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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- --------------------------------------------------------------------------------
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 0-28968
MDSI MOBILE DATA SOLUTIONS INC.
(Exact name of registrant as specified in its charter)
CANADA NOT APPLICABLE
(Jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
10271 Shellbridge Way
Richmond, British Columbia,
Canada V6X 2W8
(Address of principal executive offices)
Registrant's telephone number: (604) 207-6000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, no par value
(Title of Class)
Rights to Purchase Common Shares
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold on Nasdaq as of the last business day of the registrant's most
recently completed second fiscal quarter, which was June 30, 2003: $41,023,330
The number of shares of the Registrant's Common Shares outstanding as of
March 23, 2004 was 8,226,068.
TABLE OF CONTENTS
Item 1: Business.................................................................................................2
Item 2: Properties..............................................................................................20
Item 3: Legal Proceedings.......................................................................................20
Item 4: Submission of Matters to a Vote of Security Holders.....................................................20
Item 5: Market for Registrant's Common Equity And Related Stockholder Matters...................................21
Item 6: Selected Financial Data ................................................................................24
Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations...................25
Item 7A: Quantitative and Qualitative Disclosures About Market Risk.............................................39
Item 8: Financial Statements and Supplementary Data.............................................................40
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................70
Item 9A: Controls and Procedures................................................................................70
Item 10: Directors and Executive Officers of the Registrant.....................................................71
Item 11: Executive Compensation.................................................................................74
Item 12: Security Ownership of Certain Beneficial Owners and Management.........................................78
Item 13: Certain Relationships and Related Transactions.........................................................79
Item 14: Principal Accountant Fees and Services.................................................................79
Item 15: Exhibits, Financial Statement Schedules and Reports on Form 8-K........................................80
SIGNATURES.......................................................................................................84
i
Forward-Looking Statements
Certain statements in this Annual Report on Form 10-K constitute
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of MDSI Mobile Data Solutions Inc. ("MDSI"
or the "Company"), or developments in the Company's industry, to differ
materially from the anticipated results, performance or achievements expressed
or implied by such forward-looking statements. Such factors include, but are not
limited to: lengthy sales cycles, the Company's dependence upon large contracts
and relative concentration of customers, the failure of MDSI to maintain
anticipated levels of expenses in future periods and the risk that cost
reduction efforts adversely affect the ability of MDSI to achieve its business
objectives the failure of MDSI to successfully execute its business strategies,
the effect of volatile United States and international economies generally, the
threat or reality of war, as well as economic trends and conditions in the
vertical markets that MDSI serves, the effect of the risks associated with
technical difficulties or delays in product introductions, improvements,
implementations, product development, product pricing or other initiatives of
MDSI's competitors, the possibility that our potential customers will defer
purchasing decisions due to economic or other conditions or will purchase
products offered by our competitors, risks associated with litigation and the
protection of intellectual property, risks associated with the collection of
accounts receivable, and the other risks and uncertainties described under
"Business - Risk Factors" in Part I of this Annual Report on Form 10-K. Certain
of the forward looking statements contained in this Report are identified with
cross-references to this section and/or to specific risks identified under
"Business - Risk Factors."
Exchange Rates
The following table sets forth, for each period presented, the exchange
rates at the end of such period, the average of the exchange rates on the last
day of each month during the period and the high and low exchange rates for one
Canadian dollar, expressed in U.S. dollars, based on the noon buying rate in New
York City for cable transfers payable in Canadian dollars as certified for
customs purposes by the Federal Reserve Bank of New York.
U.S. Dollars Per Canadian Dollar
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Period End US$0.7724 US$0.6342 US$0.6275 US$0.6666 US$0.6925
Average 0.7138 0.6369 0.6461 0.6740 0.6744
High 0.7749 0.6656 0.6714 0.6983 0.6925
Low 0.6329 0.6175 0.6227 0.6397 0.6535
On March 25, 2004 the noon buying rate was CDN$1.00 = US$0.7521. The
Canadian dollar is convertible into U.S. dollars at freely floating rates, and
there are currently no restrictions on the flow of Canadian currency between
Canada and the United States. Unless stated otherwise, all financial information
is expressed in United States dollars.
1
Part I
Item 1: Business
The Company
MDSI Mobile Data Solutions Inc. is a leading provider of mobile workforce
management solutions. MDSI's suite of software applications improves customer
service and relationships, and reduces operating costs by empowering service
companies to optimally manage their mobile field resources. The Company also
provides all of the professional services necessary to implement and support its
solutions. Founded in 1993, MDSI has approximately 100 major customers
worldwide, with operations and support offices in the United States, Canada,
Europe, and Africa. MDSI markets its solutions to a variety of companies that
have substantial field workforces, and focuses primarily upon utilities
(electric, gas and water companies), telecommunications companies, and
cable/broadband companies. MDSI's products are used by such companies in
conjunction with various public and private wireless data communications
networks, mobile devices and server hardware to provide comprehensive solutions
for the automation of business processes associated with the scheduling,
dispatching and management of a mobile workforce.
Unless the context otherwise requires, references herein to "MDSI" or the
"Company" refer to MDSI Mobile Data Solutions Inc. and its subsidiaries. The
Company's principal executive offices are located at 10271 Shellbridge Way,
Richmond, British Columbia, Canada V6X 2W8, and its telephone number at that
location is (604) 207-6000. The Company's web site is www.mdsi.ca. Information
contained on the Company's web site is not part of this report.
Background
Field operations, whether involved in service, inspection, maintenance,
repair, trouble, installation or construction work, are confronted on a daily
basis with the difficult task of optimally assigning work requests to mobile
workforces, dispatching the work to the field, monitoring the progress of the
work, responding to changing conditions, and measuring workforce performance.
Common workforce management problems include:
o missed appointments;
o unnecessary overtime;
o repeat customer visits to get the job done right;
o jobs that take too long to complete;
o delayed status reports;
o inadequate information collected from/supplied to the field;
o redundant data entry work; and
o excessive driving time.
Historically, these organizations have managed and supported their mobile
workers by communicating information on paper, or through wireline solutions or
through voice radio systems. Although voice radio systems are mobile, such
systems rely on heavily used portions of the radio spectrum and are subject to
frequent periods of congestion. Mobile data communication systems that addressed
certain limitations of voice communications systems were first developed for a
limited number of vertical markets, such as utility, public safety, taxi,
courier and commercial field service. Businesses in these markets recognized
certain productivity benefits associated with wireless data applications.
Although such mobile data communications systems were introduced in a number of
vertical markets, these systems failed to achieve widespread adoption. The
Company believes that this initial low
2
rate of adoption was attributable to a number of factors, including the high
cost of establishing private radio networks; the difficulty of obtaining radio
spectrum for such networks; the high cost and limited functionality of early
mobile computing devices; the regulatory environment in certain industries, such
as utilities and telecommunications, which diminished competitive pressures; and
a lack of industry-specific application software which effectively addressed the
needs of mobile workers. MDSI was formed to address this last limitation. The
Company now provides industry-specific mobile workforce management solutions for
the utility, telecommunications and cable/broadband markets.
The Company believes that the other limitations to adoption in its markets
are also being addressed, to an increasing extent. Trends in the regulatory
environment, numerous technological advances and competitive pressures have
provided and will continue to provide a compelling case for mobile workforce
management solutions. For example, deregulation has exposed the utility and
telecommunications markets to new competitive pressures, driving businesses
within those markets to seek ways to reduce costs, improve operations,
efficiently allocate resources and increase the quality of customer service. In
addition, the availability of powerful mobile computing devices has permitted
the development of sophisticated software applications. Finally, public data
networks providing services at lower costs than ever are now widely available in
North America, and similar networks are available in Europe, Austral-Asia and
Africa. Consequently, the Company believes that mobile workforce management
solutions may now be implemented without the difficulty and expense of
establishing a private radio network, thereby increasing the cost-effectiveness
of such systems. The Company believes that these trends will continue to
increase the likelihood of adoption of mobile workforce management solutions by
companies with large field workforces. See "Forward-Looking Statements."
The MDSI Solution
MDSI has combined its expertise in software application development and
mobile data communications technology with its understanding of the unique needs
of field operations in targeted vertical markets to develop mobile workforce
management solutions that address the specific needs of businesses within those
vertical markets. MDSI's products enable these organizations to effectively
communicate with, manage and support their mobile workers in their execution and
completion of work orders.
MDSI's products are designed to interface with a variety of public and
private data networks, including PCS networks and satellite-based data
transmission networks, and are compatible with a variety of operating platforms,
and can be integrated to a wide variety of applications, including those built
in-house. For the mobile user, that browser can be located on a variety of
mobile devices, such as a laptop, personal digital assistant, pager or web
phone.
To effectively address a customer's mobile workforce management
requirements, MDSI combines its products with professional services, such as
systems implementation and integration, training and documentation, workforce
management assessments, consulting, ongoing technical support and software
maintenance. Where appropriate, MDSI also provides third party products and
services as part of a complete mobile workforce management solution.
Advantex r7
Advantex r7, the latest version of MDSI's mobile workforce management
product, is comprehensive, feature-rich and is offered as a market-specific
solution for customers in MDSI's target markets, including the utility industry,
the telecommunications industry, and the cable/broadband industry. Advantex
efficiently manages mobile workers and the work orders they execute. It
schedules work requests and, using complex business rules, assigns them to the
best available mobile worker. Advantex then dispatches work order details to
mobile workers who use the solution to process their work throughout the day and
send status updates and order completion information back to the office all
wirelessly, in real-time. Advantex also determines the best sequence for mobile
workers to address their work orders and the best routes to travel between
assignments. This provides dispatchers, supervisors and enterprise applications,
such as call centers and customer information systems, with up-to-date
information to enable them to effectively monitor and manage field service
operations at all times.
