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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- --------------------------------------------------------------------------------
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 0-28968
MDSI MOBILE DATA SOLUTIONS INC.
(Exact name of registrant as specified in its charter)
CANADA NOT APPLICABLE
(Jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
10271 Shellbridge Way
Richmond, British Columbia,
Canada V6X 2W8
(Address of principal executive offices)
Registrant's telephone number: (604) 207-6000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, no par value
---------------------------
(Title of Class)
Rights to Purchase Common Shares
--------------------------------
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Aggregate market value of the Registrant's Common Shares held by
non-affiliates as of March 25, 2002 was approximately US$33,293,415. The number
of shares of the Registrant's Common Shares outstanding as of March 25, 2002 was
8,761,425.
TABLE OF CONTENTS
Item 1: Business..............................................................1
Item 2: Properties...........................................................20
Item 3: Legal Proceedings....................................................20
Item 4: Submission of Matters to a Vote of Security Holders..................20
Item 5: Market for Registrant's Common Equity And Related
Stockholder Matters................................................21
Item 6: Selected Financial Data..............................................24
Item 7: Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................25
Item 7A: Quantitative and Qualitative Disclosure About Market Risk...........40
Item 8: Financial Statements and Supplementary Data..........................41
Item 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure...............................................67
Item 10: Directors and Officers of the Registrant............................67
Item 11: Executive Compensation..............................................70
Item 12: Security Ownership of Certain Beneficial Owners and Management......75
Item 13: Certain Relationships and Related Transactions......................76
Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K.....76
i
Forward-Looking Statements
Certain statements in this Annual Report on Form 10-K constitute
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of MDSI Mobile Data Solutions Inc. ("MDSI"
or the "Company"), or developments in the Company's industry, to differ
materially from the anticipated results, performance or achievements expressed
or implied by such forward-looking statements. Such factors include, but are not
limited to: the Company's limited operating history, lengthy sales cycles, the
Company's dependence upon large contracts and relative concentration of
customers, the failure of MDSI to achieve anticipated levels of cost savings and
the risk that such cost reduction may adversely affect the ability of MDSI to
achieve its business objectives, the failure of MDSI to successfully execute its
business strategies, the effect of slowing United States and international
economies generally, as well as economic trends and conditions in the vertical
markets that MDSI serves, the effect of the risks associated with technical
difficulties or delays in product introductions and improvements, product
development, product pricing or other initiatives of MDSI's competitors, the
possibility that our potential customers will defer purchasing decisions due to
economic or other conditions or will purchase products offered by our
competitors, risks associated with litigation and the other risks and
uncertainties described under "Business - Risk Factors" in Part I of this Annual
Report on Form 10-K. Certain of the forward looking statements contained in this
Report are identified with cross references to this section and/or to specific
risks identified under "Business - Risk Factors."
Exchange Rates
The following table sets forth, for each period presented, the exchange
rates at the end of such period, the average of the exchange rates on the last
day of each month during the period and the high and low exchange rates for one
Canadian dollar, expressed in U.S. dollars, based on the noon buying rate in New
York City for cable transfers payable in Canadian dollars as certified for
customs purposes by the Federal Reserve Bank of New York.
U.S. Dollars Per Canadian Dollar
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Period End US$0.6275 US$0.6666 US$0.6925 US$0.6504 US$0.6999
Average 0.6461 0.6740 0.6744 0.6715 0.7198
High 0.6714 0.6983 0.6925 0.7105 0.7487
Low 0.6227 0.6397 0.6535 0.6341 0.6945
On March 25, 2002 the noon buying rate was CDN$1.00 = US$0.6312 The
Canadian dollar is convertible into U.S. dollars at freely floating rates, and
there are currently no restrictions on the flow of Canadian currency between
Canada and the United States. Unless stated otherwise, all financial information
is expressed in United States dollars.
ii
Part I
Item 1: Business
The Company
MDSI Mobile Data Solutions Inc. is a leading provider of mobile workforce
management solutions. MDSI's suite of applications improves customer service and
relationships, and reduces operating costs by empowering service companies to
optimally manage their mobile, field resources. The Company also provides all of
the professional services, wireless connectivity, and hosting capabilities
necessary to implement and support its solutions. Founded in 1993, MDSI has over
100 major customers worldwide with operations and support offices in the United
States, Canada, Europe and Australia. MDSI markets its solutions to a variety of
companies that have substantial field service organizations, primarily utilities
(electric, gas and water companies), telecommunications companies, and
cable/broadband companies, and to a much lesser extent to insurance companies
and commercial field service providers. MDSI's products are used by such
companies in conjunction with public and private wireless data communications
networks and mobile devices to provide comprehensive solutions for the
automation of business processes associated with the scheduling, dispatching and
management of a mobile workforce. Through the Company's Hosting and Information
Technology (IT) Services subsidiary, Connectria Corporation ("Connectria"), the
Company also provides hosting and IT services, including outsourcing and
consulting, to a wide variety of customers.
Unless the context otherwise requires, references herein to "MDSI" or the
"Company" refer to MDSI Mobile Data Solutions Inc. and its subsidiaries. The
Company's principal executive offices are located at 10271 Shellbridge Way,
Richmond, British Columbia, Canada V6X 2W8, and its telephone number at that
location is (604) 207-6000. The Company's web site is located at
www.mdsi-advantex.com. Information contained on the Company's web site is not
part of this report.
Background
Field service organizations are confronted on a daily basis with the
difficult task of optimally assigning work requests to their mobile workforce,
dispatching the work to the field, monitoring the progress of the work,
responding to changing conditions, and measuring workforce performance. Common
workforce management problems include:
o Missed appointments;
o Unnecessary overtime;
o Repeat customer visits to get the job done right;
o Jobs that take too long to complete;
o Delayed status reports;
o Inadequate information collected from/supplied to the field;
o Redundant data entry work; and
o Excessive driving time.
Historically, these organizations have managed and supported their mobile
workers by communicating information through wireline or voice radio systems.
Although voice radio systems are mobile, such systems rely on heavily used
portions of the radio spectrum and are subject to frequent periods of
congestion. Mobile data communication systems that addressed certain limitations
of voice communications systems were first developed for a limited number of
vertical markets, such as utility, public safety, taxi, courier and commercial
field service. Businesses
-1-
in these markets recognized certain productivity benefits associated with
wireless data applications. Although such mobile data communications systems
were introduced in a number of vertical markets, these systems failed to achieve
widespread adoption. The Company believes that the low rate of adoption was
attributable to the high cost of establishing private radio networks, the
difficulty of obtaining radio spectrum for such networks, the high cost and
limited functionality of early mobile computing devices and the regulatory
environment in certain industries, such as utilities and telecommunications,
which diminished competitive pressures. Additionally, a lack of
industry-specific application software which effectively addressed the needs of
mobile workers limited the cost-effectiveness of early systems.
The Company believes that ongoing trends in the regulatory environment,
numerous technological advances and competitive pressures have reduced many of
these limitations and have provided, and will continue to provide a compelling
case for the adoption of mobile data solutions by field service organizations.
Deregulation has exposed the utility and telecommunications markets to new
competitive pressures, driving businesses within those markets to seek ways to
reduce costs, improve operations, efficiently allocate resources and increase
the quality of customer service. In addition, the availability of powerful
mobile computing devices has permitted the development of sophisticated software
applications. Finally, public data networks providing services at lower costs
than ever are now widely available in North America, and similar networks are
available in Europe and Austral-Asia . Consequently, the Company believes that
mobile data solutions may now be implemented without the difficulty and expense
of establishing a private radio network, thereby increasing the
cost-effectiveness of such systems. The Company believes that these trends will
continue to increase the likelihood of adoption of mobile data solutions by
companies with field service organizations. See "Forward-Looking Statements."
The MDSI Solution
MDSI has combined its expertise in software application development and
mobile data communications technology with its understanding of the unique needs
of field service organizations in targeted vertical markets to develop mobile
workforce management solutions that address the specific needs of businesses
within those vertical markets. MDSI's products enable these organizations to
effectively communicate with, manage and support their mobile workers in their
execution of work orders.
MDSI's products are designed to interface with a variety of public and
private mobile data networks, including PCS networks and satellite-based data
transmission networks, and are compatible with a variety of operating platforms,
computer networks and in-house applications. The most recent version of the
Company's software is also designed to be Internet-enabled, allowing service
companies' dispatchers and mobile technicians to use web browsers to interface
with the Company's software and enable the users to manage their work. For the
mobile user, that browser can be located on a variety of mobile devices, such as
a laptop, personal digital assistant, pager or web phone.
To effectively address a customer's mobile workforce management
requirements, MDSI combines its products with services, such as systems
implementation and integration, training and documentation, workforce management
assessments, consulting, and ongoing technical support and software maintenance.
Where appropriate, MDSI also provides third party products and services as part
of a complete mobile data solution.
-2-
Advantex r7
Advantex r7, the latest version of MDSI's mobile workforce management
product, is a feature-rich product that offers a comprehensive solution tailored
to address the specific mobile workforce management needs of MDSI's customers in
MDSI's target markets, including market-specific solutions for the utility
industry and the telecommunications industry. Advantex efficiently manages the
life cycle of a service work order and the days of the mobile workers who
execute them. It schedules service requests and, using complex business rules,
assigns them to the best available mobile resource. Advantex then dispatches
work order details to mobile resources who use the solution to process their
work throughout the day and send status updates and order completion information
back to the office all wirelessly, in real-time. This provides dispatchers,
supervisors and enterprise applications, such as call centres and customer
information systems, with up-to-date information to enable them to effectively
monitor and manage field service operations at all times.
