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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, 2003
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 30, 2003: $41,023,330
The number of shares of the Registrant's Common Shares outstanding as of
March 23, 2004 was 8,226,068.
TABLE OF CONTENTS
Item 1: Business.................................................................................................2
Item 2: Properties..............................................................................................20
Item 3: Legal Proceedings.......................................................................................20
Item 4: Submission of Matters to a Vote of Security Holders.....................................................20
Item 5: Market for Registrant's Common Equity And Related Stockholder Matters...................................21
Item 6: Selected Financial Data ................................................................................24
Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations...................25
Item 7A: Quantitative and Qualitative Disclosures About Market Risk.............................................39
Item 8: Financial Statements and Supplementary Data.............................................................40
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................70
Item 9A: Controls and Procedures................................................................................70
Item 10: Directors and Executive Officers of the Registrant.....................................................71
Item 11: Executive Compensation.................................................................................74
Item 12: Security Ownership of Certain Beneficial Owners and Management.........................................78
Item 13: Certain Relationships and Related Transactions.........................................................79
Item 14: Principal Accountant Fees and Services.................................................................79
Item 15: Exhibits, Financial Statement Schedules and Reports on Form 8-K........................................80
SIGNATURES.......................................................................................................84
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 volatile 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
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Period End US$0.7724 US$0.6342 US$0.6275 US$0.6666 US$0.6925
Average 0.7138 0.6369 0.6461 0.6740 0.6744
High 0.7749 0.6656 0.6714 0.6983 0.6925
Low 0.6329 0.6175 0.6227 0.6397 0.6535
On March 25, 2004 the noon buying rate was CDN$1.00 = US$0.7521. 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,
Europe, and Africa. MDSI markets its solutions to a variety of companies that
have substantial field workforces, 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.ca. Information
contained on the Company's web site is not part of this report.
Background
Field operations, whether involved in service, inspection, maintenance,
repair, trouble, installation or construction work, are confronted on a daily
basis with the difficult task of optimally assigning work requests to mobile
workforces, 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 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
2
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; the regulatory environment in certain industries, such
as utilities and telecommunications, which diminished competitive pressures; and
a lack of industry-specific application software which effectively addressed the
needs of mobile workers. MDSI was formed to address this last limitation. The
Company now provides industry-specific mobile workforce management solutions for
the utility, telecommunications and cable/broadband markets.
The Company believes that the other limitations to adoption in its markets
are also being addressed, to an increasing extent. Trends in the regulatory
environment, numerous technological advances and competitive pressures have
provided and will continue to provide a compelling case for mobile workforce
management solutions. For example, 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 workforce management
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 workforce management solutions by
companies with large field workforces. 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 operations 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 data networks, including PCS networks and satellite-based data
transmission networks, and are compatible with a variety of operating platforms,
and can be integrated to a wide variety of applications, including those built
in-house. 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 professional services, such as
systems implementation and integration, training and documentation, workforce
management assessments, consulting, ongoing technical support and software
maintenance. Where appropriate, MDSI also provides third party products and
services as part of a complete mobile workforce management solution.
Advantex r7
Advantex r7, the latest version of MDSI's mobile workforce management
product, is comprehensive, feature-rich and is offered as a market-specific
solution for customers in MDSI's target markets, including 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
(or is in the process of being) field validated by approximately 100 companies
in the Company's markets. 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 Maintenance Management-- Allows a planner to create a maintenance
or inspection schedule for an asset. For example, a gas company might
establish a bi-annual inspection schedule for its regulator stations.
Maintenance Management automatically creates corresponding work orders,
which are assigned and distributed to the field workforce in the usual way.
Once the work is done, the completion information remains associated with
the asset and is accessible to the planner through the application.
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.
4
o Advantex Common Cause-- Allows dispatchers and managers to recognize
related trouble work orders and manage them as individual dispatched work
orders.
o Advantex Time Reporting--Allows mobile workers to allocate time to job
codes and to record time spent on other activities. Replaces paper-based
time reporting.
For companies outside of MDSI's traditional markets that employ field
workforces, such as security companies, office equipment companies and home
appliance companies, MDSI offers a wireless enablement product called MDSI
ideligo, which is a subset of Advantex.
Professional and Customer Support Services
Contracts for the sale of MDSI's software typically require MDSI to provide
certain professional services. Additionally, customers typically sign a separate
customer support and maintenance agreement, which requires MDSI to provide
after-sales support of its products. The Company believes that providing these
services facilitates effective implementation and use 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 typically lasts for six to twelve
months, though the Company has entered into much longer engagements for some of
its larger customers. During this time, MDSI works with the customer in
defining, configuring, and installing Advantex, as well as providing complete
training services and systems documentation that address the implementation and
operation of Advantex. MDSI's depth of experience in the utility,
telecommunications, and cable/broadband industries allows the Company 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 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.
Customer Support
The Company believes that its ability to offer a high level of after-sale
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.
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.
Traditionally, the Company's products have best addressed the needs of
approximately one-half of these workers. The Company's recent product
developments and its' product development plan are designed to address the full
market opportunity.
5
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 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. 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's solution for this market has primarily targeted workers who
provide intra day work, such as meter services (reading, connections and
investigations), trouble work and account collections. The Company's new product
features, recently completed or in development, are targeted at the remainder of
field technicians, who are involved in maintaining, inspecting or constructing
utilities' network asset infrastructure. Such work typically involves longer
time frames for completion, may involve multiple interdependent tasks, and
multiple work crews. Accordingly, MDSI is adapting Advantex to handle this
greater complexity.
The Company believes that the market offers many opportunities for revenue
growth both from existing and new customers. 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. As with utilities, MDSI's solution for the telecommunications
and cable/broadband markets has primarily addressed the needs of only a portion
of the mobile workforce, most notably those technicians involved in intra-day
installation and repair work. The Company's new product features, recently
completed or in development, are targeted at the remainder of field technicians,
who are involved in maintaining, inspecting or constructing the networks' asset
infrastructures. Such work typically involves longer time frames for completion,
may involve multiple interdependent tasks, and multiple work crews. Accordingly,
MDSI is adapting Advantex to handle this greater complexity.
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 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.
MDSI believes that a number of major telecommunications companies are evaluating
the need for a mobile workforce management 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
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
6
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." 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 workforce management
solutions to improve their competitiveness, efficiency and level of customer
service. See "Forward-Looking Statements."
While the telecommunications and cable/broadband markets have begun to show
signs of recovery from difficult economic times, the Company anticipates that
continued economic uncertainty in these markets will have an adverse impact on
software and services revenues in the short term. See "Forward-Looking
Statements."
Other Markets. There are a large number of companies outside MDSI's
traditional markets that employ field workforces, such as security companies,
office equipment companies, home appliance companies, as well as many other
organizations that contract fieldwork 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, which 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 is working on 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 never represented a material
portion of MDSI's revenues.
Customers
MDSI has sold its solutions to approximately 100 customers worldwide,
comprising approximately 80,000 user licenses.
Sample Customers:
------------------------------------------------------------------------------------------------
UTILITY TELCO CABLE/BROADBAND
------------------------------------------------------------------------------------------------
o Consumers Energy o Belgacom (Belgium) o Cox Communications
o Keyspan Energy o Eircom (Ireland) o Rogers Cable
o Pacific Gas & Electric o TDC Tele Danmark o SureWest
o Reliant Energy (Denmark) o Videotron
o Transco (UK) o Telkom South Africa
o TXU Communications
------------------------------------------------------------------------------------------------
For the year ended December 31, 2003, MDSI's software and services revenues
were distributed approximately as follows: 66% from the utilities (electric, gas
and water) market, 32% from the telecommunications
7
and cable/broadband market and the remaining 2% from other markets. During the
year ended December 31, 2003 the Company generated approximately 55% of its
revenue from North America, approximately 42% of its revenue from Europe, Middle
East and Africa, and the remaining 3% of its revenue from other parts of the
world.
The Company's customers vary in size from small local companies to large
regional, national and international organizations. During the year ended
December 31, 2003, Telkom South Africa Limited accounted for 18.0% of MDSI's
overall revenue and Transco PLC accounted for 17.1% of MDSI's overall revenue.
The Company anticipates that revenue from each of these two customers will
account for a lesser percentage of MDSI's overall revenue in 2004. See "Forward
Looking Statements". During the year ended December 31, 2002, Telkom South
Africa Limited accounted for 9.1% of MDSI's overall revenue. During the year
ended December 31, 2001, eircom P.L.C. accounted for 11.4% of MDSI overall
revenue.
In the years ended December 31, 2003, 2002, and 2001, approximately 44.3%,
29.1%, and 33.2%, respectively, of the Company's consolidated revenue was
attributable to five or fewer customers. The Company believes that this
percentage will decrease in 2004, but that revenue derived from a limited number
of customers will continue to represent a significant portion of its
consolidated revenue. See "Forward Looking Statements".
In the years ended December 31, 2003, 2002, and 2001, revenue derived from
sales outside of North America accounted for 44.5%, 30.9%, and 23.9% of the
Company's total revenue, respectively. See Note 8 to 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
Mobile workforce management applications must adapt to 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 or license 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's 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 that 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, 2003, 2002, and 2001, the
Company's research and development expenses were $5.5 million, or 11.6% of
revenue, $5.5 million, or 14.4% of revenue and $7.3 million, or 16.2% of
revenue, respectively. The Company intends to continue committing a significant
portion of its revenues to enhance existing products and develop new products.
In addition the Company expects to increase its research and development
expenditures during 2004. See "Forward-Looking Statements."
8
Sales and Marketing
The Company markets its products through a direct sales force as well as
through strategic marketing arrangements with independent software vendors, and
systems integrators.
Direct Sales Force. MDSI's sales personnel are knowledgeable about the
Company's products and current industry and enterprise-specific application
issues. The Company organizes its sales personnel by both vertical and
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,
customer relationship management, or outage 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 a
variety of such relationships with respect to Advantex and one such 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 applications. To date, MDSI has worked with Cap Gemini Ernst
& Young LLP, Accenture LLP, IBM Business Consulting Services, CGI Group Inc.,
and Atos Origin (formerly SchlumbergerSema), amongst others. In some cases the
relationships have been formalized through written agreements, while others
remain informal. In the future, MDSI intends to involve systems integrators in
providing the implementation work surrounding customer installations. See
"Forward-Looking Statements."
Competition
The markets for MDSI's Advantex and MDSI ideligo applications 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 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.
MDSI has a number of competitors, both small companies attempting to
establish a business in the Company's markets and large companies attempting to
diversify their product offerings. 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. In general, the Company expects competition to intensify as
acceptance and awareness of the benefits of such applications and their
associated enabling wireless technologies continue.
Certain of the Company's competitors have substantially greater financial,
technical, marketing and distribution resources than the Company. As a result,
they may be able to respond more quickly to new or emerging technologies and
changing customer requirements, or to devote greater resources to the
development and distribution of existing products. There can be no assurance
that the Company will be able to compete successfully against current or future
competitors or alliances of such competitors, or that competitive pressures
faced by the Company will not have a material adverse effect on its business,
financial condition, operating results and cash flows.
The Company believes that in the utilities, telecommunications and,
cable/broadband industry segments the most important competitive factors are the
reputation of the supplier and its implementation track record. MDSI
9
believes that its reputation and long, 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., Intergraph Corporation, Axiom Corporation, ClickSoftware, Inc.,
CGI Group Inc. (via its acquisition of Cognicase, Inc., owner of MDSI competitor
M3i Systems, Inc.), ViryaNet Ltd., Oracle Corporation, Itron Inc. (via its
acquisition of e-Mobile Data Inc.), and a.p.solve Limited. 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., and Viryanet Ltd., again mostly for small
accounts.
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, which is largely 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 suppliers of wireless enablement products include 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 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 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, a company MDSI
acquired in June 2000 to its former principal shareholders. 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, and 2001 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 in a single
business segment.
Employees
As of December 31, 2003, the Company had 330 full-time employees, including
156 in operations (including project management, customer support, the Company's
solutions group and certain overhead), 85 in product development and the
Company's product group, 41 in sales and marketing, including employees working
on the Company's MDSI ideligo initiative, and 48 in finance, information
technology, human resources and general 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 8 to the consolidated financial statements included
in Item 8 of this Annual Report on Form 10-K.
10
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, 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 and political
conditions in certain of its vertical markets show signs of improvement, the
Company believes that economic conditions are likely to continue to affect
demand for the Company's products and services in 2004, particularly demand for
software and related services. Such factors may also increase the amount of
doubtful accounts or adversely affect the likelihood of collection of such
accounts.
The Company relies upon its ability to implement and integrate mobile
workforce management solutions on schedule and to the satisfaction of its
customers. The Company from time to time has experienced certain implementation
and other problems that have delayed the completion of certain projects,
including the failure of third parties to deliver products or services on a
timely basis, delays caused by customers and development delays. Because the
Company currently recognizes revenue on a percentage of completion method,
delays in completion of certain contracts have caused delays in recognition of
revenue and, consequently, unanticipated fluctuations in quarterly results.
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
11
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. 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, 2003, 2002 and
2001, 9.5%, 6.5%, and 5.5% 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 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, 2003,
2002, and 2001, approximately 44.3%, 29.1%, and 33.2% respectively, of the
Company's consolidated revenue was attributable to five or fewer customers.
During the year ended December 31, 2003, TELKOM South Africa Limited accounted
for 18.0% of the Company's consolidated revenue and Transco PLC accounted for
17.1% of the Company's consolidated revenue. During the year ended December 31,
2002 TELKOM South Africa accounted for 9.1% of the Company's consolidated
revenue. During the year ended December 31, 2001, eircom P.L.C. accounted for
11.6% 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
12
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 man days incurred compared to total man days
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.
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 2004. 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 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.
13
History of Losses and Fixed Operating Expenses
As of December 31, 2003, the Company had an accumulated deficit of $29.9
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 allocate 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 issuances 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 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.
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 330 employees
located in Canada, the United States and other international locations at
December 31, 2003. 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
14
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 performance 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
Since its inception, substantially all of the Company's revenue has been
derived from the sale of products and services to customers in the utility,
telecommunications and cable/broadband markets. The Company anticipates that a
significant portion of its revenue will continue to be generated by sales of
products and services to these markets. Demand for the Company's services in
these markets has fluctuated and is likely to fluctuate in the future. In
additions, the Company believes 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 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 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 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
15
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
workforce management solutions 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., owner of MDSI competitor M3i
Systems, Inc.), Intergraph Corporation, Axiom Corporation, Oracle Corporation,
Itron Inc. (via its acquisition of e-Mobile Data Inc.) a.p.solve Limited 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., and Viryanet Ltd., again mostly for small accounts.
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 largely 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 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.
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.
16
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 U.S. 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
grows and the functionality of products in different industry segments overlaps.