3
Advantex is the result of more than ten years of development and has been
(or is in the process of being) field validated by approximately 100 companies
in the Company's markets. Advantex uses global standards, such as CORBA (Common
Object Request Broker Architecture), Java, HTML, XML, WAP and Unicode, and
industry standard products, such as Oracle's database and BEA's infrastructure
tools, to deliver a solution that meets customers' needs for a scalable, open
and interoperable solution. Advantex has been implemented, or is in the process
of being implemented, for customers supporting as few as 70 and as many as
13,000 users. The primary components of Advantex are:
o Advantex Scheduling--Books and manages appointments with customers and
automatically assigns work orders to mobile workers based on skill and
equipment match, location, availability, and priority.
o Advantex Dispatch--Allows dispatchers to monitor work orders and workers.
Allows dispatchers to view the field service information that is most
critical to them at any given moment, to manage work orders (e.g., cancel,
modify, dispatch), and to receive alerts for unusual situations requiring
dispatcher intervention (e.g., worker in jeopardy of missing an
appointment).
o Advantex Mobile--Enables mobile workers to receive work orders, view work
order information, track their status, enter work results, and query
company applications for additional information needed to complete work.
Promotes efficient workflow by providing the information mobile workers
need to do their work when they need it.
o Advantex Wireless--Provides wireless connectivity across public and private
networks, and wireless compression, encryption, and the ability to work
offline in "out of coverage" situations.
o Advantex Maintenance Management-- Allows a planner to create a maintenance
or inspection schedule for an asset. For example, a gas company might
establish a bi-annual inspection schedule for its regulator stations.
Maintenance Management automatically creates corresponding work orders,
which are assigned and distributed to the field workforce in the usual way.
Once the work is done, the completion information remains associated with
the asset and is accessible to the planner through the application.
o Advantex Resources--Allows administrators to define resources that perform
work (e.g., mobile workers and crews) and their attributes (e.g., work
areas, skills, equipment), manage crew composition, define shift rotations,
and manage day-to-day technician availability (e.g., ad hoc adjustments for
absences).
o Advantex Decision Support--Collects and archives data in a historical
database and allows it to be presented for easy-to-understand reporting and
trend analysis via a web-browser. Lets managers prepare customized reports
on key performance indicators to measure mobile workforce performance.
o Advantex Compose--A configuration tool used to define a customer's work
practices and generate a configured Advantex system. Defines the types of
work the customer performs, the work order details, how the work orders are
presented to dispatchers and mobile workers, the forms to be completed in
the field, and the validation rules that apply to work results entered in
the field.
o Advantex Enterprise Connector--Integrates Advantex with the customer's
enterprise applications (e.g., SAP, Siebel). Bundled with Advantex when
MDSI provides application integration services.
o Advantex Vehicle Tracking--Allows dispatchers to use maps and GPS (Global
Positioning System)-equipped vehicles to track in real-time the location of
mobile workers and their work orders and to execute a wide variety of tasks
directly from the map interface.
o Advantex Complex Orders-- Coordinates mobile workers working on related
orders. Parcels orders into individual tasks, manages task assignment and
dispatch, ensures that precedence relationships are maintained, and
monitors task status.
4
o Advantex Common Cause-- Allows dispatchers and managers to recognize
related trouble work orders and manage them as individual dispatched work
orders.
o Advantex Time Reporting--Allows mobile workers to allocate time to job
codes and to record time spent on other activities. Replaces paper-based
time reporting.
For companies outside of MDSI's traditional markets that employ field
workforces, such as security companies, office equipment companies and home
appliance companies, MDSI offers a wireless enablement product called MDSI
ideligo, which is a subset of Advantex.
Professional and Customer Support Services
Contracts for the sale of MDSI's software typically require MDSI to provide
certain professional services. Additionally, customers typically sign a separate
customer support and maintenance agreement, which requires MDSI to provide
after-sales support of its products. The Company believes that providing these
services facilitates effective implementation and use of its products and
fosters a strong relationship with the customer that often leads to future sales
of MDSI products and services. See "Forward-Looking Statements."
Professional Services
A professional services engagement typically lasts for six to twelve
months, though the Company has entered into much longer engagements for some of
its larger customers. During this time, MDSI works with the customer in
defining, configuring, and installing Advantex, as well as providing complete
training services and systems documentation that address the implementation and
operation of Advantex. MDSI's depth of experience in the utility,
telecommunications, and cable/broadband industries allows the Company to
integrate Advantex with customer information systems, customer relationship
management systems, billing systems and outage management systems, among others.
Whenever industry solutions such as these are the source of work orders or the
destination for work results, MDSI offers application integration services.
MDSI also offers mobile workforce management practices assessment services,
to help customers assess where they stand against their peers, as well as other
mobile workforce management consulting services to enable customers to make the
most effective use of Advantex in their organizations to improve customer
satisfaction and increase operational efficiency.
Customer Support
The Company believes that its ability to offer a high level of after-sale
customer support is critical to its success. The Company's customer support
group provides MDSI customers with telephone and on-line technical support as
well as product updates. Most MDSI customers enter into separate customer
support agreements, which may be annual or on a multi-year basis.
Markets
MDSI has combined its expertise in software application development and
mobile data communications technology with its understanding of the unique needs
of targeted vertical markets to develop mobile workforce management solutions
that address the specific needs of businesses within those vertical markets.
Traditionally, the Company has focused its attention on mid and large-sized
customers in the utilities (electric, gas and water), telecommunications, and
cable/broadband markets. In total, MDSI believes that there are approximately
1.8 million mobile workers worldwide in its traditional markets, split
approximately evenly amongst North America, Western Europe, and certain other
commercially viable geographical markets in the rest of the world.
Traditionally, the Company's products have best addressed the needs of
approximately one-half of these workers. The Company's recent product
developments and its' product development plan are designed to address the full
market opportunity.
5
During 2002, the Company launched a product, MDSI Ideligo, to serve field
service workforces outside the Company's core markets. Within these markets,
MDSI believes that there are approximately 6.9 million mobile workers worldwide,
split approximately evenly amongst North America, Western Europe, and certain
other commercially viable geographical markets in the rest of the world. See
"Other Markets" below. The Company evaluates new target markets for mobile
workforce management based upon their similarity to existing vertical markets in
which the Company has been successful, and upon the ability of the Company to
utilize its core competencies and proven technology to meet the needs of
companies in these new markets. During 2002, the Company stopped pursuing
opportunities in the public safety market. See "Public Safety" below.
Utilities. The utilities market targeted by the Company consists of
electric, gas and water companies worldwide, most notably in the United States,
Canada, Europe and to a lesser extent South America, Austral-Asia and Africa.
The Company's solution for this market has primarily targeted workers who
provide intra day work, such as meter services (reading, connections and
investigations), trouble work and account collections. The Company's new product
features, recently completed or in development, are targeted at the remainder of
field technicians, who are involved in maintaining, inspecting or constructing
utilities' network asset infrastructure. Such work typically involves longer
time frames for completion, may involve multiple interdependent tasks, and
multiple work crews. Accordingly, MDSI is adapting Advantex to handle this
greater complexity.
The Company believes that the market offers many opportunities for revenue
growth both from existing and new customers. See "Forward-Looking Statements".
MDSI's products have been implemented or are being implemented in over 70
electric, gas and water utilities located in the United States, Canada, Europe
and Austral-Asia. MDSI believes that the total number of utilities with more
than 100 mobile workers (MDSI's typical target market) exceeds 300 in the United
States alone.
Telecommunications and Cable/Broadband. MDSI sells its Advantex product
into the telecommunications, and cable/broadband markets worldwide, most notably
in the United States, Canada, Europe and to a lesser extent in Africa,
Austral-Asia and South America. Recently, the markets for these services have
been converging. For example, companies that used to provide traditional voice
telecommunications services are now permitted to provide data services, basic
cable and other broadband services. Similarly, companies that provided
traditional cable TV service now also provide cable telephony services and
Internet services. As with utilities, MDSI's solution for the telecommunications
and cable/broadband markets has primarily addressed the needs of only a portion
of the mobile workforce, most notably those technicians involved in intra-day
installation and repair work. The Company's new product features, recently
completed or in development, are targeted at the remainder of field technicians,
who are involved in maintaining, inspecting or constructing the networks' asset
infrastructures. Such work typically involves longer time frames for completion,
may involve multiple interdependent tasks, and multiple work crews. Accordingly,
MDSI is adapting Advantex to handle this greater complexity.
The telecommunications market consists of wireline providers of local, and
long-distance services, wireless communication service providers and ISPs
(Internet service providers). The wireline market in North America is comprised
of IXCs (Inter-exchange carriers), ILECs (Incumbent Local Exchange Carriers),
and CLECs (Competitive Local Exchange Carriers). In Europe, the national
telecommunication providers are referred to as PTT's (Post, Telephone &
Telegraph). MDSI believes that the total number of telecommunications companies
and cable/broadband companies with more than 100 mobile workers (MDSI's typical
target market) exceeds 300 and 100, respectively, in the United States alone.
MDSI believes that a number of major telecommunications companies are evaluating
the need for a mobile workforce management system, and that this market will
grow as companies implement new technology to improve their competitiveness,
efficiency and service levels as the worldwide deregulation of the
telecommunications markets continues to unfold
Cable/broadband services consist of basic cable television services and new
digital interactive broadband services, including digital cable TV services,
cable data and Internet services, cable telephony services, and other
interactive broadband data and multimedia services. The market is comprised of
traditional cable MSOs (Multiple System Operators) and independent cable system
operators, satellite service operators, new broadband divisions of traditional
telecommunication firms, and new broadband entrants. Currently, in North
America, approximately 80% of the subscriber base is under the control of the
ten largest MSOs. Although several of these major cable operators
6
have implemented mobile data solutions in selected sites, few operators have
rolled out these systems to multiple sites. Additionally, these MSOs are
increasingly outsourcing some of their field technician work to specialty
contractors, a group where MDSI does not have market share, but one that could
represent a future opportunity. See "Forward-Looking Statements." Changes in the
regulatory environment and technological developments, such as satellite
television have led to the introduction of significant competition in the cable
market. MDSI sees this enhanced level of competition as being very positive for
its business. MDSI believes that growing competition and the introduction of new
services will lead cable operators to adopt mobile workforce management
solutions to improve their competitiveness, efficiency and level of customer
service. See "Forward-Looking Statements."
