Item 1: Business
The Company
MDSI develops, markets, implements and supports mobile workforce management solutions for use in the field service and delivery industries. The Company's products include market-specific applications, wireless connectivity software and related network and mobile computing equipment. These products are used by a wide variety of companies with substantial mobile workforces, such as utility and telecommunications companies, taxi services and courier companies and public safety and roadside recovery organizations. When used in conjunction with public and private wireless data communications networks, MDSI's products provide comprehensive solutions for the automation of business processes associated with the scheduling, dispatching and management of a mobile workforce. In addition, these products enable the Company's customers to cost-effectively communicate with their mobile workers, while simultaneously enabling the mobile workforce to interface with their corporate information system on a real-time basis.
The first generation of the Company's core product for the utility market, Advantex-Utility, was originally developed by MDI Mobile Data International Inc. ("MDI"), which was acquired by Motorola Inc. ("Motorola") in 1988. The Company's predecessor, MDSI Mobile Data Solutions Canada Inc. ("MDSI Canada"), commenced operations in February, 1993 when it acquired the Advantex-Utility 4.0 and certain other assets of the Mobile Data Division of Motorola Canada Limited, a wholly-owned subsidiary of Motorola.
In December 1995, as part of its strategy to broaden its technology base and product offerings, the Company, MDSI Canada and TelSoft Mobile Data Inc. ("TelSoft") completed a plan of arrangement (the "Plan of Arrangement") under the Company Act (British Columbia). Prior to the Plan of Arrangement, TelSoft held a 60% interest in MDSI Canada. As part of the Plan of Arrangement, the Company acquired all of the outstanding shares of TelSoft in exchange for 1,828,387 Common Shares of the Company and the assumption of $797,000 principal amount of convertible debentures (the "Convertible Debentures") previously issued by TelSoft, and all of the outstanding shares of MDSI Canada, other than those shares of MDSI Canada already owned by TelSoft, in exchange for 2,160,000 Common Shares of the Company. Following the acquisition of TelSoft, TelSoft was merged with and into MDSI Canada. The acquisition by the Company of MDSI Canada was accounted for as a reorganization of assets under common control. Accordingly, the Company is deemed to be a continuance of MDSI Canada subsequent to the Plan of Arrangement, and the historical accounting basis of MDSI Canada was carried forward. The acquisition of TelSoft has been accounted for under the purchase method of accounting. Effective October 1, 1998, the Company carried out a vertical short form amalgamation with MDSI Canada pursuant to which MDSI Canada was amalgamated with and into the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Effects of Acquisitions".
In June 1996, the Company acquired all of the outstanding share capital of MDSI UK for aggregate consideration of $10,616,023, consisting of 55,263 Common Shares and $9,733,270 ((pound)4,500,000) in cash. The acquisition of MDSI UK has been accounted for by the Company under the purchase method of accounting. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Effects of Acquisitions">
In July 1997, the Company acquired all of the outstanding share capital of Alliance Systems, Incorporated ("Alliance") for aggregate consideration of $9,116,828, consisting of 347,750 Common Shares and US$1,582,088 ($2,188,750) in cash. Effective January 4, 1999, Alliance merged with Mobile Data Solutions Inc. ("MDSI USA"), a Delaware corporation and a wholly-owned subsidiary of the Company. MDSI USA is the surviving corporation. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Effects of Acquisitions" and "Results of Operations - Effects of Acquisitions".
Pursuant to the Plan of Arrangement, the Company was incorporated in September 1995 under the Canada Business Corporations Act ("CBCA") as 3181910 Canada Inc. The Company changed its name to MDSI Mobile Data Solutions Inc. in December 1995. Unless the context otherwise requires, references herein to "MDSI" or the "Company" refer to MDSI Mobile Data Solutions Inc. and its subsidiaries. The Company's principal executive offices are located at 10271 Shellbridge Way, Richmond, British Columbia, Canada V6X 2W8, and its telephone number at that location is (604) 207-6000.
Background
Organizations within the field service and delivery industries are highly dependent upon their mobile workforces to deliver and support their respective products and services. The field service industry is composed of a number of market segments, such as the utility, telecommunications, cable and other general field service repair markets, in which mobile workers principally provide repair, maintenance, installation and other services for customers. The delivery industry is composed of a number of market segments, such as the taxi, courier and roadside recovery markets, in which mobile workers are engaged in the movement of people and goods. The public safety industry is composed of the police, fire and ambulance markets in which mobile workers provide law enforcement, emergency and medical services. Historically, these organizations have managed and supported their mobile workers by communicating information through wireline or voice radio systems. Although voice radio systems are mobile, such systems rely on heavily used portions of the radio spectrum and are subject to frequent periods of congestion.
Mobile data communication systems that addressed certain limitations of voice communications systems were first developed for a limited number of vertical markets, such as utility, public safety, taxi, courier and general field service. Businesses in these markets recognized certain productivity benefits associated with wireless data applications. Although such mobile data communications systems were introduced in a number of vertical markets, these systems failed to achieve widespread adoption. The Company believes that the low rate of adoption was attributable to the high cost of establishing private radio networks, the difficulty of obtaining radio spectrum for such networks, the high cost and limited functionality of early mobile computing devices and the regulatory environment in certain industries, such as utilities and telecommunications, which diminished competitive pressures. Additionally, a lack of industry-specific application software which effectively addressed the needs of mobile workers limited the cost-effectiveness of early systems.
The Company believes that significant trends in the regulatory environment, numerous technological advances and a recent significant increase in competitive pressures have reduced many of these limitations and have accelerated, and will continue to accelerate, the adoption of mobile data solutions by the field service, delivery and public safety industries. Deregulation has exposed the utility and telecommunications markets to new competitive pressures, driving businesses within those markets to seek ways to reduce costs, improve operations, efficiently allocate resources and increase the quality of customer service. In addition, the availability of powerful mobile computing devices has permitted the development of sophisticated software applications. Finally, public data networks, such as ARDIS and RAM, are now widely available in North America, and similar networks are available in Europe and the Asia Pacific region. Increasing competition among these networks and the emergence of new wireless communication services, provided by organizations such as AT&T, Ameritech Mobile Communication and others, has resulted in greater availability of wireless networks and lower costs to subscribers. Consequently, mobile data solutions may now be implemented without the difficulty and expense of establishing a private radio network, thereby increasing the cost-effectiveness of such systems. The Company believes that the convergence of these trends will increase the likelihood of adoption of mobile data solutions by companies in the field service, delivery and public safety industries. See "Forward-Looking Statements".
The MDSI Solution
MDSI has combined its expertise in software application development and mobile data communications technology with its understanding of the unique needs of targeted vertical markets in the field service, delivery and public safety industries to develop mobile workforce management solutions that address the specific needs of businesses within those vertical markets. MDSI's products enable organizations in the field service and delivery industries to effectively communicate with, manage and support their mobile workers.
MDSI's solutions include the Advantex family of applications and wireless connectivity software products designed for the field service, delivery and public safety industries. MDSI's software products provide applications for the automation of business processes, such as service order generation, scheduling and assignment, as well as wireless applications, such as work order dispatch, real-time status updates, service and credit authorization, two-way messaging and remote database access. MDSI products also include equipment for private mobile radio data networks, mobile computing devices and ancillary equipment for selected vertical markets and in certain geographic regions. MDSI's products are combined with professional services, such as implementation planning, project management, software configuration, software customization, training and ongoing technical support and software maintenance to effectively address a customer's mobile workforce management requirements. Where appropriate, MDSI also provides third party products and services as part of a complete mobile data solution. MDSI also offers
general consulting services to organizations evaluating the costs and benefits of implementing mobile workforce management systems, as well as organizations evaluating wireless industry software products and technologies.
MDSI's products are scaleable to address the needs of both small and large organizations. For example, MDSI's Advantex-Utility product has been sold for applications intended to support as few as 70 and as many as 7,000 mobile workers. MDSI's products are also modular so that a solution can be implemented in phases and expanded to satisfy an organization's evolving information requirements. MDSI's products are designed to interface with a variety of public and private mobile data networks, including PCS networks and satellite-based data transmission networks, and are compatible with a variety of operating platforms, computer networks and in-house applications.
Markets
The Company markets its products and services within the field service and delivery industries. The Company evaluates new markets based upon their similarity to existing vertical markets in which the Company has been successful, and upon the ability of the Company to utilize its core competencies and proven technology to meet the needs of companies in these new markets.
Field Service Industry
The field service industry consists of organizations having significant numbers of mobile workers who provide various customer services outside of the office. The Company believes that increasing competition is forcing field service companies to focus on the efficiency and quality of their customer service operations. The Company's principal vertical markets within the field service industry are the utility, telecommunications and cable markets. MDSI also provides products for other segments of the field service industry, such as companies engaged in the maintenance and repair of office and medical equipment.
Utilities. The utilities market targeted by the Company primarily consists of gas and electric companies. Industry sources indicate that there are approximately 4,100 gas and electric companies in the United States. The Company has traditionally targeted the distribution operations within a utility. The Company believes, however, that such operations generally account for only a portion of the total number of a utility's mobile workers, with the balance attributable to mobile workers engaged in sales, construction, engineering and management functions. As a result, the Company believes that there is an opportunity to increase sales to existing customers and generate incremental revenue. See "Forward-Looking Statements". MDSI's products have been implemented or are being implemented in over 60 gas and electric utilities located in the United States, Canada, the United Kingdom and Asia.
In the United States, the production and supply of natural gas and electric power has been regulated primarily by the Federal Energy Regulatory Commission (the "FERC"). In recent years, the FERC has implemented rules designed to transfer certain areas of regulatory authority from the FERC to state utility commissions and to encourage competition in the supply and delivery of energy resources. As a result of these regulatory changes and other anticipated regulatory developments, the Company believes that gas and electric utilities are facing new competitive pressures and are seeking ways to reduce costs and improve the quality of their customer service.
Telecommunications. The telecommunications market consists of providers of local, long-distance and wireless communication services worldwide. Although only a few such companies have adopted mobile data solutions to date, the Company believes that a number of major telecommunications companies are evaluating the need for such a system. The Company believes that this market will grow as companies implement new technology to improve their competitiveness, efficiency and service levels. See "Forward-Looking Statements". The Company has installed or has a contract to supply its products to 11 telecommunication companies worldwide, including two divisions of AT&T, Tele Danmark A/S, Frontier Information Technologies Inc., Citizens Telecom Services Company L.L.C. and Belgacom S.A.
Cable. The cable market targeted by the Company consists of providers of cable television services principally in North America and Europe. In North America, over 75% of the subscriber base is under the control of the ten largest multiple service operators. Changes in the regulatory environment and technological developments, such as satellite television have led to the introduction of significant competition in the cable market. Technological advances have also led to the development of new services utilizing the cable infrastructure, allowing cable operators to provide high-speed Internet access and basic telephony to subscribers. The Company believes that growing competition and the introduction of new services will lead cable operators to adopt mobile data solutions to improve their competitiveness, efficiency and level of customer service. See "Forward-Looking Statements". Although several major cable operators have implemented mobile data solutions in selected sites, few operators have rolled out these systems to multiple sites. The Company has installed or has a contract to supply its products to seven major cable operators, including Cox Communications Inc., Comcast Corp., MediaOne, Inc. and Adelphia Communications Corporation in the United States and Rogers Cablesystems Ltd. in Canada.
Public Safety. The public safety market consists of federal, state and local agencies that provide police, fire, medical and other emergency services. The public safety industry was one of the first vertical industries to adopt mobile data technology. As a result, the Company believes that many organizations in the public safety industry are now poised to upgrade their original mobile data systems with new technology that provides increased capabilities over the first generation systems. See "Forward Looking Statements". The Company has installed one Advantex-Public Safety product with the North Carolina State Highway Patrol and has a contract to supply this product to the State of Ohio.
Delivery Industry.
The delivery industry consists of organizations engaged in the movement of people and goods. MDSI believes that companies in this industry generally require real-time, two-way transmission of information between the central office and the most appropriate field worker for the job, and that updating status information from each mobile worker is vital for effective fleet command and control in a constantly changing environment.
Taxi. The taxicab market is characterized by the need to provide flexible scheduling, efficient use of vehicles and the ability to accept multiple forms of payment, including account card settlement and on-line credit card systems. The Company believes that most major cities worldwide are serviced by at least two competing taxi organizations. The Company has marketed its products primarily to taxi service providers in Europe and the Asia Pacific region, and currently has supplied or has contracts to supply its products to over ten taxi service providers within these regions.
Courier. The courier market is characterized by the need for accurate, real-time communications between the dispatcher and courier to facilitate rapid allocation of parcel pick-up requests, provide up-to-the-minute tracking of domestic and international parcel shipments and improve the timing of parcel deliveries. The Company believes that most major cities worldwide are serviced by at least two competing courier organizations. The Company has marketed its products primarily to courier organizations in Europe, the Middle East and the Asia Pacific region and currently has supplied or has contracts to supply its products for over 20 installations within these regions, including systems in over 17 countries with DHL.
Roadside Recovery. The roadside recovery market includes services such as tow-truck and automobile association services. This market is characterized by the need for real-time accurate messaging between the fleet and dispatch operations. Vehicle status and location data is required to allow the dispatcher to respond in a timely fashion to emergency situations. The Company believes that most major cities worldwide are serviced by a minimum of one automobile association and two competing tow-truck services. The Company has marketed its products to the roadside recovery organizations in Europe and the Asia Pacific region and currently has supplied or has contracts to supply its products to three roadside recovery organizations within these regions.
Customers and Applications
The Company's customers vary in size from small local service companies to large regional and international organizations. During the years ended December 31, 1998, 1997 and 1996, one U.S. utility company accounted for 7%, 11% and 35%, respectively of the Company's consolidated revenue. In the years ended December 31, 1998, 1997 and 1996, approximately 29%, 36% and 67%, of the Company's consolidated revenue was attributable to five or fewer customers. The Company believes that revenue derived from a limited number of customers will continue to represent a significant portion of its consolidated revenue. In the years ended December 31, 1998, 1997 and 1996 revenue derived from sales outside of North America accounted for 21%, 32% and 31% of the Company's total revenue, respectively. Because the Company's revenue is dependent, in large part, on significant contracts with a limited number of customers, the percentage of the Company's revenues that is derived from sales outside of North America has fluctuated, and may continue to fluctuate, from period-to-period. See "Business-Risk Factors - Dependence on Large Contracts and Concentration of Customers" and "Forward-Looking Statements".