See "Forward-Looking Statements". Although the Company believes that its
products do not infringe on the intellectual property rights of third parties,
there can be no assurance that third parties will not bring infringement claims
(or claims for indemnification resulting from infringement claims) against the
Company with respect to copyrights, trademarks, patents and other proprietary
rights. Any such claims, whether with or without merit, could be time consuming,
result in costly litigation and diversion of resources, cause product shipment
delays or require the Company to enter into royalty or licensing agreements.
Such royalty or licensing agreements, if required, may not be available on terms
acceptable to the Company or at all. A claim of product infringement against the
Company and failure or inability of the Company to license the infringed or
similar technology could have a material adverse effect on the Company's
business, financial condition, operating results and cash flows.
Dependence on Third Parties
Certain contracts require the Company to supply, coordinate and install
third party products and services 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 or
MDSI in a timely manner could have a material adverse effect on the Company's
financial condition, results of operations and cash flows.
17
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 has entered 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 changes on the
Company's reporting in its financial statements of the results from such
operations outside the United States. During 2003, the relative weakness of the
U.S. dollar contributed to an increase in direct costs as a percentage of
revenue, as the majority of direct costs are incurred in Canadian dollars.
Risks Associated with International Operations
In the years ended December 31, 2003, 2002, and 2001 revenue derived from
sales outside of North America accounted for approximately 44.5%, 30.9%, and
23.9%, respectively, of the Company's total revenue. Because the Company's
revenue is dependent, in large part, on significant contracts with a limited
number of customers, the percentage of the Company's revenues that is derived
from sales outside of North America has fluctuated, and may continue to
fluctuate, from period-to-period. The Company believes that its ability to grow
and be profitable will require additional expansion of its sales in foreign
markets, and that revenue derived from international sales will account for a
significant percentage of the Company's revenue for the foreseeable future. This
expansion has required and will continue to require significant management
attention and financial resources. The inability of the Company to expand
international sales in a timely and cost-effective manner could have a material
adverse effect on the Company's business, financial condition, operating results
and cash flows. There are a number of risks inherent in the Company's
international business activities, including changes in regulatory requirements,
tariffs and other trade barriers, costs and risks of localizing products for
foreign markets, longer accounts receivable payment cycles, difficulties in
collecting payments, reduced protection for intellectual property, potentially
adverse tax consequences, limits on repatriation of earnings, the burdens of
complying with a wide variety of foreign laws, nationalization, war,
insurrection, terrorism and other political risks and factors beyond the
Company's control. Fluctuations in currency exchange rates could adversely
affect sales denominated in foreign currencies and cause a reduction in revenue
derived from sales in a particular country. In addition, revenue of the Company
earned abroad may be subject to taxation by more than one jurisdiction, thereby
adversely affecting the Company's earnings. There can be no assurance that such
factors will not materially adversely affect the Company's future international
sales and, consequently, the Company's business, financial condition, operating
results and cash flows.
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 costs 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."
18
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 shareholder rights plan (the
"Plan"). The Plan had a 5-year term and was subsequently renewed in December
2003 for a further 5-year term. Pursuant to the renewed Plan, shareholders of
record on December 17, 2003 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 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 Plan 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.
Pursuant to regulatory requirements, the renewed Plan must be approved by the
Company's shareholders at a meeting to be held 6 months of implementation of the
renewed Plan.
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 ("GAAP") as
applied in Canada . Canadian and US GAAP differ in certain respects, including
the treatment of certain reorganization costs, acquired research and development
costs, and the expensing of stock options. 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.
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.
19
Item 2: Properties
The Company occupies approximately 96,000 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 16,000 square feet of this space until
November 30, 2008. The Company also maintains an office in Itasca, Illinois. The
Itasca office lease is for approximately 29,000 square feet and and has been
terminated effective November 30, 2004. 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 February 2, 2004, MDSI and Citizens settled this
lawsuit. Under the settlement agreement, each company has fully discharged the
other from all outstanding legal claims without further financial compensation.
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.
20
Part II
Item 5: Market for Registrant's Common Equity And Related Stockholder Matters
Price Range of Common Shares
The Company's Common Shares began trading on The Toronto Stock Exchange and
on the Montreal Exchange under the symbol "MMD" on December 20, 1995 and began
trading on the Nasdaq National Market System under the symbol "MDSIF" on
November 26, 1996. The Company changed its Nasdaq National Market System trading
symbol to "MDSI" in April 1999. In December 1999, the Company's listing on the
Montreal Exchange was automatically withdrawn as part of a restructuring plan of
the Canadian stock exchanges. Prior to December 20, 1995, there was no public
market for the Common Shares. The following table sets forth, for the periods
indicated, the high and low sale prices for the Common Shares as reported on The
Toronto Stock Exchange and the Nasdaq National Market System with their
equivalent U.S. dollar amounts where applicable.
The Toronto Stock Exchange Nasdaq National Market
---------------------------------------------------------- ----------------------------
US$(1) CDN$ US$ US$
---------------------------------------------------------- ----------------------------
High Low High Low High Low
-------------- -------------- -------------- -------------- -------------- -------------
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
2003
First Quarter............. 4.28 3.33 6.00 4.67 3.91 3.00
Second Quarter............ 5.18 3.39 7.25 4.75 5.35 3.00
Third Quarter............. 6.07 3.88 8.50 5.43 6.33 3.85
Fourth Quarter............ 5.60 4.12 7.85 5.77 6.12 4.25
- -----------------
(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, 2003 the Company had approximately 347 shareholders of
record.
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, 2003.
21
Exchange Controls
There are no government laws, decrees or regulations in Canada which
restrict the export or import of capital or which affect the remittance of
dividends, interest or other payments to non-resident holders of the Company's
Common Shares. Any remittances of dividends to United States residents and to
other non-residents are, however, subject to withholding tax. See "Taxation"
below.
Taxation
Canadian Federal Income Taxation
We consider that the following summary fairly describes in general the
principal Canadian federal income tax consequences applicable to a holder of our
common shares who at all times deals at arm's length with us, who holds all
common shares as capital property, who is resident in the United States, who is
not a resident of Canada and who does not use or hold, and is not deemed to use
or hold, his common shares of MDSI Mobile Data Solutions Inc. in connection with
carrying on a business in Canada (a "non-resident holder"). It is assumed that
the common shares will at all material times be listed on a stock exchange that
is prescribed for purposes of the Income Tax Act (Canada) (the "ITA") and
regulations thereunder. The Canadian federal income tax consequences applicable
to holders of the Company's common shares will not change if we are deemed
inactive by the Toronto Stock Exchange. Investors should however be aware that
the Canadian federal income tax consequences applicable to holders of the
Company's common shares will change if we cease to be listed on a prescribed
stock exchange like the Toronto Stock Exchange. Accordingly, holders and
prospective holders of our common shares should consult with their own tax
advisors with respect to the income tax consequences of them purchasing, owning
and disposing of the Company's common shares should the Company cease to be
listed on a prescribed stock exchange.
This summary is based upon the current provisions of the ITA, the
regulations thereunder, the Canada-United States Tax Convention as amended by
the Protocols thereto (the "Treaty") as at the date of the registration
statement and the currently publicly announced administrative and assessing
policies of the Canada Revenue Agency (the "CRA"). 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 CRA for the account of the
investor.
22
The reduction in withholding tax from 25%, pursuant to the Treaty, will not
be available:
(a) if the shares in respect of which the dividends are paid 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 personal property constituting business property
or were otherwise effectively connected with a permanent establishment
or fixed base that the holder has or had in Canada within the 12
months preceding the disposition, or
(d) the holder is a U.S. LLC which is not subject to tax in the U.S.
If subject to Canadian tax on such a disposition, the taxpayer's capital
gain (or capital loss) from a disposition is the amount by which the taxpayer's
proceeds of disposition exceed (or are exceeded by) the aggregate of the
taxpayer's adjusted cost base of the shares and reasonable expenses of
disposition. For Canadian income tax purposes, the "taxable capital gain" is
equal to one-half of the capital gain.
23
Item 6: Selected Financial Data (unaudited)
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, 2003, 2002 and 2001 and the consolidated
balance sheet data at December 31, 2003 and 2002 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,
2003 2002 2001 2000 1999
-------------- ------------- -------------- ------------- ------------
(In thousands, except per share data)
Statement of Operations Data:
Revenue $ 47,385 $ 38,211 $ 44,941 $ 51,852 $ 52,000
Gross profit 24,022 21,192 23,894 30,772 29,449
Operating (loss) income (2,884) (2,933) (11,167) 912 7,624
(Loss) income from continuing (3,643) (2,047) (13,240) (24) 4,731
operations for the year
(1)(2)(3)
Diluted (loss) earnings per common
share $ (0.44) $ (0.23) $ (1.61) $ (0.08) $ 0.11
Weighted average shares outstanding
8,201 8,481 8,623 8,527 9,101
-------------- ------------- -------------- ------------- ------------
Balance Sheet Data: 2003 2002 2001 2000 1999
-------------- ------------- -------------- ------------- ------------
Cash and cash equivalents $ 15,827 $ 11,017 $ 13,176 $ 12,865 $ 14,750
Working capital 8,576 8,296 11,374 23,305 23,151
Total assets 37,071 37,031 44,263 60,517 50,191
Non-current liabilities 982 1,914 3,050 6,738 3,399
Stockholders' equity 15,942 19,464 23,916 37,404 34,916
- --------------------------
(1) Net loss for the year ended December 31, 2001 includes 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 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.
(3) Net loss from continuing operations for the year ended December 31, 2003
includes charges related to the evaluation of strategic options for the
Company of $1,275,120, and $3,069,860 for bad debts with respect to several
doubtful accounts.
24
Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion contains "forward-looking statements" within the
meaning of Section 21E of the Securities Exchange Act of 1934. 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." Also see "Forward-Looking Statements."
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 Disclosures 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.
Strategic Alternatives
The Company has retained Bear, Stearns & Co. Inc. as financial advisor to
the Board of Directors. The Board is evaluating potential business combinations,
financing and other strategic alternatives to help the Company offer enhanced
products and services to its customers and maximize shareholder value. The
Company continues to conduct the strategic review process. The process is
ongoing, and to date the Company has not entered any transaction as a result of
the strategic review.
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, have elected not to purchase the Company's products, or have sought
to terminate existing contracts for the Company's products and services. As a
result, 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
facts, particularly the timing and receipt of significant orders. While the
Company believes that economic conditions in certain of its vertical markets
show signs of improvement, the Company
25
believes that economic and political conditions are likely to continue to affect
demand for the Company's products and services in 2004 , particularly demand for
software and related services. See "Forward-Looking Statements." Such factors
may also increase the amount of doubtful accounts or adversely affect the
likelihood of collection of such accounts.
In order to address the uncertainties caused by these economic trends, MDSI
announced in 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 were 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
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 (5,225,145)
------------------
Accrued restructuring charges as at December 31, 2003 $ 880,782
===================
During the year ended December 31, 2003, the Company made cash payments of
$376,553 relating to the restructuring accruals.
Provisions relating to workforce reductions, write-down of capital assets,
and other items have been fully drawn-down, and no further expenditures relating
to these items are expected to be incurred.
The Company has recorded a $1.9 million provision relating to surplus
office space under long term lease by the Company at two locations, including
one location where the Company has entered into fixed cost lease arrangements
expiring in 2004. The Company has incurred approximately $1.0 million of cash
costs relating to this provision leaving an accrual of $0.9 million remaining as
at December 31, 2003. The Company expects that the provision will be fully drawn
down no later than the time the lease expires in the fourth quarter of 2004.
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
26
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 users are rolled out initially, with the
balance implemented over a 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, which includes a warranty
period that is generally ninety days in length. These services 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 man days incurred
over the total estimated man days 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. Also included in third party revenue are reimbursements to
the Company for out of pocket expenses incurred on implementation projects
performed by the Company. EITF 01-14 "Income Statement Characterization of
Reimbursements Received for Out of Pocket Expenses" requires characterization of
these expenses as revenue. An equal and offsetting amount of expense is
recognized relating to these reimbursements as direct costs.
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 Company has now exited
the Public Safety market.
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.
27
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 of MDSI 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. The loan was repaid subsequent to
December 31,2003. 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.
Recent Accounting Pronouncements
In May 2003, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 150 "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity". SFAS 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. This Statement is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of this standard did not have a
material impact on the Company's financial statements.
In April 2003 FASB issued Statement No. 149 ("SFAS 149"), Amendment of SFAS
No. 133 on Derivative Instruments and Hedging Activities. The Statement amends
and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under SFAS No. 133. In particular, it (1) clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a derivative
as discussed in SFAS No. 133, (2) clarifies when a derivative contains a
financing component, (3) amends the definition of an underlying to conform it to
the language used in FASB Interpretation No. 45, Guarantor Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others and (4) amends certain other existing pronouncements.
SFAS 149 is effective for contracts entered into or modified after June 30,
2003, subject to certain exceptions, for hedging relationships designated after
June 30, 2003. The adoption of this standard did not have a material impact on
the Company's financial statements.
In January 2003, FASB issued Interpretation No. 46 (FIN 46), "Consolidation
of Variable Interest Entities", an Interpretation of ARB No. 51. FIN 46 requires
certain variable interest entities to be consolidated by the primary beneficiary
of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective for all
new variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or annual period
beginning after June 15, 2003. The adoption of this standard did not have a
material impact on the Company's financial statements.
28
Critical Accounting Policies and Significant Estimates
The significant accounting policies are outlined within Note 1 to the
Consolidated 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.
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, 2003, the allowance for doubtful
accounts was $2.8 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.
During the year ended December 31, 2003 the Company wrote off a long term
receivable of $2.8 million, as the Company entered into a settlement agreement
with this customer whereby no further proceeds on the receivable would be
realized by the Company.
Revenue Recognition
We recognize revenue in accordance with the American Institute of Certified
Public Accountants Statement of Position ("SOP") 97-2, "Software Revenue
Recognition," as amended by SOP 98-9, "Modification of SOP 97-2, Software
Revenue Recognition, with Respect to Certain Transactions," SOP 81-1,
"Accounting for Performance of Construction-type and Certain Production-type
Contracts," the Securities and Exchange Commission's Staff Accounting Bulletin
("SAB") No. 101, "Revenue Recognition in Financial Statements," SAB No. 104,
"Revenue Recognition," and other authoritative accounting literature. We derive
revenues from the following sources: license fees, professional services,
maintenance and support fees and third party products and services.
We generally provide services with our supply agreements, that include
significant production, modification, and customisation of the software. These
services are not separable and are essential to the functionality of the
software, and as a result we account for these licence and service arrangements
under SOP 81-1 using the percentage of completion method of contract accounting.
License Fees and Professional Services
Our supply agreements generally include multiple products and services, or
"elements." We use the residual method to recognize revenue when a supply
agreement includes one or more elements to be delivered at a future date and
vendor specific objective evidence of the fair value of all undelivered elements
exists. The fair value of the undelivered elements is determined based on the
historical evidence of stand-alone sales, or renewal terms of these elements to
customers. Under the residual method, the fair value of the undelivered elements
is deferred and the remaining portion of the arrangement fee, which relates to
the license and implementation services, is recognized as revenue on a
percentage of completion basis. If evidence of the fair value of one or more
undelivered elements
29
does not exist, the total revenue is deferred and recognized when delivery of
those elements occurs or when fair value is established.
