Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- --------------------------------------------------------------------------------
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 0-28968
MDSI MOBILE DATA SOLUTIONS INC.
(Exact name of registrant as specified in its charter)
CANADA NOT APPLICABLE
(Jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
10271 Shellbridge Way
Richmond, British Columbia,
Canada V6X 2W8
(Address of principal executive offices)
Registrant's telephone number: (604) 207-6000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, no par value
---------------------------
(Title of Class)
Rights to Purchase Common Shares
--------------------------------
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes ___ No [X]
The aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold on Nasdaq as of the last business day of the registrant's most
recently completed second fiscal quarter, which was June 28,2002: $30,008,310
The number of shares of the Registrant's Common Shares outstanding as of
March 25, 2003 was 8,176,431.
TABLE OF CONTENTS
Item 1: Business..............................................................2
Item 2: Properties...........................................................21
Item 3: Legal Proceedings....................................................21
Item 4: Submission of Matters to a Vote of Security Holders..................22
Item 5: Market for Registrant's Common Equity And Related
Stockholder Matters................................................23
Item 6: Selected Financial Data..............................................26
Item 7: Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................27
Item 7A: Quantitative and Qualitative Disclosure About Market Risk...........42
Item 8: Financial Statements and Supplementary Data..........................42
Item 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure...............................................76
Item 10: Directors and Executive Officers of the Registrant..................77
Item 11: Executive Compensation..............................................80
Item 12: Security Ownership of Certain Beneficial Owners and Management......85
Item 13: Certain Relationships and Related Transactions......................86
Item 14: Controls and Procedures.............................................86
Item 15: Exhibits, Financial Statement Schedules and Reports on Form 8-K.....87
i
Forward-Looking Statements
Certain statements in this Annual Report on Form 10-K constitute
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of MDSI Mobile Data Solutions Inc. ("MDSI"
or the "Company"), or developments in the Company's industry, to differ
materially from the anticipated results, performance or achievements expressed
or implied by such forward-looking statements. Such factors include, but are not
limited to: lengthy sales cycles, the Company's dependence upon large contracts
and relative concentration of customers, the failure of MDSI to maintain
anticipated levels of expenses in future periods and the risk that cost
reduction efforts adversely affect the ability of MDSI to achieve its business
objectives, the failure of MDSI to successfully execute its business strategies,
the effect of slow United States and international economies generally, the
threat or reality of war, as well as economic trends and conditions in the
vertical markets that MDSI serves, the effect of the risks associated with
technical difficulties or delays in product introductions, improvements,
implementations, product development, product pricing or other initiatives of
MDSI's competitors, the possibility that our potential customers will defer
purchasing decisions due to economic or other conditions or will purchase
products offered by our competitors, risks associated with litigation and the
protection of intellectual property, risks associated with the collection of
accounts receivable, and the other risks and uncertainties described under
"Business - Risk Factors" in Part I of this Annual Report on Form 10-K. Certain
of the forward looking statements contained in this Report are identified with
cross-references to this section and/or to specific risks identified under
"Business - Risk Factors."
Exchange Rates
The following table sets forth, for each period presented, the exchange
rates at the end of such period, the average of the exchange rates on the last
day of each month during the period and the high and low exchange rates for one
Canadian dollar, expressed in U.S. dollars, based on the noon buying rate in New
York City for cable transfers payable in Canadian dollars as certified for
customs purposes by the Federal Reserve Bank of New York.
U.S. Dollars Per Canadian Dollar
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Period End US$0.6342 US$0.6275 US$0.6666 US$0.6925 US$0.6504
Average 0.6369 0.6461 0.6740 0.6744 0.6715
High 0.6656 0.6714 0.6983 0.6925 0.7105
Low 0.6175 0.6227 0.6397 0.6535 0.6341
On March 25, 2003 the noon buying rate was CDN$1.00 = US$0.6755. The
Canadian dollar is convertible into U.S. dollars at freely floating rates, and
there are currently no restrictions on the flow of Canadian currency between
Canada and the United States. Unless stated otherwise, all financial information
is expressed in United States dollars.
1
PART I
Item 1: Business
The Company
MDSI Mobile Data Solutions Inc. is a leading provider of mobile workforce
management solutions. MDSI's suite of software applications improves customer
service and relationships, and reduces operating costs by empowering service
companies to optimally manage their mobile field resources. The Company also
provides all of the professional services necessary to implement and support its
solutions. Founded in 1993, MDSI has approximately 100 major customers worldwide
with operations and support offices in the United States, Canada, and Europe.
MDSI markets its solutions to a variety of companies that have substantial field
service organizations, and focuses primarily upon utilities (electric, gas and
water companies), telecommunications companies, and cable/broadband companies.
MDSI's products are used by such companies in conjunction with various public
and private wireless data communications networks, mobile devices and server
hardware to provide comprehensive solutions for the automation of business
processes associated with the scheduling, dispatching and management of a mobile
workforce.
Unless the context otherwise requires, references herein to "MDSI" or the
"Company" refer to MDSI Mobile Data Solutions Inc. and its subsidiaries. The
Company's principal executive offices are located at 10271 Shellbridge Way,
Richmond, British Columbia, Canada V6X 2W8, and its telephone number at that
location is (604) 207-6000. The Company's web site is www.mdsi-advantex.com.
Information contained on the Company's web site is not part of this report.
Background
Field service organizations are confronted on a daily basis with the
difficult task of optimally assigning work requests to their mobile workforce,
dispatching the work to the field, monitoring the progress of the work,
responding to changing conditions, and measuring workforce performance. Common
workforce management problems include:
o missed appointments;
o unnecessary overtime;
o repeat customer visits to get the job done right;
o jobs that take too long to complete;
o delayed status reports;
o inadequate information collected from/supplied to the field;
o redundant data entry work; and
o excessive driving time.
Historically, these organizations have managed and supported their mobile
workers by communicating information on paper, or through wireline solutions or
through voice radio systems. Although voice radio systems are mobile, such
systems rely on heavily used portions of the radio spectrum and are subject to
frequent periods of congestion. Mobile data communication systems that addressed
certain limitations of voice communications systems were first developed for a
limited number of vertical markets, such as utility, public safety, taxi,
courier and commercial field service. Businesses in these markets recognized
certain productivity benefits associated with
2
wireless data applications. Although such mobile data communications systems
were introduced in a number of vertical markets, these systems failed to achieve
widespread adoption. The Company believes that this initial low rate of adoption
was attributable to a number of factors including the high cost of establishing
private radio networks, the difficulty of obtaining radio spectrum for such
networks, the high cost and limited functionality of early mobile computing
devices and the regulatory environment in certain industries, such as utilities
and telecommunications, which diminished competitive pressures. In addition to
these factors, a lack of industry-specific application software which
effectively addressed the needs of mobile workers limited the cost-effectiveness
of early systems.
The Company believes that ongoing trends in the regulatory environment,
numerous technological advances and competitive pressures have reduced many of
these limitations and have provided, and will continue to provide a compelling
case for the adoption of mobile data solutions by field service organizations.
Deregulation has exposed the utility and telecommunications markets to new
competitive pressures, driving businesses within those markets to seek ways to
reduce costs, improve operations, efficiently allocate resources and increase
the quality of customer service. In addition, the availability of powerful
mobile computing devices has permitted the development of sophisticated software
applications. Finally, public data networks providing services at lower costs
than ever are now widely available in North America, and similar networks are
available in Europe, Austral-Asia and Africa. Consequently, the Company believes
that mobile data solutions may now be implemented without the difficulty and
expense of establishing a private radio network, thereby increasing the
cost-effectiveness of such systems. The Company believes that these trends will
continue to increase the likelihood of adoption of mobile data solutions by
companies with field service organizations. See "Forward-Looking Statements."
The MDSI Solution
MDSI has combined its expertise in software application development and
mobile data communications technology with its understanding of the unique needs
of field service organizations in targeted vertical markets to develop mobile
workforce management solutions that address the specific needs of businesses
within those vertical markets. MDSI's products enable these organizations to
effectively communicate with, manage and support their mobile workers in their
execution and completion of work orders.
MDSI's products are designed to interface with a variety of public and
private mobile data networks, including PCS networks and satellite-based data
transmission networks, and are compatible with a variety of operating platforms,
computer networks and in-house applications. The most recent version of the
Company's software is also designed to be Internet-enabled, allowing service
companies' mobile technicians to use web browsers to interface with the
Company's software. For the mobile user, that browser can be located on a
variety of mobile devices, such as a laptop, personal digital assistant, pager
or web phone.
To effectively address a customer's mobile workforce management
requirements, MDSI combines its products with services, such as systems
implementation and integration, training and documentation, workforce management
assessments, consulting, and ongoing technical support and software maintenance.
Where appropriate, MDSI also provides third party products and services as part
of a complete mobile data solution.
Advantex r7
Advantex r7, the latest version of MDSI's mobile workforce management
product, is a feature-rich product that offers a comprehensive solution tailored
to address the specific mobile workforce management needs of MDSI's customers in
MDSI's target markets, including market-specific solutions for the utility
industry, the telecommunications industry, and the cable/broadband industry.
Advantex efficiently manages mobile workers and the work orders they execute. It
schedules work requests and, using complex business rules, assigns them to the
best available mobile worker. Advantex then dispatches work order details to
mobile workers who use the solution to process their work throughout the day and
send status updates and order completion information back to the office all
wirelessly, in real-time. Advantex also determines the best sequence for mobile
workers to address their work orders and the best routes to travel between
assignments. This provides dispatchers, supervisors and enterprise applications,
such as call centers and customer information systems, with up-to-date
information to enable them to effectively monitor and manage field service
operations at all times.
3
Advantex is the result of more than ten years of development and has been
field validated by approximately 100 companies in the utility,
telecommunications and cable/broadband industries. Advantex uses global
standards, such as CORBA (Common Object Request Broker Architecture), Java,
HTML, XML, WAP and Unicode, and industry standard products, such as Oracle's
database and BEA's infrastructure tools, to deliver a solution that meets
customers' needs for a scalable, open and interoperable solution. Advantex has
been implemented, or is in the process of being implemented, for customers
supporting as few as 70 and as many as 13,000 users. The primary components of
Advantex are:
o Advantex Scheduling--Books and manages appointments with customers and
automatically assigns work orders to mobile workers based on skill and
equipment match, location, availability, and priority.
o Advantex Dispatch--Allows dispatchers to monitor work orders and workers.