Products
The Company currently offers mobile workforce management solutions focused on two targeted industry segments: field service and delivery. The Company's products automate processes such as appointment scheduling, work load distribution, service order dispatching, real-time status updating, credit card authorization and database access, and replace voice radio and paper-based communications with wireless exchanges of information and messages between mobile users and remote database and dispatch centers.
Field Service Industry
Advantex-Utility. Advantex-Utility is the Company's core product for the utility industry. Advantex-Utility provides the dispatcher with real-time service order information ("en route," "on site" or "job complete") and field service representative information (the number and location of service orders assigned, completed and outstanding) facilitating the effective management of the mobile work force. Numerous alerts are built into the system, including an alert to notify a dispatcher of a service order appointment which is in jeopardy of being missed. Employing mobile computing devices, field service representatives have significantly reduced paperwork. Advantex-Utility can be seamlessly integrated with an organization's LAN or WAN to provide real-time updates to other applications, such as inventory and billing systems. Advantex-Utility's modular design allows a utility company to configure a solution to its specific requirements. Building on the core Advantex-Utility functionality, optional modules include Map-based Dispatching, Order Scheduling, Workload Distribution and Call Ahead.
Advantex-Telecommunications. Advantex-Telecommunications is the Company's core product for the telecommunications industry. This product provides the dispatcher with real-time work order information ("en route," "on site" or "job complete") and field service representative information (number and location of work order assigned, completed and outstanding) facilitating the effective and timely management of field service resources. Advantex-Telecommunications is designed to be integrated into other telecommunications enterprise applications such as telephone line testing, inventory and billing and may be interfaced to existing customer service systems (mainframe or non-mainframe) that generate work orders or provide data required by telecommunications company operations personnel. The Advantex-Telecommunications product is also marketed to the cable industry. Additional features of the Advantex-Telecommunications product include Least Cost Routing, Map-based Dispatching, Order Scheduling, Workload Distribution and Call Ahead.
Advantex-Field Service. Advantex-Field Service is a general field service management system targeted to non-utility and non-telecommunications segments of the field service industry. Advantex-Field Service's core dispatch functionality allows service calls to be entered, displayed, printed and updated. The dispatch function allows work to be assigned, re-assigned, re-scheduled or canceled. A summary of the service schedule can be displayed for any day or week. A dispatcher has access to all customer information (by name, telephone number, customer number or equipment identifier) including the ability to access terms of agreements and view dispatch times, current field worker locations and schedules.
Advantex-Public Safety. The Advantex-Public Safety product is a mobile data solution for the public safety market. The software provides connectivity between statewide networks and databases and wireless networks. The solution consists of a message switch and a mobile device software application. The message switch allows multiple agencies to access the system, provides optional computer aided dispatch (CAD) interface for each agency and provides the ability to access state and national databases. The Company has installed the Advantex-Public Safety product with the North Carolina Highway Patrol and has a contract to supply this product to the State of Ohio. The Advantex-Public Safety product is able to control multiple public safety agencies from one platform infrastructure. Once the original system is installed within a government agency, other agencies can be added to the system without procuring a new system. An incremental license fee is charged for each agency and mobile data terminal added to the system.
Advantex-Enterprise. The Advantex-Enterprise family of inter-networking software products provides high speed, cost effective, enterprise-wide connectivity solutions across multiple wireless and wireline data networks. This software technology provides for the integration of existing wireline-based computing environments with the most prevalent wireless networks. Advantex-Enterprise allows users to integrate wireless and wireline data applications in a marketplace where no connectivity or interpretability standards are currently defined. MDSI markets the Advantex-Enterprise product primarily to its existing customers. The Advantex-Enterprise product consists of both the open message service (OMS) and open message client (OMC) software components. OMS is a UNIX-based messaging solution providing bridge, router and gateway functionality. OMC is a Windows product providing wireless and wireline data access for PC compatible mobile computing devices.
Delivery Industry
Advantex-Taxi. Advantex-Taxi is an automated taxi management system designed for medium and large taxicab companies which permits call takers to enter customer calls and automatically identify the most appropriate taxicab taking into account customers special requests. Advantex-Taxi utilizes a zone-based call assignment algorithm or, optionally, a global positioning system ("GPS") technology to identify the closest cab and determine the appropriate radio frequency to optimize radio channel usage. Once a request has been accepted by the driver, all pertinent information is transmitted via a wireless network to the driver's mobile computer. The driver updates the application with various status indicators including "passenger on board," "soon to clear" and "passenger disembark". Advantex-Taxi incorporates numerous modules allowing a taxicab organization to configure a solution to its specific requirements including a Billing System and Scheduling & Ride Sharing.
Advantex-Courier. Advantex-Courier provides a dispatch application that can be connected to the in-house tracking and billing package used by courier customers. Advantex-Courier facilitates the tracking, allocation, dispatch and redistribution of pick-up and drop-off information. The Advantex-Courier applications is currently being upgraded for a Windows architecture with added features that will allow it to be used as a stand-alone system, or to be configured for connection to existing systems. Advantex-Courier incorporates numerous modules allowing a courier organization to configure a solution to their specific requirements. A key Advantex-Courier module is Advantex-Tracking which enables real-time tracking of vehicles using GPS receivers to constantly update the drivers' mobile computer with location information. The location and vehicle identification information is transmitted to the dispatch computer facilitating real-time tracking of an organization's entire fleet.
Mobile Computing Devices. The Company's offers several mobile computing devices that work in conjunction with its software, including the S645 MDT and S850MDT mobile terminals for roadside recovery, taxi and courier markets and the S650 Intelligent Modem for the courier market.
Professional and Customer Support Services
The Company provides a complete range of specialized professional and customer support services to assist its clients in implementing and using MDSI's products effectively. Typically, contracts for the sale of the Company's software include implementation planning, project management, software configuration, software customization, installation, education and training, technical support and ongoing maintenance. The Company believes providing high quality, cost-effective professional services facilitates effective implementation of the Company's products and fosters a strong relationship with the customer that often leads to future orders for MDSI products and services.
Professional Services
The Company's professional services personnel facilitate the implementation and optimization of the Company's products. A professional services engagement usually lasts for six to twelve months and involves working with the client in planning, specification and implementation of its products. During the planning phase of the engagement, MDSI's personnel work closely with customer representatives to prepare a detailed project plan that includes a timetable, resource requirements, milestones, training requirements and demonstrations of product capabilities.
During the specification phase of the professional services engagement, MDSI's professional services personnel work with the customer to specify the exact MDSI products and system configuration. MDSI personnel also work with the customer to design the technology infrastructure, specify the business processes and formats for those elements of the products that are configurable, define business processes and formats for the elements that are custom designed and establish the procedure for implementation of the product. MDSI personnel also develop and recommend modifications to the customer's business processes to improve the performance of the MDSI software and reduce or eliminate the need for customization.
During the final phase of implementation, MDSI personnel complete configuration of the software products, complete project customization, finalize product installation and develop end-user documentation and other technical and business processes required to integrate the MDSI products into the client's environment. MDSI personnel also work with the client to develop and test custom features and various interfaces to corporate networks, wireless networks and other corporate information systems.
Customer Support
The Company believes that its ability to offer a high level of customer support is critical to its success. The Company's customer support group provides MDSI customers with telephone and on-line technical support as well as product updates. Most MDSI customers enter into separate customer support agreements, typically on an annual basis, that take effect on the expiration of
the product warranty. At December 31, 1998, the Company had 66 customer support personnel, of whom 28 were located in Canada, 18 in the United States, 13 in the United Kingdom, 4 in Singapore and 3 in Copenhagen.
Product Development
The mobile workforce management industry is characterized by rapid technological change and increasing user requirements. Accordingly, the Company must be able to provide new products and to modify and enhance existing products on a timely and continuing basis in order to be competitive. To accomplish this objective, the Company's strategy is to utilize proven technology to further enhance its existing products and to create new products. Where appropriate, the Company may acquire complementary technology developed by third parties for integration into the Company's products.
The Company believes that its highly qualified software development personnel provide MDSI with a significant competitive advantage. MDSI personnel have considerable experience and expertise in the development of mobile workforce management applications specifically designed for use with a wireless data network, as well as in the integration of these applications with a customer's corporate information system. MDSI software product development personnel employ modular software architecture, object-oriented software development and graphical user interface design technologies to develop scaleable, modular, configurable products. MDSI personnel have expertise in software technology, wireless and wireline communications technologies, computer environments and corporate information systems integration. They also have considerable expertise in the design and development of specialized mobile computing devices, as well as radio system design and implementation. MDSI believes that this combination of expertise in multiple disciplines has allowed and will continue to allow the Company to design and develop mobile workforce management solutions which can be implemented in a timely and cost-effective manner.
As of December 31, 1998, MDSI's technical and engineering staff, supporting both product development and professional services, consisted of 311 employees, including 190 employees based at its Richmond, British Columbia headquarters, 88 employees based primarily at its Itasca, Illinois facility and other locations in the United States and 33 employees based at its Cambridge, England facility.
During the years ended December 31, 1998, 1997 and 1996, the Company's total expenditures for product development were $9.9 million, $6.5 million and $4.4 million, respectively, reflecting 11.9%, 9.3% and 9.7% of the Company's revenue, respectively. Management believes that timely and continuing product development is critical to the Company's success and plans to continue to allocate significant resources to product development. See "Forward-Looking Statements".
Sales and Marketing
The Company markets its products and services through its direct sales force and certain strategic remarketing arrangements. The Company's sales personnel, who are knowledgeable about the technological components of wireless applications and current industry and enterprise-specific application issues, work in teams that specialize in each of the targeted vertical markets. The Company's sales personnel employ their expertise to develop long-term consultative relationships with customers in order to identify the needs of the customer and provide specific and effective solutions. To date, substantially all of the Company's revenue has been generated by direct sales activities.
At December 31, 1998, the Company's sales, marketing and technical support group consisted of 50 employees, with 34 based out of the Company's Richmond, British Columbia facility, 12 based out of its Itasca, Illinois facility, 1 based out of its Cambridge, England facility and 3 based out of various other international locations.
Competition
The markets for mobile workforce management applications, wireless connectivity software, mobile data network equipment and mobile computing devices are highly competitive. Numerous factors affect the Company's competitive position, including price, product features, product performance and reliability, ease of use, product scalability, product availability on multiple platforms (both server and mobile workstation), ability to implement mobile workforce management solutions domestically and internationally while meeting customer schedules, integration of products with other enterprise solutions, availability of project consulting services and timely ongoing customer service and support.
Within these markets, there are a small number of new ventures, either small companies attempting to establish a business in this market or large companies attempting to diversify their product offerings. The Company expects such competition to intensify as acceptance and awareness of mobile data communications and technology continue. In addition, a small number of the Company's potential customers develop software solutions internally, thereby eliminating the requirement for suppliers such as the Company. Current or potential competitors may establish cooperative arrangements among themselves or with third parties to increase the ability of their products to address customer requirements.
Certain of the Company's competitors have substantially greater financial, technical, marketing and distribution resources than the Company. As a result, they may be able to respond more quickly to new or emerging technologies and changing customer requirements, or to devote greater resources to the development and distribution of existing products. There can be no assurance that the Company will be able to compete successfully against current or future competitors or alliances of such competitors, or that competitive pressures faced by the Company will not have a material adverse effect on its business, financial condition, operating results and cash flows.
The Company believes that in the utility and telecommunications industry segments the most important competitive factors are the reputation of the supplier and their proven record in implementing wireless data solutions. The Company primarily competes in the utility market with Utility Partners, L.C., M3i Systems, Inc. and Alterra Corp. The Company has several competitors in the telecommunications market, a few of which have historical relationships with certain of the large telecommunications companies. The Company's primary competitors for telecommunications customers are Bellcore and Lucent Technologies, Inc. The Company believes that the principal competitive factors in the field service market are the ability to improve the customer service aspects of an organization's business and increase the productivity of service representatives. In this market, the Company's principal competitors are Astea International Inc. and Metrix Inc. The Company's principal competitors in the cable market are Bellcore and MobileForce Technologies, Inc. (formerly Ubiquinet, Inc).
The Company believes that the principal competitive factors in the taxi markets in Europe and the Asia Pacific region are the functionality of products and an understanding of the needs of the taxi operators. In Europe, the Company's principal competitors in the taxi market are Indelco, Oslo Taxi, Finn Frogne, Auriga (United Kingdom), Axijest (France), Tadiran (Israel), H&W (Germany) and Mikrotek (Italy). In the Asia Pacific region, the Company's principal competitors are Raywood and Sig-tec. The Company believes that the principal competitive factors in the courier market are the configurability of products and an understanding of the courier industry. The Company's principal competitors in the courier market are MobileRadio, BT Syntegra and Dynamic Transport Management.
MDSI primarily competes in the public safety market with Cerulean, PRC, Tiberon Systems, and New World Systems. Many of MDSI's competitors have a more established reputation in the public safety market. In many of the large public safety opportunities, MDSI subcontracts to a large prime contractor serving as the overall system integrator. MDSI is currently used as a subcontractor for public safety installations by Motorola.
Employees
As of December 31, 1998, the Company had 466 full-time employees and contractors, including 311 in technical and engineering, 50 in sales, marketing and technical support, 66 in customer support and 39 in management, finance and administration. None of the Company's employees is represented by a labor union and the Company believes its employee relations to be good.
Risk Factors
The Company's business is subject to the following risks. These risks also could cause actual results to differ materially from results projected in any forward-looking statement in this report.
