million in damages due to lost
productivity and direct costs, and that Citizens may be entitled to additional
contractual penalties from the Company of approximately $1.1 million. The
Company valued the receivable from Citizens at $2.7 million on its consolidated
balance sheet as of December 31, 2002. The Company believes that its position in
the matter is strong and intends to vigorously pursue collection. The Company
believes that any amounts that it is required to pay to Citizens would be an
insured loss that is covered by insurance, other than any amounts that it is
required to pay to Citizens as a result of fraud or other intentional
misconduct. Any judgment not in the Company's favor could materially affect the
Company's financial condition, results of operations, business or liquidity. See
"Business-Risk Factors-Litigation" and "Forward-Looking Statements".
33
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,
2002 2001 2000
------------------- ---------------- ------------------
(In thousands)
Revenue:
Software and services..................... $ 25,755 $ 32,066 $ 41,338
Maintenance and support................... 10,500 10,187 8,888
Third party products and services ........ 2,480 2,453 1,774
------------------- ---------------- ------------------
38,735 44,706 52,000
Direct costs................................. 17,019 21,048 21,081
------------------- ---------------- ------------------
Gross profit................................. 21,716 23,658 30,919
------------------- ---------------- ------------------
Operating expenses:
Research and development.................. 5,506 7,258 8,236
Sales and marketing....................... 12,382 10,859 12,206
General and administrative................ 6,237 6,075 6,447
Restructuring charge...................... -- 6,106 --
Amortization and provision for valuation
of intangible assets...................... -- 1,824 294
Costs of merger........................... -- -- 1,691
Provision for doubtful accounts........... -- 2,938 985
------------------- ---------------- ------------------
24,125 35,060 29,859
Operating (loss) income...................... (2,409) (11,402) 1,060
Valuation allowance on investments........... -- (2,750) --
Other income (expense) ...................... 273 177 (441)
------------------- ---------------- ------------------
(Loss) income from continuing operations
before tax provision......................... (2,136) (13,975) 619
Recovery of (provision for) income taxes
from continuing operations................... 600 521 (492)
------------------- ---------------- ------------------
(Loss) income for continuing operations (1,536) (13,454) 127
------------------- ---------------- ------------------
Income (loss) from discontinued operations 121 (653) (681)
------------------- ---------------- ------------------
Net loss for the year........................ $ (1,415) $ (14,107) $ (554)
=================== ================ ==================
34
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,
2002 2001 2000
------------------- ---------------- ------------------
Revenue:
Software and services..................... 66.6% 71.7% 79.5%
Maintenance and support..................... 27.2 22.8 17.1
Third party products and services........... 6.2 5.5 3.4
------------------ ---------------- -------------------
100.0 100.0 100.0
Direct costs................................... 43.9 47.1 40.5
------------------ ---------------- -------------------
Gross profit................................... 56.1 52.9 59.5
Operating expenses:
Research and development.................... 14.2 16.2 15.9
Sales and marketing......................... 32.0 24.3 23.5
General and administrative.................. 16.1 13.6 12.4
Restructuring charge........................ -- 13.6 --
Amortization and provision for valuation of
intangible assets........................ -- 4.1 0.6
Costs of merger............................. -- -- 3.2
Provision for doubtful accounts............. -- 6.6 1.9
------------------ ---------------- -------------------
62.3 78.4 57.5
Operating (loss) income........................ (6.2) (25.5) 2.0
Valuation allowance on investments............. -- (6.2) --
Other income (expense)......................... 0.7 0.4 (0.8)
------------------ ---------------- -------------------
(Loss) income from continuing operations
before tax provision.......................... (5.5) (31.3) 1.2
Recovery of (provision for) income taxes from
continuing operations.......................... 1.5 1.2 (1.0)
------------------ ---------------- -------------------
(Loss) income from continuing operations....... (4.0) (30.1) 0.2
Income (loss) from discontinued operations..... 0.3 (1.5) (1.3)
------------------ ---------------- -------------------
Net loss for the year.......................... (3.7)% (31.6)% (1.1)%
================== ================ ===================
Year ended December 31, 2002 Compared to the Year ended December 31, 2001
Revenue. Revenue decreased by $6.0 million (13.4%) for the year ended
December 31, 2002, compared to the year ended December 31, 2001. 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
maintenance and support.
Software and services revenue decreased by $6.3 million (19.7%) for the
year ended December 31, 2002, compared to the year ended December 31, 2001. The
Company believes its software and service revenue was adversely impacted by an
increase in time taken for the decision-making cycle regarding the purchase of
software, and reduction of capital expenditures by customers. This delay and
reduction in expenditure has caused fewer contracts to be worked on by the
Company in the year ended December 31, 2002 as compared to the year ended
December 30, 2001 and as a result has caused a reduction in revenue. While the
Company believes that economic conditions in certain of its vertical markets
show signs of improvement, the Company anticipates that economic conditions and
general trends are likely to continue to have an adverse impact on software and
services revenues in future periods. See "Forward-Looking Statements".
Maintenance and support revenue was $10.5 million for the year ended
December 31, 2002, compared to $10.2 million for the year ended December 31,
2001, an increase of 3.1%. The Company believes maintenance and support revenue
will continue to increase as the Company's installed customer base increases.
See "Forward-Looking Statements".
35
Third party products and services revenue increased by $27,000 (1.1%) for
the year ended December 31, 2002, compared to the year ended December 31, 2001.
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. In addition, not all customers under contract require the
provision of third party products and services. Accordingly, there may be large
fluctuations in revenue, direct costs, gross profits and income from operations
from one period to another. The Company has recently entered into an agreement
whereby it has agreed to supply a large amount of third party services at no
margin, in connection with one particular contract, and therefore expects that
future revenues from third party products and services will increase in the near
term. For the year ended December 31, 2002 approximately $0.1 million of these
third party services has been provided to date. See "Forward Looking
Statements."
Direct Costs. Direct costs were 43.9% of revenue for the year ended
December 31, 2002, compared to 47.1% for the year ended December 31, 2001.
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 direct costs as a
percentage of revenue occurred as the Company increased its efficiency due to
its restructuring, and as a result of increased experience with Advantex r7
installations. The Company has recently entered into an agreement whereby it has
agreed to supply a large amount of third-party services at no margin, in
connection with one particular contract. As a result, the Company expects that
future direct costs will increase as a percentage of revenue in the near term.
See "Forward-Looking Statements."
Gross Margins. Gross margins were 56.1% of revenue for the year ended
December 31, 2002, compared to 52.9% for the year ended December 31, 2001. The
increase in gross margin as a percentage of revenue relates primarily to the
increased efficiencies for the installations of Advantex r7. The Company has
recently entered into an agreement whereby it has agreed to supply a large
amount of third-party services at no margin. As a result, the Company expects
that gross margins as a percentage of revenue will decrease in the near term.
See "Forward-Looking Statements."
Research and Development. Research and development expenses were $5.5
million, or 14.2% of revenue, for the year ended December 31, 2002, compared to
$7.3 million, or 16.2% of revenue, for the year ended December 31, 2001. The
decrease in research and development expenses in 2002 is a result of research
and development personnel being utililized on revenue producing projects in the
current year, and corresponding portions of the associated salary costs for
these staff being reflected as direct costs as opposed to research and
development. The decrease is also the result of the Company's restructuring
efforts, and the completion of a major development project in the first quarter
of 2001. 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
32.0% of revenue for the year ended December 31, 2002 and $10.9 million or 24.3%
of revenue for the year ended December 31, 2001. Total sales and marketing
expenses represents an increase of approximately $1.5 million as compared to the
same period of 2001. The increase in expenditures in the current year was due to
an increase in commission costs relating to contracts entered into during the
period that are expected to generate significant revenues in future periods. See
"Forward-Looking Statements". The Company anticipates that the dollar amounts of
its sales and marketing expenses will continue to be significant as a result of
the Company's commitment to its international marketing efforts and attempts to
penetrate additional markets for its products. See "Forward-Looking Statements".
General and Administrative. General and administrative expenses were $6.2
million, or 16.1% of revenue, for the year ended December 31, 2002 and $6.1
million, or 13.6% of revenue, for the year ended December 31, 2001. General and
administrative expenses remained relatively consistent with the comparative
period as a result of a cost control effort initiated by the Company, offset by
one-time severance costs expensed during the year. The Company expects that in
the near future, general and administrative expenditures will remain relatively
consistent with current levels. See "Forward-Looking Statements".
36
Amortization and Provision for Valuation of Intangible Assets. The Company
adopted Statement of Financial Accounting Standard No. 142 "Goodwill and other
Intangible Assets" on a prospective basis at the beginning of fiscal 2002. As
the Company had taken a full valuation allowance against the remaining value of
intangible assets during the year ended December 31, 2001, Adoption of SFAS 142
on a prospective basis did not have a significant impact on the Company's
financial statements. Amortization and impairment charges for intangible assets
for the year ended December 31, 2001 were $1.8 million. The charge was 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 due to poor historical and forecasted
performance in the acquired company's business. The impact of not amortizing
goodwill on net (loss) income and net (loss) income per share for 2001 and 2000
is provided in Note 1 to the Consolidated Financial Statements.
Provision for Doubtful Accounts. During the year ended December 31, 2002
the Company recovered approximately $0.6 million from a previously allowed for
doubtful account. Also during the year ended December 31, 2002 the Company
determined that an additional allowance of approximately $0.6 million was
required due to significant uncertainty surrounding collection of a specific
account. The net result is that there was no charge recorded in the provision
for doubtful accounts for the year ended December 31, 2002. The Company included
in its operating results for the year ended December 31, 2001, a provision for
$2.9 million with respect to doubtful accounts. The Company intends to
vigorously pursue collection of these accounts; however due to uncertainty with
regard to ultimate collection, the Company determined that it would be prudent
to record an allowance to address the uncertainty regarding collection of
amounts due.
Valuation Allowance on Investments. No charge was recorded for valuation
allowance on investments during the year ended December 31, 2002, as a valuation
allowance equal to the remaining book value of investments was recorded during
the year ended December 31, 2001. As part of its 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 recorded a valuation allowance equal to the full cost of
the investments during the year ended December 31, 2001.
Other Income (expense). Other income was $0.3 million for the year ended
December 31, 2002, compared to $0.2 million for the year ended December 31,
2001. 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, 2002 at the rate of 28.1%, 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, 2002.
Income (loss) from Discontinued Operations. During the year ended December
31, 2002 the Company divested itself of its Hosting and IT services subsidiary
Connectria Corporation ("Connectria"). As a result, Connectria's results of
operations for the current and comparative periods have been presented as
Discontinued Operations. Income from Discontinued Operations for the year ended
December 31, 2002 was $121,000 as compared to a loss of $(653,000) for the year
ended December 31, 2001. The increase in the income from discontinued operations
was due to strict cost control efforts implemented at Connectria in the current
year, and the completion of the disposal of Connectria during the third quarter
of 2002. Going forward, the Company expects no further financial statement
impact from this disposition.
37
Year ended December 31, 2001 Compared to the Year ended December 31, 2000
Revenue. Revenue decreased by $7.3 million (14.0%) for the year ended
December 31, 2001, compared to the year ended December 31, 2000. The decrease
was primarily due to the decrease in software and services revenues, partially
offset by an increase in the revenue earned from third party products and
services and maintenance and support.
Software and services revenue decreased by $9.3 million (22.4%) 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.
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%. Maintenance and support revenues increased primarily
due to the increase in the level of the Company's installed customer base.
Third party products and services revenue increased by $0.7 million (38.3%)
for the year ended December 31, 2001, compared to the year ended December 31,
2000. The Company's revenue from deliveries of third party products and services
fluctuates from period to period depending upon the timing of certain contracts
and the rollout schedules that are established primarily by the customers.
Direct Costs. Direct costs were 47.1% of revenue for the year ended
December 31, 2001, compared to 40.5% 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.