Allows dispatchers to view the field service information that is most
critical to them at any given moment, to manage work orders (e.g., cancel,
modify, dispatch), and to receive alerts for unusual situations requiring
dispatcher intervention (e.g., worker in jeopardy of missing an
appointment).
o Advantex Mobile--Enables mobile workers to receive work orders, view work
order information, track their status, enter work results, and query
company applications for additional information needed to complete work.
Promotes efficient workflow by providing the information mobile workers
need to do their work when they need it.
o Advantex Wireless--Provides wireless connectivity across public and private
networks, and wireless compression, encryption, and the ability to work
offline in "out of coverage" situations.
o Advantex Resources--Allows administrators to define resources that perform
work (e.g., mobile workers and crews) and their attributes (e.g., work
areas, skills, equipment), manage crew composition, define shift rotations,
and manage day-to-day technician availability (e.g., ad hoc adjustments for
absences).
o Advantex Decision Support--Collects and archives data in a historical
database and allows it to be presented for easy-to-understand reporting and
trend analysis via a web-browser. Lets managers prepare customized reports
on key performance indicators to measure mobile workforce performance.
o Advantex Compose--A configuration tool used to define a customer's work
practices and generate a configured Advantex system. Defines the types of
work the customer performs, the work order details, how the work orders are
presented to dispatchers and mobile workers, the forms to be completed in
the field, and the validation rules that apply to work results entered in
the field.
o Advantex Enterprise Connector--Integrates Advantex with the customer's
enterprise applications (e.g., SAP, Siebel). Bundled with Advantex when
MDSI provides application integration services.
o Advantex Vehicle Tracking--Allows dispatchers to use maps and GPS (Global
Positioning System)-equipped vehicles to track in real-time the location of
mobile workers and their work orders and to execute a wide variety of tasks
directly from the map interface.
o Advantex Complex Orders--Coordinates mobile workers working on related
orders. Parcels orders into individual tasks, manages task assignment and
dispatch, ensures that precedence relationships are maintained, and
monitors task status.
o Advantex Common Cause--Allows dispatchers and managers to recognize related
trouble work orders and manage them as individual dispatched work orders.
4
o Advantex Time Reporting--Allows mobile workers to allocate time to job
codes and to record time spent on other activities. Replaces paper-based
time reporting.
Professional and Customer Support Services
MDSI provides a complete range of specialized professional and customer
support services to assist its clients in implementing and using MDSI's products
effectively. Contracts for the sale of MDSI's software typically include a
customer support and maintenance agreement, as well as professional services
such as implementation, systems integration, training and documentation, and may
also include workforce management assessments and audits or other workforce
management consulting. The Company believes that providing these services
facilitates effective implementation of its products and fosters a strong
relationship with the customer that often leads to future sales of MDSI products
and services. See "Forward-Looking Statements."
Professional Services
A professional services engagement usually lasts for six to twelve months
and involves working with the customer in defining, configuring and installing
the Advantex solution, as well as integrating it with the customer's other
enterprise software solutions and training the client in how best to use
Advantex. The engagement generally occurs in three logical phases: definition,
configuration, and installation.
o Definition--MDSI works with the customer to determine the customer's
preferred configuration for the Advantex system. A customer's Advantex
configuration will depend on a number of factors, including the types of
work the customer performs, the information associated with each type of
work order, how the customer would prefer information to be presented to
dispatchers and mobile workers (i.e., screen layouts) and what information
the customer intends to collect from the field (i.e., work results).
o Configuration--MDSI configures the baseline Advantex software in accordance
with the customer's needs to create a finished product. Once the Advantex
system has been configured, MDSI tests the system at its facilities to
ensure that the configured system is ready to be installed at the
customer's site.
o Installation--MDSI installs Advantex at the customer's site. The system is
then tested until acceptance criteria are met. Upon acceptance, the
customer is ready to deploy the solution to the field and begin rollout.
The duration of the rollout period will depend on several factors,
including the length of time the customer wishes to test the new system
with a pilot group, the size of the customer's mobile workforce, and the
extent to which the practices the customer has incorporated into the system
are a departure from current practices.
MDSI's depth of experience in the utility, telecommunications, and
cable/broadband industries allows it to integrate Advantex with customer
information systems, customer relationship management systems, billing systems
and outage management systems, among others. Whenever industry solutions such as
these are the source of work orders or the destination for work results, MDSI
offers application integration services. MDSI provides complete training
services and systems documentation that address the implementation and operation
of an Advantex mobile workforce management system.
MDSI also offers mobile workforce management practices assessment services,
to help customers assess where they stand against their peers, as well as other
mobile workforce management consulting services to enable customers to make the
most effective use of Advantex in their organizations to improve customer
satisfaction and increase operational efficiency.
5
Customer Support
The Company believes that its ability to offer a high level of customer
support is critical to its success. The Company's customer support group
provides MDSI customers with telephone and on-line technical support as well as
product updates. Most MDSI customers enter into separate customer support
agreements, which may be annual or on a multi-year basis, that take effect on
the expiration of the product warranty period, which is typically 90 days from
the acceptance of Advantex.
Markets
MDSI has combined its expertise in software application development and
mobile data communications technology with its understanding of the unique needs
of targeted vertical markets to develop mobile workforce management solutions
that address the specific needs of businesses within those vertical markets.
Traditionally, the Company has focused its attention on mid and large-sized
customers in the utilities (electric, gas and water), telecommunications, and
cable/broadband markets. In total, MDSI believes that there are approximately
1.8 million mobile workers worldwide in its traditional markets, split
approximately evenly amongst North America, Western Europe, and certain other
commercially viable geographical markets in the rest of the world. During 2002,
the Company launched a product, MDSI Ideligo, to serve field service workforces
outside the Company's core markets. Within these markets, MDSI believes that
there are approximately 6.9 million mobile workers worldwide, split
approximately evenly amongst North America, Western Europe, and certain other
commercially viable geographical markets in the rest of the world. See "Other
Field Service Markets" below. The Company evaluates new target markets for
mobile workforce management based upon their similarity to existing vertical
markets in which the Company has been successful, and upon the ability of the
Company to utilize its core competencies and proven technology to meet the needs
of companies in these new markets. The Company believes that its markets will
grow, both in terms of number of potential customers and revenues, in the
future, particularly outside North America. See "Forward-Looking Statements."
During 2002, the Company stopped pursuing opportunities in the public safety
market. See "Public Safety" below.
Utilities. The utilities market targeted by the Company consists of
electric, gas and water companies worldwide, most notably in the United States,
Canada, Europe and to a lesser extent South America, Austral-Asia and Africa.
The Company has traditionally targeted the distribution operations within a
utility. The Company believes, however, that such operations generally account
for only a portion of the total number of a utility's mobile workers, with the
balance attributable to mobile workers engaged in sales, construction,
engineering and management functions. As a result, the Company believes that
there is an opportunity to increase sales to existing customers and generate
incremental revenue. See "Forward-Looking Statements". MDSI's products have been
implemented or are being implemented in over 70 electric, gas and water
utilities located in the United States, Canada, Europe and Austral-Asia. MDSI
believes that the total number of utilities with more than 100 mobile workers
(MDSI's typical target market) exceeds 300 in the United States alone.
Telecommunications and Cable/Broadband. MDSI sells its Advantex product
into the telecommunications, and cable/broadband markets worldwide, most notably
in the United States, Canada, Europe and to a lesser extent in Africa,
Austral-Asia and South America. Recently, the markets for these services have
been converging. For example, companies that used to provide traditional voice
telecommunications services are now permitted to provide data services, basic
cable and other broadband services. Similarly, companies that provided
traditional cable TV service now also provide cable telephony services and
Internet services.
The telecommunications market consists of wireline providers of local, and
long-distance services, wireless communication service providers and ISPs
(Internet service providers). The wireline market in North America is comprised
of IXCs (Inter-exchange carriers), ILECs (Incumbent Local Exchange Carriers),
and CLECs (Competitive Local Exchange Carriers). In Europe, the national
telecommunication providers are referred to as PTT's (Post, Telephone &
Telegraph). MDSI has installed or has a contract to supply its products to
numerous
6
telecommunication companies worldwide, including Belgacom S.A., Bravida A.S.A,
eircom P.L.C., TDC Tele Danmark A/S and TELKOM South Africa Limited. MDSI
believes that the total number of telecommunications companies and
cable/broadband companies with more than 100 mobile workers (MDSI's typical
target market) exceeds 300 and 100, respectively, in the United States alone.
Although only a small percentage of telecommunications companies have adopted
mobile workforce management solutions, MDSI believes that a number of major
telecommunications companies are evaluating the need for such a system, and that
this market will grow as companies implement new technology to improve their
competitiveness, efficiency and service levels as the worldwide deregulation of
the telecommunications markets continues to unfold. The Company anticipates,
however, that continued economic uncertainty in the telecommunications and
cable/broadband markets will have an adverse impact on software and services
revenues in the short term. See "Forward-Looking Statements."
Cable/broadband services consist of basic cable television services and new
digital interactive broadband services, including digital cable TV services,
cable data and Internet services, cable telephony services, and other
interactive broadband data and multimedia services. The market is comprised of
traditional cable MSOs (Multiple System Operators) and independent cable system
operators, satellite service operators, new broadband divisions of traditional
telecommunication firms, and new broadband entrants. Currently, in North
America, approximately 80% of the subscriber base is under the control of the
ten largest MSOs. Although several of these major cable operators have
implemented mobile data solutions in selected sites, few operators have rolled
out these systems to multiple sites. Additionally, these MSOs are increasingly
outsourcing some of their field technician work to specialty contractors, a
group where MDSI does not have market share, but one that could represent a
future opportunity. See "Forward-Looking Statements." MDSI has installed or has
a contract to supply its products to several major cable operators, including
Cox Communications Inc. in the United States and Rogers Cablesystems Ltd and
Videotron in Canada.