Potential Fluctuations in Quarterly Operating Results
The Company's results of operations have fluctuated in the past and are likely to continue to fluctuate from period to period depending on a number of factors, including the timing and receipt of significant orders, the timing of completion of contracts, increased competition, changes in the demand for the Company's products and services, the cancellation of contracts, the timing of new product announcements and introductions, changes in pricing policies by the Company and its competitors, delays in the introduction of products or enhancements by the Company, expenses associated with the acquisition of products or technology from third parties, the mix of sales of the Company's products and services and third party products, seasonality of customer purchases, personnel changes, the mix of international and North American revenue, tax policies, foreign currency exchange rates and general economic conditions.
The Company relies upon its ability to implement and integrate mobile workforce management solutions on schedule and to the satisfaction of its customers. The Company from time to time has experienced certain implementation and other problems that have delayed the completion of certain projects, including the failure of third parties to deliver products or services on a timely basis and delays caused by customers. Because the Company recognizes revenue on a percentage of completion method, delays in completion of certain contracts has caused delays in recognition of revenue and, consequently, unanticipated fluctuations in quarterly results. There can be no assurance that the Company will be able to complete current projects or implement future systems on a timely and cost-effective basis or that delays will not result in cancellations of contracts or result in the imposition of substantial penalties. Any such material delay, cancellation or penalty could have a material adverse effect upon the Company's business, financial condition, operating results and cash flows.
Because the Company is unable to forecast with certainty the receipt of orders for its products and services and the Company's expense levels are relatively fixed and are based, in part, upon its expectation of future revenue, if revenue levels fall below expectations as a result of a delay in completing a contract, the inability to obtain new contracts, the cancellation of an existing contract or otherwise, operating results are likely to be adversely effected. As a result, net income may be disproportionately affected because a relatively small amount of the Company's expenses vary with its revenue. In particular, the Company plans to increase its operating expenses to expand its sales and marketing operations, expand its distribution channels, fund greater levels of research and development, broaden its customer support capabilities and increase its administrative resources. Based upon all of the foregoing factors, the Company believes that its quarterly revenue, direct expenses and operating results are likely to vary significantly in the future, that period-to-period comparisons of the results of operations are not necessarily meaningful and that such comparisons should not be relied upon as an indication of future performance. The Company may also choose to reduce prices or increase spending in response to competition, or to pursue new market opportunities. See "Forward-Looking Statements". If new competitors, technological advances by existing competitors or other competitive factors require the Company to reduce its prices or invest significantly greater resources in research and development efforts, the Company's operating results in the future may be adversely affected. There can be no assurance that the Company will be able to grow in future periods or that it will be able to sustain its level of total revenue or its rate of revenue growth on a quarterly or annual basis. It is likely that in some future quarter the Company's operating results will be below the expectations of public market analysts and investors. See "Forward Looking Statements". In such event, the price of the Company's Common Shares would likely be materially adversely affected.
Commencing in 1996, the Company has been, and anticipates that from time to time it will be, engaged to provide, in addition to its own products and services, third party hardware, software and services, which the Company purchases from vendors and sells to its customers. For the years ended December 31, 1998, 1997 and 1996, 23.4%, 23.7% and 33.7%, respectively, of the Company's revenue was attributable to third party products and services. Because the revenue generated from the supply of third party products and services may represent a significant portion of certain contracts and the installation and rollout of third party products is generally at the discretion of the customer, the Company may, depending on the level of third party products and services provided during a period, experience large quarterly fluctuations in revenue. See "Forward Looking Statements". In addition, because the Company's gross margins on third party products and services are substantially below gross margins historically achieved on revenue associated with MDSI products and services, large fluctuations in quarterly revenue from the sale of third party products and services will result in significant fluctuations in direct costs, gross profits, operating results, cash flows and other items expressed as a percentage of revenue.
Certain of the vertical markets targeted by the Company include industries with implementation requirements that vary seasonally. For example, utility companies in North America generally have decreased implementation activity in winter months when such utilities face their greatest consumer demand. As a result, the Company's results of operations may also vary seasonally, and such variation may be significant.
Lengthy Sales Cycles
The purchase of a mobile workforce management solution is often an enterprise-wide decision for prospective customers and requires the Company to engage in sales efforts over an extended period of time and to provide a significant level of education to prospective customers regarding the use and benefits of such systems. Due in part to the significant impact that the application of mobile workforce management solutions has on the operations of a business and the significant commitment of capital required by such a system, potential customers tend to be cautious in making acquisition decisions. As a result, the Company's products generally have a lengthy sales cycle ranging from several months to several years. Consequently, if sales forecasted from a specific customer for a particular quarter are not realized in that quarter, the Company may not be able to generate revenue from alternative sources in time to compensate for the shortfall. The loss or delay of a large contract could have a material adverse effect on the Company's quarterly financial condition, operating results and cash flows, which may cause such results to be less than analysts' expectations. Moreover, to the extent that significant contracts are entered into and required to be performed earlier than expected, operating results for subsequent quarters may be adversely affected. In particular, the Company has recently experienced an increase in the time necessary to complete the negotiation and signing of certain contracts with some of its larger customers.
Dependence on Large Contracts and Concentration of Customers
The Company's revenue is dependent, in large part, on significant contracts from a limited number of customers. During the years ended December 31, 1998, 1997 and 1996, approximately 29%, 36% and 67%, respectively, of the Company's consolidated revenue was attributable to five or fewer customers. During the years ended December 31, 1998, 1997 and 1996, one customer accounted for 7%, 11% and 35%, respectively, of the Company's consolidated revenue. The Company believes that revenue derived from current and future large customers will continue to represent a significant portion of its total revenue. See "Forward Looking Statements". The inability of the Company to continue to secure and maintain a sufficient number of large contracts would have a material adverse effect on the Company's business, financial condition, operating results and cash flows. Moreover, the Company's success will depend in part upon its ability to obtain orders from new customers, as well as the financial condition and success of its customers and general economic conditions.
The size of a contract for a particular customer can vary substantially depending on whether the Company is providing only its own products and services or is also responsible for supplying third party products and services. The Company recognizes revenue using the percentage of completion method, which the Company calculates based on total costs incurred compared to total costs estimated by the Company for completion. Therefore, any significant increase in the costs required to complete a project, or any significant delay in a project schedule, could have a material adverse effect on that contract's profitability and because of the size of each contract, on the Company's overall results of operations. The Company from time to time has also experienced certain implementation and other problems that have delayed the completion of certain projects, including the failure of third parties to deliver products or services on a timely basis and delays caused by customers. The Company's contracts generally provide for payments upon the achievement of certain milestones. Therefore, any significant delay in the achievement of milestones on one or more contracts would affect the timing of the Company's cash flows and could have a material adverse effect on the Company's business, financial condition, operating results and cash flows. Any significant failure by the Company to accurately estimate the scope of work involved, plan and formulate a contract proposal, effectively negotiate a favorable contract price, properly manage a project or efficiently allocate resources among several projects could have a material adverse effect on the Company's business, financial condition, operating results and cash flows.
Potential Fluctuations in Backlog
The Company's backlog consists of a relatively small number of large contracts relating to sales of its mobile workforce management and wireless connectivity software and related equipment and services, and sales of third party products and services. Due to the long, complex sales process and the mix of sales of the Company's products and services and third party products and services, the Company's backlog may fluctuate significantly from period-to-period. In addition, under the terms of the Company's contracts, the Company's customers may elect to terminate their contracts with the Company at any time after notice to the Company or to delay certain aspects of installation. Due to the relative size of a typical contract compared to the Company's annual and quarterly revenue, a termination or installation delay of one or more contracts could have a material adverse effect on the Company's business, financial condition, operating results and cash flows. Contracts for software maintenance and support are generally renewable every year and are subject to renegotiation upon renewal. There can be no assurance that the Company's customers will renew their maintenance contracts or that renewal terms will be as favorable to the Company as existing terms.
Limited Operating History; History of Losses; Increased Expenses
The Company commenced operations in February 1993 and therefore has only a limited operating history upon which an evaluation of its business and prospects can be based. Due to non-recurring charges of $6.4 million, including $1.1 million with respect to restructuring certain operations and $5.3 million due to changes in estimates to complete certain contracts in the UK
operations taken in September 1997, restructuring and reorganization charges of $2.0 million and $688,374, respectively, taken in connection with the reorganization of the Company and the acquisition of TelSoft in December 1995, and write-offs of $8.5 million and $10.0 million for acquired research and development taken in connection with the acquisitions of MDSI UK in June 1996 and Alliance effective April 1997, respectively, the Company incurred net losses of $11.5 million, $6.0 million , and $1.5 million in the years ended December 31, 1997, 1996 and 1995, respectively. As of December 31, 1998, the Company had an accumulated deficit of $13.7 million. Although the Company was profitable in its most recently completed fiscal year, there can be no assurance that, in the future, the Company will realize revenue growth or be profitable on a quarterly or annual basis. In addition, the Company plans to increase its operating expenses to expand its sales and marketing operations, fund greater levels of research and development, broaden its customer support capabilities and increase its administration resources. A relatively high percentage of the Company's expenses is typically fixed in the short term as the Company's expense levels are based, in part, on its expectations of future revenue. To the extent that such expenses precede or are not subsequently followed by increased revenue, the Company's business, financial condition, operating results and cash flows would be materially adversely affected. In addition, in view of the Company's recent revenue growth, the rapidly evolving nature of its business and markets, the Company's limited operating history and the recent
acquisitions, the Company believes that period-to-period comparisons of financial results are not necessarily meaningful and should not be relied upon as an indication of future performance.
Integration of Acquisitions
The Company may, when and if the opportunity arises, acquire other products, technologies or businesses involved in activities, or having product lines, that are complementary to the Company's business. Acquisitions involve numerous risks, including difficulties in the assimilation of the operations, technologies and products of the acquired companies, the diversion of management's attention from other business concerns, risks associated with entering markets or conducting operations with which the Company has no or limited direct prior experience and the potential loss of key employees of the acquired company. Moreover, there can be no assurance that any anticipated benefits of an acquisition will be realized. Future acquisitions by the Company could result in potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities, amortization of expenses related to goodwill and other intangible assets and write-off of restructuring costs and acquired research and development costs, all of which could materially and adversely affect the Company's financial condition, results of operations and cash flows.
New Product Development
The Company expects that a significant portion of its future revenue will be derived from the sale of newly introduced products and from enhancement of existing products. See "Forward-Looking Statements". The Company's success will depend in part upon its ability to enhance its current products on a timely and cost-effective basis and to develop new products that meet changing market conditions, including changing customer needs, new competitive product offerings and enhanced technology. There can be no assurance that the Company will be successful in developing and marketing on a timely and cost-effective basis new products and enhancements that respond to such changing market conditions. If the Company is unable to anticipate or adequately respond on a timely or cost-effective basis to changing market conditions, to develop new software products and enhancements to existing products, to correct errors on a timely basis or to complete products currently under development, or if such new products or enhancements do not achieve market acceptance, the Company's business, financial condition, operating results and cash flows could be materially adversely affected. In light of the difficulties inherent in software development, the Company expects that it will experience delays in the completion and introduction of new software products. See "Forward-Looking Statements".
Management of Growth
Since its inception, the Company has experienced rapid growth in product sales, personnel, research and development activities, number and complexity of products, the number and geographic focus of its targeted vertical markets and product distribution channels. The total number of employees of the Company has grown from nine employees in Canada in February 1993 to 466 employees located in Canada, the United States, the United Kingdom and other international locations at December 31, 1998. In addition, the recent acquisitions of Alliance and MDSI UK have increased the number of products the Company supports and markets, as well as the number of vertical markets into which it sells products and the geographical areas in which the Company operates. The Company believes that continued growth in the number and complexity of products and in the number of personnel will be required to maintain the Company's competitive position. The Company's rapid growth, coupled with the rapid evolution of the Company's markets, has placed, and is likely to continue to place, significant strains on its management, administrative, operational and financial resources, as well as increased demands on its internal systems, procedures and controls. The Company's ability to manage recent and future growth will require the Company to continue to improve its financial and management controls, reporting systems and procedures on a timely basis, to implement new systems as necessary and to expand, train, motivate and manage its sales and technical personnel. There can be no assurance that the Company will be able to manage its growth successfully. Failure to do so could have a material adverse effect on the Company's business, financial condition, operating results and cash flows.
Dependence on Key Personnel
The Company's performance and future operating results are substantially dependent on the continued service and performance of its senior management and key technical and sales personnel. The Company intends to hire a significant number of additional technical and sales personnel in the next year. See "Forward-Looking Statements". Competition for such personnel is intense, and there can be no assurance that the Company can retain its key technical, sales and managerial employees or that it will be able to attract or retain highly-qualified technical and managerial personnel in the future. The loss of the services of any of the Company's senior management or other key employees or the inability to attract and retain the necessary technical, sales and managerial personnel could have a material adverse effect upon the Company's business, financial condition, operating results and cash flows.
Dependence on Selected Vertical Markets
Prior to 1996, substantially all of the Company's revenue was derived from the sale of products and services to customers in the utility market. For the years ended December 31, 1997 and 1996, the utility market accounted for greater than 50% of the Company's revenue. In those years, the Company sought to reduce its reliance on the utility market by developing or acquiring compatible products for organizations with mobile workforces in other vertical markets. In 1998, the utility market accounted for greater than 40% of the Company's revenue. The Company anticipates that a significant portion of its future revenue will also be generated by sales of products to the taxi and telecommunications markets. See "Forward-Looking Statements". A decline in demand for the Company's products in the utility, taxi or telecommunications markets as a result of competition, technological change or otherwise, would have a material adverse effect on the Company's business, financial condition, operating results and cash flows. There can be no assurance that the Company will be able to continue to diversify its product offerings or revenue base by entering into new vertical markets.