While the telecommunications and cable/broadband markets have begun to show
signs of recovery from difficult economic times, the Company anticipates that
continued economic uncertainty in these markets will have an adverse impact on
software and services revenues in the short term. See "Forward-Looking
Statements."
Other Markets. There are a large number of companies outside MDSI's
traditional markets that employ field workforces, such as security companies,
office equipment companies, home appliance companies, as well as many other
organizations that contract fieldwork as their primary business, such as
companies engaged in the maintenance and repair of oil wells, IT/Networking
services, medical/scientific equipment, industrial equipment, and HVAC (Heating,
Ventilation and Air Conditioning) systems, amongst others. To date, the Company
has not focused its primary attention on these markets. MDSI believes that the
total number of such companies with more than 100 mobile workers (MDSI's typical
target market) exceeds 3,500 in the United States alone.
For this opportunity, MDSI has developed a subset of Advantex, called MDSI
ideligo, which is primarily comprised of the Advantex Wireless and Advantex
Mobile components. MDSI ideligo wirelessly communicates data in real-time
between the field and enterprise applications, automates workflow, and lets
field workers be more efficient and productive. Initially, MDSI has integrated
MDSI ideligo with Siebel Systems' Field Service application. Together, MDSI and
Siebel Systems Inc. have won one new customer, Texas-based Key Energy Services,
and is working on several additional prospects. MDSI anticipates integrating
MDSI ideligo with field service products from other independent software
vendors.
Public Safety. The Public Safety market consists of federal, state and
local agencies that provide police, fire, medical and other emergency services.
During 2001, MDSI ceased pursuing opportunities in the market and in 2002
reached an agreement with Datamaxx Applied Technologies, Inc. of Tallahassee,
Florida, granting Datamaxx exclusive license rights to MDSI's Public Safety
products in the North American public safety market and non-exclusive license
rights for such products outside North America. MDSI had installed solutions for
a limited number of customers, and the market never represented a material
portion of MDSI's revenues.
Customers
MDSI has sold its solutions to approximately 100 customers worldwide,
comprising approximately 80,000 user licenses.
Sample Customers:
------------------------------------------------------------------------------------------------
UTILITY TELCO CABLE/BROADBAND
------------------------------------------------------------------------------------------------
o Consumers Energy o Belgacom (Belgium) o Cox Communications
o Keyspan Energy o Eircom (Ireland) o Rogers Cable
o Pacific Gas & Electric o TDC Tele Danmark o SureWest
o Reliant Energy (Denmark) o Videotron
o Transco (UK) o Telkom South Africa
o TXU Communications
------------------------------------------------------------------------------------------------
For the year ended December 31, 2003, MDSI's software and services revenues
were distributed approximately as follows: 66% from the utilities (electric, gas
and water) market, 32% from the telecommunications
7
and cable/broadband market and the remaining 2% from other markets. During the
year ended December 31, 2003 the Company generated approximately 55% of its
revenue from North America, approximately 42% of its revenue from Europe, Middle
East and Africa, and the remaining 3% of its revenue from other parts of the
world.
The Company's customers vary in size from small local companies to large
regional, national and international organizations. During the year ended
December 31, 2003, Telkom South Africa Limited accounted for 18.0% of MDSI's
overall revenue and Transco PLC accounted for 17.1% of MDSI's overall revenue.
The Company anticipates that revenue from each of these two customers will
account for a lesser percentage of MDSI's overall revenue in 2004. See "Forward
Looking Statements". During the year ended December 31, 2002, Telkom South
Africa Limited accounted for 9.1% of MDSI's overall revenue. During the year
ended December 31, 2001, eircom P.L.C. accounted for 11.4% of MDSI overall
revenue.
In the years ended December 31, 2003, 2002, and 2001, approximately 44.3%,
29.1%, and 33.2%, respectively, of the Company's consolidated revenue was
attributable to five or fewer customers. The Company believes that this
percentage will decrease in 2004, but that revenue derived from a limited number
of customers will continue to represent a significant portion of its
consolidated revenue. See "Forward Looking Statements".
In the years ended December 31, 2003, 2002, and 2001, revenue derived from
sales outside of North America accounted for 44.5%, 30.9%, and 23.9% of the
Company's total revenue, respectively. See Note 8 to the Company's Consolidated
Financial Statements. Because the Company's revenue is dependent, in large part,
on significant contracts with a limited number of customers, the percentage of
the Company's revenues that is derived from sales outside of North America has
fluctuated, and may continue to fluctuate, from period-to-period. See
"Business-Risk Factors - Dependence on Large Contracts and Concentration of
Customers" and "Forward-Looking Statements."
Product Development
Mobile workforce management applications must adapt to rapid technological
change and increasing user requirements. Accordingly, the Company must be able
to provide new functionality and to modify and enhance existing functionality on
a timely and continuing basis in order to be competitive. To accomplish this
objective, the Company's strategy is to utilize proven technology to further
enhance its existing products and to create new products. Where appropriate, the
Company may acquire or license complementary technology developed by third
parties for integration into the Company's products.
The Company believes that its highly qualified software development
personnel provide MDSI with a competitive advantage. MDSI personnel have
considerable experience and expertise in the development of mobile workforce
management applications specifically designed for use with a wireless data
network, as well as in the integration of these applications with a customer's
corporate information system. MDSI's product development personnel employ
modular software architecture, object-oriented software development and
graphical user interface design technologies to develop scaleable, modular,
configurable products. MDSI personnel have expertise in software technology,
wireless and wireline communications technologies, computer environments and
corporate information systems integration. They also have considerable expertise
in radio system design and implementation. MDSI believes that this combination
of expertise in multiple disciplines has allowed and will continue to allow the
Company to design and develop mobile workforce management solutions that can be
implemented in a timely and cost-effective manner. Management believes that
timely and continuing product development is critical to the Company's success
and plans to continue to allocate significant resources to product development.
During the fiscal years ended December 31, 2003, 2002, and 2001, the
Company's research and development expenses were $5.5 million, or 11.6% of
revenue, $5.5 million, or 14.4% of revenue and $7.3 million, or 16.2% of
revenue, respectively. The Company intends to continue committing a significant
portion of its revenues to enhance existing products and develop new products.
In addition the Company expects to increase its research and development
expenditures during 2004. See "Forward-Looking Statements."
8
Sales and Marketing
The Company markets its products through a direct sales force as well as
through strategic marketing arrangements with independent software vendors, and
systems integrators.
Direct Sales Force. MDSI's sales personnel are knowledgeable about the
Company's products and current industry and enterprise-specific application
issues. The Company organizes its sales personnel by both vertical and
geographic market. The Company's sales personnel employ their expertise to
develop long-term consultative relationships with customers in order to identify
the needs of the customer and provide specific and effective solutions. To date,
substantially all of the Company's revenue has been generated by direct sales
activities.
Independent Software Vendors. MDSI establishes relationships with other
independent software vendors that sell complementary products, such as billing,
customer relationship management, or outage management solutions, into MDSI's
markets. The relationships typically involve MDSI and the vendors establishing a
standard integration of their products, then jointly identifying and executing
on sales prospects for the integrated solution. The Company has established a
variety of such relationships with respect to Advantex and one such relationship
for its MDSI ideligo product, with Siebel Systems Inc. In some cases,
relationships have been formalized through written agreements, while others
remain informal.
Systems Integrators. MDSI also establishes strategic relationships with
systems integrators that work in the Company's markets to provide end-to-end
solutions on a customer-by-customer basis or as an integrated product offering
for the vertical market. In either case, MDSI works with the integrator to
assist in the sales process and to integrate MDSI's products with the other
component software applications. To date, MDSI has worked with Cap Gemini Ernst
& Young LLP, Accenture LLP, IBM Business Consulting Services, CGI Group Inc.,
and Atos Origin (formerly SchlumbergerSema), amongst others. In some cases the
relationships have been formalized through written agreements, while others
remain informal. In the future, MDSI intends to involve systems integrators in
providing the implementation work surrounding customer installations. See
"Forward-Looking Statements."
Competition
The markets for MDSI's Advantex and MDSI ideligo applications are highly
competitive. Numerous factors affect the Company's competitive position,
including price, product features, product performance and reliability, ease of
use, product scalability, product availability on multiple platforms (both
server and mobile workstation), ability to implement solutions domestically and
internationally while meeting customer schedules, integration of products with
other enterprise solutions, availability of project consulting services and
timely ongoing customer service and support.
MDSI has a number of competitors, both small companies attempting to
establish a business in the Company's markets and large companies attempting to
diversify their product offerings. In addition, some of the Company's potential
customers develop software solutions internally, which may delay or eliminate
the requirement for suppliers such as the Company. Current or potential
competitors may establish cooperative arrangements among themselves or with
third parties to increase the ability of their products to address customer
requirements. In general, the Company expects competition to intensify as
acceptance and awareness of the benefits of such applications and their
associated enabling wireless technologies continue.
Certain of the Company's competitors have substantially greater financial,
technical, marketing and distribution resources than the Company. As a result,
they may be able to respond more quickly to new or emerging technologies and
changing customer requirements, or to devote greater resources to the
development and distribution of existing products. There can be no assurance
that the Company will be able to compete successfully against current or future
competitors or alliances of such competitors, or that competitive pressures
faced by the Company will not have a material adverse effect on its business,
financial condition, operating results and cash flows.
The Company believes that in the utilities, telecommunications and,
cable/broadband industry segments the most important competitive factors are the
reputation of the supplier and its implementation track record. MDSI
9
believes that its reputation and long, successful track record in these markets
gives it a competitive advantage in this regard.
