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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, 1998
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.)
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
Common Shares, no par value
---------------------------
(Title of Class)
Rights to Purchase Common Shares
--------------------------------
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes __X__ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. __X__
Aggregate market value of the Registrant's Common Shares held by non-affiliates
as of March 26, 1999 was approximately US$77,255,000. The number of shares of
the Registrant's Common Shares outstanding as of March 26, 1999, was 7,241,664.
Exhibit Index Appears at Page 38
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. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors that may cause the actual results,
performance or achievements of MDSI Mobile Data Solutions Inc. ("MDSI" or "the
Company"), or developments in the Company's industry, to differ materially from
the anticipated results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, but are not limited to:
the Company's limited operating history, lengthy sales cycles, the Company's
dependence upon large contracts and relative concentration of customers, risks
involving the management of growth and integration of acquisitions, competition,
product development risks and risks of technological change, dependence on
selected vertical markets and third-party marketing relationships and suppliers,
the Company's ability to protect its intellectual property rights and the other
risks and uncertainties described under "Business Risk Factors" in Part I of
this Annual Report on Form 10-K. Certain of the forward looking statements
contained in this Report are identified with cross references to this section
and/or to specific risks identified under "Business - Risk Factors">
Part I
Item 1: Business
The Company
MDSI develops, markets, implements and supports mobile workforce management
solutions for use in the field service and delivery industries. The Company's
products include market-specific applications, wireless connectivity software
and related network and mobile computing equipment. These products are used by a
wide variety of companies with substantial mobile workforces, such as utility
and telecommunications companies, taxi services and courier companies and public
safety and roadside recovery organizations. When used in conjunction with public
and private wireless data communications networks, MDSI's products provide
comprehensive solutions for the automation of business processes associated with
the scheduling, dispatching and management of a mobile workforce. In addition,
these products enable the Company's customers to cost-effectively communicate
with their mobile workers, while simultaneously enabling the mobile workforce to
interface with their corporate information system on a real-time basis.
The first generation of the Company's core product for the utility market,
Advantex-Utility, was originally developed by MDI Mobile Data International Inc.
("MDI"), which was acquired by Motorola Inc. ("Motorola") in 1988. The Company's
predecessor, MDSI Mobile Data Solutions Canada Inc. ("MDSI Canada"), commenced
operations in February, 1993 when it acquired the Advantex-Utility 4.0 and
certain other assets of the Mobile Data Division of Motorola Canada Limited, a
wholly-owned subsidiary of Motorola.
In December 1995, as part of its strategy to broaden its technology base
and product offerings, the Company, MDSI Canada and TelSoft Mobile Data Inc.
("TelSoft") completed a plan of arrangement (the "Plan of Arrangement") under
the Company Act (British Columbia). Prior to the Plan of Arrangement, TelSoft
held a 60% interest in MDSI Canada. As part of the Plan of Arrangement, the
Company acquired all of the outstanding shares of TelSoft in exchange for
1,828,387 Common Shares of the Company and the assumption of $797,000 principal
amount of convertible debentures (the "Convertible Debentures") previously
issued by TelSoft, and all of the outstanding shares of MDSI Canada, other than
those shares of MDSI Canada already owned by TelSoft, in exchange for 2,160,000
Common Shares of the Company. Following the acquisition of TelSoft, TelSoft was
merged with and into MDSI Canada. The acquisition by the Company of MDSI Canada
was accounted for as a reorganization of assets under common control.
Accordingly, the Company is deemed to be a continuance of MDSI Canada subsequent
to the Plan of Arrangement, and the historical accounting basis of MDSI Canada
was carried forward. The acquisition of TelSoft has been accounted for under the
purchase method of accounting. Effective October 1, 1998, the Company carried
out a vertical short form amalgamation with MDSI Canada pursuant to which MDSI
Canada was amalgamated with and into the Company. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Effects of
Acquisitions".
In June 1996, the Company acquired all of the outstanding share capital of
MDSI UK for aggregate consideration of $10,616,023, consisting of 55,263 Common
Shares and $9,733,270 ((pound)4,500,000) in cash. The acquisition of MDSI UK has
been accounted for by the Company under the purchase method of accounting. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Effects of Acquisitions">
In July 1997, the Company acquired all of the outstanding share capital of
Alliance Systems, Incorporated ("Alliance") for aggregate consideration of
$9,116,828, consisting of 347,750 Common Shares and US$1,582,088 ($2,188,750) in
cash. Effective January 4, 1999, Alliance merged with Mobile Data Solutions Inc.
("MDSI USA"), a Delaware corporation and a wholly-owned subsidiary of the
Company. MDSI USA is the surviving corporation. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Effects of
Acquisitions" and "Results of Operations - Effects of Acquisitions".
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Pursuant to the Plan of Arrangement, the Company was incorporated in
September 1995 under the Canada Business Corporations Act ("CBCA") as 3181910
Canada Inc. The Company changed its name to MDSI Mobile Data Solutions Inc. in
December 1995. 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.
Background
Organizations within the field service and delivery industries are highly
dependent upon their mobile workforces to deliver and support their respective
products and services. The field service industry is composed of a number of
market segments, such as the utility, telecommunications, cable and other
general field service repair markets, in which mobile workers principally
provide repair, maintenance, installation and other services for customers. The
delivery industry is composed of a number of market segments, such as the taxi,
courier and roadside recovery markets, in which mobile workers are engaged in
the movement of people and goods. The public safety industry is composed of the
police, fire and ambulance markets in which mobile workers provide law
enforcement, emergency and medical services. Historically, these organizations
have managed and supported their mobile workers by communicating information
through wireline or voice radio systems. Although voice radio systems are
mobile, such systems rely on heavily used portions of the radio spectrum and are
subject to frequent periods of congestion.
Mobile data communication systems that addressed certain limitations of
voice communications systems were first developed for a limited number of
vertical markets, such as utility, public safety, taxi, courier and general
field service. Businesses in these markets recognized certain productivity
benefits associated with wireless data applications. Although such mobile data
communications systems were introduced in a number of vertical markets, these
systems failed to achieve widespread adoption. The Company believes that the low
rate of adoption was attributable to the high cost of establishing private radio
networks, the difficulty of obtaining radio spectrum for such networks, the high
cost and limited functionality of early mobile computing devices and the
regulatory environment in certain industries, such as utilities and
telecommunications, which diminished competitive pressures. Additionally, a lack
of industry-specific application software which effectively addressed the needs
of mobile workers limited the cost-effectiveness of early systems.
The Company believes that significant trends in the regulatory environment,
numerous technological advances and a recent significant increase in competitive
pressures have reduced many of these limitations and have accelerated, and will
continue to accelerate, the adoption of mobile data solutions by the field
service, delivery and public safety industries. 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, such as ARDIS and RAM, are now widely available in North
America, and similar networks are available in Europe and the Asia Pacific
region. Increasing competition among these networks and the emergence of new
wireless communication services, provided by organizations such as AT&T,
Ameritech Mobile Communication and others, has resulted in greater availability
of wireless networks and lower costs to subscribers. Consequently, mobile data
solutions may now be implemented without the difficulty and expense of
establishing a private radio network, thereby increasing the cost-effectiveness
of such systems. The Company believes that the convergence of these trends will
increase the likelihood of adoption of mobile data solutions by companies in the
field service, delivery and public safety industries. 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 targeted vertical markets in the field service, delivery and public safety
industries to develop mobile workforce management solutions that address the
specific needs of businesses within those vertical markets. MDSI's products
enable organizations in the field service and delivery industries to effectively
communicate with, manage and support their mobile workers.
MDSI's solutions include the Advantex family of applications and wireless
connectivity software products designed for the field service, delivery and
public safety industries. MDSI's software products provide applications for the
automation of business processes, such as service order generation, scheduling
and assignment, as well as wireless applications, such as work order dispatch,
real-time status updates, service and credit authorization, two-way messaging
and remote database access. MDSI products also include equipment for private
mobile radio data networks, mobile computing devices and ancillary equipment for
selected vertical markets and in certain geographic regions. MDSI's products are
combined with professional services, such as implementation planning, project
management, software configuration, software customization, training and ongoing
technical support and software maintenance to effectively address a customer's
mobile workforce management requirements. Where appropriate, MDSI also provides
third party products and services as part of a complete mobile data solution.
MDSI also offers
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general consulting services to organizations evaluating the costs and benefits
of implementing mobile workforce management systems, as well as organizations
evaluating wireless industry software products and technologies.
MDSI's products are scaleable to address the needs of both small and large
organizations. For example, MDSI's Advantex-Utility product has been sold for
applications intended to support as few as 70 and as many as 7,000 mobile
workers. MDSI's products are also modular so that a solution can be implemented
in phases and expanded to satisfy an organization's evolving information
requirements. MDSI's products are designed to interface with a variety of public
and private mobile data networks, including PCS networks and satellite-based
data transmission networks, and are compatible with a variety of operating
platforms, computer networks and in-house applications.
Markets
The Company markets its products and services within the field service and
delivery industries. The Company evaluates new markets 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.
Field Service Industry
The field service industry consists of organizations having significant
numbers of mobile workers who provide various customer services outside of the
office. The Company believes that increasing competition is forcing field
service companies to focus on the efficiency and quality of their customer
service operations. The Company's principal vertical markets within the field
service industry are the utility, telecommunications and cable markets. MDSI
also provides products for other segments of the field service industry, such as
companies engaged in the maintenance and repair of office and medical equipment.
Utilities. The utilities market targeted by the Company primarily consists
of gas and electric companies. Industry sources indicate that there are
approximately 4,100 gas and electric companies in the United States. The Company
has traditionally targeted the distribution operations within a utility. The
Company believes, however, that such operations generally account for only a
portion of the total number of a utility's mobile workers, with the balance
attributable to mobile workers engaged in sales, construction, engineering and
management functions. As a result, the Company believes that there is an
opportunity to increase sales to existing customers and generate incremental
revenue. See "Forward-Looking Statements". MDSI's products have been implemented
or are being implemented in over 60 gas and electric utilities located in the
United States, Canada, the United Kingdom and Asia.
In the United States, the production and supply of natural gas and electric
power has been regulated primarily by the Federal Energy Regulatory Commission
(the "FERC"). In recent years, the FERC has implemented rules designed to
transfer certain areas of regulatory authority from the FERC to state utility
commissions and to encourage competition in the supply and delivery of energy
resources. As a result of these regulatory changes and other anticipated
regulatory developments, the Company believes that gas and electric utilities
are facing new competitive pressures and are seeking ways to reduce costs and
improve the quality of their customer service.
Telecommunications. The telecommunications market consists of providers of
local, long-distance and wireless communication services worldwide. Although
only a few such companies have adopted mobile data solutions to date, the
Company believes that a number of major telecommunications companies are
evaluating the need for such a system. The Company believes that this market
will grow as companies implement new technology to improve their
competitiveness, efficiency and service levels. See "Forward-Looking
Statements". The Company has installed or has a contract to supply its products
to 11 telecommunication companies worldwide, including two divisions of AT&T,
Tele Danmark A/S, Frontier Information Technologies Inc., Citizens Telecom
Services Company L.L.C. and Belgacom S.A.
Cable. The cable market targeted by the Company consists of providers of
cable television services principally in North America and Europe. In North
America, over 75% of the subscriber base is under the control of the ten largest
multiple service operators. Changes in the regulatory environment and
technological developments, such as satellite television have led to the
introduction of significant competition in the cable market. Technological
advances have also led to the development of new services utilizing the cable
infrastructure, allowing cable operators to provide high-speed Internet access
and basic telephony to subscribers. The Company believes that growing
competition and the introduction of new services will lead cable operators to
adopt mobile data solutions to improve their competitiveness, efficiency and
level of customer service. See "Forward-Looking Statements". Although several
major cable operators have implemented mobile data solutions in selected sites,
few operators have rolled out these systems to multiple sites. The Company has
installed or has a contract to supply its products to seven major cable
operators, including Cox Communications Inc., Comcast Corp., MediaOne, Inc. and
Adelphia Communications Corporation in the United States and Rogers Cablesystems
Ltd. in Canada.
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Public Safety. The public safety market consists of federal, state and
local agencies that provide police, fire, medical and other emergency services.
The public safety industry was one of the first vertical industries to adopt
mobile data technology. As a result, the Company believes that many
organizations in the public safety industry are now poised to upgrade their
original mobile data systems with new technology that provides increased
capabilities over the first generation systems. See "Forward Looking
Statements". The Company has installed one Advantex-Public Safety product with
the North Carolina State Highway Patrol and has a contract to supply this
product to the State of Ohio.
Delivery Industry.
The delivery industry consists of organizations engaged in the movement of
people and goods. MDSI believes that companies in this industry generally
require real-time, two-way transmission of information between the central
office and the most appropriate field worker for the job, and that updating
status information from each mobile worker is vital for effective fleet command
and control in a constantly changing environment.
Taxi. The taxicab market is characterized by the need to provide flexible
scheduling, efficient use of vehicles and the ability to accept multiple forms
of payment, including account card settlement and on-line credit card systems.
The Company believes that most major cities worldwide are serviced by at least
two competing taxi organizations. The Company has marketed its products
primarily to taxi service providers in Europe and the Asia Pacific region, and
currently has supplied or has contracts to supply its products to over ten taxi
service providers within these regions.
Courier. The courier market is characterized by the need for accurate,
real-time communications between the dispatcher and courier to facilitate rapid
allocation of parcel pick-up requests, provide up-to-the-minute tracking of
domestic and international parcel shipments and improve the timing of parcel
deliveries. The Company believes that most major cities worldwide are serviced
by at least two competing courier organizations. The Company has marketed its
products primarily to courier organizations in Europe, the Middle East and the
Asia Pacific region and currently has supplied or has contracts to supply its
products for over 20 installations within these regions, including systems in
over 17 countries with DHL.
Roadside Recovery. The roadside recovery market includes services such as
tow-truck and automobile association services. This market is characterized by
the need for real-time accurate messaging between the fleet and dispatch
operations. Vehicle status and location data is required to allow the dispatcher
to respond in a timely fashion to emergency situations. The Company believes
that most major cities worldwide are serviced by a minimum of one automobile
association and two competing tow-truck services. The Company has marketed its
products to the roadside recovery organizations in Europe and the Asia Pacific
region and currently has supplied or has contracts to supply its products to
three roadside recovery organizations within these regions.
Customers and Applications
The Company's customers vary in size from small local service companies to
large regional and international organizations. During the years ended December
31, 1998, 1997 and 1996, one U.S. utility company accounted for 7%, 11% and 35%,
respectively of the Company's consolidated revenue. In the years ended December
31, 1998, 1997 and 1996, approximately 29%, 36% and 67%, of the Company's
consolidated revenue was attributable to five or fewer customers. The Company
believes that revenue derived from a limited number of customers will continue
to represent a significant portion of its consolidated revenue. In the years
ended December 31, 1998, 1997 and 1996 revenue derived from sales outside of
North America accounted for 21%, 32% and 31% of the Company's total revenue,
respectively. 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".
Products
The Company currently offers mobile workforce management solutions focused
on two targeted industry segments: field service and delivery. The Company's
products automate processes such as appointment scheduling, work load
distribution, service order dispatching, real-time status updating, credit card
authorization and database access, and replace voice radio and paper-based
communications with wireless exchanges of information and messages between
mobile users and remote database and dispatch centers.
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Field Service Industry
Advantex-Utility. Advantex-Utility is the Company's core product for the
utility industry. Advantex-Utility provides the dispatcher with real-time
service order information ("en route," "on site" or "job complete") and field
service representative information (the number and location of service orders
assigned, completed and outstanding) facilitating the effective management of
the mobile work force. Numerous alerts are built into the system, including an
alert to notify a dispatcher of a service order appointment which is in jeopardy
of being missed. Employing mobile computing devices, field service
representatives have significantly reduced paperwork. Advantex-Utility can be
seamlessly integrated with an organization's LAN or WAN to provide real-time
updates to other applications, such as inventory and billing systems.
Advantex-Utility's modular design allows a utility company to configure a
solution to its specific requirements. Building on the core Advantex-Utility
functionality, optional modules include Map-based Dispatching, Order Scheduling,
Workload Distribution and Call Ahead.
Advantex-Telecommunications. Advantex-Telecommunications is the Company's
core product for the telecommunications industry. This product provides the
dispatcher with real-time work order information ("en route," "on site" or "job
complete") and field service representative information (number and location of
work order assigned, completed and outstanding) facilitating the effective and
timely management of field service resources. Advantex-Telecommunications is
designed to be integrated into other telecommunications enterprise applications
such as telephone line testing, inventory and billing and may be interfaced to
existing customer service systems (mainframe or non-mainframe) that generate
work orders or provide data required by telecommunications company operations
personnel. The Advantex-Telecommunications product is also marketed to the cable
industry. Additional features of the Advantex-Telecommunications product include
Least Cost Routing, Map-based Dispatching, Order Scheduling, Workload
Distribution and Call Ahead.
Advantex-Field Service. Advantex-Field Service is a general field service
management system targeted to non-utility and non-telecommunications segments of
the field service industry. Advantex-Field Service's core dispatch functionality
allows service calls to be entered, displayed, printed and updated. The dispatch
function allows work to be assigned, re-assigned, re-scheduled or canceled. A
summary of the service schedule can be displayed for any day or week. A
dispatcher has access to all customer information (by name, telephone number,
customer number or equipment identifier) including the ability to access terms
of agreements and view dispatch times, current field worker locations and
schedules.
Advantex-Public Safety. The Advantex-Public Safety product is a mobile data
solution for the public safety market. The software provides connectivity
between statewide networks and databases and wireless networks. The solution
consists of a message switch and a mobile device software application. The
message switch allows multiple agencies to access the system, provides optional
computer aided dispatch (CAD) interface for each agency and provides the ability
to access state and national databases. The Company has installed the
Advantex-Public Safety product with the North Carolina Highway Patrol and has a
contract to supply this product to the State of Ohio. The Advantex-Public Safety
product is able to control multiple public safety agencies from one platform
infrastructure. Once the original system is installed within a government
agency, other agencies can be added to the system without procuring a new
system. An incremental license fee is charged for each agency and mobile data
terminal added to the system.
Advantex-Enterprise. The Advantex-Enterprise family of inter-networking
software products provides high speed, cost effective, enterprise-wide
connectivity solutions across multiple wireless and wireline data networks. This
software technology provides for the integration of existing wireline-based
computing environments with the most prevalent wireless networks.
Advantex-Enterprise allows users to integrate wireless and wireline data
applications in a marketplace where no connectivity or interpretability
standards are currently defined. MDSI markets the Advantex-Enterprise product
primarily to its existing customers. The Advantex-Enterprise product consists of
both the open message service (OMS) and open message client (OMC) software
components. OMS is a UNIX-based messaging solution providing bridge, router and
gateway functionality. OMC is a Windows product providing wireless and wireline
data access for PC compatible mobile computing devices.
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Delivery Industry
Advantex-Taxi. Advantex-Taxi is an automated taxi management system
designed for medium and large taxicab companies which permits call takers to
enter customer calls and automatically identify the most appropriate taxicab
taking into account customers special requests. Advantex-Taxi utilizes a
zone-based call assignment algorithm or, optionally, a global positioning system
("GPS") technology to identify the closest cab and determine the appropriate
radio frequency to optimize radio channel usage. Once a request has been
accepted by the driver, all pertinent information is transmitted via a wireless
network to the driver's mobile computer. The driver updates the application with
various status indicators including "passenger on board," "soon to clear" and
"passenger disembark". Advantex-Taxi incorporates numerous modules allowing a
taxicab organization to configure a solution to its specific requirements
including a Billing System and Scheduling & Ride Sharing.
Advantex-Courier. Advantex-Courier provides a dispatch application that can
be connected to the in-house tracking and billing package used by courier
customers. Advantex-Courier facilitates the tracking, allocation, dispatch and
redistribution of pick-up and drop-off information. The Advantex-Courier
applications is currently being upgraded for a Windows architecture with added
features that will allow it to be used as a stand-alone system, or to be
configured for connection to existing systems. Advantex-Courier incorporates
numerous modules allowing a courier organization to configure a solution to
their specific requirements. A key Advantex-Courier module is Advantex-Tracking
which enables real-time tracking of vehicles using GPS receivers to constantly
update the drivers' mobile computer with location information. The location and
vehicle identification information is transmitted to the dispatch computer
facilitating real-time tracking of an organization's entire fleet.
Mobile Computing Devices. The Company's offers several mobile computing
devices that work in conjunction with its software, including the S645 MDT and
S850MDT mobile terminals for roadside recovery, taxi and courier markets and the
S650 Intelligent Modem for the courier market.