Gross Margins. Gross margins were 52.9% of revenue for the year ended
December 31, 2001, compared to 59.5% for the year ended December 31, 2000. Gross
margins were 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 $7.3
million, or 16.2% of revenue, for the year ended December 31, 2001, compared to
$8.2 million, or 15.8% of revenue, for the year ended December 31, 2000. The
11.9% 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.
Sales and Marketing. Sales and marketing expenses were $10.9 million or
24.3% of revenue for the year ended December 31, 2001 and $12.2 million or 23.5%
of revenue for the year ended December 31, 2000. This represents a decrease of
$1.3 million (11.0%) as compared to 2000. The decrease was due to the Company's
restructuring and cost control efforts, which resulted in a decrease in
discretionary spending pertaining to sales and marketing activities.
38
General and Administrative. General and administrative expenses were $6.1
million, or 13.6% of revenue, for the year ended December 31, 2001 and $6.4
million, or 12.4% 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.
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 goodwill acquired on the acquisition of Alliance
Systems, Inc. had occurred during the year ended December 31, 2001. The Company
determined that 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 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, 2001 a provision for $2.9 million and
for the year ended December 31, 2000 a provision of $1.0 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, and the ultimate amount that will be collected, the Company
determined that it would be prudent to record an allowance to address the
uncertainty regarding collection of amounts due.
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 $(0.4) 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 income tax recoveries on losses for
the year ended December 31, 2001 at the rate of 4.3%, 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.
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.
Income (loss) from Discontinued Operations. During the year ended December
31, 2002 the Company announced its intention to divest itself of its Hosting and
IT services subsidiary Connectria Corporation (Connectria). As a result,
Connectria's results of operations for the current and comparative periods have
been presented as Discontinued Operations. Loss from Discontinued Operations for
the year ended December 31, 2001 of $0.7 million is relatively consistent with
the loss of $0.7 million for the year ended December 31, 2000.
39
Liquidity and Capital Resources
The Company has financed its operations, acquisitions and capital
expenditures with cash generated from operations, loans, private placements and
public offerings of its securities. At December 31, 2002, the Company had cash
and cash equivalents of $11.0 million (2001 - $13.2 million) and working capital
of $9.4 million (2001 - $11.9 million).
Cash provided by (used in) operating activities was $2.3 million, $3.2
million and $(0.6) million, respectively, for the years ended December 31, 2002,
2001 and 2000. The $2.3 million of cash provided by operating activities in 2002
was comprised of $1.5 million net loss, non-cash charges of $2.5 million, and
$1.3 million of changes to non-cash working capital items. The changes to
working capital items include a $3.5 million decrease in trade receivables, a
$1.0 million increase in unbilled receivables, a $0.3 million decrease in
prepaid expenses, a $2.2 million decrease in accrued liabilities, a $0.1 million
decrease in trade payables, a $1.0 million increase 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 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 maintains as at December 31, 2002 a provision of $3.5 million
with respect to doubtful accounts. The Company intends to vigorously pursue
collection of these accounts; however, due to uncertainty with regards to
ultimate collection, the Company determined that it would be prudent to maintain
an allowance to address this uncertainty.
The Company is currently involved in a dispute with a customer, and as a
result had previously 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. As part of its total $3.5 million dollar doubtful accounts provision,
the Company has recorded an allowance of $1.0 million, against this receivable
given the uncertain nature of collection. The Company is currently involved in
litigation to collect the amounts due. The nature and amount of the Company's
claims, the customer's counterclaims and recent developments in the litigation
are described more fully under Item 3 of this Annual Report. Should the Company
not be successful in its claims against the customer the Company may be required
to take a $2.7 million dollar charge to earnings. Additionally, if the Company
is required to refund monies collected under the contract, the Company may be
required to take a further $3.5 million dollar charge to income to reflect this
refund. If the customer is successful in any fraud, negligent misrepresentation,
breach of express warranty or breach of implied warranties claims, the Company
may be required to take an additional charge to earnings to the extent of the
judgment. The Company believes that any amounts that it is required to pay to
the customer would be an insured loss that is covered by insurance, other than
any amounts that it is required to pay to the customer as a result of fraud or
other intentional misconduct. There is currently no provision in the Company's
financial statements to address any refund or other payment to the customer as
the Company views this to be an unlikely event. The Company believes that its
position in the matter is strong and intends to vigorously pursue collection. If
the Company is not successful in the litigation, the Company's financial
position, results of operations, business or liquidity could be materially
adversely affected. See "Business-Risk Factors-Litigation" and "Forward-Looking
Statements".
Cash provided by (used in) financing activities was $(1.7) million, $(1.6)
million and $4.9 million, respectively, during the years ended December 31,
2002, 2001 and 2000. The cash used in financing activities in 2002 comprised
$2.0 million in repayments of capital leases and $0.3 million from the issuance
of common shares.
Cash used in investing activities was $2.2 million, $0.9 million, and $4.2
million, respectively, for the years ended December 31, 2002, 2001 and 2000.
Total investing activity in 2002 primarily consisted of $2.1 million for the
purchase of capital equipment, including computer hardware and software for use
in research and development activities, and to support the growth of the
Company's corporate information systems.
Existing sources of liquidity at December 31, 2002 include $11.0 million of
cash and cash equivalents and funds available under the Company's operating line
of credit. At the year ended December 31, 2002, the Company's borrowing capacity
under the line of credit was up to $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
40
rate plus 0.5%. At December 31, 2002, the Company was not using this line of
credit, other than to secure performance guarantees.
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. 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. See "Forward Looking
Statements". As at December 31, 2002 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 $ 4,390,957 $ 2,343,275 $ 2,047,682 -- --
Obligations
Operating Leases $ 6,832,701 $ 1,144,771 $ 2,672,759 $ 2,082,469 $ 932,702
Total Contractual $11,223,658 $ 3,488,046 $ 4,720,441 $ 2,082,469 $ 932,702
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 501,082 (USD $516,114) expiring May 31, 2003, and letters of credit in the
amount of EUR 75,855 (USD $78,131) expiring February 28, 2003, $397,760 expiring
May 1, 2003, and CAD $1,864,568 (USD $1,187,623) expiring October 1, 2003. The
Company has pledged an amount equal to the letters of credit as guarantees
against its operating line of credit as security.
The Company has entered into a significant customer contract in which the
Company has agreed to utilize a certain amount of local services and create a
certain amount of commercial activity in South Africa. The Company is in the
last stages of negotiating the terms and conditions that relate to this
obligation. Based on current negotiations, the Company expects that it will be
required to utilize local content or obtain credits equivalent to approximately
$7 million over a seven year period. The Company expects that it will be
required to furnish a performance guarantee equal to approximately 5% of such
amounts. The Company expects to fulfill its obligation through a number of
activities, including the establishment of a software development center in
South Africa, the provision of technical services, and the provision of training
to local systems integrators who will be able to provide implementations
services with respect to the Company's software products. As the Company expects
to fulfill its obligations through the purchase of services in the normal course
of business, no liability has been established for these future spending
commitments.
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 subsidiary
and are typically denominated in either U.S.
41
dollars or Euros. The Company also incurs a significant portion of expenses
outside the United States, principally in Canada and Europe, which are typically
denominated in Canadian dollars, Euros or British pounds. 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, 2002, and 2001 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 2002. However, the
Company may from time-to-time hedge any net exposure to currencies other than
the United States dollar.
As of December 31, 2002, 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.
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. Consolidated
Financial Statements" of Item 15 herein, are included immediately following this
page.
42
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, 2002 and 2001 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, 2002. 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,
2002 and 2001 and the results of its operations and cash flows for each of the
years in the three year period ended December 31, 2002 in conformity with
accounting principles generally accepted in the United States of America.
On January 28, 2003, except for Note 9(c), as to which the date is March
27, 2003, 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
January 28, 2003, except for Note 9(c), as to which the date is March 27, 2003
43
MDSI MOBILE DATA SOLUTIONS INC.
Consolidated Balance Sheets
(Expressed in United States dollars)
As at December 31,
------------------------------------
2002 2001
------------ -------------
Assets
Current assets
Cash and cash equivalents $11,016,945 $13,176,080
Accounts receivable, net
Trade (net of allowance for doubtful accounts of $2,506,614;
2001 - $3,587,303) 6,705,088 9,229,663
Unbilled 5,347,993 4,331,924
Prepaid expenses and other assets (note 8) 1,552,236 1,866,459
Income taxes receivable - 366,506
------------ -------------
Total current assets 24,622,262 28,970,632
Capital assets, net (note 4) 9,798,087 7,635,248
Long term receivable (note 9(c)) 2,749,860 3,749,860
Deferred income taxes (note 7) 534,640 364,640
------------ -------------
37,704,849 40,720,380
Assets of discontinued operations (note 2) - 3,856,440
------------ -------------
Total assets $37,704,849 $44,576,820
============ =============
Liabilities and stockholders' equity
Current liabilities
Accounts payable $1,777,465 $1,961,656
Accrued liabilities (note 13) 3,300,113 5,421,808
Income taxes payable 602,717 -
Deferred revenue 7,503,613 7,685,068
Current obligations under capital lease (note 9(a)) 2,073,906 1,984,018
------------ -------------
Total current liabilities 15,257,814 17,052,550
Obligations under capital leases (note 9(a)) 1,913,538 1,301,996
------------ -------------
17,171,352 18,354,546
Liabilities of discontinued operations (note 2) - 1,747,521
------------ -------------
Total liabilities 17,171,352 20,102,067
------------ -------------
Stockholders' equity
Common stock (note 6)
Authorized:
Unlimited common shares with no par value
Issued: 8,176,431 shares; 2001: 8,676,020 shares 44,208,511 48,519,060
Additional paid-up capital 2,222,128 522,621
Treasury stock nil; (2001:13,745 shares) - (85,043)
Accumulated other comprehensive (loss) (690,104) (690,104)
Deficit (25,207,038) (23,791,781)
------------ -------------
20,533,497 24,474,753
------------ -------------
Total liabilities and stockholders' equity $37,704,849 $44,576,820
============ =============
Commitments and contingencies (note 9)
See accompanying notes to the consolidated financial statements
44
MDSI MOBILE DATA SOLUTIONS INC.