The Company primarily competes in the utilities market with Utility
Partners, L.C., Intergraph Corporation, Axiom Corporation, ClickSoftware, Inc.,
CGI Group Inc. (via its acquisition of Cognicase, Inc., owner of MDSI competitor
M3i Systems, Inc.), ViryaNet Ltd., Oracle Corporation, Itron Inc. (via its
acquisition of e-Mobile Data Inc.), and a.p.solve Limited. The Company has
several competitors in the telecommunications and cable/broadband markets. The
Company's primary competitor for telecommunications customers is Telcordia
Technologies, Inc., a company that has historical relationships with certain of
the large telecommunications companies. Other competitors include ClickSoftware,
Inc., ViryaNet Ltd., which the Company mostly sees competing for small accounts,
and more recently Accenture FFE. In the cable/broadband market, the Company's
primary competitors are Telcordia Technologies Inc., C-Cor.net Corp., PointServe
Inc., CSG Systems International Inc., and Viryanet Ltd., again mostly for small
accounts.
The Company believes that the principal competitive factors in other field
service markets are the ability to improve the customer service aspects of an
organization's business and increase the productivity of service
representatives. In this market, MDSI sells a wireless enablement product,
called MDSI ideligo, which is largely a subset of Advantex. MDSI ideligo
provides a mobile extension of selected field service application vendors'
solutions. The initial implementation has been with Siebel Systems' Field
Service offering. Other suppliers of wireless enablement products include Aether
Systems Inc., Antenna Systems, Broadbeam Corporation, Everypath Inc., Extended
Systems Incorporated and IBM, as well as a variety of other newer competitors.
Also serving the commercial field service market are enterprise application
solution providers, such as Astea International Inc., Metrix Inc., and
FieldCentrix Inc., in addition to several larger enterprise software companies,
such as Amdocs Limited (which acquired the assets of Clarify), Oracle
Corporation, PeopleSoft Inc., and Siebel Systems Inc. MDSI believes that these
enterprise application vendors offer less comprehensive wireless enablement
solutions than MDSI, and are consequently potential partners for expanding
MDSI's penetration in this market.
Hosting and IT Services
In June 2002, as part of management's strategy to return MDSI's focus to
mobile workforce management in the Company's traditional markets, MDSI entered
into an Exchange Agreement to return ownership of Connectria, a company MDSI
acquired in June 2000 to its former principal shareholders. The services of
MDSI's Hosting and IT Services comprised outsourcing, hosting and consulting,
and ranged from complete outsourcing of an IT department to providing turnkey IT
projects. Connectria's results of operations for 2002, and 2001 are summarized
in MDSI's Consolidated Statements of Operations as Income (Loss) From
Discontinued Operations. See Note 2 of the Company's Consolidated Financial
Statements for more detail regarding this transaction. Except as otherwise
indicated, the financial information in this Annual Report on Form 10-K excludes
the results of discontinued operations. The Company now operates in a single
business segment.
Employees
As of December 31, 2003, the Company had 330 full-time employees, including
156 in operations (including project management, customer support, the Company's
solutions group and certain overhead), 85 in product development and the
Company's product group, 41 in sales and marketing, including employees working
on the Company's MDSI ideligo initiative, and 48 in finance, information
technology, human resources and general administration. None of the Company's
employees is represented by a labor union and the Company believes its employee
relations to be good.
Financial Information About Segments and Geographic Markets
For certain information regarding the Company's reportable segments and
geographic markets, see Note 8 to the consolidated financial statements included
in Item 8 of this Annual Report on Form 10-K.
10
Risk Factors
The Company's business is subject to the following risks. These risks could
cause actual results to differ materially from results projected in any
forward-looking statement in this report.
Potential Fluctuations in Quarterly Operating Results
The Company's results of operations have fluctuated in the past and are
likely to continue to fluctuate from period to period depending on a number of
factors, including the timing and receipt of significant orders, the timing of
completion of contracts, increased cost in the completion of contracts,
increased competition, regulatory and other developments in the Company's
vertical markets, changes in the demand for the Company's products and services,
the cancellation of contracts, difficulties in collection of receivables, the
timing of new product announcements and introductions, difficulties encountered
in the protection of intellectual property rights, changes in pricing policies
by the Company and its competitors, delays in the introduction of products or
enhancements by the Company, expenses associated with the acquisition of
products or technology from third parties, the mix of sales of the Company's
products and services and third party products, seasonality of customer
purchases, personnel changes, political and economic uncertainty, the mix of
international and North American revenue, tax policies, foreign currency
exchange rates and general economic and political conditions.
The Company believes that economic and political developments and trends
have adversely affected and may continue to affect levels of capital spending by
companies in a variety of industries, including companies in the vertical
markets that the Company serves. The current excess of supply in the
telecommunications industry has adversely affected the financial condition of
many telecommunications companies worldwide. In addition, economic conditions
and developments in the energy markets have had an adverse affect on the
financial condition of energy and utility companies in certain geographical
areas of North America. The Company believes that these and other factors have
adversely affected demand for products and services offered by the Company, as
certain prospective and existing customers have delayed or deferred purchasing
decisions or have sought to terminate existing contracts for the Company's
products and services. While the Company believes that economic and political
conditions in certain of its vertical markets show signs of improvement, the
Company believes that economic conditions are likely to continue to affect
demand for the Company's products and services in 2004, particularly demand for
software and related services. Such factors may also increase the amount of
doubtful accounts or adversely affect the likelihood of collection of such
accounts.
The Company relies upon its ability to implement and integrate mobile
workforce management solutions on schedule and to the satisfaction of its
customers. The Company from time to time has experienced certain implementation
and other problems that have delayed the completion of certain projects,
including the failure of third parties to deliver products or services on a
timely basis, delays caused by customers and development delays. Because the
Company currently recognizes revenue on a percentage of completion method,
delays in completion of certain contracts have caused delays in recognition of
revenue and, consequently, unanticipated fluctuations in quarterly results.
There can be no assurance that the Company will be able to complete current
projects or implement future systems on a timely and cost effective basis or
that delays will not result in cancellations of contracts or result in the
imposition of substantial penalties. Any such material delay, cancellation or
penalty could have a material adverse effect upon the Company's business,
financial condition, operating results and cash flows.
Because the Company is unable to forecast with certainty the receipt of
orders for its products and services and the Company's expense levels are
relatively fixed and are based, in part, upon its expectation of future revenue,
if revenue levels fall below expectations as a result of a delay in completing a
contract, the inability to obtain new contracts, the cancellation of an existing
contract or otherwise, operating results are likely to be adversely affected. As
a result, net income may be disproportionately affected because a relatively
small amount of the Company's expenses vary with its revenue.
Based upon all of the foregoing factors, the Company believes that its
quarterly revenue, direct expenses and operating results are likely to vary
significantly in the future, that period-to-period comparisons of the results of
operations are not necessarily meaningful and that such comparisons should not
be relied upon as an indication of future performance. The Company may also
choose to reduce prices or increase spending in response to
11
competition, or to pursue new market opportunities. See "Forward-Looking
Statements". If new competitors, technological advances by existing competitors
or other competitive factors require the Company to reduce its prices or invest
significantly greater resources in research and development efforts, the
Company's operating results in the future may be adversely affected. There can
be no assurance that the Company will be able to grow in future periods or that
it will be able to sustain its level of total revenue or achieve revenue growth
on a quarterly or annual basis. It is likely that in some future quarter the
Company's operating results will be below the expectations of public market
analysts and investors. See "Forward Looking Statements". In such event, the
market price of the Company's Common Shares would likely be materially adversely
affected.
Dependence on Third Party Products and Services
Since 1996, the Company has been, and anticipates that from time to time it
will be, engaged to provide, in addition to its own products and services, third
party hardware, software and services, which the Company purchases from vendors
and sells to its customers. For the years ended December 31, 2003, 2002 and
2001, 9.5%, 6.5%, and 5.5% respectively, of the Company's revenue was
attributable to third party products and services. As the revenue generated from
the supply of third party products and services may represent a significant
portion of certain contracts and the installation and rollout of third party
products is generally at the discretion of the customer, the Company may,
depending on the level of third party products and services provided during a
period, experience large quarterly fluctuations in revenue. See "Forward Looking
Statements". In addition, because the Company's gross margins on third party
products and services are substantially below gross margins historically
achieved on revenue associated with MDSI products and services, large
fluctuations in quarterly revenue from the sale of third party products and
services will result in significant fluctuations in direct costs, gross profits,
operating results, cash flows and other items expressed as a percentage of
revenue.
Lengthy Sales Cycles for Advantex Products
The purchase of a mobile workforce management solution is often a
significant purchase decision for prospective customers and requires the Company
to engage in sales efforts over an extended period of time and to provide a
significant level of education to prospective customers regarding the use and
benefits of such systems. Due in part to the significant impact that the
application of mobile workforce management solutions has on the operations of a
business and the significant commitment of capital required by such a system,
potential customers tend to be cautious in making acquisition decisions. As a
result, the Company's products generally have a lengthy sales cycle ranging from
several months to several years. Consequently, if sales forecasted from a
specific customer for a particular quarter are not realized in that quarter, the
Company may not be able to generate revenue from alternative sources in time to
compensate for the shortfall. The loss or delay of a large contract could have a
material adverse effect on the Company's quarterly financial condition,
operating results and cash flows, which may cause such results to be less than
the Company's or analysts' expectations. Moreover, to the extent that
significant contracts are entered into and required to be performed earlier than
expected, operating results for subsequent quarters may be adversely affected.
In particular, due to economic conditions and developments in the Company's core
markets, the Company has experienced an increase in the time necessary to
complete the negotiation and signing of contracts with some of its customers.
Dependence on Large Contracts and Concentration of Customers
The Company's revenue is dependent, in large part, on significant contracts
from a limited number of customers. During the years ended December 31, 2003,
2002, and 2001, approximately 44.3%, 29.1%, and 33.2% respectively, of the
Company's consolidated revenue was attributable to five or fewer customers.
During the year ended December 31, 2003, TELKOM South Africa Limited accounted
for 18.0% of the Company's consolidated revenue and Transco PLC accounted for
17.1% of the Company's consolidated revenue. During the year ended December 31,
2002 TELKOM South Africa accounted for 9.1% of the Company's consolidated
revenue. During the year ended December 31, 2001, eircom P.L.C. accounted for
11.6% of the Company's consolidated revenue. The Company believes that revenue
derived from current and future large customers will continue to represent a
significant portion of its total revenue. See "Forward-Looking Statements". The
inability of the Company to continue to secure and maintain a sufficient number
of large contracts would have a material adverse effect on the Company's
business, financial condition, operating results and cash flows. Moreover, the
Company's success will
12
depend in part upon its ability to obtain orders from new customers, as well as
the financial condition and success of its customers and general economic
conditions.