Advantex is the result of more than ten years of development and has been
field validated by over 100 companies in the utility, telecommunications and
cable/broadband industries. Advantex uses global standards, such as CORBA
(Common Object Request Broker Architecture), Java, HTML, XML, WAP and Unicode,
and industry standard products, such as Oracle's database and BEA's
infrastructure tools, to deliver a solution that meets customers' needs for a
scalable, open and interoperable solution. Advantex has been implemented for
customers supporting as few as 70 and as many as 7,000 mobile workers. Advantex
can be offered as an "enterprise" solution delivered and implemented on the
customer's site, or as an ASP solution (Advantex ASP) hosted offsite. The
primary components of Advantex are:
o Advantex Scheduling--Books and manages appointments with customers and
automatically assigns work orders to mobile workers based on skill and
equipment match, location, availability, and priority.
o Advantex Dispatch--Allows dispatchers to monitor work orders and
workers. Allows dispatchers to view the field service information that
is most critical to them at any given moment, to manage work orders
(e.g., cancel, modify, dispatch), and to receive alerts for unusual
situations requiring dispatcher intervention (e.g., worker in jeopardy
of missing an appointment).
o Advantex Mobile--Enables mobile workers to receive work orders, view
work order information, track their status, enter work results, and
query company applications for additional information needed to
complete work. Promotes efficient workflow by providing the
information mobile workers need to do their work when they need it.
o Advantex Wireless--Provides wireless connectivity across public and
private networks, and wireless compression, encryption, and the
ability to work offline in "out of coverage" situations.
o Advantex Resources--Allows administrators to define resources that
perform work (e.g., mobile workers and crews) and their attributes
(e.g., work areas, skills, equipment), manage crew composition, define
shift rotations, and manage day-to-day technician availability (e.g.,
ad hoc adjustments for absences).
o Advantex Decision Support--Collects and archives data in a historical
database and allows it to be presented for easy-to-understand
reporting and trend analysis via a web-browser. Lets managers prepare
customized reports on key performance indicators to measure mobile
workforce performance.
o Advantex Compose--A configuration tool used to define a customer's
work practices and generate a customized Advantex system. Defines the
types of work the customer performs, the work order details, how the
work orders are presented to dispatchers and mobile workers, the forms
to be completed in the field, and the validation rules that apply to
work results entered in the field.
o Advantex Transaction Broker--Integrates Advantex with the customer's
enterprise applications (e.g., SAP, Siebel). Bundled with Advantex
when MDSI provides application integration services.
o Advantex Vehicle Tracking--Allows dispatchers to use maps and GPS
(Global Positioning System)-equipped vehicles to track in real-time
the location of mobile workers and their work orders and to execute a
wide variety of tasks directly from the map interface.
-3-
o Advantex Complex Orders-- Coordinates mobile workers working on
related orders. Parcels orders into individual tasks, manages task
assignment and dispatch, ensures that precedence relationships are
maintained, and monitors task status.
o Advantex Common Cause-- Allows dispatchers and managers to recognize
related trouble work orders and manage them as individual dispatched
work orders.
o Advantex Time Reporting--Allows mobile workers to allocate time to job
codes and to record time spent on other activities. Replaces
paper-based time reporting.
Professional and Customer Support Services
MDSI provides a complete range of specialized professional and customer
support services to assist its clients in implementing and using MDSI's products
effectively. Contracts for the sale of MDSI's software typically include a
customer support and maintenance agreement, as well as professional services
such as implementation, systems integration, training and documentation, and may
also include workforce management assessments and audits and workforce
management consulting. The Company believes that providing these services
facilitates effective implementation of its products and fosters a strong
relationship with the customer that often leads to future orders for MDSI
products and services.
Professional Services
A professional services engagement usually lasts for six to twelve months
and involves working with the customer in defining, constructing and installing
the Advantex solution, as well as integrating it with the customer's other
software solutions ("enterprise applications") and training the client in how
best to use Advantex. The engagement generally occurs in three logical phases:
definition, construction, and installation.
o Definition--MDSI works with the customer to determine the customer's
preferred configuration for the Advantex system. A customer's Advantex
configuration will depend on a number of factors, including the types
of work the customer performs, the information associated with each
type of work order, how the customer would prefer information to be
presented to dispatchers and mobile workers (i.e., screen layouts) and
what information the customer intends to collect from the field (i.e.,
work results).
o Construction--MDSI configures the baseline Advantex software in
accordance with the customer's needs to create a finished product.
Once the Advantex system has been configured, MDSI tests the system at
its facilities to ensure that the configured system is ready to be
installed at the customer's site.
o Installation--MDSI installs Advantex at the customer's site. The
system is then tested until acceptance criteria are met. Upon
acceptance, the customer is ready to deploy the solution to the field
and begin rollout. The duration of the rollout period will depend on
several factors, including the length of time the customer wishes to
test the new system with a pilot group, the size of the customer's
mobile workforce, and the extent to which the practices the customer
has incorporated into the system are a departure from current
practices.
MDSI's depth of experience in the utility, telecommunications, and
cable/broadband industries allows it to integrate Advantex with customer
information systems, customer relationship management systems, billing systems
and outage management systems, among others. Whenever industry solutions such as
these are the source of work orders or the destination for work results, MDSI
offers application integration services. MDSI provides complete training
services and systems documentation that address the implementation and operation
of an Advantex mobile workforce management system.
MDSI also offers mobile workforce management practices assessment services,
to help customers assess where they stand against their peers, as well as mobile
workforce management consulting and training services, to enable customers to
make the most effective use of Advantex in their organizations to improve
customer satisfaction and increase operational efficiency. At December 31, 2001,
the Company had 172 professional services personnel, of whom 91 were located in
Canada, 74 in the United States and 7 in Copenhagen.
-4-
Customer Support
The Company believes that its ability to offer a high level of customer
support is critical to its success. The Company's customer support group
provides MDSI customers with telephone and on-line technical support as well as
product updates. Most MDSI customers enter into separate customer support
agreements, which may be annual or on a multi-year basis, that take effect on
the expiration of the product warranty period, which is typically 90 days. At
December 31, 2001, the Company had 48 customer support personnel, of whom 33
were located in Canada, 11 in the United States and 4 in Copenhagen.
Markets
MDSI has combined its expertise in software application development and
mobile data communications technology with its understanding of the unique needs
of targeted vertical markets to develop mobile workforce management solutions
that address the specific needs of businesses within those vertical markets.
Traditionally, the Company has focused its attention on mid and large-sized
customers in the telecommunications, cable/broadband, and utilities (electric,
gas and water) markets. To a lesser extent, the Company has also served the
commercial field service and public safety markets, though recently the Company
decided to stop pursuing opportunities in the public safety market. See "Public
Safety" below. The Company evaluates new target markets for mobile workforce
management based upon their similarity to existing vertical markets in which the
Company has been successful, and upon the ability of the Company to utilize its
core competencies and proven technology to meet the needs of companies in these
new markets. The Company believes that its markets will grow, both in terms of
number of potential customers and revenues, in the future, particularly outside
North America. See "Forward-Looking Statements."
Utilities. The utilities market targeted by the Company primarily consists
of electric, gas and water companies in the United States, Canada, Europe and to
a lesser extent Austral-Asia. The Company has traditionally targeted the
distribution operations within a utility. The Company believes, however, that
such operations generally account for only a portion of the total number of a
utility's mobile workers, with the balance attributable to mobile workers
engaged in sales, construction, engineering and management functions. As a
result, the Company believes that there is an opportunity to increase sales to
existing customers and generate incremental revenue. See "Forward-Looking
Statements". MDSI's products have been implemented or are being implemented in
over 60 gas, electric and water utilities located in the United States, Canada,
Europe and Austral-Asia. MDSI believes that the total number of utilities with
more than 100 mobile workers (MDSI's typical target market) exceeds 400 in the
United States alone.
Telecommunications and Cable/Broadband. MDSI sells its Advantex product
into the telecommunications, and cable/broadband markets in the United States,
Canada, Europe and to a lesser extent Austral-Asia. Recently, the markets for
these services have been converging. For example, companies that used to provide
traditional voice telecommunications services are now permitted to provide data
services, basic cable and other broadband services. Similarly, companies that
provided traditional cable TV service, now also provide cable telephony services
and Internet services.
The telecommunications market consists of wireline providers of local, and
long-distance services, wireless communication service providers and ISPs
(Internet service providers). The wireline market in North America is comprised
of IXCs (Inter-exchange carriers), ILECs (Incumbent Local Exchange Carriers),
and CLECs (Competitive Local Exchange Carriers). In Europe, the national
telecommunication providers are referred to as PTT's (Post, Telephone &
Telegraph). MDSI has installed or has a contract to supply its products to
numerous telecommunication companies worldwide, including Belgacom S.A., Bravida
A.S.A, Eircom plc, and TDC Tele Danmark A/S. MDSI believes that the total number
of telecommunications companies and cable/broadband companies with more than 100
mobile workers (MDSI's typical target market) exceeds 300 and 100, respectively,
in the United States alone. Although, only a small percentage of
telecommunications companies have adopted mobile workforce management solutions,
MDSI believes that a number of major telecommunications companies are evaluating
the need for such a system, and that this market will grow as companies
implement new technology to improve their competitiveness, efficiency and
service levels as the worldwide deregulation of the telecommunications markets
continues to unfold. The Company anticipates, however, that continued economic
uncertainty in the telecommunications and cable/broadband markets will have an
adverse impact on software and services revenues in the short term. See
"Forward-Looking Statements."
-5-
Cable/broadband services consist of basic cable television services and new
digital interactive broadband services, including digital cable TV services,
cable data and Internet services, cable telephony services, and other
interactive broadband data and multimedia services. The market is comprised of
traditional cable MSOs (Multiple System Operators) and independent cable system
operators, satellite service operators, new broadband divisions of traditional
telecommunication firms, and new broadband entrants. Currently, in North
America, approximately 80% of the subscriber base is under the control of the
ten largest MSOs. Although several of these major cable operators have
implemented mobile data solutions in selected sites, few operators have rolled
out these systems to multiple sites. Additionally, these MSOs are increasingly
outsourcing some of their field technician work to specialty contractors, a
group where MDSI does not have market share, but one that could represent a
future opportunity. See "Forward-Looking Statements." MDSI has installed or has
a contract to supply its products to several major cable operators, including
Cox Communications Inc. and Adelphia Communications Corporation in the United
States and Rogers Cablesystems Ltd and Videotron in Canada.