Consolidated Statements of Operations
(Expressed in United States dollars)
Years ended December 31,
------------------------------------------------------
2002 2001 2000
------------ ------------- ------------
Revenue
Software and services $25,754,805 $32,065,559 $41,338,221
Maintenance and support 10,500,287 10,186,907 8,887,738
Third party products and services 2,480,368 2,453,137 1,774,031
------------ ------------- ------------
38,735,460 44,705,603 51,999,990
------------ ------------- ------------
Direct costs 17,019,346 21,047,146 21,080,654
------------ ------------- ------------
Gross profit 21,716,114 23,658,457 30,919,336
------------ ------------- ------------
Operating expenses
Research and development 5,505,810 7,258,396 8,235,472
Sales and marketing 12,381,679 10,858,596 12,206,265
General and administrative 6,237,194 6,075,396 6,447,135
Restructuring charge (note 13) - 6,105,927 -
Amortization and provision
for valuation of intangible assets (note 5) - 1,824,058 294,247
Costs of merger - - 1,691,028
Provision for doubtful accounts - 2,938,195 985,000
------------ ------------- ------------
24,124,683 35,060,568 29,859,147
------------ ------------- ------------
Operating (loss) income (2,408,569) (11,402,111) 1,060,189
Valuation allowance on investments (note 3) - (2,749,992) -
Other income (expense) 272,988 177,200 (441,483)
------------ ------------- ------------
(Loss) income from continuing operations before tax provision (2,135,581) (13,974,903) 618,706
Recovery of (Provision for) income taxes from
continuing operations (note 7) 599,293 521,375 (491,505)
------------ ------------- ------------
(Loss) income from continuing operations (1,536,288) (13,453,528) 127,201
Income (loss) from discontinued operations (note 2) 121,031 (653,165) (681,601)
------------ ------------- ------------
Net loss for the year ($1,415,257) ($14,106,693) ($554,400)
============ ============= ============
(Loss) earnings per common share
(Loss) earnings from continuing operations
Basic ($0.18) ($1.56) $0.01
============ ============= ============
Diluted ($0.18) ($1.56) $0.01
============ ============= ============
Net loss
Basic ($0.17) ($1.64) ($0.07)
============ ============= ============
Diluted ($0.17) ($1.64) ($0.07)
============ ============= ============
See accompanying notes to the consolidated financial statements
45
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, 2000 8,226,596 44,961,759 220,700 (85,043) (429,438) (9,130,688) 35,537,290
Issued on exercise of
stock options 369,236 3,268,972 -- -- -- -- 3,268,972
Issued under stock
purchase plan (Note 6(b)) 16,621 185,771 -- -- -- -- 185,771
Change in foreign
exchange fluctuations -- -- -- -- (260,666) -- (260,666)
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
charge -- -- 301,921 -- -- -- 301,921
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
Issued on exercise of
stock options 253,181 65,366 -- -- -- -- 65,366
Issued under stock
purchase plan (Note 6(b)) 85,405 212,614 -- -- -- -- 212,614
Redemption of shares
during year on
divestiture of
subsidiary (Note 2) (824,700) (4,515,766) 1,711,787 -- -- -- (2,803,979)
Redemption of treasury
shares (13,475) (72,763) (12,280) 85,043 -- -- --
Net loss for the year -- -- -- -- -- (1,415,257) (1,415,257)
-----------------------------------------------------------------------------------------------------
Balance, December 31, 2002 8,176,431 $44,208,511 $2,222,128 $ -- $(690,104) $(25,207,038) $20,533,497
====================================================================================================================================
See accompanying notes to the consolidated financial statements
46
MDSI MOBILE DATA SOLUTIONS INC.
Consolidated Statements of Cash Flows
(Expressed in United States dollars)
Years ended December 31,
----------------------------------------------------------
2002 2001 2000
--------------- --------------- --------------
Cash flows from operating activities
Net (loss) income from continuing operations for the year $ (1,536,288) $ (13,453,528) $ 127,201
Items not affecting cash:
Depreciation, amortization and provision for valuation of 2,706,987 4,502,772 2,551,927
intangible assets
Write down in value of surplus capital assets - 563,780 -
Valuation allowance on investments - 2,749,992 -
Deferred income taxes (170,000) (17,290) 230,077
Stock based compensation charge - 301,921 -
Changes in non-cash operating working capital items (Note 11) 1,304,612 8,558,044 (3,498,577)
--------------- --------------- --------------
Net cash provided by (used in) operating activities 2,305,311 3,205,691 (589,372)
--------------- --------------- --------------
Cash flows from financing activities
Issuance of common shares 277,980 102,558 3,454,743
Proceeds from (repayment of) capital leases (1,989,664) (1,727,326) 1,413,858
--------------- --------------- --------------
Net cash (used in) provided by financing activities (1,711,684) (1,624,768) 4,868,601
--------------- --------------- --------------
Cash flows from investing activities
Repayment of lease receivable - 133,724 386,860
Acquisition of investments - - (2,748,029)
Proceeds on sale of investments - 331,458 3,807,039
Acquisition of intangible asset - - (220,000)
Acquisition of capital assets (2,178,732) (1,346,279) (5,393,504)
--------------- --------------- --------------
Net cash used in investing activities (2,178,732) (881,097) (4,167,634)
--------------- --------------- --------------
Net cash (used in) provided by continuing operations (1,585,105) 699,826 111,595
Net cash used in discontinued operations (note 2) (574,030) (388,727) (1,735,988)
--------------- --------------- --------------
Net cash (outflow) inflow (2,159,135) 311,099 (1,624,393)
Effects of foreign exchange fluctuations on cash - - (260,666)
Cash and cash equivalents, beginning of year 13,176,080 12,864,981 14,750,040
--------------- --------------- --------------
Cash and cash equivalents, end of year $ 11,016,945 $ 13,176,080 $ 12,864,981
=============== =============== ==============
Supplemental disclosure of cash flow information
Cash payments for interest $ 174,619 $ 387,773 $ 148,798
=============== =============== ==============
Cash (refund) payment for taxes $ (1,320,664) $ 326,694 $ 2,110,283
=============== =============== ==============
See accompanying notes to the consolidated financial statements
47
MDSI MOBILE DATA SOLUTIONS INC.
Consolidated Statements of Cash Flows
(Expressed in United States dollars)
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING AND FINANCING ACTIVITIES
During the year ended December 31, 2002 MDSI completed an agreement to sell
its Hosting and IT Services business segment, Connectria Corporation
(Connectria). Pursuant to the terms of the agreement, the Company received from
the former Connectria shareholders 824,700 shares that had an approximate market
value of $2.8 million and the cancellation of 103,088 previously issued stock
options of MDSI as consideration for Connectria. In addition to the share
consideration, a wholly-owned subsidiary of MDSI received a warrant allowing it
to purchase up to 50,380 shares of Series A Nonvoting Preferred Stock of
Connectria at a price of $50 per share exercisable for a period of five years.
The Series A Nonvoting Preferred Stock of Connectria has a face value of $100
per share, bears a dividend of five percent per annum, bears a liquidation
preference equal to the face value, may be redeemed at Connectria's option at
any time, and must be redeemed by Connectria upon a capital infusion of $10
million or greater.
During the year ended December 31, 2002 the Company entered into two
capital lease arrangements for the gross amount of $2,922,078 for newly
purchased capital assets. As a result of these arrangements the Company did not
incur cash outlays to purchase these assets but will pay lease obligations with
interest accruing at interest rates of up to 9.5% over terms of up to three
years. Since these asset purchases in 2002 are non cash transactions, the gross
amount of the leases have been excluded from both the Acquisition of Capital
Assets and Proceeds from Capital Leases line items, and instead only the
principal portion of repayments in 2002 of $230,984 have been included in these
line items. In future periods, as additional principal repayments are made under
these capital leases those amounts will be included in the Cash Flow Statement
in order to properly reflect the cash flows during the period.
See accompanying notes to the consolidated financial statements
48
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2002, 2001 and 2000
(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.
In June 2002, MDSI adopted a plan for sale and entered into an
agreement to sell its Hosting and IT services business segment
Connectria Corporation (Connectria) to former Connectria shareholders
who were both shareholders and employees of the Company. As a result
of this transaction, the consolidated financial statements and related
footnotes have been restated to present the results of the business as
discontinued operations (Note 2).
(b) Nature of operations
The Company develops, markets and supports workforce management
software solutions for use in the mobile service industry. Prior to
the disposition of Connectria (Note 2), the Company was also a
provider of managed application services.
(c) Research and development
Research and development costs related to software are expensed as
incurred unless a project meets the specified criteria for
capitalization in accordance with Statement of Financial Accounting
Standard No. 86 Accounting for the Costs of Computer Software to be
Sold, Leased or Otherwise Marketed. Acquired research and development
costs related to software are charged to earnings on acquisition if
there is no alternative future use and technological feasibility has
not been established.
(d) Revenue recognition
In December 1999, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin ("SAB") 101, Revenue Recognition in
Financial Statements which provides guidance related to revenue
recognition based on interpretations and practices followed by the
SEC. SAB 101 requires companies to report any changes in revenue
recognition as a cumulative change in accounting principle at the time
of implementation in accordance with Accounting Principles Board
Opinion 20 "Accounting Changes." The Company adopted SAB 101 for the
Company's year ended December 31, 2000. Based on the Company's
interpretation of SAB 101, the Company believes its revenue
recognition policies are consistent with SAB 101 and as a result 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
49
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2002, 2001 and 2000
(Expressed in United States dollars)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
(d) Revenue recognition
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.
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. These estimates and contracts are
reviewed regularly and are adjusted prospectively to reflect
the Company's best estimate at the time. Where the Company
has contracted to deliver software without significant
production, modification or customization required, revenue
is recognized upon delivery if persuasive evidence of an
arrangement exists, the fee is fixed and determinable,
vendor specific objective evidence exists to allocate the
total fee to elements of the arrangement and there is
reasonable assurance of collection. Provisions for estimated
losses on contracts are recorded when identifiable.
(ii) 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.
(iii) 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.
50
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2002, 2001 and 2000
(Expressed in United States dollars)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
(f) Intangible Assets
Intangible assets previously consisted of goodwill arising on the
acquisition of Alliance Systems Inc., and the purchase of a commercial
web-site domain name and were previously amortized on a straight line
basis over ten and five years respectively. All intangible assets were
written off during the year ended December 31, 2001 (note 5).
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. As a result of the Company's decision to write-off
goodwill during the year ended December 31, 2001, the adoption of SFAS
142 on a prospective basis did not have a significant impact on the
Company's financial statements.
The Company adopted SFAS 142 on a prospective basis at the beginning
of fiscal 2002. Net loss and net loss per share adjusted to exclude
goodwill and other intangible assets that would not have been subject
to amortization for 2002, 2001 and 2000 are as follows:
Year ended December 31,
-----------------------------------------------------
2002 2001 2000
------------- ------------- -------------
Net loss for the year as reported $(1,415,257) $(14,106,693) $(554,400)
Adjustments
Amortization of goodwill - 989,693 (272,247)
Amortization of other intangible assets - 22,000 (22,000)
------------- ------------- -------------
Adjusted net loss $(1,415,257) $(15,118,386) $(260,153)
============= ============= ==============
Basic and diluted net loss per share, as $ (0.17) $ (1.64) $ (0.07)
reported
Basic and diluted net loss per share, as $ (0.17) $ (1.75) $ (0.03)
adjusted
51
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2002, 2001 and 2000
(Expressed in United States dollars)
(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,
------------------------------------------------------
2002 2001 2000
-------------- -------------- --------------
Net loss for the year $(1,415,257) $(14,106,693) $(554,400)
Other Comprehensive items
- Translation adjustment - - (260,666)
-------------- -------------- --------------
Comprehensive net income for the year $(1,415,257) $(14,106,693) $(815,066)
============== ============== ===============
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
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.
52
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2002, 2001, and 2000
(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 (loss) per common share from continuing
operations and the weighted average shares used in the earnings per
share ("EPS") calculations for fiscal years 2002, 2001 and 2000 is as
follows:
Net (Loss) (Loss) Earnings
Income from Continuing Shares Per Share from
Operations (Numerator) (Denominator) continuing operations
-------------------------------------------------------------------------
2002
----
Basic $ (1,536,288) 8,480,866 $ (0.17)
Effect of stock options - -
------------------------------------------------------------------------
Diluted $ (1,536,288) 8,480,866 $ (0.17)
=========================================================================
2001
----
Basic $ (13,453,528) 8,623,296 $ (1.56)
Effect of stock options - -
-------------------------------------------------------------------------
Diluted $ (13,453,528) 8,623,296 $ (1.56)
=========================================================================
2000
----
Basic $ 127,201 8,526,723 $ 0.01
Effect of stock options 1,672,116 -
-------------------------------------------------------------------------
Diluted $ 127,201 10,198,839 $ 0.01
=========================================================================
53
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2002, 2001, and 2000
(Expressed in United States dollars)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
(j) Earnings (loss) per common share (continued)
Options and warrants to purchase 1,291,181, 2,056,361, and 641,828
shares of common stock were outstanding during fiscal 2002, 2001 and
2000 respectively, but were not included in the computation of diluted
EPS because of the net loss in fiscal 2002, 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, accrual for
restructuring charges, 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, 2002 and December 31, 2001 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 loss
for the year and loss per common share had the Company adopted
Statement of Financial Accounting Standard No. 123 (SFAS 123)
Accounting for Stock-based Compensation.
