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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- - --------------------------------------------------------------------------------
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 0-28968
MDSI MOBILE DATA SOLUTIONS INC.
(Exact name of registrant as specified in its charter)
CANADA NOT APPLICABLE
(Jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10271 Shellbridge Way
Richmond, British Columbia,
Canada V6X 2W8
(Address of principal executive offices)
Registrant's telephone number: (604) 207-6000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- - ------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, no par value
---------------------------
(Title of Class)
Rights to Purchase Common Shares
--------------------------------
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
Aggregate market value of the Registrant's Common Shares held by
non-affiliates as of March 27, 2000 was approximately US$386,765,000. The
number of shares of the Registrant's Common Shares outstanding as of March
27, 2000 was 7,671,856.
Exhibit Index Appears at Page 39
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Forward-Looking Statements
Certain statements in this Annual Report on Form 10-K constitute
forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that may
cause the actual results, performance or achievements of MDSI Mobile Data
Solutions Inc. ("MDSI" or the "Company"), or developments in the Company's
industry, to differ materially from the anticipated results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, but are not limited to: the Company's limited operating
history, lengthy sales cycles, the Company's dependence upon large contracts
and relative concentration of customers, risks involving the management of
growth and integration of acquisitions, competition, product development
risks and risks of technological change, dependence on selected vertical
markets and third-party marketing relationships and suppliers, risks and
uncertainties related to delivering its products and services on the
Internet, the Company's ability to protect its intellectual property rights
and the other risks and uncertainties described under "Business - Risk
Factors" in Part I of this Annual Report on Form 10-K. Certain of the forward
looking statements contained in this Report are identified with cross
references to this section and/or to specific risks identified under
"Business - Risk Factors."
Exchange Rates
The following table sets forth, for each period presented, the exchange
rates at the end of such period, the average of the exchange rates on the last
day of each month during the period and the high and low exchange rates for one
Canadian dollar, expressed in U.S. dollars, based on the noon buying rate in New
York City for cable transfers payable in Canadian dollars as certified for
customs purposes by the Federal Reserve Bank of New York.
U.S. Dollars Per Canadian Dollar
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
Period End ........ US $0.6925 US $0.6504 US $0.6999 US $0.7301 US $0.7323
Average ........... 0.6744 0.6715 0.7198 0.7329 0.7305
High .............. 0.6925 0.7105 0.7487 0.7513 0.7527
Low ............... 0.6535 0.6341 0.6945 0.7235 0.7023
On December 31, 1999 the noon buying rate was CDN$1.00 = US$0.6925. The Canadian
dollar is convertible into U.S. dollars at freely floating rates, and there are
currently no restrictions on the flow of Canadian currency between Canada and
the United States. Unless stated otherwise, all financial information is
expressed in Canadian dollars.
Part I
Item 1: Business
The Company
MDSI develops, markets, implements and supports mobile workforce
management solutions for use in the field service industry. 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, telecommunications companies, and public safety 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). 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. Prior to the Plan of
Arrangement, TelSoft held a 60% interest in MDSI Canada. As part of the Plan of
Arrangement, the Company
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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 was
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."
In February 1999, the Company's Board of Directors approved a plan to
dispose of its transportation business unit. Effective June 1, 1999, the Company
completed the sale of the transportation business unit to Digital Dispatch
Systems, Inc. ("DDS"), a supplier of dispatch systems to the taxi market for
proceeds of $5,532,730. The proceeds were comprised of common shares of DDS,
representing an 11% interest in DDS, and a promissory note in the principal
amount of $500,000, due January 1, 2001, bearing interest at 8% per annum.
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 industry are highly dependent upon
their mobile workforces to support their respective products and services. The
field service industry is composed of a number of market segments, such as the
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 public safety market 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 industry. 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
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subscribers. Consequently, the Company believes that mobile data solutions may
now be implemented without the difficulty and expense of establishing a private
radio network, thereby increasing the cost-effectiveness of such systems. The
Company believes that the convergence of these trends will increase the
likelihood of adoption of mobile data solutions by companies in the field
service industry. 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 industry to develop
mobile workforce management solutions that address the specific needs of
businesses within those vertical markets. MDSI's products enable
organizations in the field service and public safety industries to
effectively communicate with, manage and support their mobile workers.
MDSI's solutions include the Advantex family of applications and
wireless connectivity software products designed for the field service
industry. 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'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
industry. 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.
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 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. The Company
believes that this market will grow as companies implement new technology to
improve their
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competitiveness, efficiency and service levels. See "Forward-Looking
Statements." The Company has installed or has a contract to supply its
products to numerous telecommunication companies worldwide, including two
divisions of AT&T, Tele Danmark A/S, 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., Cablevision Systems and Adelphia Communications Corporation in the
United States and Rogers Cablesystems Ltd. and Videotron 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.
Customers and Applications
The Company's customers vary in size from small local service companies to
large regional and international organizations. During the year ended December
31, 1999 one international telecommunication company, Beligacom S.A., accounted
for 12.2% of the Company's consolidated revenues, and for the years ended
December 31, 1998 and 1997, one U.S. utility company accounted for 9.1% and
14.4%, respectively, of the Company's consolidated revenue. In the years ended
December 31, 1999, 1998 and 1997, approximately 36.6%, 32.6% and 42.5%,
respectively, of the Company's consolidated revenue was attributable to five or
fewer customers. The Company believes that revenue derived from a limited number
of customers will continue to represent a significant portion of its
consolidated revenue. In the years ended December 31, 1999, 1998 and 1997,
revenue derived from sales outside of North America accounted for 24.8%, 3.4%
and 10.1% of the Company's total revenue, respectively. See "Note 12 of the
Company's Consolidated Financial Statements." Because the Company's revenue is
dependent, in large part, on significant contracts with a limited number of
customers, the percentage of the Company's revenues that is derived from sales
outside of North America has fluctuated, and may continue to fluctuate, from
period-to-period. See "Business-Risk Factors - Dependence on Large Contracts and
Concentration of Customers" and "Forward-Looking Statements."
Products
The Company currently offers mobile workforce management solutions
focused on the field service industry. 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
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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 Gateway. The Advantex-Enterprise Gateway family of
inter-networking software products provides high speed, cost effective,
enterprise-wide connectivity solutions across multiple wireless and wireline
data networks. This software technology provides for the integration of existing
wireline-based computing environments with the most prevalent wireless networks.
Advantex-Enterprise Gateway allows users to integrate wireless and wireline data
applications in a marketplace where no connectivity or interpretability
standards are currently defined. MDSI markets the Advantex-Enterprise Gateway
product primarily to its existing customers. The Advantex-Enterprise Gateway
product consists of both the open message service (OMS) and open message client
(OMC) software components. OMS is a UNIX-based messaging solution providing
bridge, router and gateway functionality. OMC is a Windows product providing
wireless and wireline data access for PC compatible mobile computing devices.
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.
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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, 1999, the Company had 46 customer support
personnel, of whom 22 were located in Canada, 19 in the United States, 1 in the
United Kingdom and 4 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 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, 1999, MDSI's technical and engineering staff,
supporting both product development and professional services, consisted of 286
employees, including 223 employees based at its Richmond, British Columbia
headquarters, 62 employees based primarily at its Itasca, Illinois facility and
other locations in the United States and 1 in the United Kingdom.
During the years ended December 31, 1999, 1998 and 1997, the Company's
total expenditures for product development were $9.9 million, $8.7 million and
$4.9 million, respectively, reflecting 12.9%, 13.0% and 9.3% 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.
On February 1, 2000, the Company announced that it intends to sell its
Advantex family of mobile workforce and wireless connectivity application
software products over the Internet. See "Subsequent Events."
At December 31, 1999, the Company's sales, marketing and technical support
group consisted of 47 employees, with 26 based out of the Company's Richmond,
British Columbia facility, 18 based out of its Itasca, Illinois 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.
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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 Lucent Technologies, Inc. and
Telcordia (formerly Bellcore).
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 Telcordia and MobileForce Technologies, Inc. (formerly
Ubiquinet, Inc).
MDSI primarily competes in the public safety market with Cerulean, PRC,
Tiberon Systems, and New World Systems. Many of MDSI's competitors have a more
established reputation in the public safety market. In many of the large public
safety opportunities, MDSI is a subcontractor to a large prime contractor
serving as the overall system integrator. MDSI is currently used as a
subcontractor for public safety installations by Motorola.
Employees
As of December 31, 1999, the Company had 453 full-time employees and
contractors, including 286 in technical and engineering, 47 in sales, marketing
and technical support, 46 in customer support and 74 in management, finance and
administration. None of the Company's employees is represented by a labor union
and the Company believes its employee relations to be good.
Subsequent Events
On February 1, 2000, MDSI announced that it intends to sell its
Advantex family of mobile workforce management and wireless connectivity
application software products over the Internet from a wirelessly-enabled
Applications Service Provider ("ASP") site. When delivered over the Internet,
it is anticipated that the Advantex applications will be similar
in functionality to versions installed at customer sites. It is anticipated
that MDSI's customers will pay a monthly fee for use of the applications or
pay for the use of services on a "per transaction" basis. This strategy is
intended to create a recurring source of revenue for the Company.
The Company believes that its eBusiness strategy will assist it in
addressing the needs of smaller organizations in its traditional markets that
were previously unable to afford its products, and who did not have the
technical resources to support such products. See "Forward-Looking
Statements." MDSI intends to offer its ASP solution to customers through
(i) direct sales by MDSI, and (ii) co-marketing and partnership
arrangements with other ASP providers in select vertical markets.
MDSI also intends to use the ASP to host scheduling and dispatching
engines, which are limited-function, non-configurable versions of its
existing scheduling and wireless dispatching modules. MDSI intends to offer
these ASP-based products separately or jointly to small customers with simple
requirements in a variety of field service markets. See "Forward-Looking
Statements."
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Markets (eBusiness)
The Company intends to build upon its strength in the utilities and
telecommunications industries to implement the Company's eBusiness strategy.
The Company believes that competition and deregulation create an opportunity
for MDSI to offer its ASP services to smaller and medium-sized businesses in
MDSI's existing "core" markets. The Company's eBusiness offering is targeted
at the general services marketplace, which has been marked by the entrance of
Internet intermediaries who offer a wide range of services, including home
services, to consumers and small and medium-sized businesses. MDSI intends to
initially target the U.S. and Canadian markets and then pursue opportunities
in Europe. Further, MDSI intends to leverage its existing relationships with
wireless network carriers to act as an additional distribution point for its
ASP services. See "Forward-Looking Statements."
Customers and Applications (eBusiness)
Currently, the Company does not have any eBusiness customers. The
Company, in discussion with two organizations to establish new marketing
channels. The Company is currently engaged in negotiations with OurHouse.com
Inc. ("OurHouse.com"), an Internet web site for home improvement, home
services and how-to information. The Company intends to enter into a
distribution agreement with OurHouse.com, under which the Company will
provide its scheduling and wireless dispatching engines to OurHouse.com.
Under the proposed distribution arrangement, OurHouse.com customers will have
access to real time, on-line scheduling and wireless dispatching of home
repair and home improvement services. The Company made an investment of
approximately $500,000 in OurHouse.com in connection with its distribution
arrangement with OurHouse.com.
MDSI is also engaged in negotiations with BellSouth Wireless Data
("Bellsouth"), a company with which it has a current business relationship,
to finalize the terms of an agreement to integrate MDSI's ASP site with
BellSouth's Intelligent Wireless Network. Under the proposed agreement, the
parties intend to offer MDSI's eBusiness solutions jointly with airtime from
BellSouth's network. MDSI and BellSouth intend to jointly market the bundled
products, initially to small- to medium-sized utility and home service
companies.
MDSI believes that its eBusiness products will initially appeal to
smaller customers who cannot afford the upfront costs of on-site
implementations, and who do not have the internal technical resources to
operate such systems. Because MDSI intends to offer its eBusiness products on
a monthly subscription and/or transaction fee basis, the products have the
potential to add a recurring revenue stream and may reduce MDSI's dependence
on large contracts and individual customers. See "Forward-Looking Statements."
Products (eBusiness)
MDSI's eBusiness products are designed to leverage MDSI's core Advantex
products, including the wireless scheduling and dispatching technology.
MDSI's latest version of its Advantex platform, called R7, has been designed
to enable an ASP deployment. The eBusiness product, known as "eAdvantex",
represents a modular, configurable version of Advantex that can be configured
to support the needs of a variety of potential customers from a centrally
hosted system. MDSI anticipates that additional vertical market versions of
eAdvantex may be developed as initial customers are established. See
"Forward-Looking Statements."
Professional and Customer Support Services (eBusiness)
The Company is in the process of establishing a comprehensive, 7-day,
24-hour customer service support center to provide various levels of customer
support to its eBusiness customers. The Company is also conducting benchmarking
activities to assist in the design and operation of its data center. MDSI
intends to provide professional services in conjunction with the deployment of
its ASP offerings. These professional services personnel will draw upon the
experience of existing MDSI personnel and will assist in the configuration of
MDSI's systems to meet the needs of potential customers in the target markets.
