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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- --------------------------------------------------------------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 0-28968
MDSI MOBILE DATA SOLUTIONS INC.
(Exact name of registrant as specified in its charter)
CANADA NOT APPLICABLE
(Jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
10271 Shellbridge Way
Richmond, British Columbia,
Canada V6X 2W8
(Address of principal executive offices)
Registrant's telephone number: (604) 207-6000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, no par value
---------------------------
(Title of Class)
Rights to Purchase Common Shares
--------------------------------
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Aggregate market value of the Registrant's Common Shares held by
non-affiliates as of March 27, 2001 was approximately US$29,364,000. The number
of shares of the Registrant's Common Shares outstanding as of March 27 , 2001
was 8,621,897.
TABLE OF CONTENTS
PART I ....................................................................... 1
ITEM 1: BUSINESS .................................................... 1
ITEM 2: PROPERTIES ..................................................20
ITEM 3: LEGAL PROCEEDINGS ...........................................21
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .........21
PART II ......................................................................21
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS .................................21
ITEM 6: SELECTED FINANCIAL DATA .....................................22
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS .........................23
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK .................................................35
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA .................35
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE .........................35
PART III .....................................................................36
ITEM 10: DIRECTORS AND OFFICERS OF THE REGISTRANT ...................36
ITEM 11: EXECUTIVE COMPENSATION .....................................40
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT .............................................44
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .............45
PART IV ......................................................................46
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K ........................................46
i
Forward-Looking Statements
Certain statements in this Annual Report on Form 10-K constitute
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of MDSI Mobile Data Solutions Inc. ("MDSI"
or the "Company"), or developments in the Company's industry, to differ
materially from the anticipated results, performance or achievements expressed
or implied by such forward-looking statements. Such factors include, but are not
limited to: the Company's limited operating history, lengthy sales cycles, the
Company's dependence upon large contracts and relative concentration of
customers, risks involving the management of growth and integration of
acquisitions, competition, product development risks and risks of technological
change, dependence on selected vertical markets and third-party marketing
relationships and suppliers, risks and uncertainties related to delivering its
products and services on the Internet, the Company's ability to protect its
intellectual property rights and the other risks and uncertainties described
under "Business - Risk Factors" in Part I of this Annual Report on Form 10-K.
Certain of the forward looking statements contained in this Report are
identified with cross references to this section and/or to specific risks
identified under "Business - Risk Factors."
Exchange Rates
The following table sets forth, for each period presented, the exchange
rates at the end of such period, the average of the exchange rates on the last
day of each month during the period and the high and low exchange rates for one
Canadian dollar, expressed in U.S. dollars, based on the noon buying rate in New
York City for cable transfers payable in Canadian dollars as certified for
customs purposes by the Federal Reserve Bank of New York.
U.S. Dollars Per Canadian Dollar
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Period End US$0.6666 US$0.6925 US$0.6504 US$0.6999 US$0.7301
Average 0.6740 0.6744 0.6715 0.7198 0.7329
High 0.6983 0.6925 0.7105 0.7487 0.7513
Low 0.6397 0.6535 0.6341 0.6945 0.7235
On March 27, 2001 the noon buying rate was CDN$1.00 = US$0.6372. The
Canadian dollar is convertible into U.S. dollars at freely floating rates, and
there are currently no restrictions on the flow of Canadian currency between
Canada and the United States. Unless stated otherwise, all financial information
is expressed in United States dollars.
ii
Part I
Item 1: Business
The Company
By combining wireless communications, advanced workforce management
applications and the Internet, MDSI is improving the way in which companies sell
and deliver services. MDSI enables companies of any size, in any service market,
to manage mobile and on site service workers to deliver better and more
efficient services, and empowers those workers to perform more efficiently using
reliable, wireless links to enterprise or Internet resources. MDSI's solutions
consist of a suite of wireless connectivity, and service management solutions
that can be delivered through traditional on-site, enterprise implementations or
as a hosted service over the Internet. Founded in 1993, MDSI has over 100 major
customers worldwide with operations and support offices in the United States,
Canada, Europe and Australia.
MDSI develops, markets, implements and supports mobile workforce management
and wireless connectivity software for use by a wide variety of companies that
have mobile workforces, such as telecommunications, cable and broadband,
utilities (electric, gas and water), commercial field services, and public
safety providers. MDSI's products are used by such companies in conjunction with
public and private wireless data communications networks to provide
comprehensive solutions for the automation of business processes associated with
the scheduling, dispatching and management of a mobile workforce. The Company's
products provide a cost-effective method for companies with mobile workers to
utilize data communications to communicate with such workers, and for such
workers to interface on a real-time basis with their corporate information
systems.
In June 2000, the Company acquired all of the outstanding share capital of
Connectria Corporation ("Connectria"), a Missouri corporation, for aggregate
consideration of 845,316 Common Shares and the assumption of 583,037 stock
options. The business combination was accounted for under the pooling of
interests method of accounting. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Effects of Acquisitions."
Unless the context otherwise requires, references herein to "MDSI" or the
"Company" refer to MDSI Mobile Data Solutions Inc. and its subsidiaries. The
Company's principal executive offices are located at 10271 Shellbridge Way,
Richmond, British Columbia, Canada V6X 2W8, and its telephone number at that
location is (604) 207-6000. The Company's web site is located at
www.mdsi-advantex.com. Information contained on the Company's web site is not
part of this report.
Background
Organizations within the field service industry are highly dependent upon
their mobile workforces to support their respective products and services. The
field service industry is composed of a number of market segments, such as the
telecommunications, cable and broadband, utilities (electric, gas and water) and
commercial field services markets, in which mobile workers principally provide
repair, maintenance, installation and other services for customers.
Historically, these organizations have managed and supported their mobile
workers by communicating information through wireline or voice radio systems.
Although voice radio systems are mobile, such systems rely on heavily used
portions of the radio spectrum and are subject to frequent periods of
congestion.
Mobile data communication systems that addressed certain limitations of
voice communications systems were first developed for a limited number of
vertical markets, such as utility, public safety, taxi, courier and general
field service. Businesses in these markets recognized certain productivity
benefits associated with wireless data applications. Although such mobile data
communications systems were introduced in a number of vertical markets, these
systems failed to achieve widespread adoption. The Company believes that the low
rate of adoption was attributable to the high cost of establishing private radio
networks, the difficulty of obtaining radio spectrum for such networks, the high
cost and limited functionality of early mobile computing devices and the
regulatory environment in certain industries, such as utilities and
telecommunications, which diminished competitive pressures. Additionally, a lack
of industry-specific application software which effectively addressed the needs
of mobile workers limited the cost-effectiveness of early systems.
1
The Company believes that significant trends in the regulatory environment,
numerous technological advances and competitive pressures have reduced many of
these limitations and have made the adoption of mobile data solutions by the
field service industry more attractive. Deregulation has exposed the utility and
telecommunications markets to competitive pressures, driving businesses within
those markets to seek ways to reduce costs, improve operations, efficiently
allocate resources and increase the quality of customer service. In addition,
the availability of powerful mobile computing devices has permitted the
development of sophisticated software applications. Finally, public data
networks, such as those operated by Motient Corporation and Cingular Interactive
L.P., are now widely available in North America, and similar networks are
available in Europe and the Asia Pacific region. Increasing competition among
these networks and the emergence of new wireless communication services,
provided by organizations such as AT&T, Ameritech Mobile Communication and
others, has resulted in greater availability of wireless networks and lower
costs to subscribers. Consequently, the Company believes that mobile data
solutions may now be implemented without the difficulty and expense of
establishing a private radio network, thereby increasing the cost-effectiveness
of such systems.
The MDSI Solution
MDSI has combined its expertise in software application development and
mobile data communications technology with its understanding of the unique needs
of targeted vertical markets in the field service and public safety industries
to develop mobile workforce management solutions that address the specific needs
of businesses within those vertical markets. MDSI's products enable
organizations in the field service and public safety industries to effectively
communicate with, manage and support their mobile workers. MDSI's products are
scaleable to address the needs of both small and large organizations. For
example, MDSI has sold applications to support as few as 70 and as many as 7,000
mobile workers.
MDSI's proprietary, wirelessly-enabled applications enable service
companies to provide better customer service through the efficient management of
service appointments and their workforces. MDSI's solutions help companies
optimally schedule, assign, dispatch, track, complete and report on service work
orders, and provide constant, near real-time communication between the company
and its mobile workforce. Mobile workers and their organizations stay connected
through status updates (e.g., "en route," "on site" or "job complete"), two-way
messaging, remote access to enterprise databases and applications, and other
features.
MDSI's products are modular in design, which allows a solution to be
implemented and then expanded to satisfy an organization's evolving information
requirements. MDSI's products are designed to interface with a variety of public
and private mobile data networks, including PCS networks and satellite-based
data transmission networks, and are compatible with a variety of operating
platforms, computer networks and enterprise applications. The most recent
versions of MDSI's software are also designed to be Internet-enabled, allowing
service companies' call takers, dispatchers and mobile technicians to use Web
browsers to access and input data and some products allow customers to schedule
appointments and track appointment progress online, anytime. For the mobile
user, MDSI's Internet-enabled software can be accessed on any mobile device,
such as a laptop, personal digital assistant, pager or an internet enabled
phone.
MDSI combines its products with professional services, such as
implementation planning, project management, software configuration, software
customization, training and ongoing technical support and software maintenance,
to effectively address a customer's mobile workforce management requirements.
Where appropriate, MDSI also provides third party products and services as part
of a complete mobile data solution. MDSI also offers general consulting services
to organizations evaluating the costs and benefits of implementing mobile
workforce management systems, as well as organizations evaluating wireless
industry software products and technologies.
In MDSI's traditional enterprise product deployment, MDSI's software is
installed on the customer's server at the customer's site. In 2000, MDSI
announced plans to implement its "eBusiness" strategy under which MDSI will
offer its Advantex family of mobile workforce management and wireless
connectivity application software products over the Internet from a
wirelessly-enabled Applications Service Provider ("ASP") site. The eBusiness
applications will include Advantex ASP, eService Manager and eService Manager
Mobile, which are designed to be similar in functionality to existing versions
of MDSI's software products.. MDSI intends to provide application hosting and
management services related to the eBusiness applications as a subscription
service for a monthly fee or on a "per transaction" basis.