Changes in the regulatory environment and technological developments, such
as satellite television have led to the introduction of significant competition
in the cable market. MDSI sees this enhanced level of competition as being very
positive for its business. MDSI believes that growing competition and the
introduction of new services will lead cable operators to adopt mobile data
solutions to improve their competitiveness, efficiency and level of customer
service. See "Forward-Looking Statements."
Commercial Field Service. The commercial field service market consists of a
large number of organizations who provide general field services as their
business. These organizations include companies engaged in the maintenance and
repair of IT/Networking services, office equipment, medical/scientific
equipment, industrial equipment, and HVAC (Heating, Ventilation and Air
Conditioning) systems, amongst others. To date, the Company has not focused its
primary attention on this market, but it has had some penetration. MDSI believes
that the total number of such companies with more than 100 mobile workers
(MDSI's typical target market) exceeds 3,500 in the United States alone.
For the commercial field service industry, MDSI is in the process of
developing a subset of Advantex that is primarily comprised of the Advantex
Wireless and Advantex Mobile components. MDSI anticipates integrating this
solution with field service products from other independent software vendors who
serve the commercial field service market, and offering the integrated solution
to the market through joint sales and marketing efforts.
Public Safety. During 2001, MDSI decided not to continue pursuing
opportunities in the public safety market, consisting of federal, state and
local agencies that provide police, fire, medical and other emergency services.
The Company had installed solutions for a limited number of customers, and the
market has not represented a material portion of MDSI's revenues. The Company is
currently in the process of evaluating alternatives for this business, including
divestiture and wind down of operations. The Company expects to complete the
process in the second half of 2002.
Customers
For the year ended December 31, 2001, MDSI's software and services revenues
were distributed approximately as follows: 35% from the telecommunications and,
cable/broadband market, 55% the utilities (electric, gas and water) market and
the remaining 10% from other markets. During the year ended December 31, 2001
the Company generated approximately 81% of its revenue from North America,
approximately 17% of its revenue from Europe, and the remaining 2% of its
revenue from other parts of the world, primarily Austral-Asia.
The Company's customers vary in size from small local companies to large
regional and international organizations. During the year ended December 31,
2001 the Company earned revenue from one customer that accounted for 12.7% of
overall revenue. The Company anticipates that revenue from this customer will
account for a smaller percentage of the Company's revenue in the future. The
Company did not earn revenue from any one customer that accounted for greater
than 10% of overall revenue during the year ended December 31, 2000 and during
the year ended December 31, 1999, one U.S. utility company accounted for 10.9%
of the Company's consolidated revenue. In the years ended December 31, 2001,
2000 and 1999, approximately 35.8%, 25.8% and 31.0%, respectively, of the
Company's consolidated revenue was attributable to five or fewer customers. The
Company believes that revenue derived from a limited number of customers will
continue to represent a significant portion of its consolidated revenue.
-6-
In the years ended December 31, 2001, 2000 and 1999, revenue derived from sales
outside of North America accounted for 18.3%, 20.0% and 22.1% of the Company's
total revenue, respectively. See "Note 12 of the Company's Consolidated
Financial Statements." Because the Company's revenue is dependent, in large
part, on significant contracts with a limited number of customers, the
percentage of the Company's revenues that is derived from sales outside of North
America has fluctuated, and may continue to fluctuate, from period-to-period.
See "Business-Risk Factors - Dependence on Large Contracts and Concentration of
Customers" and "Forward-Looking Statements."
Product Development
The mobile workforce management industry is characterized by rapid
technological change and increasing user requirements. Accordingly, the Company
must be able to provide new functionality and to modify and enhance existing
functionality on a timely and continuing basis in order to be competitive. To
accomplish this objective, the Company's strategy is to utilize proven
technology to further enhance its existing products and to create new products.
Where appropriate, the Company may acquire complementary technology developed by
third parties for integration into the Company's products.
The Company believes that its highly qualified software development
personnel provide MDSI with a competitive advantage. MDSI personnel have
considerable experience and expertise in the development of mobile workforce
management applications specifically designed for use with a wireless data
network, as well as in the integration of these applications with a customer's
corporate information system. MDSI software product development personnel employ
modular software architecture, object-oriented software development and
graphical user interface design technologies to develop scaleable, modular,
configurable products. MDSI personnel have expertise in software technology,
wireless and wireline communications technologies, computer environments and
corporate information systems integration. They also have considerable expertise
in radio system design and implementation. MDSI believes that this combination
of expertise in multiple disciplines has allowed and will continue to allow the
Company to design and develop mobile workforce management solutions which can be
implemented in a timely and cost-effective manner.
As of December 31, 2001, MDSI's technical and engineering staff, supporting
product development, consisted of 100 employees, including 72 employees based at
its Richmond, British Columbia headquarters and 28 in the United States.
During the years ended December 31, 2001, 2000 and 1999, the Company's
total expenditures for product development were $8.1 million, $9.0 million and
$6.9 million, respectively, reflecting 13.9%, 14.7% and 11.8% of the Company's
revenue, respectively. Management believes that timely and continuing product
development is critical to the Company's success and plans to continue to
allocate significant resources to product development. See "Forward-Looking
Statements."
Sales and Marketing
The Company markets its products through a direct sales force as well as
through strategic remarketing and/or joint selling arrangements with independent
software vendors, and systems integrators.
Direct Sales Force. MDSI's sales personnel are knowledgeable about the
technological components of wireless applications and current industry and
enterprise-specific application issues. As part of its 2001 restructuring, the
Company organized its sales personnel by geographic market. The Company's sales
personnel employ their expertise to develop long-term consultative relationships
with customers in order to identify the needs of the customer and provide
specific and effective solutions. To date, substantially all of the Company's
revenue has been generated by direct sales activities.
Independent Software Vendors. MDSI establishes relationships with other
independent software vendors that sell complementary products, such as billing
or customer relationship management solutions, into MDSI's markets. The
relationships typically involve MDSI working with the vendors to establish a
standard integration of
-7-
the companies' products, and jointly identifying and jointly executing on sales
prospects for the integrated solution. For example, the Company has established
such a relationship with Siebel Systems Inc. In some cases, relationships have
been formalized through written agreements, while others remain informal.
Systems Integrators. MDSI also establishes strategic relationships with
systems integrators that work in the Company's markets to provide end-to-end
solutions on a customer-by-customer basis or as an integrated product offering
for the vertical market. In either case, MDSI works with the integrator to
assist in the sales process and to integrate MDSI's products with the other
component software pieces. To date, MDSI has worked with Cap Gemini, Ernst &
Young LLP, Accenture LLP, PricewaterhouseCoopers LLP, CGI, and SchlumbergerSema,
amongst others. In some cases the relationships have been formalized through
written agreements, while others remain informal. In the future, MDSI intends to
involve these integrators in providing the implementation work surrounding
customer installations. See "Forward-Looking Statements."
At December 31, 2001, the Company's sales, marketing and technical support
group consisted of 58 employees, with 26 based out of the Company's Richmond,
British Columbia facility, 20 based out of its Itasca, Illinois facility, 3
based out of its St. Louis, Missouri facility, and 9 based out of various other
international locations.
Competition
The markets for mobile workforce management applications, wireless
connectivity software, mobile data network equipment and mobile computing
devices are highly competitive. Numerous factors affect the Company's
competitive position, including price, product features, product performance and
reliability, ease of use, product scalability, product availability on multiple
platforms (both server and mobile workstation), ability to implement mobile
workforce management solutions domestically and internationally while meeting
customer schedules, integration of products with other enterprise solutions,
availability of project consulting services and timely ongoing customer service
and support.
Within these markets, there are a number of competitors, either small
companies attempting to establish a business in this market or large companies
attempting to diversify their product offerings. The Company expects such
competition to intensify as acceptance and awareness of mobile data
communications and technology continue. In addition, some of the Company's
potential customers develop software solutions internally, which may delay or
eliminate the requirement for suppliers such as the Company. Current or
potential competitors may establish cooperative arrangements among themselves or
with third parties to increase the ability of their products to address customer
requirements.
Certain of the Company's competitors have substantially greater financial,
technical, marketing and distribution resources than the Company. As a result,
they may be able to respond more quickly to new or emerging technologies and
changing customer requirements, or to devote greater resources to the
development and distribution of existing products. There can be no assurance
that the Company will be able to compete successfully against current or future
competitors or alliances of such competitors, or that competitive pressures
faced by the Company will not have a material adverse effect on its business,
financial condition, operating results and cash flows.
The Company believes that in the utilities, telecommunications and,
cable/broadband industry segments the most important competitive factors are the
reputation of the supplier and its proven record in implementing wireless data
solutions. MDSI believes that its long and successful track record in these
markets gives it a competitive advantage in this regard. The Company primarily
competes in the utilities market with Utility Partners, L.C. (which recently
filed for bankruptcy protection under Chapter 11), M3i Systems, Inc. (which was
recently acquired by Cognicase, Inc.), Integraph Corporation and iMedeon, Inc.
(which has recently merged with ViryaNet Ltd.). The Company has several
competitors in the telecommunications and cable/broadband markets. The Company's
primary competitor for telecommunications customers is Telcordia Technologies
Inc. (formerly Bellcore), a company which has historical relationships with
certain of the large telecommunications companies, and more recently
ClickSoftware, Inc. (formerly IET) and ViryaNet Ltd., which the Company mostly
sees as competition for small accounts. In the cable/broadband market, the
Company's primary competitors are Telcordia, C-Cor.net Corp. (formerly
MobileForce Technologies, Inc.), PointServe Inc.(through its merger with Brazen
Software Inc.), CSG Systems International Inc., and Viryanet Ltd., again only
for small accounts.
-8-
The Company believes that the principal competitive factors in the
commercial field service market are the ability to improve the customer service
aspects of an organization's business and increase the productivity of service
representatives. In this market, the Company's principal competitors are Astea
International Inc., Metrix Inc., and FieldCentrix Inc., in addition to several
larger enterprise software companies, such as Amdocs Limited (which recently
acquired the assets of Clarify), Oracle Corporation, PeopleSoft Inc, and Siebel
Systems Inc. which, to the Company's knowledge, offer less comprehensive
solutions and which MDSI currently sees as potential partners for expanding
their penetration in this market.