Changes in the regulatory environment and technological developments, such
as satellite television have led to the introduction of significant competition
in the cable market. MDSI sees this enhanced level of competition as being very
positive for its business. MDSI believes that growing competition and the
introduction of new services will lead cable operators to adopt mobile data
solutions to improve their competitiveness, efficiency and level of customer
service. See "Forward-Looking Statements."
Other Field Service Markets. There are a large number of companies outside
MDSI's traditional markets that employ field service workforces, such as
security companies, office equipment companies, home appliance companies, as
well as many other organizations that contract field services as their primary
business, such as companies engaged in the maintenance and repair of oil wells,
IT/Networking services, medical/scientific equipment, industrial equipment, and
HVAC (Heating, Ventilation and Air Conditioning) systems, amongst others. To
date, the Company has not focused its primary attention on these markets. MDSI
believes that the total number of such companies with more than 100 mobile
workers (MDSI's typical target market) exceeds 3,500 in the United States alone.
For this opportunity, MDSI has developed a subset of Advantex, called MDSI
ideligo, that is primarily comprised of the Advantex Wireless and Advantex
Mobile components. MDSI ideligo wirelessly communicates data in real-time
between the field and enterprise applications, automates workflow, and lets
field workers be more efficient and productive. Initially, MDSI has integrated
MDSI ideligo with Siebel Systems' Field Service application. Together, MDSI and
Siebel Systems Inc. have won one new customer, Texas-based Key Energy Services,
and have approached several additional prospects. MDSI anticipates integrating
MDSI ideligo with field service products from other independent software
vendors.
Public Safety. The Public Safety market consists of federal, state and
local agencies that provide police, fire, medical and other emergency services.
During 2001, MDSI ceased pursuing opportunities in the market and in 2002
reached an agreement with Datamaxx Applied Technologies, Inc. of Tallahassee,
Florida, granting Datamaxx exclusive license rights to MDSI's Public Safety
products in the North American public safety market and non-exclusive license
rights for such products outside North America. MDSI had installed solutions for
a limited number of customers, and the market has not represented a material
portion of MDSI's revenues.
7
Customers
For the year ended December 31, 2002, MDSI's software and services revenues
were distributed approximately as follows: 65% from the utilities (electric, gas
and water) market, 33% from the telecommunications and, cable/broadband market,
and the remaining 2% from other markets. During the year ended December 31, 2002
the Company generated approximately 68% of its revenue from North America,
approximately 30% of its revenue from Europe, Middle East and Africa, and the
remaining 2% of its revenue from other parts of the world.
The Company's customers vary in size from small local companies to large
regional and international organizations. During the year ended December 31,
2002, TELKOM South Africa Limited accounted for 10.1% of MDSI's overall revenue.
The Company anticipates that revenue from this customer will account for a
larger percentage of revenue in 2003. During the year ended December 31, 2001,
eircom P.L.C. accounted for 11.9% of MDSI overall revenue. The Company did not
earn revenue from any one customer that accounted for greater than 10% of
overall revenue during the year ended December 31, 2000. In the years ended
December 31, 2002, 2001, and 2000 , approximately 30.7%, 29.8%, and 30.6%,
respectively, of the Company's consolidated revenue was attributable to five or
fewer customers. The Company believes that this percentage will increase in 2003
and that revenue derived from a limited number of customers will continue to
represent a significant portion of its consolidated revenue.
In the years ended December 31, 2002, 2001, and 2000, revenue derived from
sales outside of North America accounted for 31.7%, 23.8%, and 23.6% of the
Company's total revenue, respectively. See "Note 10 of the Company's
Consolidated Financial Statements." Because the Company's revenue is dependent,
in large part, on significant contracts with a limited number of customers, the
percentage of the Company's revenues that is derived from sales outside of North
America has fluctuated, and may continue to fluctuate, from period-to-period.
See "Business-Risk Factors - Dependence on Large Contracts and Concentration of
Customers" and "Forward-Looking Statements."
Product Development
The mobile workforce management industry is characterized by rapid
technological change and increasing user requirements. Accordingly, the Company
must be able to provide new functionality and to modify and enhance existing
functionality on a timely and continuing basis in order to be competitive. To
accomplish this objective, the Company's strategy is to utilize proven
technology to further enhance its existing products and to create new products.
Where appropriate, the Company may acquire complementary technology developed by
third parties for integration into the Company's products.
The Company believes that its highly qualified software development
personnel provide MDSI with a competitive advantage. MDSI personnel have
considerable experience and expertise in the development of mobile workforce
management applications specifically designed for use with a wireless data
network, as well as in the integration of these applications with a customer's
corporate information system. MDSI software product development personnel employ
modular software architecture, object-oriented software development and
graphical user interface design technologies to develop scaleable, modular,
configurable products. MDSI personnel have expertise in software technology,
wireless and wireline communications technologies, computer environments and
corporate information systems integration. They also have considerable expertise
in radio system design and implementation. MDSI believes that this combination
of expertise in multiple disciplines has allowed and will continue to allow the
Company to design and develop mobile workforce management solutions which can be
implemented in a timely and cost-effective manner. Management believes that
timely and continuing product development is critical to the Company's success
and plans to continue to allocate significant resources to product development.
During the fiscal years ended December 31, 2002, 2001 and 2000, the Company's
research and development expenses were $5.5 million, or 14.2% of revenue, $7.3
million, or 16.2% of revenue, and $8.2 million, or 15.8% of revenue,
respectively. The Company intends to continue committing a significant portion
of its product revenues to enhance existing products and develop new products.
See "Forward-Looking Statements."
8
Sales and Marketing
The Company markets its products through a direct sales force as well as
through strategic remarketing and/or joint selling arrangements with independent
software vendors, and systems integrators.
Direct Sales Force. MDSI's sales personnel are knowledgeable about the
technological components of wireless applications and current industry and
enterprise-specific application issues. As part of its 2001 restructuring, the
Company organized its sales personnel by geographic market. The Company's sales
personnel employ their expertise to develop long-term consultative relationships
with customers in order to identify the needs of the customer and provide
specific and effective solutions. To date, substantially all of the Company's
revenue has been generated by direct sales activities.
Independent Software Vendors. MDSI establishes relationships with other
independent software vendors that sell complementary products, such as billing
or customer relationship management solutions, into MDSI's markets. The
relationships typically involve MDSI and the vendors establishing a standard
integration of their products, then jointly identifying and executing on sales
prospects for the integrated solution. The Company has established such a
relationship for its MDSI ideligo product with Siebel Systems Inc. In some
cases, relationships have been formalized through written agreements, while
others remain informal.
Systems Integrators. MDSI also establishes strategic relationships with
systems integrators that work in the Company's markets to provide end-to-end
solutions on a customer-by-customer basis or as an integrated product offering
for the vertical market. In either case, MDSI works with the integrator to
assist in the sales process and to integrate MDSI's products with the other
component software pieces. To date, MDSI has worked with Cap Gemini Ernst &
Young LLP, Accenture LLP, IBM Business Consulting Services, CGI Group Inc., and
SchlumbergerSema, a business segment of Schlumberger Limited, amongst others. In
some cases the relationships have been formalized through written agreements,
while others remain informal. In the future, MDSI intends to involve these
integrators in providing the implementation work surrounding customer
installations. See "Forward-Looking Statements."
Competition
The markets for mobile workforce management applications, wireless
connectivity software, mobile data network equipment and mobile computing
devices are highly competitive. Numerous factors affect the Company's
competitive position, including price, product features, product performance and
reliability, ease of use, product scalability, product availability on multiple
platforms (both server and mobile workstation), ability to implement mobile
workforce management solutions domestically and internationally while meeting
customer schedules, integration of products with other enterprise solutions,
availability of project consulting services and timely ongoing customer service
and support.
Within these markets, there are a number of competitors, either small
companies attempting to establish a business in this market or large companies
attempting to diversify their product offerings. The Company expects such
competition to intensify as acceptance and awareness of mobile data
communications and technology continue. In addition, some of the Company's
potential customers develop software solutions internally, which may delay or
eliminate the requirement for suppliers such as the Company. Current or
potential competitors may establish cooperative arrangements among themselves or
with third parties to increase the ability of their products to address customer
requirements.
Certain of the Company's competitors have substantially greater financial,
technical, marketing and distribution resources than the Company. As a result,
they may be able to respond more quickly to new or emerging technologies and
changing customer requirements, or to devote greater resources to the
development and distribution of existing products. There can be no assurance
that the Company will be able to compete successfully against current or future
competitors or alliances of such competitors, or that competitive pressures
faced by the
9
Company will not have a material adverse effect on its business, financial
condition, operating results and cash flows.
The Company believes that in the utilities, telecommunications and,
cable/broadband industry segments the most important competitive factors are the
reputation of the supplier and its proven record in implementing wireless data
solutions. MDSI believes that its long and successful track record in these
markets gives it a competitive advantage in this regard.
The Company primarily competes in the utilities market with Utility
Partners, L.C. (which recently emerged from Chapter 11 bankruptcy), CGI Group
Inc. (via its acquisition of Cognicase, Inc., that owned MDSI competitor M3i
Systems, Inc.), Intergraph Corporation, Axiom Corporation, Oracle Corporation,
Itron Inc. (via its acquisition of e-Mobile Data Inc.) and ViryaNet Ltd. The
Company has several competitors in the telecommunications and cable/broadband
markets. The Company's primary competitor for telecommunications customers is
Telcordia Technologies, Inc., a company that has historical relationships with
certain of the large telecommunications companies. Other competitors include
ClickSoftware, Inc., ViryaNet Ltd., which the Company mostly sees competing for
small accounts, and more recently Accenture FFE. In the cable/broadband market,
the Company's primary competitors are Telcordia Technologies Inc., C-Cor.net
Corp., PointServe Inc., CSG Systems International Inc., Viryanet Ltd., again
mostly for small accounts, and more recently Accenture FFE.
The Company believes that the principal competitive factors in other field
service markets are the ability to improve the customer service aspects of an
organization's business and increase the productivity of service
representatives. In this market, MDSI sells a wireless enablement product,
called MDSI ideligo, that is a subset of Advantex. MDSI ideligo provides a
mobile extension of selected field service application vendors' solutions. The
initial implementation has been with Siebel Systems' Field Service offering.