2
MDSI believes that the growing usage of the Internet by the services
industry will provide opportunities to provide essential scheduling and
dispatching technology and services through its ASP site. The eBusiness strategy
is expected to provide smaller organizations that were previously unable to
afford mobile data workforce solutions or lacked the technical resources to
support such products, access to MDSI's products. See "Forward-Looking
Statements." MDSI intends to offer its ASP solution to customers through direct
sales by MDSI, co-marketing and partnership arrangements with other ASP
providers in select vertical markets, independent software vendors, systems
integration and wireless carriers. Ultimately, MDSI believes that larger
customers, including current MDSI customers, may elect to use MDSI's eBusiness
products rather than the traditional on-site systems currently used by larger
organizations.
Markets
MDSI has combined its expertise in software application development and
mobile data communications technology with its understanding of the unique needs
of targeted vertical markets to develop mobile workforce management solutions
that address the specific needs of businesses within those vertical markets.
Traditionally, MDSI has focused its attention on large customers in the
telecommunications, cable and broadband and utilities (electric, gas and water)
markets and to a lesser extent, commercial field service, and public safety
markets. MDSI evaluates new target markets based upon their similarity to
existing vertical markets in which MDSI has been successful, and upon the
ability of MDSI to utilize its core competencies and proven technology to meet
the needs of companies in these new markets.
Field Service
Telecommunications, Cable and Broadband. MDSI sells its
Advantex-Telecommunications product into the telecommunications, cable and
broadband markets. Recently, changes in the regulatory environment have led to
significant competition in these markets. For example, companies that provided
traditional voice telecommunications services are now permitted to provide data
services, basic cable and other broadband services. Similarly, companies that
provided traditional cable TV service, now also provide cable telephony services
and Internet services. The telecommunications market consists of wireline
providers of local, and long-distance services, wireless communication service
providers and ISPs (Internet service providers), worldwide. MDSI has installed
or has a contract to supply its products to numerous telecommunication companies
worldwide, including AT&T, Tele Danmark A/S, Cablevision Systems, and Belgacom
S.A.
MDSI believes that a number of major telecommunications companies have
evaluated the need for mobile workforce management systems. The Company
believes, however, that recent trends in the telecommunications industry have
affected levels of capital spending by companies in this industry, and that such
trends may adversely effect the rate at which these companies will adopt mobile
workforce management systems. Over time, MDSI believes that this market will
grow as companies implement mobile workforce management solutions to improve
their competitiveness, efficiency and service levels as deregulation of the
telecommunications markets continues. See "Forward-Looking Statements."
Cable and broadband services consist of basic cable television services and
new digital interactive broadband services, including digital cable TV services,
cable data and Internet services, cable telephony services, and other
interactive broadband data and multimedia services. The market is comprised of
traditional cable multiple system operators (MSO's) and independent cable system
operators, satellite service operators, new broadband divisions of traditional
telecommunication firms, and new broadband entrants. Currently, in North
America, approximately 80% of the subscriber base is under the control of the
ten largest MSO's. Although several of these major cable operators have
implemented mobile data solutions in selected sites, few operators have rolled
out these systems to multiple sites. Additionally, these MSO's are increasingly
outsourcing some of their field technician work to specialty contractors, a
group where MDSI does not currently have customers. See "Forward-Looking
Statements." MDSI has installed or has a contract to supply its products to
seven major cable operators, including Cox Communications Inc., Comcast Corp.,
MediaOne, Inc. and Adelphia Communications Corporation in the United States and
Rogers Cablesystems Ltd and Videotron in Canada. MDSI has also targeted the new
broadband overbuilder market (i.e., companies offering broadband services in
markets that traditionally have had only one service provider), which currently
is estimated to have only 4% share of the North American subscriber base, but
has grown rapidly. MDSI has successfully installed its r7 Advantex software with
one customer in the emerging broadband overbuilder market, Western Integrated
Networks, L.L.C. ("WinFirst").
3
Utilities. The utilities market targeted by MDSI primarily consists of gas,
electric and water companies in the United States, Canada, Europe and Asia. MDSI
has traditionally targeted the distribution operations within a utility. MDSI
believes, however, that such operations generally account for only a portion of
the total number of a utility's mobile workers, with the balance attributable to
mobile workers engaged in sales, construction, engineering and management
functions. As a result, MDSI believes that there is an opportunity to increase
sales to existing customers and generate incremental revenue. See
"Forward-Looking Statements". MDSI's products have been implemented or are being
implemented in over 60 gas and electric utilities located in the United States,
Canada, Europe and Asia.
Commercial Field Service. The commercial field market consists of a large
number of organizations mainly comprised of small and medium-sized firms who
provide a wide variety of general field services. These organizations include
companies engaged in the maintenance and repair of office equipment, insurance
adjustment, product repair and maintenance, computer technical support and
service, delivery services and on-site technical support. To date, MDSI has not
focused its primary attention on this market, but it has successfully sold its
Advantex-Field Service application to a small number of companies in this
market, including most recently, Diebold, Incorporated. The Company believes
that its new eBusiness products are designed to address the needs of small and
medium sized organizations in this market. See "Forward-Looking Statements."
Public Safety
The public safety market consists of federal, state and local agencies that
provide police, fire, medical and other emergency services. The public safety
industry was one of the first vertical industries to adopt mobile data
technology. As a result, MDSI believes that many organizations in the public
safety industry would benefit from the replacement of their original mobile data
systems with new technology that provides increased capabilities over the first
generation systems. See "Forward Looking Statements." MDSI has installed its
Advantex-Public Safety product with the North Carolina State Highway Patrol and
has a contract to supply this product to the State of Ohio. The Advantex-Public
Safety product is able to control multiple public safety agencies from one
platform infrastructure. Once the original system is installed within a
government agency, other agencies can be added to the system without procuring a
new system. An incremental license fee is charged for each agency and mobile
data terminal added to the system.
Customers and Applications
For the year ended December 31, 2000, MDSI's software and services revenues
were distributed approximately as follows: 50% from the telecommunications,
cable and broadband market, 40% the utility (electric, gas and water) market and
the remaining 10% from the other markets. During the year ended December 31,
2000, MDSI generated approximately 80% of its revenue from North America,
approximately 14% from the EMEA countries (Europe, Middle East and Africa), and
the remaining 6% from other parts of the world, primarily Austral-Asia.
MDSI's customers vary in size from small local service companies to large
regional and international organizations. During the year ended December 31,
2000, MDSI did not earn revenue from any one customer that accounted for greater
than 10% of overall revenue while in the years ended December 31, 1999 and 1998,
one U.S. utility company accounted for 10.1% and 8.5%, respectively, of MDSI's
consolidated revenue. In the years ended December 31, 2000, 1999 and 1998,
approximately 25.8%, 31.0% and 30.2%, respectively, of MDSI's consolidated
revenue was attributable to five or fewer customers. MDSI believes that revenue
derived from a limited number of customers will continue to represent a
significant portion of its consolidated revenue. In the years ended December 31,
2000, 1999 and 1998, revenue derived from sales outside of North America
accounted for 20.0%, 22.1% and 3.1% of MDSI's total revenue, respectively. See
Note 12 of MDSI's Consolidated Financial Statements. Because MDSI's revenue is
dependent, in large part, on significant contracts with a limited number of
customers, the percentage of MDSI's revenues that is derived from sales outside
of North America has fluctuated, and may continue to fluctuate, from
period-to-period. See "Business-Risk Factors - Dependence on Large Contracts and
Concentration of Customers" and "Forward-Looking Statements."
4
MDSI's eBusiness offering, including Advantex ASP, eService Manager and
eService Manager Mobile were launched during the year ended December 31, 2000.
MDSI has yet to realize any material revenues from these products. MDSI believes
that its eBusiness products will initially appeal to smaller customers who
cannot afford the upfront costs of on-site implementations and who do not have
the internal technical resources to operate such systems. MDSI intends to offer
its eBusiness products on a monthly subscription and/or transaction fee basis.
See "Forward-Looking Statements." MDSI also provides managed-hosting services to
numerous third parties. The customers for these services are typically medium-
to large- sized businesses that outsource their computer hosting needs in order
to increase efficiency, obtain increased technical expertise, and reduce cost.
Products
Advantex r7. Traditionally, MDSI has focused on on-site, enterprise
implementations for large customers in the telecommunications, cable and
broadband, utilities (electric, gas and water), commercial field services, and
public safety markets. MDSI has developed versions of its Advantex suite of
software products that are targeted specifically to meet the needs of each of
these vertical markets. The enterprise solution is typically comprised of the
sale of software licenses (priced on a per user basis) for Advantex r7 wireless
workforce management product and may include MDSI's Advantex Enterprise Gateway
product, which enables seamless wireless connectivity over a variety of wireless
networks. Additionally, MDSI provides the implementation and integration
services necessary to install the solution on the customers' site and connect it
to the customers' other enterprise applications. Finally, as part of an Advantex
enterprise sale, MDSI offers a maintenance and service agreement that may vary
in length up to multi-year terms. Advantex r7, introduced in 2000 as the latest
version of MDSI's Advantex product line, is scalable to meet the needs of large
field service organizations (tens of thousands of workers) or much smaller ones.
It is designed to be highly interoperable so that it can be seamlessly and
quickly integrated to other enterprise applications, such as inventory or
billing, on an organization's LAN or WAN. Advantex r7 is configurable by the
customer and has been designed to enable an ASP deployment. MDSI has
successfully implemented its first Advantex r7 deployment and expects to
complete the second implementation by the second quarter of 2001.
Advantex-ASP. Advantex-ASP represents a version of Advantex that can be
pre-configured to support the needs of a variety of potential customers and
deployed from a centrally hosted system. In contrast to MDSI's traditional,
one-time sale and delivery of a licensed software product, Advantex ASP allows
service companies to subscribe for hosted versions of Advantex r7 and the
Advantex Enterprise Gateway product from MDSI's wireless ASP site in St. Louis.
MDSI believes that Advantex ASP will make it easier and faster for organizations
to enjoy the benefits of a wireless workforce management system without
investing in data center operations and support functions, and allows companies
to focus exclusively on operating their core business more effectively. MDSI
believes that these benefits will be particularly attractive to mid-size
organizations in MDSI's core markets (as well as other field service markets
that are comprised primarily of mid-size organizations). The ASP offering may
also be attractive to large organizations as well, or as a means of
pilot-testing the MDSI solution prior to committing to an outright purchase of
licenses.