We estimate the percentage of completion on contracts with fixed fees on a
monthly basis utilizing hours incurred to date as a percentage of total
estimated hours to complete the project. If we do not have a sufficient basis to
measure progress towards completion, revenue is recognized when we receive final
acceptance from the customer. When the total cost estimate for a project exceeds
revenue, we accrue for the estimated losses immediately. The complexity of the
estimation process and issues related to the assumptions, risks and
uncertainties inherent with the application of the percentage-of-completion
method of accounting affect the amounts of revenue and related expenses reported
in our consolidated financial statements. A number of internal and external
factors can affect our estimates, including labor rates, utilization and
efficiency variances and specification and testing requirement changes.
We are engaged on a continuous basis in the production and delivery of
software under contractual agreements. As a result we have developed a history
of being able to estimate costs to complete and the extent of progress toward
completion of contracts, which supports the use of the percentage of completion
method of contract accounting.
Professional services revenue primarily consists of consulting and customer
training revenues, which are usually charged on a time and materials basis and
are recognized as the services are performed. Revenue from certain fixed price
contracts is recognized on a proportional performance basis, which involves the
use of estimates related to total expected man-days of completing the contract
derived from historical experience with similar contracts. If we do not have a
sufficient basis to measure the progress towards completion, revenue is
recognized when the project is completed or when we receive final acceptance
from the customer.
Maintenance Revenue
Generally, maintenance is initially sold as an element of a master supply
arrangement, with subsequent annual renewals, and is priced as a percentage of
new software license fees. Maintenance revenue is recognized ratably over the
term of the maintenance period, which typically is one year. Maintenance and
support revenue includes software license updates that provide customers with
rights to unspecified software product upgrades, maintenance releases and
patches released during the term of the support period. Product support services
also include Internet and telephone access to technical support personnel.
Historically, we have provided a warranty phase during the supply
agreement. Services provided during this warranty phase include elements of
maintenance and support. As a result we, defer a portion of the supply agreement
fee, based on Vendor Specific Objective Evidence of the value of these services,
and recognize the deferred amount as revenue over the warranty period.
Third party products and services
Revenue from sales of third party products and services is recognized on
delivery of the products. Services are recognized on a percentage-complete
basis.
When software licenses are sold incorporating third-party products or sold
with third-party products , we recognize as revenue the gross amount of sales of
third-party product. The recognition of gross revenue is in accordance with
criteria established in Emerging Issues Task Force Issue (EITF) No. 99-19,
Reporting Revenue Gross as a Principal versus Net as an Agent.
On occasion, we utilize third-party consultants to assist in
implementations or installations originated by the Company. In these cases, in
accordance with criteria established in EITF 99-19 (as described above), the
revenue for these implementations and installations is typically recognized on a
gross basis. In these cases we ultimately manage the engagement.
30
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.
Warranty
The Company warrants to its customers that its software will be in
substantial conformance with its specifications.
Indemnification
The Company typically includes indemnification provisions within license
and implementation service agreements, which are consistent with those prevalent
in the software industry. Such provisions indemnify customers against actions
arising from patent infringements that may arise through the normal use or
proper possession of the Company's software. To date the Company has not
experienced any significant obligations under customer indemnification
provisions and accordingly, no amounts have been accrued for such potential
indemnification obligations.
31
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,
2003 2002 2001
--------------- --------------- ---------------
(In thousands)
Revenue:
Software and services..................... $ 28,932 $ 24,676 $ 31,578
Maintenance and support................... 13,976 11,055 10,910
Third party products and services ........ 4,477 2,480 2,453
--------------- --------------- ---------------
47,385 38,211 44,941
Direct costs................................. 23,363 17,019 21,047
--------------- --------------- ---------------
Gross profit................................. 24,022 21,192 23,894
--------------- --------------- ---------------
Operating expenses:
Research and development.................. 5,513 5,506 7,258
Sales and marketing....................... 10,497 12,382 10,859
General and administrative................ 6,551 6,237 6,075
Restructuring charge...................... -- -- 6,106
Amortization and provision for valuation
of intangible assets.................... -- -- 1,824
Strategic expenses........................ 1,275 -- --
Provision for doubtful accounts........... 3,070 -- 2,938
--------------- --------------- ---------------
26,906 24,125 35,060
Operating loss............................... (2,884) (2,933) (11,166)
Valuation allowance on investments........... -- -- (2,750)
Other (expense) income....................... (307) 273 177
--------------- --------------- ---------------
Loss from continuing operations before tax
provision.................................... (3,191) (2,660) (13,739)
(Provision for) recovery of income taxes
from continuing operations................... (452) 613 499
--------------- --------------- ---------------
Loss for continuing operations (3,643) (2,047) (13,240)
--------------- --------------- ---------------
Income (loss) from discontinued operations -- 121 (653)
--------------- --------------- ---------------
Net loss for the year........................ $ (3,643) $ (1,926) $ (13,893)
=============== =============== ===============
32
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,
2003 2002 2001
--------------- --------------- ---------------
Revenue:
Software and services..................... 61.1% 64.6% 70.3%
Maintenance and support..................... 29.5 28.9 24.2
Third party products and services........... 9.4 6.5 5.5
--------------- --------------- ---------------
100.0 100.0 100.0
Direct costs................................... 49.3 44.5 46.8
--------------- --------------- ---------------
Gross profit................................... 50.7 55.5 53.2
--------------- --------------- ---------------
Operating expenses:
Research and development.................... 11.6 14.4 16.1
Sales and marketing......................... 22.2 32.4 24.2
General and administrative.................. 13.8 16.3 13.5
Restructuring charge........................ -- -- 13.6
Amortization and provision for valuation of
intangible assets........................ -- -- 4.1
Strategic expenses.......................... 2.7 -- --
Provision for doubtful accounts............. 6.5 -- 6.5
--------------- --------------- ---------------
56.8 63.1 78.0
--------------- --------------- ---------------
Operating loss................................. (6.1) (7.6) (24.8)
Valuation allowance on investments............. -- -- (6.1)
Other (expense) income......................... (0.6) 0.7 0.4
--------------- --------------- ---------------
Loss from continuing operations before tax
provision ........ (6.7) (6.9) (30.5)
(Provision for) recovery of income taxes from
continuing operations.......................... (1.0) 1.6 1.1
--------------- --------------- ---------------
Loss from continuing operations................ (7.7) (5.3) (29.4)
Income (loss) from discontinued operations..... -- 0.3 (1.4)
--------------- --------------- ---------------
Net loss for the year.......................... (7.7)% (5.0)% (30.8)%
=============== =============== ===============
Year ended December 31, 2003 Compared to the Year ended December 31, 2002
Revenue. Revenue increased by $9.2 million (24.0%) for the year ended
December 31, 2003, compared to the year ended December 31, 2002. The increase
was primarily due to increased software and services revenue, and maintenance
and support revenue.
Software and services revenue increased by $4.3 million (17.2%) for the
year ended December 31, 2003, compared to the year ended December 31, 2002. The
increase in revenue was attributable to several significant contracts the
Company has entered into, representing increased success in the core markets the
Company serves. These contracts continue to generate significant revenue for the
Company. The Company expects that these contracts will continue to make up a
significant portion of revenues over the next few quarters. "See Forward-Looking
Statements". While the Company believes that economic conditions in certain of
its vertical markets show signs of improvement, the Company anticipates that
economic conditions 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 $14.0 million for the year ended
December 31, 2003, compared to $11.1 million for the year ended December 31,
2002, an increase of 26.4%. The Company believes maintenance and support revenue
will continue to increase as the Company's installed customer base increases.
See "Forward-Looking Statements." The primary reason for the increase in
maintenance and support revenue during 2003 was that two of the Company's
significant implementation contracts entered the maintenance and support phases
of their agreements during the year.
33
Year ended December 31, 2003 Compared to the Year ended December 31, 2002
(continued)
Third party products and services revenue increased by $2.0 million (80.5%)
for the year ended December 31, 2003, compared to the year ended December 31,
2002. 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. 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 agreed to supply a large amount of third
party services at no margin which is being recognized on a gross basis, in
connection with one particular contract, and therefore expects that future
revenues from third party products and services will fluctuate in the near term.
For the year ended December 31, 2003 approximately $1.8 million of these
services were provided, as compared to $0.1 million for the year ended December
31, 2002. See "Forward Looking Statements."
Direct Costs. Direct costs were 49.3% of revenue for the year ended
December 31, 2003, compared to 44.5% for the year ended December 31, 2002.
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 direct costs as a
percentage of revenue occurred primarily due to the Company's agreement to
supply a large amount of third-party services at no margin, in connection with
one particular contract. The relative weakness of the United States dollar also
contributed to the cost increase as the majority of direct costs are incurred in
Canadian dollars. As a result, direct costs as a percentage of revenue
increased. The Company expects that direct costs as a percentage of revenue will
remain relatively consistent with the current period in the near term. See
"Forward-Looking Statements."
Gross Margins. Gross margins were 50.7% of revenue for the year ended
December 31, 2002, compared to 55.5% for the year ended December 31, 2002. The
decrease in gross margins as a percentage of revenue related primarily to an
agreement whereby the Company has agreed to supply a large amount of third-party
services at no margin. During the current year the Company recognized
approximately $1.8 million in third party revenues and costs related to this
project. The relative weakness of the United States dollar also contributed to
the reduction in gross margin in the period. The Company expects that in the
near term its gross margins as a percentage of revenue will remain consistent
with the current period, subject to the level of third party services actually
provided. See "Forward-Looking Statements."
Research and Development. Research and development expenses were $5.5
million, or 11.6% of revenue, for the year ended December 31, 2003, compared to
$5.5 million, or 14.4% of revenue, for the year ended December 31, 2002. The
decrease in research and development expenses as a percentage of revenue was a
result of stable research and development expenses incurred during a period of
revenue growth. The Company also utilized research and development personnel on
revenue producing projects in 2003, and corresponding portions of the associated
salary costs for these staff are reflected as direct costs as opposed to
research and development expenses. The Company intends to continue committing a
significant portion of its revenue to enhance existing products and develop new
products. In addition, the Company expects to increase its research and
development expenditures during 2004. See "Forward-Looking Statements".
Sales and Marketing. Sales and marketing expenses were $10.5 million or
22.2% of revenue for the year ended December 31, 2003 and $12.4 million or 32.4%
of revenue for the year ended December 31, 2002. Total sales and marketing
expenses represents a decrease of approximately $1.9 million as compared to the
same period of 2002. The decrease in expenditures in 2003 was due to an decrease
in commission costs relating to contracts entered into during 2002 that did not
reoccur in 2003. 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 $6.6
million, or 13.8% of revenue, for the year ended December 31, 2003 and $6.2
million, or 16.3% of revenue, for the year ended December 31, 2002. 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
increased legal costs incurred during 2003. The Company expects that in the near
future, general and administrative expenditures will remain relatively
consistent with current levels. See "Forward-Looking Statements".
34
Year ended December 31, 2003 Compared to the Year ended December 31, 2002
(continued)
Provision for Doubtful Accounts. During the year ended December 31, 2003
the Company determined that an additional allowance of approximately $3.1
million was required primarily due to a settlement agreement being reached in
the legal action against Citizens Communications. This settlement did not result
in the Company realizing any proceeds on its $2.8 million long term receivable
from Citizens Communications, and as a result the Company has written off the
entire amount during the year ended December 31, 2003. The remaining provision
resulted from significant uncertainty surrounding collection of one further
specific account. The Company intends to vigorously pursue collection of
accounts where no settlement agreements have been reached; 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. During the year ended December 31, 2002 the Company
recovered approximately $0.6 million from a previously allowed for doubtful
accounts. 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.
Strategic expenses. Strategic expenses were approximately $1.3 million, or
2.7% of revenue, for the year ended December 31, 2003. The Company did not incur
any strategic expenses in the year ended December 31, 2002. Strategic expenses
consisted of professional fees associated with investigating potential corporate
transactions that the Company considered during 2003. The Company expects it
will consider additional strategic opportunities and expects to incur additional
strategic expenses; however, the Company cannot predict the amount of the
strategic expenses or whether the Company will be successful in negotiating a
successful transaction. See "Forward-Looking Statements."
Other expense (income). Other expense was $0.3 million for the year ended
December 31, 2003, compared to $(0.3) million for the year ended December 31,
2002. Substantially all of other expense (income) related to interest income on
cash and short-term deposits, interest expense on capital leases, and
fluctuations in foreign currency denominated assets and liabilities.
Income Taxes. The Company provided for income taxes on losses for the year
ended December 31, 2003. The Company's effective tax rate reflects the
application of certain operating loss carry forwards against taxable income and
the blended effect of Canadian, U.S., and other foreign jurisdictions' tax
rates. Since the Company 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, 2003.
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 have been presented as Discontinued Operations. There was no effect
on income from Discontinued Operations during the year ended December 31, 2003.
Income from Discontinued Operations for the year ended December 31, 2002 was
$121,000. Going forward, the Company expects no further financial statement
impact from this disposition.
Year ended December 31, 2002 Compared to the Year ended December 31, 2001
Revenue. Revenue decreased by $6.7 million (15.0%) 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 $6.9 million (21.9%) 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 caused fewer contracts to be worked on by the Company
in the year ended December 31, 2002 as compared to the year ended December 31,
2001 and as a result caused a reduction in revenue.
Maintenance and support revenue was $11.1 million for the year ended
December 31, 2002, compared to $10.9 million for the year ended December 31,
2001, an increase of 1.3%. Maintenance and support revenue increased primarily
due to the increase in the Company's installed customer base.
35
Year ended December 31, 2002 Compared to the Year ended December 31, 2001
(continued)
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.
Direct Costs. Direct costs were 44.5% of revenue for the year ended
December 31, 2002, compared to 46.8% 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.
Gross Margins. Gross margins were 55.5% of revenue for the year ended
December 31, 2002, compared to 53.2% for the year ended December 31, 2001. The
increase in gross margin as a percentage of revenue related primarily to the
increased efficiencies for the installations of Advantex r7.
Research and Development. Research and development expenses were $5.5
million, or 14.4% 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
2002, 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.
Sales and Marketing. Sales and marketing expenses were $12.4 million or
32.4% of revenue for the year ended December 31, 2002 and $10.9 million or 24.2%
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".
General and Administrative. General and administrative expenses were $6.2
million, or 16.3% of revenue, for the year ended December 31, 2002 and $6.1
million, or 13.5% 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.
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 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.
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
36
Year ended December 31, 2002 Compared to the Year ended December 31, 2001
(continued)
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 23.0%, 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 was not more likely than not that the Company would 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 2002, 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.