The size of a contract for a particular customer can vary substantially
depending on whether the Company is providing only its own products and services
or is also responsible for supplying third party products and services. The
Company recognizes revenue using the percentage of completion method, which the
Company calculates based on total man days incurred compared to total man days
estimated by the Company for completion. Therefore, any significant increase in
the costs required to complete a project, or any significant delay in a project
schedule, could have a material adverse effect on that contract's profitability
and because of the size of each contract, on the Company's overall results of
operations. The Company from time to time has also experienced certain
implementation and other problems that have delayed the completion of certain
projects, including the failure of third parties to deliver products or services
on a timely basis and delays caused by customers. The Company's contracts
generally provide for payments upon the achievement of certain milestones.
Therefore, any significant delay in the achievement of milestones on one or more
contracts would affect the timing of the Company's cash flows and could have a
material adverse effect on the Company's business, financial condition,
operating results and cash flows. Any significant failure by the Company to
accurately estimate the scope of work involved, plan and formulate a contract
proposal, effectively negotiate a favorable contract price, effectively
negotiate the specifications for a workforce management system, properly manage
a project or efficiently allocate resources among several projects could have a
material adverse effect on the Company's business, financial condition,
operating results and cash flows.
Potential Fluctuations in Backlog
The Company's backlog consists of a relatively small number of large
contracts relating to sales of its mobile workforce management and wireless
connectivity software and related equipment and services, and sales of third
party products and services. Due to the long, complex sales process and the mix
of sales of the Company's products and services and third party products and
services, the Company's backlog may fluctuate significantly from
period-to-period. In addition, under the terms of the Company's contracts, the
Company's customers may elect to terminate their contracts with the Company at
any time after notice to the Company or to delay certain aspects of
installation. Due to the relative size of a typical contract compared to the
Company's annual and quarterly revenue, a termination or installation delay of
one or more contracts could have a material adverse effect on the Company's
business, financial condition, operating results and cash flows. Contracts for
software maintenance and support are generally renewable every year and are
subject to renegotiation upon renewal. There can be no assurance that the
Company's customers will renew their maintenance contracts or that renewal terms
will be as favorable to the Company as existing terms.
The Company believes that unfavorable economic conditions and reduced
capital spending by existing and prospective customers have and may continue to
adversely affect demand for the Company's products and services in 2004. In
particular, service providers, utilities companies and telecommunications
companies in North America have been impacted since the latter half of 2000.
While the Company believes that economic conditions in certain of its vertical
markets show signs of improvement, the Company believes that economic conditions
and general trends are likely to continue to delay purchasing and implementation
decisions. If the economic conditions in the United States and Canada worsen or
if a global economic slowdown occurs, the Company may experience reduced
revenues, increased costs, reduced margins and increased risks associated with
the collection of customer receivables, any of which may have a material adverse
impact on its business, operating results, cash flows and financial condition.
Seasonal Variations in Demand
Certain of the vertical markets targeted by the Company include industries
with implementation requirements that vary seasonally. For example, utility
companies in North America generally have decreased implementation activity in
winter months when such utilities face their greatest consumer demand. As a
result, the Company's results of operations may also vary seasonally, and such
variation may be significant.
13
History of Losses and Fixed Operating Expenses
As of December 31, 2003, the Company had an accumulated deficit of $29.9
million. There can be no assurance that the Company will realize revenue growth
or be profitable on a quarterly or annual basis. The Company plans to continue
to allocate significant resources to its operating expenses related to sales and
marketing operations, to fund significant levels of research and development, to
broaden its customer support capabilities and to maintain its administrative
resources. A relatively high percentage of the Company's expenses are fixed in
the short term and the Company's expense levels are based, in part, on its
expectations of future revenue. To the extent that such expenses precede or are
not subsequently followed by increased revenue, the Company's business,
financial condition, operating results and cash flows could be materially
adversely affected. In addition, due to the rapidly evolving nature of its
business and markets, the Company believes that period-to-period comparisons of
financial results are not necessarily meaningful and should not be relied upon
as an indication of future performance.
Integration of Acquisitions
The Company may, when and if the opportunity arises, acquire other
products, technologies or businesses involved in activities, or having product
lines, that are complementary to the Company's business. Acquisitions involve
numerous risks, including difficulties in the assimilation of the operations,
technologies and products of the acquired companies, the diversion of
management's attention from other business concerns, risks associated with
entering markets or conducting operations with which the Company has no or
limited direct prior experience and the potential loss of key employees of the
acquired company. Moreover, there can be no assurance that any anticipated
benefits of an acquisition will be realized. Future acquisitions by the Company
could result in potentially dilutive issuances of equity securities, the
incurrence of debt and contingent liabilities, and write-off of acquired
research and development costs, all of which could materially and adversely
affect the Company's financial condition, results of operations and cash flows.
New Product Development
The Company expects that a significant portion of its future revenue will
be derived from the sale of newly introduced products, including Advantex r7,
and from enhancement of existing products. See "Forward-Looking Statements". The
Company's success will depend in part upon its ability to enhance its current
products on a timely and cost-effective basis and to develop new products that
meet changing market conditions, including changing customer needs, new
competitive product offerings and enhanced technology. There can be no assurance
that the Company will be successful in developing and marketing on a timely and
cost-effective basis new products and enhancements that respond to such changing
market conditions. If the Company is unable to anticipate or adequately respond
on a timely or cost-effective basis to changing market conditions, to develop
new software products and enhancements to existing products, to correct errors
on a timely basis or to complete products currently under development, or if
such new products or enhancements do not achieve market acceptance, the
Company's business, financial condition, operating results and cash flows could
be materially adversely affected. In light of the difficulties inherent in
software development, the Company expects that it will experience delays in the
completion and introduction of new software products.
Management of Growth and Reduction of Workforce
Since its inception, the Company has experienced periods of rapid growth in
product sales, personnel, research and development activities, number and
complexity of products, the number and geographic focus of its targeted vertical
markets and product distribution channels. The total number of employees of the
Company has grown from 9 employees in Canada in February 1993 to 330 employees
located in Canada, the United States and other international locations at
December 31, 2003. The Company also recently expanded the geographical areas in
which it operates. In March and April, 2001, the Company made several
announcements regarding its intention to reduce the size of its work force by
approximately 25% in anticipation of reduced demand for its products and
services due to the general economic slowdown. In July 2002, the Company
completed the sale of its subsidiary Connectria Corporation, reducing the size
of its work force by 71 employees. If the Company resumes its growth in future
periods, such growth may place strains on its management, administrative,
operational and financial
14
resources, as well as increased demands on its internal systems, procedures
and controls. There can be no assurance that the Company will be able to
effectively manage its operations or future growth and expansion into new
markets. Failure to do so could have a material adverse effect on the Company's
business, financial condition, operating results and cash flows.
Dependence on Key Personnel
The Company's performance and future operating results are substantially
dependent on the continued service and performance of its senior management and
key technical and sales personnel. Competition for qualified personnel is
intense, and in light of the Company's performance there can be no assurance
that the Company can retain its key technical, sales and managerial employees or
that it will be able to attract or retain highly-qualified technical and
managerial personnel in the future if demand for the Company's products and
services increase. The loss of the services of any of the Company's senior
management or other key employees or the inability to retain the necessary
technical, sales and managerial personnel could have a material adverse effect
upon the Company's business, financial condition, operating results and cash
flows.
Dependence on Selected Vertical Markets
Since its inception, substantially all of the Company's revenue has been
derived from the sale of products and services to customers in the utility,
telecommunications and cable/broadband markets. The Company anticipates that a
significant portion of its revenue will continue to be generated by sales of
products and services to these markets. Demand for the Company's services in
these markets has fluctuated and is likely to fluctuate in the future. In
additions, the Company believes that recent economic developments and trends
have adversely affected and may continue to adversely affect levels of capital
spending by companies in a variety of industries, including the vertical markets
MDSI serves. The Company believes that these and other factors may cause
potential and existing customers to delay or defer purchasing decisions or seek
to terminate or delay payment under existing contracts for the Company's
products and services. Such factors may also increase the amount of doubtful
accounts or adversely affect the likelihood of collection of such accounts. See
"Forward-Looking Statements." A decline in demand for the Company's products in
these markets as a result of economic conditions, competition, technological
change or otherwise, would have a material adverse effect on the Company's
business, financial condition, operating results and cash flows. There can be no
assurance that the Company will be able to diversify its product offerings or
revenue base by entering into new vertical markets or continue to earn revenue
in current markets.
Dependence on Marketing Relationships
The Company's products are marketed by the Company's direct field sales
force as well as by third parties that act as lead generators or with whom the
Company acts together as a co-marketer or co-seller. The Company's existing
agreements with such partners are nonexclusive and may be terminated by either
party without cause. Such organizations are not within the control of the
Company, are not obligated to purchase products from the Company and may also
represent and sell competing products. There can be no assurance that the
Company's existing partners will continue to provide the level of services and
technical support necessary to provide a complete solution to the Company's
customers or that they will not emphasize their own or third-party products to
the detriment of the Company's products. The loss of these partners, the failure
of such parties to perform under agreements with the Company or the inability of
the Company to attract and retain new resellers with the technical, industry and
application experience required to market the Company's products successfully
could have a material adverse effect on the Company's business, financial
condition, operating results and cash flows. The Company may enter into certain
joint ventures in order to facilitate its expansion into other vertical markets
and geographic areas. See "Forward Looking Statements". To the extent that such
joint ventures are not successful, there could be a material adverse effect on
the Company's business, financial condition, operating results and cash flows.