Professional and Customer Support Services
The Company provides a complete range of specialized professional and
customer support services to assist its clients in implementing and using MDSI's
products effectively. Typically, contracts for the sale of the Company's
software include implementation planning, project management, software
configuration, software customization, installation, education and training,
technical support and ongoing maintenance. The Company believes providing high
quality, cost-effective professional services facilitates effective
implementation of the Company's products and fosters a strong relationship with
the customer that often leads to future orders for MDSI products and services.
Professional Services
The Company's professional services personnel facilitate the implementation
and optimization of the Company's products. A professional services engagement
usually lasts for six to twelve months and involves working with the client in
planning, specification and implementation of its products. During the planning
phase of the engagement, MDSI's personnel work closely with customer
representatives to prepare a detailed project plan that includes a timetable,
resource requirements, milestones, training requirements and demonstrations of
product capabilities.
During the specification phase of the professional services engagement,
MDSI's professional services personnel work with the customer to specify the
exact MDSI products and system configuration. MDSI personnel also work with the
customer to design the technology infrastructure, specify the business processes
and formats for those elements of the products that are configurable, define
business processes and formats for the elements that are custom designed and
establish the procedure for implementation of the product. MDSI personnel also
develop and recommend modifications to the customer's business processes to
improve the performance of the MDSI software and reduce or eliminate the need
for customization.
During the final phase of implementation, MDSI personnel complete
configuration of the software products, complete project customization, finalize
product installation and develop end-user documentation and other technical and
business processes required to integrate the MDSI products into the client's
environment. MDSI personnel also work with the client to develop and test custom
features and various interfaces to corporate networks, wireless networks and
other corporate information systems.
Customer Support
The Company believes that its ability to offer a high level of customer
support is critical to its success. The Company's customer support group
provides MDSI customers with telephone and on-line technical support as well as
product updates. Most MDSI customers enter into separate customer support
agreements, typically on an annual basis, that take effect on the expiration of
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the product warranty. At December 31, 1998, the Company had 66 customer support
personnel, of whom 28 were located in Canada, 18 in the United States, 13 in the
United Kingdom, 4 in Singapore and 3 in Copenhagen.
Product Development
The mobile workforce management industry is characterized by rapid
technological change and increasing user requirements. Accordingly, the Company
must be able to provide new products and to modify and enhance existing products
on a timely and continuing basis in order to be competitive. To accomplish this
objective, the Company's strategy is to utilize proven technology to further
enhance its existing products and to create new products. Where appropriate, the
Company may acquire complementary technology developed by third parties for
integration into the Company's products.
The Company believes that its highly qualified software development
personnel provide MDSI with a significant competitive advantage. MDSI personnel
have considerable experience and expertise in the development of mobile
workforce management applications specifically designed for use with a wireless
data network, as well as in the integration of these applications with a
customer's corporate information system. MDSI software product development
personnel employ modular software architecture, object-oriented software
development and graphical user interface design technologies to develop
scaleable, modular, configurable products. MDSI personnel have expertise in
software technology, wireless and wireline communications technologies, computer
environments and corporate information systems integration. They also have
considerable expertise in the design and development of specialized mobile
computing devices, as well as radio system design and implementation. MDSI
believes that this combination of expertise in multiple disciplines has allowed
and will continue to allow the Company to design and develop mobile workforce
management solutions which can be implemented in a timely and cost-effective
manner.
As of December 31, 1998, MDSI's technical and engineering staff, supporting
both product development and professional services, consisted of 311 employees,
including 190 employees based at its Richmond, British Columbia headquarters, 88
employees based primarily at its Itasca, Illinois facility and other locations
in the United States and 33 employees based at its Cambridge, England facility.
During the years ended December 31, 1998, 1997 and 1996, the Company's
total expenditures for product development were $9.9 million, $6.5 million and
$4.4 million, respectively, reflecting 11.9%, 9.3% and 9.7% of the Company's
revenue, respectively. Management believes that timely and continuing product
development is critical to the Company's success and plans to continue to
allocate significant resources to product development. See "Forward-Looking
Statements".
Sales and Marketing
The Company markets its products and services through its direct sales
force and certain strategic remarketing arrangements. The Company's sales
personnel, who are knowledgeable about the technological components of wireless
applications and current industry and enterprise-specific application issues,
work in teams that specialize in each of the targeted vertical markets. 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.
At December 31, 1998, the Company's sales, marketing and technical support
group consisted of 50 employees, with 34 based out of the Company's Richmond,
British Columbia facility, 12 based out of its Itasca, Illinois facility, 1
based out of its Cambridge, England facility and 3 based out of various other
international locations.
Competition
The markets for mobile workforce management applications, wireless
connectivity software, mobile data network equipment and mobile computing
devices are highly competitive. Numerous factors affect the Company's
competitive position, including price, product features, product performance and
reliability, ease of use, product scalability, product availability on multiple
platforms (both server and mobile workstation), ability to implement mobile
workforce management solutions domestically and internationally while meeting
customer schedules, integration of products with other enterprise solutions,
availability of project consulting services and timely ongoing customer service
and support.
Within these markets, there are a 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. The Company expects
such competition to intensify as acceptance and awareness of mobile data
communications and technology continue. In addition, a small number of the
Company's potential customers develop software solutions internally, thereby
eliminating 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.
8
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 utility and telecommunications industry
segments the most important competitive factors are the reputation of the
supplier and their proven record in implementing wireless data solutions. The
Company primarily competes in the utility market with Utility Partners, L.C.,
M3i Systems, Inc. and Alterra Corp. The Company has several competitors in the
telecommunications market, a few of which have historical relationships with
certain of the large telecommunications companies. The Company's primary
competitors for telecommunications customers are Bellcore and Lucent
Technologies, Inc. The Company believes that the principal competitive factors
in the field service market are the ability to improve the customer service
aspects of an organization's business and increase the productivity of service
representatives. In this market, the Company's principal competitors are Astea
International Inc. and Metrix Inc. The Company's principal competitors in the
cable market are Bellcore and MobileForce Technologies, Inc. (formerly
Ubiquinet, Inc).
The Company believes that the principal competitive factors in the taxi
markets in Europe and the Asia Pacific region are the functionality of products
and an understanding of the needs of the taxi operators. In Europe, the
Company's principal competitors in the taxi market are Indelco, Oslo Taxi, Finn
Frogne, Auriga (United Kingdom), Axijest (France), Tadiran (Israel), H&W
(Germany) and Mikrotek (Italy). In the Asia Pacific region, the Company's
principal competitors are Raywood and Sig-tec. The Company believes that the
principal competitive factors in the courier market are the configurability of
products and an understanding of the courier industry. The Company's principal
competitors in the courier market are MobileRadio, BT Syntegra and Dynamic
Transport Management.
MDSI primarily competes in the public safety market with Cerulean, PRC,
Tiberon Systems, and New World Systems. Many of MDSI's competitors have a more
established reputation in the public safety market. In many of the large public
safety opportunities, MDSI subcontracts to a large prime contractor serving as
the overall system integrator. MDSI is currently used as a subcontractor for
public safety installations by Motorola.
Employees
As of December 31, 1998, the Company had 466 full-time employees and
contractors, including 311 in technical and engineering, 50 in sales, marketing
and technical support, 66 in customer support and 39 in management, finance and
administration. None of the Company's employees is represented by a labor union
and the Company believes its employee relations to be good.
Risk Factors
The Company's business is subject to the following risks. These risks also
could cause actual results to differ materially from results projected in any
forward-looking statement in this report.
Potential Fluctuations in Quarterly Operating Results
The Company's results of operations have fluctuated in the past and are
likely to continue to fluctuate from period to period depending on a number of
factors, including the timing and receipt of significant orders, the timing of
completion of contracts, increased competition, changes in the demand for the
Company's products and services, the cancellation of contracts, the timing of
new product announcements and introductions, changes in pricing policies by the
Company and its competitors, delays in the introduction of products or
enhancements by the Company, expenses associated with the acquisition of
products or technology from third parties, the mix of sales of the Company's
products and services and third party products, seasonality of customer
purchases, personnel changes, the mix of international and North American
revenue, tax policies, foreign currency exchange rates and general economic
conditions.
9
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 and delays caused by customers. Because the Company recognizes
revenue on a percentage of completion method, delays in completion of certain
contracts has caused delays in recognition of revenue and, consequently,
unanticipated fluctuations in quarterly results. There can be no assurance that
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 effected. As
a result, net income may be disproportionately affected because a relatively
small amount of the Company's expenses vary with its revenue. In particular, the
Company plans to increase its operating expenses to expand its sales and
marketing operations, expand its distribution channels, fund greater levels of
research and development, broaden its customer support capabilities and increase
its administrative resources. Based upon all of the foregoing factors, the
Company believes that its quarterly revenue, direct expenses and operating
results are likely to vary significantly in the future, that period-to-period
comparisons of the results of operations are not necessarily meaningful and that
such comparisons should not be relied upon as an indication of future
performance. The Company may also choose to reduce prices or increase spending
in response to competition, or to pursue new market opportunities. See
"Forward-Looking Statements". If new competitors, technological advances by
existing competitors or other competitive factors require the Company to reduce
its prices or invest significantly greater resources in research and development
efforts, the Company's operating results in the future may be adversely
affected. There can be no assurance that the Company will be able to grow in
future periods or that it will be able to sustain its level of total revenue or
its rate of 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 price of the Company's Common Shares would
likely be materially adversely affected.
Commencing in 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, 1998, 1997 and 1996, 23.4%, 23.7% and 33.7%, respectively, of the Company's
revenue was attributable to third party products and services. Because the
revenue generated from the supply of third party products and services may
represent a significant portion of certain contracts and the installation and
rollout of third party products is generally at the discretion of the customer,
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.
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.
Lengthy Sales Cycles
The purchase of a mobile workforce management solution is often an
enterprise-wide decision for prospective customers and requires the Company to
engage in sales efforts over an extended period of time and to provide a
significant level of education to prospective customers regarding the use and
benefits of such systems. Due in part to the significant impact that the
application of mobile workforce management solutions has on the operations of a
business and the significant commitment of capital required by such a system,
potential customers tend to be cautious in making acquisition decisions. As a
result, the Company's products generally have a lengthy sales cycle ranging from
several months to several years. Consequently, if sales forecasted from a
specific customer for a particular quarter are not realized in that quarter, the
Company may not be able to generate revenue from alternative sources in time to
compensate for the shortfall. The loss or delay of a large contract could have a
material adverse effect on the Company's quarterly financial condition,
operating results and cash flows, which may cause such results to be less than
analysts' expectations. Moreover, to the extent that significant contracts are
entered into and required to be performed earlier than expected, operating
results for subsequent quarters may be adversely affected. In particular, the
Company has recently experienced an increase in the time necessary to complete
the negotiation and signing of certain contracts with some of its larger
customers.
10
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, 1998,
1997 and 1996, approximately 29%, 36% and 67%, respectively, of the Company's
consolidated revenue was attributable to five or fewer customers. During the
years ended December 31, 1998, 1997 and 1996, one customer accounted for 7%, 11%
and 35%, respectively, of the Company's consolidated revenue. The Company
believes that revenue derived from current and future large customers will
continue to represent a significant portion of its total revenue. See "Forward
Looking Statements". The inability of the Company to continue to secure and
maintain a sufficient number of large contracts would have a material adverse
effect on the Company's business, financial condition, operating results and
cash flows. Moreover, the Company's success will depend in part upon its ability
to obtain orders from new customers, as well as the financial condition and
success of its customers and general economic conditions.
The size of a contract for a particular customer can vary substantially
depending on whether the Company is providing only its own products and services
or is also responsible for supplying third party products and services. The
Company recognizes revenue using the percentage of completion method, which the
Company calculates based on total costs incurred compared to total costs
estimated by the Company for completion. Therefore, any significant increase in
the costs required to complete a project, or any significant delay in a project
schedule, could have a material adverse effect on that contract's profitability
and because of the size of each contract, on the Company's overall results of
operations. The Company from time to time has also experienced certain
implementation and other problems that have delayed the completion of certain
projects, including the failure of third parties to deliver products or services
on a timely basis and delays caused by customers. The Company's contracts
generally provide for payments upon the achievement of certain milestones.
Therefore, any significant delay in the achievement of milestones on one or more
contracts would affect the timing of the Company's cash flows and could have a
material adverse effect on the Company's business, financial condition,
operating results and cash flows. Any significant failure by the Company to
accurately estimate the scope of work involved, plan and formulate a contract
proposal, effectively negotiate a favorable contract price, properly manage a
project or efficiently allocate resources among several projects could have a
material adverse effect on the Company's business, financial condition,
operating results and cash flows.
Potential Fluctuations in Backlog
The Company's backlog consists of a relatively small number of large
contracts relating to sales of its mobile workforce management and wireless
connectivity software and related equipment and services, and sales of third
party products and services. Due to the long, complex sales process and the mix
of sales of the Company's products and services and third party products and
services, the Company's backlog may fluctuate significantly from
period-to-period. In addition, under the terms of the Company's contracts, the
Company's customers may elect to 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.
Limited Operating History; History of Losses; Increased Expenses
The Company commenced operations in February 1993 and therefore has only a
limited operating history upon which an evaluation of its business and prospects
can be based. Due to non-recurring charges of $6.4 million, including $1.1
million with respect to restructuring certain operations and $5.3 million due to
changes in estimates to complete certain contracts in the UK
10
operations taken in September 1997, restructuring and reorganization charges of
$2.0 million and $688,374, respectively, taken in connection with the
reorganization of the Company and the acquisition of TelSoft in December 1995,
and write-offs of $8.5 million and $10.0 million for acquired research and
development taken in connection with the acquisitions of MDSI UK in June 1996
and Alliance effective April 1997, respectively, the Company incurred net losses
of $11.5 million, $6.0 million , and $1.5 million in the years ended December
31, 1997, 1996 and 1995, respectively. As of December 31, 1998, the Company had
an accumulated deficit of $13.7 million. Although the Company was profitable in
its most recently completed fiscal year, there can be no assurance that, in the
future, the Company will realize revenue growth or be profitable on a quarterly
or annual basis. In addition, the Company plans to increase its operating
expenses to expand its sales and marketing operations, fund greater levels of
research and development, broaden its customer support capabilities and increase
its administration resources. A relatively high percentage of the Company's
expenses is typically fixed in the short term as 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 would
be materially adversely affected. In addition, in view of the Company's recent
revenue growth, the rapidly evolving nature of its business and markets, the
Company's limited operating history and the recent
11
acquisitions, the Company believes that period-to-period comparisons of
financial results are not necessarily meaningful and should not be relied upon
as an indication of future performance.
Integration of Acquisitions
The Company may, when and if the opportunity arises, acquire other
products, technologies or businesses involved in activities, or having product
lines, that are complementary to the Company's business. Acquisitions involve
numerous risks, including difficulties in the assimilation of the operations,
technologies and products of the acquired companies, the diversion of
management's attention from other business concerns, risks associated with
entering markets or conducting operations with which the Company has no or
limited direct prior experience and the potential loss of key employees of the
acquired company. Moreover, there can be no assurance that any anticipated
benefits of an acquisition will be realized. Future acquisitions by the Company
could result in potentially dilutive issuances of equity securities, the
incurrence of debt and contingent liabilities, amortization of expenses related
to goodwill and other intangible assets and write-off of restructuring costs and
acquired research and development costs, all of which could materially and
adversely affect 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 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. See "Forward-Looking
Statements".
Management of Growth
Since its inception, the Company has experienced rapid growth in product
sales, personnel, research and development activities, number and complexity of
products, the number and geographic focus of its targeted vertical markets and
product distribution channels. The total number of employees of the Company has
grown from nine employees in Canada in February 1993 to 466 employees located in
Canada, the United States, the United Kingdom and other international locations
at December 31, 1998. In addition, the recent acquisitions of Alliance and MDSI
UK have increased the number of products the Company supports and markets, as
well as the number of vertical markets into which it sells products and the
geographical areas in which the Company operates. The Company believes that
continued growth in the number and complexity of products and in the number of
personnel will be required to maintain the Company's competitive position. The
Company's rapid growth, coupled with the rapid evolution of the Company's
markets, has placed, and is likely to continue to place, significant strains on
its management, administrative, operational and financial resources, as well as
increased demands on its internal systems, procedures and controls. The
Company's ability to manage recent and future growth will require the Company to
continue to improve its financial and management controls, reporting systems and
procedures on a timely basis, to implement new systems as necessary and to
expand, train, motivate and manage its sales and technical personnel. There can
be no assurance that the Company will be able to manage its growth successfully.
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. The Company intends to hire a significant
number of additional technical and sales personnel in the next year. See
"Forward-Looking Statements". Competition for such personnel is intense, and
there can be no assurance that 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. The loss of
the services of any of the Company's senior management or other key employees or
the inability to attract and retain the necessary technical, sales and
managerial personnel could have a material adverse effect upon the Company's
business, financial condition, operating results and cash flows.
12
Dependence on Selected Vertical Markets
Prior to 1996, substantially all of the Company's revenue was derived from
the sale of products and services to customers in the utility market. For the
years ended December 31, 1997 and 1996, the utility market accounted for greater
than 50% of the Company's revenue. In those years, the Company sought to reduce
its reliance on the utility market by developing or acquiring compatible
products for organizations with mobile workforces in other vertical markets. In
1998, the utility market accounted for greater than 40% of the Company's
revenue. The Company anticipates that a significant portion of its future
revenue will also be generated by sales of products to the taxi and
telecommunications markets. See "Forward-Looking Statements". A decline in
demand for the Company's products in the utility, taxi or telecommunications
markets as a result of competition, technological change or otherwise, would
have a material adverse effect on the Company's business, financial condition,
operating results and cash flows. There can be no assurance that the Company
will be able to continue to diversify its product offerings or revenue base by
entering into new vertical markets.
Dependence on Marketing Relationships
The Company's products are marketed by the Company's direct field sales
force as well as by resellers. The Company's existing agreements with resellers
of its products 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
resellers 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 resellers, the failure of such parties to
perform under agreements with the Company or the inability of the Company to
attract and retain new resellers with the technical, industry and application
experience required to market the Company's products successfully could have a
material adverse effect on the Company's business, financial condition,
operating results and cash flows. The Company expects that it may enter into
certain joint ventures in order to facilitate its expansion into other vertical
markets and geographic areas. See "Forward Looking Statements". To the extent
that such joint ventures are not successful, there could be a material adverse
effect on the Company's business, financial condition, operating results and
cash flows.
Competition
The markets for mobile workforce management applications, wireless
connectivity software, mobile data network equipment and mobile computing
devices are highly competitive. Numerous factors affect the Company's
competitive position, including price, product features, product performance and
reliability, ease of use, product scalability, product availability on multiple
platforms (both server and mobile workstation), ability to implement mobile
workforce management solutions domestically and internationally while meeting
customer schedules, integration of products with other enterprise solutions,
availability of project consulting services and timely ongoing customer service
and support.
Within these markets, there are a 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. The Company expects
such competition to intensify as acceptance and awareness of mobile data
communications and technology continue. See "Forward Looking Statements". In
addition, a small number of the Company's potential customers develop software
solutions internally, thereby eliminating the requirement for suppliers such as
the Company. Current or potential competitors may establish cooperative
arrangements among themselves or with third parties to increase the ability of
their products to address customer requirements.
Certain of the Company's competitors have substantially greater financial,
technical, marketing and distribution resources than the Company. As a result,
they may be able to respond more quickly to new or emerging technologies and
changing customer requirements, or to devote greater resources to the
development and distribution of existing products. There can be no assurance
that the Company will be able to compete successfully against current or future
competitors or alliances of such competitors, or that competitive pressures
faced by the Company will not materially adversely affect its business,
financial condition, operating results and cash flows.
13
The Company primarily competes in the utility market with Utility Partners,
L.C., M3i Systems, Inc. and Alterra Corp. The Company has several competitors in
the telecommunications market, a few of which have historical relationships with
certain of the large telecommunications companies. The Company's primary
competitors for telecommunications customers are Bellcore and Lucent
Technologies Inc. The Company's principal competitors in the cable market are
Bellcore and MobileForce Technologies, Inc. In the general field service market,
the Company's principal competitors are Astea International Inc. and Metrix Inc.
In the European taxi market, the Company's principal competitors are Indelco,
OsloTaxi, Finn Frogne, Auriga (United Kingdom), Axijest (France), Tadiran
(Israel), H&W (Germany) and Mikrotek (Italy). In the Asia Pacific region, the
Company's principal competitors in the taxi market are Raywood and Sig-tec. The
Company's principal competitors in the courier market are MobileRadio, BT
Syntegra and Dynamic Transport Management. In the public safety market, the
Company's principal competitors are Cerulean, PRC, Tiberon Systems and New World
Systems.