Sales and Marketing (eBusiness)
The Company intends to market its eBusiness products through a direct
sales force. The Company also intends to use up to three other channels to
market its eBusiness products. First, the Company intends to enter into
agreements relationships with ASP's that are offering end-to-end suites of
operating solutions to MDSI's targeted vertical markets, such as the
telecommunications, utility and insurance markets. Under this type of
arrangement, MDSI would link its ASP site to the ASP's site to offer Advantex as
the workforce management component of the total solution. MDSI has yet to enter
into any of these agreements. Second, MDSI intends to expand its agreements with
wireless carriers and/or enter into new agreements with such carriers whereby
the carrier's network services would be
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integrated with MDSI's ASP site, allowing MDSI and the wireless carriers to
bundle airtime with workforce management and to jointly market the bundled
products to customers. MDSI is currently engaged in negotiations with
BellSouth with respect to a joint marketing agreement. Third, the Company
intends to enter into agreements with operators of Internet sites that
aggregate smaller service providers for home services, such as plumbing or
lawn care. In this case, the Company intends to offer its non-configurable
scheduling and dispatching products to such service providers. MDSI is
currently engaged in negotiations in enter into an agreement of this type
with OurHouse.com. See "Forward-Looking Statements."
Competition (eBusiness)
The Company will face competition from a number of existing competitors
and emerging Internet-based competitors in the eBusiness field. Existing
competitors including iMedion, ClickService (formerly IET), FieldCentrix, and
eDispatch. The Company believes that these competitors are primarily
targeting smaller-sized businesses with an ASP service offering. These
companies offer a "basic" scheduling and dispatch system. New competitors
targeting Internet intermediaries for the provision of scheduling and
dispatch software services include PointServe, ServeClick and X-Time. These
competitors are specifically focused on Internet-based scheduling and
dispatching services for the growing general services market, but do not
currently offer a wireless solution.
There can be no assurance that the Company will be able to successfully
develop its ebusiness strategy or that it 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.
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 currently
recognizes revenue on a percentage of completion method, delays in completion of
certain contracts has caused delays in recognition of revenue and, consequently,
unanticipated fluctuations in quarterly results. There can be no assurance that
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 implement its eBusiness
strategy, expand its sales and marketing operations, expand its distribution
channels, fund greater levels of research and development, broaden its customer
support capabilities and increase its administrative resources. The Company has
also implemented its eBusiness strategy, which it anticipates it will receive
revenues on a month-to-month or per-transaction basis. The Company anticipates
that costs associated with implementing its eBusiness strategy will increase the
Company's operating expenses and may not be offset by increased revenue until
the Company successfully penetrates the market for its ASP-based service. There
can be no assurance that the Company will effectively compete in this market or
receive sufficient revenues from its eBusiness to offset such costs.
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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.
Since 1996, the Company has been, and anticipates that from time to time
it will be, engaged to provide, in addition to its own products and services,
third party hardware, software and services, which the Company purchases from
vendors and sells to its customers. For the years ended December 31, 1999, 1998
and 1997, 12.9%, 27.7% and 28.6%, 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 for Advantex Products
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, 1999, 1998 and 1997, approximately 36.6%, 32.6% and 42.5%, respectively, of
the Company's consolidated revenue was attributable to five or fewer customers.
During the years ended December 31, 1999, 1998 and 1997, one customer accounted
for 12.2%, 9.1% and 14.4%, 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
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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, 1999, the Company had an accumulated deficit of
$12.3 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 implement its eBusiness
strategy, expand its sales and marketing operations, fund greater levels of
research and development, broaden its customer support capabilities and increase
its administration resources. A relatively high percentage of 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.
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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."
eBusiness Development
The Company intends to sell its Advantex family of mobile workforce
management and wireless connectivity application software products over the
Internet from a wirelessly-enabled ASP site on subscription or "per
transaction" basis. The Company's eBusiness products are targeted at Internet
intermediaries who offer a wide range of services, including home services
that to consumers and small and medium-sized businesses. The Company
anticipates that its operating expenses will increase as the Company
establishes a comprehensive 7 day, 24 hour customer service support center to
provide various levels of customer support for its eBusiness customers and
increases its development and marketing efforts. The Company does not
currently have any eBusiness customers, and there can be no assurance that
the Company will successfully implement its eBusiness strategy. There also
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.
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 453 employees located in
Canada, the United States and other international locations at December 31,
1999. In addition, the recent acquisition of Alliance has increased the number
of products the Company supports and markets, as well as the number of vertical
markets into which it sells products. The Company has also recently expanded the
geographical areas in which it 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
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compatible products for organizations with mobile workforces in other vertical
markets. In 1998, the utility market accounted for greater than 40% of the
Company's revenue. In 1999, the telecommunications market accounted for 48% of
the Company's revenue. The Company anticipates that a significant portion of its
future revenue will be generated by sales of products to the telecommunications
market. See "Forward-Looking Statements." A decline in demand for the Company's
products in the utility 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.
The Company intends to market its eBusiness products through a direct
sales force and through marketing relationships with ASP's that are offering
end-to-end suites of operating solutions to MDSI's targeted vertical markets,
wireless carriers and operators of Internet sites that aggregate smaller service
providers for home services. The Company anticipates that these marketing
relationships will be nonexclusive and may be terminated by either party without
cause. There can be no assurance that the Company's eBusiness solutions will be
compatible with these marketing partners or that they will not emphasize their
own or third-party products to the detriment of the Company's products. The
Company's failure to enter into marketing relationships, the failure of the
parties to perform under these agreements or the inability of the Company to
provide effective eBusiness solutions successfully could have 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 competitor for telecommunications customers are Lucent
Technologies, Inc. and Telcordia. The Company's principal competitors in the
cable market are Telcordia and MobileForce Technologies, Inc. In the general
field service market, the Company's principal competitors are Astea
International Inc. and Metrix Inc. In the public safety
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market, the Company's principal competitors are Cerulean, PRC, Tiberon Systems
and New World Systems. The Company's eBusiness will face competition from a
number of existing competitors and emerging Internet-based competitors,
including iMedion, ClickService (formerly IET), FieldCentrix, eDispatch,
PointServe, ServeClick and X-Time.
Risk of Product Defects
Software products, including those offered by the Company, from
time-to-time contain undetected errors or failures. There can be no assurance
that, despite testing by the Company and by current and potential customers,
errors will not be found in the Company's products. Such errors could result in
loss of or delay in market acceptance of the Company's products, which could
have a material adverse effect on the Company's business, financial condition,
operating results and cash flows.
Proprietary Technology
The Company's success is dependent on its ability to protect its
intellectual property rights. The Company relies principally upon a combination
of copyright, trademark, trade secret and patent laws, non-disclosure agreements
and other contractual provisions to establish and maintain its rights. To date,
the Company has been granted trademark registrations or has registrations
pending in the United States, Canada and the European Community for the MDSI,
Advantex and Compose marks. Other than one patent pending for certain
technology, 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.
15
<PAGE>
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, 1999, 1998 and 1997 revenue derived from
sales outside of North America accounted for approximately 24.8%, 3.4% and
10.1%, respectively of the Company's total revenue. Because the Company's
revenue is dependent, in large part, on significant contracts with a limited
number of customers, the percentage of the Company's revenues that is derived
from sales outside of North America has fluctuated, and may continue to
fluctuate, from period-to-period. The Company believes that its 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
16
<PAGE>
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 21.0% 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.
17
<PAGE>
Item 2: Properties
The Company occupies approximately 92,000 square feet of leased office
space at its headquarters in Richmond, British Columbia for its product
development, marketing, support, administration and sales operations. The
Company has sub-let approximately 16,500 of this space until June 30, 2001 after
which time it intends to occupy such space. The lease expires on November 30,
2008 with two options to renew for five years each. The Company also maintains
an office in Itasca, Illinois. The Itasca office lease is for approximately
29,000 square feet and terminates on November 30, 2009.
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: Submission of Matters to a Vote of Security Holders
Not applicable.
18
<PAGE>
Part II
Item 5: Market for Registrant's Common Equity And Related Stockholder Matters
Price Range of Common Shares
The Company's Common Shares began trading on The Toronto Stock Exchange
and on the Montreal Exchange under the symbol "MMD" on December 20, 1995 and
began trading on the NASDAQ National Market System under the symbol "MDSIF" on
November 26, 1996. The Company changed its NASDAQ National Market System trading
symbol to "MDSI" in April 1999. In December 1999, the Company's listing on the
Montreal Exchange was automatically withdrawn as part of a restructuring plan of
the Canadian stock exchanges. Prior to December 20, 1995, there was no public
market for the Common Shares. The following table sets forth, for the periods
indicated, the high and low sale prices for the Common Shares as reported on The
Toronto Stock Exchange and the NASDAQ National Market System with their
equivalent U.S. dollar amounts where applicable.
<TABLE>
<CAPTION>
The Toronto Stock Exchange NASDAQ National Market
---------------------------------------------------- ----------------------
US$(1) CDN$ US$ US$
----------------------- ---------------------- -------- -----
High Low High Low High Low
-------- ------ -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
1998
First Quarter........ 19.57 10.66 28.00 15.25 19.00 10.50
Second Quarter....... 17.11 11.41 24.75 16.50 17.63 11.13
Third Quarter........ 14.09 7.92 21.35 12.00 14.13 7.88
Fourth Quarter....... 17.83 9.40 27.50 14.50 18.00 9.25
1999
First Quarter........ 21.66 12.63 32.75 19.10 21.50 12.63
Second Quarter....... 19.01 15.28 28.00 22.50 19.88 14.88
Third Quarter........ 18.17 11.51 27.00 17.10 18.38 11.38
Fourth Quarter....... 26.14 12.34 38.50 18.15 26.50 12.25
</TABLE>
- - ----------
(1) US dollar amounts have been translated using the average noon buying rate
for Canadian dollars for the relevant quarter. See "Exchange Rates."
As of December 31, 1999 the Company had approximately 205 shareholders of
record (including nominees and brokers holding street accounts), 98 shareholders
of whom had addresses in the United States and who held 4,509,480 Common Shares,
or 61.1 % 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.
19
<PAGE>
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, 1999, 1998, 1997, 1996 and 1995 and the
consolidated balance sheet data at December 31, 1999, 1998, 1997, 1996 and 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.
<TABLE>
<CAPTION>
Years ended December 31,
1999 1998 1997 1996 1995(5)
-------- -------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue ................................ $ 77,440 $ 67,099 $ 52,859 $ 31,934 $ 9,313
Gross profit ........................... 43,902 35,030 27,977 13,460 6,303
Operating income (loss)(3) ............. 11,529 8,988 (1,587) 3,320 (1,159)
Net income (loss) for the year(1)(2) ... 1,374 5,499 (11,547) (6,014) (1,533)
Diluted earnings (loss) per common share $ 0.18 $ 0.82 $ (1.84) $ (1.24) $ (0.30)
Weighted average shares outstanding .... 7,767 6,723 6,261 4,855 5,117
US$ Equivalent (4):
Revenue ................................ $ 52,225 $ 45,057 $ 38,078 $ 23,397 $ 6,803
Gross profit ........................... 29,608 23,523 20,138 9,865 4,604
Operating income (loss)(2)(3) .......... 7,775 6,035 (1,142) 2,433 (847)
Net income (loss) for the year(1) ...... 927 3,693 (8,312) (4,408) (1,120)
Diluted earnings (loss) per common share $ 0.12 $ 0.55 $ (1.33) $ (0.91) $ (0.22)
Weighted average shares outstanding .... 7,767 6,723 6,261 4,855 5,117
<CAPTION>
US$
Equivalent(4)
At December 31, December 31,
Balance Sheet Data: 1999 1998 1997 1996 1995(5) 1999
------- ------- ------- ------- ------- ------------
Cash and cash equivalents............... $21,289 $ 5,308 $ 110 $20,207 $ 1,992 $14,743
Working capital ........................ 34,326 13,266 9,287 23,112 (1,752) 24,060
Total assets ........................... 70,878 56,568 40,644 45,572 4,978 49,083
Non-current liabilities ................ 3,496 1,907 296 20 1,995 2,421
Stockholders' equity ................... 50,523 30,819 23,836 26,836 559 34,779
</TABLE>
- - ----------
(1) Net 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) Net 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" contained in the forepart of
this Annual Report. 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
20
<PAGE>
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, 1999 Compared to the Year ended
December 31, 1998" 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 -
"Market Risk".
Overview
MDSI develops, markets, implements and supports mobile workforce
management and wireless connectivity software and related network and mobile
computing equipment for use by a wide variety of companies that have substantial
mobile workforces, such as utilities, telecommunications companies, taxi service
providers, courier companies and roadside recovery organizations. MDSI's
products are used by such companies in conjunction with public and private
wireless data communications networks to provide comprehensive solutions for the
automation of business processes associated with the scheduling, dispatching and
management of a mobile workforce. The Company's products provide a
cost-effective method for companies with mobile workers to utilize data
communications to communicate with such workers, and for such workers to
interface on a real-time basis with their corporate information systems.
The Company's revenue is derived from (i) software and services,
consisting of the licensing of software and provision of related services,
including project management, installation, integration, customization and
training; (ii) third party products and services, consisting of the provision of
non-MDSI products and services as part of the total contract; terminal and
infrastructure equipment consisting of the sale of mobile computing devices,
related in-vehicle equipment and wireless data network equipment manufactured by
the Company; (iii) terminal and infrastructure equipment consisting of the sale
of mobile computing devices, related in-vehicle equipment and wireless data
network equipment manufactured by the Company; and (iv) maintenance and support,
consisting of the provision of after-sale support services as well as hourly,
annual or extended maintenance contracts.