MDSI provides the expertise required to customize, host, manage, maintain,
and support the software application. This includes network services, data
center operations, application management and business systems integration. MDSI
will host the Advantex r7 workforce management software and the Advantex
Enterprise Gateway wireless connectivity software from its own wireless ASP
site. Advantex ASP was introduced in 2000 and MDSI is in the process of
implementing it at its data center. Advantex ASP will rely upon the continued
development of Advantex r7 product. MDSI anticipates that additional vertical
market versions of Advantex-ASP may be developed to meet the needs of customers
in new vertical markets, as they are established. See "Forward-Looking
Statements."
Advantex-Enterprise Gateway. The Advantex-Enterprise Gateway family of
inter-networking software products provides high speed, cost effective,
enterprise-wide connectivity solutions across multiple wireless and wireline
data networks. This software technology provides for the integration of existing
wireline-based computing environments with the most prevalent wireless networks.
Advantex-Enterprise Gateway allows users to integrate wireless and wireline data
applications in a marketplace where no connectivity or interoperability
standards are currently defined. MDSI markets the Advantex-Enterprise Gateway
product primarily to customers of its Advantex workforce management
applications. The Advantex-Enterprise Gateway product consists of both the open
message service (OMS) and open message client (OMC) software components. OMS is
a UNIX-based messaging solution providing bridge, router and gateway
functionality. OMC is a Windows product providing wireless and wireline data
access for PC compatible mobile computing devices.
5
eServiceManager. eServiceManager is a scaled-down software application
designed for smaller service companies with up to 50 mobile workers per
location. The application enables consumers to book appointments with service
providers online. It also allows the service provider's call-takers to schedule
appointments in response to orders by consumers via the phone. The application
performs algorithm-based resource allocation to assign each job to the most
appropriate mobile worker.
eService Manager Mobile. For small field service organizations, like
plumbers and electricians, who require an end-to-end workforce management
solution without all the features of Advantex, MDSI offers eService Manager
Mobile as a hosted service. Like Advantex, eService Manager Mobile allows
companies to schedule, assign, dispatch, update, complete and report on service
work orders and the people that execute them but was designed to meet the
requirements of a small organization. Additionally, eService Manager Mobile
provides the customer-facing functionality that allows service companies to
offer their services 24x7 through self-service, online scheduling. For small
"fixed location" service organizations, like a dentist offices, physicians, hair
salons, auto service centers or eye care outlets, without mobile workers, MDSI
offers eService Manager, a subset of eService Manager Mobile which offers
Internet-based scheduling and work order assignment without wireless
capabilities. Both eService solutions are hosted from MDSI's ASP site in St.
Louis. Unlike Advantex r7 its enterprise or ASP forms, the eService solutions
are accessible only from an Internet browser and typically are not integrated
with other enterprise applications. Accordingly, comparatively little service
work is required to implement the eService solutions.
Bundled Wireless Solutions. MDSI is currently certifying and testing a
number of products and services which are designed to provide seamless
communications between industry standard mobile devices, such as pagers, PDAs,
webphones, laptops, and wireless modems, with wireless networks and gateways
that permit communication between such mobile devices and MDSI's AdvantexASP,
eService Manager Mobile and eService Manager applications. MDSI has entered into
several reseller agreements with manufacturers and distributors of mobile
devices and the network carriers to enable it to provide these products and
services as a bundled wireless solution to its customers.
Professional and Customer Support Services
MDSI provides a complete range of specialized professional and customer
support services to assist its clients in implementing and using MDSI's products
effectively. Typically, contracts for the sale of MDSI's software include
implementation planning, project management, software configuration, software
customization, installation, education and training, technical support and
ongoing maintenance. MDSI believes that providing high quality, cost-effective
professional services facilitates effective implementation of its products and
fosters a strong relationship with the customer that often leads to future
orders for MDSI products and services. Through its wireless ASP operations, MDSI
also offers a number of professional services that are unrelated to the sale of
its products.
Professional Services
MDSI's professional services personnel facilitate the implementation and
optimization of its products. A professional services engagement usually lasts
for six to twelve months and involves working with the client in planning,
specification and implementation of its products. During the planning phase of
the engagement, MDSI's personnel work closely with customer representatives to
prepare a detailed project plan that includes a timetable, resource
requirements, milestones, training requirements and demonstrations of product
capabilities.
6
During the specification phase of the professional services engagement,
MDSI's professional services personnel work with the customer to specify the
exact MDSI products and system configuration. MDSI personnel also work with the
customer to design the technology infrastructure, specify the business processes
and formats for those elements of the products that are configurable, define
business processes and formats for the elements that are custom designed and
establish the procedure for implementation of the product. MDSI personnel also
develop and recommend modifications to the customer's business processes to
improve the performance of MDSI software and reduce or eliminate the need for
customization.
During the final phase of implementation, MDSI personnel complete
configuration of the software products, complete project customization, finalize
product installation and develop end-user documentation and other technical and
business processes required to integrate the MDSI products into the client's
environment. MDSI personnel also work with the client to develop and test custom
features and various interfaces to corporate networks, wireless networks and
other corporate information systems.
Application Hosting and Related Professional Services.
As well as being the hosting centre for MDSI's own applications, MDSI's
wireless ASP operations in St. Louis provide advanced application hosting for
many third party solutions including advanced e-commerce Web sites and the Lotus
family of advanced collaboration and distance learning applications. MDSI's St.
Louis operations can also outsource a customer's networking needs, and provide
management of their office LAN/WAN and Internet connections. MDSI's ASP
facilities and staff provide the physical environment and engineering support
necessary to keep these technologies operating at peak performance around the
clock. In connection with this business, MDSI provides the following consulting
services:
Lotus/Domino Implementations: MDSI is a Lotus Advanced Business Partner and
has been selected on various occasions by Lotus and IBM as a subcontractor to
provide advanced Lotus implementation services to their clients. Once an
implementation or upgrade is complete, MDSI offers several plans to provide
ongoing support and maintenance to keep a Lotus environment running at peak
efficiency and cost-effectively. Some of MDSI's Lotus implementation clients
include Seton Hall University, PECO Energy, Deutsche Bank, Delaware State
University and Bowling Green State University, and others.
Java Application Development: MDSI has significant expertise in the design,
development and implementation of object-oriented and component-based Java
applications that are highly scaleable, reliable, and secure. MDSI's staff has
extensive experience using client-side and server-based Java. MDSI's technical
staff have significant experience with developing systems with several major
Java standards.
Network Engineering & Audits: MDSI's staff has extensive experience in
designing, implementing, and troubleshooting voice and data network networks,
for companies such as Deutsche Bank, A.G. Edwards, PECO Energy, Bowling Green
State University, and many others. One of MDSI's core competencies is
implementing managed desktop environments that increase network performance and
reliability while reducing Total Cost of Ownership (TCO) of PC-based networks.
MDSI also has extensive experience in performing network reviews and audits,
with advanced knowledge of all seven layers of the OSI network model. Most
importantly, MDSI's staff understands the importance of each layer and how to
optimize network components to meet the requirements of each client's network.
7
Oracle Database Administration: MDSI's staff has experience in implementing
large data warehouses for companies such as MasterCard, Union Pacific, and
Citicorp among others. MDSI is an Oracle Business Partner with extensive
knowledge of Oracle 7, 8, and 8i databases. If needed, MDSI can also provide
Oracle database administration services to customers to ensure that their
databases are operating at peak performance.
Data Center Server Management: While MDSI operates its own Internet Data
Centers (IDC), MDSI can also provide data center management of clients'
facilities either remotely or on site, including UNIX, NT, Linux, and Novell
servers, along with numerous other server or networking technologies. MDSI has
performed such services for clients such as PECO Energy, Deutsche Bank, and
Bowling Green State University among others. MDSI's staff has extensive
experience in performing operational support activities to include 24 x 7 system
monitoring, problem determination, problem resolution management, operating
system/system software version management, and backup and restore. MDSI also has
extensive experience in implementing system management environments using a
combination of both automated agents and polling mechanisms using major vendor's
system management platforms, in order to deliver maximum application
availability.
Customer Support
MDSI believes that its ability to offer a high level of customer support is
critical to its success. MDSI's customer support group provides MDSI customers
with telephone and on-line technical support as well as product updates. Most
MDSI customers enter into separate customer support agreements, typically on an
annual basis, that take effect on the expiration of the product warranty. At
December 31, 2000, MDSI had 58 customer support personnel, of whom 36 were
located in Canada, 18 in the United States and 4 in Copenhagen.
MDSI is also in the process of establishing a comprehensive 7-day by
24-hour customer service support center to provide various levels of customer
support for its eBusiness customers. MDSI is also conducting benchmarking
activities to assist in the design and operation of its data center. MDSI
intends to provide professional services in conjunction with the deployment of
its ASP offerings. These professional services personnel will draw upon the
experience of existing MDSI personnel and will assist in the configuration of
MDSI's systems to meet the needs of potential customers in the target markets.
Product Development
The mobile workforce management industry is characterized by rapid
technological change and increasing user requirements. Accordingly, MDSI must be
able to provide new products and to modify and enhance existing products on a
timely and continuing basis in order to be competitive. To accomplish this
objective, MDSI's strategy is to utilize proven technology to further enhance
its existing products and to create new products. Where appropriate, MDSI may
acquire or license complementary technology developed by third parties for
integration into MDSI's products.
MDSI believes that its highly qualified software development personnel
provide MDSI with a competitive advantage. MDSI personnel have considerable
experience and expertise in the development of mobile workforce management
applications specifically designed for use with a wireless data network, as well
as in the integration of these applications with a customer's corporate
information system. MDSI software product development personnel employ modular
software architecture, object-oriented software development and graphical user
interface design technologies to develop scaleable, modular, configurable
products. MDSI personnel have expertise in software technology, wireless and
wireline communications technologies, computer environments and corporate
information systems integration. They also have considerable expertise in the
design and development of specialized mobile computing devices, as well as radio
system design and implementation. MDSI believes that this combination of
expertise in multiple disciplines has allowed and will continue to allow MDSI to
design and develop mobile workforce management solutions which can be
implemented in a timely and cost-effective manner.