Risk of Product Defects
Software products, including those offered by the Company, from
time-to-time contain undetected errors or failures. There can be no assurance
that, despite testing by the Company and by current and potential customers,
errors will not be found in the Company's products. Such errors could result in
loss of or delay in market acceptance of the Company's products, which could
have a material adverse effect on the Company's business, financial condition,
operating results and cash flows.
Proprietary Technology
The Company's success is dependent on its ability to protect its
intellectual property rights. The Company relies principally upon a combination
of copyright, trademark, trade secret and patent laws, non-disclosure agreements
and other contractual provisions to establish and maintain its rights. To date,
the Company has applied for trademark registration in the United States, Canada
and several European countries for the MDSI and Advantex marks. Other than
certain patents held or pending by MDSI UK, MDSI has not sought patent
protection for its products. As part of its confidentiality procedures, the
Company generally enters into nondisclosure and confidentiality agreements with
each of its key employees, consultants, distributors, customers and corporate
partners, to limit access to and distribution of its software, documentation and
other proprietary information. There can be no assurance that the Company's
efforts to protect its intellectual property rights will be successful. Despite
the Company's efforts to protect its intellectual property rights, unauthorized
third parties, including competitors, may be able to copy or reverse engineer
certain portions of the Company's software products, and use such copies to
create competitive products.
Policing the unauthorized use of the Company's products is difficult, and,
while the Company is unable to determine the extent to which piracy of its
software products exists, software piracy can be expected to continue. In
addition, the laws of certain countries in which the Company's products are or
may be licensed do not protect its products and intellectual property rights to
the same extent as do the laws of Canada and the United States. As a result,
sales of products by the Company in such countries may increase the likelihood
that the Company's proprietary technology is infringed upon by unauthorized
third parties.
In addition, because third parties may attempt to develop similar
technologies independently, the Company expects that software product developers
will be increasingly subject to infringement claims as the number of products
and competitors in the Company's industry segments grow and the functionality of
products in different industry segments overlaps. See "Forward Looking
Statements". Although the Company believes that its products do not infringe on
the intellectual property rights of third parties, there can be no assurance
that third parties will not bring infringement claims (or claims for
indemnification resulting from infringement claims) against the Company with
respect to copyrights, trademarks, patents and other proprietary rights. Any
such claims, whether with or without merit, could be time consuming, result in
costly litigation and diversion of resources, cause product shipment delays or
require the Company to enter into royalty or licensing agreements. Such royalty
or licensing agreements, if required, may not be available on terms acceptable
to the Company or at all. A claim of product infringement against the Company
and failure or inability of the Company to license the infringed or similar
technology could have a material adverse effect on the Company's business,
financial condition, operating results and cash flows.
14
Dependence on Third Parties
Certain contracts require the Company to supply, coordinate and install
third party products and services. The Company believes that there are a number
of acceptable vendors and subcontractors for most of its required products, but
in many cases, despite the availability of multiple sources, the Company may
select a single source in order to maintain quality control and to develop a
strategic relationship with the supplier or may be directed by a customer to use
a particular product. The failure of a third party supplier to provide a
sufficient supply of parts and components or products and services in a timely
manner could have a material adverse effect on the Company's results of
operations. In addition, any increase in the price of one or more of these
products, components or services could have a material adverse effect on the
Company's business, financial condition, operating results and cash flows.
Additionally, under certain circumstances, the Company supplies products
and services to a customer through a larger company with a more established
reputation acting as a project manager or systems integrator. In such
circumstances, the Company has a sub-contract to supply its products and
services to the customer through the prime contractor. In these circumstances,
the Company is at risk that situations may arise outside of its control that
could lead to a delay, cost over-run or cancellation of the prime contract which
could also result in a delay, cost over-run or cancellation of the Company's
sub-contract. The failure of a prime contractor to supply its products and
services or perform its contractual obligations to the customer in a timely
manner could have a material adverse effect on the Company's financial
condition, results of operations and cash flows.
Exchange Rate Fluctuations
Because the Company's reporting currency is the Canadian dollar, its
operations outside Canada face additional risks, including fluctuating currency
values and exchange rates, hard currency shortages and controls on currency
exchange. The Company has operations outside Canada and is hedged, to some
extent, from foreign exchange risks because of its ability to purchase, develop
and sell in the local currency of those jurisdictions. In addition, the Company
does enter into foreign currency contracts under certain circumstances to reduce
the Company's exposure to foreign exchange risks. There can be no assurance,
however, that the attempted matching of foreign currency receipts with
disbursements or hedging activities will adequately moderate the risk of
currency or exchange rate fluctuations which could have a material adverse
effect on the Company's business, financial condition, operating results and
cash flows. In addition, to the extent the Company has operations outside
Canada, the Company is subject to the impact of foreign currency fluctuations
and exchange rate charges on the Company's reporting in its financial statements
of the results from such operations outside Canada. Since such financial
statements are prepared utilizing Canadian dollars as the basis for
presentation, results from operations outside Canada reported in the financial
statements must be restated into Canadian dollars utilizing the appropriate
foreign currency exchange rate, thereby subjecting such results to the impact of
currency and exchange rate fluctuations.
Risks Associated with International Operations
In the years ended December 31, 1998, 1997 and 1996 revenue derived from
sales outside of North America accounted for approximately 21 %, 32% and 30%,
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 continued growth and
profitability will require additional expansion of its sales in foreign markets,
and that revenue derived from international sales will account for a significant
percentage of 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.
15
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.
Concentration of Stock Ownership; Anti-Takeover Effects; Investment Canada Act
The Company's directors, officers and their respective affiliates, in the
aggregate, beneficially own approximately 26.6% of the outstanding Common
Shares. As a result, these shareholders, if acting together, may be able to
exercise significant influence over the Company and many matters requiring
shareholder approval, including the election of directors and approval of
significant corporate transactions. Such concentration of ownership may under
certain circumstances also have the effect of delaying, deferring or preventing
a change in control of the Company.
An investment in the Common Shares of the Company which results in a change
of control of the Company may, under certain circumstances, be subject to review
and approval under the Investment Canada Act if the party or parties acquiring
control is not a Canadian person (as defined therein). Therefore, the Canadian
regulatory environment may have the effect of delaying, deferring or preventing
a change in control of the Company.
The Company is organized under the laws of Canada and, accordingly, is
governed by the CBCA. The CBCA differs in certain material respects from laws
generally applicable to United States corporations and shareholders, including
the provisions relating to interested directors, mergers and similar
arrangements, takeovers, shareholders' suits, indemnification of directors and
inspection of corporate records.
In December 1998, the Company implemented a stock rights plan (the "Plan").
Pursuant to the Plan, shareholders of record on December 17, 1998 received a
dividend of one right to purchase for CDN$140 one Common Share of the Company.
The rights are attached to the Company's Common Shares and will also become
attached to Common Shares issued in the future. The rights will not be traded
separately and will not become exercisable until the occurrence of a triggering
event, defined as an accumulation by a single person or group of 20% or more of
the Company's Common Shares. After a triggering event, the rights will detach
from the Common Shares. If the Company is then merged into, or is acquired by,
another corporation, the Company may either (i) redeem the rights or (ii) permit
the rights holder to receive in the merger Common Shares of the Company or of
the acquiring company equal to two times the exercise price of the right (i.e.,
CDN$280). In the latter instance, the rights attached to the acquirer's stock
become null and void. The effect of the rights program is to make a potential
acquisition of the Company more expensive for the acquirer if, in the opinion of
the Company's Board of Directors, the offer is inadequate. While the Company is
not aware of any circumstance that might result in the acquisition of a
sufficient number of shares of the Company's Common Shares to trigger
distribution of the Rights, existence of the Rights could discourage offers for
the Company's stock that may exceed the current market price of the stock, but
that the Board of Directors deems inadequate.
As a result of being a reporting issuer in certain provinces of Canada, the
Company is required to file certain reports in such jurisdictions. As part of
such reports, the Company is required to file consolidated financial statements
prepared in accordance with generally accepted accounting principles as applied
in Canada ("Canadian GAAP"). Canadian and US GAAP differ in certain respects,
including the treatment of certain reorganization costs and acquired research
and development costs. As a result, the Company's Consolidated Financial
Statements included in this report may differ materially from the financial
statements filed by the Company in Canada.
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.
16
Such litigation, whether with or without merit, could result in substantial
costs and a diversion of management's attention and resources, which would have
a material adverse effect on the Company's business, financial condition,
operating results and cash flows.
Year 2000
Many currently installed computer systems, software products and electronic
products are coded to accept only two-digit entries in the date code field.
These date code fields will need to accept four digit entries to distinguish
21st century dates from 20th century dates. As a result, during 1999 the
Company, its suppliers and customers, and its potential suppliers and customers,
may need to upgrade, repair or replace certain computer systems or software to
minimize the adverse impact of system failures related to "Year 2000"
noncompliance.
The Company has conducted an internal and external review of its systems
and has contacted its material software and other suppliers to determine any
major areas of exposure of its systems of Year 2000 issues. As a result of the
internal review to date, the Company believes that its products are Year 2000
compliant and that it has identified all necessary computer hardware and
software upgrades and replacements necessary to make the Company's material
computing and business systems Year 2000 compliant. As a result of the external
review to date, the Company believes that its material suppliers are Year 2000
compliant.
To date, the Company has not incurred, and does not expect to incur,
material costs to review and remedy Year 2000 compliance problems. Although the
Company believes that its products are Year 2000 compliant, failure to provide
Year 2000 compliant solutions to its customers or to receive such business
solutions from its suppliers could have a material adverse effect on the
Company's business, financial condition, operating results and cash flows.
Furthermore, the Company may incur additional expense if its products are used
by customers on third-party hardware and operating systems that are not Year
2000 compliant, which could result in a material adverse effect on the Company's
business, operating results, financial condition, and cash flows. There can be
no assurance that the systems or products of other entities, including the
Company's suppliers on which the Company relies, disruptions in the economy
generally resulting from Year 2000, issues, and disruptions caused by customers
deferring their purchase decisions or implementation plans due to their own
internal Year 2000 remediation activities, will not have a material adverse
effect on the Company.
Additionally, there is the possibility that in the coming year corporations
in dealing with their own Year 2000 issues will defer some software purchases
except for the most urgent and those relevant to solving their own Year 2000
concerns. To the extent that this occurs, it could materially adversely affect
the Company's results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operation - Year 2000".
Item 2: Properties
The Company occupies approximately 92,000 square feet of leased office
space at its headquarters in Richmond, British Columbia for its product
development, marketing, support, administration and sales operations. The
Company intends to seek to sub-let a portion of the space until such time as
full occupancy is required. The lease expires on November 30, 2008 with two
options to renew for five years each. The Company also leases approximately
17,400 square feet of office space in Cambridge, England under a lease which
terminates on April 8, 2004. The Company also maintains an office in Itasca,
Illinois. The Itasca office lease is for approximately 28,000 square feet and
terminates on November 30, 1999.
Item 3: Legal Proceedings
As of the date hereof, there is no material litigation pending against the
Company. From time to time, the Company is a party to litigation and claims
incident to the ordinary course of its business. While the results of litigation
and claims cannot be predicted with certainty, the Company believes that the
final outcome of such matters will not have a material adverse effect on the
Company's business, financial condition, operating results and cash flows.
Item 4: Submission of Matters to a Vote of Security Holders
Not applicable.
17
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 intends to change its NASDAQ National Market
System trading symbol to "MDSI" in April 1999. 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
-------------- ------------- ------------- -------------- -------------- -------------
1997
First Quarter......................... 20.35 15.01 27.80 20.50 20.13 15.88
Second Quarter........................ 28.50 16.59 39.50 23.00 28.75 16.25
Third Quarter......................... 28.17 14.81 39.00 20.50 28.75 14.88
Fourth Quarter........................ 22.52 14.78 32.00 21.00 23.00 14.25
1998
First Quarter......................... 19.57 10.66 28.00 15.25 19.00 10.50
Second Quarter........................ 17.11 11.41 24.75 16.50 17.63 11.13
Third Quarter......................... 14.09 7.92 21.35 12.00 14.13 7.88
Fourth Quarter........................ 17.83 9.40 27.50 14.50 18.00 9.25
- - -----------------
(1) US dollar amounts have been translated using the average noon buying rate
for Canadian dollars for the relevant quarter.
As of December 31, 1998 the Company had approximately 187 shareholders of
record (including nominees and brokers holding street accounts), 66 shareholders
of whom had addresses in the United States and who held 4,403,697 Common Shares,
or 67.1% of the Company's outstanding Common Shares.
The Company has never paid dividends on its Common Stock. The Company
currently intends to retain earnings for use in its business and does not
anticipate paying any dividends in the foreseeable future. The Company's current
bank credit agreement prohibits the payment of dividends without prior consent
of the lender.
18
Item 6: Selected Financial Data
The following selected consolidated financial data of the Company is
qualified in its entirety by reference to and should be read in conjunction with
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the consolidated financial statements and notes thereto
included elsewhere in this report. The consolidated statements of operations
data for the years ended December 31, 1998, 1997, 1996 and 1995 and the year
ended June 30, 1995 and the consolidated balance sheet data at December 31,
1998, 1997, 1996 and 1995 and at June 30, 1995 are derived from and are
qualified by reference to the Company's audited consolidated financial
statements which were audited by Deloitte & Touche LLP. This selected
consolidated financial data is presented in conformity with generally accepted
accounting principles in the United States.
Years ended December 31, Year ended
----------------------------------------------------------------------- June 30,
1998 1997 1996 1995(5) 1995
---------------- ---------------- --------------- ----------------- ---------------
(in thousands, except per share data)
Statement of Operations Data:
Revenue............................... $ 83,383 $ 70,280 $ 45,143 $ 9,313 $ 8,000
Gross profit.......................... 38,794 26,921 16,822 6,303 5,250
Operating income (loss)(1)(2)(3)...... 7,926 (9,763) (5,203) (1,159) 1,588
Net income (loss) for the year........ 5,499 (11,547) (6,014) (1,533) 993
Diluted earnings (loss) per
common share ........................ $ 0.82 $ (1.84) $ (1.24) $ (0.30) $ 0.19
Weighted average shares outstanding... 6,723 6,261 4,855 5,117 5,117
US$ Equivalent (4):
Revenue............................... $ 55,992 $ 50,588 $ 33,085 $ 6,803 $ 5,807
Gross profit.......................... 26,050 19,378 12,329 4,604 3,811
Operating income (loss)(1)(2)(3)...... 5,322 (7,027) (3,813) (847) 1,153
Net income (loss) for the year........ 3,693 (8,312) (4,408) (1,120) 722
Diluted earnings (loss) per
common share $ 0.55 $ (1.33) $ (0.91) $ (0.22) $ 0.14
Weighted average shares outstanding... 6,723 6,261 4,855 5,117 5,117
US$
At December 31, Equivalent(4)
----------------------------------------------------------- At June 30, December 31,
Balance Sheet Data: 1998 1997 1996 1995(5) 1995 1998
------------ ------------ ------------ ---------------- ------------- -----------
Cash and cash equivalents............. $ 6,137 $ 110 $ 20,207 $ 1,992 $ 1,350 $ 3,992
Working capital....................... 20,871 13,655 21,380 (1,752) 2,164 13,574
Total assets.......................... 56,568 40,644 45,572 4,978 4,978 36,792
Non-current liabilities............... 1,907 296 20 1,995 1,995 1,240
Stockholders' equity ................. 30,819 23,836 26,836 559 721 20,045
- - ----------------------------
(1) Operating loss for the year ended December 31, 1997 includes non-recurring
charges of $6,371,192 (US$4,585,984) including $1,145,152 (US$824,280) with
respect to restructuring certain operations and $5,226,040 (US$3,761,704)
due to changes in estimates to complete certain contracts entered into by
its UK operations which existed prior to the Company's acquisition of MDSI
UK.
(2) Operating loss for the years ended December 31, 1997 and 1996 includes
non-recurring charges of $10,002,982 (US$7,200,146) and $8,523,363
(US$6,229,726) as a result of acquired research and development costs
relating to the acquisitions of Alliance and MDSI UK in April 1997 and June
1996, respectively.
(3) Operating loss for the year ended December 31, 1995 includes non-recurring
charges of $2,017,819 (US$1,490,765) and $688,374 (US$508,571) as a result
of restructuring and reorganization costs, respectively, relating to the
acquisition of TelSoft in December 1995.
(4) Solely for the convenience of the reader, Canadian dollar income statement
amounts have been translated into U.S. dollars using the average 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 for the relevant period, and Canadian dollar balance sheet amounts
have been translated using the relevant period-end noon buying rate, as set
forth in "Exchange Rates". These translations are not necessarily
representative of the amounts that would have been reported if the Company
had historically reported its financial statements in U.S. dollars. In
addition, the rates utilized are not necessarily indicative of the rates in
effect at any other time.
(5) In 1995, the Company changed its year end from June 30 to December 31. The
results of operations for the year ended December 31, 1995 are restated to
present the results for the entire twelve month period.
19
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
1998 1997 1996 1995 1994
------------- ------------- ------------- ------------- -------------
Period End.......................... US$0.6504 US$0.6999 US$0.7301 US$0.7323 US$0.7128
Average............................. 0.6715 0.7198 0.7329 0.7305 0.7300
High ............................... 0.7105 0.7487 0.7513 0.7527 0.7632
Low................................. 0.6341 0.6945 0.7235 0.7023 0.7103
On December 31, 1998 the noon buying rate was Cdn$1.00 = US$0.6504. 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.
Item 7: Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion contains "forward looking statements" within the
meaning of Section 21E of the Securities Exchange Act of 1934. The fourth
paragraph under "Revenue", and the paragraphs entitled "Research and
Development" , "Sales and Marketing" , and "General and Administrative" , in the
section entitled "Year ended December 31, 1998 Compared to the Year ended
December 31, 1997" contain forward looking statements. Actual results could
differ materially from those projected in the forward looking statements as a
result of the Company's ability to accelerate or defer operating expenses,
achieve revenue in a particular period, hire new personnel and other factors set
forth under "Business-Risk Factors" in Item 1 of this Annual Report on Form
10-K. In particular, note the Business-Risk Factors entitled "Potential
Fluctuations in Quarterly Operating Results", "Lengthy Sales Cycles",
"Dependence on Large Contracts and Concentration of Customers", "Limited
Operating History; Increased Expenses", "Integration of Acquisitions" and
"Competition".
Unless otherwise noted, all financial information in this report is
expressed in the Company's functional currency, Canadian dollars. See item 7A -
Market Risk.
Overview
MDSI develops, markets, implements and supports mobile workforce management
and wireless connectivity software and related network and mobile computing
equipment for use by a wide variety of companies that have substantial mobile
workforces, such as utilities, telecommunications companies, taxi service
providers, courier companies and roadside recovery organizations. MDSI's
products are used by such companies in conjunction with public and private
wireless data communications networks to provide comprehensive solutions for the
automation of business processes associated with the scheduling, dispatching and
management of a mobile workforce. The Company's products provide a
cost-effective method for companies with mobile workers to utilize data
communications to communicate with such workers, and for such workers to
interface on a real-time basis with their corporate information systems.
The Company's revenue is derived from (i) software and services, consisting
of the licensing of software and provision of related services, including
project management, installation, integration, customization and training; (ii)
third party products and services, consisting of the provision of non-MDSI
products and services as part of the total contract; terminal and infrastructure
equipment consisting of the sale of mobile computing devices, related in-vehicle
equipment and wireless data network equipment manufactured by the Company; (iii)
terminal and infrastructure equipment consisting of the sale of mobile computing
devices, related in-vehicle equipment and wireless data network equipment
manufactured by the Company; and (iv) maintenance and support, consisting of the
provision of after-sale support services as well as hourly, annual or extended
maintenance contracts.
20
The implementation of a complete mobile data solution requires a wireless
data communications network, a land-based data communications network, mobile
computing devices integrated with wireless data communication modems, host
computer equipment, industry specific application software, wireless
connectivity software and a variety of services to manage and install these
components, integrate them with an organization's existing computer systems, and
configure or customize the software to meet customer requirements. Frequently,
in the Company's larger contracts only a limited number of the mobile computing
devices and in-vehicle equipment are installed initially, with the balance
implemented over a rollout period that may extend up to one year or more. Where
increases in mobile work forces require, or where additional departments of
mobile workers are added, additional mobile computing devices may be installed.
Revenue for software and services has historically accounted for a
substantial portion of the Company's revenue . Typically, the Company enters
into a fixed price contract with a customer for the licensing of selected
software products and the provision of specific services that are generally
performed within six to twelve months. Pricing for these contracts includes
license fees as well as a fee for professional services. The Company generally
recognizes total revenue for software and services associated with a contract
using a percentage of completion method based on the total costs incurred over
the total estimated costs to complete the contract.