Competition
The markets for mobile workforce management applications, wireless
connectivity software, mobile data network equipment and mobile computing
devices are highly competitive. Numerous factors affect MDSI's competitive
position, including price, product features, product performance and
reliability, ease of use, product scalability, product availability on multiple
platforms (server, wireless carrier, and mobile workstation), ability to
15
implement mobile workforce management solutions domestically and internationally
while meeting customer schedules, integration of products with other enterprise
solutions, availability of project consulting services and timely ongoing
customer service and support. Within these markets, there are a small number of
new ventures, either small companies attempting to establish a business in this
market or large companies attempting to diversify their product offerings. MDSI
expects such competition to intensify as acceptance and awareness of mobile
workforce management solutions continue. See "Forward Looking Statements". In
addition, a small number of MDSI's potential customers develop software
solutions internally, thereby eliminating the requirement for suppliers such as
MDSI. Current or potential competitors may establish cooperative arrangements
among themselves or with third parties to increase the ability of their products
to address customer requirements. Certain of MDSI's competitors have
substantially greater financial, technical, marketing and distribution resources
than MDSI. As a result, they may be able to respond more quickly to new or
emerging technologies and changing customer requirements, or to devote greater
resources to the development and distribution of existing products. There can be
no assurance that MDSI will be able to compete successfully against current or
future competitors or alliances of such competitors, or that competitive
pressures faced by MDSI will not materially adversely affect its business,
financial condition, operating results and cash flows.
The Company primarily competes in the utilities market with Utility
Partners, L.C. (which recently emerged from Chapter 11 bankruptcy), CGI Group
Inc. (via its acquisition of Cognicase, Inc., owner of MDSI competitor M3i
Systems, Inc.), Intergraph Corporation, Axiom Corporation, Oracle Corporation,
Itron Inc. (via its acquisition of e-Mobile Data Inc.) a.p.solve Limited and
ViryaNet Ltd. The Company has several competitors in the telecommunications and
cable/broadband markets. The Company's primary competitor for telecommunications
customers is Telcordia Technologies, Inc., a company that has historical
relationships with certain of the large telecommunications companies. Other
competitors include ClickSoftware, Inc., ViryaNet Ltd., which the Company mostly
sees competing for small accounts, and more recently Accenture FFE. In the
cable/broadband market, the Company's primary competitors are Telcordia
Technologies Inc., C-Cor.net Corp., PointServe Inc., CSG Systems International
Inc., and Viryanet Ltd., again mostly for small accounts.
The Company believes that the principal competitive factors in other field
service markets are the ability to improve the customer service aspects of an
organization's business and increase the productivity of service
representatives. In this market, MDSI sells a wireless enablement product,
called MDSI ideligo, that is largely a subset of Advantex. MDSI ideligo provides
a mobile extension of selected field service application vendors' solutions. The
initial implementation has been with Siebel Systems' Field Service offering.
Other wireless enablement products are offered by Aether Systems Inc., Antenna
Systems, Broadbeam Corporation, Everypath Inc., Extended Systems Incorporated
and IBM, as well as a variety of other newer competitors. Also serving the
commercial field service market are enterprise application solution providers,
such as Astea International Inc., Metrix Inc., and FieldCentrix Inc., in
addition to several larger enterprise software companies, such as Amdocs Limited
(which acquired the assets of Clarify), Oracle Corporation, PeopleSoft Inc., and
Siebel Systems Inc. MDSI believes that these enterprise application vendors
offer less comprehensive wireless enablement solutions than MDSI, and are
consequently potential partners for expanding MDSI's penetration in this market.
Risk of Product Defects and Implementation Failure
Software products, including those offered by the Company, contain
undetected errors or omissions. Software products, when implemented, installed,
configured and customized, may also fail to perform according to customer
expectations due to the failure by the customer to properly specify its system
requirements, failure by the customer to properly operate or interact with the
system, operator error, technical problems associated with the customer's host
system, or the resistance of the customer's workforce to the adoption of new
technology. In addition, software products may fail to perform according to
expectations due to the failure by the Company to properly design the system to
operate in the environment, infrastructure or communications network in which
the product is to be used. There can be no assurance that, despite testing by
the Company and by current and potential customers, that the Company's products
will be free of errors or that such products will perform according to
expectations with respect to response time, ability to communicate over multiple
networks, scalability, stability and ease of use. Such errors and failures could
result in loss of or delay in market acceptance of the Company's products, the
cancellation of contracts or the imposition of substantial penalties, any of
which could have a material adverse effect on the Company's business, financial
condition, operating results and cash flows.
16
Proprietary Technology
The Company's success is dependent on its ability to protect its
intellectual property rights. The Company relies principally upon a combination
of copyright, trademark, trade secret and patent laws, non-disclosure agreements
and other contractual provisions to establish and maintain its rights. To date,
the Company has been granted trademark registrations or has registrations
pending in the United States, Canada and the European Community for the MDSI,
Advantex, Wireless@work and Compose trademarks. MDSI has also filed several
patent applications in the United States and internationally covering various
aspects of its technology, and has recently been granted a U.S. patent for
certain aspects of Compose. The earliest of these applications has been granted
and will be issued as a U.S. patent, and the remainder are pending a substantive
examination. As part of its confidentiality procedures, the Company generally
enters into nondisclosure and confidentiality agreements with each of its key
employees, consultants, distributors, customers and corporate partners, to limit
access to and distribution of its software, documentation and other proprietary
information. There can be no assurance that the Company's efforts to protect its
intellectual property rights will be successful. Despite the Company's efforts
to protect its intellectual property rights, unauthorized third parties,
including competitors, may be able to copy or reverse engineer certain portions
of the Company's software products, and use such copies to create competitive
products. Policing the unauthorized use of the Company's products is difficult,
and, while the Company is unable to determine the extent to which piracy of its
software products exists, the risk of software piracy can be expected to
continue. In addition, the laws of certain countries in which the Company's
products are or may be licensed may not protect its products and intellectual
property rights to the same extent as do the laws of Canada and the United
States. As a result, sales of products by the Company in such countries may
increase the likelihood that the Company's proprietary technology is infringed
upon by unauthorized third parties. In addition, because third parties may
attempt to develop similar technologies independently, the Company expects that
software product developers will be increasingly subject to infringement claims
as the number of products and competitors in the Company's industry segments
grows and the functionality of products in different industry segments overlaps.
See "Forward-Looking Statements". Although the Company believes that its
products do not infringe on the intellectual property rights of third parties,
there can be no assurance that third parties will not bring infringement claims
(or claims for indemnification resulting from infringement claims) against the
Company with respect to copyrights, trademarks, patents and other proprietary
rights. Any such claims, whether with or without merit, could be time consuming,
result in costly litigation and diversion of resources, cause product shipment
delays or require the Company to enter into royalty or licensing agreements.
Such royalty or licensing agreements, if required, may not be available on terms
acceptable to the Company or at all. A claim of product infringement against the
Company and failure or inability of the Company to license the infringed or
similar technology could have a material adverse effect on the Company's
business, financial condition, operating results and cash flows.
Dependence on Third Parties
Certain contracts require the Company to supply, coordinate and install
third party products and services or employ subcontractors. The Company believes
that there are a number of acceptable vendors and subcontractors for most of its
required products, but in many cases, despite the availability of multiple
sources, the Company may select a single source in order to maintain quality
control and to develop a strategic relationship with the supplier or may be
directed by a customer to use a particular product. The failure of a third party
supplier or subcontractor to provide a sufficient and reliable supply of parts
and components or products and services in a timely manner could have a material
adverse effect on the Company's results of operations. In addition, any increase
in the price of one or more of these products, components or services could have
a material adverse effect on the Company's business, financial condition,
operating results and cash flows. Additionally, under certain circumstances, the
Company supplies products and services to a customer through a larger company
with a more established reputation acting as a project manager or systems
integrator. In such circumstances, the Company has a sub-contract to supply its
products and services to the customer through the prime contractor. In these
circumstances, the Company is at risk that situations may arise outside of its
control that could lead to a delay, cost over-run or cancellation of the prime
contract which could also result in a delay, cost over-run or cancellation of
the Company's sub-contract. The failure of a prime contractor to supply its
products and services or perform its contractual obligations to the customer or
MDSI in a timely manner could have a material adverse effect on the Company's
financial condition, results of operations and cash flows.
17
Exchange Rate Fluctuations
Because the Company's reporting and functional currency is the United
States dollar, its operations outside the United States face additional risks,
including fluctuating currency values and exchange rates, hard currency
shortages and controls on currency exchange. The Company has operations outside
the United States and is hedged, to some extent, from foreign exchange risks
because of its ability to purchase, develop and sell in the local currency of
those jurisdictions. In addition, the Company has entered into foreign currency
contracts under certain circumstances to reduce the Company's exposure to
foreign exchange risks. There can be no assurance, however, that the attempted
matching of foreign currency receipts with disbursements or hedging activities
will adequately moderate the risk of currency or exchange rate fluctuations
which could have a material adverse effect on the Company's business, financial
condition, operating results and cash flows. In addition, to the extent the
Company has operations outside the United States, the Company is subject to the
impact of foreign currency fluctuations and exchange rate changes on the
Company's reporting in its financial statements of the results from such
operations outside the United States. During 2003, the relative weakness of the
U.S. dollar contributed to an increase in direct costs as a percentage of
revenue, as the majority of direct costs are incurred in Canadian dollars.
Risks Associated with International Operations
In the years ended December 31, 2003, 2002, and 2001 revenue derived from
sales outside of North America accounted for approximately 44.5%, 30.9%, and
23.9%, respectively, of the Company's total revenue. Because the Company's
revenue is dependent, in large part, on significant contracts with a limited
number of customers, the percentage of the Company's revenues that is derived
from sales outside of North America has fluctuated, and may continue to
fluctuate, from period-to-period. The Company believes that its ability to grow
and be profitable will require additional expansion of its sales in foreign
markets, and that revenue derived from international sales will account for a
significant percentage of the Company's revenue for the foreseeable future. This
expansion has required and will continue to require significant management
attention and financial resources. The inability of the Company to expand
international sales in a timely and cost-effective manner could have a material
adverse effect on the Company's business, financial condition, operating results
and cash flows. There are a number of risks inherent in the Company's
international business activities, including changes in regulatory requirements,
tariffs and other trade barriers, costs and risks of localizing products for
foreign markets, longer accounts receivable payment cycles, difficulties in
collecting payments, reduced protection for intellectual property, potentially
adverse tax consequences, limits on repatriation of earnings, the burdens of
complying with a wide variety of foreign laws, nationalization, war,
insurrection, terrorism and other political risks and factors beyond the
Company's control. Fluctuations in currency exchange rates could adversely
affect sales denominated in foreign currencies and cause a reduction in revenue
derived from sales in a particular country. In addition, revenue of the Company
earned abroad may be subject to taxation by more than one jurisdiction, thereby
adversely affecting the Company's earnings. There can be no assurance that such
factors will not materially adversely affect the Company's future international
sales and, consequently, the Company's business, financial condition, operating
results and cash flows.