The implementation of a complete mobile data solution requires a wireless
data communications network, a land-based data communications network, mobile
computing devices integrated with wireless data communication modems, host
computer equipment, industry specific application software, wireless
connectivity software and a variety of services to manage and install these
components, integrate them with an organization's existing computer systems, and
configure or customize the software to meet customer requirements. Frequently,
in the Company's larger contracts only a limited number of the mobile computing
devices and in-vehicle equipment are installed initially, with the balance
implemented over a rollout period that may extend up to one year or more. Where
increases in mobile work forces require, or where additional departments of
mobile workers are added, additional mobile computing devices may be installed.
Revenue for software and services has historically accounted for a
substantial portion of the Company's revenue. Typically, the Company enters
into a fixed price contract with a customer for the licensing of selected
software products and the provision of specific services that are generally
performed within six to twelve months. Pricing for these contracts includes
license fees as well as a fee for professional services. The Company generally
recognizes total revenue for software and services associated with a contract
using a percentage of completion method based on the total costs incurred over
the total estimated costs to complete the contract.
21
<PAGE>
The Company's customers typically enter into ongoing maintenance
agreements that provide for maintenance and technical support services for a
period commencing after expiration of the initial warranty period.
Maintenance agreements typically have a term of twelve months and are
invoiced either annually or monthly. Revenue for these services is recognized
ratably over the term of the contract.
Prior to 1996, MDSI typically supplied only the MDSI application and
wireless connectivity software and related services as part of its contract with
a customer. The portion of contracts requiring the supply of third party
products and services was not material and was not separated for revenue
purposes. Beginning in 1996, however, the Company was called on to provide, in
addition to MDSI products and services, certain third party products, such as
host computer hardware and operating system software, and mobile computing. The
Company recognizes revenue for the supply of third party hardware upon transfer
of title to the customer. The Company recognizes revenue for the supply of third
party services using a percentage of completion method based on the costs
incurred over the total estimated cost to complete the third party services
contract.
The Company believes that it will often supply some portion of third party
products and services to customers where it is successful in selling its own
products and services. There can be no assurance, however, that any contracts
entered into by the Company to supply third party software and products in the
future will represent a substantial portion of revenue in any future period.
Since 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.
The Company's revenue is dependent, in large part, on significant
contracts from a limited number of customers. As a result, any substantial
delay in the Company's completion of a contract, the inability of the Company
to obtain new contracts or the cancellation of an existing contract by a
customer could have a material adverse effect on the Company's results of
operations. Some of the Company's contracts are cancelable upon notice by the
customer. The loss of certain contracts could have a material adverse effect
on the Company's business, financial condition, operating results and cash
flows. As a result of these and other factors, the Company's results of
operations have fluctuated in the past and may continue to fluctuate from
period-to-period.
22
<PAGE>
Effects of Acquisitions
The consolidated financial statements of the Company reflect the
acquisition of Alliance effective April 17, 1997, which was accounted for
using the purchase method.
On April 17, 1997, the Company entered into an agreement to acquire
Alliance which was completed July 1, 1997. Alliance is a supplier of mobile
workforce management solutions to the utility, public safety and cable markets.
The acquisition resulted in the write-off of $10.0 million associated with
acquired research and development. The Company's results of operations for the
year ended December 31, 1997 include only the results of operations of Alliance
from April 17, 1997.
The Company has a limited history of operations on a combined basis with
Alliance. In addition, since the acquisition of Alliance, the Company has
restructured certain aspects of this operation. As a result, the financial
information presented in this Annual Report is not indicative of the results
that would have been obtained had the acquisitions occurred prior to the
commencement of the periods covered herein, and such information should not be
relied upon as an indication of future performance.
Disposition of Transportation Business Unit
In February 1999, the Company's Board of Directors approved a plan to
dispose of its Delivery segment (Transportation Business Unit). Effective June
1, 1999, the Company completed the sale of the transportation business unit to
Digital Dispatch Systems, Inc. ("DDS"), a supplier of dispatch systems to the
taxi market for proceeds of $5,532,730. The proceeds comprised of common shares
of DDS, representing an 11% interest in DDS, and a promissory note in the
principal amount of $500,000, due January 1, 2001, bearing interest at 8% per
annum.
Under the terms of the agreement between the Company and DDS, the Company
has retained certain assets and liabilities of the discontinued operations. The
Company expects that it will liquidate these assets and liabilities by June 30,
2000. In addition, the Company has agreed to complete the implementation of a
large contract with a taxi customer. The Company has experienced, and is
continuing to experience delays in the implementation of this contract. If the
Company is unable to complete the implementation of the contract on a timely
basis, the taxi customer has the right to cancel the contract. Any such
cancellation may require the Company to reimburse the customer for payments
received to date. The Company believes that it has adequately provided for the
costs to complete this contract.
23
<PAGE>
Disposition of Transportation Business Unit (Continued)
As a result of the Company's decision to dispose of its Delivery segment,
the Delivery segment has been classified as a discontinued operation and the
results of operation, financial position and cash flow for this segment have
been segregated from those of continuing operations. The following discussion
and analysis of the Company's results of operations excludes the Delivery
segment for the current and corresponding prior period.
The Company's net income of $1.4 million for the year ended December
31, 1999 was comprised of a $7.2 million after-tax profit from continuing
operations and an after-tax loss of $5.9 million on discontinued operations.
The loss on discontinued operations is comprised of loss on operations of
$2.4 million and loss on disposal of $3.5 million. There is no tax effect on
these losses. The discontinued operating loss includes not only the results
of operations but also foreign exchange losses and provisions against
contracts to the measurement date of February 25, 1999. The loss on disposal
includes the operating results from the measurement date to the effective
date, the costs of disposal, severance costs, and the estimated costs to
complete the remaining taxi contract.
Results of Operations
The following table sets forth, for the years indicated, certain
components of the selected financial data of the Company:
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------
1999 1998 1997
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Revenue:
Software and services ...................... $ 59,231 $ 42,814 $ 34,789
Third party products and services .......... 9,955 18,567 15,133
Maintenance and support .................... 8,254 5,718 2,937
-------- -------- --------
77,440 67,099 52,859
Direct costs .................................. 33,538 32,069 24,882
-------- -------- --------
Gross profit .................................. 43,902 35,030 27,977
-------- -------- --------
Operating expenses:
Research and development ................... 9,982 8,709 4,915
Sales and marketing ........................ 13,653 11,586 9,635
General and administrative ................. 8,361 5,370 3,934
Amortization of intangible assets .......... 378 378 350
Acquired research and development .......... -- -- 10,003
Restructuring costs ........................ -- -- 726
-------- -------- --------
32,374 26,043 29,564
-------- -------- --------
Operating income (loss) ....................... 11,529 8,988 (1,587)
Other income .................................. (1,124) 41 729
-------- -------- --------
Income (loss) before provision for income taxes 10,405 9,029 (858)
Provision for income taxes .................... (3,178) (2,726) (2,702)
-------- -------- --------
Income (loss) from Continuing operations ..... 7,227 6,303 (3,560)
(Loss) from Discontinued operations .......... (5,853) (804) (7,987)
-------- -------- --------
Net income (loss) for the year ................ $ 1,374 $ 5,499 $(11,547)
======== ======== ========
</TABLE>
24
<PAGE>
The following table sets forth, for the years indicated, certain
components of the selected financial data of the Company as a percentage of
total revenue:
Years ended December 31,
------------------------------
1999 1998 1997
------ ------ ------
Revenue:
Software and services ................... 76.4% 63.8% 65.8%
Third party products and services ....... 12.9 27.7 28.6
Maintenance and support ................. 10.7 8.5 5.6
------ ------ ------
100.0 100.0 100.0
Direct costs ............................... 43.3 47.8 47.1
------ ------ ------
Gross profit ............................... 56.7 52.2 52.9
------ ------ ------
Operating expenses:
Research and development ................ 12.9 13.0 9.3
Sales and marketing ..................... 17.6 17.3 18.2
General and administrative .............. 10.8 8.0 7.4
Amortization of intangible assets ....... 0.5 0.6 0.7
Acquired research and development ....... -- -- 18.9
Restructuring costs ..................... -- -- 1.4
------ ------ ------
41.8 38.8 55.9
------ ------ ------
Operating income (loss) .................... 14.9 13.4 (3.0)
Other income ............................... (1.5) 0.1 1.4
------ ------ ------
Income (loss) before provision for
income taxes ......................... 13.4 13.5 (1.6)
Provision for income taxes ................. (4.1) (4.1) (5.1)
------ ------ ------
Income (loss) from Continuing operations.... 9.3 9.4 (6.7)
(Loss) from Discontinued operations ...... (7.6) (1.2) (15.1)
------ ------ ------
Net income (loss) for the year ............. 1.8% 8.2% (21.8)%
====== ====== ======
Year ended December 31, 1999 Compared to the Year ended December 31, 1998
Revenue - Revenue increased by $10.3 million (15.4%) for the year ended
December 31, 1999 as compared to the year ended December 31, 1998. The increase
was primarily due to the increase in software and services which was partially
offset by a decrease in the revenue earned from third party products and
services.
Software and services revenue increased by $16.4 million (38.4%) for the
year ended December 31, 1999 as compared to the year ended December 31, 1998.
This increase was due to an 92% increase in the revenues earned from customers
in the telecommunications market.
Third party products and services revenue decreased by $8.6 million
(46.4%) for the year ended December 31, 1999 compared to the year ended December
31, 1998. Third party products and services revenue is primarily earned from
certain customers in the utility market pursuant to agreements under which the
Company provides third party products and services, typically host computer
equipment and mobile computing devices, as part of the installation of software
and provision of services. Revenue from deliveries of third party products and
services will fluctuate from period to period given the timing of certain
contracts and the rollout schedules which are established primarily by the
customers. Accordingly, this will result in large fluctuations in revenue,
direct costs, gross profits and income from operations from one period to
another.
Maintenance and support revenue was $8.3 million for the year ended
December 31, 1999 as compared to $5.7 million for the year ended December 31,
1998, an increase of 44.3%. Typically, maintenance and support revenue will
increase with the number of customers using MDSI's software.
25
<PAGE>
Direct Costs. Direct costs were 43.3% of revenue for the year ended
December 31, 1999 as compared to 47.8% for the year ended December 31, 1998.
Direct costs include labor and other costs directly related to a project
including those related to the provision of services and support, and costs
related to host equipment and mobile devices on behalf of third party product
sales. Labor costs include direct payroll, benefits and overhead charges. The
decrease in proportion of direct costs to revenue relates primarily to the
decrease third -party products and services, which have higher direct costs.
Gross Margins. Gross margins were 56.7% of revenue for the year ended
December 31, 1999 as compared to 52.2% for the year ended December 31, 1998. The
change in profit margin relates to the change in the mix in revenues. The
proportion in revenue of lower margin third-party products and services
decreased in 1999 compared to 1998.
Research and Development. Research and development expenses were $10.0
million, or 12.9% of revenue, for the year ended December 31, 1999, compared to
$8.7 million, or 13.0% of revenue, for the year ended December 31, 1998. The
14.6% increase in research and development expenses in 1999 is a result of the
continued development and enhancement of the Company's Advantex products. The
Company anticipates continuing to commit a significant portion of its product
revenues to enhancement of existing products and the development of new
products, resulting in an anticipated increase in the dollar amounts of research
and development expenses.
Sales and Marketing. Sales and marketing expenses were $13.7 million or
17.6% of revenue for the year ended December 31, 1999 and 17.3% of revenue for
the year ended December 31, 1998. This represents an increase of $2.1 million
(17.8%) as compared to 1998. The increase was primarily due to an increase in
marketing, sales and technical support personnel to support the Company's
increased marketing activities worldwide. The Company anticipates that the
dollar amounts of its sales and marketing expenses will continue to increase as
the result of the Company's commitment to its international marketing effort.
General and Administrative. General and administrative expenses were $8.3
million, or 10.8% of revenue, for the year ended December 31, 1999 and $5.4
million, or 8.0% of revenue, for the year ended December 31, 1998. This increase
was due primarily to the hiring of additional accounting and administrative
personnel to support the Company's growth. The Company expects that its general
and administrative expenses will increase in the future as the Company expands
its staffing, information systems and other administrative costs to support its
expanding operations.
Other Income(expense). Other income (expense) was $(1.1) million for the
year ended December 31, 1999 as compared to $0.0 million for the year ended
December 31, 1998. Substantially all of other income (expense) relates to
interest income on cash and short term deposits and fluctuations in foreign
currency denominated assets and liabilities.
Income Taxes. The Company provided for income taxes on earnings for the
year ended December 31, 1999 at the rate of 29.5%, after adjusting for the
amortization of intangible assets. The Company's effective tax rate reflects the
application of certain operating loss carry forwards against taxable income and
the blended effect of Canadian, US, and other foreign jurisdictions' tax rates.