Hosting and IT Services
Background
In addition to its core mobile workforce management business, beginning in
early 2000 MDSI unveiled an eBusiness strategy whereby it planned to "rent"
hosted workforce management and wireless connectivity solutions over the
Internet from a wirelessly-enabled Application Service Provider (ASP) site. The
Company's eBusiness solutions included Advantex ASP, eService Manager, and
eService Mobile, as well as hosted versions of the Company's and third parties'
wireless middleware solutions which enable wireless communications over a
variety of wireless networks and mobile devices.
In connection with this strategy, in June 2000 MDSI acquired Connectria
Corporation, a provider of managed hosting and IT services to a wide variety of
customers. Connectria provided the hosting infrastructure for the Company's
eBusiness products as well as components of the technology behind the eService
products. MDSI intended to offer its eBusiness solutions either on a
subscription basis where customers would pay a monthly fee for their use, or on
a "per transaction" basis where customers would pay each time they used the
solutions.
Under a new senior management team in 2001, MDSI decided to put greater
focus on its core mobile workforce management business and consequently reduce
focus on the eBusiness strategy. This prompted corresponding organizational
changes. The Company transferred Advantex ASP to its core mobile workforce
management operations, where the Company's direct sales force offers it as an
alternative to an enterprise-installed solution. MDSI also stopped further
development and marketing efforts on its eService suite and hosted wireless
middleware solutions, though MDSI continues to serve existing customers of the
products. The eBusiness Division was then renamed Hosting and IT Services to
better reflect Connectria's core business, which generated and continues to
generate the majority of the Company's Hosting and IT Services revenue.
As a result of the Company's strategy to focus on its mobile workforce
management operations, the Company is currently evaluating strategic
alternatives with respect to its Hosting and IT Services business. The Company
currently expects to make a decision regarding this business unit by the second
half of 2002.
Services
The services of MDSI's Hosting and IT Services, essentially Connectria,
comprise outsourcing, hosting and consulting, and can range from complete
outsourcing of an IT department to providing turnkey IT projects.
Outsourcing: Customized IT Outsourcing Solutions leverage Connectria's Data
Centers, Network Operation Centers, and Application Development Centers, as well
as certain services performed on the customer's site. Such outsourcing allows
customers to focus on running their business instead of designing, building or
running their IT departments.
Hosting: Connectria provides customized hosting programs for clients that
require world-class data center operations. Connectria provides management
services for all major hardware platforms including mainframes, servers,
databases, application servers, operating systems, IP-based networks, storage
area networks and wireless networks. Connectria provides full operational
support including system and network monitoring, problem resolution, version
management, backup and restore, change control, capacity planning, performance
tuning and system programming.
-9-
Consulting: Connectria provides a variety of IT consulting services
including, application development, system and network engineering, and various
operations support services, such as help desk support, data center management
and network management.
Customers
MDSI provides Hosting and IT Services to numerous third parties primarily
located in the United States. The customers for these services are typically
medium to large sized businesses spanning all types of industries, that
outsource their computer hosting needs in order to increase efficiency, obtain
increased technical expertise, and reduce cost.
During the year ended December 31, 2001, one customer accounted for
approximately 54% (2000 - 37%; 1999 - 0%) of Hosting and IT Services revenues.
Competition
The Company believes that the principal competitive factors in the Hosting
and IT Services market are the integrity of the Company's business model, and
the financial viability of the organization. The Company again believes that its
track record in this business provides it with a competitive advantage. The
Company will face competition from managed IT services providers such as
Rackspace and Jamcracker Inc.
Employees
As of December 31, 2001, the Company had 448 full-time employees and
contractors, including 272 in technical and engineering, 58 in sales, marketing
and technical support, 48 customer support and 70 in management, finance and
administration. None of the Company's employees is represented by a labor union
and the Company believes its employee relations to be good.
Financial Information About Segments and Geographic Markets
For certain information regarding the Company's reportable segments and
geographic markets, see Note 12 to the consolidated financial statements
included in Item 8 of this Annual Report on Form 10-K.
Risk Factors
The Company's business is subject to the following risks. These risks also
could cause actual results to differ materially from results projected in any
forward-looking statement in this report.
Potential Fluctuations in Quarterly Operating Results
The Company's results of operations have fluctuated in the past and are
likely to continue to fluctuate from period to period depending on a number of
factors, including the timing and receipt of significant orders, the timing of
completion of contracts, increased competition, regulatory and other
developments in the Company's vertical markets, changes in the demand for the
Company's products and services, the cancellation of contracts, the timing of
new product announcements and introductions, changes in pricing policies by the
Company and its competitors, delays in the introduction of products or
enhancements by the Company, expenses associated with the acquisition of
products or technology from third parties, the mix of sales of the Company's
products and services and third party products, seasonality of customer
purchases, personnel changes, political and economic uncertainty, the mix of
international and North American revenue, tax policies, foreign currency
exchange rates and general economic and political conditions.
The Company believes that the events of September 11, 2001 and recent
economic developments and trends have adversely affected and may continue to
affect levels of capital spending by companies in a variety of industries,
including companies in the vertical markets that the Company serves. The current
excess of supply in the telecommunications industry has adversely affected the
financial condition of many telecommunications companies worldwide. In addition,
current economic conditions and developments in the energy markets have had an
adverse
-10-
affect on the financial condition of energy and utility companies in certain
geographical areas of North America. The Company believes that these and other
factors have adversely affected demand for products and services offered by the
Company, as certain prospective and existing customers have delayed or deferred
purchasing decisions or have sought to terminate existing contracts for the
Company's products and services. The Company believes that these factors will
continue to affect demand for the Company's products and services in 2002,
particularly demand for software and related services. Such factors may also
increase the amount of doubtful accounts or adversely affect the likelihood of
collection of such accounts.
The Company relies upon its ability to implement and integrate mobile
workforce management solutions on schedule and to the satisfaction of its
customers. The Company from time to time has experienced certain implementation
and other problems that have delayed the completion of certain projects,
including the failure of third parties to deliver products or services on a
timely basis, delays caused by customers and development delays. Because the
Company currently recognizes revenue on a percentage of completion method,
delays in completion of certain contracts have caused delays in recognition of
revenue and, consequently, unanticipated fluctuations in quarterly results. In
light of the Company's recent reduction in its work force, there can be no
assurance that the Company will be able to complete current projects or
implement future systems on a timely and cost effective basis or that delays
will not result in cancellations of contracts or result in the imposition of
substantial penalties. Any such material delay, cancellation or penalty could
have a material adverse effect upon the Company's business, financial condition,
operating results and cash flows.
Because the Company is unable to forecast with certainty the receipt of
orders for its products and services and the Company's expense levels are
relatively fixed and are based, in part, upon its expectation of future revenue,
if revenue levels fall below expectations as a result of a delay in completing a
contract, the inability to obtain new contracts, the cancellation of an existing
contract or otherwise, operating results are likely to be adversely affected. As
a result, net income may be disproportionately affected because a relatively
small amount of the Company's expenses vary with its revenue.
Based upon all of the foregoing factors, the Company believes that its
quarterly revenue, direct expenses and operating results are likely to vary
significantly in the future, that period-to-period comparisons of the results of
operations are not necessarily meaningful and that such comparisons should not
be relied upon as an indication of future performance. The Company may also
choose to reduce prices or increase spending in response to competition, or to
pursue new market opportunities. See "Forward-Looking Statements". If new
competitors, technological advances by existing competitors or other competitive
factors require the Company to reduce its prices or invest significantly greater
resources in research and development efforts, the Company's operating results
in the future may be adversely affected. There can be no assurance that the
Company will be able to grow in future periods or that it will be able to
sustain its level of total revenue or achieve revenue growth on a quarterly or
annual basis. In fiscal 2001, the Company's revenue declined compared to the
same period in 2000. These recent declines have resulted from an economic slow
down in the vertical industries served by the Company. It is likely that in some
future quarter the Company's operating results will be below the expectations of
public market analysts and investors. See "Forward Looking Statements". In such
event, the market price of the Company's Common Shares would likely be
materially adversely affected.
Dependence on Third Party Products and Services
Since 1996, the Company has been, and anticipates that from time to time it
will be, engaged to provide, in addition to its own products and services, third
party hardware, software and services, which the Company purchases from vendors
and sells to its customers. For the years ended December 31, 2001, 2000 and
1999, 4.5%, 4.6%, and 14.1% respectively, of the Company's revenue was
attributable to third party products and services. As the revenue generated from
the supply of third party products and services may represent a significant
portion of certain contracts and the installation and rollout of third party
products is generally at the discretion of the customer, the Company may,
depending on the level of third party products and services provided during a
period, experience large quarterly fluctuations in revenue. See "Forward Looking
Statements". In addition, because the Company's gross margins on third party
products and services are substantially below gross margins historically
achieved on revenue associated with MDSI products and services, large
fluctuations in quarterly revenue from the sale of third party products and
services will result in significant fluctuations in direct costs, gross profits,
operating results, cash flows and other items expressed as a percentage of
revenue.
-11-
Lengthy Sales Cycles for Advantex Products
The purchase of a mobile workforce management solution is often a
significant purchase decision for prospective customers and requires the Company
to engage in sales efforts over an extended period of time and to provide a
significant level of education to prospective customers regarding the use and
benefits of such systems. Due in part to the significant impact that the
application of mobile workforce management solutions has on the operations of a
business and the significant commitment of capital required by such a system,
potential customers tend to be cautious in making acquisition decisions. As a
result, the Company's products generally have a lengthy sales cycle ranging from
several months to several years. Consequently, if sales forecasted from a
specific customer for a particular quarter are not realized in that quarter, the
Company may not be able to generate revenue from alternative sources in time to
compensate for the shortfall. The loss or delay of a large contract could have a
material adverse effect on the Company's quarterly financial condition,
operating results and cash flows, which may cause such results to be less than
analysts' expectations. Moreover, to the extent that significant contracts are
entered into and required to be performed earlier than expected, operating
results for subsequent quarters may be adversely affected. In particular, due to
economic conditions and developments in the Company's core markets, the Company
has experienced an increase in the time necessary to complete the negotiation
and signing of contracts with some of its customers.