Other wireless enablement products are offered by Aether Systems Inc., Antenna
Systems, Broadbeam Corporation, Everypath Inc., Extended Systems Incorporated
and IBM, as well as a variety of other newer competitors. Also serving the
commercial field service market are enterprise application solution providers,
such as Astea International Inc., Metrix Inc., and FieldCentrix Inc., in
addition to several larger enterprise software companies, such as Amdocs Limited
(which recently acquired the assets of Clarify), Oracle Corporation, PeopleSoft
Inc., and Siebel Systems Inc. MDSI believes that these enterprise application
vendors offer less comprehensive wireless enablement solutions than MDSI, and
are consequently potential partners for expanding MDSI's penetration in this
market.
Hosting and IT Services
In June 2000, the Company acquired all of the outstanding share capital of
Connectria Corporation, a Missouri corporation, for aggregate consideration of
845,316 Common Shares and the assumption of 583,037 stock options. The business
combination was accounted for under the pooling of interests method of
accounting. Connectria became the Company's Hosting and IT Services subsidiary.
In June 2002, as part of management's strategy to return MDSI's focus to mobile
workforce management in the Company's traditional markets, MDSI entered into an
Exchange Agreement to return ownership of Connectria to its former principal
shareholders, Richard S. Waidmann and Eric Y. Miller. The services of MDSI's
Hosting and IT Services comprised outsourcing, hosting and consulting, and
ranged from complete outsourcing of an IT department to providing turnkey IT
projects. Connectria's results of operations for 2002, 2001 and 2000 are
summarized in MDSI's Consolidated Statements of Operations as Income (Loss) From
Discontinued Operations. See Note 2 of the Company's Consolidated Financial
Statements for more detail regarding this transaction. Except as otherwise
indicated, the financial information in this Annual Report on Form 10-K excludes
the results of discontinued operations. The Company now operates as a single
business segment.
Employees
As of December 31, 2002, the Company had 325 full-time employees, including
134 in operations (including professional services, customer support and
operations management), 91 in product development and product management, 55 in
sales and marketing (including employees working on the Company's MDSI ideligo
10
initiative), and 45 in finance and administration. None of the Company's
employees is represented by a labor union and the Company believes its employee
relations to be good.
Financial Information About Segments and Geographic Markets
For certain information regarding the Company's reportable segments and
geographic markets, see Note 10 to the consolidated financial statements
included in Item 8 of this Annual Report on Form 10-K.
Risk Factors
The Company's business is subject to the following risks. These risks could
cause actual results to differ materially from results projected in any
forward-looking statement in this report.
Potential Fluctuations in Quarterly Operating Results
The Company's results of operations have fluctuated in the past and are
likely to continue to fluctuate from period to period depending on a number of
factors, including the timing and receipt of significant orders, the timing of
completion of contracts, increased cost in the completion of contracts,
increased competition, regulatory and other developments in the Company's
vertical markets, changes in the demand for the Company's products and services,
the cancellation of contracts, difficulties in collection of receivables, the
timing of new product announcements and introductions, difficulties encountered
in the protection of intellectual property rights, changes in pricing policies
by the Company and its competitors, delays in the introduction of products or
enhancements by the Company, expenses associated with the acquisition of
products or technology from third parties, the mix of sales of the Company's
products and services and third party products, seasonality of customer
purchases, personnel changes, political and economic uncertainty, the mix of
international and North American revenue, tax policies, foreign currency
exchange rates and general economic and political conditions.
The Company believes that economic and political developments and trends
have adversely affected and may continue to affect levels of capital spending by
companies in a variety of industries, including companies in the vertical
markets that the Company serves. The current excess of supply in the
telecommunications industry has adversely affected the financial condition of
many telecommunications companies worldwide. In addition, current economic
conditions and developments in the energy markets have had an adverse affect on
the financial condition of energy and utility companies in certain geographical
areas of North America. The Company believes that these and other factors have
adversely affected demand for products and services offered by the Company, as
certain prospective and existing customers have delayed or deferred purchasing
decisions or have sought to terminate existing contracts for the Company's
products and services. While the Company believes that economic conditions in
certain of its vertical markets show signs of improvement, the Company believes
that economic and political conditions and general trends are likely to continue
to affect demand for the Company's products and services in 2003, particularly
demand for software and related services. Such factors may also increase the
amount of doubtful accounts or adversely affect the likelihood of collection of
such accounts.
The Company relies upon its ability to implement and integrate mobile
workforce management solutions on schedule and to the satisfaction of its
customers. The Company from time to time has experienced certain implementation
and other problems that have delayed the completion of certain projects,
including the failure of third parties to deliver products or services on a
timely basis, delays caused by customers and development delays. Because the
Company currently recognizes revenue on a percentage of completion method,
delays in completion of
11
certain contracts have caused delays in recognition of revenue and,
consequently, unanticipated fluctuations in quarterly results. In light of the
Company's recent reduction in its work force, there can be no assurance that the
Company will be able to complete current projects or implement future systems on
a timely and cost effective basis or that delays will not result in
cancellations of contracts or result in the imposition of substantial penalties.
Any such material delay, cancellation or penalty could have a material adverse
effect upon the Company's business, financial condition, operating results and
cash flows.
Because the Company is unable to forecast with certainty the receipt of
orders for its products and services and the Company's expense levels are
relatively fixed and are based, in part, upon its expectation of future revenue,
if revenue levels fall below expectations as a result of a delay in completing a
contract, the inability to obtain new contracts, the cancellation of an existing
contract or otherwise, operating results are likely to be adversely affected. As
a result, net income may be disproportionately affected because a relatively
small amount of the Company's expenses vary with its revenue.
Based upon all of the foregoing factors, the Company believes that its
quarterly revenue, direct expenses and operating results are likely to vary
significantly in the future, that period-to-period comparisons of the results of
operations are not necessarily meaningful and that such comparisons should not
be relied upon as an indication of future performance. The Company may also
choose to reduce prices or increase spending in response to competition, or to
pursue new market opportunities. See "Forward-Looking Statements". If new
competitors, technological advances by existing competitors or other competitive
factors require the Company to reduce its prices or invest significantly greater
resources in research and development efforts, the Company's operating results
in the future may be adversely affected. There can be no assurance that the
Company will be able to grow in future periods or that it will be able to
sustain its level of total revenue or achieve revenue growth on a quarterly or
annual basis. In fiscal 2002, the Company's revenue declined compared to the
same period in 2001. These recent declines have resulted from an economic slow
down in the vertical industries served by the Company. It is likely that in some
future quarter the Company's operating results will be below the expectations of
public market analysts and investors. See "Forward Looking Statements". In such
event, the market price of the Company's Common Shares would likely be
materially adversely affected.
Dependence on Third Party Products and Services
Since 1996, the Company has been, and anticipates that from time to time it
will be, engaged to provide, in addition to its own products and services, third
party hardware, software and services, which the Company purchases from vendors
and sells to its customers. For the years ended December 31, 2002, 2001 and
2000, 6.4%, 5.5%, and 3.4% respectively, of the Company's revenue was
attributable to third party products and services. As the revenue generated from
the supply of third party products and services may represent a significant
portion of certain contracts and the installation and rollout of third party
products is generally at the discretion of the customer, the Company may,
depending on the level of third party products and services provided during a
period, experience large quarterly fluctuations in revenue. See "Forward Looking
Statements". In addition, because the Company's gross margins on third party
products and services are substantially below gross margins historically
achieved on revenue associated with MDSI products and services, large
fluctuations in quarterly revenue from the sale of third party products and
services will result in significant fluctuations in direct costs, gross profits,
operating results, cash flows and other items expressed as a percentage of
revenue.
Lengthy Sales Cycles for Advantex Products
The purchase of a mobile workforce management solution is often a
significant purchase decision for prospective customers and requires the Company
to engage in sales efforts over an extended period of time and to provide a
significant level of education to prospective customers regarding the use and
benefits of such systems. Due in part to the significant impact that the
application of mobile workforce management solutions has on the operations of a
business and the significant commitment of capital required by such a system,
potential customers tend to be cautious in making acquisition decisions. As a
result, the Company's products generally have a lengthy sales cycle ranging from
several months to several years. Consequently, if sales forecasted from a
specific customer for a particular quarter are not realized in that quarter, the
Company may not be able to generate revenue from
12
alternative sources in time to compensate for the shortfall. The loss or delay
of a large contract could have a material adverse effect on the Company's
quarterly financial condition, operating results and cash flows, which may cause
such results to be less than the Company's or analysts' expectations. Moreover,
to the extent that significant contracts are entered into and required to be
performed earlier than expected, operating results for subsequent quarters may
be adversely affected. In particular, due to economic conditions and
developments in the Company's core markets, the Company has experienced an
increase in the time necessary to complete the negotiation and signing of
contracts with some of its customers.
Dependence on Large Contracts and Concentration of Customers
The Company's revenue is dependent, in large part, on significant contracts
from a limited number of customers. During the years ended December 31, 2002,
2001, and 2000, approximately 30.7%, 29.8%, and 30.6% respectively, of the
Company's consolidated revenue was attributable to five or fewer customers.
During the year ended December 31, 2002, TELKOM South Africa Limited accounted
for 10.1% of the Company's consolidated revenue. During the year ended December
31, 2001, eircom P.L.C. accounted for 11.9% of the Company's consolidated
revenue. During the year ended December 31, 2000, no single customer accounted
for 10% or more of the Company's consolidated revenue. The Company believes that
revenue derived from current and future large customers will continue to
represent a significant portion of its total revenue. See "Forward Looking
Statements". The inability of the Company to continue to secure and maintain a
sufficient number of large contracts would have a material adverse effect on the
Company's business, financial condition, operating results and cash flows.
Moreover, the Company's success will depend in part upon its ability to obtain
orders from new customers, as well as the financial condition and success of its
customers and general economic conditions.
The size of a contract for a particular customer can vary substantially
depending on whether the Company is providing only its own products and services
or is also responsible for supplying third party products and services. The
Company recognizes revenue using the percentage of completion method, which the
Company calculates based on total costs incurred compared to total costs
estimated by the Company for completion. Therefore, any significant increase in
the costs required to complete a project, or any significant delay in a project
schedule, could have a material adverse effect on that contract's profitability
and because of the size of each contract, on the Company's overall results of
operations. The Company from time to time has also experienced certain
implementation and other problems that have delayed the completion of certain
projects, including the failure of third parties to deliver products or services
on a timely basis and delays caused by customers. The Company's contracts
generally provide for payments upon the achievement of certain milestones.