Dependence on Marketing Relationships
The Company's products are marketed by the Company's direct field sales force as well as by resellers. The Company's existing agreements with resellers of its products are nonexclusive and may be terminated by either party without cause. Such organizations are not within the control of the Company, are not obligated to purchase products from the Company and may also represent and sell competing products. There can be no assurance that the Company's existing resellers will continue to provide the level of services and technical support necessary to provide a complete solution to the Company's customers or that they will not emphasize their own or third-party products to the detriment of the Company's products. The loss of these resellers, the failure of such parties to perform under agreements with the Company or the inability of the Company to attract and retain new resellers with the technical, industry and application experience required to market the Company's products successfully could have a material adverse effect on the Company's business, financial condition, operating results and cash flows. The Company expects that it may enter into certain joint ventures in order to facilitate its expansion into other vertical markets and geographic areas. See "Forward Looking Statements". To the extent that such joint ventures are not successful, there could be a material adverse effect on the Company's business, financial condition, operating results and cash flows.
Competition
The markets for mobile workforce management applications, wireless connectivity software, mobile data network equipment and mobile computing devices are highly competitive. Numerous factors affect the Company's competitive position, including price, product features, product performance and reliability, ease of use, product scalability, product availability on multiple platforms (both server and mobile workstation), ability to implement mobile workforce management solutions domestically and internationally while meeting customer schedules, integration of products with other enterprise solutions, availability of project consulting services and timely ongoing customer service and support.
Within these markets, there are a small number of new ventures, either small companies attempting to establish a business in this market or large companies attempting to diversify their product offerings. The Company expects such competition to intensify as acceptance and awareness of mobile data communications and technology continue. See "Forward Looking Statements". In addition, a small number of the Company's potential customers develop software solutions internally, thereby eliminating the requirement for suppliers such as the Company. Current or potential competitors may establish cooperative arrangements among themselves or with third parties to increase the ability of their products to address customer requirements.
Certain of the Company's competitors have substantially greater financial, technical, marketing and distribution resources than the Company. As a result, they may be able to respond more quickly to new or emerging technologies and changing customer requirements, or to devote greater resources to the development and distribution of existing products. There can be no assurance that the Company will be able to compete successfully against current or future competitors or alliances of such competitors, or that competitive pressures faced by the Company will not materially adversely affect its business, financial condition, operating results and cash flows.
The Company primarily competes in the utility market with Utility Partners, L.C., M3i Systems, Inc. and Alterra Corp. The Company has several competitors in the telecommunications market, a few of which have historical relationships with certain of the large telecommunications companies. The Company's primary competitors for telecommunications customers are Bellcore and Lucent Technologies Inc. The Company's principal competitors in the cable market are Bellcore and MobileForce Technologies, Inc. In the general field service market, the Company's principal competitors are Astea International Inc. and Metrix Inc. In the European taxi market, the Company's principal competitors are Indelco, OsloTaxi, Finn Frogne, Auriga (United Kingdom), Axijest (France), Tadiran (Israel), H&W (Germany) and Mikrotek (Italy). In the Asia Pacific region, the Company's principal competitors in the taxi market are Raywood and Sig-tec. The Company's principal competitors in the courier market are MobileRadio, BT Syntegra and Dynamic Transport Management. In the public safety market, the Company's principal competitors are Cerulean, PRC, Tiberon Systems and New World Systems.
Risk of Product Defects
Software products, including those offered by the Company, from time-to-time contain undetected errors or failures. There can be no assurance that, despite testing by the Company and by current and potential customers, errors will not be found in the Company's products. Such errors could result in loss of or delay in market acceptance of the Company's products, which could have a material adverse effect on the Company's business, financial condition, operating results and cash flows.
Proprietary Technology
The Company's success is dependent on its ability to protect its intellectual property rights. The Company relies principally upon a combination of copyright, trademark, trade secret and patent laws, non-disclosure agreements and other contractual provisions to establish and maintain its rights. To date, the Company has applied for trademark registration in the United States, Canada and several European countries for the MDSI and Advantex marks. Other than certain patents held or pending by MDSI UK, MDSI has not sought patent protection for its products. As part of its confidentiality procedures, the Company generally enters into nondisclosure and confidentiality agreements with each of its key employees, consultants, distributors, customers and corporate partners, to limit access to and distribution of its software, documentation and other proprietary information. There can be no assurance that the Company's efforts to protect its intellectual property rights will be successful. Despite the Company's efforts to protect its intellectual property rights, unauthorized third parties, including competitors, may be able to copy or reverse engineer certain portions of the Company's software products, and use such copies to create competitive products.
Policing the unauthorized use of the Company's products is difficult, and, while the Company is unable to determine the extent to which piracy of its software products exists, software piracy can be expected to continue. In addition, the laws of certain countries in which the Company's products are or may be licensed do not protect its products and intellectual property rights to the same extent as do the laws of Canada and the United States. As a result, sales of products by the Company in such countries may increase the likelihood that the Company's proprietary technology is infringed upon by unauthorized third parties.
In addition, because third parties may attempt to develop similar technologies independently, the Company expects that software product developers will be increasingly subject to infringement claims as the number of products and competitors in the Company's industry segments grow and the functionality of products in different industry segments overlaps. See "Forward Looking Statements". Although the Company believes that its products do not infringe on the intellectual property rights of third parties, there can be no assurance that third parties will not bring infringement claims (or claims for indemnification resulting from infringement claims) against the Company with respect to copyrights, trademarks, patents and other proprietary rights. Any such claims, whether with or without merit, could be time consuming, result in costly litigation and diversion of resources, cause product shipment delays or require the Company to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company or at all. A claim of product infringement against the Company and failure or inability of the Company to license the infringed or similar technology could have a material adverse effect on the Company's business, financial condition, operating results and cash flows.
Dependence on Third Parties
Certain contracts require the Company to supply, coordinate and install third party products and services. The Company believes that there are a number of acceptable vendors and subcontractors for most of its required products, but in many cases, despite the availability of multiple sources, the Company may select a single source in order to maintain quality control and to develop a strategic relationship with the supplier or may be directed by a customer to use a particular product. The failure of a third party supplier to provide a sufficient supply of parts and components or products and services in a timely manner could have a material adverse effect on the Company's results of operations. In addition, any increase in the price of one or more of these products, components or services could have a material adverse effect on the Company's business, financial condition, operating results and cash flows.
Additionally, under certain circumstances, the Company supplies products and services to a customer through a larger company with a more established reputation acting as a project manager or systems integrator. In such circumstances, the Company has a sub-contract to supply its products and services to the customer through the prime contractor. In these circumstances, the Company is at risk that situations may arise outside of its control that could lead to a delay, cost over-run or cancellation of the prime contract which could also result in a delay, cost over-run or cancellation of the Company's sub-contract. The failure of a prime contractor to supply its products and services or perform its contractual obligations to the customer in a timely manner could have a material adverse effect on the Company's financial condition, results of operations and cash flows.
Exchange Rate Fluctuations
Because the Company's reporting currency is the Canadian dollar, its operations outside Canada face additional risks, including fluctuating currency values and exchange rates, hard currency shortages and controls on currency exchange. The Company has operations outside Canada and is hedged, to some extent, from foreign exchange risks because of its ability to purchase, develop and sell in the local currency of those jurisdictions. In addition, the Company does enter into foreign currency contracts under certain circumstances to reduce the Company's exposure to foreign exchange risks. There can be no assurance, however, that the attempted matching of foreign currency receipts with disbursements or hedging activities will adequately moderate the risk of currency or exchange rate fluctuations which could have a material adverse effect on the Company's business, financial condition, operating results and cash flows. In addition, to the extent the Company has operations outside Canada, the Company is subject to the impact of foreign currency fluctuations and exchange rate charges on the Company's reporting in its financial statements of the results from such operations outside Canada. Since such financial statements are prepared utilizing Canadian dollars as the basis for presentation, results from operations outside Canada reported in the financial statements must be restated into Canadian dollars utilizing the appropriate foreign currency exchange rate, thereby subjecting such results to the impact of currency and exchange rate fluctuations.
Risks Associated with International Operations
In the years ended December 31, 1998, 1997 and 1996 revenue derived from sales outside of North America accounted for approximately 21 %, 32% and 30%, respectively of the Company's total revenue. Because the Company's revenue is dependent, in large part, on significant contracts with a limited number of customers, the percentage of the Company's revenues that is derived from sales outside of North America has fluctuated, and may continue to fluctuate, from period-to-period. The Company believes that its continued growth and profitability will require additional expansion of its sales in foreign markets, and that revenue derived from international sales will account for a significant percentage of the Company's revenue for the foreseeable future. This expansion has required and will continue to require significant management attention and financial resources. The inability of the Company to expand international sales in a timely and cost-effective manner could have a material adverse effect on the Company's business, financial condition, operating results and cash flows. There are a number of risks inherent in the Company's international business activities, including changes in regulatory requirements, tariffs and other trade barriers, costs and risks of localizing products for foreign markets, longer accounts receivable payment cycles, difficulties in collecting payments, reduced protection for intellectual property, potentially adverse tax consequences, limits on repatriation of earnings, the burdens of complying with a wide variety of foreign laws, nationalization, war, insurrection, terrorism and other political risks and factors beyond the Company's control. Fluctuations in currency exchange rates could adversely affect sales denominated in foreign currencies and cause a reduction in revenue derived from sales in a particular country. In addition, revenue of the Company earned abroad may be subject to taxation by more than one jurisdiction, thereby adversely affecting the Company's earnings. There can be no assurance that such factors will not materially adversely affect the Company's future international sales and, consequently, the Company's business, financial condition operating results and cash flows.
Product Liability
The license and support of products by the Company may entail the risk of exposure to product liability claims. A product liability claim brought against the Company or a third party that the Company is required to indemnify, whether with or without merit, could have a material adverse effect on the Company's business, financial condition, operating results and cash flows. The Company carries insurance coverage for product liability claims which it believes to be adequate for its operations.
Concentration of Stock Ownership; Anti-Takeover Effects; Investment Canada Act
The Company's directors, officers and their respective affiliates, in the aggregate, beneficially own approximately 26.6% of the outstanding Common Shares. As a result, these shareholders, if acting together, may be able to exercise significant influence over the Company and many matters requiring shareholder approval, including the election of directors and approval of significant corporate transactions. Such concentration of ownership may under certain circumstances also have the effect of delaying, deferring or preventing a change in control of the Company.
An investment in the Common Shares of the Company which results in a change of control of the Company may, under certain circumstances, be subject to review and approval under the Investment Canada Act if the party or parties acquiring control is not a Canadian person (as defined therein). Therefore, the Canadian regulatory environment may have the effect of delaying, deferring or preventing a change in control of the Company.
The Company is organized under the laws of Canada and, accordingly, is governed by the CBCA. The CBCA differs in certain material respects from laws generally applicable to United States corporations and shareholders, including the provisions relating to interested directors, mergers and similar arrangements, takeovers, shareholders' suits, indemnification of directors and inspection of corporate records.
In December 1998, the Company implemented a stock rights plan (the "Plan"). Pursuant to the Plan, shareholders of record on December 17, 1998 received a dividend of one right to purchase for CDN$140 one Common Share of the Company. The rights are attached to the Company's Common Shares and will also become attached to Common Shares issued in the future. The rights will not be traded separately and will not become exercisable until the occurrence of a triggering event, defined as an accumulation by a single person or group of 20% or more of the Company's Common Shares. After a triggering event, the rights will detach from the Common Shares. If the Company is then merged into, or is acquired by, another corporation, the Company may either (i) redeem the rights or (ii) permit the rights holder to receive in the merger Common Shares of the Company or of the acquiring company equal to two times the exercise price of the right (i.e., CDN$280). In the latter instance, the rights attached to the acquirer's stock become null and void. The effect of the rights program is to make a potential acquisition of the Company more expensive for the acquirer if, in the opinion of the Company's Board of Directors, the offer is inadequate. While the Company is not aware of any circumstance that might result in the acquisition of a sufficient number of shares of the Company's Common Shares to trigger distribution of the Rights, existence of the Rights could discourage offers for the Company's stock that may exceed the current market price of the stock, but that the Board of Directors deems inadequate.
As a result of being a reporting issuer in certain provinces of Canada, the Company is required to file certain reports in such jurisdictions. As part of such reports, the Company is required to file consolidated financial statements prepared in accordance with generally accepted accounting principles as applied in Canada ("Canadian GAAP"). Canadian and US GAAP differ in certain respects, including the treatment of certain reorganization costs and acquired research and development costs. As a result, the Company's Consolidated Financial Statements included in this report may differ materially from the financial statements filed by the Company in Canada.
Market for the Common Shares; Potential Volatility of Stock Price
The trading prices of the Common Shares have been subject to wide fluctuations since trading of the Company's shares commenced in December 1995. There can be no assurance that the market price of the Common Shares will not significantly fluctuate from its current level. The market price of the Common Shares may be subject to wide fluctuations in response to quarterly variations in operating results, announcements of technological innovations or new products by the Company or its competitors, changes in financial estimates by securities analysts, or other events or factors. In addition, the financial markets have experienced significant price and volume fluctuations for a number of reasons, including the failure of the operating results of certain companies to meet market expectations that have particularly affected the market prices of equity securities of many high-technology companies that have often been unrelated to the operating performance of such companies. These broad market fluctuations, or any industry-specific market fluctuations, may adversely affect the market price of the Common Shares. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been instituted against such a company.
Such litigation, whether with or without merit, could result in substantial costs and a diversion of management's attention and resources, which would have a material adverse effect on the Company's business, financial condition, operating results and cash flows.
Year 2000
Many currently installed computer systems, software products and electronic products are coded to accept only two-digit entries in the date code field. These date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. As a result, during 1999 the Company, its suppliers and customers, and its potential suppliers and customers, may need to upgrade, repair or replace certain computer systems or software to minimize the adverse impact of system failures related to "Year 2000" noncompliance.
The Company has conducted an internal and external review of its systems and has contacted its material software and other suppliers to determine any major areas of exposure of its systems of Year 2000 issues. As a result of the internal review to date, the Company believes that its products are Year 2000 compliant and that it has identified all necessary computer hardware and software upgrades and replacements necessary to make the Company's material computing and business systems Year 2000 compliant. As a result of the external review to date, the Company believes that its material suppliers are Year 2000 compliant.