Dependence on Large Contracts and Concentration of Customers
The Company's revenue is dependent, in large part, on significant contracts
from a limited number of customers. During the years ended December 31, 2001,
2000, and 1999, approximately 35.8%, 25.8%, and 31.0% respectively, of the
Company's consolidated revenue was attributable to five or fewer customers.
During the years ended December 31, 2001, 2000 and 1999, one customer accounted
for 12.7%, 5.8%, and 10.9% respectively, of the Company's consolidated revenue.
The Company believes that revenue derived from current and future large
customers will continue to represent a significant portion of its total revenue.
See "Forward Looking Statements". The inability of the Company to continue to
secure and maintain a sufficient number of large contracts would have a material
adverse effect on the Company's business, financial condition, operating results
and cash flows. Moreover, the Company's success will depend in part upon its
ability to obtain orders from new customers, as well as the financial condition
and success of its customers and general economic conditions.
The size of a contract for a particular customer can vary substantially
depending on whether the Company is providing only its own products and services
or is also responsible for supplying third party products and services. The
Company recognizes revenue using the percentage of completion method, which the
Company calculates based on total costs incurred compared to total costs
estimated by the Company for completion. Therefore, any significant increase in
the costs required to complete a project, or any significant delay in a project
schedule, could have a material adverse effect on that contract's profitability
and because of the size of each contract, on the Company's overall results of
operations. The Company from time to time has also experienced certain
implementation and other problems that have delayed the completion of certain
projects, including the failure of third parties to deliver products or services
on a timely basis and delays caused by customers. The Company's contracts
generally provide for payments upon the achievement of certain milestones.
Therefore, any significant delay in the achievement of milestones on one or more
contracts would affect the timing of the Company's cash flows and could have a
material adverse effect on the Company's business, financial condition,
operating results and cash flows. Any significant failure by the Company to
accurately estimate the scope of work involved, plan and formulate a contract
proposal, effectively negotiate a favorable contract price, properly manage a
project or efficiently allocate resources among several projects could have a
material adverse effect on the Company's business, financial condition,
operating results and cash flows.
Potential Fluctuations in Backlog
The Company's backlog consists of a relatively small number of large
contracts relating to sales of its mobile workforce management and wireless
connectivity software and related equipment and services, and sales of third
party products and services. Due to the long, complex sales process and the mix
of sales of the Company's products and services and third party products and
services, the Company's backlog may fluctuate significantly from
period-to-period. In addition, under the terms of the Company's contracts, the
Company's customers may elect to
-12-
terminate their contracts with the Company at any time after notice to the
Company or to delay certain aspects of installation. Due to the relative size of
a typical contract compared to the Company's annual and quarterly revenue, a
termination or installation delay of one or more contracts could have a material
adverse effect on the Company's business, financial condition, operating results
and cash flows. Contracts for software maintenance and support are generally
renewable every year and are subject to renegotiation upon renewal. There can be
no assurance that the Company's customers will renew their maintenance contracts
or that renewal terms will be as favorable to the Company as existing terms.
The Company believes that unfavorable economic conditions and reduced
capital spending by existing and prospective customers may adversely affect
demand for the Company's products and services in 2002. In particular, service
providers, utilities companies and telecommunications companies in the North
America were impacted during the latter half of 2000 and during 2001. The
September 11, 2001 terrorist attacks and the resulting slow down in the U.S.
economy is expected to continue to delay purchasing and implementation
decisions. If the economic conditions in the United States and Canada worsen or
if a wider or global economic slowdown occurs, the Company may experience
reduced revenues, increased costs, reduced margins and increased risks
associated with the collection of customer receivables, any of which may have a
material adverse impact on its business, operating results, cash flows and
financial condition.
Seasonal Variations in Demand
Certain of the vertical markets targeted by the Company include industries
with implementation requirements that vary seasonally. For example, utility
companies in North America generally have decreased implementation activity in
winter months when such utilities face their greatest consumer demand. As a
result, the Company's results of operations may also vary seasonally, and such
variation may be significant.
Limited Operating History; History of Losses; Increased Expenses
The Company commenced operations in February 1993 and therefore has only a
limited operating history upon which an evaluation of its business and prospects
can be based. As of December 31, 2001, the Company had an accumulated deficit of
$23.8 million. There can be no assurance that the Company will realize revenue
growth or be profitable on a quarterly or annual basis. The Company plans to
continue to contribute significant resources to its operating expenses related
to sales and marketing operations, to fund significant levels of research and
development, to broaden its customer support capabilities and to maintain its
administrative resources. A relatively high percentage of the Company's expenses
is fixed in the short term and the Company's expense levels are based, in part,
on its expectations of future revenue. To the extent that such expenses precede
or are not subsequently followed by increased revenue, the Company's business,
financial condition, operating results and cash flows could be materially
adversely affected. In addition, due to the rapidly evolving nature of its
business and markets, the Company's limited operating history and its recent
acquisitions, the Company believes that period-to-period comparisons of
financial results are not necessarily meaningful and should not be relied upon
as an indication of future performance.
Integration of Acquisitions
The Company may, when and if the opportunity arises, acquire other
products, technologies or businesses involved in activities, or having product
lines, that are complementary to the Company's business. Acquisitions involve
numerous risks, including difficulties in the assimilation of the operations,
technologies and products of the acquired companies, the diversion of
management's attention from other business concerns, risks associated with
entering markets or conducting operations with which the Company has no or
limited direct prior experience and the potential loss of key employees of the
acquired company. Moreover, there can be no assurance that any anticipated
benefits of an acquisition will be realized. Future acquisitions by the Company
could result in potentially dilutive issuance's of equity securities, the
incurrence of debt and contingent liabilities, amortization of expenses related
to goodwill and other intangible assets and write-off of acquired research and
development costs, all of which could materially and adversely affect the
Company's financial condition, results of operations and cash flows.
-13-
New Product Development
The Company expects that a significant portion of its future revenue will
be derived from the sale of newly introduced products, including Advantex r7,
and from enhancement of existing products. See "Forward-Looking Statements". The
Company's success will depend in part upon its ability to enhance its current
products on a timely and cost-effective basis and to develop new products that
meet changing market conditions, including changing customer needs, new
competitive product offerings and enhanced technology. There can be no assurance
that the Company will be successful in developing and marketing on a timely and
cost-effective basis new products and enhancements that respond to such changing
market conditions. If the Company is unable to anticipate or adequately respond
on a timely or cost-effective basis to changing market conditions, to develop
new software products and enhancements to existing products, to correct errors
on a timely basis or to complete products currently under development, or if
such new products or enhancements do not achieve market acceptance, the
Company's business, financial condition, operating results and cash flows could
be materially adversely affected. In light of the difficulties inherent in
software development, the Company expects that it will experience delays in the
completion and introduction of new software products. For example, the time
required for the initial implementation and field testing of Advantex r7 was
greater than expected, which resulted in delays in commencement of certain
installations of the Advantex r7 product.
e-Business Investments
As part of MDSI's e-Business strategy, during 2000 the Company made
strategic investments in two private companies that have created Internet
marketplaces in an aggregate investment of approximately $2.5 million and made
advances to a third company of $0.5 million. During 2001, the Company recorded a
valuation allowance for the full costs of these investments. There can be no
assurance that such entities will be commercially successful or that MDSI will
be able to recover or realize a return on its investment in such companies.
System Failures Could Lead to Significant Costs
The Company must protect its hosting services network infrastructure, its
equipment and its customers' equipment (including data) against damage from
human error, security breaches, power loss and other facility failures, fire,
earthquake, flood, telecommunications failure, sabotage, terrorist attacks,
vandalism and similar events. Despite the precautions the Company has taken, a
natural disaster or other unanticipated problems at one or more of its data
centers could result in interruptions in its hosting services or significant
damage to customer equipment. In addition, failure of any of its
telecommunications providers to provide consistent data communications capacity
or of other network providers to provide interconnection agreements could result
in service interruptions. Any damage to, or failure of, the Company's systems or
service providers could result in reductions in, or terminations of, services
supplied to the Company's customers, which could have a material adverse effect
on its business. If the Company incurs significant financial commitments to its
customers in connection with its failure to meet service level commitment
obligations as a result of system downtime or the loss of customer data, its
liability insurance may not be adequate to cover those expenses, and its results
of operations and financial condition may be adversely affected.
Litigation
The Company is a party to a suit filed against Citizens Telecom Services
Co., L.L.C., generally alleging that Citizens breached a series of contracts
dated October 15, 1998. The suit alleges that Citizens has wrongfully terminated
the contracts and failed to pay sums due. The suit seeks damages, interest and
attorneys' fees. Citizens filed an answer and counter claim alleging that MDSI
breached the contracts, justifying Citizens' termination of the contracts and
entitling Citizens to repayment of approximately $3.5 million paid to MDSI in
addition to interest and attorneys' fees. In its consolidated balance sheet as
of December 31, 2001 and 2000, the Company has classified approximately $3.7
million in amounts due from Citizens, which amounts are subject to the suit, as
a long term receivable as of December 31, 2001. The Company has not recorded any
amounts due from Citizens as doubtful accounts and has not recorded any amounts
claimed by Citizens as a contingent or other liability of the Company as the
Company believes that is will recover all amounts owing to it. There can be no
assurance that the Company will be successful in the prosecution of its claim or
in the defense of Citizens' counter claim.
-14-
Management of Growth and Reduction of Workforce
Since its inception, the Company has experienced periods of rapid growth in
product sales, personnel, research and development activities, number and
complexity of products, the number and geographic focus of its targeted vertical
markets and product distribution channels. The total number of employees of the
Company has grown from 9 employees in Canada in February 1993 to 448 employees
located in Canada, the United States and other international locations at
December 31, 2001. In addition, the acquisition of Connectria has increased the
number of products the Company supports and markets, as well as the number of
vertical markets into which it sells products and services. The Company also
recently expanded the geographical areas in which it operates.