Therefore, any significant delay in the achievement of milestones on one or more
contracts would affect the timing of the Company's cash flows and could have a
material adverse effect on the Company's business, financial condition,
operating results and cash flows. Any significant failure by the Company to
accurately estimate the scope of work involved, plan and formulate a contract
proposal, effectively negotiate a favorable contract price, effectively
negotiate the specifications for a workforce management system, properly manage
a project or efficiently allocate resources among several projects could have a
material adverse effect on the Company's business, financial condition,
operating results and cash flows.
Potential Fluctuations in Backlog
The Company's backlog consists of a relatively small number of large
contracts relating to sales of its mobile workforce management and wireless
connectivity software and related equipment and services, and sales of third
party products and services. Due to the long, complex sales process and the mix
of sales of the Company's products and services and third party products and
services, the Company's backlog may fluctuate significantly from
period-to-period. In addition, under the terms of the Company's contracts, the
Company's customers may elect to terminate their contracts with the Company at
any time after notice to the Company or to delay certain aspects of
installation. Due to the relative size of a typical contract compared to the
Company's annual and quarterly revenue, a termination or installation delay of
one or more contracts could have a material adverse effect on the Company's
business, financial condition, operating results and cash flows. Contracts for
software maintenance and support are generally renewable every year and are
subject to renegotiation upon renewal. There can be no assurance that the
Company's customers will renew their maintenance contracts or that renewal terms
will be as favorable to the Company as existing terms.
13
The Company believes that unfavorable economic conditions and reduced
capital spending by existing and prospective customers have and may continue to
adversely affect demand for the Company's products and services in 2003. In
particular, service providers, utilities companies and telecommunications
companies in North America have been impacted since the latter half of 2000.
While the Company believes that economic conditions in certain of its vertical
markets show signs of improvement, the Company believes that economic conditions
and general trends are likely to continue to delay purchasing and implementation
decisions. If the economic conditions in the United States and Canada worsen or
if a wider or global economic slowdown occurs, the Company may experience
reduced revenues, increased costs, reduced margins and increased risks
associated with the collection of customer receivables, any of which may have a
material adverse impact on its business, operating results, cash flows and
financial condition.
Seasonal Variations in Demand
Certain of the vertical markets targeted by the Company include industries
with implementation requirements that vary seasonally. For example, utility
companies in North America generally have decreased implementation activity in
winter months when such utilities face their greatest consumer demand. As a
result, the Company's results of operations may also vary seasonally, and such
variation may be significant.
History of Losses and Fixed Operating Expenses
As of December 31, 2002, the Company had an accumulated deficit of $25.2
million. There can be no assurance that the Company will realize revenue growth
or be profitable on a quarterly or annual basis. The Company plans to continue
to contribute significant resources to its operating expenses related to sales
and marketing operations, to fund significant levels of research and
development, to broaden its customer support capabilities and to maintain its
administrative resources. A relatively high percentage of the Company's expenses
are fixed in the short term and the Company's expense levels are based, in part,
on its expectations of future revenue. To the extent that such expenses precede
or are not subsequently followed by increased revenue, the Company's business,
financial condition, operating results and cash flows could be materially
adversely affected. In addition, due to the rapidly evolving nature of its
business and markets, the Company believes that period-to-period comparisons of
financial results are not necessarily meaningful and should not be relied upon
as an indication of future performance.
Integration of Acquisitions
The Company may, when and if the opportunity arises, acquire other
products, technologies or businesses involved in activities, or having product
lines, that are complementary to the Company's business. Acquisitions involve
numerous risks, including difficulties in the assimilation of the operations,
technologies and products of the acquired companies, the diversion of
management's attention from other business concerns, risks associated with
entering markets or conducting operations with which the Company has no or
limited direct prior experience and the potential loss of key employees of the
acquired company. Moreover, there can be no assurance that any anticipated
benefits of an acquisition will be realized. Future acquisitions by the Company
could result in potentially dilutive issuance's of equity securities, the
incurrence of debt and contingent liabilities, and write-off of acquired
research and development costs, all of which could materially and adversely
affect the Company's financial condition, results of operations and cash flows.
New Product Development
The Company expects that a significant portion of its future revenue will
be derived from the sale of newly introduced products, including Advantex r7,
and from enhancement of existing products. See "Forward-Looking
14
Statements". The Company's success will depend in part upon its ability to
enhance its current products on a timely and cost-effective basis and to develop
new products that meet changing market conditions, including changing customer
needs, new competitive product offerings and enhanced technology. There can be
no assurance that the Company will be successful in developing and marketing on
a timely and cost-effective basis new products and enhancements that respond to
such changing market conditions. If the Company is unable to anticipate or
adequately respond on a timely or cost-effective basis to changing market
conditions, to develop new software products and enhancements to existing
products, to correct errors on a timely basis or to complete products currently
under development, or if such new products or enhancements do not achieve market
acceptance, the Company's business, financial condition, operating results and
cash flows could be materially adversely affected. In light of the difficulties
inherent in software development, the Company expects that it will experience
delays in the completion and introduction of new software products. For example,
the time required for the initial implementation and field testing of Advantex
r7 was greater than expected, which resulted in delays in commencement of
certain installations of the Advantex r7 product.
Litigation
The Company is a party to a suit filed against Citizens Telecom Services
Co., L.L.C., generally alleging that Citizens breached a series of contracts
dated October 15, 1998. The suit alleges that Citizens has wrongfully terminated
the contracts and failed to pay sums due. The suit seeks damages, interest and
attorneys' fees. Citizens filed an answer and counterclaims alleging that MDSI
breached the contracts, justifying Citizens' termination of the contracts and
entitling Citizens to repayment of approximately $3.5 million paid to MDSI in
addition to interest and attorneys' fees. In addition, Citizens' counterclaims
allege fraud, negligent misrepresentation, breach of express warranty and breach
of implied warranties. Citizens seeks actual, special, incidental and
consequential damages associated with these claims, in addition to punitive
damages, interest and attorneys' fees. In March 2003, Citizens submitted an
expert report estimating that Citizens had incurred approximately $6.1 million
in damages due to lost productivity and direct costs, and that Citizens may be
entitled to additional contractual penalties from MDSI of approximately $1.1
million. On March 5, 2003, the court granted Citizens' motion for summary
judgment, dismissing MDSI's claims for lack of sufficient evidence of damages.
MDSI filed a motion for reconsideration of this ruling. On March 26, 2003, the
court denied MDSI's motion for reconsideration. MDSI cannot assure you that it
will be successful in reinstituting its claim for damages or that, if
successful, it will be able to recover on its claims at trial. Further, although
the court has granted MDSI's motion for partial summary judgment on Citizens'
breach of the professional services agreement, and MDSI believes that it will
successfully defend against Citizens' counterclaims, there can be no assurance
that MDSI will be successful in the defense of Citizens' counterclaims.
In its consolidated balance sheet as of December 31, 2002 and 2001, MDSI
has classified approximately $3.7 million in amounts due from Citizens, which
amounts are subject to the suit, as a long term receivable as of December 31,
2002. MDSI has recorded $1.0 million of such amounts as doubtful accounts and
has not recorded any amounts claimed by Citizens as a contingent or other
liability of MDSI. If MDSI is not successful in its claims against Citizens,
MDSI may need to take a $2.7 million dollar charge to earnings. Additionally, if
MDSI is made to refund monies collected under the contract, MDSI may need to
take a further $3.5 million dollar charge to income to reflect this refund. If
the customer is successful in any fraud, negligent misrepresentation, breach of
express warranty or breach of implied warranties claims, the Company may need to
take an additional charge to earnings to the extent of the judgment. MDSI
believes that any amounts that it is required to pay to Citizens would be an
insured loss that is covered by insurance, other than any amounts that it is
required to pay to Citizens as a result of fraud or other intentional
misconduct. There is currently no provision in MDSI's financial statements to
address any refund or other payment to Citizens as MDSI views this to be an
unlikely event. If MDSI is not successful in the Citizens litigation, the loss
may have a material adverse impact on MDSI's business, results of operations,
financial condition or liquidity.
Management of Growth and Reduction of Workforce
Since its inception, the Company has experienced periods of rapid growth in
product sales, personnel, research and development activities, number and
complexity of products, the number and geographic focus of its targeted vertical
markets and product distribution channels. The total number of employees of the
Company has grown from 9 employees in Canada in February 1993 to 325 employees
located in Canada, the United States and
15
other international locations at December 31, 2002. The Company also recently
expanded the geographical areas in which it operates. In March and April, 2001,
the Company made several announcements regarding its intention to reduce the
size of its work force by approximately 25% in anticipation of reduced demand
for its products and services due to the general economic slowdown. In July
2002, the Company completed the sale of its subsidiary Connectria Corporation,
reducing the size of its work force by 71 employees. If the Company resumes its
growth in future periods, such growth may place strains on its management,
administrative, operational and financial resources, as well as increased
demands on its internal systems, procedures and controls. There can be no
assurance that the Company will be able to effectively manage its operations or
future growth and expansion into new markets. Failure to do so could have a
material adverse effect on the Company's business, financial condition,
operating results and cash flows.
Dependence on Key Personnel
The Company's performance and future operating results are substantially
dependent on the continued service and performance of its senior management and
key technical and sales personnel. Competition for qualified personnel is
intense, and in light of the Company's recent layoffs there can be no assurance
that the Company can retain its key technical, sales and managerial employees or
that it will be able to attract or retain highly-qualified technical and
managerial personnel in the future if demand for the Company's products and
services increase. The loss of the services of any of the Company's senior
management or other key employees or the inability to retain the necessary
technical, sales and managerial personnel could have a material adverse effect
upon the Company's business, financial condition, operating results and cash
flows.