To date, the Company has not incurred, and does not expect to incur, material costs to review and remedy Year 2000 compliance problems. Although the Company believes that its products are Year 2000 compliant, failure to provide Year 2000 compliant solutions to its customers or to receive such business solutions from its suppliers could have a material adverse effect on the Company's business, financial condition, operating results and cash flows. Furthermore, the Company may incur additional expense if its products are used by customers on third-party hardware and operating systems that are not Year 2000 compliant, which could result in a material adverse effect on the Company's business, operating results, financial condition, and cash flows. There can be no assurance that the systems or products of other entities, including the Company's suppliers on which the Company relies, disruptions in the economy generally resulting from Year 2000, issues, and disruptions caused by customers deferring their purchase decisions or implementation plans due to their own internal Year 2000 remediation activities, will not have a material adverse effect on the Company.
Additionally, there is the possibility that in the coming year corporations in dealing with their own Year 2000 issues will defer some software purchases except for the most urgent and those relevant to solving their own Year 2000 concerns. To the extent that this occurs, it could materially adversely affect the Company's results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operation - Year 2000".
Item 2:
Item 2: Properties
The Company occupies approximately 92,000 square feet of leased office space at its headquarters in Richmond, British Columbia for its product development, marketing, support, administration and sales operations. The Company intends to seek to sub-let a portion of the space until such time as full occupancy is required. The lease expires on November 30, 2008 with two options to renew for five years each. The Company also leases approximately 17,400 square feet of office space in Cambridge, England under a lease which terminates on April 8, 2004. The Company also maintains an office in Itasca, Illinois. The Itasca office lease is for approximately 28,000 square feet and terminates on November 30, 1999.
Item 3:
Item 3: Legal Proceedings
As of the date hereof, there is no material litigation pending against the Company. From time to time, the Company is a party to litigation and claims incident to the ordinary course of its business. While the results of litigation and claims cannot be predicted with certainty, the Company believes that the final outcome of such matters will not have a material adverse effect on the Company's business, financial condition, operating results and cash flows.
Item 4:
Item 4: Submission of Matters to a Vote of Security Holders
Not applicable.
Part II
Item 5:
Item 5: Market for Registrant's Common Equity And Related Stockholder Matters
Price Range of Common Shares
The Company's Common Shares began trading on The Toronto Stock Exchange and on the Montreal Exchange under the symbol "MMD" on December 20, 1995 and began trading on the NASDAQ National Market System under the symbol "MDSIF" on November 26, 1996. The Company intends to change its NASDAQ National Market System trading symbol to "MDSI" in April 1999. Prior to December 20, 1995, there was no public market for the Common Shares. The following table sets forth, for the periods indicated, the high and low sale prices for the Common Shares as reported on The Toronto Stock Exchange and the NASDAQ National Market System with their equivalent U.S. dollar amounts where applicable.
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(1) US dollar amounts have been translated using the average noon buying rate for Canadian dollars for the relevant quarter.
As of December 31, 1998 the Company had approximately 187 shareholders of record (including nominees and brokers holding street accounts), 66 shareholders of whom had addresses in the United States and who held 4,403,697 Common Shares, or 67.1% of the Company's outstanding Common Shares.
The Company has never paid dividends on its Common Stock. The Company currently intends to retain earnings for use in its business and does not anticipate paying any dividends in the foreseeable future. The Company's current bank credit agreement prohibits the payment of dividends without prior consent of the lender.
Item 6:
Item 6: Selected Financial Data
The following selected consolidated financial data of the Company is qualified in its entirety by reference to and should be read in conjunction with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and notes thereto included elsewhere in this report. The consolidated statements of operations data for the years ended December 31, 1998, 1997, 1996 and 1995 and the year ended June 30, 1995 and the consolidated balance sheet data at December 31, 1998, 1997, 1996 and 1995 and at June 30, 1995 are derived from and are qualified by reference to the Company's audited consolidated financial statements which were audited by Deloitte & Touche LLP. This selected consolidated financial data is presented in conformity with generally accepted accounting principles in the United States.
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(1) Operating loss for the year ended December 31, 1997 includes non-recurring charges of $6,371,192 (US$4,585,984) including $1,145,152 (US$824,280) with respect to restructuring certain operations and $5,226,040 (US$3,761,704) due to changes in estimates to complete certain contracts entered into by its UK operations which existed prior to the Company's acquisition of MDSI UK. (2) Operating loss for the years ended December 31, 1997 and 1996 includes non-recurring charges of $10,002,982 (US$7,200,146) and $8,523,363 (US$6,229,726) as a result of acquired research and development costs relating to the acquisitions of Alliance and MDSI UK in April 1997 and June 1996, respectively. (3) Operating loss for the year ended December 31, 1995 includes non-recurring charges of $2,017,819 (US$1,490,765) and $688,374 (US$508,571) as a result of restructuring and reorganization costs, respectively, relating to the acquisition of TelSoft in December 1995. (4) Solely for the convenience of the reader, Canadian dollar income statement amounts have been translated into U.S. dollars using the average noon buying rate in New York City for cable transfers payable in Canadian dollars as certified for customs purposes by the Federal Reserve Bank of New York for the relevant period, and Canadian dollar balance sheet amounts have been translated using the relevant period-end noon buying rate, as set forth in "Exchange Rates". These translations are not necessarily representative of the amounts that would have been reported if the Company had historically reported its financial statements in U.S. dollars. In addition, the rates utilized are not necessarily indicative of the rates in effect at any other time. (5) In 1995, the Company changed its year end from June 30 to December 31. The results of operations for the year ended December 31, 1995 are restated to present the results for the entire twelve month period.
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
On December 31, 1998 the noon buying rate was Cdn$1.00 = US$0.6504. The Canadian dollar is convertible into U.S. dollars at freely floating rates, and there are currently no restrictions on the flow of Canadian currency between Canada and the United States.
Item 7:
Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion contains "forward looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934. The fourth paragraph under "Revenue", and the paragraphs entitled "Research and Development" , "Sales and Marketing" , and "General and Administrative" , in the section entitled "Year ended December 31, 1998 Compared to the Year ended December 31, 1997" contain forward looking statements. Actual results could differ materially from those projected in the forward looking statements as a result of the Company's ability to accelerate or defer operating expenses, achieve revenue in a particular period, hire new personnel and other factors set forth under "Business-Risk Factors" in Item 1 of this Annual Report on Form 10-K. In particular, note the Business-Risk Factors entitled "Potential Fluctuations in Quarterly Operating Results", "Lengthy Sales Cycles", "Dependence on Large Contracts and Concentration of Customers", "Limited Operating History; Increased Expenses", "Integration of Acquisitions" and "Competition".
Unless otherwise noted, all financial information in this report is expressed in the Company's functional currency, Canadian dollars. See item 7A
Item 7A: Quantitative and Qualitative Disclosure About Market Risk
The Company's primary market risk is foreign currency exchange rates. The Company has established procedures to manage sensitivity to foreign currency exchange rate market risk. These procedures include the monitoring of the Company's net exposure to each foreign currency and the use of foreign currency forward contracts to hedge firm exposures to currencies other than the Canadian and United States dollars and the Great Britain pound. The Company has operations in the United States and Great Britain in addition to its Canadian operations and did not hedge these exposures in 1998. However, the Company may from time-to-time hedge any net exposure to the United States dollar and the Great Britain pound.
As of December 31, 1998, the potential reduction in future earnings from a hypothetical instantaneous 10% change in quoted foreign currency exchange rates applied to the foreign currency sensitive contracts and assets would be approximately $3.0 million. The foreign currency sensitivity model is limited by the assumption that all foreign currencies, to which the Company is exposed, would simultaneously change by 10%. Such synchronized changes are unlikely to occur. The sensitivity model does not include the inherent risks associated with anticipated future transactions denominated in foreign currencies or future forward contracts entered into for hedging purposes.
Subsequent to December 31, 1998, the Company has entered into foreign currency forward contracts in respect of net exposures under customer contracts to the Belgian Franc and Danish Kroner. Effective January 1, 1999, the Belgian Franc is tied to the Euro, the new European Union common currency. The effect of the subsequent transactions is to reduce the potential reduction in future earnings from a hypothetical instantaneous 10% change in quoted foreign currency exchange rates to $2.2 million.
The Company does not have any material exposure to interest or commodity risks. The Company is exposed to economic and political changes in international markets where the Company competes such as inflation rates, recession, foreign ownership restrictions and other external factors over which the Company has no control; domestic and foreign government spending, budgetary and trade policies.
Item 8:
Item 8: Financial Statements and Supplementary Data
Reference is made to the financial statements listed under the heading "(a)(1) Financial Statements" of Item 14 herein, which financial statements are incorporated herein by reference in response to this Item 8.
Item 9:
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
PART III
Item 10:
Item 10: Directors and Officers of the Registrant
The following table sets forth certain information concerning the Company's executive officers, officers and directors as of December 31, 1998.
(1) Member of Compensation Committee. (2) Appointed February 1, 1999 (3) Member of Corporate Governance and Nominating Committee. (4) Member of Audit Committee.
Erik Dysthe has served as Chairman of the Company since its inception. He was also Chief Executive Officer of the Company from its inception to November 1998 and President from its inception until February 1996. From July 1989 to March 1992, Mr. Dysthe was Vice President of Marketing and Sales at Orcatron Systems. Since September 1997, Mr. Dysthe has also been Managing Director - U.K. Operations on an interim basis.
Kenneth R. Miller has served as the Company's Chief Executive Officer since December 1998. From 1995 to 1998, Mr. Miller held various senior management positions within the Company, including President, Vice President - Finance, Chief Financial Officer and Corporate Secretary. Since May 1995, Mr. Miller has served as a director of Avcan Global Systems Inc. From 1987 to the present, Mr. Miller has served as President and Chief Executive Officer of Southview Equities Ltd., a private investment company of which Mr. Miller is a controlling shareholder.
Robert G. Cruickshank was appointed the Company's President and Chief Operating Officer on February 1, 1999. Mr. Cruickshank has over 28 years experience in the telecommunications industry with BC Telephone Company, where he held a number of senior management positions, including Senior Vice President, Sales and Customer Service from 1997 to 1999 and President of BC Tel Mobility from 1992 to 1997.
Verne D. Pecho has served as Vice President - Finance and Administration and Chief Financial Officer of the Company since June 1996. From June 1995 to June 1996, Mr. Pecho was an independent consultant. From September 1992 to June 1995, Mr. Pecho was Executive Vice President and Chief Financial Officer of Versacold Corporation.
Robert Campbell has served as Vice President - Telecom/Cable of the Company since February 1996. From 1991 to 1996, Mr. Campbell was a Regional Sales Manager of McDonald, Dettwiler and Associates Ltd.
James R. Dalbey has served as Senior Vice President - International from November 1998. From inception of the Company to October 1998, Mr. Dalbey held various senior management positions within the Company, including Senior Vice President - Utilties & International and Vice President - Sales, Utilities. From October 1992 to December 1995, Mr. Dalbey was Vice President - Sales for MDSI Canada. From 1990 to 1992, Mr. Dalbey was President of Epic Security Systems.
Brent W. James has served as Vice President - Marketing and Business Development of the Company since January 1996. From February 1994 to December 1995, Mr. James was Vice President and General Manager of MDSI USA. From March 1993 to January 1994, Mr. James was Vice President - Marketing and Business Development of MDSI Canada. From February 1991 to March 1993, Mr. James was the Vice President of TIR Systems, Inc.
M. Greg Beniston has served as Vice President - Legal and Corporate Secretary of the Company since March 1996. From 1993 to the present, Mr. Beniston has also served as Corporate Counsel and Secretary of Xillix Technologies Corp. From 1988 to 1993, Mr. Beniston was a lawyer at the firm of Russell & DuMoulin, Barristers and Solicitors in Vancouver, British Columbia.
Glenn Y. Kumoi has served as General Counsel since December 1998. From April 1997 to November 1998 he was President of MDSI Software SRL. From October 1996 to March 1997, Mr. Kumoi served as Vice President - Customer Contracts of the Company. From 1994 to 1996, Mr. Kumoi was a lawyer at the firm of Wedge and Company, Computer Law in Vancouver, British Columbia. From 1991 to 1994, Mr. Kumoi was a lawyer at the firm of Richards, Buell, Sutton, Barristers and Solicitors in Vancouver, British Columbia.
Geoffrey Engerman has served as Vice President - US Operations since July 1997. From 1994 to July 1997, was President and Chief Technology Officer of Alliance. From 1983 to 1994, Mr. Engerman served as Vice President, Chief Operating Officer of Alliance.
Simon Backer has served as Vice President - Transportation and Customer Engineering since July 1998. From August 1997 to June 1998, Mr. Backer was Vice President - Customer Engineering. Between 1997 and 1998 he was President and CEO of Retix Wireless Inc. From 1984 to 1996, Mr. Backer held numerous positions of progressive responsibility at Motorola's Wireless Data Group (formerly MDI), culminating in his appointment as Director of Architecture in 1996.
Tommy Lee has served as Vice President - Product Development since 1997. From inception of the Company to 1997, Mr. Lee served in various technical positions, including Director - Product Development and Software Development Manager. Between 1998 and 1995, Mr. Lee was a member of the scientific and engineering staff at McDonald, Dettwiler and Associates Ltd.
Douglas Engerman has served as Vice President - Utilities since November 1998. From July 1997 to October 1998 he was Vice President - Sales of MDSI USA. From 1989 to 1997, he was Executive Vice President at Alliance and was responsible for Sales and Marketing.
Ronald Toffolo has served as Vice President - Human Resources since 1999. Between 1997 and 1998 he was Director of Human Resources. From 1985 to 1997, he held various human resources management positions at Canadian Airlines International Ltd.
Gerald F. Chew has served as a director of the Company since December 1995. Mr.Chew is currently Executive Vice President of Ancora Capital & Management Group, LLC. From August 1996 to February 1997, he was Chief Operating Officer of SpotMagic, Inc. From November 1992 to July 1996, Mr. Chew served as Executive Director of Strategy Development for U S WEST, Inc.