Commencing in the third quarter of 1996, the Company began generating
revenues from the sale of mobile computing and infrastructure equipment as a
result of the acquisition of MDSI UK. The Company's contracts with customers in
the taxi, courier and roadside recovery markets generally require the Company to
provide mobile computing devices and wireless data communications network
equipment. Revenues for these products are recognized at the time of transfer of
title.
The Company's customers typically enter into ongoing maintenance agreements
that provide for maintenance, product enhancement and technical support services
for a period commencing after expiration of the initial warranty period.
Maintenance agreements typically have a term of twelve months and are invoiced
either annually or monthly. Revenue for these services is recognized ratably
over the term of the contract.
Prior to 1996, MDSI typically supplied only the MDSI application and
wireless connectivity software and related services as part of its contract with
a customer. The portion of contracts requiring the supply of third party
products and services was not material and was not separated for revenue
purposes. Beginning in 1996, however, the Company was called on to provide, in
addition to MDSI products and services, certain third party products, such as
host computer hardware and operating system software, mobile computing devices
and radio data network infrastructure equipment, or sub-contract services, such
as radio data system design and implementation. The Company recognizes revenue
for the supply of third party hardware upon transfer of title to the customer.
The Company recognizes revenue for the supply of third party services using a
percentage of completion method based on the costs incurred over the total
estimated cost to complete the third party services contract.
The Company believes that it will often supply some portion of third party
products and services to customers where it is successful in selling its own
products and services. There can be no assurance, however, that any contracts
entered into by the Company to supply third party software and products in the
future will represent a substantial portion of revenue in any future period.
Since the revenue generated from the supply of third party products and services
may represent a significant portion of certain contracts and the installation
and rollout of third party products is generally at the discretion of the
customer, the Company may, depending on the level of third party products and
services provided during a period, experience large quarterly fluctuations in
revenue.
Prior to 1996, the Company achieved a gross margin of 60-70% on its
consolidated revenue. The gross margins achieved on revenue from the MDSI UK
operations during the three years prior to its acquisition by the Company ranged
from 62.6% to 21.2%. In addition, since the commencement of sales of third party
products and services in 1996, the Company has achieved gross margins of
approximately 12.2% on revenue attributable to such products and services.
Accordingly, the Company expects that its consolidated gross margins in future
periods will be lower than those achieved by MDSI prior to the MDSI UK
acquisition and that changes in the mix of these revenues in any period will
result in significant fluctuations in direct costs, gross profits, operating
results and other items expressed as a percentage of revenue.
The Company's revenue is dependent, in large part, on significant contracts
from a limited number of customers. As a result, any substantial delay in the
Company's completion of a contract, the inability of the Company to obtain new
contracts or the cancellation of an existing contract by a customer could have a
material adverse effect on the Company's results of operations. The Company's
contracts are generally 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.
21
Effects of Acquisitions
The consolidated financial statements of the Company reflect the
acquisitions of Alliance effective April 17, 1997 and MDSI UK on June 28, 1996.
These acquisitions have been accounted for using the purchase method.
The Company acquired MDSI UK on June 28, 1996. MDSI UK develops, markets,
implements and supports mobile workforce management application software,
wireless connectivity software, wireless data network equipment, mobile
computing devices and related in-vehicle equipment used by customers principally
in the taxi, courier and roadside recovery markets. The acquisition resulted in
the write-off of $8.5 million associated with acquired research and development.
As the acquisition was completed at the end of the second quarter in 1996, the
Company's results of operations for the year ended December 31, 1996 include
only the results of operations of MDSI UK for the six months ended December 31,
1996.
On April 17, 1997, the Company entered into an agreement to acquire
Alliance which was completed July 1, 1997. Alliance is a supplier of mobile
workforce management solutions to the utility, public safety and cable markets.
The acquisition resulted in the write-off of $10.0 million associated with
acquired research and development. The Company's results of operations for the
year ended December 31, 1997 include only the results of operations of Alliance
from April 17, 1997.
The Company has a limited history of operations on a combined basis with
Alliance and MDSI UK. In addition, since the acquisition of Alliance and MDSI
UK, the Company has restructured certain aspects of those operations. As a
result, the financial information presented in this Annual Report is not
indicative of the results that would have been obtained had the acquisitions
occurred prior to the commencement of the periods covered herein, and such
information should not be relied upon as an indication of future performance.
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,
--------------------------------------------------------------------
1998 1997 1996
--------------------- -------------------- -------------------
(in thousands)
Revenue:
Software and services.................................. $ 47,497 $ 39,358 $ 18,388
Terminals and infrastructure........................... 8,385 10,646 8,708
Third party products and services ..................... 19,514 16,677 15,228
Maintenance and support................................ 7,987 3,599 2,819
--------------------- -------------------- -------------------
83,383 70,280 45,143
Direct costs.............................................. 44,589 43,359 28,321
--------------------- -------------------- -------------------
Gross profit.............................................. 38,794 26,921 16,822
--------------------- -------------------- -------------------
Operating expenses:
Research and development............................... 9,894 6,540 4,357
Sales and marketing.................................... 13,423 12,071 5,689
General and administrative............................. 6,686 6,088 3,125
Amortization of intangible assets...................... 864 837 331
Acquired research and development...................... - 10,003 8,523
Restructuring costs.................................... - 1,145 -
--------------------- -------------------- -------------------
30,867 36,684 22,025
--------------------- -------------------- -------------------
Operating income (loss)................................... 7,927 (9,763) (5,203)
Other income.............................................. 162 535 114
--------------------- -------------------- -------------------
Income (loss) before provision for income taxes........... 8,089 (9,228) (5,089)
Provision for income taxes................................ ( 2,590) (2,319) (925)
--------------------- -------------------- -------------------
Net income (loss) for the year............................ $ 5,499 $ (11,547) $ (6,014)
===================== ==================== ===================
22
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,
--------------------------------------------------------------------
1998 1997 1996
--------------------- -------------------- -------------------
(in thousands)
Revenue:
Software and services.................................. 57.0% 56.0% 40.7%
Terminals and infrastructure........................... 10.0 15.2 19.3
Third party products and services...................... 23.4 23.7 33.7
Maintenance and support................................ 9.6 5.1 6.3
--------------------- --------------------- -------------------
100.0 100.0 100.0
Direct costs.............................................. 53.5 61.7 62.7
--------------------- --------------------- -------------------
Gross profit.............................................. 46.5 38.3 37.3
--------------------- --------------------- -------------------
Operating expenses:
Research and development............................... 11.9 9.3 9.7
Sales and marketing.................................... 16.1 17.2 12.6
General and administrative............................. 8.0 8.7 6.9
Amortization of intangible assets...................... 1.0 1.2 0.7
Acquired research and development...................... - 14.2 18.9
Restructuring costs.................................... - 1.6 -
--------------------- --------------------- -------------------
37.0 52.2 48.8
--------------------- --------------------- -------------------
Operating income (loss)................................... 9.5 (13.9) (11.5)
Other income.............................................. 0.2 0.8 0.2
--------------------- --------------------- -------------------
Income (loss) before provision for income taxes........... 9.7 (13.1) (11.3)
Provision for income taxes................................ (3.1) (3.3) (2.0)
===================== ===================== ===================
Net income (loss) for the year............................ 6.6% (16.4)% (13.3)%
===================== ===================== ===================
Year ended December 31, 1998 Compared to the Year ended December 31, 1997
Revenue - Revenue increased by $13.1 million (18.6%) for the year ended
December 31, 1998 as compared to the year ended December 31, 1997. This increase
in revenue can be attributed to the reflection in the financial statements of a
full year of Alliance's (now MDSI US) operations, in comparison to eight and
one-half months in the year ended December 31, 1997, and to the continued growth
of the existing business.
Software and services revenue increased by $8.1 million (20.7%) for the
year ended December 31, 1998 as compared to the year ended December 31, 1997.
This increase is due primarily to the reflection of a full year of Alliance's
results in the financial statements, and additional revenue from customers in
both the telecommunications and utility markets.
Terminals and infrastructure revenue decreased by $2.3 million (21.2%) for
the year ended December 31, 1998. Terminals and infrastructure revenue is
derived solely from the MDSI UK operations. Due to the delay in implementation
of two legacy taxi contracts in 1997, MDSI UK was unable to commence work on new
taxi contracts until 1998, resulting in reduced terminals and infrastructure
revenue during the period.
Third party products and services revenue increased by $2.8 million (17.0%)
for the year ended December 31, 1998 compared the year ended December 31, 1997.
Third party products and services revenue is primarily earned from certain
customers in the utility market pursuant to agreements under which the Company
provides third party products and services, typically host computer equipment
and mobile computing devices, as part of the installation of software and
provision of services. Revenue from deliveries of third party products and
services will fluctuate from period to period given the timing of certain
contracts and the rollout schedules which are established primarily by the
customers. Accordingly, this will result in large fluctuations in revenue,
direct costs, gross profits and income from operations from one period to
another.
Maintenance and support revenue was $8.0 million for the year ended
December 31, 1998 as compared to $3.6 million for the year ended December 31,
1997, an increase of 121.9%. Typically, maintenance and support revenue will
increase with the number of customers using MDSI's software.
Direct Costs - Direct costs were 53.5% of revenue for the year ended
December 31, 1998 as compared to 61.7% for the year ended December 31, 1997. The
decrease in direct costs as a percentage of revenue relates primarily to the
fact that during the year ended December 31, 1997, the Company recorded direct
costs of $5.2 million relating to estimated losses on two MDSI UK contracts due
to changes in estimates to complete. Under the percentage of completion method
used to recognize revenue on fixed price contracts, where it has been determined
that a contract will be completed at a loss due to changes in estimates to
complete, the Company is required to recognize the full amount of such losses in
the period that the loss is determined. Excluding these contracts, the Company's
direct costs for the year ended December 31, 1997 were 54.3% of revenue.
23
Direct costs include labor and other costs directly related to a project
including those related to the provision of services and support, production and
inventory costs associated with terminals and infrastructure equipment provided
by MDSI UK and costs related to host equipment and mobile devices on behalf of
third party product sales. Labor costs include direct payroll, benefits and
overhead charges.
Gross Margins. Gross margins were 46.5% of revenue for the year ended
December 31, 1998 as compared to 38.3% for the year ended December 31, 1997. The
increase in gross margins is attributable to the absence of charges to direct
costs caused by changes in estimates to complete contracts required during the
year ended December 31, 1998, and the higher proportion of total revenues
represented by the high margin software and services business. After adjusting
for the margins on the legacy contracts in the MDSI UK operations, the Company's
gross margins for the year ended December 31, 1997 were 45.7% of revenue.
Research and Development. Research and development expenses were $9.9
million, or 11.9% of revenue, for the year ended December 31, 1998, compared to
$6.5 million, or 9.3% of revenue, for the year ended December 31, 1997. The
51.3% increase in research and development expenses in 1998 is a result of the
continued development and enhancement of the Company's Advantex products. The
Company anticipates continuing to commit a significant portion of its product
revenues to enhancement of existing products and the development of new
products, resulting in an anticipated increase in the dollar amounts of research
and development expenses.
Sales and Marketing. Sales and marketing expenses were $13.4 million or
16.1% of revenue for the year ended December 31, 1998 and 17.2% of revenue for
the year ended December 31, 1997. This represents an increase of $1.4 million
(11.2%) as compared to 1997. The increase was primarily due to an increase in
marketing, sales and technical support personnel to support the Company's
increased marketing activities worldwide. The Company anticipates that the
dollar amounts of its sales and marketing expenses will continue to increase as
the result of the Company's commitment to its international marketing effort.
General and Administrative. General and administrative expenses were $6.7
million, or 8.0% of revenue, for the year ended December 31, 1998 and $6.1
million, or 8.7% of revenue, for the year ended December 31, 1997. This increase
was due primarily to the hiring of additional accounting and administrative
personnel to support the Company's growth. The Company expects that its general
and administrative expenses will increase in the future as the Company expands
its staffing, information systems and other administrative costs to support its
expanding operations.
Other Income. Other income was $0.2 million for the year ended December 31,
1998 as compared to $0.5 million for the year ended December 31, 1997.
Substantially all of other income relates to interest income on cash and short
term deposits and fluctuations in the currencies of the Company's foreign
operations
Income Taxes. The Company provided for income taxes on earnings for the
year ended December 31, 1998 at the rate of 28.9%, after adjusting for the
amortization of intangible assets. The Company's effective tax rate reflects the
application of certain operating loss carry forwards against taxable income and
the blended effect of Canadian, US, UK and other foreign jurisdictions' tax
rates.
Year ended December 31, 1997 Compared to the Year ended December 31, 1996
Revenue - Revenue increased by $25.1 million (55.7%) for the year ended
December 31, 1997 as compared to the year ended December 31, 1996. This increase
in revenue is due to revenue contributed by Alliance and MDSI UK during the year
ended December 31, 1997 of $27.9 million and the continued growth of the
existing business.
Software and services revenue increased by $21.0 million (114%) for the
year ended December 31, 1997 as compared to the year ended December 31, 1996.
This increase is due primarily to the acquisitions of Alliance and MDSI UK in
April 1997 and June 1996, respectively, and additional revenue from customers in
both the telecommunications and utility markets.
Terminals and infrastructure revenue increased by $1.9 million (22.4%) for
the year ended December 31, 1997 due to the inclusion of revenue from the MDSI
UK operations for the full year ended December 31, 1997 whereas 1996 results are
only included subsequent to the acquisition of MDSI UK at the end of June 1996.
Terminals and infrastructure revenue is derived solely from the MDSI UK
operations.
24
Third party products and services revenue increased by $1.5 million (9.5%)
for the year ended December 31, 1997 compared the year ended December 31, 1996.
Third party products and services revenue primarily represents revenue earned
from certain customers in the utility market pursuant to agreements under which
the Company provides third party products and services, typically host computer
equipment and mobile computing devices, as part of the installation of software
and provision of services.
Maintenance and support revenue was $3.6 million for the year ended
December 31, 1997 as compared to $2.8 million for the year ended December 31,
1996. The increase in maintenance and support revenue reflects the growth in the
number of installations of the Company's products.
Direct Costs - Direct costs were 61.7% of revenue for the year ended
December 31, 1997 as compared to 62.7% for the year ended December 31, 1996. The
decrease in direct costs as a percentage of revenue related primarily to the
proportionately large amount of third party hardware and services supplied in
1996. Margins on third party supplied hardware and services are typically lower
than margins on software and services. Also, under the percentage of completion
method used to recognize revenue on fixed price contracts, the Company is
required to recognize the full amount of any loss in the period where it has
been determined that a contract will be completed at a loss due to changes in
estimates to complete. During the year ended December 31, 1997, the Company
recorded direct costs of $5.2 million relating to estimated losses on legacy
contracts in MDSI UK due to changes in estimates to complete. Excluding these
contracts, the Company's direct costs were 54.3% of revenue for the year ended
December 31, 1997.
Direct costs include labor and other costs directly related to a project
including those related to the provision of services and support, production and
inventory costs associated with terminals and infrastructure equipment provided
by MDSI UK and costs related to host equipment and mobile devices on behalf of
third party product sales. Labor costs include direct payroll, benefits and
overhead charges.
Gross Margins. Gross margins were 38.3% of revenue for the year ended
December 31, 1997 as compared to 37.3% for the year ended December 31, 1996.
After adjusting for the margins on the legacy contracts in the MDSI UK
operations, the Company's gross margins were 45.7% of revenue.
Research and Development. Research and development expenses were 9.3% of
revenue for the year ended December 31, 1997 and 9.7% of revenue for the year
ended December 31, 1996. Total research and development expenditures for the
year ended December 31, 1997 of $6.5 million represents an increase of $2.2
million (50.1%) as compared to the same period in 1996. The increase in research
and development expenses in 1997 was a result of the continued development and
enhancement of the Company's Advantex products.
Sales and Marketing. Sales and marketing expenses were 17.2% of revenue for
the year ended December 31, 1997 and 12.6% of revenue for the year ended
December 31, 1996. This represents an increase of $6.4 million (112%) as
compared to the same period in 1996. The increase was primarily due to an
increase in marketing, sales and technical support personnel to support the
Company's increased marketing activities worldwide.
General and Administrative. General and administrative expenses were 8.7%
of revenue for the year ended December 31, 1997 and 6.9% of revenue for the year
ended December 31, 1996. Total general and administrative expenses of $6.1
million represents an increase of $3.0 million (94.8%) for the year ended
December 31, 1997, as compared to the same period in 1996. The increase was due
primarily to the hiring of additional accounting and administrative personnel to
support the Company's growth and inclusion of costs associated with Alliance and
MDSI UK.
Restructuring Costs. During the year ended December 31, 1997, the Company
incurred costs of $1.1 million associated with the restructuring of certain
operations related to its UK and Kansas operations. These costs include
severance and related provisions for future costs as a result of the
restructuring. The restructuring was complete as of December 31, 1997.
Acquired Research and Development . Effective April 17, 1997, the Company
acquired Alliance for total consideration of $9.1 million. Included in the fair
value of net assets acquired was research and development of $10.0 million which
was expensed at the time of acquisition.
Other Income. Other income was $535,000 for the year ended December 31,
1997 as compared to $113,664 for the year ended December 31, 1996. Substantially
all of other income relates to interest income on cash and short term deposits
and fluctuations in the currencies of the Company's foreign operations
25
Income Taxes. The Company provided for income taxes on earnings for the
year ended December 31, 1997 at the rate of 31.8%, after adjusting for the
amortization of intangible assets, acquired research and development costs and
the recovery of income taxes related to restructuring costs and losses on
certain legacy contracts in the MDSI UK operations. 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, UK and other foreign
jurisdictions' tax rates.
Quarterly Results of Operations
The following table sets forth certain unaudited statement of operations
data for each of the eight quarters beginning January 1, 1997 and ending
December 31, 1998 as well as the percentage of the Company's revenue represented
by each item. The unaudited financial statements have been prepared on the same
basis as the audited financial statements contained herein and include all
adjustments, consisting only of normal recurring adjustments, that the Company
considers necessary to present fairly this information when read in conjunction
with the Company's audited financial statements and the notes thereto appearing
elsewhere in this report. In view of the Company's recent growth, its recent
acquisitions and other factors, the Company believes that quarterly comparisons
of its financial results are not necessarily meaningful and should not be relied
upon as an indication of future performance.
Three Months Ended
------------------------------------------------- ------------------------------------------------
1998 1997
------------------------------------------------- ------------------------------------------------
Dec. 31 Sept. 30 June 30 March 31 Dec. 31 Sept. 30 June 30 March 31
---------- ---------- ---------- ----------- ---------- ----------- ---------- ---------
(Unaudited, in thousands)
Statement of Operations Data:
Revenue:
Software and services...... $ 15,185 $12,372 $11,023 $ 8,917 $11,908 $ 9,175 $11,157 $ 7,118
Terminals and infrastructure 2,070 1,890 1,977 2,448 2,767 1,359 4,654 1,865
Third party products and
services................... 8,277 7,141 3,058 1,038 1,235 5,236 1,994 8,212
Maintenance and support.... 2,312 2,113 1,885 1,677 1,070 1,033 659 837
----------- ---------- ---------- ----------- ---------- ----------- ---------- ---------
27,844 23,516 17,943 14,080 16,980 16,803 18,464 18,032
Direct costs................. 15,245 13,087 9,197 7,060 8,036 14,425 9,446 11,452
----------- ---------- ---------- ----------- ---------- ----------- ---------- ---------
Gross profit................. 12,598 10,429 8,746 7,020 8,944 2,378 9,018 6,580
----------- ---------- ---------- ----------- ---------- ----------- ---------- ---------
Operating expenses:
Research and development... 3,153 2,765 2,049 1,927 1,427 1,870 1,843 1,400
Sales and marketing........ 3,823 3,194 3,267 3,139 3,596 3,453 2,896 2,125
General and administrative. 1,908 1,696 1,573 1,508 1,488 1,796 1,646 1,159
Amortization of intangible
assets..................... 216 216 216 216 238 238 216 145
Acquired research and
development........... _ _ _ _ _ _ 10,003 _
Restructuring costs........ _ _ _ _ _ 1,145 _ _
----------- ---------- ---------- ----------- ---------- ----------- ---------- ---------
9,100 7,871 7,105 6,790 6,749 8,502 16,604 4,829
----------- ---------- ---------- ----------- ---------- ----------- ---------- ---------
Operating income (loss)...... 3,498 2,558 1,641 230 2,195 (6,124) (7,586) 1,751
Other income................. 55 54 81 (28) 266 135 20 115
----------- ---------- ---------- ----------- ---------- ----------- ---------- ---------
Income (loss) before income
tax provision.............. 3,553 2,612 1,722 202 2,461 (5,989) (7,566) 1,866
Recovery of (provision for)
income taxes............... (1,031) (848) (586) (126) (934) 43 (826) (603)
=========== ========== ========== =========== ========== =========== ========== =========
Net income (loss) for the
period...................... $ 2,522 $ 1,764 $ 1,136 $ 76 $ 1,527 $ (5,946) $(8,392) $ 1,263
=========== ========== ========== =========== ========== =========== ========== =========
26
The following table sets forth, for the periods indicated, certain components of
the selected financial data of the Company as a percentage of total revenue:
Three Months Ended
----------------------------------------------- ------------------------------------------------
1998 1997
------------------------------------------------ -----------------------------------------------
Dec. 31 Sept. 30 June 30 March 31 Dec. 31 Sept. 30 June 30 March 31
---------- ---------- ---------- ----------- ---------- ---------- ---------- ------------
Revenue:
Software and services..... 54.6% 52.6% 61.4% 63.3% 70.1% 54.6% 60.4% 39.5%
Terminals and infrastructure 7.4 8.0 11.0 17.4 16.3 8.1 25.2 10.3
Third party products and 29.7 30.4 17.1 7.4 7.3 31.2 10.8 45.6
services..................