26
<PAGE>
Year ended December 31, 1998 Compared to the Year ended December 31, 1997
Revenue - Revenue increased by $14.2 million (26.9%) for the year ended
December 31, 1998 as compared to the year ended December 31, 1997. This increase
in revenue can be attributed to the reflection in the financial statements of a
full year of Alliance's (now MDSI US) operations, in comparison to eight and
one-half months in the year ended December 31, 1997, and to the continued growth
of the existing business.
Software and services revenue increased by $8.0 million (23.1%) for the
year ended December 31, 1998 as compared to the year ended December 31, 1997.
This increase is due primarily to the reflection of a full year of Alliance's
results in the financial statements, and additional revenue from customers in
both the telecommunications and utility markets.
Third party products and services revenue increased by $3.4 million
(22.7%) for the year ended December 31, 1998 compared the year ended December
31, 1997. Third party products and services revenue is primarily earned from
certain customers in the utility market pursuant to agreements under which the
Company provides third party products and services, typically host computer
equipment and mobile computing devices, as part of the installation of software
and provision of services. Revenue from deliveries of third party products and
services will fluctuate from period to period given the timing of certain
contracts and the rollout schedules which are established primarily by the
customers. Accordingly, this will result in large fluctuations in revenue,
direct costs, gross profits and income from operations from one period to
another.
Maintenance and support revenue was $5.7 million for the year ended
December 31, 1998 as compared to $2.9 million for the year ended December 31,
1997, an increase of 94.7%. Typically, maintenance and support revenue will
increase with the number of customers using MDSI's software.
Direct Costs - Direct costs were 47.8% of revenue for the year ended
December 31, 1998 as compared to 47.1% for the year ended December 31, 1997.
Direct costs include labor and other costs directly related to a project
including those related to the provision of services and support, and costs
related to host equipment and mobile devices on behalf of third party product
sales. Labor costs include direct payroll, benefits and overhead charges.
Gross Margins. Gross margins were 52.2% of revenue for the year ended
December 31, 1998 as compared to 52.9% for the year ended December 31, 1997.
27
<PAGE>
Research and Development. Research and development expenses were $8.7
million, or 13.0% of revenue, for the year ended December 31, 1998, compared to
$4.9 million, or 9.3% of revenue, for the year ended December 31, 1997. The
77.2% increase in research and development expenses in 1998 is a result of the
continued development and enhancement of the Company's Advantex products. The
Company anticipates continuing to commit a significant portion of its product
revenues to enhancement of existing products and the development of new
products, resulting in an anticipated increase in the dollar amounts of research
and development expenses.
Sales and Marketing. Sales and marketing expenses were $11.6 million or
17.3% of revenue for the year ended December 31, 1998 and 18.2% of revenue for
the year ended December 31, 1997. This represents an increase of $1.9 million
(20.2%) as compared to 1997. The increase was primarily due to an increase in
marketing, sales and technical support personnel to support the Company's
increased marketing activities worldwide. The Company anticipates that the
dollar amounts of its sales and marketing expenses will continue to increase as
the result of the Company's commitment to its international marketing effort.
General and Administrative. General and administrative expenses were $5.4
million, or 8.0% of revenue, for the year ended December 31, 1998 and $3.9
million, or 7.4% of revenue, for the year ended December 31, 1997. This increase
was due primarily to the hiring of additional accounting and administrative
personnel to support the Company's growth. The Company expects that its general
and administrative expenses will increase in the future as the Company expands
its staffing, information systems and other administrative costs to support its
expanding operations.
Other Income. Other income was $41,000 for the year ended December 31,
1998 as compared to $0.7 million for the year ended December 31, 1997.
Substantially all of other income relates to interest income on cash and short
term deposits and fluctuations in the currencies of the Company's foreign
operations.
Income Taxes. The Company provided for income taxes on earnings for the
year ended December 31, 1998 at the rate of 28.9%, after adjusting for the
amortization of intangible assets. The Company's effective tax rate reflects the
application of certain operating loss carry forwards against taxable income and
the blended effect of Canadian, US, and other foreign jurisdictions' tax rates.
Quarterly Results of Operations
The following table sets forth certain unaudited statement of operations
data for each of the eight quarters beginning January 1, 1998 and ending
December 31, 1999 as well as the percentage of the Company's revenue represented
by each item. The unaudited financial statements have been prepared on the same
basis as the audited financial statements contained herein and include all
adjustments, consisting only of normal recurring adjustments, that the Company
considers necessary to present fairly this information when read in conjunction
with the Company's audited financial statements and the notes thereto appearing
elsewhere in this report. In view of the Company's recent growth, its recent
acquisitions and other factors, the Company believes that quarterly comparisons
of its financial results are not necessarily meaningful and should not be relied
upon as an indication of future performance.
28
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
------------------
----------------------------------------- -----------------------------------------
1999 1998
----------------------------------------- -----------------------------------------
Dec. 31 Sept. 30 June 30 March 31 Dec. 31 Sept. 30 June 30 March 31
-------- -------- -------- -------- -------- -------- -------- --------
(Unaudited, in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue:
Software and services ................. $ 14,961 $ 15,658 $ 15,391 $ 13,221 $ 14,058 $ 11,027 $ 9,906 $ 7,823
Third party products and services ..... 1,419 1,992 2,459 4,086 8,044 6,719 2,936 868
Maintenance and support ............... 2,312 2,504 1,913 1,524 1,696 1,616 1,273 1,133
-------- -------- -------- -------- -------- -------- -------- --------
18,693 20,154 19,762 18,832 23,799 19,362 14,115 9,824
Direct costs ............................ 7,633 8,859 8,247 8,799 11,881 9,646 6,038 4,503
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit ............................ 11,060 11,294 11,515 10,033 11,917 9,716 8,076 5,321
-------- -------- -------- -------- -------- -------- -------- --------
Operating expenses:
Research and development .............. 2,514 2,514 2,515 2,440 2,759 2,509 1,788 1,653
Sales and marketing ................... 3,163 2,914 3,697 3,880 3,215 2,776 2,875 2,720
General and administrative ............ 2,410 1,887 2,027 2,037 1,638 1,428 1,182 1,123
Amortization of intangible assets ..... 94 94 94 94 94 94 94 94
-------- -------- -------- -------- -------- -------- -------- --------
8,181 7,409 8,333 8,451 7,706 6,807 5,938 5,590
-------- -------- -------- -------- -------- -------- -------- --------
Operating income (loss) ................. 2,879 3,885 3,182 1,582 4,211 2,908 2,138 (269)
Other income ............................ (453) 66 (491) (245) (77) (182) 123 177
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before income
tax provision ....................... 2,426 3,915 2,691 1,337 4,134 2,727 2,261 (92)
Provision for income taxes .............. (700) (1,205) (844) (429) (1,168) (845) (711) (1)
Income (loss) from continuing operations 1,726 2,746 1,847 907 2,965 1,881 1,550 (93)
Income(loss) from discontinued operations -- -- -- (5,853) (443) (117) (413) 169
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) for the period ........ $ 1,726 $ 2,746 $ 1,847 $ (4,945) $ 2,522 $ 1,764 $ 1,136 $ 76
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
29
<PAGE>
The following table sets forth, for the periods indicated, certain components of
the selected financial data of the Company as a percentage of total revenue:
<TABLE>
<CAPTION>
Three Months Ended
------------------
----------------------------------------- -----------------------------------------
1999 1998
----------------------------------------- -----------------------------------------
Dec. 31 Sept. 30 June 30 March 31 Dec. 31 Sept. 30 June 30 March 31
------- -------- ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Software and services .................. 80.0% 77.7% 77.9% 70.2% 59.1% 56.9% 70.2% 79.6%
Third party products and services ...... 7.6 9.9 12.4 21.7 33.8 34.7 20.8 8.8
Maintenance and support ................ 12.4 12.4 9.7 8.1 7.1 8.3 9.0 11.5
------ ------ ------ ------ ------ ------ ------ ------
100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Direct costs ............................. 40.8 44.0 41.7 46.7 49.9 49.8 42.8 45.8
------ ------ ------ ------ ------ ------ ------ ------
Gross profit ............................. 59.2 56.0 58.3 53.3 50.1 50.2 57.2 54.2
------ ------ ------ ------ ------ ------ ------ ------
Operating expenses:
Research and development ............... 13.4 12.5 12.7 13.0 11.6 13.0 12.7 16.8
Sales and marketing .................... 16.9 14.5 18.7 20.6 13.5 14.3 20.4 27.7
General and administrative ............. 12.9 9.4 10.3 10.8 6.9 7.4 8.4 11.4
Amortization of intangible assets ...... 0.5 0.5 0.5 0.5 0.4 0.5 0.7 1.0
------ ------ ------ ------ ------ ------ ------ ------
43.8 36.8 42.2 44.9 32.4 35.2 42.1 56.9
------ ------ ------ ------ ------ ------ ------ ------
Operating income (loss) .................. 15.4 19.3 16.1 8.4 17.7 15.0 15.1 (2.7)
Other income ............................. (2.4) 0.3 (2.5) (1.3) (0.3) (0.9) 0.9 1.8
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before income
tax provision ......................... 13.0 19.6 13.6 7.1 17.4 14.1 16.0 (0.9)
------ ------ ------ ------ ------ ------ ------ ------
Recovery of (provision for)
income taxes .......................... (3.7) (6.0) (4.3) (2.3) (4.9) (4.4) (5.0) (0.0)
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) form continuing
operations ............................ 9.2 13.6 9.3 4.8 12.5 9.7 11.0 (0.9)
Income (loss) form discontinued
operations ............................ -- -- -- (31.1) (1.9)% (.06) (2.9)% 1.7
====== ====== ====== ====== ====== ====== ====== ======
Net income (loss) for the period ......... 9.2% 13.6% 9.3% (26.3)% 10.6% 9.1% 8.1% 0.8%
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
Liquidity and Capital Resources
The Company finances its operations, acquisitions and capital
expenditures with cash generated from operations, loans, private placements and
public offerings of its securities. At December 31, 1999, the Company had cash
and cash equivalents of $21.3 million and working capital of $34.3 million.
Cash provided by (used in) operating activities was $3.5 million,
$8.4 million and $(1.1) million, respectively for the years ended December 31,
1999, 1998 and 1997. The $3.5 million of cash provided by operating activities
in 1999 comprised $7.2 million net income, non-cash charges of $2.4 million and
$(6.1) million of changes to non-cash working capital items. The changes to
working capital items include a $2.4 million increase in trade receivables, a
$287,000 increase in unbilled receivables, a $1.8 million decrease in prepaid
expenses and a $241,000 increase in accrued liabilities offset by a $4.9 million
decrease in trade payables, a $180,000 increase in taxes payable and a $499,000
decrease in deferred revenue. Unbilled accounts receivable arise where the
Company has earned revenue on a project though has yet to complete specific
billing milestones under the terms of the applicable contract. Deferred revenue
arises where the Company has achieved a billing milestone under a customer
contract but has yet to recognize all of the revenue billed due to the
percentage of completion under the contract. The $1.8 million decrease in
prepaid expenses is primarily attributable to expenses incurred with respect to
the Richmond facility, which were recovered from the landlord during the first
half of 1999.
30
<PAGE>
Cash provided by (used in) financing activities was $20.4 million,
$2.9 million and $(1.7) million, respectively during the years ended December
31, 1999, 1998 and 1997. The cash provided by financing activities in 1999
comprised $2.4 million in capital leases and $18.3 million from the issue of
common shares partially offset by a $377,000 repayment of long-term debt. During
1999, the Company financed a major portion of its capital expenditure program
through capital leases. The $18.3 million received for shares issued was made up
of a 575,000 common shares issue on a private placement for net consideration of
$14.7 million, exercise of stock options for proceeds of $3.2million and
purchases by employees under the Company's share purchase plan of $409,000.
Cash used in investing activities was $5.7 million, $2.6 million,
$4.1 million, respectively for the years ended December 31, 1999, 1998 and 1997.
Total investing activity in 1999 consisted of $5.9 million for the purchase of
capital equipment, including computer hardware and software for use in research
and development activities and to support the growth of the Company's corporate
information systems.
Existing sources of liquidity at December 31, 1999 include $21.3
million of cash and cash equivalents and funds available under the Company's
operating line of credit. At the year ended December 31, 1999, the Company's
borrowing capacity under the line of credit was $8 million. Under the terms of
the agreement, borrowings and letters of credit under the line are limited to
60% to 90% of eligible accounts receivable. Borrowings accrue interest at the
bank's prime rate plus 0.5%. At December 31, 1999, the Company was not utilizing
this line of credit.
The Company believes that future cash flows from operations, and its
borrowing capacity under the operating line of credit will provide sufficient
funds to meet cash requirements for at least the next twelve months.
Commensurate with its past and expected future growth, the Company may increase,
from time to time, its borrowing facility under its operating line of credit to
support its operations. The Company has no material additional commitments other
than operating leases. Future growth or other investing activities may require
the Company to obtain additional equity or debt financing, which may or may not
be available on attractive terms, or at all, or may be dilutive to current or
future shareholders.