As a result of the international scope of the Company's operations, the
Company's business is carried out under an international corporate structure
that has been designed in part to optimize tax costs to the Company. The
effectiveness of this international corporate structure from a tax perspective,
and the corresponding risk of any negative financial impact on the Company from
the imposition of tax liability on the Company in the event such structure is
not effective, depends on the quality of the Company's internal compliance and
implementation procedures, as well as external regulatory factors such as
investigations, audits and decisions by tax officials and changes in tax laws,
regulations and policies.
Product Liability
The license and support of products by the Company may entail the risk of
exposure to product liability claims. A product liability claim brought against
the Company or a third party that the Company is required to indemnify, whether
with or without merit, could have a material adverse effect on the Company's
business, financial condition, operating results and cash flows. The Company
carries insurance coverage for product liability claims which it believes to be
adequate for its operations. See "Forward-Looking statements."
18
Anti-Takeover Effects; Investment Canada Act
An investment in the Common Shares of the Company which results in a change
of control of the Company may, under certain circumstances, be subject to review
and approval under the Investment Canada Act if the party or parties acquiring
control is not a Canadian person (as defined therein). Therefore, the Canadian
regulatory environment may have the effect of delaying, deferring or preventing
a change in control of the Company.
The Company is organized under the laws of Canada and, accordingly, is
governed by the Canada Business Corporations Act (the "CBCA"). The CBCA differs
in certain material respects from laws generally applicable to United States
corporations and shareholders, including the provisions relating to interested
directors, mergers and similar arrangements, takeovers, shareholders' suits,
indemnification of directors and inspection of corporate records.
In December 1998, the Company implemented a shareholder rights plan (the
"Plan"). The Plan had a 5-year term and was subsequently renewed in December
2003 for a further 5-year term. Pursuant to the renewed Plan, shareholders of
record on December 17, 2003 received a dividend of one right to purchase, for
CDN$140, one Common Share of the Company. The rights are attached to the
Company's Common Shares and will also become attached to Common Shares issued in
the future. The rights will not be traded separately and will not become
exercisable until the occurrence of a triggering event, defined as an
accumulation by a single person or group of 20% or more of the Company's Common
Shares. After a triggering event, the rights will detach from the Common Shares.
If the Company is then merged into, or is acquired by, another corporation, the
Company may either (i) redeem the rights or (ii) permit the rights holder to
receive in the merger Common Shares of the Company equal to two times the
exercise price of the right (i.e., CDN $280). In the latter instance, the rights
attached to the acquirer's stock become null and void. The effect of the Plan is
to make a potential acquisition of the Company more expensive for the acquirer
if, in the opinion of the Company's Board of Directors, the offer is inadequate.
Pursuant to regulatory requirements, the renewed Plan must be approved by the
Company's shareholders at a meeting to be held 6 months of implementation of the
renewed Plan.
As a result of being a reporting issuer in certain provinces of Canada, the
Company is required to file certain reports in such jurisdictions. As part of
such reports, the Company is required to file consolidated financial statements
prepared in accordance with generally accepted accounting principles ("GAAP") as
applied in Canada . Canadian and US GAAP differ in certain respects, including
the treatment of certain reorganization costs, acquired research and development
costs, and the expensing of stock options. As a result, the Company's
Consolidated Financial Statements included in this report may differ materially
from the financial statements filed by the Company in Canada.
Market for the Common Shares; Potential Volatility of Stock Price
The trading prices of the Common Shares have been subject to wide
fluctuations since trading of the Company's shares commenced in December 1995.
There can be no assurance that the market price of the Common Shares will not
significantly fluctuate from its current level. The market price of the Common
Shares may be subject to wide fluctuations in response to quarterly variations
in operating results, announcements of technological innovations or new products
by the Company or its competitors, changes in financial estimates by securities
analysts, or other events or factors. In addition, the financial markets have
experienced significant price and volume fluctuations for a number of reasons,
including the failure of the operating results of certain companies to meet
market expectations that have particularly affected the market prices of equity
securities of many high-technology companies that have often been unrelated to
the operating performance of such companies. These broad market fluctuations, or
any industry-specific market fluctuations, may adversely affect the market price
of the Common Shares. In the past, following periods of volatility in the market
price of a company's securities, securities class action litigation has often
been instituted against such a company. Such litigation, whether with or without
merit, could result in substantial costs and a diversion of management attention
and resources, which would have a material adverse effect on the Company's
business, financial condition, operating results and cash flows.
19
Item 2: Properties
The Company occupies approximately 96,000 square feet of leased office
space at its headquarters in Richmond, British Columbia for its product
development, marketing, support, administration and sales operations. The lease
expires on November 30, 2008 with two options to renew for five years each. The
Company has sub-let approximately 16,000 square feet of this space until
November 30, 2008. The Company also maintains an office in Itasca, Illinois. The
Itasca office lease is for approximately 29,000 square feet and and has been
terminated effective November 30, 2004. The Company has sub-let approximately
17,600 feet of this space until November 30, 2004. The Company believes that the
current office space under lease less the current subleased portions is adequate
to meet its needs for the foreseeable future.
Item 3: Legal Proceedings
Mobile Data Solutions Inc. v. Citizens Telecom Services Co., L.L.C. - U.S.
District Court, Texas District Court Collin County - 366 Judicial District
(Docket No. 366-01914-00). On February 2, 2004, MDSI and Citizens settled this
lawsuit. Under the settlement agreement, each company has fully discharged the
other from all outstanding legal claims without further financial compensation.
From time to time, the Company is a party to other litigation and claims
incident to the ordinary course of its business. While the results of litigation
and claims cannot be predicted with certainty, the Company believes that the
final outcome of such matters will not have a material adverse effect on the
Company's business, results of operations, financial condition or liquidity.
Item 4: Submission of Matters to a Vote of Security Holders
Not applicable.
20
Part II
Item 5: Market for Registrant's Common Equity And Related Stockholder Matters
Price Range of Common Shares
The Company's Common Shares began trading on The Toronto Stock Exchange and
on the Montreal Exchange under the symbol "MMD" on December 20, 1995 and began
trading on the Nasdaq National Market System under the symbol "MDSIF" on
November 26, 1996. The Company changed its Nasdaq National Market System trading
symbol to "MDSI" in April 1999. In December 1999, the Company's listing on the
Montreal Exchange was automatically withdrawn as part of a restructuring plan of
the Canadian stock exchanges. Prior to December 20, 1995, there was no public
market for the Common Shares. The following table sets forth, for the periods
indicated, the high and low sale prices for the Common Shares as reported on The
Toronto Stock Exchange and the Nasdaq National Market System with their
equivalent U.S. dollar amounts where applicable.
The Toronto Stock Exchange Nasdaq National Market
---------------------------------------------------------- ----------------------------
US$(1) CDN$ US$ US$
---------------------------------------------------------- ----------------------------
High Low High Low High Low
-------------- -------------- -------------- -------------- -------------- -------------
2002
First Quarter............. 4.29 3.31 6.76 5.22 4.25 3.40
Second Quarter............ 3.93 3.10 6.21 4.87 3.95 3.05
Third Quarter............. 3.48 2.83 5.50 4.47 3.62 2.87
Fourth Quarter............ 3.55 2.82 5.60 4.44 3.60 2.78
2003
First Quarter............. 4.28 3.33 6.00 4.67 3.91 3.00
Second Quarter............ 5.18 3.39 7.25 4.75 5.35 3.00
Third Quarter............. 6.07 3.88 8.50 5.43 6.33 3.85
Fourth Quarter............ 5.60 4.12 7.85 5.77 6.12 4.25
- -----------------
(1) US dollar amounts have been translated using the average noon buying rate
for Canadian dollars for the relevant quarter. See "Exchange Rates."
Shareholders
As of December 31, 2003 the Company had approximately 347 shareholders of
record.
Dividends
The Company has never paid dividends on its Common Shares. The Company
currently intends to retain earnings for use in its business and does not
anticipate paying any dividends in the foreseeable future. The Company's current
bank credit agreement prohibits the payment of dividends without prior consent
of the lender.
Recent Sales of Unregistered Securities
The Company did not issue any unregistered securities during the fiscal
year ended December 31, 2003.
21
Exchange Controls
There are no government laws, decrees or regulations in Canada which
restrict the export or import of capital or which affect the remittance of
dividends, interest or other payments to non-resident holders of the Company's
Common Shares. Any remittances of dividends to United States residents and to
other non-residents are, however, subject to withholding tax. See "Taxation"
below.
Taxation
Canadian Federal Income Taxation
We consider that the following summary fairly describes in general the
principal Canadian federal income tax consequences applicable to a holder of our
common shares who at all times deals at arm's length with us, who holds all
common shares as capital property, who is resident in the United States, who is
not a resident of Canada and who does not use or hold, and is not deemed to use
or hold, his common shares of MDSI Mobile Data Solutions Inc. in connection with
carrying on a business in Canada (a "non-resident holder"). It is assumed that
the common shares will at all material times be listed on a stock exchange that
is prescribed for purposes of the Income Tax Act (Canada) (the "ITA") and
regulations thereunder. The Canadian federal income tax consequences applicable
to holders of the Company's common shares will not change if we are deemed
inactive by the Toronto Stock Exchange. Investors should however be aware that
the Canadian federal income tax consequences applicable to holders of the
Company's common shares will change if we cease to be listed on a prescribed
stock exchange like the Toronto Stock Exchange. Accordingly, holders and
prospective holders of our common shares should consult with their own tax
advisors with respect to the income tax consequences of them purchasing, owning
and disposing of the Company's common shares should the Company cease to be
listed on a prescribed stock exchange.