Bruno Ducharme has served as a director of the Company since May 1996. Mr. Ducharme is currently President and Chief Executive Officer of Telesystem International Wireless Services Inc. and Executive Vice-President of Telesystem Ltd. Mr. Ducharme has held various senior management positions within the Telesystem group of companies since its inception in 1991.
Robert C. Harris, Jr. has served as a director of the Company since December 1995. Mr. Harris is currently Senior Managing Director of Bear Stearns & Co., Inc. Mr. Harris was a co-founder and Managing Director of Unterberg Harris from May 1989 until November, 1997. Mr. Harris also serves as a director of N2K, Inc. and a number of private companies.
John T. McLennan has served as a director of the Company since February 1998. Mr. McLennan was the President and Chief Executive Officer of Bell Canada from 1994 to 1997 and is currently the President of Jenmark Consulting Inc. Mr. McLennan also serves as a director of Hummingbird Communications Ltd. and Architel Systems Corporation.
Terrence P. McGarty has served as a director of the Company since December 1995. Mr. McGarty is currently President and CEO of Zepher Telecommunications Inc. He also served as Chairman and Chief Executive Officer of The Telmarc Group, Inc. from 1992 to 1998.
Marc Rochefort has served as a director of the Company since June 1996. Mr. Rochefort has been a partner at the law firm of Desjardins Ducharme Stein Monast in Montreal, Quebec since May 1993. From March 1989 to April 1993, Mr. Rochefort was a partner at the law firm of Clark Lord Rochefort Fortier. Mr. Rochefort also serves as a director of Mont Saint-Sauveur International Inc., as well as numerous other private companies.
Board of Directors
Each member of the Board of Directors is elected annually and holds office until the next annual meeting of shareholders or until his successor has been elected or appointed, unless his office is earlier vacated in accordance with the Bylaws of the Company or the provisions of the CBCA. Officers serve at the discretion of the Board and are appointed annually. The Company's Board of Directors currently has three committees, the Audit Committee, the Corporate Governance and Nominating Committee and the Compensation Committee.
Committees of the Board of Directors
The Audit Committee recommends independent accountants to the Company to audit the Company's financial statements, discusses the scope and results of the audit with the independent accountants, reviews the Company's interim and year-end operating results with the Company's executive officers and the Company's independent accountants, considers the adequacy of the internal accounting controls, considers the audit procedures of the Company and reviews the non-audit services to be performed by the independent accountants. The members of the Audit Committee are Terrence P. McGarty, Gerald F. Chew and Bruno Ducharme.
The Corporate Governance and Nominating Committee monitors and assesses the corporate governance system in place in the Company, develops corporate disclosure and insider trading policies, and monitors the effectiveness of the Board of Directors, its size and composition, its committees and the individual performance of its directors. The Corporate Governance and Nominating Committee also identifies and recommends potential appointees to the Board of Directors, reviews the adequacy of directors and officers third-party liability coverage, ensures that annual strategic planning process and review is carried out and approves appropriate orientation and education programs for new directors. The members of the Corporate Governance and Nominating Committee are Marc Rochefort, Gerald F. Chew, Robert C. Harris, Jr., John T. McLennan, Terrence P. McGarty and Bruno Ducharme.
The Compensation Committee reviews and recommends the compensation arrangements for the executive officers of the Company and administers the Company's stock option and stock purchase plans. The members of the Compensation Committee are Robert C. Harris, Jr., Gerald F. Chew and Kenneth R. Miller.
Section 16 (a) Beneficial Ownership Reporting Compliance
The Company is a foreign private issuer and, as such, its insiders are not required to file reports under Section 16(a).
Item 11:
Item 11: Executive Compensation
Report of the Compensation Committee
The Company's compensation program for all executive officers is administered by the Compensation Committee of the Board of Directors which is composed of two non-employee directors and one-employee director. The compensation of the Chairman, Chief Executive Officer (CEO) and the President and Chief Operating Officer (COO) is determined by Compensation Committee. The Chairman and the CEO had variable components to their compensation in the past financial year based on certain performance criteria. With respect to compensation for executive officers other than the Chairman, the CEO or the President and COO, the Board of Directors reviews a compensation proposal prepared by the CEO and the President and COO, and approved by the Compensation Committee.
Objectives
The primary objectives of the Company's executive compensation program are to enable the Company to attract, motivate and retain outstanding individuals and to align their success with that of the Company's shareholders through the achievement of strategic corporate objectives and creation of shareholder value. The level of compensation paid to an individual is based on the individual's overall experience, responsibility and performance. The Company's executive compensation program consists of a base salary, performance bonuses and stock options. The Company furnishes other benefits to certain of its officers and other employees.
Chief Executive Officers and Executive Officers
There are currently 15 executive officers of the Company. For purposes of this section, "executive officer" of the Company means an individual who at any time during the year was the Chairman or a Vice-Chairman of the board of directors, where such person performed the functions of such office on a full-time basis; the President; any Vice-President in charge of a principal business unit such as sales, finance or production; any officer of the Company or of a subsidiary of the Company, and any other person who performed a policy-making function in respect of the Company.
Employment Agreements
The Company has entered into employment agreements with each of its Named Executive Officers (as hereinafter defined), providing for base salaries and incentive plan bonuses as approved by the Board of Directors of the Company, medical and dental benefits and reimbursement for certain expenses approved by the Company.
Termination Arrangements
The Company may terminate any of its officers for cause without any payment of any kind of compensation, except for such compensation earned to the date of such termination. The Company may terminate any of its officers without cause by giving notice and upon payment of all salary and bonuses owing up to the date of termination and a lump sum termination payment equal to their base annual salary. Any officer may terminate their employment with the Company at any time by giving four weeks written notice to the Board of Directors of the Company. In the event of a takeover or change of control of the Company, any officer of the Company may elect to terminate their employment and receive, in addition to compensation earned to the date of his termination, a lump sum payment equal to their annual base salary. If an officer is terminated by the Company within two years after such takeover or change in control, such officer is also entitled to compensation earned to the date of termination and a lump-sum payment equal to his annual base salary.
Pension Arrangements
The Company and its subsidiaries do not have any pension arrangements in place for the Named Executive Officers or any other officers.
Summary Compensation Table
The following table sets forth all compensation paid in respect of the individuals who were at any time during the 1998, 1997 and 1996 financial years of the Company, Chief Executive Officers of the Company or its subsidiaries and the four most highly compensated executive officers among the Company and its subsidiaries (collectively "Named Executive Officers"):
Notes:
(1) Mr. Campbell joined the Company in February 1996. (2) Mr. Kumoi joined the Company in October 1996. (3) Mr. Engerman joined the Company in July 1997. (4)(5) Non-recurring bonus paid to Mr. Engerman in connection with the Company's acquisition of Alliance Systems, Incorporated.
Stock Options
The following table sets forth stock options granted by the Company during the financial year ended December 31, 1998 to any of the Named Executive Officers:
Option Grants During the Financial Year Ended December 31, 1998\
The following table sets forth details of each exercise of stock options during the financial year ended December 31, 1998 by any of the Named Executive Officers, and the financial year end value of unexercised options on an aggregate basis:
Aggregated Options Exercised During the Financial Year Ended December 31, 1998 And Financial Year-End Option Values
(1) Based on TSE closing price of $27.50 on December 31, 1998.
Compensation of Directors
In November 1998 the Company commenced paying its outside directors a meeting stipend of US$2,500 for each board meeting they attended in person and US$1,000 for certain committee meetings. During the financial year ended December 31, 1998, the directors of the Company received aggregate cash compensation of $24,134 for their services. The Directors were also reimbursed for actual expenses reasonably incurred in connection with the performance of their duties as Directors.
Directors were also eligible to receive stock options issued pursuant to the Company's Stock Option Plan and in accordance with rules and policies of The Toronto Stock Exchange. On February 26, 1998, one Director was granted 30,000 stock options vesting over three years at an exercise price of $20.00 and five Directors were each granted 3,000 stock options with immediate vesting at an exercise price of $20.00. On September 17, 1998 three Directors were each granted 3,000 stock options vesting over two years at an exercise price of $15.50. These stock options are subject to the grantee being a Director on the date of vesting.
Item 12:
Item 12: Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information known to the Company with respect to the beneficial ownership of its Common Shares as of December 31, 1998, by (i) each person known by the Company to be the beneficial owner of more than 5% of the outstanding Common Shares, (ii) each director of the Company, (iii) each Named Executive Officer, and (iv) all directors and officers as a group. Except as otherwise indicated, the Company believes that the beneficial owners of the Common Shares listed below, based on information furnished by such owners, have sole investment and voting power with respect to such shares, subject to community property laws where applicable.
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* Represents beneficial ownership of less than 1% of the Common Shares.
(1) Unless otherwise indicated, the address of each beneficial owner is that of the Company.
(2) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission, based on factors including voting and investment power with respect to shares. Common Shares subject to options currently exercisable, or exercisable within 60 days after December 31, 1997, are deemed outstanding for computing the percentage ownership of the person holding such options, but are not deemed outstanding for computing the percentage ownership for any other person. Applicable percentage ownership based on aggregate Common Shares outstanding as of December 31, 1996.
(3) Includes 389,498 Common Shares held by Erik Dysthe Holdings Co. and options to purchase 52,864 Common Shares exercisable within 60 days after December 31, 1998 held by Mr. Dysthe individually.
(4) Includes options to purchase 106,110 Common Shares exercisable within 60 days after December 31, 1998.
(5) Includes options to purchase 30,805 Common Shares exercisable within 60 days after December 31, 1998.
(6) Represents options to purchase 8,263 Common Shares exercisable within 60 days after December 31, 1998.
(7) Represents options to purchase 30,032 Common Shares exercisable within 60 days of December 31, 1998.
(8) Represents options to purchase 18,000 Common Shares exercisable within 60 days after December 31, 1998.
(9) Includes options to purchase 33,000 Common Shares exercisable within 60 days after December 31, 1998.
(10) Includes options to purchase 1,170 Common Shares held by The Telmarc Group Inc. and options to purchase 10,375 Common Shares exercisable within 60 days after December 31, 1998.
(11) Includes options to purchase 10,375 Common Shares exercisable within 60 days after December 31, 1998.
(12) Represents options to purchase 10,000 Common Shares exercisable within 60 days after December 31, 1998.
(13) Includes options to purchase an aggregate of 440,373 Common Shares exercisable within 60 days after December 31, 1998
Item 13:
Item 13: Certain Relationships and Related Transactions
In April 1996, the Company entered into employment agreements with Erik Dysthe, the Company's Chairman, and Kenneth R. Miller, the Company's Chief Executive Officer. See Item 11 - "Executive Compensation".
The Company has granted options to certain of its directors and executive officers. See Item 11 - "Executive Compensation".
The Company believes that all of the transactions set forth above were made on terms no less favorable to the Company than could have been obtained from unaffiliated third parties. All future transactions, including loans, between the Company and its officers, directors, principal shareholders and their affiliates will be approved by a majority of the Board of Directors, including a majority of the independent and disinterested directors, and will continue to be on terms no less favorable to the Company than could be obtained from unaffiliated third parties.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
The following financial statements of the Registrant and the Report of Independent Auditors thereon are included herewith in response to Item 8 above.
(a) 1. Consolidated Financial Statements Report of Independent Auditors Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Changes in Stockholders' Equity Consolidated Statements of Cash Flows Notes to the Consolidated Financial Statements
2. Consolidated financial statement schedules and Report of Independent Auditors are included as follows: Schedule II: Valuation and Qualifying Accounts
3. Exhibits:
The following Exhibits are filed as part of this report:
Exhibit Number Exhibit Description - - -------- -------------------
t2.1 Agreement and Plan of Merger dated April 17, 1997 among the Company, MDSI Acquisition Corp., Alliance, Geoffrey Engerman and Doug Engerman (previously filed as Exhibit 2.2)
*3.1 Articles of Incorporation of the Company
*3.2 Articles of Amendments of the Company
*3.3 By-laws of the Company
*4.1 Form of Common Share Certificate
tt*10.1 1996 Stock Option Plan
tt10.2 1997 Stock Option Plan
tt10.3 1998 Stock Option Plan
tt*10.4 Stock Purchase Plan (previously filed as Exhibit 10.2)
tt10.5 1998 Stock Purchase Plan
*10.6 Form of Indemnification Agreement between the Company and certain officers of the Company (previously filed as Exhibit 10.4)
*10.7 Promissory Note dated January 2, 1996 granted by the Company and TelSoft in favor of Killean Consulting Inc. (previously filed as Exhibit 10.8)
*10.8 Promissory Note dated January 2, 1996 granted by the Company and TelSoft in favor of 382904 B.C. Ltd. (previously filed as Exhibit 10.9)
tt*10.9 Employment Agreement dated April 1, 1996 between the Company and Erik Dysthe (previously filed as Exhibit 10.18)
tt*10.10 Employment Agreement dated July 1, 1995 between the Company and Kenneth R. Miller (previously filed as Exhibit 10.19)
10.11 Lease dated September 25, 1997 between Sun Life Assurance Company of Canada and the Company
*10.12 Lease dated June 2, 1989 between Corporate Woods Associates and Service Systems International Limited and subsequent amendments (previously filed as Exhibit 10.23)
*10.13 Lease dated April 8, 1993 between Cambridge Scanning Company Limited and Spectronics Micro Systems Limited (previously filed as Exhibit 10.25)
11.1 Computation of Earnings Per Common Share.
*21.1 List of the Company's Subsidiaries.
23.1 Consent of Deloitte & Touche LLP.
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* Previously filed as exhibits with the same corresponding number with the Registrants' Registration Statement on Form (Registration No. J33-5872) and amendments numbers 1 and 2 thereto, filed with the Securities and Exchange Commission on October 28, 1996, November 13, 1996 and November 25, 1996, respectively.
tt This document has been identified as a management contract or compensatory plan or arrangement.
t Previously filed as an exhibit to Registrant's Registration Statement on Form
(b) Reports on Form 8-K None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, MDSI Mobile Data Solutions Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
March 31,1999.