2002 2001 2000
------------- ------------- -------------
Net loss for the year $(1,952,390) $(16,189,425) $(6,521,603)
------------- ------------- -------------
Basic and fully diluted loss per common share $(0.23) $(1.87) $(0.76)
============= ============== ==============
Using the fair value method for stock-based compensation, additional
compensation costs of approximately $537,133 would have been recorded
for the year ended December 31, 2002 (2001 - $2,082,732 and 2000 -
$5,967,203 respectively). This amount is determined using an option
pricing model assuming no dividends are to be paid, an average vesting
period of four years (2001 - 3 years; 2000 - 3 years), average life of
the option of 5 years (2001 - 5 years; 2000 5 years) a weighted
average annualized volatility of the Company's share price of 73%
(2001 - 96% and 2000 - 81% respectively) and a weighted average
annualized risk free interest rate at 2.7% (2001 3.7% and 2000 - 7.00%
respectively).
54
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2002, 2001, and 2000
(Expressed in United States dollars)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
(m) Stock-based compensation (continued)
In March 2000, the Financial Accounting Standards Board ("FASB")
issued FASB interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation - an interpretation of APB
Opinion No. 25" ("FIN 44"). FIN 44 clarifies the application of APB
Opinion No. 25 and among other issues clarifies the following: the
definition of an employee for purposes of applying APB Opinion No. 25,
the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequences of various
modifications to the terms of the previously fixed 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 other
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 one reportable segment, Field Service and has reported in
accordance with SFAS 131 in note 10.
(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.
55
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2002, 2001, and 2000
(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) Product Warranties
The company generally provides a limited warranty of ninety days on
its products and holds back a portion of revenue as deferred revenue
based on its experience. The deferred revenue is then recognized
ratably over the warranty period. Reconciliation of the deferred
product warranty revenue held back for the years ended December 31,
2002 and 2001 is as follows:
December 31,
2002 2001
----------------------------
Beginning Balance $ 511,351 $1,145,758
Revenue holdback for new warranties issued 607,488 172,800
Reduction for warranty obligations satisfied (612,745) (807,207)
----------------------------
Total deferred warranty revenue $ 506,094 $ 511,351
============================
(s) Recent accounting pronouncements
In June 2002, the FASB issued SFAS No. 146 ("SFAS 146"), "Accounting
for Costs Associated with Exit or Disposal Activities". SFAS 146
requires that the liability for a cost associated with an exit or
disposal activity be recognized at its fair value when the liability
is incurred. Under previous guidance, a liability for certain exit
costs was recognized at the date that management committed to an exit
plan, which was generally before the actual liability had been
incurred. As SFAS 146 is effective only for exit or disposal
activities initiated after December 31, 2002, adoption of this
statement will not impact the Company's financial statements for
fiscal 2002 but will affect the accounting and recognition of any
future restructuring costs.
In November 2002, the FASB issued FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others" (FIN45). FIN
45 requires that upon issuance of a guarantee, a guarantor must
recognize a liability for the fair value of an obligation assumed
under a guarantee. FIN 45 also requires additional disclosures by a
guarantor in its interim and annual financial statements about the
obligations associated with guarantees issued. The disclosure
provisions of FIN 45 are effective for financial statements for both
interim and annual periods ending after December 15, 2002 (see note
9). The recognition provisions of FIN 45 will be effective for any
guarantees that are issued or modified after December 31, 2002. The
Company is currently evaluating the effects of FIN 45; however, it
does not expect that the adoption will have a material impact on the
Company's results of operations or financial position.
56
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2002, 2001, and 2000
(Expressed in United States dollars)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
(r) Recent accounting pronouncements (continued)
In December 2002, the FASB issued Statement of Financial Accounting
Standard No. 148 (SFAS 148), "Accounting for Stock-Based Compensation
- Transition and Disclosure". SFAS 148 provides alternative methods of
transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. SFAS 148 also
requires prominent disclosure in the "Summary of Significant
Accounting Policies" of both annual and interim financial statements
about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. SFAS 148 is
effective for the Company's 2002 fiscal year. Adoption of this
statement will affect the frequency of the Company's disclosure, but
will not impact the Company's results of operation or financial
position until the Company changes to the fair value method of
accounting for stock-based employee compensation. (See note 1 (m)).
2. DISCONTINUED OPERATIONS
Connectria Corporation
In June 2002, MDSI adopted a plan for sale and entered into an agreement to
sell its Hosting and IT Services business segment, Connectria Corporation
(Connectria) to former Connectria shareholders who were both shareholders
and employees of the Company. The transaction closed in July 2002. Pursuant
to the terms of the agreement, the Company received from the former
Connectria shareholders 824,700 shares that had an approximate market value
of $2.8 million and the cancellation of 103,088 previously issued stock
options of MDSI as consideration for Connectria. In addition to the share
consideration, a wholly-owned subsidiary of MDSI received a warrant
allowing it to purchase up to 50,380 shares of Series A Nonvoting Preferred
Stock of Connectria at a price of $50 per share exercisable for a period of
five years. The Series A Nonvoting Preferred Stock of Connectria has a face
value of $100 per share, bears a dividend of five percent per annum, bears
a liquidation preference equal to the face value, may be redeemed at
Connectria's option at any time, and must be redeemed by Connectria upon a
capital infusion of $10 million or greater. In addition MDSI has advanced
to Connectria $500,000, consisting of a loan in the principal amount of
$250,000 with a two year term, bearing interest at 5%, and $250,000 for
prepaid hosting services. The Company recognized a gain of $12,419 on the
disposal of Connectria. Connectria represented a significant segment of the
Company's business.
Transportation Business Unit
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.
Certain contracts of the Transportation Business Unit were retained for
completion during the year 2000. 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 Transportation Business Unit were settled with no
further charge to earnings.
57
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2002, 2001, and 2000
(Expressed in United States dollars)
2. DISCONTINUED OPERATIONS (Continued)
These businesses are accounted for as discontinued operations 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
operations, 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 contracts.
Summarized financial information of the discontinued operations is as
follows:
December 31, 2002 December 31, 2001 December 31, 2000
--------------------------------------------------------------
Revenues from discontinued operations
(after applicable income taxes of $ - nil) $ 5,058,101 $13,414,690 $ 9,543,489
Income (loss) before income taxes 108,612 (653,165) (286,579)
-------------------- -------------------- ----------------
Operating income (loss) to measurement date 108,612 (653,165) (286,579)
Estimated income (loss) on disposal
(net of income taxes of 2002 - $5,322;
2000 - nil) 12,419 - (395,022)
-------------------- -------------------- ----------------
Income (loss) from discontinued operations $ 121,031 $ (653,165) $ (681,601)
==================== ===================== ================
Net assets of discontinued operations
December 31, 2002 December 31, 2001
-------------------------------------------
Current assets $ - $ 2,242,633
Long term assets - 1,613,807
------------------- -------------------
Total assets of discontinued operations - 3,856,440
------------------- -------------------
Current liabilities - 1,426,638
Long term liabilities - 320,883
------------------- -------------------
Total liabilities of discontinued operations $ - $ 1,747,521
=================== ===================
Cash flow of discontinued operations
December 31, 2002 December 31, 2001 December 31, 2000
----------------- ----------------- ------------------
Operating activities $ 2,491,158 $ 758,508 $ (841,474)
Investing activities (43,775) (807,710) (1,792,799)
Financing activities (3,021,413) (339,525) 898,285
----------------- ----------------- ------------------
Cash (used in) provided by discontinued
operations $ (574,030) $ (388,727) $ (1,735,988)
================= ================= ==================
58
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2002, 2001, and 2000
(Expressed in United States dollars)
3. INVESTMENTS AND ADVANCES
2002 2001
------------- -------------
Investment in private companies, at cost 2,000,000 2,499,992
Other advances 500,000 500,000
Less: Valuation allowance (2,500,000) (2,999,992)
------------- -------------
Total Investments $ - $ -
============= =============
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 advances, 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, 2002 one of the Companies in which MDSI
had made a $500,000 equity investment was liquidated, with no net proceeds
being realized by MDSI. As a result MDSI has written off the investment of
$500,000 against the valuation allowance set up during the year ended
December 31, 2001.
59
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2002, 2001, and 2000
(Expressed in United States dollars)
4. CAPITAL ASSETS
2002 2001
-------------- --------------
Computer hardware and software $ 15,830,618 $ 11,403,557
Furniture and fixtures 2,532,807 2,440,006
Leasehold improvements 918,920 568,956
Vehicles 50,905 50,905
-------------- --------------
19,333,250 14,463,424
Less: accumulated amortization (9,535,163) (6,828,176)
-------------- --------------
$ 9,798,087 $ 7,635,248
============== ===============
As at December 31, 2002 the Company has entered into capital lease
arrangements for computer hardware in the amount of $7,218,355 (2001 -
$6,261,660) and recorded accumulated amortization of $2,489,013 (2001
-$2,656,071) relating to these assets (note 9(a)).
5. INTANGIBLE ASSETS
2002 2001
-------------- --------------
Goodwill $ 2,615,751 $ 2,615,751
Commercial web site domain name 220,000 220,000
Less: accumulated amortization and provision
for valuation (2,835,751) (2,835,751)
-------------- --------------
$ - $ -
============== ==============
In connection with the Company's announced restructuring (note 13), 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
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 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.
60
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2002, 2001, and 2000
(Expressed in United States dollars)
6. 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 the Company assumed certain obligations
under the Connectria Stock Option Plan, and all future option
issuances will occur under the MDSI Plan. As a result of the
divestiture of Connectria (note 2) all outstanding options under the
Connectria plan were cancelled during 2002. 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, 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
Granted - 249,000 249,000 3.48
Exercised (253,077) (104) (253,181) 0.26
Cancelled (174,066) (586,933) (760,999) 7.13
------------------------------------------------------------------
Outstanding at December 31, 2002 - 1,291,181 1,291,181 6.96
==================================================================
61
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2002, 2001 and 2000
(Expressed in United States dollars)
6. STOCKHOLDERS' EQUITY (Continued)
The following table summarizes information concerning options outstanding
at December 31, 2002:
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, 2002 (months) Price 31, 2002 Price
--------------- ----------- ------------ --------- ------------ ------------
$0-$6.75 778,249 40.7 $ 3.89 448,434 $ 4.16
$6.80-$13.35 466,298 19.7 11.02 431,078 10.99
$13.40-$20.00 34,634 15.6 15.04 34,509 15.04
$20.05-$36.20 12,000 30.1 25.48 12,000 25.48
----------- ------------ --------- ------------ ------------
1,291,181 32.3 $ 6.96 926,021 $ 8.02
=========== ============ ========= ============ ============
At December 31, 2001 and 2000 under the combined MDSI and Connectria option
plans, 1,304,959 and 1,441,280 options were exercisable at a weighted
average exercise price of $6.73 and $8.31, 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 $10,000 CDN for
each employee per year. The subscription price of common shares
purchased under the 2002 Stock Purchase Plan is determined based upon
a weighted average market price of the Company's common shares each
quarter, less 15%. During the year ended December 31, 2002, 85,405
(2001 - nil; 2000 - 16,621) common shares were issued under the 2000
Stock Purchase Plan, a predecessor to the current plan.
62
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2002, 2001, and 2000
(Expressed in United States dollars)
6. STOCKHOLDERS' EQUITY (Continued)
(c) 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.