This summary is based upon the current provisions of the ITA, the
regulations thereunder, the Canada-United States Tax Convention as amended by
the Protocols thereto (the "Treaty") as at the date of the registration
statement and the currently publicly announced administrative and assessing
policies of the Canada Revenue Agency (the "CRA"). This summary does not take
into account Canadian provincial income tax consequences. This description is
not exhaustive of all possible Canadian federal income tax consequences and does
not take into account or anticipate any changes in law, whether by legislative,
governmental or judicial action. This summary does, however, take into account
all specific proposals to amend the ITA and regulations thereunder, publicly
announced by the Government of Canada to the date hereof.
This summary does not address potential tax effects relevant to the Company
or those tax considerations that depend upon circumstances specific to each
investor. Accordingly, holders and prospective holders of our common shares
should consult with their own tax advisors with respect to the income tax
consequences to them of purchasing, owning and disposing of the Company's common
shares.
Dividends
The ITA provides that dividends and other distributions deemed to be
dividends paid or deemed to be paid by a Canadian resident corporation (such as
MDSI Mobile Data Solutions Inc.) to a non-resident of Canada shall be subject to
a non-resident withholding tax equal to 25% of the gross amount of the dividend
or deemed dividend. Provisions in the ITA relating to dividend and deemed
dividend payments and gains realized by non-residents of Canada, who are
residents of the United States, are subject to the Treaty. The Treaty may reduce
the withholding tax rate on dividends as discussed below.
Article X, of the Treaty as amended by the US-Canada Protocol ratified on
December 16, 1997 provides a 5% withholding tax on gross dividends or deemed
dividends paid to a United States corporation which beneficially owns at least
10% of our voting stock paying the dividend. In cases where dividends or deemed
dividends are paid to a United States resident (other than a corporation) or a
United States corporation which beneficially owns less than 10% of our voting
stock, a withholding tax of 15% is imposed on the gross amount of the dividend
or deemed dividend paid. The Company will be required to withhold any such tax
from the dividend and remit the tax directly to CRA for the account of the
investor.
22
The reduction in withholding tax from 25%, pursuant to the Treaty, will not
be available:
(a) if the shares in respect of which the dividends are paid are
effectively connected with a permanent establishment or fixed base
that the holder has in Canada, or
(b) the holder is a U.S. LLC which is not subject to tax in the U.S.
The Treaty generally exempts from Canadian income tax dividends paid to a
religious, scientific, literary, educational or charitable organization or to an
organization exclusively administering a pension, retirement or employee benefit
fund or plan, if the organization is resident in the U.S. and is exempt from
income tax under the laws of the U.S.
Capital Gains
A non-resident holder is not subject to tax under the ITA in respect of a
capital gain realized upon the disposition of our share unless the share
represents "taxable Canadian property" to the holder thereof. The Company's
Common shares will be considered taxable Canadian property to a non-resident
holder only if:
(a) the non-resident holder,
(b) persons with whom the non-resident holder did not deal at arm's
length, or
(c) the non-resident holder and persons with whom he did not deal at arm's
length,
owned 25% or more of the Company's issued shares of any class or series at
any time during the five year period preceding the disposition. In the case of a
non-resident holder to whom the Company's shares represent taxable Canadian
property and who is resident in the United States, no Canadian taxes will
generally be payable on a capital gain realized on such shares by reason of the
Treaty unless:
(a) the value of such shares is derived principally from real property
(including resource property) situated in Canada,
(b) the holder was resident in Canada for 120 months during any period of
20 consecutive years preceding the disposition, the holder was
resident in Canada at any time during the 10 years immediately
preceding the disposition and the shares were owned by him when he
ceased to be a resident of Canada,
(c) they formed part of personal property constituting business property
or were otherwise effectively connected with a permanent establishment
or fixed base that the holder has or had in Canada within the 12
months preceding the disposition, or
(d) the holder is a U.S. LLC which is not subject to tax in the U.S.
If subject to Canadian tax on such a disposition, the taxpayer's capital
gain (or capital loss) from a disposition is the amount by which the taxpayer's
proceeds of disposition exceed (or are exceeded by) the aggregate of the
taxpayer's adjusted cost base of the shares and reasonable expenses of
disposition. For Canadian income tax purposes, the "taxable capital gain" is
equal to one-half of the capital gain.
23
Item 6: Selected Financial Data (unaudited)
The following selected consolidated financial data of the Company is
qualified in its entirety by reference to and should be read in conjunction with
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the consolidated financial statements and notes thereto
included elsewhere in this report. The consolidated statements of operations
data for the years ended December 31, 2003, 2002 and 2001 and the consolidated
balance sheet data at December 31, 2003 and 2002 are derived from and are
qualified by reference to the Company's audited consolidated financial
statements. This selected consolidated financial data is presented in conformity
with generally accepted accounting principles in the United States.
Years ended December 31,
2003 2002 2001 2000 1999
-------------- ------------- -------------- ------------- ------------
(In thousands, except per share data)
Statement of Operations Data:
Revenue $ 47,385 $ 38,211 $ 44,941 $ 51,852 $ 52,000
Gross profit 24,022 21,192 23,894 30,772 29,449
Operating (loss) income (2,884) (2,933) (11,167) 912 7,624
(Loss) income from continuing (3,643) (2,047) (13,240) (24) 4,731
operations for the year
(1)(2)(3)
Diluted (loss) earnings per common
share $ (0.44) $ (0.23) $ (1.61) $ (0.08) $ 0.11
Weighted average shares outstanding
8,201 8,481 8,623 8,527 9,101
-------------- ------------- -------------- ------------- ------------
Balance Sheet Data: 2003 2002 2001 2000 1999
-------------- ------------- -------------- ------------- ------------
Cash and cash equivalents $ 15,827 $ 11,017 $ 13,176 $ 12,865 $ 14,750
Working capital 8,576 8,296 11,374 23,305 23,151
Total assets 37,071 37,031 44,263 60,517 50,191
Non-current liabilities 982 1,914 3,050 6,738 3,399
Stockholders' equity 15,942 19,464 23,916 37,404 34,916
- --------------------------
(1) Net loss for the year ended December 31, 2001 includes charges of
$6,105,927 with respect to restructuring of certain operations, $2,749,992
for the impairment in valuation of investments in three private companies,
$1,558,578 for the impairment in valuation of intangible assets acquired on
acquisition of Alliance Systems Incorporated, $165,000 for the impairment
in valuation of a commercial web site domain name, and $2,938,195 for bad
debts with respect to several doubtful accounts.
(2) Net income from continuing operations for the year ended December 31, 2000
includes charges of $1,691,028 for costs of merger with respect to the
Company's merger with Connectria, and $985,000 for bad debts with respect
to one doubtful account.
(3) Net loss from continuing operations for the year ended December 31, 2003
includes charges related to the evaluation of strategic options for the
Company of $1,275,120, and $3,069,860 for bad debts with respect to several
doubtful accounts.
24
Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion contains "forward-looking statements" within the
meaning of Section 21E of the Securities Exchange Act of 1934. Actual results
could differ materially from those projected in the forward-looking statements
as a result of the Company's ability to accelerate or defer operating expenses,
achieve revenue in a particular period, hire new personnel and other factors set
forth under "Business-Risk Factors" in Item 1 of this Annual Report on Form
10-K. In particular, note the Business-Risk Factors entitled "Potential
Fluctuations in Quarterly Operating Results", "Lengthy Sales Cycles for Advantex
Products", "Dependence on Large Contracts and Concentration of Customers",
"History of Losses and Fixed Expenses", "Integration of Acquisitions,"
"Litigation" and "Competition." Also see "Forward-Looking Statements."
Unless otherwise noted, all financial information in this report is
expressed in the Company's functional currency, United States dollars. See Item
7A, "Quantitative and Qualitative Disclosures About Market Risk".
Overview
MDSI develops, markets, implements and supports mobile workforce management
and wireless connectivity software for use by a wide variety of companies that
have substantial mobile workforces, such as utilities, telecommunications and
cable/broadband companies. MDSI's products are used by such companies in
conjunction with public and private wireless data communications networks to
provide comprehensive solutions for the automation of business processes
associated with the scheduling, dispatching and management of a mobile
workforce. The Company's products are designed to provide a cost-effective
method for companies with mobile workers to utilize data communications to
communicate with such workers, and for such workers to interface on a real-time
basis with their corporate information systems.
The Company's revenue is derived from (i) software and services, consisting
of the licensing of software and provision of related services, including
project management, installation, integration, configuration, customization and
training; (ii) maintenance and support, consisting of the provision of
after-sale support services as well as hourly, annual or extended maintenance
contracts; and (iii) third party products and services, consisting of the
provision of non-MDSI products and services as part of the total contract.
Strategic Alternatives
The Company has retained Bear, Stearns & Co. Inc. as financial advisor to
the Board of Directors. The Board is evaluating potential business combinations,
financing and other strategic alternatives to help the Company offer enhanced
products and services to its customers and maximize shareholder value. The
Company continues to conduct the strategic review process. The process is
ongoing, and to date the Company has not entered any transaction as a result of
the strategic review.
Restructuring
The Company believes that economic conditions and trends have adversely
affected and may continue to affect levels of capital spending by companies in a
variety of industries, including companies in the vertical markets that the
Company serves. The current excess supply of capacity in the telecommunications
industry has adversely affected the financial condition of many
telecommunications companies worldwide. In addition, economic conditions and
developments in the energy markets have had an adverse effect on the financial
condition of energy and utility companies in certain geographic areas of North
America. The Company believes that these and other factors have adversely
affected demand for products and services offered by the Company, as certain
prospective and existing customers have delayed or deferred purchasing
decisions, have elected not to purchase the Company's products, or have sought
to terminate existing contracts for the Company's products and services. As a
result, the Compa