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, 2003, the Company had cash
and cash equivalents of $15.8 million (2002 - $11.0 million) and working capital
of $8.6 million (2002 - $8.3 million).
Cash provided by (used in) operating activities was $7.4 million, $2.3
million and $3.2 million, respectively, for the years ended December 31, 2003,
2002 and 2001. The $7.4 million of cash provided by operating activities in 2003
was comprised of $3.6 million net loss, non-cash charges of $5.6 million, and
$5.4 million of changes to non-cash working capital items. The changes to
working capital items include a $1.9 million increase in trade receivables, a
$2.2 million decrease in unbilled receivables, a $0.3 million increase in
prepaid expenses and other assets, a $1.4 million increase in accounts payable
and accrued liabilities, a $0.3 million increase in taxes payable and a $3.7
million increase 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, 2003 a provision of $2.8 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.
Cash used in financing activities was $1.7 million, $1.7 million and $1.6
million, respectively, during the years ended December 31, 2003, 2002 and 2001.
The cash used in financing activities in 2003 comprised $1.8 million in
repayments of capital leases offset by $0.1 million from the issuance of common
shares.
Cash used in investing activities was $0.9 million, $2.2 million, and $0.9
million, respectively, for the years ended December 31, 2003, 2002 and 2001.
Total investing activity in 2003 primarily consisted of $0.9 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.
37
Year ended December 31, 2002 Compared to the Year ended December 31, 2001
(continued)
Existing sources of liquidity at December 31, 2003 include $15.8 million of
cash and cash equivalents and funds available under the Company's operating line
of credit. At the year ended December 31, 2003, 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 rate plus 0.5%. At December 31, 2003, 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, 2003 the Company had the following contractual
obligations and commercial commitments:
- ---------------------------------------------------------------------------------------------------
Contractual Obligations Payments Due by Period
- ---------------------------------------------------------------------------------------------------
Total Less Than One 1-3 Years 4-5 Years After 5
Year Years
- ---------------------------------------------------------------------------------------------------
Capital Lease $2,376,504 $1,345,399 $1,031,105 - -
Obligations
- ---------------------------------------------------------------------------------------------------
Operating Leases $6,730,801 $1,954,669 $2,438,876 $2,337,256 -
- ---------------------------------------------------------------------------------------------------
Total Contractual $9,107,305 $3,300,068 $3,469,981 $2,337,256 -
Obligations
- ---------------------------------------------------------------------------------------------------
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 required
to utilize local content or obtain credits equivalent to approximately $7.1
million over a seven year period. The Company has furnished 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. As at December 31,
2003 the Company has generated an estimated $175,000 of credits relating to this
obligation. The Company's obligation may increase as a result of contract
expansions.
In addition to these commercial commitments the Company has also provided,
letters of credit in the amounts of CAD $810,000 (USD $625,644) expiring April
4, 2004, and CAD $1,864,568 (USD $1,440,192) expiring October 1, 2004. The
Company has pledged an amount equal to the letters of credit as guarantees
against its operating line of credit as security.
Derivative Financial Instruments
The Company generates a significant portion of its sales from 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. 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
38
Year ended December 31, 2002 Compared to the Year ended December 31, 2001
(continued)
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, 2003, and 2002 the Company had no foreign currency forward
contracts outstanding.
Off-Balance Sheet Transactions
The Company does not have any off-balance sheet arrangements that have or
are reasonably likely to have a current or future effect on the registrant's
financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources that
is material to investors.
Item 7A: Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of loss that may impact our financial
position due to adverse changes in financial market prices and rates. Our market
risk exposure is primarily a result of fluctuations in foreign currency exchange
rates and interest rates. We do not hold or issue financial instruments for
trading purposes.
Foreign Currency Risk
We conduct business on a global basis in international currencies. As such,
we are exposed to adverse or beneficial movements in foreign exchange rates. The
majority of our sales are denominated in U.S. dollars, the functional currency
of our domestic operations and the currency in which we report our financial
statements. We also conduct a portion of our sales in currencies other than the
U.S. dollar, including the British pound and Euro.
We are exposed to foreign exchange fluctuations as the financial results of
our foreign subsidiaries are translated into U.S. dollars on consolidation. All
translation gains and losses are included in the determination of net income
(loss). As exchange rates vary, these results when translated may impact our
overall expected financial results. We also have exposure to foreign currency
rate fluctuations when we translate cash from one currency into another to fund
operational requirements. In addition, we have exposure to the change in rates
as the result of timing differences between expenses being incurred and paid. As
exchange rates vary, we may experience a negative impact on financial results.
We have evaluated our exposure to foreign currency risk and have determined
that while we have a degree of exposure to the Euro and British pound, our most
significant operating exposure to foreign currencies at this time is to the
Canadian dollar. The strengthening of the Canadian dollar has negatively
affected our operating results.
As of December 31, 2003, the potential reduction in future earnings from a
hypothetical instantaneous 10% change in quoted foreign currency exchange rates
applied to our foreign currency sensitive contracts and assets would be
approximately $3.5 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.
To minimize the risk associated with the effects of certain foreign
currency exposures, we occasionally use foreign currency forward exchange
contracts. We do not use forward contracts for trading or speculative purposes.
From time to time we may also purchase Canadian dollars in the open market and
hold these funds in order to satisfy forecasted operating needs in Canadian
dollars
39
At December 31, 2003 and December 31, 2002, we had no outstanding currency
forward exchange contracts, and during the years ended December 31, 2003, and
December 31, 2002 we did not enter into any forward exchange contracts. We
therefore did not record any gain or loss as a result of these contracts for the
years ended December 31, 2003 or December 31, 2002.
Interest Rate Risk
Our exposure to market rate risk for changes in interest rates relates
primarily to our investment portfolio. The investment of cash is regulated by
our investment policy of which the primary objective is the security of
principal. Among other selection criteria, the investment policy states that the
term to maturity of investments cannot exceed one year in length. We invest our
cash in a variety of short-term financial instruments, including government
bonds, commercial paper and money market instruments. Our portfolio is
diversified and consists primarily of investment grade securities to minimize
credit risk. These investments are typically denominated in U.S. dollars. Cash
balances in foreign currencies are operating balances and are only invested in
demand or short-term deposits of the local operating bank. We do not use
derivative financial instruments in our investment portfolio.
Investments in both fixed rate and floating rate interest earning
instruments carry a degree of interest rate risk. Fixed rate securities may have
their fair market value adversely impacted because of a rise in interest rates,
while floating rate securities may produce less income than expected if interest
rates fall. Due in part to these factors, our future investment income may fall
short of expectations because of changes in interest rates or we may suffer
losses in principal if forced to sell securities that have seen a decline in
market value because of changes in interest rates.
While interest income on our cash, cash equivalents, and short-term
investments is subject to interest rate fluctuations, we believe that the impact
of these fluctuations does not have a material effect on our financial position
due to the short-term nature of these financial instruments. Our interest income
and interest expense are most sensitive to the general level of interest rates
in Canada and the United States. Sensitivity analysis is used to measure our
interest rate risk. Based on analysis of our balances as of December 31, 2003, a
100 basis-point adverse change in interest rates would not have a material
effect on our consolidated financial position, results of operation, or cash
flows.
The Company does not have any material exposure to 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.
40
Independent Auditors' Report
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. and subsidiaries as of December 31, 2003 and 2002 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 2003. Our audits also
included the financial statement schedule listed in the Index at Item 15 (a).
These consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule 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 the 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, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company and subsidiaries as at
December 31, 2003 and 2002 and the results of its operations and cash flows for
each of the three years in the period ended December 31, 2003 in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, the financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.
On March 25, 2004, we reported separately to the Board of Directors and
Shareholders of MDSI Mobile Data Solutions Inc. on consolidated financial
statements for the same periods audited in accordance with Canadian generally
accepted auditing standards and prepared in accordance with Canadian generally
accepted accounting principles.
/s/ Deloitte & Touche LLP
Chartered Accountants
Vancouver, British Columbia
March 25, 2004
41
MDSI MOBILE DATA SOLUTIONS INC.
Consolidated Balance Sheets
(Expressed in United States dollars)
As at December 31,
--------------------------------
2003 2002
--------------- --------------
Assets
Current assets
Cash and cash equivalents $ 15,827,043 $ 11,016,945
Accounts receivable, net
Trade (net of allowance for doubtful accounts of $2,792,415 ; 2002 - $2,506,614) 8,610,846 6,705,088
Unbilled 2,446,271 4,675,112
Prepaid expenses and other assets 1,838,425 1,552,236
--------------- --------------
Total current assets 28,722,585 23,949,381
Capital assets, net (note 3) 7,990,457 9,798,087
Long term receivable (note 7(c)) - 2,749,860
Deferred income taxes (note 5) 357,628 533,628
--------------- --------------
Total assets $ 37,070,670 $ 37,030,956
=============== ==============
Liabilities and stockholders' equity
Current liabilities
Accounts payable $ 1,786,665 $ 1,777,465
Accrued liabilities (note 11) 4,677,980 3,300,113
Income taxes payable 917,183 602,717
Deferred revenue 11,560,446 7,899,034
Current obligations under capital lease (note
7(a)) 1,204,269 2,073,906
--------------- --------------
Total current liabilities 20,146,543 15,653,235
Obligations under capital leases (note 7(a)) 982,016 1,913,538
--------------- --------------
Total liabilities 21,128,559 17,566,773
--------------- --------------
Stockholders' equity
Common stock (note 4)
Authorized:
Unlimited common shares with no par value
Issued: 8,218,118 shares; 2002: 8,176,431 shares 44,329,182 44,208,511
Additional paid-up capital 2,222,128 2,222,128
Accumulated other comprehensive loss (690,104) (690,104)
Deficit (29,919,095) (26,276,352)
--------------- --------------
15,942,111 19,464,183
--------------- --------------
Total liabilities and stockholders' equity $ 37,070,670 $ 37,030,956
=============== ==============
Commitments and contingencies (note 7)
See accompanying notes to the consolidated financial statements
42
MDSI MOBILE DATA SOLUTIONS INC.
Consolidated Statements of Operations
(Expressed in United States dollars)
Years ended December 31,
-----------------------------------------------------------
2003 2002 2001
---------------- ---------------- ----------------
Revenue
Software and services $ 28,931,932 $ 24,676,534 $ 31,577,795
Maintenance and support 13,976,154 11,054,550 10,909,906
Third party products and services 4,476,503 2,480,368 2,453,137
---------------- ---------------- ----------------
47,384,589 38,211,452 44,940,838
---------------- ---------------- ----------------
Direct costs 23,362,608 17,019,346 21,047,146
---------------- ---------------- ----------------
Gross profit 24,021,981 21,192,106 23,893,692
---------------- ---------------- ----------------
Operating expenses
Research and development 5,512,706 5,505,810 7,258,396
Sales and marketing 10,496,644 12,381,679 10,858,596
General and administrative 6,551,205 6,237,194 6,075,396
Restructuring charge (note 11) - - 6,105,927
Amortization and provision
for valuation of intangible assets (note 1(h)) - - 1,824,058
Strategic expenses (note 12) 1,275,120 - -
Provision for doubtful accounts 3,069,860 - 2,938,195
---------------- ---------------- ----------------
26,905,535 24,124,683 35,060,568
---------------- ---------------- ----------------
Operating loss (2,883,554) (2,932,577) (11,166,876)
Valuation allowance on investments (note 1(k)) - - (2,749,992)
Other (expense) income (307,404) 272,988 177,200
---------------- ---------------- ----------------
Loss from continuing operations before tax provision (3,190,958) (2,659,589) (13,739,668)
(Provision for) recovery of income taxes from continuing
continuing operations (note 5) (451,785) 612,952 499,715
---------------- ---------------- ----------------
Loss from continuing operations (3,642,743) (2,046,637) (13,239,953)
Income (loss) from discontinued operations (note 2) - 121,031 (653,165)
---------------- ---------------- ----------------
Net loss for the year ($3,642,743) ($1,925,606) ($13,893,118)
================ ================ ================
Loss per common share
Loss from continuing operations
Basic ($0.44) ($0.24) ($1.54)
================ ================ ================
Diluted ($0.44) ($0.24) ($1.54)
================ ================ ================
Net loss
Basic ($0.44) ($0.23) ($1.61)
================ ================ ================
Diluted ($0.44) ($0.23) ($1.61)
================ ================ ================
See accompanying notes to the consolidated financial statements
43
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, December 31, 2000 8,612,453 $48,416,502 220,700 (85,043) (690,104) (10,457,628) 37,404,427
Issued on exercise of
stock options 63,567 102,558 - - - - 102,558
Stock based compensation
charge - - 301,921 - - - 301,921
Net loss for the year - - - - - (13,893,118) (13,893,118)
----------- ------------- ----------- ----------- ------------- ------------- --------------
Balance, December 31, 2001 8,676,020 $48,519,060 $ 522,621 $(85,043) $(690,104) $(24,350,746) $23,915,788
Issued on exercise of
stock options 253,181 65,366 - - - - 65,366
Issued under stock
purchase plan (Note 4(b)) 85,405 212,614 - - - - 212,614
Redemption of shares
during year on
divestiture of (824,700) (4,515,766) 1,711,787 - - - (2,803,979)
subsidiary (Note 2)
Redemption of treasury
shares (13,475) (72,763) (12,280) 85,043 - - -
Net loss for the year - - - - - (1,925,606) (1,925,606)
----------- ------------- ----------- ----------- ------------- ------------- --------------
Balance, December 31, 2002 8,176,431 $44,208,511 $2,222,128 $ - $(690,104) $(26,276,352) $19,464,183
Issued on exercise of
stock options 4,312 14,312 14,312
Issued under stock
purchase plan (Note 4(b)) 37,375 106,359 106,359
Net loss for the year (3,642,743) (3,642,743)
----------- ------------- ----------- ----------- ------------- ------------- --------------
Balance, December 31, 2003 8,218,118 $44,329,182 $2,222,128 $ - $(690,104) $(29,919,095) $15,942,111
=========== ============= =========== =========== ============= ============= ==============
See accompanying notes to the consolidated financial statements
44
MDSI MOBILE DATA SOLUTIONS INC.