Derivative Financial Instruments
It is the policy of the Company not to enter into derivative financial
instruments for trading purposes. The Company does enter into foreign currency
forward exchange contracts in the ordinary course of business to protect itself
from adverse currency rate fluctuations on certain firm foreign currency
transactions. The Company may also utilize foreign currency exchange contracts
to hedge net assets or liabilities denominated in foreign currencies. These
contracts are generally for eighteen months or less. Gains or losses relating to
hedging firm commitments are deferred and included in the measurement of the
foreign currency transaction subject to the hedge.
The Company's foreign currency forward contracts are executed with
credit worthy banks and are denominated in currencies of major industrial
countries. As at December 31,1999, the Company had the following foreign
currency forward contracts outstanding: 1) sold 104,000,000 Belgian Franc for
delivery on October 31, 2000 for $4.3 million, 2) sold GBP sterling 350,000
and 180,000 for $ 814,660 and $ 418,860 to be delivered on May 31, 2000 and
September 29, 2000 respectively.
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. The Company has operations in the United States and
Europe in addition to its Canadian operations and except as note below did not
hedge these exposures in 1999. However, the Company may from time-to-time hedge
any net exposure to the United States dollar.
As of December 31, 1999, 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 $4.9 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.
The Company has entered into foreign currency forward contracts in respect
of net exposures under customer contracts to the Belgian Franc and Great Britain
Pound. Effective January 1, 1999, the Belgian Franc is tied to the Euro, the new
European Union common currency. The effect of these transactions is to reduce
the potential reduction in future earnings from a hypothetical instantaneous 10%
change in quoted foreign currency exchange rates to $4.1 million.
31
<PAGE>
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: 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: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Part III
Item 10: Directors and Officers of the Registrant
The following table sets forth certain information concerning the
Company's executive officers, officers, key employees and directors as of
December 31, 1999.
Name Age Position
- - ------------------------------ --- ---------------------------------------
Executive Officers
Erik Dysthe................... 62 Chairman of the Board and Director
Kenneth R. Miller (1)......... 44 Chief Executive Officer and Director
Robert G. Cruickshank (2)..... 49 President, Chief Operating Officer and
Director
Verne D. Pecho................ 56 Vice President - Finance and
Administration and Chief Financial
Officer
Officers and Key Employees
Simon Backer.................. 44 Senior Vice President - Customer
Engineering
Douglas Engerman(6) 43 Senior Vice President - Operations
Geoffrey Engerman(6).......... 45 Vice President - US Operations
Tommy Lee..................... 36 Senior Vice President - Product
Development
Gene Mastro................... 52 Senior Vice President - Sales
Rodney Neumann (3)............ 37 Senior Vice President - Business
Development
Paul Ballinger................ 52 Vice President and Chief Information
Officer
M. Greg Beniston.............. 42 Vice President - Legal and Corporate
Secretary
Glenn Y. Kumoi................ 37 Vice President - Chief Legal Officer
Ronald P. Toffolo............. 48 Vice President - Human Resources
Directors
Gerald F. Chew (1)(4)(5)...... 39 Director
Bruno Ducharme (4)(5)......... 41 Director
Robert C. Harris, Jr. (1)(4).. 53 Director
John T. McLennan (4) ......... 54 Director
Terrence P. McGarty (4)(5).... 56 Director
Marc Rochefort (4)............ 52 Director
- - ----------
(1) Member of Compensation Committee.
(2) Appointed as a director on February 1, 2000.
(3) Appointed as an officer February 7, 2000.
(4) Member of Corporate Governance and Nominating Committee.
(5) Member of Audit Committee.
(6) Douglas Engerman and Geoffrey Engerman are brothers.
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.
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.
32
<PAGE>
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 Telus (formerly, 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.
Simon Backer has served as Senior Vice President - Customer Engineering
since March 1999. From August 1997 to February 1999, 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.
Douglas Engerman has served as Senior Vice President Operations since
October 1999. Prior to that he was 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.
Geoffrey Engerman has served as Senior Vice President - US Operations
since October 1999, and as Vice President - US Operations since July 1997. From
1994 to July 1997, Mr. Engerman was President and Chief Technology Officer of
Alliance. From 1983 to 1994, Mr. Engerman served as Vice President, Chief
Operating Officer of Alliance.
Tommy Lee has served as Senior Vice President - Product Development since
March 1999, and 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 1988 and 1995, Mr. Lee was a member of the scientific and engineering
staff at McDonald, Dettwiler and Associates Ltd.
Gene Mastro has served as Senior Vice President - Sales of the Company
since October 1999. From November 1997 to September 1999, Mr. Mastro was Vice
President Sales, Telecommunications of the Company. Form November 1988 to
October 1997, Mr. Mastro held various senior sales management positions at
Computer Sciences Corporation, most recently as Vice President Sales -
Communications Industry Division. From 1974 to 1988 he held various sales
management positions with IBM, Exxon and Chemical (Chase Manhattan) Bank.
Rodney Neumann has served as Senior Vice President - Business Development
of the Company since February 2000. From 1998 to February 2000, Mr. Neumann was
a Vice President and General Manager at Kelman Technologies Inc. From 1986 to
1998 he held various technical and managerial positions at TELUS including
Director of Enhanced Services responsible for its unregulated Internet and
Ecommerce data communication services.
Paul Ballinger has served as Vice President and Chief Information Officer
since November 1999. From September 1993 to March 1999, Mr. Ballinger held a
number of senior management positions at Telus (formerly BC Telephone Company),
including Vice President and General Manager, Enhanced Services and Vice
President, Business Design & Support. From 1991 to 1993, Mr. Ballinger was
Director, Management Consulting with DMR Group.
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 Vice President - Chief Legal Officer of the
Company since October 1999. From December 1998 to October 1999, Mr. Kumoi was
Vice President - General Counsel of the Company. From April 1997 to November
1998 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. Mr. Kumoi is also a director of eTVtech.com
Communications Inc.
Ronald Toffolo has served as Vice President - Human Resources since March
1999. Between 1997 and 1998, he was Director of Human Resources. From 1985 to
1997, Mr. Toffolo held various human resources management positions at Canadian
Airlines International Ltd.
33
<PAGE>
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. Mr. Erik Dysthe was also appointed to this Committee in February
2000.
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).
34
<PAGE>
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 the 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, Executive Officers and Key Employees
There are currently 25 executive officers of the Company, including the
chief executive officer. 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 or key employee 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.
35
<PAGE>
Summary Compensation Table ---
The following table sets forth all compensation paid in respect of the
individuals who were, at any time during the 1999, 1998 and 1997 financial years
of the Company, Chief Executive Officer of the Company or its subsidiaries and
the four most highly compensated executive officers among the Company and its
subsidiaries (collectively "Named Executive Officers"):
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------------------------
Annual Compensation (in Cdn.$)
-------------------------------------- Long Term
Compensation Awards
-------------------
Other Annual Securities Under
Years Ending Salary Bonus Compensation Options
Name and Principal Position December 31 ($) ($) ($) (#)
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Kenneth R. Miller 1999 275,000 44,000 N/A Nil
Chief Executive Officer 1998 180,632 Nil N/A 150,000
1997 115,436 Nil N/A 7,500
- - -----------------------------------------------------------------------------------------------------------------------------------
Robert G. Cruickshank 1999 233,750 38,400 N/A 25,000
President and Chief Operating Officer 1998 N/A N/A N/A 100,000
1997 N/A N/A N/A N/A
- - -----------------------------------------------------------------------------------------------------------------------------------
Robert Campbell(1) 1999 135,000 335,261 N/A Nil
Senior Vice President, Telecommunications/Cable 1998 135,000 106,532 N/A 35,000
1997 135,000 94,162 N/A 5,000
- - -----------------------------------------------------------------------------------------------------------------------------------
Gene Mastro 1999 246,880 352,350 N/A 35,000
Senior Vice President, Sales 1998 238,284 Nil N/A Nil
1997 37,059 21,394 N/A 30,000
- - -----------------------------------------------------------------------------------------------------------------------------------
Douglas Engerman(2) 1999 200,485 110,925 N/A 5,000
Senior Vice President, Operations 1998 201,029 186,882(3) N/A 30,000
1997 94,065 208,395(4) N/A Nil
- - -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Mr. Campbell resigned from the Company on December 31, 1999.
(2) Mr. Engerman joined the Company in July 1997.
(3)(4) Non-recurring bonus paid to Mr. Engerman in connection with the Company's
acquisition of Alliance Systems, Incorporated.
36
<PAGE>
Stock Options
The following table sets forth stock options granted by the Company during the
financial year ended December 31, 1999 to any of the Named Executive Officers:
Option Grants During the Financial Year Ended December 31, 1999
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------------------
Name Securities % of Total Exercise or Market Value of Expiration Date
Under Options Options Base Price Securities
Granted (#) Grantedto (Cdn.$/Security) Underlying
employees in Options on the
Financial Year Date of Grant
(Cdn.$/Security)
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Kenneth R. Miller N/A -- -- -- --
Chief Executive Officer
- - -----------------------------------------------------------------------------------------------------------------------------------
Robert G. Cruickshank 25,000 4.9% $20.00 $20.00 Oct. 1, 2004
President and Chief Operating Officer
- - -----------------------------------------------------------------------------------------------------------------------------------
Robert Campbell N/A -- -- -- --
Senior Vice President,
Telecommunications/Cable
- - -----------------------------------------------------------------------------------------------------------------------------------
Gene Mastro 35,000 6.9% $18.00 $18.00 Aug. 24, 2004
Senior Vice President, Sales
- - -----------------------------------------------------------------------------------------------------------------------------------
Douglas Engerman 5,000 1.0% $18.50 $18.50 Oct. 5, 2004
Senior Vice President, Operations
- - -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table sets forth details of each exercise of stock options during
the financial year ended December 31, 1999 by any of the Named Executive
Officers, and the financial year end value of unexercised options on an
aggregate basis:
Aggregated Options Exercised During the Financial Year Ended December 31,
1999 and Financial Year-End Option Values
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------------------
Name Securities Aggregate Unexercised Options Value of Unexercised in the
Acquired on Value At FY-End (#) Money-Options at FY-End
Exercise (#) Realized ($) Exercisable/ (Cdn.$) Exercisable/
Unexercisable Unexercisable (1)(2)
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kenneth R. Miller Nil Nil 166,249/56,251 $3,623,728/$1,215,201
Chief Executive Officer
- - -----------------------------------------------------------------------------------------------------------------------------------
Robert G. Cruickshank Nil Nil 40,000/85,000 $680,000/$1,445,000
President and Chief Operating Officer
- - -----------------------------------------------------------------------------------------------------------------------------------
Robert Campbell Nil Nil 39,332/0 $906,769/$0
Senior Vice President,
Telecommunications/Cable
- - -----------------------------------------------------------------------------------------------------------------------------------
Gene Mastro Nil Nil 28,054/36,946 $593,531/$716,559
Senior Vice President, Sales
- - -----------------------------------------------------------------------------------------------------------------------------------
Douglas Engerman Nil Nil 14,166/20,834 $304,569/$432,931
Senior Vice President, Operations
- - -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Based on TSE closing price of Cdn.$37.00 on December 31, 1999.
(2) Includes Options to purchase common shares within 60 days after December
31, 1999.
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, 1999, the directors of the Company received aggregate cash
compensation of $64,792 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 May 6, 1999, six Directors were each granted 3,000
stock options with vesting over two years at an exercise price of $25.50. These
stock options are subject to the grantee being a Director on the date of
vesting.
37
<PAGE>
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,
1999, 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.
<TABLE>
<CAPTION>
Number of Shares % of total Shares
Directors, Named Executive Officers and 5% Shareholders(1) Beneficially Owned
Owned(2)
- - ---------------------------------------------------------- ---------------- -----------------
<S> <C> <C>
Erik Dysthe(3) 466,867 6.27
Richmond, B.C. CANADA
Kenneth R. Miller(4) 411,303 5.45
Richmond, B.C. CANADA
Robert G. Cruickshank(5) 40,123 *
Richmond, B.C. CANADA
Robert Campbell(6) 41,120 *
Richmond, B.C. CANADA
Gene Mastro(7) 28,054 *
New Yoik, NY USA
Douglas Engerman(8) 57,428 *
Blaine, WA USA
Gerald F. Chew(9) 33,282 *
San Francisco, CA USA
Bruno Ducharme(10) 19,125 *
Montreal, Q.B. CANADA
Robert C. Harris, Jr. (11) 88,080 1.19
San Francisco, CA USA
Terrence P. McGarty(12) 21,587 *
Florham Park, NJ USA
Marc Rochefort(13) 12,930 *
Montreal, Q.B. CANADA
John T. McLennan(14) 21,125 *
Mahone Bay, N.S. CANADA
----------
All Directors, Named Executive Officers and Officers as a group 1,559,400 20.92
(20 persons) ................................................
5% Shareholders
Kern Capital Management(15) 732,500 9.92
114 West 47th Street
New York, NY
----------
</TABLE>
- - ----------
* 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,
1999, are deemed
38
<PAGE>
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, 1999, together with
the applicable options of such shareholder.
(3) Includes 338,498 Common Shares held by Erik Dysthe Holdings Co. and
options to purchase 68,205 Common Shares exercisable within 60 days after
December 31, 1999 held by Mr. Dysthe individually.
(4) Includes options to purchase 166,249 Common Shares exercisable within 60
days after December 31, 1999.
(5) Includes options to purchase 40,000 Common Shares exercisable within 60
days after December 31, 1999.