Dependence on Selected Vertical Markets
Prior to 1996, substantially all of the Company's revenue was derived from
the sale of products and services to customers in the utility market. For the
years ended December 31, 1997 and 1996, the utility market accounted for greater
than 50% of the Company's revenue. In those years, the Company sought to reduce
its reliance on the utility market by developing or acquiring compatible
products for organizations with mobile workforces in other vertical markets. In
1998, the utility market accounted for greater than 40% of the Company's
revenue. In 1999, the telecommunications market accounted for 54% of the
Company's revenue. In 2000 the telecommunications and cable/broadband markets
accounted for greater than 53% of the Company's revenue. In 2002 and 2001 the
utility market accounted for 65% and 70% respectively of the Company's revenue.
The Company anticipates that a significant portion of its future revenue will be
generated by sales of products to the utility, telecommunications, and
cable/broadband markets and that recent economic developments and trends have
adversely affected and may continue to adversely affect levels of capital
spending by companies in a variety of industries, including the vertical markets
MDSI serves. The Company believes that these and other factors may cause
potential and existing customers to delay or defer purchasing decisions or seek
to terminate or delay payment under existing contracts for the Company's
products and services. Such factors may also increase the amount of doubtful
accounts or adversely affect the likelihood of collection of such accounts. See
"Forward-Looking Statements." A decline in demand for the Company's products in
these markets as a result of economic conditions, competition, technological
change or otherwise, would have a material adverse effect on the Company's
business, financial condition, operating results and cash flows. There can be no
assurance that the Company will be able to continue to diversify its product
offerings or revenue base by entering into new vertical markets or continue to
earn revenue in current markets.
Dependence on Marketing Relationships
The Company's products are marketed by the Company's direct field sales
force as well as by third parties that act as lead generators or with whom the
Company acts together as a co-marketer or co-seller. The Company's existing
agreements with such partners are nonexclusive and may be terminated by either
party without cause. Such organizations are not within the control of the
Company, are not obligated to purchase products from the Company and may also
represent and sell competing products. There can be no assurance that the
Company's existing partners
16
will continue to provide the level of services and technical support necessary
to provide a complete solution to the Company's customers or that they will not
emphasize their own or third-party products to the detriment of the Company's
products. The loss of these partners, the failure of such parties to perform
under agreements with the Company or the inability of the Company to attract and
retain new resellers with the technical, industry and application experience
required to market the Company's products successfully could have a material
adverse effect on the Company's business, financial condition, operating results
and cash flows. The Company expects that it may enter into certain joint
ventures in order to facilitate its expansion into other vertical markets and
geographic areas. See "Forward Looking Statements". To the extent that such
joint ventures are not successful, there could be a material adverse effect on
the Company's business, financial condition, operating results and cash flows.
Competition
The markets for mobile workforce management applications, wireless
connectivity software, mobile data network equipment and mobile computing
devices are highly competitive. Numerous factors affect MDSI's competitive
position, including price, product features, product performance and
reliability, ease of use, product scalability, product availability on multiple
platforms (server, wireless carrier, and mobile workstation), ability to
implement mobile workforce management solutions domestically and internationally
while meeting customer schedules, integration of products with other enterprise
solutions, availability of project consulting services and timely ongoing
customer service and support. Within these markets, there are a small number of
new ventures, either small companies attempting to establish a business in this
market or large companies attempting to diversify their product offerings. MDSI
expects such competition to intensify as acceptance and awareness of mobile data
communications and technology continue. See "Forward Looking Statements". In
addition, a small number of MDSI's potential customers develop software
solutions internally, thereby eliminating the requirement for suppliers such as
MDSI. Current or potential competitors may establish cooperative arrangements
among themselves or with third parties to increase the ability of their products
to address customer requirements. Certain of MDSI's competitors have
substantially greater financial, technical, marketing and distribution resources
than MDSI. As a result, they may be able to respond more quickly to new or
emerging technologies and changing customer requirements, or to devote greater
resources to the development and distribution of existing products. There can be
no assurance that MDSI will be able to compete successfully against current or
future competitors or alliances of such competitors, or that competitive
pressures faced by MDSI will not materially adversely affect its business,
financial condition, operating results and cash flows.
The Company primarily competes in the utilities market with Utility
Partners, L.C. (which recently emerged from Chapter 11 bankruptcy), CGI Group
Inc. (via its acquisition of Cognicase, Inc., that owned MDSI competitor M3i
Systems, Inc.), Intergraph Corporation, Axiom Corporation, Oracle Corporation,
Itron Inc. (via its acquisition of e-Mobile Data Inc.) and ViryaNet Ltd. The
Company has several competitors in the telecommunications and cable/broadband
markets. The Company's primary competitor for telecommunications customers is
Telcordia Technologies, Inc., a company that has historical relationships with
certain of the large telecommunications companies. Other competitors include
ClickSoftware, Inc., ViryaNet Ltd., which the Company mostly sees competing for
small accounts, and more recently Accenture FFE. In the cable/broadband market,
the Company's primary competitors are Telcordia Technologies Inc., C-Cor.net
Corp., PointServe Inc., CSG Systems International Inc., Viryanet Ltd., again
only for small accounts, and more recently Accenture FFE.
The Company believes that the principal competitive factors in other field
service markets are the ability to improve the customer service aspects of an
organization's business and increase the productivity of service
representatives. In this market, MDSI sells a wireless enablement product,
called MDSI ideligo, that is a subset of Advantex. MDSI ideligo provides a
mobile extension of selected field service application vendors' solutions. The
initial implementation has been with Siebel Systems' Field Service offering.
Other wireless enablement products are offered by Aether Systems Inc., Antenna
Systems, Broadbeam Corporation, Everypath Inc., Extended Systems Incorporated
and IBM, as well as a variety of other newer competitors. Also serving the
commercial field service market are enterprise application solution providers,
such as Astea International Inc., Metrix Inc., and FieldCentrix Inc., in
addition to several larger enterprise software companies, such as Amdocs Limited
(which recently acquired the assets of Clarify), Oracle Corporation, PeopleSoft
Inc., and Siebel Systems Inc. MDSI believes that these
17
enterprise application vendors offer less comprehensive wireless enablement
solutions than MDSI, and are consequently potential partners for expanding
MDSI's penetration in this market.
Risk of Product Defects and Implementation Failure
Software products, including those offered by the Company, contain
undetected errors or omissions. Software products, when implemented, installed,
configured and customized, may also fail to perform according to customer
expectations due to the failure by the customer to properly specify its system
requirements, failure by the customer to properly operate or interact with the
system, operator error, technical problems associated with the customer's host
system, or the resistance of the customer's workforce to the adoption of new
technology. In addition, software products may fail to perform according to
expectations due to the failure by the Company to properly design the system to
operate in the environment, infrastructure or communications network in which
the product is to be used. There can be no assurance that, despite testing by
the Company and by current and potential customers, that the Company's products
will be free of errors or that such products will perform according to
expectations with respect to response time, ability to communicate over multiple
networks, scalability, stability and ease of use. Such errors and failures could
result in loss of or delay in market acceptance of the Company's products, the
cancellation of contracts or the imposition of substantial penalties, any of
which could have a material adverse effect on the Company's business, financial
condition, operating results and cash flows.
Proprietary Technology
The Company's success is dependent on its ability to protect its
intellectual property rights. The Company relies principally upon a combination
of copyright, trademark, trade secret and patent laws, non-disclosure agreements
and other contractual provisions to establish and maintain its rights. To date,
the Company has been granted trademark registrations or has registrations
pending in the United States, Canada and the European Community for the MDSI,
Advantex, Wireless@work and Compose trademarks. MDSI has also filed several
patent applications in the United States and internationally covering various
aspects of its technology, and has recently been granted a US patent for certain
aspects of Compose. The earliest of these applications has been granted and will
be issued as a U.S. patent, and the remainder are pending a substantive
examination. As part of its confidentiality procedures, the Company generally
enters into nondisclosure and confidentiality agreements with each of its key
employees, consultants, distributors, customers and corporate partners, to limit
access to and distribution of its software, documentation and other proprietary
information. There can be no assurance that the Company's efforts to protect its
intellectual property rights will be successful. Despite the Company's efforts
to protect its intellectual property rights, unauthorized third parties,
including competitors, may be able to copy or reverse engineer certain portions
of the Company's software products, and use such copies to create competitive
products. Policing the unauthorized use of the Company's products is difficult,
and, while the Company is unable to determine the extent to which piracy of its
software products exists, the risk of software piracy can be expected to
continue. In addition, the laws of certain countries in which the Company's
products are or may be licensed may not protect its products and intellectual
property rights to the same extent as do the laws of Canada and the United
States. As a result, sales of products by the Company in such countries may
increase the likelihood that the Company's proprietary technology is infringed
upon by unauthorized third parties. In addition, because third parties may
attempt to develop similar technologies independently, the Company expects that
software product developers will be increasingly subject to infringement claims
as the number of products and competitors in the Company's industry segments
grow and the functionality of products in different industry segments overlaps.
See "Forward-Looking Statements". Although the Company believes that its
products do not infringe on the intellectual property rights of third parties,
there can be no assurance that third parties will not bring infringement claims
(or claims for indemnification resulting from infringement claims) against the
Company with respect to copyrights, trademarks, patents and other proprietary
rights. Any such claims, whether with or without merit, could be time consuming,
result in costly litigation and diversion of resources, cause product shipment
delays or require the Company to enter into royalty or licensing agreements.
Such royalty or licensing agreements, if required, may not be available on terms
acceptable to the Company or at all. A claim of product infringement against the
Company and failure or
18
inability of the Company to license the infringed or similar technology could
have a material adverse effect on the Company's business, financial condition,
operating results and cash flows.
Dependence on Third Parties
Certain contracts require the Company to supply, coordinate and install
third party products and services or employ subcontractors. The Company believes
that there are a number of acceptable vendors and subcontractors for most of its
required products, but in many cases, despite the availability of multiple
sources, the Company may select a single source in order to maintain quality
control and to develop a strategic relationship with the supplier or may be
directed by a customer to use a particular product. The failure of a third party
supplier or subcontractor to provide a sufficient and reliable supply of parts
and components or products and services in a timely manner could have a material
adverse effect on the Company's results of operations. In addition, any increase
in the price of one or more of these products, components or services could have
a material adverse effect on the Company's business, financial condition,
operating results and cash flows. Additionally, under certain circumstances, the
Company supplies products and services to a customer through a larger company
with a more established reputation acting as a project manager or systems
integrator. In such circumstances, the Company has a sub-contract to supply its
products and services to the customer through the prime contractor. In these
circumstances, the Company is at risk that situations may arise outside of its
control that could lead to a delay, cost over-run or cancellation of the prime
contract which could also result in a delay, cost over-run or cancellation of
the Company's sub-contract. The failure of a prime contractor to supply its
products and services or perform its contractual obligations to the customer in
a timely manner could have a material adverse effect on the Company's financial
condition, results of operations and cash flows.