Maintenance and support.... 8.3 9.0 10.5 11.9 6.3 6.1 3.6 4.6
---------- ---------- ---------- ----------- ---------- ---------- ---------- ------------
100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Direct costs................. 54.8 55.6 51.3 50.2 47.3 85.8 51.2 63.5
---------- ---------- ---------- ----------- ---------- ---------- ---------- ------------
Gross profit................. 45.2 44.4 48.7 49.8 52.7 14.2 48.8 36.5
---------- ---------- ---------- ----------- ---------- ---------- ---------- ------------
Operating expenses:
Research and development... 11.3 11.8 11.4 13.7 8.4 11.1 10.0 7.8
Sales and marketing........ 13.7 13.6 18.2 22.3 21.2 20.5 15.7 11.8
General and administrative. 6.9 7.2 8.8 10.7 8.8 10.7 8.9 6.4
Amortization of intangible
assets..................... 0.7 0.9 1.2 1.5 1.4 1.4 1.2 0.8
Acquired research and
development........... _ _ _ _ _ _ 54.1 _
Restructuring costs........ _ _ _ _ _ 6.8 _ _
---------- ---------- ---------- ----------- ---------- ---------- ---------- ------------
32.6 33.5 39.6 48.2 39.8 50.5 89.9 26.8
---------- ---------- ---------- ----------- ---------- ---------- ---------- ------------
Operating income (loss).... 12.6 10.9 9.1 1.6 12.9 (36.3) (41.1) 9.7
Other income............... 0.2 0.2 0.5 (0.2) 1.6 0.6 0.1 0.6
---------- ---------- ---------- ----------- ---------- ---------- ---------- ------------
Income (loss) before income
tax provision........... 12.8 11.1 9.6 1.4 14.5 (35.7) (41.0) 10.3
---------- ---------- ---------- ----------- ---------- ---------- ---------- ------------
Recovery of (provision for)
income taxes............ (3.7) (3.6) (3.3) (0.9) (5.5) 0.3 (4.5) (3.3)
========== ========== ========== =========== ========== ========== ========== ============
Net income (loss) for the
period.................. 9.1% 7.5% 6.3% 0.5% 9.0% (35.4)% (45.5)% 7.0%
========== ========== ========== =========== ========== ========== ========== ============
Liquidity and Capital Resources
The Company finances its operations, acquisitions and capital expenditures
with cash generated from operations, loans, private placements and public
offerings of its securities. At December 31, 1998, the Company had cash and cash
equivalents of $6.1 million and working capital of $20.9 million. On January 29,
1999 the Company issued 575,000 common shares for net consideration of $14.7
million.
Cash provided by (used in) operating activities was $5.9 million, $(13.5)
million and $(1.7) million, respectively for the years ended December 31, 1998,
1997 and 1996. The $5.9 million of cash provided by operating activities in 1998
comprised $5.5 million net income, non-cash charges of $2.4 million and $(2.0)
million of changes to non-cash working capital items. The changes to working
capital items include a $3.5 million increase in trade receivables, a $3.2
million increase in unbilled receivables, a $2.2 million increase in prepaid
expenses and a $2.4 million decrease in accrued liabilities offset by a $3.8
million increase in trade payables, a $578,000 increase in taxes payable, a $4.4
million increase in deferred revenue and a $800,000 decrease in deferred income
taxes. Unbilled accounts receivable arise where the Company has earned revenue
on a project though has yet to complete specific billing milestones under the
terms of the applicable contract. Deferred revenue arises where the Company has
achieved a billing milestone under a customer contract but has yet to recognize
all of the revenue billed due to the percentage of completion under the
contract. The increase in accounts payable of $3.8 million is due in part to
payments for third party products and services accrued at December 31, 1998. The
$2.2 million increase in prepaid expenses is primarily attributable to expenses
incurred with respect to the Richmond facility which are recoverable from the
landlord and are expected to be recovered during the first half of 1999.
Cash provided by (used in) financing activities was $2.9 million, $(2.2)
million and $22.0 million, respectively during the years ended December 31,
1998, 1997 and 1996. The cash provided by financing activities in 1998 comprised
$1.6 million in capital leases and $1.5 million from the issue of common shares
partially offset by a $134,000 repayment of long-term debt. During 1998, the
Company financed a major portion of its capital expenditure program through
capital leases. In addition, the equipment lease to a customer was financed by a
capital lease. Common shares were issued on the conversion of outstanding share
purchase warrants ($731,000), exercise of stock options ($449,000) and purchases
by employees under the Company's share purchase plan ($303,000).
27
Cash used in investing activities was $2.8 million, $4.5 million, $2.0
million, respectively for the years ended December 31, 1998, 1997 and 1996.
Total investing activity in 1998 consisted of $2.8 million for the purchase of
capital equipment, including computer hardware and software for use in research
and development activities and to support the growth of the Company's corporate
information systems.
Existing sources of liquidity at December 31, 1998 include $6.1 million of
cash and cash equivalents and funds available under the Company's operating line
of credit. During the year ended December 31, 1998, the Company increased its
borrowing capacity under this line of credit to a limit of $8 million. At
December 31, 1998, (pound)200,000 of such amount was committed to securing the
Company's obligations under an outstanding letter of credit. The (pound)200,000
letter of credit is provided as security for any overdraft position of MDSI UK.
Under the terms of the agreement, borrowings and letters of credit under the
line are limited to 60% to 90% of eligible accounts receivable. Borrowings
accrue interest at the bank's prime rate plus 0.5%. From time to time, the
Company draws on the line of credit for general working capital requirements
related to its operations.
The Company believes that future cash flows from operations, the January
29, 1999 financing and its borrowing capacity under the operating line of credit
will provide sufficient funds to meet cash requirements for at least the next
twelve months. Commensurate with its past and expected future growth, the
Company may increase, from time to time, its borrowing facility under its
operating line of credit to support its operations. The Company has no material
additional commitments other than operating leases. Future growth or other
investing activities may require the Company to obtain additional equity or debt
financing, which may or may not be available on attractive terms, or at all, or
may be dilutive to current or future shareholders.
Derivative Financial Instruments
It is the policy of the Company not to enter into derivative financial
instruments for trading purposes. The Company does enter into foreign currency
forward exchange contracts in the ordinary course of business to protect itself
from adverse currency rate fluctuations on certain firm foreign currency
transactions. The Company may also utilize foreign currency exchange contracts
to hedge net assets on liabilities denominated in foreign currencies. These
contracts are generally for eighteen months or less. Gains or losses relating to
hedging firm commitments are deferred and included in the measurement of the
foreign currency transaction subject to the hedge.
The Company's foreign currency forward contracts are executed with credit
worthy banks and are denominated in currencies of major industrial countries. No
foreign currency forward contracts were entered into during 1998.
Year 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four digits to define the applicable year. Computer
equipment, software and other devices with embedded technology that are
time-sensitive may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in system failures or miscalculations causing
disruption of operations, including, among other things, a temporary inability
to manufacture products, acquire or ship products, process transactions, send
invoices, or engage in other normal business activities. The inability of
business processes to function correctly in 2000 could have serious adverse
effects on companies and entities throughout the world.
In 1997 the Company established a team of professionals within the company
to plan and implement its year 2000 compliance initiative. The Company has
developed and is implementing a Company-wide Year 2000 plan (the "Plan") to
ensure that its computer equipment and software with date sensitive embedded
technology will be able to distinguish the year 1900 and the 2000 and will
function properly with respect to all dates (referred to as "Year 2000
Compliant"). The Company presently believes that its planned modifications or
replacements of certain existing computer equipment and software will be
completed on a timely basis so as to minimize potential Year 2000-related
disruptions or malfunctions of its computer equipment and software.
The Company's Plan focuses on internal systems, including personal
computing, facilities and business systems, and third-party considerations,
including products and suppliers. The tasks common to each of these areas are
(i) the identification and assessment of Year 2000 issues, (ii) assessment of
remediation required, (iii) prioritization of risk, (iv) remediation and testing
and (v) contingency planning.
28
Internal Systems
The Company's compliance team has evaluated significant internal personal
computing and business systems that are critical to the ongoing operation of the
Company and has identified the computer hardware and software upgrades and
replacements necessary to make such systems Year 2000 compliant. Such upgrades
and replacements are expected to be completed by the end of the second quarter
of 1999. The Company is reviewing its present financial systems and its
long-term business system requirements. Any decision to purchase and implement
new systems will include the requirement that such systems be Year 2000
compliant.
Customers
The Company is a software developer and has been testing its software
internally and in conjunction with customers for Year 2000 readiness. The
Company believes that all its current products are Year 2000 compliant and
believes that it has identified and informed all its customers of the steps that
are required to make software previously purchased by such customers Year 2000
compliant. The Company's software runs on a variety of third party computers and
operating systems. While the Company is not obligated to ensure that third party
suppliers are Year 2000 compliant, the Company has suggested to customers that
they utililize available Year 2000 remedies. The Company is assisting its
customers with Year 2000 validation efforts including synchronization of Year
2000 upgrades and testing, to eliminate implementation of non-compatible
solutions by customers.
There is also the possibility that in the coming year corporations in
dealing with their own Year 2000 issues will defer some software purchases
except for the most urgent and those relevant to solving their own Year 2000
concerns. To the extent that this occurs, it could materially adversely affect
the Company's results of operations.
Suppliers
The Company has identified its third party software and, in conjunction
with its vendors, has considered possible remediation requirements. After review
and consultation, the Company has determined that no updates are required to
make existing software Year 2000 compliant. Business operations will also be
dependent on the Year 2000 readiness of infrastructure suppliers such as
banking, communications, transportation and other services. In this environment,
there will likely be instances of failure that could cause disruptions in
business processes. The likelihood and effects of such failures in
infrastructure systems and the supply chain cannot be estimated.
Costs
The total cost of the Company's Year 2000 Plan is not material to the
Company's financial condition. The estimated total cost of the Plan is expected
to be approximately $400,000, and is being funded through operating cash flow.
As at December 31, 1998, the Company had incurred approximately $225,000 in
costs related to its Year 2000 identification, assessment, remediation and
testing efforts. The major portion of the remaining amount of the estimate is
expected to have been incurred by the end of the second quarter of 1999 when the
Company's Year 2000 compliance efforts are expected to be completed, with the
balance expended thereafter to monitor the compliance process. None of the
Company's other projects have been delayed or deferred as a result of the
implementation of the Year 2000 Compliance Plan.
Risks
To date, the Company has not incurred, and does not expect to incur,
material costs to review and remedy Year 2000 compliance problems. Although the
Company believes that its products are Year 2000 compliant, failure to provide
Year 2000 compliant solutions to its customers or to receive such business
solutions from its suppliers could have a material adverse effect on the
Company's business, financial condition, operating results and cash flows.
Furthermore, the Company may incur additional expense if its products are used
by customers on third-party hardware and operating systems that are not Year
2000 compliant, which could result in a material adverse effect on the Company's
business, operating results, financial condition, and cash flows. There can be
no assurance that the systems or products of other entities, including the
Company's suppliers on which the Company relies, disruptions in the economy
generally resulting from Year 2000, issues, and disruptions caused by customers
deferring their purchase decisions or implementation plans due to their own
internal Year 2000 remediation activities, will not have a material adverse
effect on the Company.
The preceding "Year 2000" discussion contains various forward-looking
statements which represent the Company's beliefs or expectations regarding
future events. These forward-looking statements include the Company's
expectations and beliefs as to the most likely scenarios or occurrences. All
forward-looking statements, however, involve a number of risks which and
uncertainties that could cause actual results to differ from projected results.
29
Contingency Plans
As part of its continuing assessment of its Year 2000 compliance
requirements, the Company has developed contingency plans to deal with what it
feels is its worst case scenario. This contingency plan revolves around a staff
team of Information Technology professionals that will be available during the
Year 2000 date change period and the facilities to support that staff.
Item 7A: Quantitative and Qualitative Disclosure About Market Risk
The Company's primary market risk is foreign currency exchange rates. The
Company has established procedures to manage sensitivity to foreign currency
exchange rate market risk. These procedures include the monitoring of the
Company's net exposure to each foreign currency and the use of foreign currency
forward contracts to hedge firm exposures to currencies other than the Canadian
and United States dollars and the Great Britain pound. The Company has
operations in the United States and Great Britain in addition to its Canadian
operations and did not hedge these exposures in 1998. However, the Company may
from time-to-time hedge any net exposure to the United States dollar and the
Great Britain pound.
As of December 31, 1998, the potential reduction in future earnings from a
hypothetical instantaneous 10% change in quoted foreign currency exchange rates
applied to the foreign currency sensitive contracts and assets would be
approximately $3.0 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.
Subsequent to December 31, 1998, the Company has entered into foreign
currency forward contracts in respect of net exposures under customer contracts
to the Belgian Franc and Danish Kroner. Effective January 1, 1999, the Belgian
Franc is tied to the Euro, the new European Union common currency. The effect of
the subsequent transactions is to reduce the potential reduction in future
earnings from a hypothetical instantaneous 10% change in quoted foreign currency
exchange rates to $2.2 million.
The Company does not have any material exposure to interest or commodity
risks. The Company is exposed to economic and political changes in international
markets where the Company competes such as inflation rates, recession, foreign
ownership restrictions and other external factors over which the Company has no
control; domestic and foreign government spending, budgetary and trade policies.
Item 8: Financial Statements and Supplementary Data
Reference is made to the financial statements listed under the heading
"(a)(1) Financial Statements" of Item 14 herein, which financial statements are
incorporated herein by reference in response to this Item 8.
Item 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
30
PART III
Item 10: Directors and Officers of the Registrant
The following table sets forth certain information concerning the
Company's executive officers, officers and directors as of December 31, 1998.
Name Age Position
- - ----------------------------------------- --- -----------------------------------------------------------------------
Executive Officers
- - -----------------------------------------
Erik Dysthe.............................. 61 Chairman of the Board and Director
Kenneth R. Miller (1).................... 43 Chief Executive Officer and Director
Robert G. Cruickshank (2) ............... 48 President and Chief Operating Officer
Verne D. Pecho........................... 55 Vice President - Finance and Administration and Chief Financial Officer
Officers
- - -----------------------------------------
Robert Campbell.......................... 45 Vice President - Telecom/Cable
James R. Dalbey.......................... 47 Senior Vice President - International
Brent W. James........................... 41 Vice President - Marketing and Business Development
M. Greg Beniston......................... 41 Vice President - Legal and Corporate Secretary
Glenn Y. Kumoi........................... 36 General Counsel
Geoffrey Engerman........................ 44 Vice President - US Operations
Tommy Lee................................ 35 Vice President - Product Development
Douglas Engerman......................... 42 Vice President - Utilities
Simon Backer............................. 43 Vice President - Transportation & Customer Engineering
Ronald Toffolo .......................... 47 Vice President - Human Resources
Directors
- - -----------------------------------------
Gerald F. Chew (1)(3)(4)................. 38 Director
Bruno Ducharme (3)(4).................... 40 Director
Robert C. Harris, Jr. (1)(3)............. 52 Director
John T. McLennan (3) .................... 53 Director
Terrence P. McGarty (3)(4)............... 55 Director
Marc Rochefort (3)....................... 51 Director
- - -----------------------------------------
(1) Member of Compensation Committee.
(2) Appointed February 1, 1999
(3) Member of Corporate Governance and Nominating Committee.
(4) Member of Audit Committee.
Erik Dysthe has served as Chairman of the Company since its inception. He
was also Chief Executive Officer of the Company from its inception to November
1998 and President from its inception until February 1996. From July 1989 to
March 1992, Mr. Dysthe was Vice President of Marketing and Sales at Orcatron
Systems. Since September 1997, Mr. Dysthe has also been Managing Director - U.K.
Operations on an interim basis.
Kenneth R. Miller has served as the Company's Chief Executive Officer since
December 1998. From 1995 to 1998, Mr. Miller held various senior management
positions within the Company, including President, Vice President - Finance,
Chief Financial Officer and Corporate Secretary. Since May 1995, Mr. Miller has
served as a director of Avcan Global Systems Inc. From 1987 to the present, Mr.
Miller has served as President and Chief Executive Officer of Southview Equities
Ltd., a private investment company of which Mr. Miller is a controlling
shareholder.
Robert G. Cruickshank was appointed the Company's President and Chief
Operating Officer on February 1, 1999. Mr. Cruickshank has over 28 years
experience in the telecommunications industry with BC Telephone Company, where
he held a number of senior management positions, including Senior Vice
President, Sales and Customer Service from 1997 to 1999 and President of BC Tel
Mobility from 1992 to 1997.
Verne D. Pecho has served as Vice President - Finance and Administration
and Chief Financial Officer of the Company since June 1996. From June 1995 to
June 1996, Mr. Pecho was an independent consultant. From September 1992 to June
1995, Mr. Pecho was Executive Vice President and Chief Financial Officer of
Versacold Corporation.
Robert Campbell has served as Vice President - Telecom/Cable of the Company
since February 1996. From 1991 to 1996, Mr. Campbell was a Regional Sales
Manager of McDonald, Dettwiler and Associates Ltd.
31
James R. Dalbey has served as Senior Vice President - International from
November 1998. From inception of the Company to October 1998, Mr. Dalbey held
various senior management positions within the Company, including Senior Vice
President - Utilties & International and Vice President - Sales, Utilities. From
October 1992 to December 1995, Mr. Dalbey was Vice President - Sales for MDSI
Canada. From 1990 to 1992, Mr. Dalbey was President of Epic Security Systems.
Brent W. James has served as Vice President - Marketing and Business
Development of the Company since January 1996. From February 1994 to December
1995, Mr. James was Vice President and General Manager of MDSI USA. From March
1993 to January 1994, Mr. James was Vice President - Marketing and Business
Development of MDSI Canada. From February 1991 to March 1993, Mr. James was the
Vice President of TIR Systems, Inc.
M. Greg Beniston has served as Vice President - Legal and Corporate
Secretary of the Company since March 1996. From 1993 to the present, Mr.
Beniston has also served as Corporate Counsel and Secretary of Xillix
Technologies Corp. From 1988 to 1993, Mr. Beniston was a lawyer at the firm of
Russell & DuMoulin, Barristers and Solicitors in Vancouver, British Columbia.
Glenn Y. Kumoi has served as General Counsel since December 1998. From
April 1997 to November 1998 he was President of MDSI Software SRL. From October
1996 to March 1997, Mr. Kumoi served as Vice President - Customer Contracts of
the Company. From 1994 to 1996, Mr. Kumoi was a lawyer at the firm of Wedge and
Company, Computer Law in Vancouver, British Columbia. From 1991 to 1994, Mr.
Kumoi was a lawyer at the firm of Richards, Buell, Sutton, Barristers and
Solicitors in Vancouver, British Columbia.
Geoffrey Engerman has served as Vice President - US Operations since July
1997. From 1994 to July 1997, was President and Chief Technology Officer of
Alliance. From 1983 to 1994, Mr. Engerman served as Vice President, Chief
Operating Officer of Alliance.
Simon Backer has served as Vice President - Transportation and Customer
Engineering since July 1998. From August 1997 to June 1998, 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.
Tommy Lee has served as Vice President - Product Development since 1997.
From inception of the Company to 1997, Mr. Lee served in various technical
positions, including Director - Product Development and Software Development
Manager. Between 1998 and 1995, Mr. Lee was a member of the scientific and
engineering staff at McDonald, Dettwiler and Associates Ltd.
Douglas Engerman has served as Vice President - Utilities since November
1998. From July 1997 to October 1998 he was Vice President - Sales of MDSI USA.
From 1989 to 1997, he was Executive Vice President at Alliance and was
responsible for Sales and Marketing.
Ronald Toffolo has served as Vice President - Human Resources since 1999.
Between 1997 and 1998 he was Director of Human Resources. From 1985 to 1997, he
held various human resources management positions at Canadian Airlines
International Ltd.