8
As of December 31, 2000, MDSI's technical and engineering staff, supporting
both product development and professional services, consisted of 346 employees,
including 224 employees based at its Richmond, British Columbia headquarters, 52
employees based primarily at its Itasca, Illinois facility, 65 employees based
at its St. Louis, Missouri facility and other locations in the United States and
5 in the United Kingdom.
During the years ended December 31, 2000, 1999 and 1998, MDSI's total
expenditures for product development were $9.0 million, $6.9 million and $5.8
million, respectively, reflecting 14.7%, 11.8% and 12.1% of MDSI's revenue,
respectively. Management believes that timely and continuing product development
is critical to MDSI's success and plans to continue to allocate significant
resources to product development. See "Forward-Looking Statements."
Sales and Marketing
MDSI markets its products through a direct sales force as well as through
strategic remarketing and/or joint selling arrangements with independent
software vendors, system integrators, vertical-market-focused ASP's, wireless
carriers and Internet service portals (or marketplaces).
Direct Sales Force. MDSI's sales personnel are knowledgeable about the
technological components of wireless applications and current industry and
enterprise-specific application issues. They work in teams that specialize in
each of the targeted vertical markets. MDSI's sales personnel employ their
expertise to develop long-term consultative relationships with customers in
order to identify the needs of the customer and provide specific and effective
solutions. To date, substantially all of MDSI's revenue has been generated by
direct sales activities.
Independent Software Vendors. MDSI establishes relationships with other
independent software vendors that sell complementary products, such as billing
or customer relationship management solutions, into MDSI's markets. The
relationships typically involve MDSI working with the vendors to establish a
standard integration of the companies' products, and jointly identifying and
jointly executing on sales prospects for the integrated solution. To date, MDSI
has established relationships with companies like Siebel Systems, Lucent
Technologies, SAP, and CES International. In some cases the relationships have
been formalized through written agreements, while others remain informal.
Systems Integrators. MDSI also establishes strategic relationships with
systems integrators that work in MDSI's markets to provide end-to-end solutions
on a customer-by-customer basis or as an integrated product offering for the
vertical market. In either case, MDSI works with the integrator to assist in the
sales process and to integrate MDSI's products with the other component software
pieces. To date, MDSI has worked with Cap Gemini, Ernst & Young, Accenture
(formerly Andersen Consulting), PricewaterhouseCoopers, CGI, and Convergent
Group. In some cases the relationships have been formalized through written
agreements, while others remain informal. In the future, MDSI intends to involve
these integrators in providing the implementation work surrounding customer
installations. See "Forward-Looking Statements."
9
Vertical Market ASPs. For its Advantex ASP product, MDSI intends to
establish relationships with other ASPs that offer complementary solutions. The
relationships will involve solution integration work, an interconnection of the
companies' ASP sites and arrangements surrounding sales of the integrated
solution. To date, MDSI has entered into one such relationship, with DriveLogic,
a company that is integrating an end-to-end ASP solution to automate the life
cycle of auto insurance claims, from initiation to settlement. MDSI's Advantex
ASP product will provide the workforce management and wireless connectivity
components of the total solution. DriveLogic is a subsidiary of CCC Information
Services, a leading provider of outsourced solutions, such as claims management,
to the auto insurance industry. See "Forward-Looking Statements."
Wireless Carriers. MDSI also intends to market its eBusiness applications
through wireless carriers. For these carriers, MDSI's products represent content
that could increase their customers' usage of their wireless networks, and make
customers less likely to switch to another wireless service provider. For
prospects identified by the wireless carrier, MDSI anticipates that its direct
sales force will play a significant role in the sales process. MDSI intends to
bundle the carrier's airtime and resell it to its eBusiness customers as part of
a total solution. To achieve these goals, MDSI must link the carriers' networks
to MDSI's wireless ASP site. To date, MDSI has entered into reseller
arrangements with Cingular Interactive L.P. (formerly BellSouth Wireless Data
L.P.), Motient Corporation, and AT&T Wireless Services Inc. Under these
arrangements, the parties intend to offer MDSI's eBusiness solutions jointly
with airtime from the carrier's network. MDSI and the carrier's intend to
jointly market the bundled products, initially to small and medium-sized
companies. See "Forward Looking Statements."
Online Service Marketplaces. MDSI intends to sell its eService products
through Web companies who create Internet marketplaces where sellers and buyers
of services can transact business online. MDSI's hosted eService products can be
integrated with a company's technology and linking sites to enable the
marketplace with the eService functionality (including online scheduling, order
assignment, order dispatching, and real-time, online tracking) and to offer that
functionality to the marketplaces' service company customers. To date, MDSI has
entered into agreements with two such Internet marketplaces, both in the home
services market, OurHouse.com Inc. ("OurHouse.com"), an Internet site for home
improvement, home services and how-to information, and ServiceMagic, Inc., an
Internet site for home improvement, home services and how-to information. As
part of its agreement with OurHouse.com, MDSI has made an investment of
approximately $500,000 in OurHouse.com. See "Forward-Looking Statements."
At December 31, 2000, MDSI's sales, marketing and technical support group
consisted of 70 employees, with 33 based out of MDSI's Richmond, British
Columbia facility, 19 based out of its Itasca, Illinois facility, 10 employees
based out of its St. Louis, Missouri facility, and 8 based out of various other
international locations.
Competition
The markets for mobile workforce management applications and wireless
connectivity software are highly competitive. Numerous factors affect MDSI
competitive position, including price, product features, product performance and
reliability, ease of use, product scalability, product availability on multiple
platforms (both server and mobile workstation), ability to implement mobile
workforce management solutions domestically and internationally while meeting
customer schedules, integration of products with other enterprise solutions,
availability of project consulting services and timely ongoing customer service
and support.
10
Within these markets, there are a small number of new ventures, either
small companies attempting to establish a business in this market or large
companies attempting to diversify their product offerings. MDSI expects such
competition to intensify as acceptance and awareness of mobile data
communications and technology continue. In addition, a small number of MDSI's
potential customers develop software solutions internally, thereby eliminating
the requirement for suppliers such as MDSI. Current or potential competitors may
establish cooperative arrangements among themselves or with third parties to
increase the ability of their products to address customer requirements.
Certain of MDSI's competitors have substantially greater financial,
technical, marketing and distribution resources than MDSI. As a result, they may
be able to respond more quickly to new or emerging technologies and changing
customer requirements, or to devote greater resources to the development and
distribution of existing products. There can be no assurance that MDSI will be
able to compete successfully against current or future competitors or alliances
of such competitors, or that competitive pressures faced by MDSI will not have a
material adverse effect on its business, financial condition, operating results
and cash flows.
MDSI believes that in the utility, telecommunications, cable and broadband
industry segments the most important competitive factors are the reputation of
the supplier and their proven record in implementing wireless data solutions.
MDSI primarily competes in the utility market with Utility Partners, L.C.,
Alterra Corp., M3i Systems, Inc. and iMedeon, Inc. MDSI has several competitors
in the telecommunications, cable and broadband markets, a few of which have
historical relationships with certain of the large telecommunications companies.
MDSI's primary competitor for telecommunications customers is Telcordia
(formerly Bellcore), and more recently ClickSoftware, Inc. (formerly IET) and
ViryaNet Ltd. In the cable and broadband markets, MDSI's primary competitors are
Telcordia, MobileForce Technologies, Inc. (formerly Ubiquinet, Inc), PointServe
(through its merger with Brazen Software, Inc.) and CSG Systems International.
MDSI believes that the principal competitive factors in the field service
market are the ability to improve the customer service aspects of an
organization's business and increase the productivity of service
representatives. In this market, MDSI's principal competitors are Astea
International Inc. and Metrix Inc., in addition to several larger enterprise
software companies, such as Clarify, Oracle, PeopleSoft and Siebel Systems,
which offer less comprehensive solutions.
MDSI primarily competes in the public safety market with Cerulean, PRC,
Tiberon Systems, and New World Systems. Many of MDSI's competitors have a more
established reputation in the public safety market. In many of the large public
safety opportunities, MDSI is a subcontractor to a large prime contractor
serving as the overall system integrator. MDSI is currently used as a
subcontractor for public safety installations by Motorola Inc. and TRW Inc.
MDSI believes that the principal competitive factors in the eBusiness
market are the integrity of MDSI's business model, and the financial viability
of the organization. MDSI will face competition from a number of existing
competitors and emerging Internet based competitors in the eBusiness field.
Existing competitors including iMedeon, ClickSoftware, FieldCentrix, and
eDispatch.com Wireless Data Inc. ("eDispatch"). MDSI believes that these
competitors are primarily targeting smaller-sized businesses with an ASP service
offering. These companies offer a "basic" scheduling and dispatch system. New
competitors targeting Internet intermediaries for the provision of scheduling
and/or dispatch software services include Microsoft WebAppoint, TimeTrade,
MegaTribe and X-Time. These competitors are specifically focused on
Internet-based scheduling and dispatching services for the growing general
services market, but do not currently offer a wireless solution. The competitive
landscape that MDSI's products face is complex since this market is in the
relatively early stages of development. By positioning itself as a wireless
Internet ASP, MDSI will also face competition from wireless infrastructure
providers such as Aether Systems, Inc. and Broadbeam Inc., and from managed IT
services providers such as Exodus Communications Inc. and Jamcracker Inc. MDSI
intends to compete with both types of competitors in the eBusiness solutions
market by leveraging on its track-record, its relationships and its product
history.
11
Employees
As of December 31, 2000, the Company had 564 full-time employees and
contractors, including 346 in technical and engineering, 70 in sales, marketing
and technical support, 58 customer support and 90 in management, finance and
administration. None of the Company's employees is represented by a labor union
and the Company believes its employee relations to be good. Subsequent to
December 31, 2000, the Company terminated 34 employee and contractor positions
in Canada and the United States in connection with a restructuring. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Risk Factors
MDSI's business is subject to the following risks. These risks also could
cause actual results to differ materially from results projected in any
forward-looking statement in this report.
Potential Fluctuations in Quarterly Operating Results
MDSI's results of operations have fluctuated in the past and are likely to
continue to fluctuate from period to period depending on a number of factors,
including the timing and receipt of significant orders, the timing of completion
of contracts, increased competition, changes in the demand for MDSI's products
and services, the cancellation of contracts, the timing of new product
announcements and introductions, changes in pricing policies by MDSI and its
competitors, delays in the introduction of products or enhancements by MDSI,
expenses associated with the acquisition of products or technology from third
parties, the mix of sales of MDSI's products and services and third party
products, seasonality of customer purchases, personnel changes, the mix of
international and North American revenue, tax policies, foreign currency
exchange rates and general economic conditions.