7. INCOME TAXES
The provision for income taxes consists of the following:
2002 2001 2000
-------------- -------------- --------------
Current:
Canada $ - $ - $ 49,500
Foreign 429,293 504,085 (310,928)
-------------- -------------- --------------
Total current recovery of (provision for)
income taxes from continuing operations 429,293 504,085 (261,428)
-------------- -------------- --------------
Deferred:
Canada - - 92,870
Foreign 170,000 17,290 (322,947)
-------------- -------------- --------------
Total deferred (recovery of) provision for
income taxes from continuing operations 170,000 17,290 (230,077)
-------------- -------------- --------------
Recovery of (provision for) income taxes from
continuing operations $ 599,293 $ 521,375 $ (491,505)
============== ============== ==============
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 from continuing operations
before tax provision due to the following:
2002 2001 2000
-------------- -------------- --------------
Statutory tax rate 39.6% 44.6% 45.6%
Recovery of (provision for) income taxes from
continuing operations computed at statutory
rate $ 845,690 $ 6,232,807 $ (282,130)
Tax losses and (benefits) not recognized in the
period that the benefit arose (759,708) (5,937,925) (684,949)
Lower effective rate on earnings of foreign
subsidiaries 158,652 1,286,297 871,970
Amortization and write-down of intangible assets
not deductible for tax 393,202 (813,529) (127,333)
Other (38,543) (246,275) (269,063)
----------------- ------------------ -----------------
Recovery of (provision for) income taxes from
continuing operations $ 599,293 $ 521,375 $ (491,505)
================= ================== =================
63
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2002, 2001, and 2000
(Expressed in United States dollars)
7. INCOME TAXES (continued)
The principal components of the deferred portion of the provision for
income taxes are as follows:
2002 2001 2000
--------------- --------------- ---------------
Depreciation $ 1,482,694 $ 807,765 $ (349,067)
Deferred revenue (224,433) 756,867 969,689
Operating loss carry forwards - - (361,160)
Other (1,088,261) (1,547,342) (489,539)
--------------- --------------- ---------------
Total deferred provision for income taxes $ 170,000 $ 17,290 $ (230,077)
=============== =============== ================
The approximate tax effect of each type of temporary difference that gave
rise to the Company's deferred tax assets are as follows:
2002 2001
-------------- --------------
Operating loss carry forwards $ 3,789,394 $ 3,905,312
Deferred revenue 1,029,846 1,254,279
Capital assets & intangibles 2,093,368 341,323
Reserves and accrued expenses 2,579,456 2,770,950
Other 375,530 241,456
-------------- --------------
9,867,594 8,513,320
Less: Valuation allowance (9,332,954) (8,148,680)
-------------- --------------
Net non current deferred tax asset $ 534,640 $ 364,640
============== ==============
At December 31, 2002, the Company has the following loss carry-forwards
available for tax purposes:
Country Amount Expiry
------- ------ ------
Canada $4,700,000 2005 through 2009
US $4,400,000 2021 through 2022
67
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2002, 2001, and 2000
(Expressed in United States dollars)
8. 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, 2002 of $ nil (2001 - $280,000; 2000 - $45,000) paid to
companies controlled by two former directors of MDSI.
In June 2002, MDSI adopted a plan for sale and entered into an agreement to
sell its Hosting and IT Services business segment, Connectria Corporation
(Connectria) to former Connectria shareholders who were both shareholders
and employees of the Company (note 2). The Company advanced Connectria
$500,000, consisting of a promissory note in the principal amount of
$250,000 with a two year term, bearing interest at 5%, and $250,000 for
prepaid hosting services. As at December 31, 2002 the promissory note of
$250,000 and a remaining amount of prepaid hosting services of
approximately $45,000 were included as part of prepaid expenses and other
assets.
9. COMMITMENTS AND CONTINGENCIES
(a) Capital and operating leases
At December 31, 2002, future minimum payments under capital and
non-cancelable operating leases for office space and computer
equipment are as follows:
Capital Operating
Leases Leases
--------------- ----------------
2003 $ 2,343,275 $ 1,144,771
2004 1,186,574 1,655,266
2005 861,108 1,017,493
2006 - 1,064,976
2007 - 1,017,493
Therafter - 932,702
--------------- ----------------
Total minimum lease payments 4,390,957 $ 6,832,701
================
Less: amount representing interest (403,513)
--------------
Present value of net minimum lease payments 3,987,444
Less: current portion of capital lease obligations (2,073,906)
--------------
Long term portion of capital lease obligations $ 1,913,538
===============
Rent expense for the year ended December 31, 2002 in respect of
operating leases for office space was $1,139,352 (2001 - $1,662,337;
2000 - $2,047,294).
68
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2002, 2001, and 2000
(Expressed in United States dollars)
9. COMMITMENTS AND CONTINGENCIES (Continued)
(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 (2001 - $10,000,000 CDN), which
bears interest at prime plus 0.5%. As at December 31, 2002, 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 501,082 (USD $516,114)
expiring May 31, 2003, and letters of credit in the amount of EUR
75,855 (USD $78,131) expiring February 28, 2003, $397,760 expiring May
1, 2003, and CAD $1,864,568 (USD $1,187,623) expiring October 1, 2003.
The Company has pledged an amount equal to the letters of credit
against its operating line of credit as security.
(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 of
approximately $3.7 million. The suit seeks payment of the contract
balance, plus other damages, interest and attorneys' fees. The
customer has filed an answer and counterclaim alleging the Company
breached the contracts, entitling the customer to repayment of all
sums paid to the Company of approximately $3.5 million. In addition,
the customer counterclaims allege fraud, negligent misrepresentation,
breach of express warranty and breach of implied warranties. The
customer seeks all actual, special, incidental and consequential
damages associated with these claims of approximately $7.2 million, in
addition to punitive damages, interest and attorneys' fees. 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 approximately $3.7 million as a long
term receivable. Due to the uncertain nature of the receivable the
Company has recorded an allowance of $1.0 million against the amounts
due. There is currently no provision in the Company's financial
statements to address any refund or other payment to the customer as
the Company views this to be an unlikely event. On March 5, 2003, the
court granted the customer motion for summary judgment, dismissing the
Company's claims for lack of sufficient evidence of damages. The
Company filed a motion for reconsideration of this ruling. On March
26, 2003, the court denied the Company's motion. On March 26, 2003,
the court granted the Company's motion for partial summary judgment,
finding that the customer breached the professional services agreement
by wrongfully terminating the agreement. The Company has tendered
defense of the customers claim to Chubb Insurance Company. Chubb has
accepted defense of the claim under a reservation of rights. The
Company believes that any amounts that it is required to pay to the
customer would be an insured loss that is covered by insurance, other
than any amounts that it is required to pay to the customer as a
result of fraud or other intentional misconduct. The Company believes
that its claims against the customer are strong and it intends to
vigorously pursue its claims for damages, on appeal, if necessary.
From time to time, the Company is a party to other 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.
69
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2002, 2001, and 2000
(Expressed in United States dollars)
9. COMMITMENTS AND CONTINGENCIES (Continued)
(d) Guarantees
As part of the disposition agreement with Connectria Corporation,
Connectria is to use its best efforts to terminate, or obtain the
release of MDSI from approximately $0.4 million in loan guarantees and
equipment leases made by MDSI on behalf of Connectria. To date
termination or release from these obligations has not occurred, and as
a result MDSI could potentially be liable under these obligations
should Connectria default on a payment. Based on management's
estimates, the Company does not anticipate having to make payments in
connection with this guarantee and accordingly no amounts have been
accrued as a liability in the financial statements.
(e) Commitment
The Company has entered into a significant customer contract in which
the Company has agreed to utilize a certain amount of local services
and create a certain amount of commercial activity in South Africa.
The Company is in the last stages of negotiating the terms and
conditions that relate to this obligation. Based on current
negotiations, the Company expects that it will be required to utilize
local content or obtain credits equivalent to approximately $7 million
over a seven year period. The Company expects that it will be required
to furnish a performance guarantee equal to approximately 5% of such
amounts. The Company expects to fulfill its obligation through a
number of activities, including the establishment of a software
development center in South Africa, the provision of technical
services, and the provision of training to local systems integrators
who will be able to provide implementations services with respect to
the Company's software products. As the Company expects to fulfill its
obligations through the purchase of services in the normal course of
business, no liability has been established for these future spending
commitments.
70
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2002, 2001, and 2000
(Expressed in United States dollars)
10. SEGMENTED INFORMATION
As described in Note 2, the Company has reclassified the results of
operations of Connectria as discontinued operations. The business was
previously disclosed as a separate operating segment. As a result of
discontinuing this business, the Company now only operates in a single
business segment, the Field Service business segment. The segment data
below has been restated to exclude amounts related to the discontinued
operations.
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:
2002 2001 2000
------------------------------- ------------------------------- ------------------------------
Long-lived Long-lived Long-lived
Revenue assets Revenue assets Revenue assets
------------- -------------- -------------- -------------- -------------- --------------
Canada $ 840,388 $ 8,880,084 $ 1,374,365 $ 6,789,712 $ 1,688,705 $ 8,731,563
United States 25,623,163 830,789 32,701,905 787,448 38,022,275 5,636,603
Europe, Middle East
and Africa 11,466,125 80,991 9,594,137 57,416 8,713,390 66,946
Asia and Other 805,784 6,223 1,035,196 672 3,575,620 1,856
------------- -------------- -------------- -------------- -------------- --------------
$38,735,460 $ 9,798,087 $ 44,705,603 $ 7,635,248 $ 51,999,990 $ 14,436,968
============= ============== ============== ============== ============== ==============
Major customer
During the year ended December 31, 2002 the Company earned revenue from one
customer of $3,896,232 or approximately 10.1% of total revenue. For the
year ended December 31, 2001 the Company earned revenue from on customer of
$5,319,633 or approximately 11.9% of total revenue. 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.
71
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2002, 2001 and 2000
(Expressed in United States dollars)
11. SUPPLEMENTAL CASH FLOW DISCLOSURES
2002 2001 2000
--------------- --------------- ---------------
Accounts receivable $ 2,508,506 $ 8,616,099 $ (7,179,818)
Prepaid expenses and other assets 314,223 (595,648) (153,431)
Income taxes payable / receivable 969,223 (1,457,670) (476,507)
Accounts payable and accrued liabilities (2,305,885) 1,841,956 1,504,268
Deferred revenue (181,455) 153,307 2,806,911
--------------- --------------- ---------------
$ 1,304,612 $ 8,558,044 $ (3,498,577)
=============== =============== ================
During the year ended December 31, 2002, capital assets of $2,922,078 were
acquired through the assumption of capital lease obligations (2001 -
$885,145; 2000 - $ 3,357,109).
12. FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, accounts receivable,
certain other assets, investments and advances, accounts payable, accrued
liabilities, and capital lease obligations approximate their respective
fair values as of December 31, 2002.
The Company's revenues have historically been dependent on large contracts
from a limited number of customers in the utility, telecommunications and
cable sectors. Where exposed to credit risk, the Company mitigates this
risk by analyzing the counter-parties' financial condition prior to
entering into agreements, establishing billing arrangements and determining
the collectibility of the account on an ongoing basis. As these customers
are geographically dispersed, concentrations of credit risk are further
mitigated.
13. 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 (4,848,592)
-------------------
Accrued restructuring charges included in accrued
liabilities at December 31, 2002 (2001 - $3,133,660) $1,257,335
===================
72
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2002, 2001 and 2000
(Expressed in United States dollars)
13. RESTRUCTURING CHARGE (continued)
During year ended December 31, 2002 and 2001 the Company made cash payments
of $1,876,325 and $2,408,487 respectively relating to the restructuring
accruals.
Workforce reduction charges in 2001 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, 2002, the provision balance has been fully drawn down by cash
payments with no additional amounts expected to be paid out.
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, where the Company has entered into fixed cost
lease arrangements with agreements extending up to 2004. The Company has
incurred approximately $0.6 million of cash costs relating to this
provision leaving an accrual of $1.3 million as at December 31, 2002. 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, 2002, the full amount of the charge has been applied to the assets to
value them at their estimated net realizable value.
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, 2002, the Company has
incurred cash costs of approximately $0.3 million against this provision
with no additional amounts expected to be paid out.