(6) Includes options to purchase 39,332 Common Shares exercisable within 60
days after December 31, 1999.
(7) Represents options to purchase 28,054 Common Shares exercisable within 60
days of December 31, 1999.
(8) Includes options to purchase 14,166 Common Shares exercisable within 60
days after December 31, 1999.
(9) Represents options to purchase 33,282 Common Shares exercisable within 60
days after December 31, 1999.
(10) Represents options to purchase 19,125 Common Shares exercisable within 60
days after December 31, 1999.
(11) Includes options to purchase 36,250 Common Shares exercisable within 60
days after December 31, 1999.
(12) Includes 1,170 Common Shares held by The Telmarc Group Inc. and options to
purchase 20,417 Common Shares exercisable within 60 days after December
31, 1999.
(13) Includes options to purchase 11,500 Common Shares exercisable within 60
days after December 31, 1999.
(14) Represents options to purchase 21,125 Common Shares exercisable within 60
days after December 31, 1999.
(15) Beneficially owned by Robert E. Kern, Jr. and David G. Kern.
Item 13: Certain Relationships and Related Transactions
In April 1996, the Company entered into an employment agreement with Erik
Dysthe, the Company's Chairman. In December 1998, the Company entered into an
employment agreement with Kenneth R. Miller, the Company's Chief Executive
Officer. In February 1999, the Company entered into an employment agreement with
Robert G. Cruickshank, the Company's President and Chief Operating 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: 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:
+2.1 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
39
<PAGE>
*4.1 Form of Common Share Certificate
++*10.1 1996 Stock Option Plan
++*10.2 1997 Stock Option Plan
++*10.3 1998 Stock Option Plan
++10.4 Stock Purchase Plan
++10.5 1999 Stock Option 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)
+*10.9 Employment Agreement dated April 1, 1996 between the
Company and Erik Dysthe (previously filed as Exhibit
10.18)
+*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 (previously filed as
Exhibit 10.20)
*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)
**++10.14 Employment Agreement dated February 1, 1999 between the
Company and Robert Cruickshank
**++10.15 Employment Agreement dated February 1, 1999 between the
Company and Kenneth Miller
10.16 Master Purchase and Sale Agreement dated June 1, 1999
Between Digital Dispatch Systems Inc. and the Company
(without schedules or exhibits)(1)
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 F-1 (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.
** Previously filed as exhibits with the same corresponding number with the
Registrant's Form 10-Q for the quarterly period ended September 30, 1999.
++ This document has been identified as a management contract or compensatory
plan or arrangement.
+ Previously filed as an exhibit to Registrant's Registration Statement on
Form F-4
(1) The Company agrees to supplementally furnish a copy of any omitted
schedule or exhibit to the Securities and Exchange Commission upon
request.
(b) Report on Form 8-K
None.
40
<PAGE>
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 29, 2000.
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.
<TABLE>
<CAPTION>
Signature Title Date
- - ------------------------------- ------------------------------------------------------ --------------
<S> <C> <C>
/S/ KENNETH R. MILLER Chief Executive Officer and Director (Principal
- - ------------------------------- Executive Officer) March 29, 2000
Kenneth R. Miller
/S/ ROBERT G. CRUICKSHANK President, Chief Operating Officer and Director March 29, 2000
- - -------------------------------
Robert G. Cruickshank
/S/ VERNE D. PECHO Vice President - Finance and Administration and Chief
- - ------------------------------- Financial Officer (Principal Financial and Accounting
Verne D. Pecho Officer) March 29, 2000
/S/ ERIK DYSTHE
- - ------------------------------- Chairman of the Board and Director March 29, 2000
Erik Dysthe
/S/ GERALD F. CHEW Director
- - ------------------------------- (Authorized U.S. Representative) March 29, 2000
Gerald F. Chew
/S/ BRUNO DUCHARME
- - ------------------------------- Director March 29, 2000
Bruno Ducharme
/S/ ROBERT C. HARRIS, JR. Director March 29, 2000
- - ----------------------------
Robert C. Harris, Jr.
/S/ TERRENCE P. MCGARTY Director March 29, 2000
- - -------------------------------
Terrence P. McGarty
/S/ MARC ROCHEFORT Director March 29, 2000
- - -------------------------------
Marc Rochefort
/S/ JOHN T. MCLENNAN Director March 28, 2000
- - -------------------------------
John T. McLennan
</TABLE>
41
<PAGE>
MDSI MOBILE DATA SOLUTIONS INC.
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors......................................... F-2
Consolidated Balance Sheets............................................ F-3
Consolidated Statements of Operations.................................. F-4
Consolidated Statements of Changes in Stockholders' Equity............. F-5
Consolidated Statements of Cash Flows.................................. F-6
Notes to the Consolidated Financial Statements......................... F-8
F-1
<PAGE>
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, 1999 and 1998 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, 1999. 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 auditing standards generally accepted
in the United States of America. 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, 1999
and 1998 and the results of its operations and cash flows for each of the years
in the three year period ended December 31, 1999 in conformity with accounting
principles generally accepted in the United States of America.
/S/ DELOITTE & TOUCHE LLP
Chartered Accountants
Vancouver, British Columbia
February 3, 2000
F-2
<PAGE>
MDSI MOBILE DATA SOLUTIONS INC.
Consolidated Balance Sheets
(Expressed in Canadian dollars)
<TABLE>
<CAPTION>
At December 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 21,288,733 $ 5,308,259
Accounts receivable, net
Trade 18,982,034 16,603,944
Unbilled 8,076,566 7,789,586
Prepaid expenses 1,612,715 3,458,348
Deferred income taxes (note 9) 414,878 1,016,766
Current portion of lease receivable (note 3) 558,357 560,478
------------ ------------
Total current assets 50,933,283 34,737,381
Lease receivable (note 3) 193,003 845,889
Investments and advances, at cost (note 4) 5,975,921 --
Capital assets, net (note 5) 9,217,847 5,137,296
Long term deferred income taxes (note 9) 418,523 --
Intangible assets, net (note 6) 2,752,802 3,130,334
------------ ------------
69,491,379 43,850,900
Assets of discontinued operations (note 16) 1,386,449 12,717,456
------------ ------------
Total assets $ 70,877,828 $ 56,568,356
============ ============
Liabilities and stockholders' equity
Current liabilities
Accounts payable $ 2,267,631 $ 7,140,470
Accrued liabilities 3,559,318 3,320,436
Income taxes payable (note 9) 2,262,620 2,442,571
Deferred revenue 6,819,376 7,317,895
Current portion of long-term debt (note 7) -- 377,332
Current obligations under capital lease (note 11) 1,698,702 872,917
------------ ------------
Total current liabilities 16,607,647 21,471,621
Obligations under capital leases (note 11) 3,496,431 1,907,037
------------ ------------
20,104,078 23,378,658
Liabilities of discontinued operations (note 16) 250,303 2,370,579
------------ ------------
Total liabilities 20,354,381 25,749,237
------------ ------------
Commitments and contingencies (note 11)
Stockholders' equity
Common stock (note 8)
Authorized:
Unlimited common shares with no par value Issued:
1999: 7,381,212 shares; 1998: 6,562,088 shares 62,968,249 44,637,778
Treasury stock (13,475 shares) (122,743) (122,743)
Deficit (12,322,059) (13,695,916)
------------ ------------
50,523,447 30,819,119
------------ ------------
Total liabilities and stockholders' equity $ 70,877,828 $ 56,568,356
============ ============
</TABLE>
F-3
<PAGE>
MDSI MOBILE DATA SOLUTIONS INC.
Consolidated Statements of Operations
(Expressed in Canadian dollars)
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenue
Software and services $ 59,231,093 $ 42,813,657 $ 34,789,024
Third party products and services 9,955,219 18,567,358 15,133,211
Maintenance and support 8,253,831 5,718,298 2,936,952
------------ ------------ ------------
77,440,143 67,099,313 52,859,187
Direct costs 33,537,701 32,068,823 24,882,301
------------ ------------ ------------
Gross profit 43,902,442 35,030,490 27,976,886
------------ ------------ ------------
Operating expenses
Research and development 9,981,939 8,709,118 4,915,448
Sales and marketing 13,653,380 11,585,547 9,635,329
General and administrative 8,360,837 5,370,346 3,934,315
Amortization of intangible assets 377,532 377,532 350,239
Restructuring costs (note 15) -- -- 725,748
Acquired research and development (note 2) -- -- 10,002,982
------------ ------------ ------------
32,373,688 26,042,543 29,564,061
------------ ------------ ------------
Operating income (loss) 11,528,754 8,987,947 (1,587,175)
Other income (expense) (1,123,783) 41,362 729,265
------------ ------------ ------------
Income (loss) before tax provision 10,404,971 9,029,309 (857,910)
Provision for income taxes (note 9) (3,178,328) (2,725,957) (2,702,498)
------------ ------------ ------------
Income (loss) from continuing operations 7,226,643 6,303,352 (3,560,408)
Loss from discontinued operations (note 16) (5,852,786) (804,408) (7,986,628)
------------ ------------ ------------
Net income (loss) for the year $ 1,373,857 $ 5,498,944 $(11,547,036)
============ ============ ============
Earnings (loss) per common share
Earnings(loss) from continuing operations
Basic $ 1.00 $0.97 $(0.57)
============ ============ ============
Diluted $ 0.93 $0.94 $(0.57)
============ ============ ============
Net earnings (loss)
Basic $ 0.19 $0.85 $(1.84)
============ ============ ============
Diluted $ 0.18 $0.82 $(1.84)
============ ============ ============
Weighted average shares outstanding
Basic 7,245,071 6,504,188 6,261,001
============ ============ ============
Diluted 7,773,462 6,722,823 6,261,001
============ ============ ============
</TABLE>
F-4
<PAGE>
MDSI MOBILE DATA SOLUTIONS INC.
Consolidated Statements of Stockholders' Equity
(Expressed in Canadian dollars)
<TABLE>
<CAPTION>
Common Stock
------------------------------ Special Treasury
Shares Amount Warrants Stock Deficit Total
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 5,703,294 $ 30,681,176 $ 3,925,100 $ (122,743) $ (7,647,824) $ 26,835,700
Issued on exercise of
stock options 107,010 1,275,842 -- -- -- 1,275,842
Issued under Stock
Purchase Plan 21,671 343,843 -- -- -- 343,843
Issued on acquisition of
Alliance (Note 2 ) 347,750 6,928,078 -- -- -- 6,928,078
Issued on conversion of
special warrants (Note 8) 280,000 3,925,100 (3,925,100) -- -- --
Net loss for the year -- -- -- -- (11,547,036) (11,547,036)
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1997 6,459,725 43,154,039 -- (122,743) (19,194,860) 23,836,436
Issued on exercise of
stock options 32,844 448,944 -- -- -- 448,944
Issued under Stock
Purchase Plan (Note 8) 17,919 303,395 -- -- -- 303,395
Issued on conversion of
warrants (Note 8) 51,600 731,400 -- -- -- 731,400
Net income for the year -- -- -- -- 5,498,944 5,498,944
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1998 6,562,088 $ 44,637,778 $ -- $ (122,743) $(13,695,916) $ 30,819,119
Issued on exercise of
stock options 215,980 3,185,880 -- -- -- 3,185,880
Issued under Stock
Purchase Plan (Note 8) 28,144 408,654 -- -- -- 408,654
Issued on public
offering (Note 8) 575,000 14,735,937 -- -- -- 14,735,937
Net income for the year -- -- -- -- 1,373,857 1,373,857
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1999 7,381,212 $ 62,968,249 $ -- $ (122,743) $(12,322,059) $ 50,523,447
============ ============ ============ ============ ============ ============
</TABLE>
F-5
<PAGE>
MDSI MOBILE DATA SOLUTIONS INC.
Consolidated Statements of Cash Flows
(Expressed in Canadian dollars)
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities
Income (loss) from continuing operations for the year $ 7,226,643 $ 6,303,352 $ (3,560,408)
Items not affecting cash:
Depreciation and amortization 2,219,092 1,298,480 1,773,284
Deferred income taxes 183,365 1,079,778 454,513
Acquired research and development -- -- 10,002,982
Changes in non-cash operating working capital items (note 13) (6,131,864) (251,950) (9,726,389)
------------ ------------ ------------
Net cash provided by (used in) operating activities 3,497,236 8,429,660 (1,056,018)
------------ ------------ ------------
Cash flows from financing activities
Issuance of common shares 18,330,471 1,483,739 1,619,685
Repayment of long-term debt (377,332) (134,446) (3,295,348)
Proceeds from (repayment of) capital leases 2,415,179 1,560,119 (53,856)
------------ ------------ ------------
Net cash provided by (used in) financing activities 20,368,318 2,909,141 (1,729,519)
------------ ------------ ------------
Cash flows from investing activities
Long term lease receivable repayment 655,007 -- --
Acquisition of Alliance (note 2) -- -- (1,892,426)
Advances (443,191) -- --
Acquisition of capital assets (5,922,111) (2,607,807) (2,182,689)
------------ ------------ ------------
Net cash used in investing activities (5,710,295) (2,607,807) (4,075,115)
------------ ------------ ------------
Net cash provided by continuing operations 18,155,259 8,730,994 (6,860,652)
Net cash (used by) discontinued operations (3,003,237) (3,532,852) (13,236,250)
------------ ------------ ------------
Net cash inflow (outflow) 15,152,022 5,198,142 (20,096,902)
Cash and cash equivalents, beginning of year 6,136,711 110,117 20,207,019
------------ ------------ ------------
Cash and cash equivalents, end of year $ 21,288,733 $ 5,308,259 $ 110,117
============ ============ ============
Supplemental disclosure of cash flow information
Cash payments for interest $ 199,641 $ 140,475 $ 182,513
============ ============ ============
Cash receipts for interest $ 790,304 $ 147,420 $ 344,697
============ ============ ============
Cash payments for taxes $ 3,405,769 $ 224,667 $ 417,701
============ ============ ============
</TABLE>
F-6
<PAGE>
MDSI MOBILE DATA SOLUTIONS INC.