MDSI relies upon its ability to implement and integrate mobile workforce
management solutions on schedule and to the satisfaction of its customers. MDSI
from time to time has experienced certain implementation and other problems that
have delayed the completion of certain projects, including the failure of third
parties to deliver products or services on a timely basis and delays caused by
customers. Because MDSI currently recognizes revenue on a percentage of
completion method, delays in completion of certain contracts has caused delays
in recognition of revenue and, consequently, unanticipated fluctuations in
quarterly results. There can be no assurance that MDSI will be able to complete
current projects or implement future systems on a timely and cost effective
basis or that delays will not result in cancellations of contracts or result in
the imposition of substantial penalties. Any such material delay, cancellation
or penalty could have a material adverse effect upon MDSI's business, financial
condition, operating results and cash flows.
Because MDSI is unable to forecast with certainty the receipt of orders for
its products and services and MDSI's expense levels are relatively fixed and are
based, in part, upon its expectation of future revenue, if revenue levels fall
below expectations as a result of a delay in completing a contract, the
inability to obtain new contracts, the cancellation of an existing contract or
otherwise, operating results are likely to be adversely effected. As a result,
net income may be disproportionately affected because a relatively small amount
of MDSI's expenses vary with its revenue. In particular, MDSI plans to increase
its operating expenses to implement its e-Business strategy, expand its sales
and marketing operations, expand its distribution channels, fund greater levels
of research and development, broaden its customer support capabilities and
increase its administrative resources. MDSI is in the process of implementing
its e-Business strategy, which is designed to generate revenues on a
month-to-month or per-transaction basis. MDSI anticipates that costs associated
with implementing its e-Business strategy will increase MDSI's operating
expenses and may not be offset by ASP service revenue, if at all. There can be
no assurance that MDSI will effectively compete in this market or receive
sufficient revenues from its e-Business to offset such costs.
12
Based upon all of the foregoing factors, MDSI believes that its quarterly
revenue, direct expenses and operating results are likely to vary significantly
in the future, that period-to-period comparisons of the results of operations
are not necessarily meaningful and that such comparisons should not be relied
upon as an indication of future performance. MDSI may also choose to reduce
prices or increase spending in response to competition, or to pursue new market
opportunities. See "Forward-Looking Statements". If new competitors,
technological advances by existing competitors or other competitive factors
require MDSI to reduce its prices or invest significantly greater resources in
research and development efforts, MDSI's operating results in the future may be
adversely affected. There can be no assurance that MDSI will be able to grow in
future periods or that it will be able to sustain its level of total revenue or
its rate of revenue growth on a quarterly or annual basis. It is likely that in
some future quarter MDSI's operating results will be below the expectations of
public market analysts and investors. See "Forward Looking Statements". In such
event, the price of MDSI's Common Shares would likely be materially adversely
affected.
Since 1996, MDSI has been, and anticipates that from time to time it will
be, engaged to provide, in addition to its own products and services, third
party hardware, software and services, which MDSI purchases from vendors and
sells to its customers. For the years ended December 31, 2000, 1999 and 1998,
4.6%, 14.1% and 27.0%, respectively, of MDSI's revenue was attributable to third
party products and services. Because the revenue generated from the supply of
third party products and services may represent a significant portion of certain
contracts and the installation and rollout of third party products is generally
at the discretion of the customer, MDSI may, depending on the level of third
party products and services provided during a period, experience large quarterly
fluctuations in revenue. See "Forward Looking Statements". In addition, because
MDSI's gross margins on third party products and services are substantially
below gross margins historically achieved on revenue associated with MDSI
products and services, large fluctuations in quarterly revenue from the sale of
third party products and services will result in significant fluctuations in
direct costs, gross profits, operating results, cash flows and other items
expressed as a percentage of revenue.
Certain of the vertical markets targeted by MDSI include industries with
implementation requirements that vary seasonally. For example, utility companies
in North America generally have decreased implementation activity in winter
months when such utilities face their greatest consumer demand. As a result,
MDSI's results of operations may also vary seasonally, and such variation may be
significant.
Lengthy Sales Cycles for Advantex Products
The purchase of a mobile workforce management solution is often an
enterprise-wide decision for prospective customers and requires MDSI to engage
in sales efforts over an extended period of time and to provide a significant
level of education to prospective customers regarding the use and benefits of
such systems. Due in part to the significant impact that the application of
mobile workforce management solutions has on the operations of a business and
the significant commitment of capital required by such a system, potential
customers tend to be cautious in making acquisition decisions. As a result,
MDSI's products generally have a lengthy sales cycle ranging from several months
to several years. Consequently, if sales forecasted from a specific customer for
a particular quarter are not realized in that quarter, MDSI may not be able to
generate revenue from alternative sources in time to compensate for the
shortfall. The loss or delay of a large contract could have a material adverse
effect on MDSI's quarterly financial condition, operating results and cash
flows, which may cause such results to be less than analysts' expectations.
Moreover, to the extent that significant contracts are entered into and required
to be performed earlier than expected, operating results for subsequent quarters
may be adversely affected. In particular, MDSI has recently experienced an
increase in the time necessary to complete the negotiation and signing of
certain contracts with some of its larger customers.
Dependence on Large Contracts and Concentration of Customers
MDSI's revenue is dependent, in large part, on significant contracts from a
limited number of customers. During the years ended December 31, 2000, 1999 and
1998, approximately 25.8%, 31.0% and 30.2%, respectively, of MDSI's consolidated
revenue was attributable to five or fewer customers. During the years ended
December 31, 2000, 1999 and 1998, one customer accounted for 5.8%, 10.1% and
8.5%, respectively, of MDSI's consolidated revenue. MDSI believes that revenue
derived from current and future large customers will continue to represent a
significant portion of its total revenue. See "Forward Looking Statements". The
inability of MDSI to continue to secure and maintain a sufficient number of
large contracts would have a material adverse effect on MDSI's business,
financial condition, operating results and cash flows. Moreover, MDSI's success
will depend in part upon its ability to obtain orders from new customers, as
well as the financial condition and success of its customers and general
economic conditions.
13
The size of a contract for a particular customer can vary substantially
depending on whether MDSI is providing only its own products and services or is
also responsible for supplying third party products and services. MDSI
recognizes revenue using the percentage of completion method, which MDSI
calculates based on total costs incurred compared to total costs estimated by
MDSI for completion. Therefore, any significant increase in the costs required
to complete a project, or any significant delay in a project schedule, could
have a material adverse effect on that contract's profitability and because of
the size of each contract, on MDSI's overall results of operations. MDSI from
time to time has also experienced certain implementation and other problems that
have delayed the completion of certain projects, including the failure of third
parties to deliver products or services on a timely basis and delays caused by
customers. MDSI's contracts generally provide for payments upon the achievement
of certain milestones. Therefore, any significant delay in the achievement of
milestones on one or more contracts would affect the timing of MDSI's cash flows
and could have a material adverse effect on MDSI's business, financial
condition, operating results and cash flows. Any significant failure by MDSI to
accurately estimate the scope of work involved, plan and formulate a contract
proposal, effectively negotiate a favorable contract price, properly manage a
project or efficiently allocate resources among several projects could have a
material adverse effect on MDSI's business, financial condition, operating
results and cash flows.
Potential Fluctuations in Backlog
MDSI's backlog consists of a relatively small number of large contracts
relating to sales of its mobile workforce management and wireless connectivity
software and related equipment and services, and sales of third party products
and services. Due to the long, complex sales process and the mix of sales of
MDSI's products and services and third party products and services, MDSI's
backlog may fluctuate significantly from period-to-period. In addition, under
the terms of MDSI's contracts, MDSI's customers may elect to terminate their
contracts with MDSI at any time after notice to MDSI or to delay certain aspects
of installation. Due to the relative size of a typical contract compared to
MDSI's annual and quarterly revenue, a termination or installation delay of one
or more contracts could have a material adverse effect on MDSI's business,
financial condition, operating results and cash flows. Contracts for software
maintenance and support are generally renewable every year and are subject to
renegotiation upon renewal. There can be no assurance that MDSI's customers will
renew their maintenance contracts or that renewal terms will be as favorable to
MDSI as existing terms.
Limited Operating History; History of Losses; Increased Expenses
MDSI commenced operations in February 1993 and therefore has only a limited
operating history upon which an evaluation of its business and prospects can be
based. As of December 31, 2000, MDSI had an accumulated deficit of $9.7 million.
There can be no assurance of sustained profitability or that, MDSI will realize
revenue growth or be profitable on a quarterly or annual basis. In addition,
MDSI plans to increase its operating expenses to implement its e-Business
strategy, expand its sales and marketing operations, fund greater levels of
research and development, broaden its customer support capabilities and increase
its administration resources. A relatively high percentage of MDSI's expenses is
typically fixed in the short term as MDSI's expense levels are based, in part,
on its expectations of future revenue. To the extent that such expenses precede
or are not subsequently followed by increased revenue, MDSI's business,
financial condition, operating results and cash flows would be materially
adversely affected. In addition, in view of MDSI's recent revenue growth, the
rapidly evolving nature of its business and markets, MDSI's limited operating
history and the recent acquisitions, MDSI believes that period-to-period
comparisons of financial results are not necessarily meaningful and should not
be relied upon as an indication of future performance.
Integration of Acquisitions
MDSI may, when and if the opportunity arises, acquire other products,
technologies or businesses involved in activities, or having product lines, that
are complementary to MDSI's business. Acquisitions involve numerous risks,
including difficulties in the assimilation of the operations, technologies and
products of the acquired companies, the diversion of management's attention from
other business concerns, risks associated with entering markets or conducting
operations with which MDSI has no or limited direct prior experience and the
potential loss of key employees of the acquired company. Moreover, there can be
no assurance that any anticipated benefits of an acquisition will be realized.
Future acquisitions by MDSI could result in potentially dilutive issuance's of
equity securities, the incurrence of debt and contingent liabilities,
amortization of expenses related to goodwill and other intangible assets and
write-off of restructuring costs and acquired research and development costs,
all of which could materially and adversely affect MDSI's financial condition,
results of operations and cash flows.