73
Selected Quarterly Financial Data
The following table sets forth certain unaudited statement of operations
data for each of the eight quarters beginning January 1, 2001 and ending
December 31, 2002 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 dispositions 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
2002 2001
--------------------------------------------------------------------------------------
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 $8,448 $6,615 $ 4,885 $5,807 $ 7,332 $7,282 $ 7,714 $ 9,738
Maintenance and support 2,472 2,605 2,867 2,557 2,649 2,647 2,434 2,457
Third party products and services 356 1,607 279 236 778 266 292 1,116
--------------------------------------------------------------------------------------
11,276 10,827 8,031 8,600 10,759 10,195 10,440 13,311
Direct costs 4,897 5,001 3,491 3,630 5,010 4,449 4,836 6,752
--------------------------------------------------------------------------------------
Gross profit 6,379 5,826 4,540 4,970 5,749 5,746 5,604 6,559
--------------------------------------------------------------------------------------
Operating expenses:
Research and development 1,269 1,278 1,499 1,460 1,553 1,662 1,868 2,175
Sales and marketing 3,026 3,030 3,912 2,414 2,274 2,277 3,266 3,041
General and administrative 1,557 1,485 1,529 1,664 1,541 1,510 1,539 1,485
Amortization and provision for
valuation of intangible assets - - - - 165 11 11 1,637
Restructuring - - - - - - 4,906 1,200
Provision for doubtful accounts - - - - 1,736 - - 1,203
--------------------------------------------------------------------------------------
5,852 5,793 6,940 5,538 7,269 5,460 11,590 10,741
--------------------------------------------------------------------------------------
Operating income (loss) 527 33 (2,400) (568) (1,520) 286 (5,986) (4,182)
Valuation allowance on investments - - - - - - - (2,750)
--------------------------------------------------------------------------------------
Other income (expense) 40 70 86 76 305 203 (295) (36)
--------------------------------------------------------------------------------------
Income (loss) from continuing
operations before income tax
provision 567 103 (2,314) (492) (1,215) 489 (6,281) (6,968)
(Provision for) recovery of income
taxes from continuing operations (175) (39) 689 126 (149) (45) 23 693
--------------------------------------------------------------------------------------
Income (loss) from continuing
operations 392 64 (1,625) (366) (1,364) 444 (6,258) (6,275)
Income (loss) from discontinued
operations - 12 22 86 (341) (402) (32) 121
--------------------------------------------------------------------------------------
Net income (loss) for the period $ 392 $ 76 $(1,603) $ (280) $(1,705) $ 42 $(6,290) $(6,154)
======================================================================================
74
The following table sets forth, for the periods indicated, certain
components of the unaudited selected financial data of the Company as a
percentage of total revenue:
Three Months Ended
--------------------------------------------------------------------------------
2002 2001
Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31
------- -------- ------- ------- ------- -------- ------- -------
Revenue:
Software and services 74.9% 61.1% 60.8% 67.5% 68.2% 71.4% 73.9% 73.1%
Maintenance and support 21.9 24.1 35.7 29.7 24.6 26.0 23.3 18.5
Third party products and services 3.2 14.8 3.5 2.8 7.2 2.6 2.8 8.4
--------------------------------------------------------------------------------
100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Direct costs 43.4 46.2 43.5 42.2 46.6 43.6 46.3 50.7
--------------------------------------------------------------------------------
Gross profit 56.6 53.8 56.5 57.8 53.4 56.4 53.7 49.3
--------------------------------------------------------------------------------
Operating expenses:
Research and development 11.3 11.8 18.7 17.0 14.5 16.3 17.9 16.4
Sales and marketing 26.8 28.0 48.7 28.1 21.1 22.4 31.3 22.8
General and administrative 13.8 13.7 19.0 19.3 14.3 14.8 14.7 11.2
Amortization and provision for
valuation of intangible assets - - - - 1.5 0.1 0.1 12.3
Restructuring - - - - - - 47.0 9.0
Allowance for doubtful accounts - - - - 16.1 - - 9.0
--------------------------------------------------------------------------------
51.9 53.5 86.4 64.4 67.5 53.6 111.0 80.7
--------------------------------------------------------------------------------
Operating income (loss) 4.7 0.3 (29.9) (6.6) (14.1) 2.8 (57.3) (31.4)
Valuation allowance on investments - - - - - - - (20.6)
Other income (expense) 0.3 0.7 1.1 0.9 2.8 2.0 (2.8) (0.3)
--------------------------------------------------------------------------------
Income (loss) from continuing
operations before income tax
provision 5.0 1.0 (28.8) (5.7) (11.3) 4.8 (60.1) (52.3)
--------------------------------------------------------------------------------
(Provision for) recovery of income
taxes from continuing operations (1.5) (0.4) 8.6 1.5 (1.4) (0.4) 0.2 5.2
--------------------------------------------------------------------------------
Income (loss) from continuing
operations 3.5 0.6 (20.2) (4.2) (12.7) 4.4 (59.9) (47.1)
Income (loss) from discontinued
operations - 0.1 0.2 1.0 (3.1) (4.0) (0.3) 0.9
================================================================================
Net income (loss) for the period 3.5% 0.7% (20.0)% (3.2)% (15.8)% 0.4% (60.2)% (46.2)%
================================================================================
75
Item 9: Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None
76
PART III
Item 10: Directors and Executive Officers of the Registrant
The following table sets forth certain information concerning the Company's
executive officers and directors as of December 31, 2002.
Name Age Position
- ------------------------------------- ------- ------------------------------------------------------------------------
Executive Officers
Erik Dysthe......................... 65 Chairman of the Board, Director, President and Chief Executive Officer
Peter H. Rankin .................... 46 Executive Vice President, Operations
Verne D. Pecho...................... 59 Vice President - Finance and Administration and Chief Financial Officer
Simon Backer........................ 47 Senior Vice President - Wireless Services
Cyril Tordiffe...................... 51 Senior Vice President - Project Implementation
Tommy Lee........................... 39 Senior Vice President - Product Development
Walter Beisheim..................... 48 Senior Vice President - Worldwide Sales and Marketing
Warren Cree......................... 43 Senior Vice President - Product Marketing
Glenn Y. Kumoi...................... 40 Senior Vice President and Chief Legal Counsel
Paul H.L. Lui....................... 46 Vice President - Customer Support
M. Greg Beniston.................... 45 Vice President - Legal and Corporate Secretary
Ronald P. Toffolo................... 51 Vice President - Human Resources
David Haak.......................... 41 Vice President - Sales, Americas
Scott Munro......................... 38 Vice President - Product Marketing
Robert Owen......................... 55 Managing Director -Europe Middle East and Africa
Directors
Peter Ciceri (2)(3)................. 47 Director
Robert C. Harris, Jr. (1)(2)........ 56 Director
Terrence P. McGarty (2)(3).......... 59 Director
Marc Rochefort (1)(2)............... 55 Director
David R. Van Valkenburg(1)(2)(3).... 60 Director
- ------------------------------------------------------------------------------------------------------------------------
(1) Member of Compensation Committee.
(2) Member of Corporate Governance and Nominating Committee.
(3) 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.
and several other private companies.
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.
77
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.
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 MacDonald, Dettwiler and Associates Ltd.
Walter Beisheim has served as Senior Vice President - Worldwide Sales and
Marketing since July 2002. Prior to that he was Vice President, North American
Sales with Click Software, Inc. from 2001 to 2002. From 2000 to 2001, Mr.
Beisheim was Vice President Worldwide Sales for Inxight Software. From 1999 to
2000, he was General Manager, Software Products Group for Digital Microwave
Corp. (now DMC Stratex Networks) and from 1997 to 1999 he was Vice President and
General Manager of SR Datacom. Mr. Beishem has over 20 years of experience in
sales, marketing and business development of enterprise software with an
emphasis on the utility and telecommunications industries.
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. Between 1989 and 1994, he was a member of the
scientific and engineering staff at MacDonald, Dettwiler and Associates Ltd.
Glenn Y. Kumoi has served as Senior Vice President - Chief Legal Officer of
the Company since September 2002. Before that he was 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.
Paul H.L. Lui has served as Vice President - Customer Support since 2001.
Since joining the Company in 1993, Mr. Lui has held various positions of
progressive responsibility, including Director of Customer Service (1993 to
1997), Director of Customer Service - UK Operations (1998 to 1999), and Director
of Special Projects (1999 to 2000).
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.
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
78
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.
Robert Owen has served as Managing Director - Europe Middle East and Africa
since October 2002. From 1999 to 2002 Mr. Owen was an independent consultant.
Prior to joining the Company, Mr. Owen has served in a number of senior
executive positions at multi-national systems and software companies, including
Managing Director (EMEA) for Smallworld plc between 1994 and 1999, Managing
Director (EMEA) for Vision Systems between 1992 and 1994 and Managing Director
for Intergragh (UK) between 1987 and 1992.
Scott Munro has served as Vice President, Product Marketing since 2001.
Since joining the Company in 1996, Mr. Munro has held numerous positions of
progressive responsibility, including Director of Product Marketing and Product
Manager - Utilities. Prior to joining the Company, he held a number of software
engineering and project management positions at Telus, Epic Data and MPR
Teltech.
David R. Van Valkenburg has served as a director of the Company since June
2001. Mr. Van Valkenburg is currently a management consultant. 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., 360 Networks Inc. and
several other private companies.
Peter Ciceri has served as a director of the Company since June 2001. Mr.
Ciceri is currently a management consultant and 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 independent lead director of Sierra Wireless, Inc. and as
a director of several other private companies.
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 served as Chairman and Chief Executive Officer of Zephyr
Telecommunications, Inc from 1998 to 2002. 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.
79
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
and approves the non-audit services to be performed by the independent
accountants. During the fiscal year ended December 31, 2002, no non-audit
services were performed or approved by the Audit Committee to be performed by
the Company's 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.
A Special Committee of the Board of Directors was formed in 2002. Its
mandate was to review strategic business development alternatives that would
potentially enhance shareholder value, including the disposition of Connectria
and other strategic initiatives. The members of the Special Committee are Peter
Ciceri, 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. The
Compensation Committee is composed of three non-employee directors. During
fiscal 2002, the compensation of Erik Dysthe, the Chairman, President and CEO of
the Company, Peter Rankin, the Executive Vice President, Operations of the
Company, Verne Pecho Vice President Finance and Administration and Chief
Financial Officer of the Company, and Gerald Chew, the President and Chief
Operating Officer (COO) of the Company until March 15, 2002 was determined by
the Compensation Committee. Erik Dysthe, Peter Rankin, Verne Pecho and Gerald
Chew 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, President and CEO, Executive Vice
President Operations, CFO and the President and COO, the Board of Directors
reviewed a compensation proposal prepared by the Chairman, President and CEO.
80
Objectives
The primary objectives of the Company's executive compensation program are
to enable the Company to attract, motivate and retain outstanding individuals
and to align their success with that of the Company's shareholders through the
achievement of strategic corporate objectives and creation of shareholder value.
The level of compensation paid to an individual is based on the individual's
overall experience, responsibility and performance. The Company's executive
compensation program consists of a base salary, performance bonuses and stock
options. The Company furnishes other benefits to certain of its officers and
other employees.
Chief Executive Officers, Executive Officers and Key Employees
There are currently 15 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) except David Haak and Tommy Lee.
These agreements provide 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.
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 for those officers with an employment agreement, 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.