Exchange Rate Fluctuations
Because the Company's reporting and functional currency is the United
States dollar, its operations outside the United States face additional risks,
including fluctuating currency values and exchange rates, hard currency
shortages and controls on currency exchange. The Company has operations outside
the United States and is hedged, to some extent, from foreign exchange risks
because of its ability to purchase, develop and sell in the local currency of
those jurisdictions. In addition, the Company does enter into foreign currency
contracts under certain circumstances to reduce the Company's exposure to
foreign exchange risks. There can be no assurance, however, that the attempted
matching of foreign currency receipts with disbursements or hedging activities
will adequately moderate the risk of currency or exchange rate fluctuations
which could have a material adverse effect on the Company's business, financial
condition, operating results and cash flows. In addition, to the extent the
Company has operations outside the United States, the Company is subject to the
impact of foreign currency fluctuations and exchange rate charges on the
Company's reporting in its financial statements of the results from such
operations outside the United States.
Risks Associated with International Operations
In the years ended December 31, 2002, 2001, and 2000 revenue derived from
sales outside of North America accounted for approximately 31.7%, 23.8%, and
23.6%, respectively, of the Company's total revenue. Because the Company's
revenue is dependent, in large part, on significant contracts with a limited
number of customers, the percentage of the Company's revenues that is derived
from sales outside of North America has fluctuated, and may continue to
fluctuate, from period-to-period. The Company believes that its ability to grow
and be profitable will require additional expansion of its sales in foreign
markets, and that revenue derived from international sales will account for a
significant percentage of the Company's revenue for the foreseeable future. This
expansion has required and will continue to require significant management
attention and financial resources. The inability of the Company to expand
international sales in a timely and cost-effective manner could have a material
adverse effect on the Company's business, financial condition, operating results
and cash flows. There are a number of risks inherent in the Company's
international business activities, including changes in regulatory requirements,
tariffs and other trade barriers, costs and risks of localizing products for
foreign markets, longer accounts receivable payment cycles, difficulties in
collecting payments, reduced protection for intellectual property, potentially
adverse tax consequences, limits on repatriation of earnings, the burdens of
complying with a wide
19
variety of foreign laws, nationalization, war, insurrection, terrorism and other
political risks and factors beyond the Company's control. Fluctuations in
currency exchange rates could adversely affect sales denominated in foreign
currencies and cause a reduction in revenue derived from sales in a particular
country. In addition, revenue of the Company earned abroad may be subject to
taxation by more than one jurisdiction, thereby adversely affecting the
Company's earnings. There can be no assurance that such factors will not
materially adversely affect the Company's future international sales and,
consequently, the Company's business, financial condition, operating results and
cash flows.
As a result of the international scope of the Company's operations, the
Company's business is carried out under an international corporate structure
that has been designed in part to optimize tax savings to the Company. The
effectiveness of this international corporate structure from a tax perspective,
and the corresponding risk of any negative financial impact on the Company from
the imposition of tax liability on the Company in the event such structure is
not effective, depends on the quality of the Company's internal compliance and
implementation procedures, as well as external regulatory factors such as
investigations, audits and decisions by tax officials and changes in tax laws,
regulations and policies.
Product Liability
The license and support of products by the Company may entail the risk of
exposure to product liability claims. A product liability claim brought against
the Company or a third party that the Company is required to indemnify, whether
with or without merit, could have a material adverse effect on the Company's
business, financial condition, operating results and cash flows. The Company
carries insurance coverage for product liability claims which it believes to be
adequate for its operations. See "forward looking statements."
Anti-Takeover Effects; Investment Canada Act
An investment in the Common Shares of the Company which results in a change
of control of the Company may, under certain circumstances, be subject to review
and approval under the Investment Canada Act if the party or parties acquiring
control is not a Canadian person (as defined therein). Therefore, the Canadian
regulatory environment may have the effect of delaying, deferring or preventing
a change in control of the Company.
The Company is organized under the laws of Canada and, accordingly, is
governed by the Canada Business Corporations Act (the "CBCA"). The CBCA differs
in certain material respects from laws generally applicable to United States
corporations and shareholders, including the provisions relating to interested
directors, mergers and similar arrangements, takeovers, shareholders' suits,
indemnification of directors and inspection of corporate records.
In December 1998, the Company implemented a stock rights plan (the "Plan").
Pursuant to the Plan, shareholders of record on December 17, 1998 received a
dividend of one right to purchase, for CDN$140, one Common Share of the Company.
The rights are attached to the Company's Common Shares and will also become
attached to Common Shares issued in the future. The rights will not be traded
separately and will not become exercisable until the occurrence of a triggering
event, defined as an accumulation by a single person or group of 20% or more of
the Company's Common Shares. After a triggering event, the rights will detach
from the Common Shares. If the Company is then merged into, or is acquired by,
another corporation, the Company may either (i) redeem the rights or (ii) permit
the rights holder to receive in the merger Common Shares of the Company or of
the acquiring company equal to two times the exercise price of the right (i.e.,
CDN $280). In the latter instance, the rights attached to the acquirer's stock
become null and void. The effect of the rights program is to make a potential
acquisition of the Company more expensive for the acquirer if, in the opinion of
the Company's Board of Directors, the offer is inadequate.
As a result of being a reporting issuer in certain provinces of Canada, the
Company is required to file certain reports in such jurisdictions. As part of
such reports, the Company is required to file consolidated financial statements
prepared in accordance with generally accepted accounting principles as applied
in Canada ("Canadian GAAP"). Canadian and US GAAP differ in certain respects,
including the treatment of certain reorganization costs, and acquired research
and development costs. As a result, the Company's Consolidated Financial
Statements included in this report may differ materially from the financial
statements filed by the Company in Canada.
20
Market for the Common Shares; Potential Volatility of Stock Price
The trading prices of the Common Shares have been subject to wide
fluctuations since trading of the Company's shares commenced in December 1995.
There can be no assurance that the market price of the Common Shares will not
significantly fluctuate from its current level. The market price of the Common
Shares may be subject to wide fluctuations in response to quarterly variations
in operating results, announcements of technological innovations or new products
by the Company or its competitors, changes in financial estimates by securities
analysts, or other events or factors. In addition, the financial markets have
experienced significant price and volume fluctuations for a number of reasons,
including the failure of the operating results of certain companies to meet
market expectations that have particularly affected the market prices of equity
securities of many high-technology companies that have often been unrelated to
the operating performance of such companies. These broad market fluctuations, or
any industry-specific market fluctuations, may adversely affect the market price
of the Common Shares. In the past, following periods of volatility in the market
price of a company's securities, securities class action litigation has often
been instituted against such a company. Such litigation, whether with or without
merit, could result in substantial costs and a diversion of management attention
and resources, which would have a material adverse effect on the Company's
business, financial condition, operating results and cash flows.
Item 2: Properties
The Company occupies approximately 92,000 square feet of leased office
space at its headquarters in Richmond, British Columbia for its product
development, marketing, support, administration and sales operations. The lease
expires on November 30, 2008 with two options to renew for five years each. The
Company has sub-let approximately 22,000 square feet of this space until
December 31, 2003. The Company also maintains an office in Itasca, Illinois. The
Itasca office lease is for approximately 29,000 square feet and terminates on
November 30, 2009. The Company has sub-let approximately 17,600 feet of this
space until November 30, 2004. The Company believes that the current office
space under lease less the current subleased portions is adequate to meet its
needs for the foreseeable future.
Item 3: Legal Proceedings
Mobile Data Solutions Inc. v. Citizens Telecom Services Co., L.L.C. - U.S.
District Court, Texas District Court Collin County - 366 Judicial District
(Docket No. 366-01914-00) .
On November 22, 2000, MDSI filed suit in Texas District Court Collin County
against Citizens Telecom Services Co., L.L.C., generally alleging that Citizens
breached a series of contracts dated October 15, 1998. The suit alleges that
Citizens has wrongfully terminated the contracts and failed to pay sums due of
approximately $3.7 million. The suit seeks payment of the contract balance, plus
other damages, interest and attorneys' fees. In late February 2001, Citizens
filed an answer and counterclaim alleging that MDSI breached the contracts,
justifying Citizens' termination of the contracts and entitling Citizens to
repayment of all sums paid to MDSI of approximately $3.5 million in addition to
interest and attorneys' fees. At Citizens' request the parties held a mediation
on April 2, 2001. Mediation was not successful and both parties began discovery.
In October 2002, Citizens filed amended counterclaims alleging fraud, negligent
misrepresentation, breach of express warranty and breach of implied warranties.
Citizens seeks all actual, special, incidental and consequential damages
associated with these claims, in addition to punitive damages, interest and
attorneys' fees. In March 2003, Citizens submitted an expert report estimating
that Citizens had incurred approximately $6.1 million in damages due to lost
productivity and direct costs, and that Citizens may be entitled to additional
contractual penalties from MDSI of approximately $1.1 million. MDSI disputes
these claims and believes them to be without merit.
On March 5, 2003, the court granted Citizens' motion for summary judgment,
dismissing MDSI's claims for lack of sufficient evidence of damages. MDSI filed
a motion for reconsideration of this ruling. On March 26, 2003, the court denied
MDSI's motion.
On March 26, 2003, the court granted MDSI's motion for partial summary
judgment, finding that Citizens breached the professional services agreement by
wrongfully terminating the agreement.
21
MDSI has tendered the prosecution of its claim and the defense of Citizen's
counterclaims to Chubb Insurance Company. Chubb has accepted the claims under a
reservation of rights. MDSI believes that any amounts that it is required to pay
to Citizens would be an insured loss that is covered by insurance, other than
any amounts that it is required to pay to Citizens as a result of fraud or other
intentional misconduct. See "Forward-Looking Statements".