MDSI MOBILE DATA SOLUTIONS INC.
By: /s/ KENNETH R. MILLER ---------------------------------------- Kenneth R. Miller, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report to be signed by the following persons on behalf of MDSI Mobile Data Solutions Inc. in the capacities and on the dates indicated.
MDSI MOBILE DATA SOLUTIONS INC.
Page
Report of Independent Auditors.............................................
Consolidated Balance Sheets................................................
Consolidated Statements of Operations......................................
Consolidated Statements of Changes in Stockholders' Equity.................
Consolidated Statements of Cash Flows......................................
Notes to the Consolidated Financial Statements.............................
Report of Independent Auditors
To the Board of Directors and Shareholders of MDSI Mobile Data Solutions Inc.
We have audited the accompanying consolidated balance sheets of MDSI Mobile Data Solutions Inc. as at December 31, 1998 and 1997 and the related consolidated statements of operations, stockholders' equity and cash flows for the each of the years in the three year period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 1998 and 1997 and the results of its operations and cash flows for each of the years in the three year period ended December 31, 1998 in conformity with accounting principles generally accepted in the United States.
/s/ DELOITTE & TOUCHE LLP Chartered Accountants Vancouver, British Columbia February 25, 1999
MDSI MOBILE DATA SOLUTIONS INC. Consolidated Balance Sheets (Expressed in Canadian dollars)
MDSI MOBILE DATA SOLUTIONS INC. Consolidated Statements of Operations (Expressed in Canadian dollars)
MDSI MOBILE DATA SOLUTIONS INC. Consolidated Statements of Stockholders' Equity (Expressed in Canadian dollars)
MDSI MOBILE DATA SOLUTIONS INC. Consolidated Statements of Cash Flows (Expressed in Canadian dollars)
MDSI MOBILE DATA SOLUTIONS INC. Consolidated Statements of Cash Flows (Expressed in Canadian dollars)
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING AND FINANCING ACTIVITIES
During the year ended December 31, 1998, the Company leased certain computer equipment to a customer. The transaction was accounted for as a sales-type lease with a discounted present value of $1,406,367 at December 31,1998. The equipment purchase was financed by capital lease, which had a balance of $1,199,214 at December 31, 1998.
During the year ended December 31, 1997, the Company issued 280,000 common shares and 280,000 common share purchase warrants on the exercise of 280,000 special warrants without additional consideration.
Also, during the year ended December 31, 1997, the Company acquired all of the issued and outstanding shares of Alliance Systems, Incorporated ("Alliance") for $9,116,828. Consideration consisted of 347,750 common shares of the Company and payments of $2,188,750, including cash of $1,892,426 (US$1,367,869) and unsecured promissory notes for $296,324 (US$214,219)
During the year ended December 31, 1996, the Company acquired all of the issued and outstanding shares of MDSI Mobile Data Solutions (UK) Ltd. (formerly Spectronics Micro Systems Limited - "MDSI UK") for $10,616,023. Consideration consisted of cash payments of $1,089,973 and convertible loan notes in the amount of $9,526,050.
MDSI MOBILE DATA SOLUTIONS INC. Notes to the Consolidated Financial Statements For the years ended December 31, 1998, 1997 and 1996 (Expressed in Canadian dollars)
1. SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in accordance with generally accepted accounting principles in the United States and reflect the following significant accounting policies:
(a) Basis of presentation
These consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated.
(b) Nature of operations
The Company develops, markets and supports wireless mobile data communication software products.
(c) Research and development
Research and development costs related to software are expensed as incurred unless a project meets the specified criteria for capitalization in accordance with Statement of Financial Accounting Standard No. 86 Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed. Acquired research and development costs related to software are charged to earnings on acquisition if there is no alternative future use and technological feasibility has not been established.
(d) Revenue recognition
The Company's revenue is derived primarily from the following sources:
(i) Software and services
Revenue related to software and services, including software licenses, is generally recognized on a percentage of completion basis, representing costs incurred relative to total estimated costs. Where the Company has contracted to deliver software without significant production, modification or customization required, revenue is recognized upon delivery if the fee is determinable and there is reasonable assurance of collection. Provisions for estimated losses on contracts are recorded when identifiable.
(ii) Third party products and services and terminals and infrastructure
Revenue from sales of third party products and services and terminals and infrastructure is recognized on delivery of products.
(iii) Maintenance and support
Revenue related to maintenance agreements for supporting and maintaining the Company's products are recognized rateably over the term of the agreement, generally one year.
(e) Work in progress
Work in progress is valued at the lower of cost and net realizable value. Cost is determined on a first-in first-out basis and generally consists of raw materials and direct labor. Net realizable value is based on the estimated selling price after allowing for all future costs of completion and disposal.
MDSI MOBILE DATA SOLUTIONS INC. Notes to the Consolidated Financial Statements For the years ended December 31, 1998, 1997 and 1996 (Expressed in Canadian dollars)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
(f) Capital assets
Capital assets are recorded at cost. Depreciation is charged to operations over the estimated useful lives of the assets as follows:
Computer hardware and software 30% declining balance Plant and equipment 15% declining balance Furniture and fixtures 20% declining balance Leasehold improvements lesser of lease term or useful life, generally five years
The carrying value of capital assets is reviewed on a regular basis for any permanent impairment in value. To date, no such impairment has been indicated.
(g) Goodwill
Goodwill arising on acquisitions is amortized on the straight-line basis over seven to ten years. Management regularly reviews the carrying value of goodwill based upon expected future cash flows. To date, no impairment has been indicated.
(h) Foreign exchange
The accounts of the Company and its foreign subsidiaries are expressed in Canadian dollars, its functional currency. Monetary assets and liabilities denominated in foreign currencies are translated at the rate in effect at the balance sheet date. Other balance sheet items and revenues and expenses are translated at the rates prevailing on the respective transaction dates. Translation gains and losses relating to current monetary items and revenue and expenses denominated in foreign currencies are included in income.
(i) Income taxes
The Company accounts for income taxes using the asset and liability method. Under this method, deferred income taxes are recorded for the temporary differences between the financial reporting basis and tax basis of the Company's assets and liabilities. These deferred taxes are measured by the provisions of currently enacted tax laws. Management believes that it is more likely than not that the Company will generate sufficient taxable income to allow the realization of the recorded deferred tax assets.
MDSI MOBILE DATA SOLUTIONS INC. Notes to the Consolidated Financial Statements For the years ended December 31, 1998, 1997 and 1996 (Expressed in Canadian dollars)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
(j) Earnings (loss) per common share
In February 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings Per Share (SFAS 128), which established new standards for computing and presenting earnings per share effective for fiscal years ending after December 15, 1997. With SFAS 128, Primary earnings per share is replaced by Basic earnings per share which is computed by dividing income available to common shareholders by the weighted average number of shares outstanding for the period. In addition, SFAS 128 requires the presentation of Diluted earnings per share which includes the potential dilution that could occur if common stock equivalents or other potentially dilutive securities were exercised or converted into common stock. Common stock equivalent shares are excluded from the computation if their effect is anti-dilutive. Common equivalent shares consist of the common shares issuable upon the conversion of the special warrants (using the if-converted method) and incremental shares issuable upon the exercise of stock options and share purchase warrants (using the treasury stock method).
(k) Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
(l) Derivatives
From time to time the Company may attempt to hedge its position with respect to currency fluctuations on specific contracts. This is generally accomplished by entering into forward contracts. Related costs are realized as the forward contracts are settled. The Company was not engaged in any forward contracts at December 31, 1998.
(m) Stock -based compensation
The Company accounts for stock-based compensation using the intrinsic value based method whereby compensation cost is recorded for the excess, if any, of the quoted market price of the common share over the exercise price at the date granted for all common stock options. As December 31, 1998, no compensation cost has been recorded for any period under this method.
The following pro forma financial information presents the net loss for the year and loss per common share had the Company adopted Statement of Financial Accounting Standard No. 123 (SFAS 123) Accounting for Stock-based Compensation.
MDSI MOBILE DATA SOLUTIONS INC. Notes to the Consolidated Financial Statements For the years ended December 31, 1998, 1997 and 1996 (Expressed in Canadian dollars)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
(m) Stock -based compensation (Continued)
Using the fair value method for stock-based compensation, additional compensation costs of approximately $3,368,111 would have been recorded for the year ended December 31, 1998 (1997 - $1,710,995 and 1996 - $732,611, respectively). This amount is determined using an option pricing model assuming no dividends are to be paid, an average vesting period of three years, a weighted average annualized volatility of the Company's share price of 56.03% (1997 - 43.93% and 1996 - 30.74% respectively) and a weighted average annualized risk free interest rate at 5.00% (1997 - 5.00% and 1996 - 5.46% respectively).
(n) Recent pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement No. 130 (SFAS 130), Reporting Comprehensive Income, which is required to be adopted for fiscal years beginning on or after December 15, 1997. SFAS 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Reclassification of financial statements for earlier periods presented is required. As the Company's operations do not generate any other comprehensive items, the adoption of this standard has no affect on the Company's financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement No. 131 (SFAS 131), Disclosures About Segments of an Enterprise and Related Information, which is required to be adopted for fiscal years beginning on or after December 15, 1997. SFAS 131 establishes new standards for the reporting of segmented information in annual financial statements and requires the reporting of certain selected segmented information on interim reports to shareholders. The Company adopted SFAS 131 for the year ended December 31, 1997 (Note 11).
In October 1997, the American Institute of Certified Public Accountants issued a Statement of Position, Software Revenue Recognition (SOP 97-2), which provides guidance in applying generally accepted accounting principles in recognizing revenue on software transactions. SOP 97-2 is effective for transactions entered into in fiscal years beginning after December 15, 1997. The Company adopted SOP-97-2 for the year ended December 31, 1997 and subsequent. The impact on the Company's financial statements is not material.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities, which standardizes the accounting for derivative instruments. SFAS 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999. The impact on the Company's financial statements is not expected to be material.
(o) Cash and cash equivalents
Cash and cash equivalents consist of cash on hand, deposits in banks and highly liquid investments with an original maturity of three months or less.
MDSI MOBILE DATA SOLUTIONS INC. Notes to the Consolidated Financial Statements For the years ended December 31, 1998, 1997 and 1996 (Expressed in Canadian dollars)
2) ACQUISITIONS
(a) Alliance Systems Incorporated
On April 17, 1997, the Company entered into an agreement to acquire all of the issued and outstanding shares of Alliance Systems Incorporated ("Alliance") for $9,116,828, consisting of 347,750 common shares and US$1,582,088 ($2,188,750) including cash of US$1,367,869 ($1,892,426) and US$214,219 ($296,324) of unsecured promissory notes which bear interest at 6.07% and mature on January 1, 1999. The acquisition was completed July 1, 1997 and the common shares were issued at that date. Alliance, based out of Itasca, Illinois, is a supplier of mobile workforce management solutions to the utility, public safety and cable market sectors.
This transaction has been accounted for using the purchase method and the purchase price has been allocated to the estimated fair value of net assets acquired as follows:
Estimated fair value of net assets acquired:
Current assets $ 1,737,363 Capital assets 1,117,328 Deferred income taxes 2,401,290 Other assets 27,287 ----------------- 5,283,268 ----------------- Current liabilities 6,833,045 Long-term debt 3,111,690 ----------------- 9,944,735 ----------------- (4,661,467) Acquired research and development 10,002,982 Goodwill 3,775,313 ----------------- $ 9,116,828 =================
The results of operations of Alliance have been consolidated from April 17, 1997.
(b) MDSI Mobile Data Solutions (UK) Ltd.
On June 28, 1996, the Company entered into an agreement to acquire 100% of the issued and outstanding shares of MDSI Mobile Data Solutions (UK) Ltd. (formerly Spectronics Micro Systems Limited - "MDSI UK") for aggregate consideration of $10,616,023 including (pound)500,000 ($1,089,973) payable in cash on closing and secured convertible loan notes in the amount of (pound)4,500,000 ($9,526,050). MDSI UK is a supplier of wireless computer-aided dispatching systems for the taxi, courier, and transport markets in the United Kingdom, Europe, Middle East, Southeast Asia and Australia.
MDSI MOBILE DATA SOLUTIONS INC. Notes to the Consolidated Financial Statements For the years ended December 31, 1998, 1997 and 1996 (Expressed in Canadian dollars)
2. ACQUISITIONS (Continued)
(b) MDSI Mobile Data Solutions (UK) Ltd. (Continued)
The acquisition has been accounted for using the purchase method and the purchase price has been allocated to the net estimated fair value of assets acquired as follows:
Net estimated fair value of assets acquired:
Current assets $ 5,343,114 Capital assets 547,081 ----------------- 5,890,195 ----------------- Current liabilities 7,205,980 ----------------- (1,315,785) Acquired research and development 8,523,363 Goodwill 3,408,445 ----------------- $10,616,023 =================
The operations of MDSI UK have been consolidated from June 28, 1996.
The secured convertible loan notes consisted of non-interest bearing Class A and B loan notes. The Class A loan notes, in the amount of (pound)3,870,940 were repaid December 4, 1996. The Class B loan notes in the amount of (pound)629,060 were discharged on the issue of 55,263 common shares on the conversion of notes in the amount of (pound)417,003 ($882,753) and the balance repaid during the year ended December 31, 1996.
3. LEASE RECEIVABLE
At December 31, future payments under customer sales-types leases are as follows:
--------------------
Total lease payments due $ 1,552,842 Less: amount representing interest (146,475) -------------------- Present value of lease payments 1,406,367 less: current portion (560,478) -------------------- $ 845,889 ====================
The lease has an effective interest rate of 7.25% and is payable in equal monthly instalments over 36 months.
MDSI MOBILE DATA SOLUTIONS INC. Notes to the Consolidated Financial Statements For the years ended December 31, 1998, 1997 and 1996 (Expressed in Canadian dollars)
4. CAPITAL ASSETS
5. INTANGIBLE ASSETS
6. LONG-TERM DEBT
(i) Stockholders
The amounts owing to stockholders are unsecured, non-interest bearing and without specific terms for repayment.