Consolidated Statements of Cash Flows
(Expressed in Canadian dollars)
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING AND FINANCING ACTIVITIES
In February 1999, the Company adopted a plan to dispose of the Transportation
Business Unit which was completed on June 1, 1999. The Company disposed of the
Transportation Business Unit for proceeds of $5,532,730 comprised of common
shares representing an 11% interest in Digital Dispatch Systems, Inc. and a
promissory note in the principal amount of $500,000, due January 1, 2001 and
bearing an interest rate of 8% per annum.
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).
F-7
<PAGE>
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 1999, 1998 and 1997
(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
Statement of Position 97-2 (Software Revenue Recognition) (SOP
97-2), was issued in October 1997 by the American Institute of
Certified Public Accountants (AICPA) and was amended by the
Statement of Position 98-4 (SOP 98-4). The Company adopted SOP 97-2
effective for the Company's year ended December 31 1998. Based upon
our interpretation of SOP 97-2 and SOP 98-4, the Company believes
its current revenue recognition policies and practices are
consistent with SOP 97-2 and SOP 98-4. Additionally, the AICPA
issued SOP 98-9, which provides certain amendments to SOP 97-2,
which is effective for transactions entered into beginning July 1,
1999. This pronouncement has not materially impacted the Company's
revenue recognition practices.
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.
F-8
<PAGE>
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 1999, 1998 and 1997
(Expressed in Canadian dollars)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
(e) 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
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. An impairment loss would be
recognized when estimates of future cash flows expected to result
from the use of an asset and its eventual disposition are less than
it carrying amount. To date, no such impairment has been indicated.
(f) Goodwill
Goodwill arising on the acquisition of Alliance is amortized on a
straight-line basis over ten years. Management regularly reviews the
carrying value of goodwill based upon expected future cash flows. To
date, no impairment has been indicated.
(g) 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.
(h) 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.
(i) Investments
The Company accounts for investments on a cost basis, Any
impairment in value that is determined to be other than
temporary is charged to earnings.
(j) Earnings (loss) per common share
Basic earnings per share is computed by dividing net income
(loss) available to common shareholders by the weighted
average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution of
securities by including other common share equivalents in the
weighted average number of common shares outstanding for a
period, if dilutive. Common equivalent shares consist of
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).
F-9
<PAGE>
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 1999, 1998 and 1997
(Expressed in Canadian dollars)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
(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 and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Estimates are
used for, but not limited to, the accounting for doubtful accounts,
amortization, determination of net recoverable value of assets,
revenue recognized on long-term contracts, taxes and contingencies.
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
had forward contracts as outlined in note 11(c).
(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 at December 31, 1999, no compensation cost has
been recorded for any period under this method.
The following pro forma financial information presents the net
income (loss) for the year and income (loss) per common share had
the Company adopted Statement of Financial Accounting Standard No.
123 (SFAS 123) Accounting for Stock-based Compensation.
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Net income (loss) for the year $ (3,753,354) $ 2,130,833 $ (13,258,031)
============== ============== ==============
Diluted income (loss) per common share $ (0.48) $ 0.32 $ (2.12)
============== ============== ==============
</TABLE>
Using the fair value method for stock-based compensation, additional
compensation costs of approximately $5,127,211 would have been
recorded for the year ended December 31, 1999 (1998 - $3,368,111 and
1997 - $1,710,995, 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 65.14% (1998 - 56.03% and
1997 - 43.93% respectively) and a weighted average annualized risk
free interest rate at 5.00% (1998 - 5.00% and 1997 - 5.00%
respectively).
(n) Comprehensive income
SFAS 130, Reporting Comprehensive Income, 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.
(o) Segmented information
SFAS 131, Disclosures About Segments of an Enterprise and Related
Information, 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 12).
F-10
<PAGE>
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 1999, 1998 and 1997
(Expressed in Canadian dollars)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued
(p) Accounting for derivative instruments and hedging activities
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 and is effective for all fiscal quarters of
all fiscal years beginning after June 15, 1999. The Company
anticipates that the adoption of this statement, which requires the
accounting recognition of derivatives at fair value, will not have a
significant effect on the Company's financial position or results of
operations. SFAS 137 defers the date of implementation to June 15,
2000. The impact on the Company's financial statements has not been
determined.
(q) 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.
2. ACQUISITIONS
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 matured on January 1, 1999. The acquisition was completed July
1, 1997 and the common shares were issued at that date. Alliance, based in
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.
F-11
<PAGE>
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 1999, 1998 and 1997
(Expressed in Canadian dollars)
3. LEASE RECEIVABLE
At December 31, future payments under customer sales-types leases are as
follows:
1999 1998
----------- -----------
Total lease payments due $ 771,893 $ 1,552,842
Less: amount representing interest (20,533) (146,475)
----------- -----------
Present value of lease payments 751,360 1,406,367
less: current portion (558,357) (560,478)
----------- -----------
$ 193,003 $ 845,889
=========== ===========
The lease has an effective interest rate of 7.25% and is payable in equal
monthly instalments over 36 months with a remaining life of 16 months.
F-12
<PAGE>
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 1999, 1998 and 1997
(Expressed in Canadian dollars)
4. INVESTMENTS AND ADVANCES
1999 1998
---------- ----
Investment in Digital Dispatch Systems Inc. (note 16) $5,032,730 $ --
Promissory note (note 16) 500,000 --
Other advances 443,191 --
---------- ----
Total investments and advances $5,975,921 $ --
========== ====
5. CAPITAL ASSETS
1999 1998
------------ ------------
Computer hardware and software $ 8,390,577 $ 5,280,566
Furniture and fixtures 2,837,268 130,663
Vehicles 73,471 98,503
Leasehold improvements 327,224 196,697
------------ ------------
11,628,540 5,706,429
Less: accumulated depreciation (2,410,694) (569,134)
------------ ------------
$ 9,217,846 $ 5,137,295
============ ============
6. INTANGIBLE ASSETS
1999 1998
----------- -----------
Goodwill $ 3,775,314 $ 3,775,314
Less: accumulated amortization (1,022,512) (644,980)
----------- -----------
$ 2,752,802 $ 3,130,334
=========== ===========
7. LONG-TERM DEBT
1999 1998
--------- ---------
Stockholders (i) $ -- $ 72,800
Promissory notes (ii) -- 304,532
--------- ---------
-- 377,332
Less: current portion -- (377,332)
--------- ---------
$ -- $ --
========= =========
(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 ) to
former stockholders of Alliance. The promissory notes were
unsecured, bearing interest at the rate of 6.07% and matured
January 1, 1999.
F-13
<PAGE>
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 1999, 1998 and 1997
(Expressed in Canadian dollars)
8. 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 2,181,678 common shares. Information regarding the Company's
stock options is as follows:
Weighted
Number of Average
Shares Price
---------- ---------
Outstanding at January 1, 1997 624,999 13.29
Granted 514,000 23.46
Exercised (107,010) 11.92
Cancelled (53,471) 18.25
----------
Outstanding at December 31, 1997 978,518 18.48
Granted 1,112,750 16.56
Exercised (32,844) 13.78
Cancelled (403,218) 23.67
----------
Outstanding at December 31, 1998 1,655,206 16.01
Granted 561,500 19.76
Exercised (215,980) 14.75
Cancelled (102,192) 15.75
----------
Outstanding at December 31, 1999 1,898,534 17.28
==========
The following table summarizes information concerning options outstanding
at December 31, 1999:
Options Outstanding Options Exercisable
-------------------------------------- ----------------------
Weighted
Number Average Number
Outstanding Remaining Weighted Exercisable Weighted
as of Contractual Average as of Average
Range of December Life Exercise December Exercise
Exercise Prices 31, 1999 (months) Price 31, 1999 Price
- - --------------- -------- -------- ----- -------- -----
$10.38-$15.50 985,135 9.81 $ 14.75 754,747 $ 14.41
$16.00-$20.00 712,399 29.12 18.91 111,640 18.96
$21.00-$25.00 138,000 25.73 22.56 84,639 22.44
$25.50-$29.00 63,000 36.00 26.87 -- --
--------- ----- ------- ------- -------
1,898,534 22.23 $ 17.28 951,026 $ 15.66
========= ===== ======= ======= =======
F-14
<PAGE>
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 1999, 1998 and 1997
(Expressed in Canadian dollars)
8. STOCKHOLDERS' EQUITY (continued)
At December 31,1998 and 1997, 618,368 and 414,547 options were
exercisable at a weighted average exercise price of $14.81 and
$13.15 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, 1999, 28,144 common shares were issued under
this Plan.
(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 January 29, 1999, the Company completed a public offering for the
sale and issue of 575,000 common shares at a price of $27.75 per
share for net proceeds of $14,735,937 (net of offering costs of
$1,220,313).
(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), the
remaining unallocated shares held by the ESOP were allocated to
employees. At December 31, 1999, 99,079 shares of the Company were
held by the ESOP of which all have vested and are in the process of
being distributed.
(f) Shareholder rights plan
At the Annual General Meeting on May 6, 1999, the Company's
shareholders' approved the adoption of a Shareholder Rights Plan,
similar to those adopted by other Canadian companies. 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.
F-15
<PAGE>
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 1999, 1998 and 1997
(Expressed in Canadian dollars)
9. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Canada $ 799,670 $(1,872,670) $(1,945,359)
Foreign (3,794,632) 226,461 (302,626)
----------- ----------- -----------
Total current provision for income taxes (2,994,962) (1,646,209) (2,247,985)
----------- ----------- -----------
Deferred:
Canada (694,951) 594,237 --
Foreign 511,586 (1,674,015) (454,513)
----------- ----------- -----------
Total deferred provision for income taxes (183,365) (1,079,778) (454,513)
----------- ----------- -----------
Provision for income taxes $(3,178,327) $(2,725,987) $(2,702,498)
=========== =========== ===========
</TABLE>
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:
<TABLE>
<S> <C> <C> <C>
Statutory tax rate 45.0% 45.0% 45.0%
(Provision for) recovery of income taxes computed
at statutory rate $(5,103,385) $(3,142,549) $ 10,629
Tax losses and (benefits) not recognized in the period
that the benefit arose (761,020) 1,528,458 --
Lower effective rate on earnings of foreign subsidiaries 3,215,126 (647,530) 2,307,309
Acquired research and development costs not
deductible for tax purposes -- -- (4,501,342)
Amortization of intangibles not deductible for tax
purposes (377,532) (377,532) (350,239)
Other permanent differences (151,518) (86,804) (168,855)
----------- ----------- -----------
Provision for income taxes $(3,178,329) $(2,725,957) $(2,702,498)
=========== =========== ===========
</TABLE>
The principal components of the deferred portion of the provision for
income taxes are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Depreciation $ 393,223 $ -- $ --
Deferred revenue (299,372) (1,132,761) 258,233
Operating loss carry forwards (848,586) 114,225 (712,746)
Other 571,370 (61,242) --
----------- ----------- -----------
Total deferred provision for income taxes $ (183,365) $(1,079,778) $ (454,513)
=========== =========== ===========
</TABLE>
The approximate tax effect of each type of temporary difference that gave
rise to the Company's deferred tax assets are as follows:
F-16
<PAGE>
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 1999, 1998 and 1997
(Expressed in Canadian dollars)
9. INCOME TAXES (Continued)
1999 1998
----------- -----------
Current
Operating loss carry forwards $ 414,878 $ 1,016,766
----------- -----------
Net current deferred tax asset $ 414,878 $ 1,016,766
=========== ===========
1999 1998
----------- -----------
Non-current
Depreciation $ (393,223) $ 40,271
Other 811,746 (4,631)
----------- -----------
418,523 35,640
Less: valuation allowance -- (35,640)
----------- -----------
Net non-current deferred tax asset $ 418,523 $ --
=========== ===========
At December 31, 1999, the Company has the following loss carry-forwards
available for tax purposes:
Country Amount Expiry
------- ------ ------
Canada $ 600,000 2003 through 2004
Netherlands NLG 580,000 unlimited
10. 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.