Consolidated Statements of Cash Flows
(Expressed in United States dollars)
Years ended December 31,
-----------------------------------------------------------
2003 2002 2001
---------------- ---------------- ----------------
Cash flows from operating activities
Net loss from continuing operations for the year $(3,642,743) $(2,046,637) $(13,239,953)
Items not affecting cash:
Depreciation, amortization and provision for valuation of 2,726,208 2,706,987 4,502,772
intangible assets
Write down in value of surplus capital assets - - 563,780
Write down in value of long term receivable 2,749,860 - -
Valuation allowance on investments - - 2,749,992
Deferred income taxes 176,000 (183,659) 4,370
Stock based compensation charge - - 301,921
Changes in non-cash operating working capital items (Note 9) 5,399,839 1,828,619 8,322,809
---------------- ---------------- ----------------
Net cash provided by operating activities 7,409,164 2,305,310 3,205,691
---------------- ---------------- ----------------
Cash flows from financing activities
Issuance of common shares 120,671 277,981 102,558
Repayment of capital leases (1,801,159) (1,989,664) (1,727,326)
---------------- ---------------- ----------------
Net cash used in financing activities (1,680,488) (1,711,683) (1,624,768)
---------------- ---------------- ----------------
Cash flows from investing activities
Repayment of lease receivable - - 133,724
Proceeds on sale of investments - - 331,458
Acquisition of capital assets (918,578) (2,178,732) (1,346,279)
---------------- ---------------- ----------------
Net cash used in investing activities (918,578) (2,178,732) (881,097)
---------------- ---------------- ----------------
Net cash provided by (used in) continuing operations 4,810,098 (1,585,105) 699,826
Net cash used in discontinued operations (note 2) - (574,030) (388,727)
---------------- ---------------- ----------------
Net cash inflow (outflow) 4,810,098 (2,159,135) 311,099
Cash and cash equivalents, beginning of year 11,016,945 13,176,080 12,864,981
---------------- ---------------- ----------------
Cash and cash equivalents, end of year $ 15,827,043 $ 11,016,945 $ 13,176,080
================ ================ ================
Supplemental disclosure of cash flow information
Cash payments for interest $ 300,686 $ 174,619 $ 387,773
================ ================ ================
Cash payment (refund) for taxes $ 415,251 $ (1,320,664) $ 326,694
================ ================ ================
See accompanying notes to the consolidated financial statements
45
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 (2001 - $881,195)
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.
See accompanying notes to the consolidated financial statements
46
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2003, 2002 and 2001
(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 the
Company's functional currency, the 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
We recognize revenue in accordance with the American Institute of
Certified Public Accountants Statement of Position ("SOP") 97-2,
"Software Revenue Recognition," as amended by SOP 98-9, "Modification
of SOP 97-2, Software Revenue Recognition, with Respect to Certain
Transactions," SOP 81-1, "Accounting for Performance of
Construction-type and Certain Production-type Contracts," the
Securities and Exchange Commission's Staff Accounting Bulletin ("SAB")
No. 101, "Revenue Recognition in Financial Statements," SAB No. 104,
"Revenue Recognition," and other authoritative accounting literature.
We derive revenues from the following sources: license fees,
professional services, maintenance and support fees and third party
products and services.
We generally provide services with our supply agreements, that include
significant production, modification, and customisation of the
software. These services are not separable and are essential to the
functionality of the software, and as a result we account for these
licence and service arrangements under SOP 81-1 using the percentage
of completion method of contract accounting.
License Fees and Professional Services
Our supply agreements generally include multiple products and
services, or "elements." We use the residual method to recognize
revenue when a supply agreement includes one or more elements to be
delivered at a future date and vendor specific objective evidence of
the fair value of all undelivered elements exists. The fair value of
the undelivered elements is determined based on the historical
evidence of stand-alone sales, or
47
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2003, 2002 and 2001
(Expressed in United States dollars)
1. SIGNIFICANT ACCOUNTING POLICIES
(d) Revenue recognition (continued)
renewal terms of these elements to customers. Under the residual
method, the fair value of the undelivered elements is deferred and the
remaining portion of the arrangement fee, which relates to the license
and implementation services, is recognized as revenue on a percentage
of completion basis. If evidence of the fair value of one or more
undelivered elements does not exist, the total revenue is deferred and
recognized when delivery of those elements occurs or when fair value
is established.
We estimate the percentage of completion on contracts with fixed fees
on a monthly basis utilizing hours incurred to date as a percentage of
total estimated hours to complete the project. If we do not have a
sufficient basis to measure progress towards completion, revenue is
recognized when we receive final acceptance from the customer. When
the total cost estimate for a project exceeds revenue, we accrue for
the estimated losses immediately. The complexity of the estimation
process and issues related to the assumptions, risks and uncertainties
inherent with the application of the percentage-of-completion method
of accounting affect the amounts of revenue and related expenses
reported in our consolidated financial statements. A number of
internal and external factors can affect our estimates, including
labor rates, utilization and efficiency variances and specification
and testing requirement changes.
We are engaged on a continuous basis in the production and delivery of
software under contractual agreements. As a result we have developed a
history of being able to estimate costs to complete and the extent of
progress toward completion of contracts, which supports the use of the
percentage of completion method of contract accounting.
Professional services revenue primarily consists of consulting and
customer training revenues, which are usually charged on a time and
materials basis and are recognized as the services are performed.
Revenue from certain fixed price contracts is recognized on a
proportional performance basis, which involves the use of estimates
related to total expected man-days of completing the contract derived
from historical experience with similar contracts. If we do not have a
sufficient basis to measure the progress towards completion, revenue
is recognized when the project is completed or when we receive final
acceptance from the customer.
Maintenance Revenue
Generally, maintenance is initially sold as an element of a master
supply arrangement, with subsequent annual renewals, and is priced as
a percentage of new software license fees. Maintenance revenue is
recognized ratably over the term of the maintenance period, which
typically is one year. Maintenance and support revenue includes
software license updates that provide customers with rights to
unspecified software product upgrades, maintenance releases and
patches released during the term of the support period. Product
support services also include Internet and telephone access to
technical support personnel.
Historically, we have provided a warranty phase during the supply
agreement. Services provided during this warranty phase include
elements of maintenance and support. As a result we, defer a portion
of the supply agreement fee, based on Vendor Specific Objective
Evidence of the value of these services, and recognize the deferred
amount as revenue over the warranty period.
Third party products and services
Revenue from sales of third party products and services is recognized
on delivery of the products. Services are recognized on a
percentage-complete basis.
48
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2003, 2002 and 2001
(Expressed in United States dollars)
1. SIGNIFICANT ACCOUNTING POLICIES
(d) Revenue recognition (continued)
When software licenses are sold incorporating third-party products or
sold with third-party products, we recognize as revenue the gross
amount of sales of third-party product. The recognition of gross
revenue is in accordance with criteria established in Emerging Issues
Task Force Issue (EITF) No. 99-19, Reporting Revenue Gross as a
Principal versus Net as an Agent.
On occasion, we utilize third-party consultants to assist in
implementations or installations originated by the Company. In these
cases, in accordance with criteria established in EITF 99-19 (as
described above), the revenue for these implementations and
installations is typically recognized on a gross basis. In these
cases, the we ultimately manage the engagement.
Warranty
The Company warrants to its customers that its software will be in
substantial conformance with its specifications.
(e) Deferred Revenue
Deferred revenue is comprised of deferrals for software and service
fees, and maintenance and support fees. The principal components of
deferred revenue at December 31, 2003 and 2002 were as follows
2003 2002
---------------- ----------------
Software and services $ 7,313,279 $3,890,260
Maintenance and support 4,247,167 4,008,774
---------------- ----------------
Total Deferred Revenue $11,560,446 $7,899,034
================ ================
(f) Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are comprised of billed and unbilled receivables
arising from recognized or deferred revenues. Receivables related to
specific deferred revenues are offset for balance sheet presentation.
The Company's receivables are unsecured.
The Company maintains an allowance for doubtful accounts at an amount
it estimates to be sufficient to provide adequate protection against
losses resulting from collecting less than full payment on its
receivables. Individual overdue accounts are reviewed, and allowance
adjustments are recorded when determined necessary to state
receivables at realizable value.
49
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2003, 2002 and 2001
(Expressed in United States dollars)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
(g) 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.
(h) 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 .
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 2003, 2002 and 2001 are as follows:
Year ended December 31,
---------------------------------------------------------
2003 2002 2001
----------------- ----------------- ----------------
Net loss for the year $ (3,642,743) $ (1,925,606) $ (13,893,118)
Adjustments
Amortization of goodwill - - 989,693
Amortization of other intangible assets - - 22,000
----------------- ----------------- ----------------
Adjusted net loss $ (3,642,743) $ (1,925,606) $ (14,904,811)
================= ================= ================
Basic and diluted net loss per share, as
reported $ (0.44) $ (0.23) $ (1.61)
Basic and diluted net loss per share, as
adjusted $ (0.44) $ (0.23) $ (1.73)
50
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2003, 2002 and 2001
(Expressed in United States dollars)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
(i) 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.
(j) 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.
(k) 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. 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.
51
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2003, 2002, and 2001
(Expressed in United States dollars)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
(l) Loss per common share
Basic earnings (loss) 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 2003, 2002 and 2001 is as
follows:
Net Loss Loss Per Share
from Continuing Shares from continuing
Operations (Numerator) (Denominator) operations
----------------------- ---------------- -------------------
2003
Basic $ (3,642,743) 8,200,676 $ (0.44)
Effect of stock options - - -
----------------------- ---------------- -------------------
Diluted $ (3,642,743) 8,200,676 $ (0.44)
======================= ================ ===================
2002
Basic $ (2,046,637) 8,480,866 $ (0.24)
Effect of stock options - - -
----------------------- ---------------- -------------------
Diluted $ (2,046,637) 8,480,866 $ (0.24)
======================= ================ ===================
2001
Basic $ (13,239,953) 8,623,296 $ (1.54)
Effect of stock options - - -
----------------------- ---------------- -------------------
Diluted $ (13,239,953) 8,623,296 $ (1.54)
======================= ================ ===================
Options to purchase 1,191,248, 1,291,181, and 2,056,361 shares of
common stock were outstanding as at December 31, 2003, 2002 and 2001
respectively, but were not included in the computation of diluted EPS
because of the net loss in fiscal 2003, 2002 and 2001, and therefore,
their effect would be antidilutive.
52
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2003, 2002, and 2001
(Expressed in United States dollars)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
(m) 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.
(n) 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. As at
December 31, 2003 and December 31, 2002 the Company had no forward
transactions open.
(o) 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.
2003 2002 2001
-------------- -------------- --------------
Net loss for the year $(5,209,143) $(4,607,505) $(17,847,308)
-------------- -------------- --------------
Basic and fully diluted loss per common share $ (0.64) $ (0.54) $ (2.07)
============== ============== ==============
Using the fair value method for stock-based compensation, additional
compensation costs of approximately $1,566,400 would have been
recorded for the year ended December 31, 2003 (2002 - $2,681,899 and
2001 - $3,954,190 respectively). This amount is determined using an
option pricing model assuming no dividends are to be paid, an average
vesting period of four years (2002 - 4 years; 2001 - 3 years), average
life of the option of 5 years (2002 - 5 years; 2001 5 years) a
weighted average annualized volatility of the Company's share price of
47% (2002 - 73% and 2001 - 96% respectively) and a weighted average
annualized risk free interest rate at 1.1% (2002 2.7% and 2001 - 3.7%
respectively).
53
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2003, 2002, and 2001
(Expressed in United States dollars)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
(p) 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. The Company had no source of other
comprehensive income for the years ended December 31, 2003, 2002 or
2001. Tax effects of other comprehensive income or loss are not
considered material for any period.
(q) 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 8.
(r) 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).
54
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2003, 2002, and 2001
(Expressed in United States dollars)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
(s) 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.
(t) Recent accounting pronouncements
In May 2003, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 150 "Accounting
for Certain Financial Instruments with Characteristics of both
Liabilities and Equity". SFAS 150 establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an
issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). Many of those
instruments were previously classified as equity. This Statement is
effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. The adoption of this
standard did not have a material impact on the Company's financial
statements.
In April 2003 FASB issued Statement No. 149 ("SFAS 149"), Amendment of
SFAS No. 133 on Derivative Instruments and Hedging Activities. The
Statement amends and clarifies accounting for derivative instruments,
including certain derivative instruments embedded in other contracts,
and for hedging activities under SFAS No. 133. In particular, it (1)
clarifies under what circumstances a contract with an initial net
investment meets the characteristic of a derivative as discussed in
SFAS No. 133, (2) clarifies when a derivative contains a financing
component, (3) amends the definition of an underlying to conform it to
the language used in FASB Interpretation No. 45, Guarantor Accounting
and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others and (4) amends certain other
existing pronouncements.
SFAS 149 is effective for contracts entered into or modified after
June 30, 2003, subject to certain exceptions, for hedging
relationships designated after June 30, 2003.
The adoption of this standard did not have a material impact on the
Company's financial statements.
55
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2003, 2002, and 2001
(Expressed in United States dollars)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
(t) Recent accounting pronouncements (continued)
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities", an Interpretation of
ARB No. 51. FIN 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the equity
investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at
risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective
for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired
prior to February 1, 2003, the provisions of FIN 46 must be applied
for the first interim or annual period beginning after June 15, 2003.
The adoption of this standard did not have a material impact on the
Company's financial statements.
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 loan was repaid subsequent to December 31,
2003. The Company recognized a gain of $12,419 on the disposal of
Connectria. Connectria represented a significant segment of the Company's
business.
56
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2003, 2002, and 2001
(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, 2003 December 31, 2002 December 31, 2001
----------------- ----------------- -----------------
Revenues from discontinued operations
(after applicable income taxes of $ - nil) $ - $ 5,058,101 $ 13,414,690
Income (loss) before income taxes - 108,612 (653,165)
----------------- ----------------- -----------------
Operating income (loss) to measurement date - 108,612 (653,165)
Estimated income (loss) on disposal
(net of income taxes of 2002 - $5,322;
2000 - nil) - 12,419 -
----------------- ----------------- -----------------
Income (loss) from discontinued operations $ - $ 121,031 $ (653,165)
================= ================= =================
Cash flow of discontinued operations
December 31, 2003 December 31, 2002 December 31, 2001
----------------- ----------------- -----------------
Operating activities $ - $ 2,491,158 $ 758,508
Investing activities - (43,775) (807,710)
Financing activities - (3,021,413) (339,525)
----------------- ----------------- -----------------
Cash used in discontinued operations $ - $ (574,030) $ (388,727)
================= ================= =================
57
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2003, 2002, and 2001
(Expressed in United States dollars)
3. CAPITAL ASSETS
2003 2002
--------------- ---------------
Computer hardware and software $ 16,705,813 $ 15,830,618
Furniture and fixtures 2,557,303 2,532,807
Leasehold improvements 988,712 918,920
Vehicles - 50,905
--------------- ---------------
20,251,828 19,333,250
Less: accumulated amortization (12,261,371) (9,535,163)
--------------- ---------------
$ 7,990,457 $ 9,798,087
=============== ===============
As at December 31, 2003 the Company has entered into capital lease
arrangements for computer hardware in the amount of $3,540,336 (2002 -
$7,218,355) and recorded accumulated amortization of $1,280,535 (2002
-$2,489,013) relating to these assets (note 7(a)).