In March and April, 2001, the Company made several announcements regarding
its intention to reduce the size of its work force by approximately 25% in
anticipation of reduced demand for its products and services due to the general
economic slowdown. If the Company resumes its growth in future periods, such
growth may place strains on its management, administrative, operational and
financial resources, as well as increased demands on its internal systems,
procedures and controls. There can be no assurance that the Company will be able
to effectively manage its operations or future growth and expansion into new
markets. Failure to do so could have a material adverse effect on the Company's
business, financial condition, operating results and cash flows.
Dependence on Key Personnel
The Company's performance and future operating results are substantially
dependent on the continued service and performance of its senior management and
key technical and sales personnel. Competition for qualified personnel is
intense, and in light of the Company's recent layoffs there can be no assurance
that the Company can retain its key technical, sales and managerial employees or
that it will be able to attract or retain highly-qualified technical and
managerial personnel in the future if demand for the Company's products and
services increase. The loss of the services of any of the Company's senior
management or other key employees or the inability to retain the necessary
technical, sales and managerial personnel could have a material adverse effect
upon the Company's business, financial condition, operating results and cash
flows.
Dependence on Selected Vertical Markets
Prior to 1996, substantially all of the Company's revenue was derived from
the sale of products and services to customers in the utility market. For the
years ended December 31, 1997 and 1996, the utility market accounted for greater
than 50% of the Company's revenue. In those years, the Company sought to reduce
its reliance on the utility market by developing or acquiring compatible
products for organizations with mobile workforces in other vertical markets. In
1998, the utility market accounted for greater than 40% of the Company's
revenue. In 1999, the telecommunications market accounted for 48% of the
Company's revenue. In 2000 the telecommunications and cable/broadband markets
accounted for greater than 45% of the Company's revenue. In 2001 the utility
market accounted for 55% of the Company's revenue. The Company anticipates that
a significant portion of its future revenue will be generated by sales of
products to the telecommunications, cable/broadband and utility markets and that
recent economic developments and trends have adversely affected and may continue
to adversely affect levels of capital spending by companies in a variety of
industries, including the vertical markets MDSI serves. The Company believes
that these and other factors may cause potential and existing customers to delay
or defer purchasing decisions or seek to terminate or delay payment under
existing contracts for the Company's products and services. Such factors may
also increase the amount of doubtful accounts or adversely affect the likelihood
of collection of such accounts. See "Forward-Looking Statements." A decline in
demand for the Company's products in these markets as a result of economic
conditions, competition, technological change or otherwise, would have a
material adverse effect on the Company's business, financial condition,
operating results and cash flows. There can be no assurance that the Company
will be able to continue to diversify its product offerings or revenue base by
entering into new vertical markets.
-15-
Dependence on Marketing Relationships
The Company's products are marketed by the Company's direct field sales
force as well as by third parties that act as lead generators or with whom the
Company acts together as a co-marketer or co-seller. The Company's existing
agreements with such partners are nonexclusive and may be terminated by either
party without cause. Such organizations are not within the control of the
Company, are not obligated to purchase products from the Company and may also
represent and sell competing products. There can be no assurance that the
Company's existing partners will continue to provide the level of services and
technical support necessary to provide a complete solution to the Company's
customers or that they will not emphasize their own or third-party products to
the detriment of the Company's products. The loss of these partners, the failure
of such parties to perform under agreements with the Company or the inability of
the Company to attract and retain new resellers with the technical, industry and
application experience required to market the Company's products successfully
could have a material adverse effect on the Company's business, financial
condition, operating results and cash flows. The Company expects that it may
enter into certain joint ventures in order to facilitate its expansion into
other vertical markets and geographic areas. See "Forward Looking Statements".
To the extent that such joint ventures are not successful, there could be a
material adverse effect on the Company's business, financial condition,
operating results and cash flows.
Competition
The markets for mobile workforce management applications, wireless
connectivity software, mobile data network equipment and mobile computing
devices are highly competitive. Numerous factors affect MDSI's competitive
position, including price, product features, product performance and
reliability, ease of use, product scalability, product availability on multiple
platforms (server, wireless carrier, and mobile workstation), ability to
implement mobile workforce management solutions domestically and internationally
while meeting customer schedules, integration of products with other enterprise
solutions, availability of project consulting services and timely ongoing
customer service and support. Within these markets, there are a small number of
new ventures, either small companies attempting to establish a business in this
market or large companies attempting to diversify their product offerings. MDSI
expects such competition to intensify as acceptance and awareness of mobile data
communications and technology continue. See "Forward Looking Statements". In
addition, a small number of MDSI's potential customers develop software
solutions internally, thereby eliminating the requirement for suppliers such as
MDSI. Current or potential competitors may establish cooperative arrangements
among themselves or with third parties to increase the ability of their products
to address customer requirements. Certain of MDSI's competitors have
substantially greater financial, technical, marketing and distribution resources
than MDSI. As a result, they may be able to respond more quickly to new or
emerging technologies and changing customer requirements, or to devote greater
resources to the development and distribution of existing products. There can be
no assurance that MDSI will be able to compete successfully against current or
future competitors or alliances of such competitors, or that competitive
pressures faced by MDSI will not materially adversely affect its business,
financial condition, operating results and cash flows.
The Company primarily competes in the utilities market with Utility
Partners, L.C. (which recently filed for bankruptcy protection under Chapter
11), M3i Systems, Inc. (which was recently purchased by Cognicase, Inc.),
Integraph Corporation and iMedeon, Inc (which has recently merged with ViryaNet
Ltd.). The Company has several competitors in the telecommunications and
cable/broadband markets. The Company's primary competitor for telecommunications
customers is Telcordia Technologies Inc. (formerly Bellcore), a company which
has historical relationships with certain of the large telecommunications
companies, and more recently ClickSoftware, Inc. (formerly IET) and ViryaNet
Ltd., which the Company mostly sees as competition for small accounts. In the
cable/broadband market, the Company's primary competitors are Telcordia,
C-Cor.net Corp. (formerly MobileForce Technologies, Inc.), PointServe
Inc.(through its merger with Brazen Software Inc.), CSG Systems International
Inc., and Viryanet Ltd., again only for small accounts.
The Company believes that the principal competitive factors in the
commercial field service market are the ability to improve the customer service
aspects of an organization's business and increase the productivity of service
representatives. In this market, the Company's principal competitors are Astea
International Inc., Metrix Inc., and FieldCentrix Inc., in addition to several
larger enterprise software companies, such as Amdocs Limited who recently
acquired the assets of Clarify, Oracle Corporation, PeopleSoft Inc., and Siebel
Systems Inc. which, to the Company's
-16-
knowledge, offer less comprehensive solutions and which MDSI currently sees as
potential partners for expanding their penetration in this market.
Risk of Product Defects
Software products, including those offered by the Company, from
time-to-time contain undetected errors or failures. There can be no assurance
that, despite testing by the Company and by current and potential customers,
errors will not be found in the Company's products. Such errors could result in
loss of or delay in market acceptance of the Company's products, which could
have a material adverse effect on the Company's business, financial condition,
operating results and cash flows.
Proprietary Technology
The Company's success is dependent on its ability to protect its
intellectual property rights. The Company relies principally upon a combination
of copyright, trademark, trade secret and patent laws, non-disclosure agreements
and other contractual provisions to establish and maintain its rights. To date,
the Company has been granted trademark registrations or has registrations
pending in the United States, Canada and the European Community for the MDSI,
Advantex, Wireless@work and Compose trademarks. MDSI has also filed United
States and international patent applications covering various aspects of its
technology. As part of its confidentiality procedures, the Company generally
enters into nondisclosure and confidentiality agreements with each of its key
employees, consultants, distributors, customers and corporate partners, to limit
access to and distribution of its software, documentation and other proprietary
information. There can be no assurance that the Company's efforts to protect its
intellectual property rights will be successful. Despite the Company's efforts
to protect its intellectual property rights, unauthorized third parties,
including competitors, may be able to copy or reverse engineer certain portions
of the Company's software products, and use such copies to create competitive
products. Policing the unauthorized use of the Company's products is difficult,
and, while the Company is unable to determine the extent to which piracy of its
software products exists, software piracy can be expected to continue. In
addition, the laws of certain countries in which the Company's products are or
may be licensed do not protect its products and intellectual property rights to
the same extent as do the laws of Canada and the United States. As a result,
sales of products by the Company in such countries may increase the likelihood
that the Company's proprietary technology is infringed upon by unauthorized
third parties. In addition, because third parties may attempt to develop similar
technologies independently, the Company expects that software product developers
will be increasingly subject to infringement claims as the number of products
and competitors in the Company's industry segments grow and the functionality of
products in different industry segments overlaps. See "Forward-Looking
Statements". Although the Company believes that its products do not infringe on
the intellectual property rights of third parties, there can be no assurance
that third parties will not bring infringement claims (or claims for
indemnification resulting from infringement claims) against the Company with
respect to copyrights, trademarks, patents and other proprietary rights. Any
such claims, whether with or without merit, could be time consuming, result in
costly litigation and diversion of resources, cause product shipment delays or
require the Company to enter into royalty or licensing agreements. Such royalty
or licensing agreements, if required, may not be available on terms acceptable
to the Company or at all. A claim of product infringement against the Company
and failure or inability of the Company to license the infringed or similar
technology could have a material adverse effect on the Company's business,
financial condition, operating results and cash flows.
Dependence on Third Parties
Certain contracts require the Company to supply, coordinate and install
third party products and services. The Company believes that there are a number
of acceptable vendors and subcontractors for most of its required products, but
in many cases, despite the availability of multiple sources, the Company may
select a single source in order to maintain quality control and to develop a
strategic relationship with the supplier or may be directed by a customer to use
a particular product. The failure of a third party supplier to provide a
sufficient supply of parts and components or products and services in a timely
manner could have a material adverse effect on the Company's results of
operations. In addition, any increase in the price of one or more of these
products, components or services could have a material adverse effect on the
Company's business, financial condition, operating results and cash flows.