14
New Product Development
MDSI expects that a significant portion of its future revenue will be
derived from the sale of newly introduced products, including Advantex r7,
Advantex ASP, eService Manager, and from enhancement of existing products.
MDSI's success will depend in part upon its ability to enhance its current
products on a timely and cost-effective basis and to develop new products that
meet changing market conditions, including changing customer needs, new
competitive product offerings and enhanced technology. There can be no assurance
that MDSI will be successful in developing and marketing on a timely and
cost-effective basis new products and enhancements that respond to such changing
market conditions. If MDSI is unable to anticipate or adequately respond on a
timely or cost-effective basis to changing market conditions, to develop new
software products and enhancements to existing products, to correct errors on a
timely basis or to complete products currently under development, or if such new
products or enhancements do not achieve market acceptance, MDSI's business,
financial condition, operating results and cash flows could be materially
adversely affected. In light of the difficulties inherent in software
development, MDSI has experienced, and expects that it will experience, delays
in the completion and introduction of new software products, such as Advantex
r7. The increased time required for the initial implementation and field testing
of a new version of software has resulted in delays in commencement of
additional installations of the Advantex r7 product. MDSI completed its first r7
installation in the first quarter of 2001, and anticipates it will complete an
additional installation of the Advantex r7 product during the second quarter of
2001. See "Forward-Looking Statements".
e-Business Development
MDSI intends to provide access to its mobile workforce management and
wireless connectivity application software products over the Internet from a
wirelessly-enabled ASP site on a subscription or "per transaction" basis.
Currently MDSI derives e-Business revenue from consulting and hosting services,
and there can be no assurance that MDSI will realize significant revenues from
its new e-Business products. MDSI's e-Business products are targeted at Internet
intermediaries who offer a wide range of services, including home services to
consumers and small and medium-sized businesses. MDSI anticipates that its
operating expenses will increase as MDSI establishes a comprehensive 7 day, 24
hour customer service support center to provide various levels of customer
support for its e-Business customers and increases its development and marketing
efforts. MDSI does not currently have any e-Business customers, operating on a
commercial basis although field trials have commenced, and there can be no
assurance that MDSI will successfully implement its e-Business strategy. There
also can be no assurance that MDSI will be able to compete successfully against
current or future competitors or alliances of such competitors, or that
competitive pressures faced by MDSI will not materially adversely affect its
business, financial condition, operating results and cash flows.
As part of MDSI's eBusiness strategy, MDSI has made strategic investments
in two private companies that have created Internet marketplaces. At December
31, 2001, MDSI has made an aggregate investment of approximately $2.5 million in
such companies. There can be no assurance that such entities will be
commercially successful or that MDSI will be able to recover or realize a return
on its investment in such companies.
Management of Growth
Since its inception, MDSI has experienced rapid growth in product sales,
personnel, research and development activities, number and complexity of
products, the number and geographic focus of its targeted vertical markets and
product distribution channels. The total number of employees of MDSI has grown
from nine employees in Canada in February 1993 to 564 employees located in
Canada, the United States and other international locations at December 31,
2000. In addition, the recent acquisition of Connectria has increased the number
of products MDSI supports and markets, as well as the number of vertical markets
into which it sells products. MDSI has also recently expanded the geographical
areas in which it operates. MDSI believes that continued growth in the number
and complexity of products and in the number of personnel will be required to
maintain MDSI's competitive position. MDSI's rapid growth, coupled with the
rapid evolution of MDSI's markets, has placed, and is likely to continue to
place, significant strains on its management, administrative, operational and
financial resources, as well as increased demands on its internal systems,
procedures and controls. MDSI's ability to manage recent and future growth will
require MDSI to continue to improve its financial and management controls,
reporting systems and procedures on a timely basis, to implement new systems as
necessary and to expand, train, motivate and manage its sales and technical
personnel. There can be no assurance that MDSI will be able to manage its growth
successfully. Failure to do so could have a material adverse effect on MDSI's
business, financial condition, operating results and cash flows.
15
Dependence on Key Personnel
MDSI's performance and future operating results are substantially dependent
on the continued service and performance of its senior management and key
technical and sales personnel. MDSI intends to hire a significant number of
additional technical and sales personnel in the next year. See "Forward-Looking
Statements." Competition for such personnel is intense, and there can be no
assurance that MDSI can retain its key technical, sales and managerial employees
or that it will be able to attract or retain highly-qualified technical and
managerial personnel in the future. The loss of the services of any of MDSI's
senior management or other key employees or the inability to attract and retain
the necessary technical, sales and managerial personnel could have a material
adverse effect upon MDSI's business, financial condition, operating results and
cash flows.
Dependence on Selected Vertical Markets
Prior to 1996, substantially all of MDSI's revenue was derived from the
sale of products and services to customers in the utility market. For the years
ended December 31, 1997 and 1996, the utility market accounted for greater than
50% of MDSI's revenue. In those years, MDSI sought to reduce its reliance on the
utility market by developing or acquiring compatible products for organizations
with mobile workforces in other vertical markets. In 1998, the utility market
accounted for greater than 40% of MDSI's revenue. In 1999, the
telecommunications market accounted for 48% of MDSI's revenue. In 2000, the
telecommunications and cable markets accounted for greater than 45% of MDSI's
revenue. MDSI anticipates that a significant portion of its future revenue will
be generated by sales of products to the telecommunications market. See
"Forward-Looking Statements." The Company believes that recent economic
developments and trends have adversely affected and may continue to affect
levels of capital spending by companies in a variety of industries, including
telecommunications and broadband. In addition, current economic conditions and
developments in the energy markets may have an adverse affect on the financial
condition of energy and utility companies in certain geographic areas of North
America. The Company anticipates that such economic conditions and regulatory
trends may affect demand in 2001 for the products and services offered by the
Company. A decline in demand for MDSI's products in the telecommunications,
utilities or other markets as a result of economic conditions, regulatory
trends, competition, technological change or otherwise, would have a material
adverse effect on MDSI's business, financial condition, operating results and
cash flows. There can be no assurance that MDSI will be able to continue to
diversify its product offerings or revenue base by entering into new vertical
markets.
Dependence on Marketing Relationships
MDSI's products are marketed by MDSI's direct field sales force as well as
by resellers. There can be no assurance that MDSI's existing resellers will
continue to provide the level of services and technical support necessary to
provide a complete solution to MDSI's customers or that they will not emphasize
their own or third-party products to the detriment of MDSI's products. The loss
of these resellers, the failure of such parties to perform under agreements with
MDSI or the inability of MDSI to attract and retain new resellers with the
technical, industry and application experience required to market MDSI's
products successfully could have a material adverse effect on MDSI's business,
financial condition, operating results and cash flows. MDSI expects that it may
enter into certain joint ventures in order to facilitate its expansion into
other vertical markets and geographic areas. See "Forward Looking Statements".
To the extent that such joint ventures are not successful, there could be a
material adverse effect on MDSI's business, financial condition, operating
results and cash flows.
MDSI intends to market its e-Business products through a direct sales
force, and through marketing relationships with ASP's that are offering
end-to-end suites of operating solutions to MDSI's targeted vertical markets,
wireless carriers and operators of Internet sites that aggregate smaller service
providers for home services. There can be no assurance that MDSI's e-Business
solutions will be compatible with these marketing partners or that they will not
emphasize their own or third-party products to the detriment of MDSI's products.
MDSI's failure to enter into marketing relationships, the failure of the parties
to perform under these agreements or the inability of MDSI to provide effective
e-Business solutions successfully could have a material adverse effect on MDSI's
business, financial condition, operating results and cash flows.
Competition
The markets for mobile workforce management applications, wireless
connectivity software, mobile data network equipment and mobile computing
devices are highly competitive. Numerous factors affect MDSI's competitive
position, including price, product features, product performance and
reliability, ease of use, product scalability, product availability on multiple
platforms (server, wireless carrier, and mobile workstation), ability to
implement mobile workforce management solutions domestically and internationally
while meeting customer schedules, integration of products with other enterprise
solutions, availability of project consulting services and timely ongoing
customer service and support. Within these markets, there are a small number of
new ventures, either small companies attempting to establish a business in this
market or large companies attempting to diversify their product offerings. MDSI
16
expects such competition to intensify as acceptance and awareness of mobile data
communications and technology continue. See "Forward Looking Statements". In
addition, a small number of MDSI's potential customers develop software
solutions internally, thereby eliminating the requirement for suppliers such as
MDSI. Current or potential competitors may establish cooperative arrangements
among themselves or with third parties to increase the ability of their products
to address customer requirements. Certain of MDSI's competitors have
substantially greater financial, technical, marketing and distribution resources
than MDSI. As a result, they may be able to respond more quickly to new or
emerging technologies and changing customer requirements, or to devote greater
resources to the development and distribution of existing products. There can be
no assurance that MDSI will be able to compete successfully against current or
future competitors or alliances of such competitors, or that competitive
pressures faced by MDSI will not materially adversely affect its business,
financial condition, operating results and cash flows. MDSI primarily competes
in the utility market with Utility Partners, L.C., Alterra Corp., M3i Systems,
Inc. and iMedeon, Inc. MDSI has several competitors in the telecommunications,
cable and broadband markets, a few of which have historical relationships with
certain of the large telecommunications companies. MDSI's primary competitor for
telecommunications customers is Telcordia (formerly Bellcore), and more recently
ClickSoftware, Inc (formerly IET) and ViryaNet Ltd. MDSI's principal competitors
in the cable and broadband markets are Telcordia, MobileForce Technologies, Inc.
(formerly Ubiquinet, Inc.), Pointserve (through its merger with Brazen Software,
Inc.), and CSG Systems International. In the general field service market,
MDSI's principal competitors are Astea International Inc. and Metrix Inc., in
addition to several larger enterprise software companies, such as Clarify,
Oracle, PeopleSoft and Siebel Systems, which offer less comprehensive solutions.
In the public safety market, MDSI's principal competitors are Cerulean, PRC,
Tiberon Systems and New World Systems.