58
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2003, 2002, and 2001
(Expressed in United States dollars)
4. 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, 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
Granted - 298,755 298,755 4.31
Exercised - (4,312) (4,312) 3.72
Cancelled - (394,376) (394,376) 8.87
--------------------------------------------------------------------------
Outstanding at December 31, 2003 - 1,191,248 1,191,248 $ 5.67
==========================================================================
59
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2003, 2002 and 2001
(Expressed in United States dollars)
4. STOCKHOLDERS' EQUITY (Continued)
The following table summarizes information concerning options outstanding
at December 31, 2003:
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, 2003 (months) Price 31, 2003 Price
-------------------------- -------------- ------------- ------------ -------------- ------------
$0-$3.95 483,374 38.7 $ 3.45 303,755 $ 3.42
$4.00-$12.90 443,790 39.6 5.19 318,891 5.35
$12.95-$28.00 264,084 12.6 13.76 264,084 13.76
-------------- ------------- ------------ -------------- ------------
1,191,248 33.3 $ 5.67 886,730 $ 7.19
============== ============= ============ ============== ============
At December 31, 2002 and 2001 under the combined MDSI and Connectria option
plans, 926,021 and 1,304,959 options were exercisable at a weighted average
exercise price of $8.02 and $6.73, 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, 2003, 37,375
(2002 - 85,405; 2001 - nil) common shares were issued under the Stock
Purchase Plan.
60
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2003, 2002, and 2001
(Expressed in United States dollars)
4. 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. The Plan had a
5-year term and was subsequently renewed in December 2003 for a
further 5-year term. 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.
5. INCOME TAXES
The provision for income taxes consists of the following:
2003 2002 2001
-------------- -------------- --------------
Current:
Canada $ - $ - $ -
Foreign 275,785 (429,293) (504,085)
-------------- -------------- --------------
Total current provision for (recovery
of) income taxes from continuing operations 275,785 (429,293) (504,085)
-------------- -------------- --------------
Deferred:
Canada - - -
Foreign 176,000 (183,659) 4,370
-------------- -------------- --------------
Total deferred (recovery of) provision for
income taxes from continuing operations 176,000 (183,659) 4,370
-------------- -------------- --------------
Provision for (recovery of) income taxes from
continuing operations $ 451,785 $ (612,952) $ (499,715)
============== =============== ==============
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 from continuing operations before tax provision due to the
following:
2003 2002 2001
-------------- -------------- --------------
Statutory tax rate 37.6% 39.6% 44.6%
Recovery of income taxes from continuing
operations computed at statutory rate $ (1,200,438) $(1,053,197) $(6,127,892)
Tax benefits not recognized in the
period that the benefit arose 2,409,337 967,215 5,833,010
Lower effective rate on earnings of foreign
subsidiaries (1,295,973) (158,652) (1,286,297)
Amortization and write-down of intangible assets
not deductible for tax - (393,202) 813,529
Other 538,859 24,884 267,935
-------------- -------------- --------------
Provision for (recovery of) income taxes from
continuing operations $ 451,785 $ (612,952) $ (499,715)
============== ============== ==============
61
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2003, 2002, and 2001
(Expressed in United States dollars)
5. INCOME TAXES (continued)
The principal components of the deferred portion of the provision for
income taxes are as follows:
2003 2002 2001
---------------- ---------------- ----------------
Depreciation $ (1,961,685) $ (1,482,694) $ (807,765)
Deferred revenue 383,204 224,433 (756,867)
Other 1,754,481 1,074,602 1,569,002
---------------- ---------------- ----------------
Total deferred provision for
(recovery of) income taxes $ 176,000 $ (183,659) $ 4,370
================ ================ ================
The approximate tax effect of each type of temporary difference that gave
rise to the Company's deferred tax assets are as follows:
2003 2002
-------------- --------------
Operating loss carry forwards $ 6,700,056 $ 3,789,394
Deferred revenue 646,642 1,029,846
Capital assets & intangibles 4,102,742 2,093,368
Reserves and accrued expenses 333,079 2,579,456
Other 493,398 374,518
-------------- --------------
12,275,917 9,886,582
Less: Valuation allowance (11,918,289) (9,332,954)
-------------- --------------
Net non current deferred tax asset $ 357,628 $ 533,628
============== ===============
At December 31, 2003, the Company has the following loss carry-forwards
available for tax purposes:
Country Amount Expiry
------- ------ ------
Canada $6,000,000 2005 through 2010
US $13,000,000 2021 through 2023
62
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2003, 2002, and 2001
(Expressed in United States dollars)
6. 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, 2003 of $ nil (2002 - $nil; 2001 - $280,000) paid to companies
controlled by two former directors of MDSI.
7. COMMITMENTS AND CONTINGENCIES
(a) Capital and operating leases
At December 31, 2003, future minimum payments under capital and
non-cancelable operating leases for office space and computer
equipment are as follows:
Capital Operating
Leases Leases
---------------- ----------------
2004 $ 1,345,399 $ 1,954,669
2005 1,031,105 1,219,438
2006 - 1,219,438
2007 - 1,219,438
2008 - 1,117,818
Therafter - -
---------------- ----------------
Total minimum lease payments 2,376,504 $ 6,730,801
================
Less: amount representing interest (190,219)
----------------
Present value of net minimum lease payments 2,186,285
Less: current portion of capital lease obligations (1,204,269)
----------------
Long term portion of capital lease obligations $ 982,016
================
Rent expense for the year ended December 31, 2003 in respect of
operating leases for office space was $1,468,887 (2002 - $1,139,352;
2001 - $1,662,337).
(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 (2002 - $10,000,000 CDN), which
bears interest at prime plus 0.5%. As at December 31, 2003, the
Company was not utilizing the operating line of credit.
The Company has provided, letters of credit in the amounts of CAD
$810,000 (USD $625,644) expiring April 4, 2004, and CAD $1,864,568
(USD $1,440,192) expiring October 1, 2004. The Company has pledged an
amount equal to the letters of credit as guarantees against its
operating line of credit as security.
63
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2003, 2002, and 2001
(Expressed in United States dollars)
7. COMMITMENTS AND CONTINGENCIES (Continued)
(c) Contingency
The Company was involved in a legal dispute with a customer. The
Company 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 sought payment of the contract
balance, plus other damages, interest and attorneys' fees. The
customer 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's counterclaims alleged fraud, negligent
misrepresentation, breach of express warranty and breach of implied
warranties. The customer sought 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.
On February 2, 2004 the customer and the Company settled this lawsuit.
Under the settlement agreement each company has fully released and
discharged the other from all outstanding legal claims without further
financial compensation. As a result of this settlement the Company has
written off the remaining $2.7 million long term receivable due from
the customer as no further consideration will be received from this
customer under terms of the settlement.
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.
64
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2003, 2002, and 2001
(Expressed in United States dollars)
7. COMMITMENTS AND CONTINGENCIES (Continued)
(d) 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 required to utilize local content or obtain credits
equivalent to approximately $7.1 million over a seven year period. The
Company has furnished 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 implementation 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. As at December 31, 2003 the Company has
generated an estimated $175,000 of credits relating to this
obligation. The Company's obligation may increase as a result of
contract expansions.
The Company typically includes indemnification provisions within
license and implementation service agreements, which are consistent
with those prevalent in the software industry. Such provisions
indemnify customers against actions arising from patent infringements
that may arise through the normal use or proper possession of the
Company's software. To date the Company has not experienced any
significant obligations under customer indemnification provisions and
accordingly, no amounts have been accrued for such potential
indemnification obligations.
8. 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 excludes 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:
2003 2002 2001
-------------------------------- -------------------------------- --------------------------------
Long-lived Long-lived Long-lived
Revenue assets Revenue assets Revenue assets
------------- ---------------- ------------- ---------------- ------------- ----------------
Canada $ 1,540,258 $ 7,442,217 $ 840,388 $ 8,880,084 $ 1,374,365 $ 6,789,712
United States 24,749,574 397,485 25,571,679 830,789 32,819,991 787,448
Europe, Middle East
and Africa 20,034,775 150,755 10,999,163 80,991 9,507,404 57,416
Asia and Other 1,059,982 - 800,222 6,223 1,239,078 672
------------- ---------------- ------------- ---------------- ------------- ----------------
$47,384,589 $ 7,990,457 $38,211,452 $ 9,798,087 $ 44,940,838 $ 7,635,248
============= ================ ============= ================ ============== ================
Major customer
During the year ended December 31, 2003 the Company earned revenue from one
customer of $8,532,086 and revenue from a second customer of $8,098,509,
representing 18.0% and 17.1% of revenue respectively. During the year ended
December 31, 2002 the Company earned revenue from one customer of
$3,472,229 or approximately 9.1% of total revenue. For the year ended
December 31, 2001 the Company earned revenue from on customer of $5,211,212
or approximately 11.6% of total revenue.
65
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2003, 2002 and 2001
(Expressed in United States dollars)
9. SUPPLEMENTAL CASH FLOW DISCLOSURES
2003 2002 2001
--------------- --------------- ---------------
Accounts receivable $ 323,083 $ 2,882,600 $ 8,396,394
Prepaid expenses and other assets (286,189) 314,223 (595,648)
Income taxes payable / receivable 314,467 969,223 (1,457,670)
Accounts payable and accrued liabilities 1,387,067 (2,305,884) 1,841,956
Deferred revenue 3,661,411 (31,543) 137,777
--------------- --------------- ---------------
$ 5,399,839 $ 1,828,619 $ 8,322,809
=============== =============== ===============
10. FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, accounts receivable,
certain other assets, accounts payable, accrued liabilities, and capital
lease obligations approximate their respective fair values as of December
31, 2003 and 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 assessing
the collectibility of the account on an ongoing basis. As these customers
are geographically dispersed, concentrations of credit risk are further
mitigated.
11. 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 (5,225,145)
-------------------
Accrued restructuring charges included in accrued
liabilities at December 31, 2003 (2002 - $1,257,335) $ 880,782
===================
66
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2003, 2002 and 2001
(Expressed in United States dollars)
11. RESTRUCTURING CHARGE (continued)
Provisions relating to workforce reductions, write-down of capital assets,
and other items have been fully drawn-down, and no further expenditures
relating to these items are expected to be incurred.
The Company has recorded a $1.9 million provision relating to surplus
office space under long term lease by the Company at two locations,
including one location where the Company has entered into fixed cost lease
arrangements expiring in 2004. The Company has incurred approximately $1.0
million of cash costs relating to this provision leaving an accrual of $0.9
million remaining as at December 31, 2003. The Company expects that the
provision will be fully drawn down no later than the time the lease expires
in the fourth quarter of 2004.
12. STRATEGIC EXPENSES
Strategic expenses consist of professional fees associated with
investigating potential corporate transactions that the Company considered
during the year ended December 31, 2003.
67
Selected Quarterly Financial Data (unaudited)
The following table sets forth certain unaudited statement of operations
data for each of the eight quarters beginning January 1, 2002 and ending
December 31, 2003 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
2003 2002
--------------------------------------------------------------------------------------
Dec. 31 Sep. 30 June 30 Mar. 31 Dec. 31 Sep. 30 June 30 Mar. 31
------- ------- ------- ------- ------- ------- ------- -------
(Unaudited, in thousands of dollars)
Statement of Operations Data:
Revenue:
Software and services $ 7,364 $6,976 $ 7,379 $7,213 $8,017 $6,283 $ 4,723 $5,654
Maintenance and support 4,230 3,560 3,368 2,818 2,637 2,675 2,907 2,836
Third party products and services 538 1,474 612 1,853 356 1,608 279 236
--------------------------------------------------------------------------------------
12,131 12,010 11,359 11,884 11,010 10,565 7,909 8,727
Direct costs 5,741 6,055 5,638 5,928 4,897 5,001 3,491 3,630
--------------------------------------------------------------------------------------
Gross profit 6,390 5,955 5,721 5,956 6,113 5,564 4,418 5,097
--------------------------------------------------------------------------------------
Operating expenses:
Research and development 1,490 1,324 1,419 1,279 1,269 1,278 1,499 1,460
Sales and marketing 2,228 2,436 2,884 2,948 3,026 3,030 3,912 2,414
General and administrative 1,503 1,865 1,613 1,570 1,557 1,486 1,529 1,664
Strategic expenses 450 - 825 - - - - -
Provision for doubtful accounts 2,960 110 - - - - - -
--------------------------------------------------------------------------------------
8,632 5,736 6,741 5,797 5,852 5,794 6,940 5,538
--------------------------------------------------------------------------------------
Operating (loss) income (2,242) 219 (1,020) 159 261 (230) (2,522) (441)
Other income (expense) 235 (81) (208) (253) 40 70 86 76
--------------------------------------------------------------------------------------
(Loss) income from continuing
operations before income tax (2,007) 138 (1,228) (94) 301 (160) (2,436) (365)
provision
(Provision for) recovery of income
taxes from continuing operations (59) (168) (125) (99) (169) 31 689 122
--------------------------------------------------------------------------------------
(Loss) income from continuing (2,066) (30) (1,354) (193) 132 (191) (1,747) (243)
operations
Income from discontinued operations
- - - - - 12 22 86
--------------------------------------------------------------------------------------
Net (loss) income for the period $(2,066) $ (30) $(1,354) $ (193) $ 132 $ (179) $(1,725) $ (157)
======================================================================================
68
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
--------------------------------------------------------------------------------
2003 2002
Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31
------- -------- ------- ------- ------- -------- ------- -------
Revenue:
Software and services 60.7% 58.1% 65.0% 60.7% 72.8% 59.5% 59.7% 64.8%
Maintenance and support 34.9 29.6 29.6 23.7 24.0 25.3 36.8 32.5
Third party products and services 4.4 12.3 5.4 15.6 3.2 15.2 3.5 2.7
--------------------------------------------------------------------------------
100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Direct costs 47.3 50.4 49.6 49.9 44.5 47.3 44.1 41.6
--------------------------------------------------------------------------------
Gross profit 52.7 49.6 50.4 50.1 55.5 52.7 55.9 58.4
--------------------------------------------------------------------------------
Operating expenses:
Research and development 12.3 11.0 12.5 10.8 11.5 12.1 19.0 16.7
Sales and marketing 18.4 20.3 25.4 24.8 27.5 28.7 49.5 27.7
General and administrative 12.4 15.5 14.2 13.2 14.2 14.1 19.3 19.1
Strategic expenses 3.7 - 7.3 - - - - -
Allowance for doubtful accounts 24.4 0.9 - - - - - -
--------------------------------------------------------------------------------
71.2 47.8 59.4 48.8 53.2 54.8 87.8 63.5
--------------------------------------------------------------------------------
Operating (loss) income (18.5) 1.8 (9.0) 1.3 2.4 (2.2) (31.9) (5.1)
Other income (expense) 1.9 (0.7) (1.8) (2.1) 0.4 0.7 1.1 0.9
--------------------------------------------------------------------------------
(Loss) income from continuing
operations before income tax (16.5) 1.1 (10.8) (0.8) 2.7 (1.5) (30.8) (4.2)
provision
--------------------------------------------------------------------------------
(Provision for) recovery of income
taxes from continuing operations (0.5) (1.4) (1.1) 0.8 (1.5) (0.3) 8.7 1.4
--------------------------------------------------------------------------------
(Loss) income from continuing
operations (17.0) (0.3) (11.9) (1.6) 1.2 (1.8) (22.1) (2.8)
Income from discontinued operations
- - - - - 0.1 0.3 1.0
================================================================================
Net (loss) income for the period (17.0)% (0.3)% (11.9)% (1.6)% 1.2% (1.7)% (21.8)% (1.8)%
================================================================================
69
Item 9: Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None
Item 9A: Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
In connection with this filing, the Company's management, with the
participation of the Company's Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of the Company's disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end
of the period covered by this report (the "Evaluation Date").