Additionally, under certain circumstances, the Company supplies products and
services to a customer through a larger company with a more established
reputation acting as a project manager or systems integrator. In
-17-
such circumstances, the Company has a sub-contract to supply its products and
services to the customer through the prime contractor. In these circumstances,
the Company is at risk that situations may arise outside of its control that
could lead to a delay, cost over-run or cancellation of the prime contract which
could also result in a delay, cost over-run or cancellation of the Company's
sub-contract. The failure of a prime contractor to supply its products and
services or perform its contractual obligations to the customer in a timely
manner could have a material adverse effect on the Company's financial
condition, results of operations and cash flows.
Exchange Rate Fluctuations
Because the Company's reporting and functional currency is the United
States dollar, its operations outside the United States face additional risks,
including fluctuating currency values and exchange rates, hard currency
shortages and controls on currency exchange. The Company has operations outside
the United States and is hedged, to some extent, from foreign exchange risks
because of its ability to purchase, develop and sell in the local currency of
those jurisdictions. In addition, the Company does enter into foreign currency
contracts under certain circumstances to reduce the Company's exposure to
foreign exchange risks. There can be no assurance, however, that the attempted
matching of foreign currency receipts with disbursements or hedging activities
will adequately moderate the risk of currency or exchange rate fluctuations
which could have a material adverse effect on the Company's business, financial
condition, operating results and cash flows. In addition, to the extent the
Company has operations outside the United States, the Company is subject to the
impact of foreign currency fluctuations and exchange rate charges on the
Company's reporting in its financial statements of the results from such
operations outside the United States.
Risks Associated with International Operations
In the years ended December 31, 2001, 2000, and 1999 revenue derived from
sales outside of North America accounted for approximately 18.3%, 20.0%, and
22.1%, respectively, of the Company's total revenue. Because the Company's
revenue is dependent, in large part, on significant contracts with a limited
number of customers, the percentage of the Company's revenues that is derived
from sales outside of North America has fluctuated, and may continue to
fluctuate, from period-to-period. The Company believes that its ability to grow
and be profitable will require additional expansion of its sales in foreign
markets, and that revenue derived from international sales will account for a
significant percentage of the Company's revenue for the foreseeable future. This
expansion has required and will continue to require significant management
attention and financial resources. The inability of the Company to expand
international sales in a timely and cost-effective manner could have a material
adverse effect on the Company's business, financial condition, operating results
and cash flows. There are a number of risks inherent in the Company's
international business activities, including changes in regulatory requirements,
tariffs and other trade barriers, costs and risks of localizing products for
foreign markets, longer accounts receivable payment cycles, difficulties in
collecting payments, reduced protection for intellectual property, potentially
adverse tax consequences, limits on repatriation of earnings, the burdens of
complying with a wide variety of foreign laws, nationalization, war,
insurrection, terrorism and other political risks and factors beyond the
Company's control. Fluctuations in currency exchange rates could adversely
affect sales denominated in foreign currencies and cause a reduction in revenue
derived from sales in a particular country. In addition, revenue of the Company
earned abroad may be subject to taxation by more than one jurisdiction, thereby
adversely affecting the Company's earnings. There can be no assurance that such
factors will not materially adversely affect the Company's future international
sales and, consequently, the Company's business, financial condition, operating
results and cash flows.
Product Liability
The license and support of products by the Company may entail the risk of
exposure to product liability claims. A product liability claim brought against
the Company or a third party that the Company is required to indemnify, whether
with or without merit, could have a material adverse effect on the Company's
business, financial condition, operating results and cash flows. The Company
carries insurance coverage for product liability claims which it believes to be
adequate for its operations.
-18-
Concentration of Stock Ownership; Anti-Takeover Effects; Investment Canada Act
The Company's directors, officers and their respective affiliates, in the
aggregate, beneficially own approximately 25.8% of the outstanding Common
Shares. As a result, these shareholders, if acting together, may be able to
exercise significant influence over the Company and many matters requiring
shareholder approval, including the election of directors and approval of
significant corporate transactions. Such concentration of ownership may under
certain circumstances also have the effect of delaying, deferring or preventing
a change in control of the Company.
An investment in the Common Shares of the Company which results in a change
of control of the Company may, under certain circumstances, be subject to review
and approval under the Investment Canada Act if the party or parties acquiring
control is not a Canadian person (as defined therein). Therefore, the Canadian
regulatory environment may have the effect of delaying, deferring or preventing
a change in control of the Company.
The Company is organized under the laws of Canada and, accordingly, is
governed by the Canada Business Corporations Act "CBCA". The CBCA differs in
certain material respects from laws generally applicable to United States
corporations and shareholders, including the provisions relating to interested
directors, mergers and similar arrangements, takeovers, shareholders' suits,
indemnification of directors and inspection of corporate records.
In December 1998, the Company implemented a stock rights plan (the "Plan").
Pursuant to the Plan, shareholders of record on December 17, 1998 received a
dividend of one right to purchase, for CDN$140, one Common Share of the Company.
The rights are attached to the Company's Common Shares and will also become
attached to Common Shares issued in the future. The rights will not be traded
separately and will not become exercisable until the occurrence of a triggering
event, defined as an accumulation by a single person or group of 20% or more of
the Company's Common Shares. After a triggering event, the rights will detach
from the Common Shares. If the Company is then merged into, or is acquired by,
another corporation, the Company may either (i) redeem the rights or (ii) permit
the rights holder to receive in the merger Common Shares of the Company or of
the acquiring company equal to two times the exercise price of the right (i.e.,
CDN $280). In the latter instance, the rights attached to the acquirer's stock
become null and void. The effect of the rights program is to make a potential
acquisition of the Company more expensive for the acquirer if, in the opinion of
the Company's Board of Directors, the offer is inadequate. While the Company is
not aware of any circumstance that might result in the acquisition of a
sufficient number of shares of the Company's Common Shares to trigger
distribution of the Rights, existence of the Rights could discourage offers for
the Company's stock that may exceed the current market price of the stock, but
that the Board of Directors deems inadequate.
As a result of being a reporting issuer in certain provinces of Canada, the
Company is required to file certain reports in such jurisdictions. As part of
such reports, the Company is required to file consolidated financial statements
prepared in accordance with generally accepted accounting principles as applied
in Canada ("Canadian GAAP"). Canadian and US GAAP differ in certain respects,
including the treatment of certain reorganization costs, acquired research and
development costs, and treatment of business combinations. As a result, the
Company's Consolidated Financial Statements included in this report will differ
materially from the financial statements filed by the Company in Canada.
Market for the Common Shares; Potential Volatility of Stock Price
The trading prices of the Common Shares have been subject to wide
fluctuations since trading of the Company's shares commenced in December 1995.
There can be no assurance that the market price of the Common Shares will not
significantly fluctuate from its current level. The market price of the Common
Shares may be subject to wide fluctuations in response to quarterly variations
in operating results, announcements of technological innovations or new products
by the Company or its competitors, changes in financial estimates by securities
analysts, or other events or factors. In addition, the financial markets have
experienced significant price and volume fluctuations for a number of reasons,
including the failure of the operating results of certain companies to meet
market expectations that have particularly affected the market prices of equity
securities of many high-technology companies that have often been unrelated to
the operating performance of such companies. These broad market fluctuations, or
any industry-specific market fluctuations, may adversely affect the market price
of the Common Shares. In the past, following periods of volatility in the market
price of a company's securities, securities class
-19-
action litigation has often been instituted against such a company. Such
litigation, whether with or without merit, could result in substantial costs and
a diversion of management' attention and resources, which would have a material
adverse effect on the Company's business, financial condition, operating results
and cash flows.
Item 2: Properties
The Company occupies approximately 92,000 square feet of leased office
space at its headquarters in Richmond, British Columbia for its product
development, marketing, support, administration and sales operations. The lease
expires on November 30, 2008 with two options to renew for five years each. The
Company has sub-let approximately 22,000 square feet of this space until
December 31, 2003. The Company also maintains an office in Itasca, Illinois. The
Itasca office lease is for approximately 29,000 square feet and terminates on
November 30, 2009. The Company has sub-let approximately 17,600 feet of this
space until November 30, 2004. The Company also maintains an office in St.
Louis, Missouri. The St. Louis office lease is for approximately 7,700 feet and
terminates on December 31, 2006. Properties under lease in Richmond and Itasca
are used for its Field Service segment, and the property in St. Louis is
utilized by the Company's Hosting and IT Service segment. The Company believes
that the current office space under lease less the current subleased portions is
adequate to meet its needs for the foreseeable future.
Item 3: Legal Proceedings
MDSI Mobile Data Solutions Inc. v. Citizens Telecom Services Co., L.L.C. -
U.S. District Court, Texas District Court Collin County - 366 Judicial District
(Docket No. 366-01914-00)
On November 22, 2000, MDSI filed suit in Texas District Court Collin County
against Citizens Telecom Services Co., L.L.C., generally alleging that Citizens
breached a series of contracts dated October 15, 1998. The suit alleges that
Citizens has wrongfully terminated the contracts and failed to pay sums due of
approximately $3.7 million. The suit seeks damages, interest and attorneys'
fees. In late February 2001, Citizens filed an answer and counter claim alleging
that MDSI breached the contracts, justifying Citizens' termination of the
contracts and entitling Citizens to repayment of all sums paid to MDSI of
approximately $3.5 million in addition to interest and attorneys' fees. At
Citizens request the parties held a mediation on April 2, 2001. Mediation was
not successful and both parties have begun discovery. MDSI disputes Citizens'
claims and intends to pursue the lawsuit vigorously.
From time to time, the Company is a party to litigation and claims incident
to the ordinary course of its business. While the results of litigation and
claims cannot be predicted with certainty, the Company believes that the final
outcome of such matters will not have a material adverse effect on the Company's
business, financial condition, operating results and cash flows.
Item 4: Submission of Matters to a Vote of Security Holders
Not applicable.