Gerald F. Chew has served as a director of the Company since December 1995.
Mr.Chew is currently Executive Vice President of Ancora Capital & Management
Group, LLC. From August 1996 to February 1997, he was Chief Operating Officer of
SpotMagic, Inc. From November 1992 to July 1996, Mr. Chew served as Executive
Director of Strategy Development for U S WEST, Inc.
Bruno Ducharme has served as a director of the Company since May 1996. Mr.
Ducharme is currently President and Chief Executive Officer of Telesystem
International Wireless Services Inc. and Executive Vice-President of Telesystem
Ltd. Mr. Ducharme has held various senior management positions within the
Telesystem group of companies since its inception in 1991.
Robert C. Harris, Jr. has served as a director of the Company since
December 1995. Mr. Harris is currently Senior Managing Director of Bear Stearns
& Co., Inc. Mr. Harris was a co-founder and Managing Director of Unterberg
Harris from May 1989 until November, 1997. Mr. Harris also serves as a director
of N2K, Inc. and a number of private companies.
John T. McLennan has served as a director of the Company since February
1998. Mr. McLennan was the President and Chief Executive Officer of Bell Canada
from 1994 to 1997 and is currently the President of Jenmark Consulting Inc. Mr.
McLennan also serves as a director of Hummingbird Communications Ltd. and
Architel Systems Corporation.
32
Terrence P. McGarty has served as a director of the Company since December
1995. Mr. McGarty is currently President and CEO of Zepher Telecommunications
Inc. He also served as Chairman and Chief Executive Officer of The Telmarc
Group, Inc. from 1992 to 1998.
Marc Rochefort has served as a director of the Company since June 1996. Mr.
Rochefort has been a partner at the law firm of Desjardins Ducharme Stein Monast
in Montreal, Quebec since May 1993. From March 1989 to April 1993, Mr. Rochefort
was a partner at the law firm of Clark Lord Rochefort Fortier. Mr. Rochefort
also serves as a director of Mont Saint-Sauveur International Inc., as well as
numerous other private companies.
Board of Directors
Each member of the Board of Directors is elected annually and holds office
until the next annual meeting of shareholders or until his successor has been
elected or appointed, unless his office is earlier vacated in accordance with
the Bylaws of the Company or the provisions of the CBCA. Officers serve at the
discretion of the Board and are appointed annually. The Company's Board of
Directors currently has three committees, the Audit Committee, the Corporate
Governance and Nominating Committee and the Compensation Committee.
Committees of the Board of Directors
The Audit Committee recommends independent accountants to the Company to
audit the Company's financial statements, discusses the scope and results of the
audit with the independent accountants, reviews the Company's interim and
year-end operating results with the Company's executive officers and the
Company's independent accountants, considers the adequacy of the internal
accounting controls, considers the audit procedures of the Company and reviews
the non-audit services to be performed by the independent accountants. The
members of the Audit Committee are Terrence P. McGarty, Gerald F. Chew and Bruno
Ducharme.
The Corporate Governance and Nominating Committee monitors and assesses the
corporate governance system in place in the Company, develops corporate
disclosure and insider trading policies, and monitors the effectiveness of the
Board of Directors, its size and composition, its committees and the individual
performance of its directors. The Corporate Governance and Nominating Committee
also identifies and recommends potential appointees to the Board of Directors,
reviews the adequacy of directors and officers third-party liability coverage,
ensures that annual strategic planning process and review is carried out and
approves appropriate orientation and education programs for new directors. The
members of the Corporate Governance and Nominating Committee are Marc Rochefort,
Gerald F. Chew, Robert C. Harris, Jr., John T. McLennan, Terrence P. McGarty and
Bruno Ducharme.
The Compensation Committee reviews and recommends the compensation
arrangements for the executive officers of the Company and administers the
Company's stock option and stock purchase plans. The members of the Compensation
Committee are Robert C. Harris, Jr., Gerald F. Chew and Kenneth R. Miller.
Section 16 (a) Beneficial Ownership Reporting Compliance
The Company is a foreign private issuer and, as such, its insiders are not
required to file reports under Section 16(a).
Item 11: Executive Compensation
Report of the Compensation Committee
The Company's compensation program for all executive officers is
administered by the Compensation Committee of the Board of Directors which is
composed of two non-employee directors and one-employee director. The
compensation of the Chairman, Chief Executive Officer (CEO) and the President
and Chief Operating Officer (COO) is determined by Compensation Committee. The
Chairman and the CEO had variable components to their compensation in the past
financial year based on certain performance criteria. With respect to
compensation for executive officers other than the Chairman, the CEO or the
President and COO, the Board of Directors reviews a compensation proposal
prepared by the CEO and the President and COO, and approved by the Compensation
Committee.
33
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 and Executive Officers
There are currently 15 executive officers of the Company. 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 of the Company
or of a subsidiary of the Company, and any other person who performed a
policy-making function in respect of the Company.
Employment Agreements
The Company has entered into employment agreements with each of its Named
Executive Officers (as hereinafter defined), providing for base salaries and
incentive plan bonuses as approved by the Board of Directors of the Company,
medical and dental benefits and reimbursement for certain expenses approved by
the Company.
Termination Arrangements
The Company may terminate any of its officers for cause without any payment
of any kind of compensation, except for such compensation earned to the date of
such termination. The Company may terminate any of its officers without cause by
giving notice and upon payment of all salary and bonuses owing up to the date of
termination and a lump sum termination payment equal to their base annual
salary. Any officer may terminate their employment with the Company at any time
by giving four weeks written notice to the Board of Directors of the Company. In
the event of a takeover or change of control of the Company, any officer of the
Company may elect to terminate their employment and receive, in addition to
compensation earned to the date of his termination, a lump sum payment equal to
their annual base salary. If an officer is terminated by the Company within two
years after such takeover or change in control, such officer is also entitled to
compensation earned to the date of termination and a lump-sum payment equal to
his annual base salary.
Pension Arrangements
The Company and its subsidiaries do not have any pension arrangements in
place for the Named Executive Officers or any other officers.
34
Summary Compensation Table
The following table sets forth all compensation paid in respect of the
individuals who were at any time during the 1998, 1997 and 1996 financial years
of the Company, Chief Executive Officers of the Company or its subsidiaries and
the four most highly compensated executive officers among the Company and its
subsidiaries (collectively "Named Executive Officers"):
- - --------------------------------------------------- --------------- ----------------------------------------- ---------------------
Annual Compensation (in $Cdn) Long Term
----------------------------------------- Compensation Awards
--------------------
Other Annual
Years Ending Salary Bonus Compensation Securities Under
Name and Principal Position December 31 ($) ($) ($) Options (#)
- - --------------------------------------------------- --------------- -------------- ------------- -------------- --------------------
Kenneth R. Miller 1998 180,632 Nil N/A 150,000
Chief Executive Officer 1997 115,436 Nil N/A 7,500
1996 106,242 Nil N/A 65,000
- - --------------------------------------------------- --------------- -------------- ------------- -------------- --------------------
Erik Dysthe 1998 178,959 Nil N/A 50,000
Chairman of the Board 1997 115,008 4,370 N/A 7,500
1996 114,036 Nil N/A 10,000
- - --------------------------------------------------- --------------- -------------- ------------- -------------- --------------------
Robert Campbell(1) 1998 135,000 106,532 N/A 35,000
Vice President, Telecommunications/Cable 1997 135,000 94,162 N/A 5,000
1996 67,286 130,000 N/A 25,000
- - --------------------------------------------------- --------------- -------------- ------------- -------------- --------------------
Glenn Y. Kumoi(2) 1998 258,359 Nil N/A 5,000
General Counsel 1997 192,686 Nil N/A 4,000
1996 28,752 Nil N/A 7,500
- - --------------------------------------------------- --------------- -------------- ------------- -------------- --------------------
Douglas Engerman(3) 1998 201,029 186,882(4) N/A 30,000
Vice President, Utilities 1997 94,065 208,395(5) N/A Nil
- - --------------------------------------------------- --------------- -------------- ------------- -------------- --------------------
Notes:
(1) Mr. Campbell joined the Company in February 1996.
(2) Mr. Kumoi joined the Company in October 1996.
(3) Mr. Engerman joined the Company in July 1997.
(4)(5) Non-recurring bonus paid to Mr. Engerman in connection with the
Company's acquisition of Alliance Systems, Incorporated.
Stock Options
The following table sets forth stock options granted by the Company during the
financial year ended December 31, 1998 to any of the Named Executive Officers:
Option Grants During the Financial Year Ended December 31, 1998\
- - ------------------------------------------- ----------------- ---------------- ---------------- ------------------- ----------------
Market Value of
% of Total Securities
Options Granted Underlying
Securities to employees Exercise of Options on the
Under Options in Financial Base Price Date of Grant
Name Granted (#) Year ($/Security) ($/Security) Expiration Date
- - ------------------------------------------- ----------------- ---------------- ---------------- ------------------- ----------------
Kenneth R. Miller 75,000 9.6% $15.50 $15.50 September 16,
Chief Executive Officer 75,000 9.6% $20.00 $20.00 2003
October 27, 2003
- - ------------------------------------------- ----------------- ---------------- ---------------- ------------------- ----------------
Erik Dysthe 50,000 6.4% $15.50 $15.50 September 16,
Chairman of the Board 2003
- - ------------------------------------------- ----------------- ---------------- ---------------- ------------------- ----------------
Robert Campbell 35,000 4.5% $20.00 $20.00 February 28,
Vice President, Telecommunications/Cable 2003
- - ------------------------------------------- ----------------- ---------------- ---------------- ------------------- ----------------
Glenn Y. Kumoi 5,000 0.6% $15.50 $15.50 September 16,
General Counsel 2003
- - ------------------------------------------- ----------------- ---------------- ---------------- ------------------- ----------------
Douglas Engerman 30,000 3.9% $15.50 $15.50 September 16,
Vice President, Utilities 2003
- - ------------------------------------------- ----------------- ---------------- ---------------- ------------------- ----------------
35
The following table sets forth details of each exercise of stock options during
the financial year ended December 31, 1998 by any of the Named Executive
Officers, and the financial year end value of unexercised options on an
aggregate basis:
Aggregated Options Exercised During the Financial Year Ended December 31, 1998
And Financial Year-End Option Values
- - ---------------------------------------------- --------------- ---------------- -------------------- -------------------------------
Name Securities Aggregate Unexercised Options Value of Unexercised in the
Acquired on Value Realized At FY-End (#) Money-Options at FY-End
Exercise (#) ($) Exercisable/ ($) Exercisable/
Unexercisable Unexercisable (1)
- - ---------------------------------------------- --------------- ---------------- -------------------- -------------------------------
Kenneth R. Miller Nil Nil 98,333 $1,220,266 (exercisable)
Chief Executive Officer (exercisable) $1,161,284 (unexercisable)
124,167(unexercisable)
- - ---------------------------------------------- --------------- ---------------- -------------------- -------------------------------
Erik Dysthe Nil Nil 49,530 $604,460 (exercisable)
Chairman of the Board (exercisable) $361,371 (unexercisable)
30,002
(unexercisable)
- - ---------------------------------------------- --------------- ---------------- -------------------- -------------------------------
Robert Campbell Nil Nil 28,194 $447,163 (exercisable)
Vice President, Telecommunications/Cable (exercisable) $273,337 (unexercisable)
36,806
(unexercisable)
- - ---------------------------------------------- --------------- ---------------- -------------------- -------------------------------
Glenn Y. Kumoi Nil Nil 7,624 (exercisable) $75,597 (exercisable)
General Counsel 8,876 $91,653 (unexercisable)
(unexercisable)
- - ---------------------------------------------- --------------- ---------------- -------------------- -------------------------------
Douglas Engerman Nil Nil 0 (exercisable) $0 (exercisable)
Vice President, Utilities 30,000 $360,000 (unexercisable)
(unexercisable)
- - ---------------------------------------------- --------------- ---------------- -------------------- -------------------------------
(1) Based on TSE closing price of $27.50 on December 31, 1998.
Compensation of Directors
In November 1998 the Company commenced paying its outside directors a
meeting stipend of US$2,500 for each board meeting they attended in person and
US$1,000 for certain committee meetings. During the financial year ended
December 31, 1998, the directors of the Company received aggregate cash
compensation of $24,134 for their services. The Directors were also reimbursed
for actual expenses reasonably incurred in connection with the performance of
their duties as Directors.
Directors were also eligible to receive stock options issued pursuant to
the Company's Stock Option Plan and in accordance with rules and policies of The
Toronto Stock Exchange. On February 26, 1998, one Director was granted 30,000
stock options vesting over three years at an exercise price of $20.00 and five
Directors were each granted 3,000 stock options with immediate vesting at an
exercise price of $20.00. On September 17, 1998 three Directors were each
granted 3,000 stock options vesting over two years at an exercise price of
$15.50. These stock options are subject to the grantee being a Director on the
date of vesting.
36
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,
1998, by (i) each person known by the Company to be the beneficial owner of more
than 5% of the outstanding Common Shares, (ii) each director of the Company,
(iii) each Named Executive Officer, and (iv) all directors and officers as a
group. Except as otherwise indicated, the Company believes that the beneficial
owners of the Common Shares listed below, based on information furnished by such
owners, have sole investment and voting power with respect to such shares,
subject to community property laws where applicable.
Number of Shares % of total Shares
Directors, Named Executive Officers and 5% Shareholders(1) Beneficially Owned
Owned(2)
- - ------------------------------------------------------------------ --------------------- ---------------------
Erik Dysthe(3)............................................ 531,526 7.6
Kenneth R. Miller(4)...................................... 381,164 5.5
Robert Campbell(5)........................................ 40,983 *
Glenn Y. Kumoi(6)......................................... 8,263 *
Douglas Engerman.......................................... 43,262 *
Gerald F. Chew(7)......................................... 30,032 *
Bruno Ducharme(8)......................................... 18,000 *
Robert C. Harris, Jr. (9)................................. 51,413 *
Terrence P. McGarty(10).................................... 19,170 *
Marc Rochefort(11)......................................... 11,755 *
John T. McLennan(12).......................................... 10,000 *
All Directors, Named Executive Officers and Officers as -------------
a group (20 persons) (13)............................... 1,901,313
- - ------------------
* Represents beneficial ownership of less than 1% of the Common Shares.
(1) Unless otherwise indicated, the address of each beneficial owner is that of
the Company.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, based on factors including voting and
investment power with respect to shares. Common Shares subject to options
currently exercisable, or exercisable within 60 days after December 31,
1997, are deemed outstanding for computing the percentage ownership of the
person holding such options, but are not deemed outstanding for computing
the percentage ownership for any other person. Applicable percentage
ownership based on aggregate Common Shares outstanding as of December 31,
1996.
(3) Includes 389,498 Common Shares held by Erik Dysthe Holdings Co. and options
to purchase 52,864 Common Shares exercisable within 60 days after December
31, 1998 held by Mr. Dysthe individually.
(4) Includes options to purchase 106,110 Common Shares exercisable within 60
days after December 31, 1998.
(5) Includes options to purchase 30,805 Common Shares exercisable within 60
days after December 31, 1998.
(6) Represents options to purchase 8,263 Common Shares exercisable within 60
days after December 31, 1998.
(7) Represents options to purchase 30,032 Common Shares exercisable within 60
days of December 31, 1998.
(8) Represents options to purchase 18,000 Common Shares exercisable within 60
days after December 31, 1998.
(9) Includes options to purchase 33,000 Common Shares exercisable within 60
days after December 31, 1998.
(10) Includes options to purchase 1,170 Common Shares held by The Telmarc Group
Inc. and options to purchase 10,375 Common Shares exercisable within 60
days after December 31, 1998.
(11) Includes options to purchase 10,375 Common Shares exercisable within 60
days after December 31, 1998.
(12) Represents options to purchase 10,000 Common Shares exercisable within 60
days after December 31, 1998.
(13) Includes options to purchase an aggregate of 440,373 Common Shares
exercisable within 60 days after December 31, 1998
Item 13: Certain Relationships and Related Transactions
In April 1996, the Company entered into employment agreements with Erik
Dysthe, the Company's Chairman, and Kenneth R. Miller, the Company's Chief
Executive Officer. See Item 11 - "Executive Compensation".
The Company has granted options to certain of its directors and executive
officers. See Item 11 - "Executive Compensation".
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions, including loans, between
the Company and its officers, directors, principal shareholders and their
affiliates will be approved by a majority of the Board of Directors, including a
majority of the independent and disinterested directors, and will continue to be
on terms no less favorable to the Company than could be obtained from
unaffiliated third parties.
37
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
The following financial statements of the Registrant and the Report of
Independent Auditors thereon are included herewith in response to Item 8 above.
(a) 1. Consolidated Financial Statements
Report of Independent Auditors
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
2. Consolidated financial statement schedules and Report of Independent
Auditors are included as follows:
Schedule II: Valuation and Qualifying Accounts
3. Exhibits:
The following Exhibits are filed as part of this report:
Exhibit
Number Exhibit Description
- - -------- -------------------
t2.1 Agreement and Plan of Merger dated April 17, 1997 among the
Company, MDSI Acquisition Corp., Alliance, Geoffrey Engerman and
Doug Engerman (previously filed as Exhibit 2.2)
*3.1 Articles of Incorporation of the Company
*3.2 Articles of Amendments of the Company
*3.3 By-laws of the Company
*4.1 Form of Common Share Certificate
tt*10.1 1996 Stock Option Plan
tt10.2 1997 Stock Option Plan
tt10.3 1998 Stock Option Plan
tt*10.4 Stock Purchase Plan (previously filed as Exhibit 10.2)
tt10.5 1998 Stock Purchase Plan
*10.6 Form of Indemnification Agreement between the Company and certain
officers of the Company (previously filed as Exhibit 10.4)
*10.7 Promissory Note dated January 2, 1996 granted by the Company and
TelSoft in favor of Killean Consulting Inc. (previously filed as
Exhibit 10.8)
*10.8 Promissory Note dated January 2, 1996 granted by the Company and
TelSoft in favor of 382904 B.C. Ltd. (previously filed as Exhibit
10.9)
tt*10.9 Employment Agreement dated April 1, 1996 between the Company and
Erik Dysthe (previously filed as Exhibit 10.18)
tt*10.10 Employment Agreement dated July 1, 1995 between the Company and
Kenneth R. Miller (previously filed as Exhibit 10.19)
10.11 Lease dated September 25, 1997 between Sun Life Assurance Company
of Canada and the Company
*10.12 Lease dated June 2, 1989 between Corporate Woods Associates and
Service Systems International Limited and subsequent amendments
(previously filed as Exhibit 10.23)
*10.13 Lease dated April 8, 1993 between Cambridge Scanning Company
Limited and Spectronics Micro Systems Limited (previously filed
as Exhibit 10.25)
11.1 Computation of Earnings Per Common Share.
*21.1 List of the Company's Subsidiaries.
23.1 Consent of Deloitte & Touche LLP.
- - ---------------------
* 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.
tt This document has been identified as a management contract or compensatory
plan or arrangement.
t Previously filed as an exhibit to Registrant's Registration Statement on
Form F-4
(b) Reports on Form 8-K
None.
38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, MDSI Mobile Data Solutions Inc. has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
March 31,1999.
MDSI MOBILE DATA SOLUTIONS INC.
By: /s/ KENNETH R. MILLER
----------------------------------------
Kenneth R. Miller, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report to be signed by the following persons on behalf of MDSI Mobile Data
Solutions Inc. in the capacities and on the dates indicated.
Signature Title Date
/s/ KENNETH R. MILLER
- - ------------------------------------- Chief Executive Officer and Director (Principal March 31, 1999
Kenneth R. Miller Executive Officer)
/s/ VERNE D. PECHO
- - ------------------------------------- Vice President - Finance and Administration and Chief
Verne D. Pecho Financial Officer (Principal Financial and Accounting March 31, 1999
Officer)
/s/ ERIK DYSTHE
- - ------------------------------------- Chairman of the Board and Director March 31, 1999
Erik Dysthe
/s/ GERALD F. CHEW
- - ------------------------------------- Director
Gerald F. Chew (Authorized U.S. Representative) March 31, 1999
/s/ BRUNO DUCHARME
- - ------------------------------------- Director March 31, 1999
Bruno Ducharme
/s/ ROBERT C. HARRIS, JR.
- - ------------------------------------- Director March 31, 1999
Robert C. Harris, Jr.
/s/ TERRENCE P. MCGARTY
- - ------------------------------------- Director March 31, 1999
Terrence P. McGarty
/s/ MARC ROCHEFORT
- - ------------------------------------- Director March 31, 1999
Marc Rochefort
/s/ JOHN T. MCLENNAN
- - ------------------------------------- Director March 31, 1999
John T. McLennan
39
MDSI MOBILE DATA SOLUTIONS INC.