The scheduled trial date for this matter is April 7, 2003 in Texas District
Court Collin County. MDSI believes that it has various defenses against
Citizen's claims, and it intends to vigorously pursue these defenses as
appropriate. MDSI also believes that its claims against Citizens are strong and
it intends to vigorously pursue its claims for damages, on appeal, if necessary.
If, contrary to MDSI's expectations, MDSI is not successful in the Citizens
litigation, the loss may have a material adverse impact on MDSI's business,
results of operations, financial condition or liquidity. See "Business-Risk
Factors-Litigation" and "Forward-Looking Statements".
From time to time, the Company is a party to other litigation and claims
incident to the ordinary course of its business. While the results of litigation
and claims cannot be predicted with certainty, the Company believes that the
final outcome of such matters will not have a material adverse effect on the
Company's business, results of operations, financial condition or liquidity.
Item 4: Submission of Matters to a Vote of Security Holders
Not applicable.
22
PART II
Item 5: Market for Registrant's Common Equity And Related Stockholder Matters
Price Range of Common Shares
The Company's Common Shares began trading on The Toronto Stock Exchange and
on the Montreal Exchange under the symbol "MMD" on December 20, 1995 and began
trading on the Nasdaq National Market System under the symbol "MDSIF" on
November 26, 1996. The Company changed its Nasdaq National Market System trading
symbol to "MDSI" in April 1999. In December 1999, the Company's listing on the
Montreal Exchange was automatically withdrawn as part of a restructuring plan of
the Canadian stock exchanges. Prior to December 20, 1995, there was no public
market for the Common Shares. The following table sets forth, for the periods
indicated, the high and low sale prices for the Common Shares as reported on The
Toronto Stock Exchange and the Nasdaq National Market System with their
equivalent U.S. dollar amounts where applicable.
The Toronto Stock Exchange Nasdaq National Market
------------------------------------------------------- -------------------------
US$(1) CDN$ US$ US$
------------------------------------------------------- --------------------------
High Low High Low High Low
---------- ---------- ---------- ---------- ---------- ----------
2001
First Quarter............. 11.13 5.07 17.00 7.75 11.25 4.88
Second Quarter............ 6.32 4.05 9.75 6.25 6.20 4.00
Third Quarter............. 5.02 2.26 7.75 3.50 5.29 2.23
Fourth Quarter............ 5.03 2.66 7.95 4.20 5.08 2.71
2002
First Quarter............. 4.29 3.31 6.76 5.22 4.25 3.40
Second Quarter............ 3.93 3.10 6.21 4.87 3.95 3.05
Third Quarter............. 3.48 2.83 5.50 4.47 3.62 2.87
Fourth Quarter............ 3.55 2.82 5.60 4.44 3.60 2.78
- ----------
(1) US dollar amounts have been translated using the average noon buying rate
for Canadian dollars for the relevant quarter. See "Exchange Rates."
Shareholders
As of December 31, 2002 the Company had approximately 190 shareholders of
record, 77 shareholders of whom had addresses in the United States and who held
4,998,896 Common Shares, or 61.1% of the Company's outstanding Common Shares.
Dividends
The Company has never paid dividends on its Common Shares. The Company
currently intends to retain earnings for use in its business and does not
anticipate paying any dividends in the foreseeable future. The Company's current
bank credit agreement prohibits the payment of dividends without prior consent
of the lender.
Recent Sales of Unregistered Securities
The Company did not issue any unregistered securities during the fiscal
year ended December 31, 2002.
23
Exchange Controls
There are no government laws, decrees or regulations in Canada which
restrict the export or import of capital or which affect the remittance of
dividends, interest or other payments to non-resident holders of the Company's
Common Shares. Any remittances of dividends to United States residents and to
other non-residents are, however, subject to withholding tax. See "Taxation"
below.
Taxation
Canadian Federal Income Taxation
We consider that the following summary fairly describes in general the
principal Canadian federal income tax consequences applicable to a holder of our
common shares who at all times deals at arm's length with us, who holds all
common shares as capital property, who is resident in the United States, who is
not a resident of Canada and who does not use or hold, and is not deemed to use
or hold, his common shares of MDSI Mobile Data Solutions Inc. in connection with
carrying on a business in Canada (a "non-resident holder"). It is assumed that
the common shares will at all material times be listed on a stock exchange that
is prescribed for purposes of the Income Tax Act (Canada) (the "ITA") and
regulations thereunder. The Canadian federal income tax consequences applicable
to holders of the Company's common shares will not change if we are deemed
inactive by the Toronto Stock Exchange. Investors should however be aware that
the Canadian federal income tax consequences applicable to holders of the
Company's common shares will change if we cease to be listed on a prescribed
stock exchange like the Toronto Stock Exchange. Accordingly, holders and
prospective holders of our common shares should consult with their own tax
advisors with respect to the income tax consequences of them purchasing, owning
and disposing of the Company's common shares should the Company cease to be
listed on a prescribed stock exchange.
This summary is based upon the current provisions of the ITA, the
regulations thereunder, the Canada-United States Tax Convention as amended by
the Protocols thereto (the "Treaty") as at the date of the registration
statement and the currently publicly announced administrative and assessing
policies of the Canada Customs and Revenue Agency (the "CCRA"). This summary
does not take into account Canadian provincial income tax consequences. This
description is not exhaustive of all possible Canadian federal income tax
consequences and does not take into account or anticipate any changes in law,
whether by legislative, governmental or judicial action. This summary does,
however, take into account all specific proposals to amend the ITA and
regulations thereunder, publicly announced by the Government of Canada to the
date hereof.
This summary does not address potential tax effects relevant to the Company
or those tax considerations that depend upon circumstances specific to each
investor. Accordingly, holders and prospective holders of our common shares
should consult with their own tax advisors with respect to the income tax
consequences to them of purchasing, owning and disposing of the Company's common
shares.
Dividends
The ITA provides that dividends and other distributions deemed to be
dividends paid or deemed to be paid by a Canadian resident corporation (such as
MDSI Mobile Data Solutions Inc.) to a non-resident of Canada shall be subject to
a non-resident withholding tax equal to 25% of the gross amount of the dividend
or deemed dividend. Provisions in the ITA relating to dividend and deemed
dividend payments and gains realized by non-residents of Canada, who are
residents of the United States, are subject to the Treaty. The Treaty may reduce
the withholding tax rate on dividends as discussed below.
Article X, of the Treaty as amended by the US-Canada Protocol ratified on
December 16, 1997 provides a 5% withholding tax on gross dividends or deemed
dividends paid to a United States corporation which beneficially owns at least
10% of our voting stock paying the dividend. In cases where dividends or deemed
dividends are paid to a United States resident (other than a corporation) or a
United States corporation which beneficially owns less than 10% of our voting
stock, a withholding tax of 15% is imposed on the gross amount of the dividend
or deemed dividend paid. The Company will be required to withhold any such tax
from the dividend and remit the tax directly to CCRA for the account of the
investor.
24
The reduction in withholding tax from 25%, pursuant to the Treaty, will not
be available:
(a) if the shares in respect of which the dividends are paid are
effectively connected with a permanent establishment or fixed base
that the holder has in Canada, or
(b) the holder is a U.S. LLC which is not subject to tax in the U.S.
The Treaty generally exempts from Canadian income tax dividends paid to a
religious, scientific, literary, educational or charitable organization or to an
organization exclusively administering a pension, retirement or employee benefit
fund or plan, if the organization is resident in the U.S. and is exempt from
income tax under the laws of the U.S.
Capital Gains
A non-resident holder is not subject to tax under the ITA in respect of a
capital gain realized upon the disposition of our share unless the share
represents "taxable Canadian property" to the holder thereof. The Company's
Common shares will be considered taxable Canadian property to a non-resident
holder only if:
(a) the non-resident holder,
(b) persons with whom the non-resident holder did not deal at arm's
length, or
(c) the non-resident holder and persons with whom he did not deal at arm's
length,
owned 25% or more of the Company's issued shares of any class or series at
any time during the five year period preceding the disposition. In the case of a
non-resident holder to whom the Company's shares represent taxable Canadian
property and who is resident in the United States, no Canadian taxes will
generally be payable on a capital gain realized on such shares by reason of the
Treaty unless:
(a) the value of such shares is derived principally from real property
(including resource property) situated in Canada,
(b) the holder was resident in Canada for 120 months during any period of
20 consecutive years preceding the disposition, the holder was
resident in Canada at any time during the 10 years immediately
preceding the disposition and the shares were owned by him when he
ceased to be a resident of Canada,
(c) they formed part of the business property or were otherwise
effectively connected with a permanent establishment or fixed base
that the holder has or had in Canada within the 12 months preceding
the disposition, or
(d) the holder is a U.S. LLC which is not subject to tax in the U.S.
If subject to Canadian tax on such a disposition, the taxpayer's capital
gain (or capital loss) from a disposition is the amount by which the taxpayer's
proceeds of disposition exceed (or are exceeded by) the aggregate of the
taxpayer's adjusted cost base of the shares and reasonable expenses of
disposition. For Canadian income tax purposes, the "taxable capital gain" is
equal to one-half of the capital gain.
25
Item 6: Selected Financial Data
The following selected consolidated financial data of the Company is
qualified in its entirety by reference to and should be read in conjunction with
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the consolidated financial statements and notes thereto
included elsewhere in this report. The consolidated statements of operations
data for the years ended December 31, 2002, 2001 and 2000 and the consolidated
balance sheet data at December 31, 2002 and 2001 are derived from and are
qualified by reference to the Company's audited consolidated financial
statements. This selected consolidated financial data is presented in conformity
with generally accepted accounting principles in the United States.
Years ended December 31,
2002 2001 2000 1999 1998
------------- ------------- ------------- ------------- -------------
(In thousands, except per share data)
Statement of Operations Data:
Revenue $ 38,735 $ 44,706 $ 52,000 $ 52,157 $ 44,866
Gross profit 21,716 23,658 30,919 29,606 23,458
Operating (loss) income (2,409) (11,402) 1,060 7,781 5,944
(Loss) income from continuing
operations for the year (1)(2)