-20-
Part II
Item 5: Market for Registrant's Common Equity and Related Stockholder Matters
Price Range of Common Shares
The Company's Common Shares began trading on The Toronto Stock Exchange and
on the Montreal Exchange under the symbol "MMD" on December 20, 1995 and began
trading on the Nasdaq National Market System under the symbol "MDSIF" on
November 26, 1996. The Company changed its Nasdaq National Market System trading
symbol to "MDSI" in April 1999. In December 1999, the Company's listing on the
Montreal Exchange was automatically withdrawn as part of a restructuring plan of
the Canadian stock exchanges. Prior to December 20, 1995, there was no public
market for the Common Shares. The following table sets forth, for the periods
indicated, the high and low sale prices for the Common Shares as reported on The
Toronto Stock Exchange and the Nasdaq National Market System with their
equivalent U.S. dollar amounts where applicable.
The Toronto Stock Exchange Nasdaq National Market
----------------------------------------- ----------------------------
US$(1) CDN$ US$ US$
--------------------- ----------------- ------------- -------------
High Low High Low High Low
--------- ---------- -------- ------- ------------- -------------
2000
First Quarter...................... 87.84 18.58 130.00 27.50 90.00 19.00
Second Quarter..................... 64.00 19.96 93.00 29.00 64.94 18.28
Third Quarter...................... 24.53 10.60 36.35 15.70 24.31 10.31
Fourth Quarter..................... 13.11 6.59 20.00 10.05 13.13 6.38
2001
First Quarter...................... 11.13 5.07 17.00 7.75 11.25 4.88
Second Quarter..................... 6.32 4.05 9.75 6.25 6.20 4.00
Third Quarter...................... 5.02 2.26 7.75 3.50 5.29 2.23
Fourth Quarter..................... 5.03 2.66 7.95 4.20 5.08 2.71
- ----------
(1) US dollar amounts have been translated using the average noon buying rate
for Canadian dollars for the relevant quarter. See "Exchange Rates."
Shareholders
As of December 31, 2001 the Company had approximately 305 shareholders of
record (including nominees and brokers holding street accounts), 78 shareholders
of whom had addresses in the United States and who held 5,560,822 Common Shares,
or 64.1 % of the Company's outstanding Common Shares.
Dividends
The Company has never paid dividends on its Common Shares. The Company
currently intends to retain earnings for use in its business and does not
anticipate paying any dividends in the foreseeable future. The Company's current
bank credit agreement prohibits the payment of dividends without prior consent
of the lender.
Recent Sales of Unregistered Securities
The Company did not issue any unregistered securities during the fiscal
year ended December 31, 2001.
-21-
Exchange Controls
There are no government laws, decrees or regulations in Canada which
restrict the export or import of capital or which affect the remittance of
dividends, interest or other payments to non-resident holders of the Company's
Common Shares. Any remittances of dividends to United States residents and to
other non-residents are, however, subject to withholding tax. See "Taxation"
below.
Taxation
Canadian Federal Income Taxation
We consider that the following summary fairly describes in general the
principal Canadian federal income tax consequences applicable to a holder of our
common shares who at all times deals at arm's length with us, who holds all
common shares as capital property, who is resident in the United States, who is
not a resident of Canada and who does not use or hold, and is not deemed to use
or hold, his common shares of MDSI Mobile Data Solutions Inc. in connection with
carrying on a business in Canada (a "non-resident holder"). It is assumed that
the common shares will at all material times be listed on a stock exchange that
is prescribed for purposes of the Income Tax Act (Canada) (the "ITA") and
regulations thereunder. The Canadian federal income tax consequences applicable
to holders of the Company's common shares will not change if we are deemed
inactive by the Toronto Stock Exchange. Investors should however be aware that
the Canadian federal income tax consequences applicable to holders of the
Company's common shares will change if we cease to be listed on a prescribed
stock exchange like the Toronto Stock Exchange. Accordingly, holders and
prospective holders of our common shares should consult with their own tax
advisors with respect to the income tax consequences of them purchasing, owning
and disposing of the Company's common shares should the Company cease to be
listed on a prescribed stock exchange.
This summary is based upon the current provisions of the ITA, the
regulations thereunder, the Canada-United States Tax Convention as amended by
the Protocols thereto (the "Treaty") as at the date of the registration
statement and the currently publicly announced administrative and assessing
policies of the Canada Customs and Revenue Agency (the "CCRA"). This summary
does not take into account Canadian provincial income tax consequences. This
description is not exhaustive of all possible Canadian federal income tax
consequences and does not take into account or anticipate any changes in law,
whether by legislative, governmental or judicial action. This summary does,
however, take into account all specific proposals to amend the ITA and
regulations thereunder, publicly announced by the Government of Canada to the
date hereof.
This summary does not address potential tax effects relevant to the Company
or those tax considerations that depend upon circumstances specific to each
investor. Accordingly, holders and prospective holders of our common shares
should consult with their own tax advisors with respect to the income tax
consequences to them of purchasing, owning and disposing of the Company's common
shares.
Dividends
The ITA provides that dividends and other distributions deemed to be
dividends paid or deemed to be paid by a Canadian resident corporation (such as
MDSI Mobile Data Solutions Inc.) to a non-resident of Canada shall be subject to
a non-resident withholding tax equal to 25% of the gross amount of the dividend
or deemed dividend. Provisions in the ITA relating to dividend and deemed
dividend payments and gains realized by non-residents of Canada, who are
residents of the United States, are subject to the Treaty. The Treaty may reduce
the withholding tax rate on dividends as discussed below.
Article X, of the Treaty as amended by the US-Canada Protocol ratified on
December 16, 1997 provides a 5% withholding tax on gross dividends or deemed
dividends paid to a United States corporation which beneficially owns at least
10% of our voting stock paying the dividend. In cases where dividends or deemed
dividends are paid to a United States resident (other than a corporation) or a
United States corporation which beneficially owns less than 10% of our voting
stock, a withholding tax of 15% is imposed on the gross amount of the dividend
or deemed dividend paid. The Company will be required to withhold any such tax
from the dividend and remit the tax directly to CCRA for the account of the
investor.
-22-
The reduction in withholding tax from 25%, pursuant to the Treaty, will not
be available:
(a) if the shares in respect of which the dividends are paid formed part
of the business property or were otherwise effectively connected with
a permanent establishment or fixed base that the holder has or had in
Canada within the 12 months preceding the disposition, or
(b) the holder is a U.S. LLC which is not subject to tax in the U.S.
The Treaty generally exempts from Canadian income tax dividends paid to a
religious, scientific, literary, educational or charitable organization or to an
organization exclusively administering a pension, retirement or employee benefit
fund or plan, if the organization is resident in the U.S. and is exempt from
income tax under the laws of the U.S.
Capital Gains
A non-resident holder is not subject to tax under the ITA in respect of a
capital gain realized upon the disposition of our share unless the share
represents "taxable Canadian property" to the holder thereof. The Company's
Common shares will be considered taxable Canadian property to a non-resident
holder only if:
(a) the non-resident holder,
(b) persons with whom the non-resident holder did not deal at arm's
length, or
(c) the non-resident holder and persons with whom he did not deal at arm's
length,
owned not less than 25% of the Company's issued shares of any class or
series at any time during the five year period preceding the disposition. In the
case of a non-resident holder to whom the Company's shares represent taxable
Canadian property and who is resident in the United States, no Canadian taxes
will generally be payable on a capital gain realized on such shares by reason of
the Treaty unless:
(a) the value of such shares is derived principally from real property
(including resource property) situated in Canada,
(b) the holder was resident in Canada for 120 months during any period of
20 consecutive years preceding, and at any time during the 10 years
immediately preceding, the disposition and the shares were owned by
him when he ceased to be a resident of Canada,
(c) they formed part of the business property or were otherwise
effectively connected with a permanent establishment or fixed base
that the holder has or had in Canada within the 12 months preceding
the disposition, or
(d) the holder is a U.S. LLC which is not subject to tax in the U.S.
If subject to Canadian tax on such a disposition, the taxpayer's capital
gain (or capital loss) from a disposition is the amount by which the taxpayer's
proceeds of disposition exceed (or are exceeded by) the aggregate of the
taxpayer's adjusted cost base of the shares and reasonable expenses of
disposition. For Canadian income tax purposes, the "taxable capital gain" is
equal to one-half of the capital gain.
-23-
Item 6: Selected Financial Data
The following selected consolidated financial data of the Company is
qualified in its entirety by reference to and should be read in conjunction with
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the consolidated financial statements and notes thereto
included elsewhere in this report. The consolidated statements of operations
data for the years ended December 31, 2001, 2000 and 1999 and the consolidated
balance sheet data at December 31, 2001 and 2000 are derived from and are
qualified by reference to the Company's audited consolidated financial
statements. Segmented information regarding the Company's two business segments
for the fiscal years ended December 31, 2001, 2000 and 1999 is provided in Note
12 to such consolidated financial statements. This selected consolidated
financial data is presented in conformity with generally accepted accounting
principles in the United States.
Years ended December 31,
---------------------------------------------------------------------
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
(in thousands, except per share data)
Statement of Operations Data:
Revenue $ 58,120 $ 61,542 $ 58,571 $ 48,363 $ 38,523
Gross profit 26,870 33,487 31,253 24,423 20,290
Operating income (loss) (11,687) 857 7,923 6,079 (1,086)
Net income (loss) from continuing (14,107) (159) 5,019 4,309 (2,517)
operations for the year
(1)(2)(3)(4)
Diluted earnings (loss) per common
share $ (1.64) $ (0.07) $ 0.13 $ 0.5 $ (1.30)
Weighted average shares outstanding 8,623 8,527 9,101 7,563 6,754
As at December 31,
---------------------------------------------------------------------
Balance Sheet Data: 2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
Cash and cash equivalents $ 13,692 $ 13,238 $ 14,613 $ 3,606 $ 93
Working capital 12,734 25,565 24,084 9,073 6,563
Total assets 44,577 60,781 50,443 38,522 28,529
Non-current liabilities 1,623 4,380 2,838 2,927 4,224
Stockholders' equity 24,475 38,177 35,537 20,596 16,688
- -------------
(1) Net loss for the year ended December 31, 1997, includes non-recurr