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Auditors............................................. F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statements of Changes in Stockholders' Equity................. F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to the Consolidated Financial Statements............................. F-8
F-1
Report of Independent Auditors
To the Board of Directors and Shareholders of
MDSI Mobile Data Solutions Inc.
We have audited the accompanying consolidated balance sheets of MDSI Mobile Data
Solutions Inc. as at December 31, 1998 and 1997 and the related consolidated
statements of operations, stockholders' equity and cash flows for the each of
the years in the three year period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 1998
and 1997 and the results of its operations and cash flows for each of the years
in the three year period ended December 31, 1998 in conformity with accounting
principles generally accepted in the United States.
/s/ DELOITTE & TOUCHE LLP
Chartered Accountants
Vancouver, British Columbia
February 25, 1999
F-2
MDSI MOBILE DATA SOLUTIONS INC.
Consolidated Balance Sheets
(Expressed in Canadian dollars)
At December 31,
------------------------------------------------
1998 1997
---------------------- ---------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 6,136,711 $ 110,117
Accounts receivable, net
Trade 18,776,551 15,256,202
Unbilled 12,778,398 9,604,060
Work in progress 1,377,228 1,451,662
Prepaid expenses 3,863,738 1,647,748
Deferred income taxes (Note 8) 1,220,350 2,096,544
Current portion of lease receivable (Note 3) 560,478
-
---------------------- ---------------------
44,713,454 30,166,333
LEASE RECEIVABLE (Note 3) 845,889
-
CAPITAL ASSETS, NET (Note 4) 5,687,543 4,291,755
INTANGIBLE ASSETS, NET (Note 5) 5,321,470 6,185,926
---------------------- ---------------------
TOTAL ASSETS $ 56,568,356 $ 40,644,014
====================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 7,698,324 $ 3,936,501
Accrued liabilities 4,080,392 6,488,755
Income taxes payable (Note 8) 2,442,571 1,864,662
Deferred revenue 8,370,664 3,985,261
Current portion of long-term debt (Note 6) 377,332 215,454
Current obligations under capital lease (Note 10) 872,917
20,621
---------------------- ---------------------
23,842,200 16,511,254
OBLIGATIONS UNDER CAPITAL LEASES (Note 10) 1,907,037
-
LONG-TERM DEBT (Note 6) 296,324
-
---------------------- ---------------------
TOTAL LIABILITIES 25,749,237 16,807,578
---------------------- ---------------------
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS' EQUITY Common stock (Note 7)
Authorized:
Unlimited common shares with no par value Issued:
1998: 6,562,088 shares; 1997: 6,459,725 shares 44,637,778 43,154,039
Treasury stock (13,475 shares) (122,743) (122,743)
Deficit (13,695,916) (19,194,860)
----------------------
---------------------
30,819,119 23,836,436
---------------------- ---------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 56,568,356 $ 40,644,014
====================== =====================
F-3
MDSI MOBILE DATA SOLUTIONS INC.
Consolidated Statements of Operations
(Expressed in Canadian dollars)
Years ended December 31,
------------------------------------------------------------------
1998 1997 1996
--------------------- -------------------- -------------------
REVENUE
Software and services $ 47,497,292 $ 39,358,386 $ 18,387,600
Terminals and infrastructure 8,385,099 10,645,596 8,708,078
Third party products and services 19,513,884 16,676,557 15,227,463
Maintenance and support 7,986,579 3,599,640 2,819,429
--------------------- -------------------- -------------------
83,382,854 70,280,179 45,142,570
DIRECT COSTS (Note 14) 44,589,107 43,358,975 28,320,887
--------------------- -------------------- -------------------
GROSS PROFIT 38,793,747 26,921,204 16,821,683
--------------------- -------------------- -------------------
OPERATING EXPENSES
Research and development 9,894,101 6,539,841 4,356,884
Sales and marketing 13,422,494 12,070,517 5,688,455
General and administrative 6,686,231 6,088,499 3,124,748
Amortization of intangible assets 864,456 837,163 331,411
Restructuring costs (Note 14) - 1,145,152 -
Acquired research and development - 10,002,982 8,523,363
--------------------- -------------------- -------------------
30,867,282 36,684,154 22,024,861
--------------------- -------------------- -------------------
OPERATING INCOME (LOSS) 7,926,465 (9,762,950) (5,203,178)
OTHER INCOME 162,371 535,089 113,664
--------------------- -------------------- -------------------
INCOME (LOSS) BEFORE TAX PROVISION 8,088,836 (9,227,861) (5,089,514)
PROVISION FOR INCOME TAXES (Note 8) (2,589,892) (2,319,175) (924,615)
--------------------- -------------------- -------------------
NET INCOME (LOSS) FOR THE YEAR $ 5,498,944 $ (11,547,036) $ (6,014,129)
===================== ==================== ===================
EARNINGS (LOSS) PER COMMON SHARE
Basic $ 0.85 $ (1.84) $ (1.24)
===================== ==================== ===================
Diluted $ 0.82 $ (1.84) $ (1.24)
===================== ==================== ===================
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 6,504,188 6,261,001 4,855,479
===================== ==================== ===================
Diluted 6,722,823 6,261,001 4,855,479
===================== ==================== ===================
F-4
MDSI MOBILE DATA SOLUTIONS INC.
Consolidated Statements of Stockholders' Equity
(Expressed in Canadian dollars)
Common Stock
--------------------------------- Special Treasury
Shares Amount Warrants Stock Deficit Total
--------------- ----------------- ------------- ------------- -------------- ----------------
Balance, January 1, 1996 3,988,387 $ 2,315,000 $ - $ (122,743) $ (1,633,695) $ 558,562
Issued on exercise of
stock options 19,890 210,117 - - - 210,117
Issue of specia
warrants (Note 7) 3,925,100 - - 3,925,100
Issued on conversion
of debentures 144,754 797,000 - - - 797,000
Issued on conversion
of notes payable 55,263 882,753 - - - 882,753
Issued on public
offering (Note 7) 1,495,000 26,476,306 - - - 26,476,306
Net loss for the year - - - - (6,014,129) (6,014,129)
--------------- ----------------- ------------- ------------- -------------- ----------------
Balance, December 31, 1996 5,703,294 30,681,176 3,925,100 (122,743) (7,647,824) 26,835,709
Issued on exercise of
stock options 107,010 1,275,842 - - - 1,275,842
Issued under Stock
Purchase Plan 21,671 343,843 - - - 343,843
Issued on acquisition of
Alliance (Note 2) 347,750 6,928,078 - - - 6,928,078
Issued on conversion of
special warrants (Note 7) 280,000 3,925,100 (3,925,100) - - -
Net loss for the year - - - - (11,547,036) (11,547,036)
--------------- ----------------- ------------- ------------- -------------- ----------------
Balance, December 31, 1997 6,459,725 43,154,039 - (122,743) (19,194,860) 23,836,436
Issued on exercise of
stock options 32,844 448,944 - - - 448,944
Issued under Stock
Purchase Plan (Note 7) 17,919 303,395 - - - 303,395
Issued on conversion of
warrants (Note 7) 51,600 731,400 - - - 731,400
Net income for the year - - - - 5,498,944 5,498,944
--------------- ----------------- ------------- ------------- -------------- ----------------
Balance, December 31, 1998 6,562,088 $ 44,637,778 $ - $ (122,743) $(13,695,916) $ 30,819,119
=============== ================= ============= ============= ============== ================
F-5
MDSI MOBILE DATA SOLUTIONS INC.
Consolidated Statements of Cash Flows
(Expressed in Canadian dollars)
Years ended December 31,
-----------------------------------------------------------------
1998 1997 1996
--------------------- ------------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) for the year $ 5,498,944 $ (11,547,036) $ (6,014,129)
Items not affecting cash:
Depreciation and amortization 2,237,201 2,478,332 1,031,952
Deferred income taxes 147,321 454,513 924,615
Acquired research and development - 10,002,982 8,523,363
Changes in non-cash operating working
capital items (Note 12) (1,997,751) (14,847,491) (6,141,234)
--------------------- ------------------- -------------------
Net cash provided by (used in) operating activities 5,885,715 (13,458,700) (1,675,433)
--------------------- ------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common shares 1,483,739 1,619,685 26,686,423
Repayment of long-term debt (134,446) (3,295,398) (346,200)
Repayment of notes payable - (428,424) (8,214,874)
Proceeds from special warrants - - 3,925,100
Proceeds from (repayment of) capital leases 1,560,119 (53,856) (46,519)
--------------------- ------------------- -------------------
Net cash provided by (used in) financing activities 2,909,412 (2,157,943) 22,003,930
--------------------- ------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of MDSI UK - - (1,089,973)
Acquisition of Alliance - (1,892,426) -
Acquisition of capital assets (2,768,533) (2,587,833) (953,304)
--------------------- ------------------- -------------------
Net cash used in investing activities (2,768,533) (4,480,259) (2,043,277)
--------------------- ------------------- -------------------
NET CASH INFLOW (OUTFLOW) 6,026,594 (20,096,902) 18,285,220
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 110,117 20,207,019 1,921,799
--------------------- ------------------- -------------------
CASH AND CASH EQUIVALENTS, END OF YEAR 6,136,711 110,117 20,207,019
===================== =================== ===================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments for interest $ 140,475 $ 182,513 $ 93,648
Cash receipts for interest $ 147,420 $ 344,697 $ -
Cash payments for taxes $ 224,667 $ 417,701 $ 10,227
===================== =================== ===================
F-6
MDSI MOBILE DATA SOLUTIONS INC.
Consolidated Statements of Cash Flows
(Expressed in Canadian dollars)
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING AND FINANCING ACTIVITIES
During the year ended December 31, 1998, the Company leased certain computer
equipment to a customer. The transaction was accounted for as a sales-type lease
with a discounted present value of $1,406,367 at December 31,1998. The equipment
purchase was financed by capital lease, which had a balance of $1,199,214 at
December 31, 1998.
During the year ended December 31, 1997, the Company issued 280,000 common
shares and 280,000 common share purchase warrants on the exercise of 280,000
special warrants without additional consideration.
Also, during the year ended December 31, 1997, the Company acquired all of the
issued and outstanding shares of Alliance Systems, Incorporated ("Alliance") for
$9,116,828. Consideration consisted of 347,750 common shares of the Company and
payments of $2,188,750, including cash of $1,892,426 (US$1,367,869) and
unsecured promissory notes for $296,324 (US$214,219)
During the year ended December 31, 1996, the Company acquired all of the issued
and outstanding shares of MDSI Mobile Data Solutions (UK) Ltd. (formerly
Spectronics Micro Systems Limited - "MDSI UK") for $10,616,023. Consideration
consisted of cash payments of $1,089,973 and convertible loan notes in the
amount of $9,526,050.
F-7
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 1998, 1997 and 1996
(Expressed in Canadian 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. All intercompany balances
and transactions have been eliminated.
(b) Nature of operations
The Company develops, markets and supports wireless mobile data
communication software products.
(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
The Company's revenue is derived primarily from the following sources:
(i) Software and services
Revenue related to software and services, including software
licenses, is generally recognized on a percentage of completion
basis, representing costs incurred relative to total estimated
costs. Where the Company has contracted to deliver software
without significant production, modification or customization
required, revenue is recognized upon delivery if the fee is
determinable and there is reasonable assurance of collection.
Provisions for estimated losses on contracts are recorded when
identifiable.
(ii) Third party products and services and terminals and
infrastructure
Revenue from sales of third party products and services and
terminals and infrastructure is recognized on delivery of
products.
(iii) Maintenance and support
Revenue related to maintenance agreements for supporting and
maintaining the Company's products are recognized rateably over
the term of the agreement, generally one year.
(e) Work in progress
Work in progress is valued at the lower of cost and net realizable
value. Cost is determined on a first-in first-out basis and generally
consists of raw materials and direct labor. Net realizable value is
based on the estimated selling price after allowing for all future
costs of completion and disposal.
F-8
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 1998, 1997 and 1996
(Expressed in Canadian dollars)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
(f) 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
Plant and equipment 15% declining balance
Furniture and fixtures 20% declining balance
Leasehold improvements lesser of lease term or useful
life, generally five years
The carrying value of capital assets is reviewed on a regular basis
for any permanent impairment in value. To date, no such impairment has
been indicated.
(g) Goodwill
Goodwill arising on acquisitions is amortized on the straight-line
basis over seven to ten years. Management regularly reviews the
carrying value of goodwill based upon expected future cash flows. To
date, no impairment has been indicated.
(h) Foreign exchange
The accounts of the Company and its foreign subsidiaries are expressed
in Canadian dollars, its functional currency. Monetary assets and
liabilities denominated in foreign currencies are translated at the
rate in effect at the balance sheet date. Other balance sheet items
and revenues and expenses are translated at the rates prevailing on
the respective transaction dates. Translation gains and losses
relating to current monetary items and revenue and expenses
denominated in foreign currencies are included in income.
(i) 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.
Management believes that it is more likely than not that the Company
will generate sufficient taxable income to allow the realization of
the recorded deferred tax assets.
F-9
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 1998, 1997 and 1996
(Expressed in Canadian dollars)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
(j) Earnings (loss) per common share
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings Per Share (SFAS 128), which established
new standards for computing and presenting earnings per share
effective for fiscal years ending after December 15, 1997. With SFAS
128, Primary earnings per share is replaced by Basic earnings per
share which is computed by dividing income available to common
shareholders by the weighted average number of shares outstanding for
the period. In addition, SFAS 128 requires the presentation of Diluted
earnings per share which includes the potential dilution that could
occur if common stock equivalents or other potentially dilutive
securities were exercised or converted into common stock. Common stock
equivalent shares are excluded from the computation if their effect is
anti-dilutive. Common equivalent shares consist of the common shares
issuable upon the conversion of the special warrants (using the
if-converted method) and incremental shares issuable upon the exercise
of stock options and share purchase warrants (using the treasury stock
method).
(k) Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Actual
results could differ from those estimates.
(l) Derivatives
From time to time the Company may attempt to hedge its position with
respect to currency fluctuations on specific contracts. This is
generally accomplished by entering into forward contracts. Related
costs are realized as the forward contracts are settled. The Company
was not engaged in any forward contracts at December 31, 1998.
(m) Stock -based compensation
The Company accounts for stock-based compensation using the intrinsic
value based method whereby compensation cost is recorded for the
excess, if any, of the quoted market price of the common share over
the exercise price at the date granted for all common stock options.
As December 31, 1998, no compensation cost has been recorded for any
period under this method.
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.
1998 1997 1996
----------------- ------------------ ------------------
Net income (loss) for the year $ 2,130,833 $ (13,258,031) $ (6,746,740)
================= ================== ==================
Diluted income (loss) per common share $ 0.32 $ (2.12) $ (1.39)
================= ================== ==================
F-10
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 1998, 1997 and 1996
(Expressed in Canadian dollars)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
(m) Stock -based compensation (Continued)
Using the fair value method for stock-based compensation, additional
compensation costs of approximately $3,368,111 would have been
recorded for the year ended December 31, 1998 (1997 - $1,710,995 and
1996 - $732,611, respectively). This amount is determined using an
option pricing model assuming no dividends are to be paid, an average
vesting period of three years, a weighted average annualized
volatility of the Company's share price of 56.03% (1997 - 43.93% and
1996 - 30.74% respectively) and a weighted average annualized risk
free interest rate at 5.00% (1997 - 5.00% and 1996 - 5.46%
respectively).
(n) Recent pronouncements
In June 1997, the Financial Accounting Standards Board issued
Statement No. 130 (SFAS 130), Reporting Comprehensive Income, which is
required to be adopted for fiscal years beginning on or after December
15, 1997. SFAS 130 establishes standards for the reporting and display
of comprehensive income and its components in a full set of general
purpose financial statements. Reclassification of financial statements
for earlier periods presented is required. As the Company's operations
do not generate any other comprehensive items, the adoption of this
standard has no affect on the Company's financial statements.
In June 1997, the Financial Accounting Standards Board issued
Statement No. 131 (SFAS 131), Disclosures About Segments of an
Enterprise and Related Information, which is required to be adopted
for fiscal years beginning on or after December 15, 1997. SFAS 131
establishes 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. The
Company adopted SFAS 131 for the year ended December 31, 1997 (Note
11).
In October 1997, the American Institute of Certified Public
Accountants issued a Statement of Position, Software Revenue
Recognition (SOP 97-2), which provides guidance in applying generally
accepted accounting principles in recognizing revenue on software
transactions. SOP 97-2 is effective for transactions entered into in
fiscal years beginning after December 15, 1997. The Company adopted
SOP-97-2 for the year ended December 31, 1997 and subsequent. The
impact on the Company's financial statements is not material.
In June 1998, the Financial Accounting Standards Board issued
Statement No. 133 (SFAS 133), Accounting for Derivative Instruments
and Hedging Activities, which standardizes the accounting for
derivative instruments. SFAS 133 is effective for all fiscal quarters
of all fiscal years beginning after June 15, 1999. The impact on the
Company's financial statements is not expected to be material.
(o) Cash and cash equivalents
Cash and cash equivalents consist of cash on hand, deposits in banks
and highly liquid investments with an original maturity of three
months or less.
F-11
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 1998, 1997 and 1996
(Expressed in Canadian dollars)
2) ACQUISITIONS
(a) Alliance Systems Incorporated
On April 17, 1997, the Company entered into an agreement to acquire
all of the issued and outstanding shares of Alliance Systems
Incorporated ("Alliance") for $9,116,828, consisting of 347,750 common
shares and US$1,582,088 ($2,188,750) including cash of US$1,367,869
($1,892,426) and US$214,219 ($296,324) of unsecured promissory notes
which bear interest at 6.07% and mature on January 1, 1999. The
acquisition was completed July 1, 1997 and the common shares were
issued at that date. Alliance, based out of Itasca, Illinois, is a
supplier of mobile workforce management solutions to the utility,
public safety and cable market sectors.
This transaction has been accounted for using the purchase method and
the purchase price has been allocated to the estimated fair value of
net assets acquired as follows:
Estimated fair value of net assets acquired:
Current assets $ 1,737,363
Capital assets 1,117,328
Deferred income taxes 2,401,290
Other assets 27,287
-----------------
5,283,268
-----------------
Current liabilities 6,833,045
Long-term debt 3,111,690
-----------------
9,944,735
-----------------
(4,661,467)
Acquired research and development 10,002,982
Goodwill 3,775,313
-----------------
$ 9,116,828
=================
The results of operations of Alliance have been consolidated from
April 17, 1997.
(b) MDSI Mobile Data Solutions (UK) Ltd.
On June 28, 1996, the Company entered into an agreement to acquire
100% of the issued and outstanding shares of MDSI Mobile Data
Solutions (UK) Ltd. (formerly Spectronics Micro Systems Limited -
"MDSI UK") for aggregate consideration of $10,616,023 including
(pound)500,000 ($1,089,973) payable in cash on closing and secured
convertible loan notes in the amount of (pound)4,500,000 ($9,526,050).
MDSI UK is a supplier of wireless computer-aided dispatching systems
for the taxi, courier, and transport markets in the United Kingdom,
Europe, Middle East, Southeast Asia and Australia.
F-12
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 1998, 1997 and 1996
(Expressed in Canadian dollars)
2. ACQUISITIONS (Continued)
(b) MDSI Mobile Data Solutions (UK) Ltd. (Continued)
The acquisition has been accounted for using the purchase method and
the purchase price has been allocated to the net estimated fair value
of assets acquired as follows:
Net estimated fair value of assets acquired:
Current assets $ 5,343,114
Capital assets 547,081
-----------------
5,890,195
-----------------
Current liabilities 7,205,980
-----------------
(1,315,785)
Acquired research and development 8,523,363
Goodwill 3,408,445
-----------------
$10,616,023
=================
The operations of MDSI UK have been consolidated from June 28, 1996.
The secured convertible loan notes consisted of non-interest bearing Class
A and B loan notes. The Class A loan notes, in the amount of
(pound)3,870,940 were repaid December 4, 1996. The Class B loan notes in
the amount of (pound)629,060 were discharged on the issue of 55,263 common
shares on the conversion of notes in the amount of (pound)417,003
($882,753) and the balance repaid during the year ended December 31, 1996.
3. LEASE RECEIVABLE
At December 31, future payments under customer sales-types leases are as
follows:
1998
--------------------
Total lease payments due $ 1,552,842
Less: amount representing interest (146,475)
--------------------
Present value of lease payments 1,406,367
less: current portion (560,478)
--------------------
$ 845,889
====================
The lease has an effective interest rate of 7.25% and is payable in equal
monthly instalments over 36 months.