MDSI will face competition from a number of existing competitors and
emerging Internet-based competitors in the eBusiness field. Existing competitors
including iMedeon, ClickSoftware, FieldCentrix and eDispatch. MDSI believes that
these competitors are primarily targeting smaller-sized businesses with an ASP
service offering. These companies offer a "basic" scheduling and dispatch
system. New competitors targeting Internet intermediaries for the provision of
scheduling and/or dispatch software services include Microsoft WebAppoint,
TimeTrade, MegaTribe and X-Time. These competitors are specifically focused on
Internet-based scheduling and dispatching services for the growing general
services market, but do not currently offer a wireless solution. The competitive
landscape that MDSI's products face is complex since this market is in the
relatively early stages of development. By positioning itself as a wireless
Internet ASP, MDSI will also face competition from wireless infrastructure
providers such as Aether Systems, Inc. and Broadbeam Inc., and finally from
managed IT services providers such as Exodus Communications Inc. and Jamcracker
Inc.
Risk of Product Defects
Software products, including those offered by MDSI, from time-to-time
contain undetected errors or failures. There can be no assurance that, despite
testing by MDSI and by current and potential customers, errors will not be found
in MDSI's products. Such errors could result in loss of or delay in market
acceptance of MDSI's products, which could have a material adverse effect on
MDSI's business, financial condition, operating results and cash flows.
Proprietary Technology
MDSI's success is dependent on its ability to protect its intellectual
property rights. MDSI relies principally upon a combination of copyright,
trademark, trade secret and patent laws, non-disclosure agreements and other
contractual provisions to establish and maintain its rights. To date, MDSI has
been granted trademark registrations or has registrations pending in the United
States, Canada and the European Community for the MDSI, Advantex, Wireless@work
and Compose marks. Other than several patents pending for certain technology,
MDSI has not generally sought patent protection for its products. As part of its
confidentiality procedures, MDSI generally enters into nondisclosure and
confidentiality agreements with each of its key employees, consultants,
distributors, customers and corporate partners, to limit access to and
distribution of its software, documentation and other proprietary information.
There can be no assurance that MDSI's efforts to protect its intellectual
property rights will be successful. Despite MDSI's efforts to protect its
intellectual property rights, unauthorized third parties, including competitors,
may be able to copy or reverse engineer certain portions of MDSI's software
products, and use such copies to create competitive products. Policing the
unauthorized use of MDSI's products is difficult, and, while MDSI is unable to
determine the extent to which piracy of its software products exists, software
piracy can be expected to continue. In addition, the laws of certain countries
in which MDSI's products are or may be licensed do not protect its products and
intellectual property rights to the same extent as do the laws of Canada and the
United States. As a result, sales of products by MDSI in such countries may
17
increase the likelihood that MDSI's proprietary technology is infringed upon by
unauthorized third parties. In addition, because third parties may attempt to
develop similar technologies independently, MDSI expects that software product
developers will be increasingly subject to infringement claims as the number of
products and competitors in MDSI's industry segments grow and the functionality
of products in different industry segments overlaps. See "Forward Looking
Statements". Although MDSI believes that its products do not infringe on the
intellectual property rights of third parties, there can be no assurance that
third parties will not bring infringement claims (or claims for indemnification
resulting from infringement claims) against MDSI with respect to copyrights,
trademarks, patents and other proprietary rights. Any such claims, whether with
or without merit, could be time consuming, result in costly litigation and
diversion of resources, cause product shipment delays or require MDSI to enter
into royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to MDSI or at all. A claim of
product infringement against MDSI and failure or inability of MDSI to license
the infringed or similar technology could have a material adverse effect on
MDSI's business, financial condition, operating results and cash flows.
Dependence on Third Parties
Certain contracts require MDSI to supply, coordinate and install third
party products and services. MDSI believes that there are a number of acceptable
vendors and subcontractors for most of its required products, but in many cases,
despite the availability of multiple sources, MDSI may select a single source in
order to maintain quality control and to develop a strategic relationship with
the supplier or may be directed by a customer to use a particular product. The
failure of a third party supplier to provide a sufficient supply of parts and
components or products and services in a timely manner could have a material
adverse effect on MDSI's results of operations. In addition, any increase in the
price of one or more of these products, components or services could have a
material adverse effect on MDSI's business, financial condition, operating
results and cash flows. Additionally, under certain circumstances, MDSI supplies
products and services to a customer through a larger company with a more
established reputation acting as a project manager or systems integrator. In
such circumstances, MDSI has a sub-contract to supply its products and services
to the customer through the prime contractor. In these circumstances, MDSI is at
risk that situations may arise outside of its control that could lead to a
delay, cost over-run or cancellation of the prime contract which could also
result in a delay, cost over-run or cancellation of MDSI's sub-contract. The
failure of a prime contractor to supply its products and services or perform its
contractual obligations to the customer in a timely manner could have a material
adverse effect on MDSI's financial condition, results of operations and cash
flows.
Exchange Rate Fluctuations
Because MDSI's reporting currency is the United States dollar, its
operations outside the United States face additional risks, including
fluctuating currency values and exchange rates, hard currency shortages and
controls on currency exchange. MDSI has operations outside the United States and
is hedged, to some extent, from foreign exchange risks because of its ability to
purchase, develop and sell in the local currency of those jurisdictions. In
addition, MDSI does enter into foreign currency contracts under certain
circumstances to reduce MDSI's exposure to foreign exchange risks. There can be
no assurance, however, that the attempted matching of foreign currency receipts
with disbursements or hedging activities will adequately moderate the risk of
currency or exchange rate fluctuations which could have a material adverse
effect on MDSI's business, financial condition, operating results and cash
flows. In addition, to the extent MDSI has operations outside the United States,
MDSI is subject to the impact of foreign currency fluctuations and exchange rate
charges on MDSI's reporting in its financial statements of the results from such
operations outside the United States.
18
Risks Associated with International Operations
In the years ended December 31, 2000, 1999 and 1998 revenue derived from
sales outside of North America accounted for approximately 20.0%, 22.1% and
3.1%, respectively of MDSI's total revenue. Because MDSI's revenue is dependent,
in large part, on significant contracts with a limited number of customers, the
percentage of MDSI's revenues that is derived from sales outside of North
America has fluctuated, and may continue to fluctuate, from period-to-period.
MDSI believes that its continued growth and profitability will require
additional expansion of its sales in foreign markets, and that revenue derived
from international sales will account for a significant percentage of MDSI's
revenue for the foreseeable future. This expansion has required and will
continue to require significant management attention and financial resources.
The inability of MDSI to expand international sales in a timely and
cost-effective manner could have a material adverse effect on MDSI's business,
financial condition, operating results and cash flows. There are a number of
risks inherent in MDSI's international business activities, including changes in
regulatory requirements, tariffs and other trade barriers, costs and risks of
localizing products for foreign markets, longer accounts receivable payment
cycles, difficulties in collecting payments, reduced protection for intellectual
property, potentially adverse tax consequences, limits on repatriation of
earnings, the burdens of complying with a wide variety of foreign laws,
nationalization, war, insurrection, terrorism and other political risks and
factors beyond MDSI's control. Fluctuations in currency exchange rates could
adversely affect sales denominated in foreign currencies and cause a reduction
in revenue derived from sales in a particular country. In addition, revenue of
MDSI earned abroad may be subject to taxation by more than one jurisdiction,
thereby adversely affecting MDSI's earnings. There can be no assurance that such
factors will not materially adversely affect MDSI's future international sales
and, consequently, MDSI's business, financial condition operating results and
cash flows.
Product Liability
The license and support of products by MDSI may entail the risk of exposure
to product liability claims. A product liability claim brought against MDSI or a
third party that MDSI is required to indemnify, whether with or without merit,
could have a material adverse effect on MDSI's business, financial condition,
operating results and cash flows. MDSI carries insurance coverage for product
liability claims which it believes to be adequate for its operations.
Concentration of Stock Ownership; Anti-Takeover Effects; Investment Canada Act
MDSI's directors, officers and their respective affiliates, in the
aggregate, beneficially own approximately 29.9% of the outstanding Common
Shares. As a result, these shareholders, if acting together, may be able to
exercise significant influence over MDSI and many matters requiring shareholder
approval, including the election of directors and approval of significant
corporate transactions. Such concentration of ownership may under certain
circumstances also have the effect of delaying, deferring or preventing a change
in control of MDSI.
An investment in the Common Shares of MDSI which results in a change of
control of MDSI may, under certain circumstances, be subject to review and
approval under the Investment Canada Act if the party or parties acquiring
control is not a Canadian person (as defined therein). Therefore, the Canadian
regulatory environment may have the effect of delaying, deferring or preventing
a change in control of MDSI.
MDSI is organized under the laws of Canada and, accordingly, is governed by
the Canada Business Corporations Act "CBCA". The CBCA differs in certain
material respects from laws generally applicable to United States corporations
and shareholders, including the provisions relating to interested directors,
mergers and similar arrangements, takeovers, shareholders' suits,
indemnification of directors and inspection of corporate records.
19
In December 1998, MDSI implemented a stock rights plan (the "Plan").
Pursuant to the Plan, shareholders of record on December 17, 1998 received a
dividend of one right to purchase, for CDN$140, one Common Share of MDSI. The
rights are attached to MDSI's Common Shares and will also become attached to
Common Shares issued in the future. The rights will not be traded separately and
will not become exercisable until the occurrence of a triggering event, defined
as an accumulation by a single person or group of 20% or more of MDSI's Common
Shares. After a triggering event, the rights will detach from the Common Shares.
If MDSI is then merged into, or is acquired by, another corporation, MDSI may
either (i) redeem the rights or (ii) permit the rights holder to receive in the
merger Common Shares of MDSI or of the acquiring company equal to two times the
exercise price of the right (i.e., CDN $280). In the latter instance, the rights
attached to the acquirer's stock become null and void. The effect of the rights
program is to make a potential acquisition of MDSI more expensive for the
acquirer if, in the opinion of MDSI's Board of Directors, the offer is
inadequate. While MDSI is not aware of any circumstance that might result in the
acquisition of a sufficient number of shares of MDSI's Common Shares to trigger
distribution of the Rights, existence of the Rights could discourage offers for
MDSI's stock that may exceed the current market price of the stock, but that the
Board of Directors deems inadequate.
As a result of being a reporting issuer in certain provinces of Canada,
MDSI is required to file certain reports in such jurisdictions. As part of such
reports, MDSI is required to file consolidated financial statements prepared in
accordance with generally accepted accounting principles as applied in Canada
("Canadian GAAP"). Canadian and US GAAP differ in certain respects, including
the treatment of certain reorganization costs, acquired research and development
costs, and treatment of business combinations. As a result, MDSI's Consolidated
Financial Statements included in this report may differ materially from the
financial statements filed by MDSI in Canada.