Based upon the evaluation described above, the Chief Executive Officer and
Chief Financial Officer concluded that as of the Evaluation Date, subject to the
matters discussed in the following paragraphs with respect to the Company's
internal accounting controls, 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
reports that the Company files or submits under the Exchange Act.
In connection with the contract review undertaken concerning the
restatements of the Company's financial statements for the fiscal years ended
December 31, 1998 to 2002 and for the first three quarters of fiscal 2003, as
discussed in previously refiled audited consolidated financial statements, the
Company together with its independent auditors identified certain areas in which
the Company could improve its internal control over financial reporting. The
Company had implemented internal controls and procedures to review and evaluate
its software and implementation contracts to determine the appropriate revenue
recognition accounting treatment for such contracts in accordance with U.S.
generally accepted accounting principles. Notwithstanding these internal
controls, the Company, in consultation with its independent auditors, determined
that its analysis of the terms included in the Company's software and
implementation contracts resulted in the Company's revenue recognition for such
contracts being inappropriate under U.S. generally accepted accounting
principles.
(b) Changes in Internal Control
On November 17, 2003 and February 26, 2004, the Company announced its
intention to restate the Company's annual financial statements for the fiscal
years ended December 31, 1998 to 2002 and for the first three quarters of fiscal
2003. The restatement related to an inappropriate allocation of contracted fees
between software and implementation services and maintenance and support
services as a result of certain terms or provisions included in software and
implementation contracts and a detailed review of the services being performed
during this period. Please see the company's previously refiled consolidated
financial statements for further information.
In connection with this restatement, senior management performed a review
of the circumstances that resulted in the need for the restatements and as a
result, the Company has undertaken certain steps to strengthen the Company's
internal control over financial reporting in order to prevent future
recurrences. These steps include a thorough review and analysis of the Company's
existing software and implementation contracts by senior members of the
Company's accounting group, a determination of the appropriate revenue
recognition treatment for each existing contract by senior members of the
accounting group and revisions to the Company's standard contractual wording.
The Company plans to take additional steps to strengthen the Company's internal
control over financial reporting, including: implementing a formal contract
review checklist for each new contract; improving communication between the
various functional groups within the Company (namely sales, implementation,
accounting and legal) at both the contract negotiation and execution level and
at the implementation level; requiring any exceptions to the Company's standard
contractual wording to be approved at a senior management level; and review by
management of any unusual terms which may impact its historical practice of
accounting for revenue. The Company's management plans to undertake a further
review and assessment of the Company's internal control over financial reporting
in light of the requirements of Section 404 of the Sarbanes-Oxley Act of 2002
and the rules adopted by the SEC thereunder, which the SEC currently plans to
implement for accelerated filers for fiscal years ending on or after November
15, 2004 and for non-accelerated filers for fiscal years ending on or after July
15, 2005. As of the date of this report, the Company is not an accelerated filer
and, accordingly, the Company expects
70
these additional requirements to apply to the Company for its fiscal year ended
December 31, 2005. The Company's management may recommend and the Company may
implement additional changes in the Company's internal control over financial
reporting pursuant to this review. In light of these additional SEC requirements
and the Company's current level of activities, the Company is evaluating the
level of staffing of its finance group
Except as described in the foregoing paragraphs, no changes were made in
the Company's internal control over financial reporting during the period
covered by this report that have materially affected, or are reasonably likely
to materially affect, the Company's internal control over financial reporting.
The Company's management, including the Chief Executive Officer and Chief
Financial Officer, does not expect that the Company's disclosure controls and
procedures or internal control over financial reporting will prevent all error
and all fraud. A control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the objectives of the
control system are met. Further, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake, such as the error that led to the Company's restatements.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions; over time, control may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
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, 2003.
Name Age Position
- ------------------------------------- ------- ------------------------------------------------------------------------
Executive Officers
Erik Dysthe......................... 66 Chairman of the Board, Director, President and Chief Executive Officer
Peter H. Rankin .................... 47 Vice President - Strategy and Performance Improvement
Verne D. Pecho...................... 60 Vice President - Finance and Administration and Chief Financial Officer
Simon Backer........................ 48 Vice President - Wireless Services
Cyril Tordiffe...................... 52 Vice President - Enterprise Solutions
Tommy Lee........................... 40 Vice President - Product Development
Walter Beisheim (4)................. 49 Vice President - Worldwide Sales
Warren Cree......................... 44 Vice President - Marketing and Business Development
Glenn Y. Kumoi...................... 41 Senior Vice President -Chief Legal Counsel and Corporate Secretary
Paul H.L. Lui....................... 47 Vice President - Customer Support
Poul Kvist.......................... 58 Operations Manager EMEA
Ronald P. Toffolo................... 52 Vice President - Human Resources
David Haak.......................... 42 Vice President - Sales, Americas
Directors
Peter Ciceri (2)(3)................. 48 Director
Robert C. Harris, Jr. (1)(2)........ 57 Director
Marc Rochefort (1)(2)............... 56 Director
David R. Van Valkenburg(1)(2)(3).... 61 Director
- ------------------------------------------------------------------------------------------------------------------------
(1) Member of Compensation Committee.
(2) Member of Corporate Governance and Nominating Committee.
(3) Member of Audit Committee.
(4) Mr. Beisheim resigned effective January 7, 2004.
71
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 Digital Dispatch
Systems Inc., Avcan Systems Inc. and several private companies.
Peter H. Rankin has served as Vice President - Strategy and Performance
Improvement since 2003. From May 2001 to 2003, he was Executive Vice President -
Operations. 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.
Simon Backer has served as Vice President - Wireless Services of the
Company since 2003. From June 2000 to 2003 he was Senior Vice President
- -Wireless Services. 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 Vice President - Enterprise Solutions since
2003. From July 2001 to 2003 he was Senior Vice President - Project
Implementation of the Company and he was 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 Vice President - Product Development since 2003.
From March 1999 to 2003 he was Senior Vice President Product Development. From
1997 to March 1999he was Vice President - Product Development. 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 served as Vice President - Worldwide Sales from 2003 until
January 7, 2004. From July 2002 to 2003 he was Senior Vice President Worldwide
Sales and Marketing. 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 Vice President - Products since 2003. From
October 2001 to 2003 he was Senior Vice President - Products. 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 Vice President - Chief Legal Officer and
Corporate Secretary of the Company since 2003. From September 2002 to 2003 he
was Senior Vice President - Chief Legal Officer. Prior to 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
72
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.
Poul Kvist has served as Operations Manager EMEA since 1997. Prior to this
he held various positions with Nokia Corporation.
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).
Ronald P. Toffolo has served as Vice President - Human Resources since
March 1999. Between 1997 and 1998, he was Director of Human Resources. From 1985
to 1997, Mr. Toffolo held various human resources management positions at
Canadian Airlines International Ltd.
David Haak has served as Vice President, Sales - Americas of the Company
since November 2000 and as Vice President, Sales - North America since June
1999. Prior to that he was Vice President, Sales - Utilities since January of
1999. Prior to joining the Company Mr. Haak was employed by IBM Corporation
where he held a number of sales, marketing and management positions during his
11-year tenure.
David R. Van Valkenburg has served as a director of the Company since June
2001. Mr. Van Valkenburg is currently 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 and from 1997 to
1999, CEO/COO of Telwest Communications, PLC. 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 American Independance
Corp. and a number of private companies.
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.
73
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 four committees, the Audit Committee, the Corporate
Governance, the Special Committee and the 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, 2003, non-audit services
were approved by the Audit Committee to be performed by the Company's
independent accountants. The members of the Audit Committee are David Van
Valkenburg, and Peter Ciceri. The Board of Directors has determined that David
Van Valkenburg is an audit committee financial expert within the meaning of the
SEC's rules. Mr. Van Valkenburg is independent, as independence is defined in
the NASD's listing standards.
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, and David Van Valkenburg.
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 is to review strategic business development alternatives that would
potentially enhance shareholder value. The members of the Special Committee are
Peter Ciceri, Marc Rochefort and David Van Valkenburg.
Code of Ethics
The Company's management has adopted a code of ethics that applies to the
Company's principal executive officer, principal financial officer, principal
accounting officer or controller and persons performing similar functions. A
copy of the code of ethics is being filed as an exhibit to this report.
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 2003, the compensation of Erik Dysthe, the Chairman, President and CEO of
the Company, Peter Rankin, the Vice President Strategy and Performance
Improvement of the Company, Verne Pecho the Vice President Finance and
Administration and Chief Financial Officer of the Company had variable
components to their compensation based on certain performance criteria. With
respect to compensation for all other executive officers, the Board of Directors
reviewed a compensation proposal prepared by the Chairman, President and CEO.
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 13 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. 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 to twelve 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 one and one-half times 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.
74
Summary Compensation Table
The following table sets forth all compensation paid during the fiscal
years ended December 31 2003, 2002 and 2001 in respect of each individual who,
at any time during fiscal 2003, 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 $100,000 for fiscal 2003
who were serving as executive officers as at December 31, 2003, and one
individual who would have been among the foregoing but for the fact that the
individual was not employed by the Company at December 31, 2003. (collectively
"Named Executive Officers") :
- ---------------------------------------------------------------------------------------------------------------------------------
Annual Compensation Long Term Other
Compensation Compensation
Awards
------------------------------------------- --------------
Other Annual Securities
Years Ending Salary Bonus Compensation Under Options
Name and Principal Position December 31 ($) ($) ($) (#)
- ---------------------------------------------------------------------------------------------------------------------------------
Erik Dysthe 2003 $200,561 - N/A 52,500 -
Chairman, President & Chief Executive 2002 177,632 19,032 N/A 100,000 -
Officer 2001 123,011 - N/A 10,000 -
- ---------------------------------------------------------------------------------------------------------------------------------
Peter H. Rankin(1) 2003 157,584 - - - -
Vice President, Strategy and 2002 139,568 - N/A - -
Performance Improvement 2001 92,668 - N/A 70,000 -
- ---------------------------------------------------------------------------------------------------------------------------------
David Haak 2003 151,250 39,908 N/A 15,000 -
Vice President Sales, Americas 2002 151,250 72,651 N/A - -
2001 134,000 81,241 N/A 5,000 -
- ---------------------------------------------------------------------------------------------------------------------------------
Rob Owen(2) 2003 151,837 19,891 - - -
General Manager, EMEA 2002 33,160 - 8,000 - -
2001 - - - - -
- ---------------------------------------------------------------------------------------------------------------------------------
Walter Beisheim(3) 2003 157,584 195,743 N/A - -
Vice President 2002 58,154 43,487 N/A 15,000 -
Worldwide Sales 2001 - - - - -
- ---------------------------------------------------------------------------------------------------------------------------------
Poul Kvist 2003 149,992 - N/A 1,670 -
Operations Manager EMEA 2002 126,304 33,408 N/A - -
2001 92,623 21,634 N/A 1,500 -
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Had Mr. Rankin been employed for the full year ended December 31, 2001 his
salary would have been $142,146.
(2) Mr. Owen is the additional officer. Mr. Owen was terminated effective October 31, 2003.
(3) Mr. Beisheim resigned effective January 7, 2004.
75
Stock Options
The following table sets forth stock options granted by the Company during
the fiscal year ended December 31, 2003 to any of the Named Executive Officers:
Option Grants During the Fiscal Year Ended December 31, 2003
- ------------------------------------------------------------------------------------------------------------------------------
% of Total Potential Realized Value at
Securities Options Assumed Annual Rates of
Under Granted to Exercise or Stock Price Appreciation
Options Employees in Base Price Expiration Date for Option Term
Name Granted (#) Fiscal Year ($/Security)
---------------------------
5% Growth 10% Growth
- ------------------------------------------------------------------------------------------------------------------------------
Erik Dysthe 45,000 15.1% $4.89 September 17, 2008 $60,796 $134,343
Chairman, President & Chief ($6.70 CAD)
Executive Officer 7,500 2.5% $3.35 February 25, 2008 $ 7,978 $ 17,628
($5.00 CAD)
- ------------------------------------------------------------------------------------------------------------------------------
Peter H. Rankin Nil Nil Nil Nil Nil Nil
Vice President, Strategy and
Performance Improvement
- ------------------------------------------------------------------------------------------------------------------------------
David Haak 15,000 5.0% $5.26 November 3, 2008 $21,799 $48,169
Vice President Sales, Americas
- ------------------------------------------------------------------------------------------------------------------------------
Rob Owen Nil Nil Nil Nil Nil Nil
General Manager, EMEA
- ------------------------------------------------------------------------------------------------------------------------------
Walter Beisheim Nil Nil Nil Nil Nil Nil
Vice President
Worldwide Sales
- ------------------------------------------------------------------------------------------------------------------------------
Poul Kvist Nil Nil Nil Nil Nil Nil
Operations Manager
EMEA
- ------------------------------------------------------------------------------------------------------------------------------
76
The following table sets forth details of each exercise of stock options
during the fiscal year ended December 31, 2003 by any of the Named Executive
Officers, and the fiscal year end value of unexercised options on an aggregate
basis:
Aggregated Options Exercised During the Fiscal Year Ended December 31, 2003 and Fiscal Year-End Option Values
- ---------------------------------------------------------------------------------------------------------------------------
Unexercised Options
At FY-End (#) Value of Unexercised in the
Securities Aggregate Exercisable/ Money-Options at FY-End
Acquired on Value Realized Unexercisable(2) ($) Exercisable/
Name Exercise (#) ($) Unexercisable (1)
- ---------------------------------------------------------------------------------------------------------------------------
Erik Dysthe Nil Nil 109,040 (exercisable) $ 15,721 (exercisable)
Chairman, President & Chief 55,960 (unexercisable) $ 20,048 (unexercisable)
Executive Officer
- ---------------------------------------------------------------------------------------------------------------------------
Peter H. Rankin Nil Nil 64,167 (exercisable) $ nil (exercisable)
Vice President, Strategy and 5,833 (unexercisable) $ nil (unexercisable)
Performance Improvement
- ---------------------------------------------------------------------------------------------------------------------------
David Haak Nil Nil 12,915 (exercisable) $ 6,457 (exercisable)
Vice President Sales, Americas 9,585(unexercisable) $ 1,293 (unexercisable)
- ---------------------------------------------------------------------------------------------------------------------------
Rob Owen Nil Nil nil (exercisable) $ nil (exercisable)
General Manager, EMEA nil (unexercisable) $ nil (unexercisable)
- ---------------------------------------------------------------------------------------------------------------------------
Walter Beisheim Nil Nil 6,249 (exercisable) $ 5,437 (exercisable)
Vice President 8,751 (unexercisable) $ 7,613 (unexercisable)
Worldwide Sales
- ---------------------------------------------------------------------------------------------------------------------------
Poul Kvist Nil Nil 3,353(exercisable) $ 2,098 (exercisable)
Operations Manager 817(unexercisable) $ 687(unexercisable)
EMEA
- ---------------------------------------------------------------------------------------------------------------------------
(1) Based on Nasdaq closing price of $4.55 on December 31, 2003.