(ii) Promissory notes
The Company issued promissory notes in the amount of US$214,219 as part of the Alliance acquisition (Note 2 (a)) to former stockholders of Alliance. The promissory notes are unsecured, bear interest at the rate of 6.07% and matured January 1, 1999. The promissory notes have been paid, subsequently.
7. STOCKHOLDERS' EQUITY
(a) Stock options
The Company adopted its Stock Option Plan to provide options to purchase common shares of the Company for its employees, officers, directors and consultants. The options granted pursuant to the Stock Option Plan are exercisable at a price which is equal to the fair market value of the common shares at the time the options are granted. The maximum number of common shares reserved for issuance under the Stock Option Plan, including current options outstanding, is 1,850,000 common shares. Information regarding the Company's stock options is as follows:
MDSI MOBILE DATA SOLUTIONS INC. Notes to the Consolidated Financial Statements For the years ended December 31, 1998, 1997 and 1996 (Expressed in Canadian dollars)
7. STOCKHOLDERS' EQUITY (Continued)
The following table summarizes information concerning options outstanding at December 31, 1998:
At December 31,1997 and 1996, 414,547 and 218,499 options were exercisable at a weighted average exercise price of $13.15 and $11.55 respectively.
(b) Stock purchase plan
The Company has established a voluntary stock compensation arrangement for its full and part-time employees to purchase common shares of the Company by way of payroll deductions for a maximum of $10,000 for each employee per year. The subscription price of common shares purchased under the Stock Purchase Plan is determined based upon a weighted average market price of the Company's common shares each quarter, less 15%. The Company has reserved 100,000 common shares for issuance pursuant to the Stock Purchase Plan. During the year ended December 31, 1998, 17,919 common shares were issued under this Plan.
MDSI MOBILE DATA SOLUTIONS INC. Notes to the Consolidated Financial Statements For the years ended December 31, 1998, 1997 and 1996 (Expressed in Canadian dollars)
7. STOCKHOLDERS' EQUITY (Continued)
(c) Special warrants and share purchase warrants
In June 1996, the Company issued 280,000 special warrants through a private placement for net proceeds of $3,925,100 (net of issue costs of $30,000). Each special warrant was exchangeable, without further payment or additional consideration, into one common share and one share purchase warrant. During the year ended December 31, 1997, 280,000 common shares and 280,000 share purchase warrants were issued on the conversion of special warrants. During the year ended December 31, 1998, 258,000 share purchase warrants were exercised to purchase 51,600 common shares for proceeds of $731,400.
(d) Stock transactions
On December 2, 1996, the Company completed a public offering for the sale and issue of 1,495,000 common shares at a price of $20.10 (US$14.875) per share for net proceeds of $26,476,306 (net of offering costs of $3,573,194).
(e) Alliance employee stock ownership plan
Prior to the Company's acquisition of Alliance, the Alliance employees participated in an employee stock ownership plan (the ESOP). Upon the Company's acquisition of Alliance (Note 2(a)), the remaining unallocated shares held by the ESOP were allocated to employees. At December 31, 1998, 99,079 shares of the Company were held by the ESOP of which 99,079 will vest on July 1, 1999.
(f) Shareholder rights plan
On December 17, 1998, the Company's Board of Directors approved the adoption of a Shareholder Rights Plan, similar to those adopted by other Canadian companies, subject to shareholder approval at the next annual general meeting of the Company, scheduled to be held on May 6, 1999. Under the terms of the Plan, rights are attached to the common shares of the Company. These rights become marketable and exercisable only after certain specified events related to the acquisition of, or announcement of an intention to acquire 20% or more of the outstanding common shares of the Company.
8. INCOME TAXES
The provision for income taxes consists of the following:
MDSI MOBILE DATA SOLUTIONS INC. Notes to the Consolidated Financial Statements For the years ended December 31, 1998, 1997 and 1996 (Expressed in Canadian dollars)
The provision for income taxes reported differs from the amounts computed by applying the cumulative Canadian Federal and provincial income tax rates to the loss before tax provision due to the following:
The principal components of the deferred portion of the provision for income taxes are as follows:
The approximate tax effect of each type of temporary difference that gave rise to the Company's deferred tax assets are as follows:
1998 1997 ----------------- ----------------- Current Operating loss carry forwards $ 1,220,350 $ 2,096,544 ----------------- ----------------- Net current deferred tax asset $ 1,220,350 $ 2,096,544 ================= =================
1998 1997 ----------------- ----------------- Non-current Depreciation $ 40,271 $ 60,406 Operating loss carry forwards 1,314,131 4,460,628 Other (4,631) (17,348) ----------------- ----------------- 1,349,771 4,503,686 Less: valuation allowance (1,349,771) (4,503,686) ----------------- ----------------- Net non-current deferred tax asset $ - $ - ================= =================
MDSI MOBILE DATA SOLUTIONS INC. Notes to the Consolidated Financial Statements For the years ended December 31, 1998, 1997 and 1996 (Expressed in Canadian dollars)
8. INCOME TAXES (Continued)
During the year ended December 31, 1998, the Company concluded that tax benefits of $2,633,000 relating to previously disposed US operations would not be available to the Company in the future. The benefit of the losses and the related valuation allowance have been removed from the income tax reconciliations.
At December 31, 1998, the Company has the following loss carry-forwards available for tax purposes:
Country Amount Expiry ------- ------ ------
Canada $1,300,000 2003 through 2004
United Kingdom 3,000,000 (pound) unlimited
The loss carry-forwards in Canada are subject to certain annual restrictions.
9. RELATED PARTY TRANSACTIONS
Related party transactions and balances not disclosed elsewhere in these financial statements include advisory fees of US$25,000 paid to a company controlled by a director during the year ended December 31,1997.
10. COMMITMENTS AND CONTINGENCIES
(a) Capital and operating leases
At December 31, 1998, future minimum payments under capital and non-cancellable operating leases for office space and computer equipment are as follows:
Rent expense for the year ended December 31, 1998 in respect of operating leases for office space was $2,728,233 (1997 - $1,583,767; 1996 - $658,765).
MDSI MOBILE DATA SOLUTIONS INC. Notes to the Consolidated Financial Statements For the years ended December 31, 1998, 1997 and 1996 (Expressed in Canadian dollars)
10. COMMITMENTS AND CONTINGENCIES (Continued)
(b) Line and letters of credit
The Company has an operating line of credit with a Canadian commercial bank to borrow up to $8,000,000 which bears interest at prime plus 0.5%. As at December 31,1998, the Company was not utilizing the operating line of credit. In addition, the Company has an irrevocable revolving letter of credit with the same bank in the amount of (pound)200,000. Subsequent to December 31, 1998 the Company has provided as performance bonds, an irrevocable revolving letter of credit in the amount of Belgian Franc 101,068,000 and a bank guarantee in the amount of Danish Kroner 9,740,000, both with same bank. The company has pledged an amount equal to the letters of credit and guarantee against its operating line of credit as security.
11. SEGMENTED INFORMATION
Segmented information
In 1997, the Company adopted the Financial Accounting Standards Board statement No.131 (SFAS 131) requiring disclosure of a company's business segments. At the time of adoption, the Company had determined that it had only one reportable segment and therefore did not provide a detailed breakdown other than provided by its general purpose financial statements. In 1998, the Company has reassessed its position in regards to reportable segments and determined that it has two distinct segments based on the differing capabilities of the software and hardware platforms offered to customers. The following describes the reportable segments on which management bases its operating decisions and performance assessment.
Field Service - Field Service comprises software and services designed to serve the mobile workforce management needs of industry and government. Examples include the utility, telecommunication and public safety industries.
Delivery - The Delivery segment comprises software, hardware and services designed to serve providers of services to the general public for the movement of people and goods. Examples include the taxi, courier and roadside recovery industries.
Business Segments
Field Service Delivery Total - - --------------------------------------------------------------------------------
Revenue $ 67,588,754 $15,794,100 $ 83,382,854 Operating earnings 9,051,802 (1,125,337) 7,926,465 Depreciation & Amortization 1,298,480 938,721 2,237,201
Assets 44,018,594 12,549,762 56,568,356 Capital Expenditures 2,607,807 160,726 2,768,533
Revenue $ 52,859,186 $17,420,993 $ 70,280,179
Operating earnings (1,587,178) (8,175,772) (9,762,950) Depreciation & Amortization 1,628,683 849,650 2,478,332
Assets 27,064,461 13,579,553 40,644,014 Capital Expenditures 2,059,685 528,148 2,587,833
MDSI MOBILE DATA SOLUTIONS INC. Notes to the Consolidated Financial Statements For the years ended December 31, 1998, 1997 and 1996 (Expressed in Canadian dollars)
11. SEGMENTED INFORMATION (Continued)
Business Segments (continued) Field Service Delivery Total - - -------------------------------------------------------------------------------- Revenue $ 31,923,675 $13,218,895 $45,142,570
Operating earnings 3,320,636 (8,523,814) (5,203,178) Depreciation & Amortization 638,801 393,148 1,031,952 Assets 34,920,694 10,651,064 45,571,758 Capital Expenditures 851,829 101,475 953,304
Geographic information
The Company earned revenue from sales to customers and has long-lived assets, including capital assets and goodwill, in the following geographic locations:
Long-lived assets consist of the lease receivable, capital and intangible assets.
Major customers
During the year ended December 31, 1998, the Company earned revenue from one customer of $6,129,753 (1997 one customer of $7,598,277; 1996 - one customer of $15,922,960).
MDSI MOBILE DATA SOLUTIONS INC. Notes to the Consolidated Financial Statements For the years ended December 31, 1998, 1997 and 1996 (Expressed in Canadian dollars)
12. CHANGES IN NON-CASH OPERATING WORKING CAPITAL ITEMS
13. FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and capital lease obligations reflected in the balance sheets approximate their respective fair values.
The Company estimates the fair value of its non-interest bearing long-term debt using discounted cash flows assuming a borrowing rate equal to the Bank of Canada rate plus 2%.
The Company's revenues have historically been dependent on large contracts from a limited number of customers in the utility, telecommunications, courier and taxi market sectors. However, as these customers are geographically dispersed and bad debts have not been significant, concentrations of credit risk are considered to be minimal.
14. PROVISION FOR RESTRUCTURING AND CHANGES IN ESTIMATES TO COMPLETE
During the year ended December 31, 1997, the Company recorded a one-time charge of $6,371,192, including $1,145,152 with respect to restructuring of certain operations and $5,226,040 due to a change in the estimates to complete certain contracts by its UK operations. These contracts were entered into by MDSI UK prior to the acquisition by the Company.
15. SUBSEQUENT EVENTS
Subsequent to December 31, 1998, the Company:
(a) Issued 575,000 common shares on an oversubscribed share offering for net proceeds of $14,735,937
(b) Provided as performance bonds, an irrevocable revolving letter of credit expiring May 28, 2001 in the amount Belgian Franc 101,068,000 ($4.2 million) and a bank guarantee expiring February 2, 2000 in the amount of Danish Kroner 9,740,000 ($2.2 million).
(c) Sold Belgian Franc 134,400,000 ($5.6 million) and 104,000,000 ($4.3 million) under forward contracts due December 14, 1999 and October 31, 2000, respectively.
(d) Sold Danish Kroner 5,000,000 ($1.1 million) under a forward contract due October 29, 1999.
SCHEDULE II
MDSI MOBILE DATA SOLUTIONS INC. Valuation and Qualifying Accounts (Expressed in Canadian dollars)
Exhibit Number Exhibit Description - - -------- -------------------
t2.1 Agreement and Plan of Merger dated April 17, 1997 among the Company, MDSI Acquisition Corp., Alliance, Geoffrey Engerman and Doug Engerman (previously filed as Exhibit 2.2)
*3.1 Articles of Incorporation of the Company
*3.2 Articles of Amendments of the Company
*3.3 By-laws of the Company
*4.1 Form of Common Share Certificate
tt*10.1 1996 Stock Option Plan
tt10.2 1997 Stock Option Plan
tt10.3 1998 Stock Option Plan
tt*10.4 Stock Purchase Plan (previously filed as Exhibit 10.2)
tt10.5 1998 Stock Purchase Plan
*10.6 Form of Indemnification Agreement between the Company and certain officers of the Company (previously filed as Exhibit 10.4)
*10.7 Promissory Note dated January 2, 1996 granted by the Company and TelSoft in favor of Killean Consulting Inc. (previously filed as Exhibit 10.8)
*10.8 Promissory Note dated January 2, 1996 granted by the Company and TelSoft in favor of 382904 B.C. Ltd. (previously filed as Exhibit 10.9)
tt*10.9 Employment Agreement dated April 1, 1996 between the Company and Erik Dysthe (previously filed as Exhibit 10.18)
tt*10.10 Employment Agreement dated July 1, 1995 between the Company and Kenneth R. Miller (previously filed as Exhibit 10.19)
10.11 Lease dated September 25, 1997 between Sun Life Assurance Company of Canada and the Company
*10.12 Lease dated June 2, 1989 between Corporate Woods Associates and Service Systems International Limited and subsequent amendments (previously filed as Exhibit 10.23)
*10.13 Lease dated April 8, 1993 between Cambridge Scanning Company Limited and Spectronics Micro Systems Limited (previously filed as Exhibit 10.25)
11.1 Computation of Earnings Per Common Share.
*21.1 List of the Company's Subsidiaries.
23.1 Consent of Deloitte & Touche LLP.
- - ---------------------
* Previously filed as exhibits with the same corresponding number with the Registrants' Registration Statement on Form (Registration No. J33-5872) and amendments numbers 1 and 2 thereto, filed with the Securities and Exchange Commission on October 28, 1996, November 13, 1996 and November 25, 1996, respectively.
tt This document has been identified as a management contract or compensatory plan or arrangement.
t Previously filed as an exhibit to Registrant's Registration Statement on Form