Market for the Common Shares; Potential Volatility of Stock Price
The trading prices of the Common Shares have been subject to wide
fluctuations since trading of MDSI's shares commenced in December 1995. There
can be no assurance that the market price of the Common Shares will not
significantly fluctuate from its current level. The market price of the Common
Shares may be subject to wide fluctuations in response to quarterly variations
in operating results, announcements of technological innovations or new products
by MDSI or its competitors, changes in financial estimates by securities
analysts, or other events or factors. In addition, the financial markets have
experienced significant price and volume fluctuations for a number of reasons,
including the failure of the operating results of certain companies to meet
market expectations that have particularly affected the market prices of equity
securities of many high-technology companies that have often been unrelated to
the operating performance of such companies. These broad market fluctuations, or
any industry-specific market fluctuations, may adversely affect the market price
of the Common Shares. In the past, following periods of volatility in the market
price of a company's securities, securities class action litigation has often
been instituted against such a company. Such litigation, whether with or without
merit, could result in substantial costs and a diversion of management's
attention and resources, which would have a material adverse effect on MDSI's
business, financial condition, operating results and cash flows.
Item 2: Properties
The Company occupies approximately 92,000 square feet of leased office
space at its headquarters in Richmond, British Columbia for its product
development, marketing, support, administration and sales operations. The
Company has sub-let approximately 16,500 of this space until June 30, 2001. The
lease expires on November 30, 2008 with two options to renew for five years
each. The Company also maintains an office in Itasca, Illinois. The Itasca
office lease is for approximately 29,000 square feet and terminates on November
30, 2009. The Company also maintains an office in St. Louis, Missouri. The St.
Louis office lease is for approximately 15,000 square feet and terminates on
December 31, 2001.
20
Item 3: Legal Proceedings
MDSI Mobile Data Solutions Inc. v. Citizens Telecom Services Co. L.L.C. - U.S.
District Court, Texas District Court Collin County - 366 Judicial District
(Docket No. 366-01914-00)
On November 22, 2000, MDSI filed suit in Texas District Court Collin County
against Citizens Telecom Services Co. L.L.C., generally alleging that Citizens
breached a series of contracts dated October 15, 1998. The suit alleges that
Citizens has wrongfully terminated the contracts and failed to pay sums due. The
suit seeks damages, interest and attorneys' fees. In late February 2001,
Citizens filed an answer and counter claim alleging that MDSI breached the
contracts, justifying Citizens' termination of the contracts and entitling
Citizens to repayment of all sums paid to MDSI in addition to interest and
attorneys' fees. Citizens requested and MDSI agreed to mediate the dispute.
Mediation is scheduled to begin on April 2, 2001. MDSI disputes Citizens' claims
and intends to pursue the lawsuit vigorously.
From time to time, the Company is a party to litigation and claims incident
to the ordinary course of its business. While the results of litigation and
claims cannot be predicted with certainty, the Company believes that the final
outcome of such matters will not have a material adverse effect on the Company's
business, financial condition, operating results and cash flows.
Item 4: Submission of Matters to a Vote of Security Holders
Not applicable.
Part II
Item 5: Market for Registrant's Common Equity And Related Stockholder Matters
Price Range of Common Shares
The Company's Common Shares began trading on The Toronto Stock Exchange
and on the Montreal Exchange under the symbol "MMD" on December 20, 1995 and
began trading on the NASDAQ National Market System under the symbol "MDSIF" on
November 26, 1996. The Company changed its NASDAQ National Market System trading
symbol to "MDSI" in April 1999. In December 1999, the Company's listing on the
Montreal Exchange was automatically withdrawn as part of a restructuring plan of
the Canadian stock exchanges. Prior to December 20, 1995, there was no public
market for the Common Shares. The following table sets forth, for the periods
indicated, the high and low sale prices for the Common Shares as reported on The
Toronto Stock Exchange and the NASDAQ National Market System with their
equivalent U.S. dollar amounts where applicable.
The Toronto Stock Exchange NASDAQ National Market
---------------------------------------------------- ------------------------
US$(1) CDN$ US$ US$
---------------------- ------------------------ ---------- ---------
High Low High Low High Low
---------- -------- ---------- -------- ---------- --------
1999
First Quarter...................... 21.66 12.63 32.75 19.10 21.50 12.63
Second Quarter..................... 19.01 15.28 28.00 22.50 19.88 14.88
Third Quarter...................... 18.17 11.51 27.00 17.10 18.38 11.38
Fourth Quarter..................... 26.14 12.34 38.50 18.15 26.50 12.25
2000
First Quarter...................... 87.84 18.58 130.00 27.50 90.00 19.00
Second Quarter..................... 64.00 19.96 93.00 29.00 64.94 18.28
Third Quarter...................... 24.53 10.60 36.35 15.70 24.31 10.31
Fourth Quarter..................... 13.11 6.59 20.00 10.05 13.13 6.38
- ----------
(1) US dollar amounts have been translated using the average noon buying rate
for Canadian dollars for the relevant quarter. See "Exchange Rates."
21
As of December 31, 2000 the Company had approximately 188 shareholders of
record (including nominees and brokers holding street accounts), 83 shareholders
of whom had addresses in the United States and who held 5,489,419 Common Shares,
or 63.7% of the Company's outstanding Common Shares.
The Company has never paid dividends on its Common Stock. The Company
currently intends to retain earnings for use in its business and does not
anticipate paying any dividends in the foreseeable future. The Company's current
bank credit agreement prohibits the payment of dividends without prior consent
of the lender.
Item 6: Selected Financial Data
The following selected consolidated financial data of the Company is
qualified in its entirety by reference to and should be read in conjunction with
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the consolidated financial statements and notes thereto
included elsewhere in this report. The consolidated statements of operations
data for the years ended December 31, 2000, 1999 and 1998 and the consolidated
balance sheet data at December 31, 2000 and 1999 are derived from and are
qualified by reference to the Company's audited consolidated financial
statements. This selected consolidated financial data is presented in conformity
with generally accepted accounting principles in the United States.
Years ended December 31,
-----------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
---------------- ---------------- --------------- -----------------------------------
(in thousands, except per share data)
Statement of Operations Data:
Revenue $ 61,542 $ 58,571 $ 48,363 $ 38,523 $ 23,397
Gross profit 33,487 31,253 24,423 20,290 9,865
Operating income (loss)(3) 857 7,923 6,079 (1,086) 2,434
Net income (loss) for the years(1)(2) (554) 1,146 3,776 (8,299) (4,408)
Diluted earnings (loss) per common $ (0.07) $ 0.13 $ 0.5 $ (1.30) $ (0.91)
share
Weighted average shares outstanding 8,526 9,101 7,563 6,754 4,855
At December 31,
-----------------------------------------------------------------------------------------
Balance Sheet Data: 2000 1999 1998 1997 1996
---------------- ---------------- --------------- -----------------------------------
Cash and cash equivalents $ 13,238 $ 14,613 $ 3,606 $ 93 $ 14,752
Working capital 25,565 24,084 9,073 6,563 16,517
Total assets 60,781 50,443 38,522 28,529 33,271
Non-current liabilities 4,380 2,838 2,927 4,224 6,304
Stockholders' equity 38,177 35,537 20,596 16,688 19,592
- ---------
(1) Net loss for the year ended December 31, 1997, includes non-recurring
charges of $4,585,984, including $824,280 with respect to restructuring
certain operations and $3,761,704 due to changes in estimates to complete
certain contracts entered into by its UK operations which existed prior to
the Company's acquisition of Mobile Data Solutions (UK) Ltd. ("MDSI UK").
(2) Net loss for the years ended December 31, 1997 and 1996 includes
non-recurring charges of $7,200,146 and $6,229,726 as a result of acquired
research and development costs relating to the acquisitions of Alliance
Systems, Incorporated and MDSI UK in April 1997 and June 1996,
respectively.
(3) Operating income for the year ended December 31, 2000 include a one time
charge of $1,691,028 to account for one time cost of merger with
Connectria.
22
Item 7: Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion contains "forward looking statements" within the
meaning of Section 21E of the Securities Exchange Act of 1934. The fourth
paragraph under "Revenue", and the paragraphs entitled "Research and
Development", "Sales and Marketing" , and "General and Administrative" , in the
section entitled "Year ended December 31, 2000 Compared to the Year ended
December 31, 1999" contain forward looking statements. Actual results could
differ materially from those projected in the forward looking statements as a
result of the Company's ability to accelerate or defer operating expenses,
achieve revenue in a particular period, hire new personnel and other factors set
forth under "Business-Risk Factors" in Item 1 of this Annual Report on Form
10-K. In particular, note the Business-Risk Factors entitled "Potential
Fluctuations in Quarterly Operating Results", "Lengthy Sales Cycles",
"Dependence on Large Contracts and Concentration of Customers", "Limited
Operating History; Increased Expenses", "Integration of Acquisitions,"
"eBusiness Development" and "Competition."
Unless otherwise noted, all financial information in this report is
expressed in the Company's functional currency, United States dollars. See item
7A - "Market Risk".
Overview
MDSI develops, markets, implements and supports mobile workforce management
and wireless connectivity software for use by a wide variety of companies that
have substantial mobile workforces, such as utilities, telecommunications
companies, cable companies and insurance companies. MDSI's products are used by
such companies in conjunction with public and private wireless data
communications networks to provide comprehensive solutions for the automation of
business processes associated with the scheduling, dispatching and management of
a mobile workforce. The Company's products are designed to provide a
cost-effective method for companies with mobile workers to utilize data
communications to communicate with such workers, and for such workers to
interface on a real-time basis with their corporate information systems. MDSI
also provides hosting and related professional services.
The Company's revenue is derived from (i) software and services, consisting
of the licensing of software and provision of related services, including
project management, installation, integration, customization and training; (ii)
e-Business services such as the provision of consulting and hosting services,
the provision of application services, and provision of online service
management solutions; (iii) third party products and services, consisting of the
provision of non-MDSI products and services as part of the total contract and
(iv) maintenance and support, consisting of the provision of after-sale support
services as well as hourly, annual or extended maintenance contracts.
The C