F-13
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 1998, 1997 and 1996
(Expressed in Canadian dollars)
4. CAPITAL ASSETS
1998 1997
------------------- ------------------
Computer hardware and software $ 8,038,184 $ 5,262,667
Plant and equipment 351,003 290,138
Furniture and fixtures 829,935 1,040,859
Vehicles 139,048 -
Leasehold improvements 202,279 198,252
------------------- ------------------
9,560,449 6,791,916
Less: accumulated depreciation (3,872,906) (2,500,161)
------------------- ------------------
$ 5,687,543 $ 4,291,755
=================== ==================
5. INTANGIBLE ASSETS
1998 1997
------------------- ------------------
Goodwill $ 7,183,758 $ 7,183,758
Less: accumulated amortization (1,862,288) (997,832)
------------------- ------------------
$ 5,321,470 $ 6,185,926
=================== ==================
6. LONG-TERM DEBT
1998 1997
------------------- ------------------
Stockholders (i) $ 72,800 $ 215,454
Promissory notes (ii) 304,532 296,324
------------------- ------------------
377,332 511,778
Less: current portion (377,332) (215,454)
------------------- ------------------
$ - $ 296,324
=================== ==================
(i) Stockholders
The amounts owing to stockholders are unsecured, non-interest bearing
and without specific terms for repayment.
(ii) Promissory notes
The Company issued promissory notes in the amount of US$214,219 as
part of the Alliance acquisition (Note 2 (a)) to former stockholders
of Alliance. The promissory notes are unsecured, bear interest at the
rate of 6.07% and matured January 1, 1999. The promissory notes have
been paid, subsequently.
7. 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 maximum number of
common shares reserved for issuance under the Stock Option Plan, including
current options outstanding, is 1,850,000 common shares. Information
regarding the Company's stock options is as follows:
F-14
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 1998, 1997 and 1996
(Expressed in Canadian dollars)
7. STOCKHOLDERS' EQUITY (Continued)
Weighted
Number of Average
Shares Price
---------------- -----------
Outstanding at January 1, 1996 228,603 11.13
Granted 441,500 14.18
Exercised (19,890) 10.54
Cancelled (25,214) 11.75
----------------
Outstanding at December 31, 1996 624,999 13.29
Granted 514,000 23.46
Exercised (107,010) 11.92
Cancelled (53,471) 18.25
----------------
Outstanding at December 31, 1997 978,518 18.48
Granted 1,112,750 16.56
Exercised (32,844) 13.78
Cancelled (403,218) 23.67
================
Outstanding at December 31, 1998 1,655,206 16.01
================
The following table summarizes information concerning options outstanding at
December 31, 1998:
Options Outstanding Options Excersable
-------------------------------------------------- ---------------------------
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 31,998 (months) Price 31, 1998 Price
- - --------------- ------------- ------------ ---------- ------------ ---------
$10.38-$15.50 1,268,306 20.04 $14.72 522,321 $13.69
$16.00-$20.00 276,900 32.50 19.39 29,103 17.03
$21.00-$25.00 110,000 20.67 22.38 66,944 22.60
------------- ------------ ---------- ------------ ---------
1,655,206 22.69 $16.01 618,368 $14.81
============= ============ ========== ============ =========
At December 31,1997 and 1996, 414,547 and 218,499 options were exercisable at a
weighted average exercise price of $13.15 and $11.55 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 for each
employee per year. The subscription price of common shares purchased
under the Stock Purchase Plan is determined based upon a weighted
average market price of the Company's common shares each quarter, less
15%. The Company has reserved 100,000 common shares for issuance
pursuant to the Stock Purchase Plan. During the year ended December
31, 1998, 17,919 common shares were issued under this Plan.
F-15
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 1998, 1997 and 1996
(Expressed in Canadian dollars)
7. STOCKHOLDERS' EQUITY (Continued)
(c) Special warrants and share purchase warrants
In June 1996, the Company issued 280,000 special warrants through a
private placement for net proceeds of $3,925,100 (net of issue costs
of $30,000). Each special warrant was exchangeable, without further
payment or additional consideration, into one common share and one
share purchase warrant. During the year ended December 31, 1997,
280,000 common shares and 280,000 share purchase warrants were issued
on the conversion of special warrants. During the year ended December
31, 1998, 258,000 share purchase warrants were exercised to purchase
51,600 common shares for proceeds of $731,400.
(d) Stock transactions
On December 2, 1996, the Company completed a public offering for the
sale and issue of 1,495,000 common shares at a price of $20.10
(US$14.875) per share for net proceeds of $26,476,306 (net of offering
costs of $3,573,194).
(e) Alliance employee stock ownership plan
Prior to the Company's acquisition of Alliance, the Alliance employees
participated in an employee stock ownership plan (the ESOP). Upon the
Company's acquisition of Alliance (Note 2(a)), the remaining
unallocated shares held by the ESOP were allocated to employees. At
December 31, 1998, 99,079 shares of the Company were held by the ESOP
of which 99,079 will vest on July 1, 1999.
(f) Shareholder rights plan
On December 17, 1998, the Company's Board of Directors approved the
adoption of a Shareholder Rights Plan, similar to those adopted by
other Canadian companies, subject to shareholder approval at the next
annual general meeting of the Company, scheduled to be held on May 6,
1999. 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.
8. INCOME TAXES
The provision for income taxes consists of the following:
1998 1997 1996
----------------- ----------------- -----------------
Current:
Canada $ (1,872,670) $ (1,945,359) $ -
United States (471,015) 107,146 -
United Kingdom - 254,821 -
Other (98,886) (281,270)
----------------- ----------------- -----------------
Total current provision for income taxes (2,442,571) (1,864,662) -
----------------- ----------------- -----------------
Deferred:
Canada 594,237 - (1,334,615)
United States (464,974) (960,252) 160,000
United Kingdom (261,546) 452,542 250,000
Other (15,038) 53,197 -
----------------- ----------------- -----------------
Total deferred provision for income taxes (147,321) (454,513) (924,615)
----------------- ----------------- -----------------
Provision for income taxes $ (2,589,892) $ (2,319,175) $ (924,615)
================= ================= =================
F-16
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 1998, 1997 and 1996
(Expressed in Canadian dollars)
The provision for income taxes reported differs from the amounts computed by
applying the cumulative Canadian Federal and provincial income tax rates to the
loss before tax provision due to the following:
1998 1997 1996
----------------- ----------------- -----------------
Statutory tax rate 45.0% 45.0% 45.0%
(Provision for) Recovery of income taxes computed
at statutory rate $ (3,639,976) $ 4,152,381 $ 2,290,281
Tax losses and (benefits) not recognized in the period
that the benefit arose 808,111 (1,238,564) 769,752
Lower effective rate on earnings of foreign
subsidiaries 706,309 (186,071) -
Acquired research and development costs not
deductible for tax purposes - (4,501,342) (3,835,513)
Amortization of intangibles not deductible for tax
purposes (389,005) (376,724) (149,135)
Other permanent differences (75,331) (168,855) -
----------------- ----------------- -----------------
Provision for income taxes $ (2,589,892) $ (2,319,175) $ (924,615)
================= ================= =================
The principal components of the deferred portion of the provision for
income taxes are as follows:
1998 1997 1996
----------------- ----------------- -----------------
Depreciation $ - $ - $ (2,677)
Research and development - - (19,627)
Deferred revenue - 258,233 (308,553)
Operating loss carry forwards (147,321) (712,746) (624,000)
Other - - 30,242
----------------- ----------------- -----------------
Total deferred provision for income taxes $ (147,321) $ (454,513) $ (924,615)
================= ================= =================
The approximate tax effect of each type of temporary difference that gave
rise to the Company's deferred tax assets are as follows:
1998 1997
----------------- -----------------
Current
Operating loss carry forwards $ 1,220,350 $ 2,096,544
----------------- -----------------
Net current deferred tax asset $ 1,220,350 $ 2,096,544
================= =================
1998 1997
----------------- -----------------
Non-current
Depreciation $ 40,271 $ 60,406
Operating loss carry forwards 1,314,131 4,460,628
Other (4,631) (17,348)
----------------- -----------------
1,349,771 4,503,686
Less: valuation allowance (1,349,771) (4,503,686)
----------------- -----------------
Net non-current deferred tax asset $ - $ -
================= =================
F-17
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 1998, 1997 and 1996
(Expressed in Canadian dollars)
8. INCOME TAXES (Continued)
During the year ended December 31, 1998, the Company concluded that tax
benefits of $2,633,000 relating to previously disposed US operations would
not be available to the Company in the future. The benefit of the losses
and the related valuation allowance have been removed from the income tax
reconciliations.
At December 31, 1998, the Company has the following loss carry-forwards
available for tax purposes:
Country Amount Expiry
------- ------ ------
Canada $1,300,000 2003 through 2004
United Kingdom 3,000,000 (pound) unlimited
The loss carry-forwards in Canada are subject to certain annual
restrictions.
9. RELATED PARTY TRANSACTIONS
Related party transactions and balances not disclosed elsewhere in these
financial statements include advisory fees of US$25,000 paid to a company
controlled by a director during the year ended December 31,1997.
10. COMMITMENTS AND CONTINGENCIES
(a) Capital and operating leases
At December 31, 1998, future minimum payments under capital and
non-cancellable operating leases for office space and computer
equipment are as follows:
Capital Operating
leases leases
------------------ ------------------
1999 $ 1,109,422 $ 2,542,360
2000 1,109,410 2,040,633
2001 906,182 1,973,879
2002 15,551 1,760,867
2003 5,781 1,570,409
Thereafter - 7,590,000
------------------ ------------------
Total minimum lease payments 3,146,346 $ 17,478,148
==================
Less: amount representing interest (366,392)
------------------
Present value of net minimum lease payments 2,779,954
Less: current portion (872,917)
------------------
$ 1,907,037
==================
Rent expense for the year ended December 31, 1998 in respect of
operating leases for office space was $2,728,233 (1997 - $1,583,767;
1996 - $658,765).
F-18
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 1998, 1997 and 1996
(Expressed in Canadian dollars)
10. COMMITMENTS AND CONTINGENCIES (Continued)
(b) Line and letters of credit
The Company has an operating line of credit with a Canadian commercial
bank to borrow up to $8,000,000 which bears interest at prime plus
0.5%. As at December 31,1998, the Company was not utilizing the
operating line of credit. In addition, the Company has an irrevocable
revolving letter of credit with the same bank in the amount of
(pound)200,000. Subsequent to December 31, 1998 the Company has
provided as performance bonds, an irrevocable revolving letter of
credit in the amount of Belgian Franc 101,068,000 and a bank guarantee
in the amount of Danish Kroner 9,740,000, both with same bank. The
company has pledged an amount equal to the letters of credit and
guarantee against its operating line of credit as security.
11. SEGMENTED INFORMATION
Segmented information
In 1997, the Company adopted the Financial Accounting Standards Board
statement No.131 (SFAS 131) requiring disclosure of a company's business
segments. At the time of adoption, the Company had determined that it had
only one reportable segment and therefore did not provide a detailed
breakdown other than provided by its general purpose financial statements.
In 1998, the Company has reassessed its position in regards to reportable
segments and determined that it has two distinct segments based on the
differing capabilities of the software and hardware platforms offered to
customers. The following describes the reportable segments on which
management bases its operating decisions and performance assessment.
Field Service - Field Service comprises software and services designed to
serve the mobile workforce management needs of industry and government.
Examples include the utility, telecommunication and public safety
industries.
Delivery - The Delivery segment comprises software, hardware and services
designed to serve providers of services to the general public for the
movement of people and goods. Examples include the taxi, courier and
roadside recovery industries.
Business Segments
Field
Service Delivery Total
- - --------------------------------------------------------------------------------
1998
Revenue $ 67,588,754 $15,794,100 $ 83,382,854
Operating earnings 9,051,802 (1,125,337) 7,926,465
Depreciation & Amortization 1,298,480 938,721 2,237,201
Assets 44,018,594 12,549,762 56,568,356
Capital Expenditures 2,607,807 160,726 2,768,533
1997
Revenue $ 52,859,186 $17,420,993 $ 70,280,179
Operating earnings (1,587,178) (8,175,772) (9,762,950)
Depreciation & Amortization 1,628,683 849,650 2,478,332
Assets 27,064,461 13,579,553 40,644,014
Capital Expenditures 2,059,685 528,148 2,587,833
F-19
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 1998, 1997 and 1996
(Expressed in Canadian dollars)
11. SEGMENTED INFORMATION (Continued)
Business Segments (continued)
Field
Service Delivery Total
- - --------------------------------------------------------------------------------
1996
Revenue $ 31,923,675 $13,218,895 $45,142,570
Operating earnings 3,320,636 (8,523,814) (5,203,178)
Depreciation & Amortization 638,801 393,148 1,031,952
Assets 34,920,694 10,651,064 45,571,758
Capital Expenditures 851,829 101,475 953,304
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:
1998 1997 1996
-------------------------------- ------------------------------ ------------------------------
Long-lived Long-lived Long-lived
Revenue assets Revenue assets Revenue assets
--------------- ---------------- --------------- -------------- -------------- --------------
Canada $ 2,984,562 $ 3,429,687 $ 1,975,850 2,222,706 $ 851,163 1,030,274
United States 62,583,853 5,614,529 45,525,859 4,712,938 30,349,559 677,855
Europe 14,806,724 2,752,711 18,134,893 3,527,130 9,672,356 3,767,411
Asia 2,657,917 44,385 2,112,136 - 4,269,492 -
South America 349,798 - 2,531,441 - - -
Other - 13,590 - 14,907 - -
--------------- ---------------- --------------- -------------- -------------- --------------
83,382,854 $11,854,902 70,280,179 10,477,681 45,142,570 5,475,540
=============== ================ =============== ============== ============== ==============
Long-lived assets consist of the lease receivable, capital and intangible
assets.
Major customers
During the year ended December 31, 1998, the Company earned revenue from
one customer of $6,129,753 (1997 one customer of $7,598,277; 1996 - one
customer of $15,922,960).
F-20
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 1998, 1997 and 1996
(Expressed in Canadian dollars)
12. CHANGES IN NON-CASH OPERATING WORKING CAPITAL ITEMS
1998 1997 1996
----------------- ----------------- ------------------
Accounts receivable $ (6,694,687) $ (5,047,163) $ (10,791,491)
Work in progress 74,434 63,437 (68,240)
Prepaid expenses (2,215,990) (1,499,151) 8,478
Other (207,153) - -
Income taxes payable 577,909 1,864,662 -
Accounts payable and accrued liabilities 2,082,333 (8,244,375) 3,847,758
Deferred revenue 4,385,403 (1,984,901) 862,261
----------------- ----------------- ------------------
$ (1,997,751) $(14,847,491) $ (6,141,234)
================= ================= ==================
13. FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, accounts receivable,
accounts payable, accrued liabilities and capital lease obligations
reflected in the balance sheets approximate their respective fair values.
The Company estimates the fair value of its non-interest bearing long-term
debt using discounted cash flows assuming a borrowing rate equal to the
Bank of Canada rate plus 2%.
1998 1997
------------------------------------ -------------------------------------
Carrying Carrying
amount Fair value amount Fair value
----------------- ----------------- ----------------- -----------------
Long-term debt:
Stockholders $ 72,800 $ 72,800 $ 215,454 $ 215,454
Promissory note 304,532 295,229 296,324 277,717
----------------- ----------------- ----------------- -----------------
$ 377,332 $ 368,029 $ 511,778 $ 493,171
================= ================= ================= =================
The Company's revenues have historically been dependent on large contracts
from a limited number of customers in the utility, telecommunications,
courier and taxi market sectors. However, as these customers are
geographically dispersed and bad debts have not been significant,
concentrations of credit risk are considered to be minimal.
14. PROVISION FOR RESTRUCTURING AND CHANGES IN ESTIMATES TO COMPLETE
During the year ended December 31, 1997, the Company recorded a one-time
charge of $6,371,192, including $1,145,152 with respect to restructuring of
certain operations and $5,226,040 due to a change in the estimates to
complete certain contracts by its UK operations. These contracts were
entered into by MDSI UK prior to the acquisition by the Company.
15. SUBSEQUENT EVENTS
Subsequent to December 31, 1998, the Company:
(a) Issued 575,000 common shares on an oversubscribed share offering for net
proceeds of $14,735,937
(b) Provided as performance bonds, an irrevocable revolving letter of credit
expiring May 28, 2001 in the amount Belgian Franc 101,068,000 ($4.2
million) and a bank guarantee expiring February 2, 2000 in the amount of
Danish Kroner 9,740,000 ($2.2 million).
(c) Sold Belgian Franc 134,400,000 ($5.6 million) and 104,000,000 ($4.3
million) under forward contracts due December 14, 1999 and October 31,
2000, respectively.
(d) Sold Danish Kroner 5,000,000 ($1.1 million) under a forward contract due
October 29, 1999.
F-21
SCHEDULE II
MDSI MOBILE DATA SOLUTIONS INC.
Valuation and Qualifying Accounts
(Expressed in Canadian dollars)
Application/
Balance, Additions Write-off Balance,
Beginning During During End
of Period Period of Period of Period
---------------- --------------- ---------------- ----------------
Accumulated amortization of software
Year ended December 31, 1998 $ - $ - $ - $ -
Year ended December 31, 1997 87,950 87,920 (175,870) -
Year ended December 31, 1996 - 87,950 - 87,950
Allowance for doubtful accounts
Year ended December 31, 1998 $ 252,243 $ - $ (30,009) $ 222,234
Year ended December 31, 1997 37,000 252,243 (37,000) 252,243
Year ended December 31, 1996 142,046 37,000 (142,046) 37,000
Accumulated depreciation of capital assets
Year ended December 31, 1998 $ 2,500,161 $ 1,372,745 $ - $ 3,872,906
Year ended December 31, 1997 1,128,000 1,372,161 - 2,500,161
Year ended December 31, 1996 427,459 700,541 - 1,128,000
Accumulated amortization of goodwill
Year ended December 31, 1998 $ 997,832 $ 864,456 $ - $ 1,862,288
Year ended December 31, 1997 243,461 754,371 - 997,832
Year ended December 31, 1996 - 243,461 - 243,461
Deferred income tax valuation allowance
Year ended December 31, 1998 $ 4,503,686 $ - $ (3,153,915) $ 1,349,771
Year ended December 31, 1997 3,070,673 2,485,470 (1,052,457) 4,503,686
Year ended December 31, 1996 3,667,500 - (596,827) 3,070,673
Reserve for contracts
Year ended December 31, 1998 $ 4,646,276 $ - $ (4,646,276) $ -
Year ended December 31, 1997 21,169 9,139,182 (4,514,075) 4,646,276
Year ended December 31, 1996 - 1,041,515 (1,020,346) 21,169
Exhibit
Number Exhibit Description
- - -------- -------------------
t2.1 Agreement and Plan of Merger dated April 17, 1997 among the
Company, MDSI Acquisition Corp., Alliance, Geoffrey Engerman and
Doug Engerman (previously filed as Exhibit 2.2)
*3.1 Articles of Incorporation of the Company
*3.2 Articles of Amendments of the Company
*3.3 By-laws of the Company
*4.1 Form of Common Share Certificate
tt*10.1 1996 Stock Option Plan
tt10.2 1997 Stock Option Plan
tt10.3 1998 Stock Option Plan
tt*10.4 Stock Purchase Plan (previously filed as Exhibit 10.2)
tt10.5 1998 Stock Purchase Plan
*10.6 Form of Indemnification Agreement between the Company and certain
officers of the Company (previously filed as Exhibit 10.4)
*10.7 Promissory Note dated January 2, 1996 granted by the Company and
TelSoft in favor of Killean Consulting Inc. (previously filed as
Exhibit 10.8)
*10.8 Promissory Note dated January 2, 1996 granted by the Company and
TelSoft in favor of 382904 B.C. Ltd. (previously filed as Exhibit
10.9)
tt*10.9 Employment Agreement dated April 1, 1996 between the Company and
Erik Dysthe (previously filed as Exhibit 10.18)
tt*10.10 Employment Agreement dated July 1, 1995 between the Company and
Kenneth R. Miller (previously filed as Exhibit 10.19)
10.11 Lease dated September 25, 1997 between Sun Life Assurance Company
of Canada and the Company
*10.12 Lease dated June 2, 1989 between Corporate Woods Associates and
Service Systems International Limited and subsequent amendments
(previously filed as Exhibit 10.23)
*10.13 Lease dated April 8, 1993 between Cambridge Scanning Company
Limited and Spectronics Micro Systems Limited (previously filed
as Exhibit 10.25)
11.1 Computation of Earnings Per Common Share.
*21.1 List of the Company's Subsidiaries.
23.1 Consent of Deloitte & Touche LLP.
- - ---------------------
* 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.
tt This document has been identified as a management contract or compensatory
plan or arrangement.
t Previously filed as an exhibit to Registrant's Registration Statement on
Form F-4