81
Summary Compensation Table
The following table sets forth all compensation paid during the fiscal
years ended December 31 2002, 2001 and 2000 in respect of each individual who,
at any time during fiscal 2002, served as the Company's Chief Executive Officer,
the four most highly compensated executive officers other than the Chief
Executive Officer whose total salary and bonus exceeded $100,000 for fiscal 2002
who were serving as executive officers as at December 31, 2002 and two
individuals who would have been among the foregoing but for the fact that such
individuals were not employed by the Company at December 31, 2002 (collectively
"Named Executive Officers") and one additional individual who would have been
among the foregoing but for the fact that the individual was not employed by the
Company as at December 31, 2002 (the "Additional Officer"):
- --------------------------------------------------------------------------------------------------------------------------------
Annual Compensation Long Term Other
Compensation Compensation
Awards
------------------------------------- ------------
Other Annual Securities
Years Ending Salary Bonus Compensation Under Options
Name and Principal Position December 31 ($) ($) ($) (#)
- --------------------------------------------------------------------------------------------------------------------------------
Erik Dysthe 2002 177,632 19,032 N/A 100,000 -
Chairman & Chief Executive Officer 2001 123,011 - N/A 10,000 -
2000 25,953(1) - N/A 3,000 -
- --------------------------------------------------------------------------------------------------------------------------------
Peter H. Rankin(2) 2002 139,568 - N/A - -
Executive Vice President, Operations 2001 92,668 - N/A 70,000 -
2000 - - N/A - -
- --------------------------------------------------------------------------------------------------------------------------------
Gerald F. Chew(3) 2002 40,504 45,677 N/A - 227,500(4)
President and Chief Operating Officer 2001 64,612 - 81,500 215,000 -
2000 63,500 - N/A 3,000 -
- --------------------------------------------------------------------------------------------------------------------------------
David Haak 2002 151,250 72,651 N/A - -
Vice President Sales, Americas 2001 134,000 81,241 N/A 5,000 -
2000 120,000 81,568 N/A Nil -
- --------------------------------------------------------------------------------------------------------------------------------
Gene Mastro(5) 2002 128,831 891,690 N/A - 199,500(4)
Senior Vice President, Sales 2001 246,090 106,173 N/A 10,000 -
2000 190,000 17,100 - Nil -
- --------------------------------------------------------------------------------------------------------------------------------
Tom Lawdensky (6) 2002 58,597 - N/A - 90,207(4)
Vice President, Technology 2001 120,560 4,250 N/A 2,500 -
2000 110,000 3,850 N/A - -
- --------------------------------------------------------------------------------------------------------------------------------
Glenn Kumoi 2002 125,662 - N/A 12,000 -
Senior Vice President and Chief 2001 120,787 5,815 N/A 5,000 -
Legal Officer 2000 101,097 9,099 N/A - -
- --------------------------------------------------------------------------------------------------------------------------------
Tommy Lee 2002 126,880 - N/A 4,250 -
Senior Vice President 2001 101,764 5,815 N/A 10,000 -
Product Development 2000 101,097 9,099 N/A - -
- --------------------------------------------------------------------------------------------------------------------------------
(1) Represents compensation received by Mr. Dysthe in his capacity as Chairman
of the Board and a director of the Company.
(2) Had Mr. Rankin been employed for the full year ended December 31, 2001 his
salary would have been $142,146.
(3) Excludes consulting fees paid to Mr. Chew. See "Item 13: Certain
Relationship and Related Transactions" for details. Includes salary earned
until Mr. Chew's resignation on March 15, 2002. If Mr. Chew had been
employed by the Company for the full year ended December 31, 2002 his
salary would have been $152,256.
(4) Represents severance paid in 2002.
(5) Includes salary earned until Mr. Mastro's resignation on May 31, 2002. If
Mr. Mastro had been employed by the Company for the full year ended
December 31, 2002 his salary would have been $199,500.
(6) Mr. Lawdensky is the Additional Officer. Had Mr. Lawdensky been employed
for the full year ended December 31, 2002 his salary would have been
$120,120.
82
Stock Options
The following table sets forth stock options granted by the Company during
the fiscal year ended December 31, 2002 to any of the Named Executive Officers
or the Additional Officer:
Option Grants During the Fiscal Year Ended December 31, 2002
- -----------------------------------------------------------------------------------------------------------------------------------
% of Total Potential Realized Value at
Securities Options Assumed Annual Rates of
Under Granted to Exercise or Stock Price Appreciation
Options Employees in Base Price Expiration Date for Option Term
Name Granted (#) Fiscal Year ($/Security) --------- ----------
5% Growth 10% Growth
- -----------------------------------------------------------------------------------------------------------------------------------
Erik Dysthe 50,000 20.1% $4.20 January 29, 2007 $58,020 $128,760
Chairman & Chief Executive ($6.57 CAD)
Officer 50,000 20.1% $3.32 July 2, 2007 $47,750 $103,760
($5.22 CAD)
- -----------------------------------------------------------------------------------------------------------------------------------
Peter H. Rankin Nil Nil Nil Nil Nil Nil
Executive Vice President,
Operations
- -----------------------------------------------------------------------------------------------------------------------------------
Gerald F. Chew Nil Nil Nil Nil Nil Nil
President and Chief Operating
Officer
- -----------------------------------------------------------------------------------------------------------------------------------
David Haak Nil Nil Nil Nil Nil Nil
Vice President Sales, Americas
- -----------------------------------------------------------------------------------------------------------------------------------
Tom Lawdensky Nil Nil Nil Nil Nil Nil
Vice President, Technology
- -----------------------------------------------------------------------------------------------------------------------------------
Tommy Lee 4,250 1.7% $3.58 February 1, 2007 $ 4,200 $ 9,300
Senior Vice President ($5.63 CAD)
Product Development
- -----------------------------------------------------------------------------------------------------------------------------------
Glenn Kumoi 10,000 4.0% $3.26 September 20, 2007 $ 9,000 $ 19,900
Senior Vice President and Chief ($5.10 CAD)
Legal Officer 2,000 0.8% $3.61 January 2, 2007 $ 2,000 $ 4,370
(5.63 CAD)
- -----------------------------------------------------------------------------------------------------------------------------------
Gene Mastro Nil Nil Nil Nil Nil Nil
Senior Vice President, Sales
- -----------------------------------------------------------------------------------------------------------------------------------
83
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 or the Additional Officer, and the fiscal year end value of unexercised
options on an aggregate basis:
Aggregated Options Exercised During the Fiscal Year Ended December 31, 2002 and Fiscal Year-End Option Values
- -------------------------------------------------------------------------------------------------------------------------
Unexercised Options Value of Unexercised in the
Securities Aggregate At FY-End (#) Money-Options at FY-End
Acquired on Value Exercisable/ ($) Exercisable/
Name Exercise (#) Realized($) Unexercisable(2) Unexercisable (1)
- -------------------------------------------------------------------------------------------------------------------------
Erik Dysthe Nil Nil nil (exercisable) $ nil (exercisable)
Chairman & Chief Executive Officer nil (unexercisable) $ nil (unexercisable)
- -------------------------------------------------------------------------------------------------------------------------
Peter H. Rankin Nil Nil nil (exercisable) $ nil (exercisable)
Executive Vice President, nil (unexercisable) $ nil (unexercisable)
Operations
- -------------------------------------------------------------------------------------------------------------------------
Gerald F. Chew Nil Nil 65,000 (exercisable) $9,235 (exercisable)
President and Chief Operating nil (unexercisable) $ nil (unexercisable)
Officer
- -------------------------------------------------------------------------------------------------------------------------
David Haak Nil Nil 20,000 (exercisable) $500 (exercisable)
Vice President Sales, Americas 2,500 (unexercisable) $500 (unexercisable)
- -------------------------------------------------------------------------------------------------------------------------
Glenn Kumoi Nil Nil 18,054 (exercisable) $560 (exercisable)
Senior Vice President and Chief 12,446 (unexercisable) $560 (unexercisable)
Legal Officer
- -------------------------------------------------------------------------------------------------------------------------
Gene Mastro Nil Nil nil (exercisable) $ nil (exercisable)
Senior Vice President, Sales nil (unexercisable) $ nil (unexercisable)
- -------------------------------------------------------------------------------------------------------------------------
Tom Lawdensky Nil Nil nil (exercisable) $ nil (exercisable)
Vice President, Technology nil (unexercisable) $ nil (unexercisable)
- -------------------------------------------------------------------------------------------------------------------------
Tommy Lee Nil Nil 36,700(exercisable) $1,115 (exercisable)
Senior Vice President 3,800(unexercisable) $1,115(unexercisable)
Product Development
- -------------------------------------------------------------------------------------------------------------------------
(1) Based on Nasdaq closing price of $3.20 on December 31, 2002.
(2) Includes options to purchase common shares within 60 days after December
31, 2002.
Compensation of Directors
During the latest fiscal year, the Company paid its non-employee Directors
a meeting stipend of $2,500 for each board meeting they attended in person,
$1,250 for each board meeting they attended by telephone, and $1,000 for certain
committee meetings. In the case of the Special Committee, members received
$2,500 per day. During the fiscal year ended December 31, 2002, the non-employee
directors of the Company received aggregate cash compensation of $194,478 for
their services. The non-employee Directors were also reimbursed for actual
expenses reasonably incurred in connection with the performance of their duties
as Directors.
Non-employee Directors were also eligible to receive stock options issued
pursuant to the Company's stock option plan in consideration for their services
as Directors and in accordance with rules and policies of The Toronto Stock
Exchange. On June 27, 2002, the Company's five non employee Directors were
granted options to acquire 3,000 common shares each; at an exercise price of
$3.27 per share, vesting over thirty-six months and subject to the grantee being
a Director on the date of vesting.
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended December 31, 2002, the Compensation Committee
consisted of Robert C. Harris, Jr., Marc Rochefort and David Van Valkenburg.
None of the members of the Compensation Committee was an officer or employee of
MDSI during the fiscal year ended December 31, 2002, or was formerly an officer
of MDSI, or had any relationship during the fiscal year ended December 31, 2002
that required disclosure under Item 14 below.
During the fiscal year ended December 31, 2002, no executive officer of
MDSI served as a director or member of a committee of the board of any entity
that had one or more executive officers serving as a member of MDSI's Board or
Compensation Committee.
84
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,
2002, 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 executive
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, Executive Officers and 5% Shareholders(1) Beneficially % of total Shares
Owned(2) Owned
- ------------------------------------------------------------- ----------------- --------------------
Erik Dysthe(3) ............................................. 490,394 5.9
Peter Hill Rankin (4)....................................... 86,598 1.1
David Haak(5) .............................................. 27,500 *
Glenn Kumoi(6).............................................. 20,421 *
Tommy Lee(7)................................................ 43,801 *
Robert C. Harris, Jr. (8)................................... 91,662 1.1
Terrence P. McGarty(9)...................................... 27,502 *
David R. Van Valkenburg(10)................................. 32,332 *
Peter Ciceri(11)............................................ 8,999 *
Marc Rochefort(12).......................................... 12,193 *
- ------------------------------------------------------------- ----------------- --------------------
All Directors and Executive Officers as a group
(20 persons) (13)........................................... 1,057,930 12.2%
- ------------------------------------------------------------- ----------------- --------------------
5% Shareholders:
Kern Capital Management (14) 1,288,100 15.8%
114 West 47th Street, Suite 1926
New York, NY, 10036
Seamark Asset Management Ltd. 1,110,500 13.6%
1801 Hollis Street, Suite 310
Halifax, Nova Scotia B3J 3N4
Howson Tattersall Investment Counsel Limited 903,495 11.0%
20 Queen Street West,
Toronto, Ontario M5H 3R3
Guardian Capital Inc. 578,375 7.1%
Commerce Court West
Suite 3100 PO Box 201
Toronto Ontario M5L 1E8
- ----------
* 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. Unless otherwise indicated, the
Company believes that each person has sole voting and investment power over
the Common Shares beneficially owned by such person. Common Shares subject
to options currently exercisable at December 31, 2002, or exercisable
within 60 days after December 31, 2002, 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, 2002, together with the applicable
options of such shareholder.
(3) Includes 326,898 Common Shares held by Erik Dysthe Holdings Co. and options
to purchase 115,500 Common Shares exercisable within 60 days after December
31, 2002 held by Mr. Dysthe individually.
(4) Includes options to purchase 40,833 Common Shares exercisable within 60
days of December 31, 2002.
(5) Includes options to purchase 20,000 Common Shares exercisable within 60
days after December 31, 2002.
(6) Includes options to purchase 18,054 Common Shares exercisable within 60
days of December 31, 2002.