(2) Includes options to purchase common shares within 60 days after December
31, 2003.
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, 2003, the non-employee
directors of the Company received aggregate cash compensation of $241,642 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 5, 2003, the Company's four non employee directors were
granted options to acquire 3,000 common shares each; at an exercise price of
$4.41 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, 2003, 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, 2003, or was formerly an officer
of MDSI, or had any relationship during the fiscal year ended December 31, 2003
that required disclosure under Item 14 below.
77
During the fiscal year ended December 31, 2003, 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.
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,
2003, 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) ............................................. 483,933 5.8
Peter Hill Rankin (4)....................................... 106,043 1.2
David Haak(5) .............................................. 20,415 *
Robert Owen................................................. - *
Walter Beisheim(6).......................................... 6,249 *
Poul Kvist(7)............................................... 3,363 *
Robert C. Harris, Jr. (8)................................... 107,744 1.3
David R. Van Valkenburg(9).................................. 43,998 *
Peter Ciceri(10)............................................ 15,665 *
Marc Rochefort(11).......................................... 19,317 *
--------------------- ----------------------
All Directors and Executive Officers as a group
(17 persons) (12)........................................... 1,050,488 12.2%
--------------------- ----------------------
5% Shareholders:
Howson Tattersall Investment Counsel Limited 1,211,995 14.7%
20 Queen Street West,
Toronto, Ontario M5H 3R3
Seamark Asset Management Ltd. 1,110,500 13.5%
1801 Hollis Street, Suite 310
Halifax, Nova Scotia B3J 3N4
Natcan Investment Management 765,600 9.3%
1100, rue Universite Suite 400
Montreal, Quebec H3B 2G7
Guardian Capital Inc. 548,775 6.7%
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. Common Shares subject to options
currently exercisable at December 31, 2003, or exercisable within 60 days
after December 31, 2003, 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 is based on the aggregate Common Shares
outstanding as of December 31, 2003, together with the applicable options
of such shareholder.
(3) Includes 326,898 Common Shares held by Erik Dysthe Holdings Co. and options
to purchase 109.039 Common Shares exercisable within 60 days after December
31, 2003 held by Mr. Dysthe individually.
(4) Includes options to purchase 60,278 Common Shares exercisable within 60
days of December 31, 2003.
(5) Includes options to purchase 12,915 Common Shares exercisable within 60
days after December 31, 2003
(6) Consists of options to purchase 6,249 Common Shares exercisable within 60
days after December 31, 2003.
(7) Consists of options purchase 3,363 Common Shares exercisable within 60 days
after December 31, 2003.
(8) Includes options to purchase 38,554 Common Shares exercisable within 60
days after December 31, 2003.
(9) Includes options to purchase 28,998 Common Shares exercisable within 60
days after December 31, 2003.
(10) Consists of options to purchase 15,665 Common Shares exercisable within 60
days after December 31, 2003.
(11) Includes options to purchase 17,887 Common Shares exercisable within 60
days after December 31, 2003.
(12) Includes options to purchase 476,182 Common Shares exercisable within 60
days after December 31, 2003.
78
Equity Compensation Plan Information as at December 31, 2003
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 1,191,248 (stock option plan) $ 5.67 1,208,752
approved by security holders
Nil (employee share N/A 62,625
purchase plan)
Equity compensation plans Nil N/A Nil
not approved by security
holders
------------------------------ ---------------------------- ---------------------------
Total 1,191,248 N/A 1,271,377
============================== ============================ ===========================
Item 13: Certain Relationships and Related Transactions
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, 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: Principal Accountant Fees and Services
The following table sets forth the aggregate fees billed to the Company for
the years ended December 31, 2003 and 2002 by its independent accountants,
Deloitte & Touche LLP ("Deloitte"):
Year ended December Year ended December
31, 2003 31, 2002
- ------------------------------------------------------------- --------------------- ---------------------
Audit Fees.................................................. $260,098 $113,337
Audit-Related Fees.......................................... $ 87,803 $ 62,481
Tax Fees ................................................... $ 1,420 $ -
All Other Fees.............................................. $ - $ -
The Audit Committee must pre-approve audit-related and non-audit services
not prohibited by law to be performed by the Company's independent certified
public accountants. The Audit Committee pre-approved all audit-related and
non-audit services in 2003.
79
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
15(d) are included immediately following this page.
80
SCHEDULE II
MDSI MOBILE DATA SOLUTIONS INC.
Valuation and Qualifying Accounts
(Expressed in United States Dollars)
Balance, Additions,
Beginning of During Period Application/Write-off Balance, End
Period During Period of Period
Allowance for doubtful accounts
Year ended December 31, 2003 3,506,614 3,069,860 3,784,059 2,792,415
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
Provision against investments and
advances
Year ended December 31, 2003 2,499,992 - 2,499,992 -
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
Deferred income tax valuation
allowance
Year ended December 31, 2003 9,332,954 2,585,335 - 11,918,289
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
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
4.2(11) Shareholder Rights Plan Agreement made as of December 17,
2003 between the Company and Computershare Trust Company of
Canada
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(4) Lease dated October 12, 2001 between Crown Diversified
Industries Corporation and Connectria Corporation a
subsidiary of the Company
10.5(4) Amending Agreement dated December 1, 1998 between Sun Life
Assurance Company of Canada and the Company
81
Exhibit
Number Description
------ -----------
10.6(2)(5) Employment Agreement dated January 2, 2002 between the
Company and Verne Pecho
10.7(2)(6) 2002 Stock Purchase Plan
10.8(7) Exchange Agreement dated as of June 26, 2002 among the
Company, Connectria Corporation, Richard S. Waidmann and
Eric Y. Miller
10.9(7) Amendment to Exchange Agreement dated as of June 30, 2002
among the Company, Connectria Corporation, Richard S.
Waidmann and Eric Y. Miller
10.10(7) Warrant dated as of June 29, 2002 to purchase 50,380 shares
of Series A Nonvoting Preferred Stock of Connectria
Corporation
10.11(7) $250,000 Promissory Note dated as of June 30, 2002 made by
Connectria Corporation in favor of the Company
10.12(7) Security Agreement dated as of June 30, 2002 between
Connectria Connectria and the Company
10.13(2)(8) Employment Agreement dated January 1, 1999 between the
Company and Glenn Y. Kumoi
10.14(2)(8) Settlement Agreement dated March 15, 2002 between the
Company and Gerald F. Chew
10.15(2)(8) Settlement Agreement dated May 31, 2002 between the Company
and Gene Mastro*
10.16(2)(9) Employment Agreement dated September 12, 2001 between the
Company and Walter J. Beisheim
10.17(2)(10) Employment Agreement dated August 1, 2003 between the
Company and Peter Hill Rankin
10.18(2)(10) Employment Agreement dated September 3, 2003 between the
Company and Glenn Kumoi
10.19(2)(10) Employment Agreement dated September 4, 2003 between the
Company and Erik Dysthe
10.20(2)(10) Employment Agreement dated August 20, 2003 between the
Company and Joo-Hyung (Tommy) Lee
10.21(2) Settlement Agreement dated January 7, 2004 between the
Company and Walter J. Beisheim
10.22(2) Employment Agreement dated August 18, 1997 between the
Company and Poul Kvist
10.23(2) Employment Agreement dated October 21, 2002 between the
Company and Rob Owen
10.24(2) Settlement Agreement dated October 30, 2003 between the
Company and Rob Owen
14.1 Code of Ethics
21.1 List of the Company's Subsidiaries
23.1 Consent of Deloitte & Touche LLP
31.1 Section 302 Certification of Chief Executive Officer
31.2 Section 302 Certification of Chief Financial Officer
32.1 Section 906 Certification of Chief Executive Officer
32.2 Section 906 Certification of Chief Financial Officer
- --------------------------------
(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-K for the year
ended December 31, 2001.
(5) Previously filed as exhibits with the Registrant's Form 10-Q for the
quarterly period ended March 31, 2002.
(6) Previously filed as exhibits with the Registrant's Form 10-Q for the
quarterly period ended June 30, 2002.
(7) Previously filed as exhibits with the Registrant's Form 8-K filed on August
14, 2002.
(8) Previously filed as exhibits with the Registrant's Form 10-K for the year
ended December 31, 2002.
(9) Previously filed as exhibits with the Registrant's Form 10-Q for the
quarterly period ended March 31, 2003.
(10) Previously filed as exhibits with the Registrant's Form 10-Q for the
quarterly period ended September 30, 2003.
(11) Previously filed as exhibits with the Registrant's Form 8-K filed on
December 18, 2003.
* 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 to the SEC on October 28, 2003 pursuant to
Items 9 and 12 attaching a press release regarding the Company's earnings for
the third quarter of 2003.
The Company furnished a Form 8-K to the SEC on November 17, 2003 pursuant
to Items 9 and 12 attaching a press release regarding the Company's intent to
restate its consolidated financial statements for the fiscal year 2002, the
third and fourth quarters of 2002 and the first and second quarters of 2003.
82
The Company filed and furnished a Form 8-K to the SEC on December 18, 2003
pursuant to Items 5, 7 and 9 relating to the renewal of the Company's
shareholder rights plan.
The information in a Form 8-K furnished pursuant to Items 9 and 12 shall
not be deemed to be filed under the Exchange Act.
83
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 30, 2004.
MDSI MOBILE DATA SOLUTIONS INC.
By: /s/ Erik Dysthe
----------------------------------
Erik Dysthe,
President and Chief Executive
Officer, Chairman of the Board
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report to be signed by the following persons on behalf of MDSI Mobile Data
Solutions Inc. in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Erik Dysthe President and Chief Executive
- --------------------------- Officer, Chairman of the Board
Erik Dysthe and Director (Principal Executive March 30, 2004
Officer)
/s/ Verne D. Pecho Vice President - Finance and
- --------------------------- Administration and Chief Financial
Verne D. Pecho Officer (Principal Financial and
Accounting Officer) March 30, 2004
/s/ Peter Ciceri
- ---------------------------
Peter Ciceri Director March 30, 2004
/s/ Robert C. Harris, Jr.
- ---------------------------
Robert C. Harris, Jr. Director March 30, 2004
/s/ Marc Rochefort
- ---------------------------
Marc Rochefort Director March 30, 2004
/s/ David R. Van Valkenburg
- ---------------------------
David R. Van Valkenburg Director (Authorized U.S.
Representative) March 30, 2004
84
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
2.1(3) Agreement and Plan of Merger dated April 17, 1997 among the
Company, MDSI Acquisition Corp., Alliance, Geoffrey Engerman
and Doug Engerman
3.1(1) Articles of Incorporation of the Company
3.2(1) Articles of Amendments of the Company
3.3(1) By-laws of the Company
4.1(1) Form of Common Share Certificate
4.2(11) Shareholder Rights Plan Agreement made as of December 17,
2003 between the Company and Computershare Trust Company of
Canada
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(4) Lease dated October 12, 2001 between Crown Diversified
Industries Corporation and Connectria Corporation a
subsidiary of the Company
10.5(4) Amending Agreement dated December 1, 1998 between Sun Life
Assurance Company of Canada and the Company
10.6(2)(5) Employment Agreement dated January 2, 2002 between the
Company and Verne Pecho
10.7(2)(6) 2002 Stock Purchase Plan
10.8(7) Exchange Agreement dated as of June 26, 2002 among the
Company, Connectria Corporation, Richard S. Waidmann and
Eric Y. Miller
10.9(7) Amendment to Exchange Agreement dated as of June 30, 2002
among the Company, Connectria Corporation, Richard S.
Waidmann and Eric Y. Miller
10.10(7) Warrant dated as of June 29, 2002 to purchase 50,380 shares
of Series A Nonvoting Preferred Stock of Connectria
Corporation
10.11(7) $250,000 Promissory Note dated as of June 30, 2002 made by
Connectria Corporation in favor of the Company
10.12(7) Security Agreement dated as of June 30, 2002 between
Connectria Connectria and the Company
10.13(2)(8) Employment Agreement dated January 1, 1999 between the
Company and Glenn Y. Kumoi
10.14(2)(8) Settlement Agreement dated March 15, 2002 between the
Company and Gerald F. Chew
10.15(2)(8) Settlement Agreement dated May 31, 2002 between the Company
and Gene Mastro*
10.16(2)(9) Employment Agreement dated September 12, 2001 between the
Company and Walter J. Beisheim
10.17(2)(10) Employment Agreement dated August 1, 2003 between the
Company and Peter Hill Rankin
10.18(2)(10) Employment Agreement dated September 3, 2003 between the
Company and Glenn Kumoi
10.19(2)(10) Employment Agreement dated September 4, 2003 between the
Company and Erik Dysthe
10.20(2)(10) Employment Agreement dated August 20, 2003 between the
Company and Joo-Hyung (Tommy) Lee
10.21(2) Settlement Agreement dated January 7, 2004 between the
Company and Walter J. Beisheim
10.22(2) Employment Agreement dated August 18, 1997 between the
Company and Poul Kvist
10.23(2) Employment Agreement dated October 21, 2002 between the
Company and Rob Owen
10.24(2) Settlement Agreement dated October 30, 2003 between the
Company and Rob Owen
14.1 Code of Ethics
21.1 List of the Company's Subsidiaries
23.1 Consent of Deloitte & Touche LLP
31.1 Section 302 Certification of Chief Executive Officer
31.2 Section 302 Certification of Chief Financial Officer
32.1 Section 906 Certification of Chief Executive Officer
32.2 Section 906 Certification of Chief Financial Officer
- --------------------------------
(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-K for the year
ended December 31, 2001.
(5) Previously filed as exhibits with the Registrant's Form 10-Q for the
quarterly period ended March 31, 2002.
(6) Previously filed as exhibits with the Registrant's Form 10-Q for the
quarterly period ended June 30, 2002.
(7) Previously filed as exhibits with the Registrant's Form 8-K filed on August
14, 2002.
(8) Previously filed as exhibits with the Registrant's Form 10-K for the year
ended December 31, 2002.
(9) Previously filed as exhibits with the Registrant's Form 10-Q for the
quarterly period ended March 31, 2003.
(10) Previously filed as exhibits with the Registrant's Form 10-Q for the
quarterly period ended September 30, 2003.
(11) Previously filed as exhibits with the Registrant's Form 8-K filed on
December 18, 2003.
* 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.