(7) Includes options to purchase 36,700 Common shares exercisable within 60
days after December 31, 2002.
(8) Includes options to purchase 41,332 Common Shares exercisable within 60
days after December 31, 2002.
(9) Includes 1,170 Common Shares held by The Telmarc Group Inc., a company
controlled by Mr. McGarty, and options to purchase 26,332 Common Shares
exercisable within 60 days after December 31, 2002.
(10) Includes options to purchase 17,332 Common Shares exercisable within 60
days after December 31, 2002.
(11) Includes options to purchase 8,999 Common Shares exercisable within 60 days
after December 31, 2002.
(12) Includes options to purchase 10,763 Common Shares exercisable within 60
days after December 31, 2002.
(13) Includes options to purchase 474,105 Common Shares exercisable within 60
days after December 31, 2002.
(14) Beneficially owned by Robert E. Kern Jr. and David G. Kern.
85
Equity Compensation Plan Information as at December 31, 2002
Plan Category Number of securities to be Weighted-average exercise Number of securities
issued upon exercise of price of outstanding remaining available for
outstanding options, options, warrants and future issuance under
warrants and rights rights equity compensation plans
(excluding securities
subject to outstanding
options, warrants and
rights)
Equity compensation plans 1,291,181 (stock option plan) $6.96 1,108,819
approved by security holders Nil (employee share N/A 100,000
purchase plan)
Equity compensation plans not Nil N/A Nil
approved by security holders
--------------------------------------------------------------------------------------
Total 1,291,181 N/A 1,208,819
======================================================================================
Item 13: Certain Relationships and Related Transactions
In January 2002, the Company entered into an employment agreement with
Verne D. Pecho, the Company's Vice President Finance and Administration and
Chief Financial Officer. See Item 11 - "Executive Compensation".
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.
Item 14: Controls and Procedures
Under the supervision and with the participation of the Company's
management, including its Chief Executive Officer and Chief Financial Officer,
the Company evaluated the effectiveness of the design and operation of its
disclosure controls and procedures (as defined in Rule 13a-14(c) under the
Exchange Act as of a date (the "Evaluation Date") within 90 days prior to the
filing date of this report. Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that, as of the Evaluation Date,
the Company's disclosure controls and procedures were effective in timely
alerting them to the material information relating to the Company (or its
consolidated subsidiaries) required to be included in the Company's periodic SEC
filings and Form 8-K reports.
There were no significant changes made in the Company's internal controls
during the period covered by this Annual Report on Form 10-K or, to the
Company's knowledge, in other factors that could significantly affect these
controls subsequent to the date of their execution.
86
PART IV
Item 15: 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.
Report of Independent Auditors
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
2. Financial Statement Schedules
The financial statement schedules required to be filed by Item 8 and
Item 14(d) are included immediately following this page.
87
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, 2002 3,587,303 - 80,689 3,506,614
Year ended December 31, 2001 985,000 2,938,195 335,892 3,587,303
Year ended December 31, 2000 - 985,000 - 985,000
Provision against investments and
advances
Year ended December 31, 2002 2,999,992 - 500,000 2,499,992
Year ended December 31, 2001 250,000 2,749,992 - 2,999,992
Year ended December 31, 2000 - 250,000 - 250,000
Deferred income tax valuation
allowance
Year ended December 31, 2002 8,148,680 1,184,274 - 9,332,954
Year ended December 31, 2001 1,825,049 6,323,631 - 8,148,680
Year ended December 31, 2000 - 1,825,049 - 1,825,049
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(2)(3) 2000 Stock Option Plan
10.2(1) Form of Indemnification Agreement between the Company and
certain officers of the Company
10.3(1) Lease dated September 25, 1997 between Sun Life Assurance
Company of Canada and the Company
10.4(2)(4) Employment Agreement dated March 26, 2001 between the
Company and Erik Dysthe
10.5(2)(4) Employment Agreement dated April 24, 2001 between the
Company and Gerald F. Chew
10.6(2)(4) Employment Agreement dated May 7, 2001 between the Company
and Peter H. Rankin
10.7(5) Lease dated October 12, 2001 between Crown Diversified
Industries Corporation and Connectria Corporation a
subsidiary of the Company
10.8(5) Lease dated May 14, 1999 between California Public
Employees' Retirement System and Mobile Data Solutions Inc.
a subsidiary of the Company
10.9(5) Amending Agreement dated December 1, 1998 between Sun Life
Assurance Company of Canada and the Company
10.10(2)(5) Employment Agreement dated May 9, 2001 between the Company
and Richard S. Waidmann
10.11(2)(5) Employment Agreement dated May 9, 2001 between the Company
and Eric Y. Miller
10.12(2)(6) Employment Agreement dated January 2, 2002 between the
Company and Verne Pecho
10.13(2)(7) 2002 Stock Purchase Plan
10.14(8) Exchange Agreement dated as of June 26, 2002 among the
Company, Connectria Corporation, Richard S. Waidmann and
Eric Y. Miller
10.15(8) Amendment to Exchange Agreement dated as of June 30, 2002
among the Company, Connectria Corporation, Richard S.
Waidmann and Eric Y. Miller
88
Exhibit
Number Description
------ -----------
10.16(8) Warrant dated as of June 29, 2002 to purchase 50,380 shares
of Series A Nonvoting Preferred Stock of Connectria
Corporation
10.17(8) $250,000 Promissory Note dated as of June 30, 2002 made by
Connectria Corporation in favor of the Company
10.18(8) Security Agreement dated as of June 30, 2002 between
Connectria Connectria and the Company
10.19(2) Employment Agreement dated January 1, 1999 between the
Company and Glenn Y. Kumoi
10.20(2) Settlement Agreement dated March 15, 2002 between the
Company and Gerald F. Chew
10.21(2) Settlement Agreement dated May 31, 2002 between the Company
and Gene Mastro*
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 exhibits with the Registrant's Registration Statement
on Form S-8 filed on November 22, 2000.
(4) Previously filed as exhibits with the Registrant's Form 10-Q for the
quarterly period ended June 30, 2001.
(5) Previously filed as exhibits with the Registrant's Form 10-K for the year
ended December 31, 2001.
(6) Previously filed as exhibits with the Registrant's Form 10-Q for the
quarterly period ended March 31, 2002.
(7) Previously filed as exhibits with the Registrant's Form 10-Q for the
quarterly period ended June 30, 2002.
(8) Previously filed as exhibits with the Registrant's Form 8-K filed on August
14, 2002.
* Confidential portions of this exhibit have been omitted and filed
separately with the Commission pursuant to an application for Confidential
Treatment under Rule 24b-2 promulgated under the Securities Exchange Act of
1934, as amended.
(b) Reports on Form 8-K
The Company furnished a Form 8-K on November 11, 2002 pursuant to Item 9
attaching the certifications of the Company's Chief Executive Officer and Chief
Financial Officer made pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
in connection with the Company's Quarterly Report on Form 10-Q filed on November
11, 2002. The information in a Form 8-K furnished pursuant to Item 9 shall not
be deemed to be filed under the Exchange Act.
89
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 31, 2003.
MDSI MOBILE DATA SOLUTIONS INC.
By: /s/ Erick 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 28, 2003
Officer)
/s/ Verne D. Pecho Vice President - Finance and
- --------------------------- Administration and Chief Financial
Verne D. Pecho Officer (Principal Financial and
Accounting Officer) March 31, 2003
/s/ Peter Ciceri
- ---------------------------
Peter Ciceri Director March 28, 2003
/s/ Robert C. Harris, Jr.
- ---------------------------
Robert C. Harris, Jr. Director March 31, 2003
/s/ Terrence P. McGarty
- ---------------------------
Terrence P. McGarty Director March 28, 2003
/s/ Marc Rochefort
- ---------------------------
Marc Rochefort Director March 27, 2003
/s/ David R. Van Valkenburg
- ---------------------------
David R. Van Valkenburg Director (Authorized U.S.
Representative) March 27, 2003
90
CERTIFICATIONS
I, Erik Dysthe, President, Chief Executive Officer, Chairman of the Board
and Director of MDSI Mobile Data Solutions Inc., certify that:
1. I have reviewed this annual report on Form 10-K of MDSI Mobile Data
Solutions Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 31, 2003
/s/ Erik Dysthe
-----------------------------------------
Erik Dysthe
President, Chief Executive Officer,
Chairman of the Board and Director
91
I, Verne D. Pecho, Vice President Finance & Administration and Chief
Financial Officer of MDSI Mobile Data Solutions Inc., certify that:
1. I have reviewed this annual report on Form 10-K of MDSI Mobile Data
Solutions Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 31, 2003
/s/ Verne D. Pecho
-----------------------------------------
Verne D. Pecho
Vice President Finance & Administration
and Chief Financial Officer
92
EXHIBIT LIST
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(2)(3) 2000 Stock Option Plan
10.2(1) Form of Indemnification Agreement between the Company and
certain officers of the Company
10.3(1) Lease dated September 25, 1997 between Sun Life Assurance
Company of Canada and the Company
10.4(2)(4) Employment Agreement dated March 26, 2001 between the
Company and Erik Dysthe
10.5(2)(4) Employment Agreement dated April 24, 2001 between the
Company and Gerald F. Chew
10.6(2)(4) Employment Agreement dated May 7, 2001 between the Company
and Peter H. Rankin
10.7(5) Lease dated October 12, 2001 between Crown Diversified
Industries Corporation and Connectria Corporation a
subsidiary of the Company
10.8(5) Lease dated May 14, 1999 between California Public
Employees' Retirement System and Mobile Data Solutions Inc.
a subsidiary of the Company
10.9(5) Amending Agreement dated December 1, 1998 between Sun Life
Assurance Company of Canada and the Company
10.10(2)(5) Employment Agreement dated May 9, 2001 between the Company
and Richard S. Waidmann
10.11(2)(5) Employment Agreement dated May 9, 2001 between the Company
and Eric Y. Miller
10.12(2)(6) Employment Agreement dated January 2, 2002 between the
Company and Verne Pecho
10.13(2)(7) 2002 Stock Purchase Plan
10.14(8) Exchange Agreement dated as of June 26, 2002 among the
Company, Connectria Corporation, Richard S. Waidmann and
Eric Y. Miller
10.15(8) Amendment to Exchange Agreement dated as of June 30, 2002
among the Company, Connectria Corporation, Richard S.
Waidmann and Eric Y. Miller
10.16(8) Warrant dated as of June 29, 2002 to purchase 50,380 shares
of Series A Nonvoting Preferred Stock of Connectria
Corporation
10.17(8) $250,000 Promissory Note dated as of June 30, 2002 made by
Connectria Corporation in favor of the Company
10.18(8) Security Agreement dated as of June 30, 2002 between
Connectria Connectria and the Company
10.19(2) Employment Agreement dated January 1, 1999 between the
Company and Glenn Y. Kumoi
10.20(2) Settlement Agreement dated March 15, 2002 between the
Company and Gerald F. Chew
10.21(2) Settlement Agreement dated May 31, 2002 between the Company
and Gene Mastro*
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 exhibits with the Registrant's Registration Statement
on Form S-8 filed on November 22, 2000.
(4) Previously filed as exhibits with the Registrant's Form 10-Q for the
quarterly period ended June 30, 2001.
(5) Previously filed as exhibits with the Registrant's Form 10-K for the year
ended December 31, 2001.
(6) Previously filed as exhibits with the Registrant's Form 10-Q for the
quarterly period ended March 31, 2002.
(7) Previously filed as exhibits with the Registrant's Form 10-Q for the
quarterly period ended June 30, 2002.
(8) Previously filed as exhibits with the Registrant's Form 8-K filed on August
14, 2002.
* Confidential portions of this exhibit have been omitted and filed
separately with the Commission pursuant to an application for Confidential
Treatment under Rule 24b-2 promulgated under the Securities Exchange Act of
1934, as amended.
93