F-17
<PAGE>
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 1999, 1998 and 1997
(Expressed in Canadian dollars)
11. COMMITMENTS AND CONTINGENCIES
(a) Capital and operating leases
At December 31, 1999, future minimum payments under capital and
non-cancellable operating leases for office space and computer
equipment are as follows:
Capital Operating
leases leases
----------- -----------
2000 $ 2,022,743 $ 2,506,163
2001 2,414,822 2,463,462
2002 1,216,280 2,482,153
2003 66,324 2,503,267
2004 -- 2,542,381
Thereafter -- 12,248,614
----------- -----------
Total minimum lease payments 5,720,169 $24,746,040
===========
Less: amount representing interest (525,036)
-----------
Present value of net minimum lease payments 5,195,133
Less: current portion (1,698,702)
-----------
$ 3,496,431
===========
Rent expense for the year ended December 31, 1999 in respect of
operating leases for office space was $2,798,804 (1998 - $2,728,233;
1997 - $1,583,767).
(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, 1999, the Company was not
utilizing the operating line of credit. The Company has provided, as
performance bonds, an irrevocable revolving letter of credit in the
amount of Belgian Franc 101,068,000 maturing May 28, 2001, a bank
guarantee in the amount of Danish Kroner 9,740,000, which matured,
undrawn, at February 2, 2000 and a bank guarantee in the amount of
Belgian Franc 3,060,000 maturing August 30, 2001 all with the same
bank. The Company has pledged an amount equal to the letters of
credit and guarantee against its operating line of credit as
security.
(c) Foreign exchange forward contracts
The Company has entered into a forward contract for Belgian Franc
104,000,000 with a delivery date of October 31, 2000, a forward
contract for GBP 350,000 with a delivery date of May 31, 2000 and a
forward contract for GBP 180,000 with a delivery date of September
29, 2000. All three foreign exchange forward exchange contracts have
been accounted for as foreign currency hedges for specific foreign
currency transactions.
F-18
<PAGE>
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 1999, 1998 and 1997
(Expressed in Canadian dollars)
12. 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. In 1998, the Company reported two business segments - Field
Service and Delivery based on the differing capabilities of the software
and hardware platforms offered to customers. In February 1999, the
Company's Board of Directors approved a plan to dispose of its Delivery
Segment which was subsequently sold effective June 1, 1999 (note 16). As a
result the Company now has only one business segment and therefore does
not provide a detailed breakdown other than provided by its general
purpose financial statements.
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:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------- ------------------------- -------------------------
Long-lived Long-lived Long-lived
Revenue assets Revenue assets Revenue assets
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Canada $ 2,480,095 $13,046,173 $ 2,984,562 $ 3,429,687 $ 1,975,850 $ 2,222,706
United States 55,737,104 4,981,648 61,847,684 5,614,529 45,525,859 4,712,938
Europe 16,968,400 106,120 1,917,269 55,713 2,826,037 59,623
Asia 2,254,544 -- -- -- -- --
South America -- -- 349,798 -- 2,531,441 --
Other -- 7,978 -- 13,590 -- 14,907
----------- ----------- ----------- ----------- ----------- -----------
$77,440,143 $18,141,919 $67,099,313 $ 9,113,519 $52,859,187 $ 7,010,174
=========== =========== =========== =========== =========== ===========
</TABLE>
Long-lived assets consist of the lease receivable, investments, capital
and intangible assets.
Major customers
During the year ended December 31, 1999, the Company earned revenue from
one customer of $9,442,816 (1998 - one customer of $6,129,753; 1997 - one
customer of $7,598,277). No other single customer accounted for more than
10% of total revenue.
F-19
<PAGE>
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 1999, 1998 and 1997
(Expressed in Canadian dollars)
13. CHANGES IN NON-CASH OPERATING WORKING CAPITAL ITEMS
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Accounts receivable $(2,665,070) $(7,462,658) $(3,455,667)
Work in progress -- 66,963 413,879
Prepaid expenses 1,845,633 (2,546,559) (763,192)
Income taxes payable (179,951) 577,909 1,864,662
Accounts payable and accrued liabilities (4,633,957) 4,581,954 (8,658,058)
Deferred revenue (498,519) 4,530,441 871,987
----------- ----------- -----------
$(6,131,864) $ (251,950) $(9,726,389)
=========== =========== ===========
</TABLE>
14. FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, accounts receivable,
accounts payable, accrued liabilities, capital lease obligations and
assets and liabilities from discontinued operations 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%.
1999 1998
------------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
Long-term debt:
Stockholders $ -- $ -- $ 72,800 $ 72,800
Promissory note -- -- 304,532 295,229
-------- -------- -------- --------
$ -- $ -- $377,332 $368,029
======== ======== ======== ========
The Company's revenues have historically been dependent on large contracts
from a limited number of customers in the utility, telecommunications and
cable sectors. However, as these customers are geographically dispersed
and bad debts have not been significant, concentrations of credit risk are
considered to be minimal.
15. PROVISION FOR RESTRUCTURING
During the year ended December 31, 1997, the Company recorded a one-time
charge of $725,748 with respect to restructuring of certain operations.
F-20
<PAGE>
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 1999, 1998 and 1997
(Expressed in Canadian dollars)
16. DISCONTINUED OPERATIONS
In February 1999, the Company's Board of Directors approved a plan for the sale
of the Transportation Business Unit which develops mobile workforce software for
the taxi, courier and roadside recovery markets. The disposition was completed
June 24, effective June 1, 1999, for proceeds of $5,532,730. The proceeds
comprise common shares representing an 11% interest in Digital Dispatch Systems
Inc., a supplier of dispatch systems to the taxi market, and an 8%, $500,000
promissory note due January 1, 2001.
For the year ended December 31, 1999, the Company recorded a one-time charge of
$5,852,786 concurrent with the decision to discontinue the Delivery segment of
the Company's business. Certain contracts were retained for completion during
the year 2000. The estimated cost to complete these contracts is included in the
one-time charge.
This business is accounted for as a discontinued operation and for reporting
purposes the results of operations, financial position and cash flow are
segregated from those of continuing operations for the current and prior
periods. The Company has included in the results of the discontinued operation,
the sale proceeds, the costs of disposition, the results of operations from the
measurement date to the disposal date and an estimate of the costs to complete
the remaining contract.
F-21
<PAGE>
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 1999, 1998 and 1997
(Expressed in Canadian dollars)
<TABLE>
<CAPTION>
Results of discontinued operations
- - ---------------------------------------------------------------------------------------------------------------------
December 31, 1999 December 31, 1998 December 31, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Revenues $ 4,008,198 $ 16,283,541 $ 17,420,993
============ ============ ============
Loss before income taxes (2,375,492) (940,473) (8,369,952)
Income tax -- 136,065 383,324
------------ ------------ ------------
Operating loss to measurement date (2,375,492) (804,408) (7,986,628)
Estimated loss on disposal
(net of nil income taxes) (3,477,294) -- --
------------ ------------ ------------
Loss from discontinued operations $ (5,852,786) $ (804,408) $ (7,986,628)
============ ============ ============
Financial position of discontinued operations
- - ---------------------------------------------------------------------------------------------------------------------
December 31, 1999 December 31, 1998 December 31, 1997
----------------- ----------------- -----------------
Current assets $ 1,386,449 $ 9,147,621 $ 10,050,048
Long term assets -- 2,741,383 3,467,507
------------ ------------ ------------
Total assets of discontinued operations $ 1,386,449 $ 11,889,004 $ 13,517,555
============ ============ ============
Current liabilities $ 250,303 $ 2,370,579 $ 5,744,111
Long term liabilities -- -- --
------------ ------------ ------------
Total liabilities of discontinued operations $ 250,303 $ 2,370,579 $ 5,744,111
============ ============ ============
Cash flow of discontinued operations
- - ---------------------------------------------------------------------------------------------------------------------
December 31, 1999 December 31, 1998 December 31, 1997
----------------- ----------------- -----------------
Operating activities $ (2,871,759) $ (2,454,603) $(12,399,682)
Investing activities (131,480) (94,786) (405,144)
Financing activities -- -- (428,424)
------------ ------------ ------------
Cash provided by (used for) discontinued operations $ (3,003,239) $ (2,549,389) $(13,233,250)
============ ============ ============
</TABLE>
F-22
<PAGE>
MDSI MOBILE DATA SOLUTIONS INC.
1999 STOCK OPTION PLAN
1. INTERPRETATION
1.1 Defined Terms - For the purposes of this Plan, the following terms shall
have the following meanings:
(a) "Associate" shall have the meaning ascribed to such term in the
Ontario Securities Act, as amended from time to time;
(b) "Board" means the Board of Directors of the Company;
(c) "Change in Control" means the acquisition, directly or indirectly,
through one transaction or a number of transactions, by any Person,
of an aggregate of more than fifty percent of the outstanding
Shares;
(d) "Code" means the United States Internal Revenue Code of 1986, as
amended from time to time;
(e) "Committee" means a committee of the Board appointed in accordance
with this Plan, or if no such committee is appointed, the Board
itself;
(f) "Company" means MDSI Mobile Data Solutions Inc., a corporation
incorporated under the laws of Canada;
(g) "Date of Grant" means the date on which a grant of an Option is
effective;
(h) "Disability" means a medically determinable physical or mental
impairment expected to result in death or to last for a continuous
period of not less than 12 months which causes an individual to be
unable to engage in any substantial gainful activity;
(i) "Domestic Relations Successor" means a person entitled to receive
transfer of ownership of an Option pursuant to a Qualified Domestic
Relations Order;
(j) "Effective Date" means the effective date of this Plan, which is
February 25, 1999;
(k) "Exchange Act" means the United States Securities Exchange Act of
1934, as amended;
(l) "Fair Market Value" means:
(i) where the Shares are listed for trading on a stock exchange or
over the counter market, the closing price of the Shares on
the stock exchange or over the counter market which is the
principal trading market for the Company's Shares, as may be
determined for such purpose by the Committee, or
(ii) where the Shares are not listed for trading on a stock
exchange or over the counter market, the value which is
determined by the Committee to be the fair value of the
Shares, taking into consideration all factors that the
Committee deems appropriate, including, without limitation,
recent sale and offer prices of the Shares in private
transactions negotiated at arm's length;
(m) "Guardian" means the guardian, if any, appointed for an Optionee;
(n) "ISO" means an Option granted to an employee of the Company or a
Related Company that qualifies as an "incentive stock option" for
purposes of section 422 of the Code and is therefore subject to
favourable tax treatment under the Code;
<PAGE>
(o) "ISO Optionee" means an Optionee to whom an ISO has been granted;
(p) "Modification" means any change in the terms of an Option which
gives the Optionee additional benefits under the Option, but such
change shall not include a change in the terms of an Option:
(i) to make the Option not transferable other than by will or the
laws of descent and distribution,
(ii) to make the Option exercisable only by the Optionee during his
lifetime,
(iii) in the case of an Option not immediately exercisable in full,
to accelerate the time within which the Option may be
exercised, or
(iv) attributable to the issuance or assumption of an Option by
reason of a corporate merger, consolidation, acquisition of
property or stock, separation, reorganization or liquidation
if the new Option or assumption of the old Option does not
give the Optionee additional benefits which he did not have
under the old Option;
(q) "Non-ISO" means an Option that is not an "incentive stock option"
for purposes of section 422 of the Code, and is therefore not
subject to favourable tax treatment under the Code;
(r) "Non-ISO Optionee" means an Optionee to whom a Non-ISO has been
granted;
(s) "Option" means an option to purchase Shares granted pursuant to the
terms of this Plan;
(t) "Option Agreement" means a written agreement between the Company and
an Optionee, specifying the terms of the Option being granted to the
Optionee under the Plan;
(u) "Option Price" means the exercise per Share for an Option which
shall be expressed in Canadian funds or in the United States dollar
equivalent thereof;
(v) "Optionee" means a person to whom an Option has been granted;
(w) "Person" means a natural person, company, government, or political
subdivision or agency of a government; and where two or more Persons
act as a partnership, limited partnership, syndicate or other group
for the purpose of acquiring, holding or disposing of securities of
an issuer, such syndicate or group shall be deemed to be a Person;
(x) "Plan" means this Stock Option Plan of the Company;
(y) "Qualified Domestic Relations Order" means a judgment or order which
relates to the provision of child support, alimony payments or
marital property rights to a spouse, former spouse, child or other
dependent of an Optionee, made pursuant to domestic relations law of
a state of the United States, and which meets all the requirements
of section 414(p) of the Code;
(z) "Qualified Successor" means a person who is:
(i) entitled to ownership of an Option upon the death of an
Optionee, pursuant to a will or the applicable laws of descent
and distribution upon death, or
(ii) a Domestic Relations Successor of an Optionee;
(aa) "Related Company" shall mean a company which is an affiliate of the
Company as the term "affiliate" is defined in Section 1(2) of the
Ontario Securities Act, as amended from time to time;
(bb) "Shares" means the common shares without par value in the capital of
the Company;
<PAGE>
(cc) "Term" means the period of time during which an Option may be
exercised; and
(dd) "Terminating Event" means:
(i) the dissolution or liquidation of the Company,
(ii) a merger or consolidation of the Company with one or more
corporations as a result of which, immediately following such
merger or consolidation, the shareholders of the Company as a
group will hold less than a majority of the outstanding
capital stock of the surviving corporation,
(iii) the sale or other disposition of all or substantially all of
the assets of the Company, or
(iv) a material change in the capital structure of the Company that
is deemed to be a Terminating Event by virtue of the last
sentence of Section 11.1 of this Plan or by virtue of Section
11.4 of this Plan.
2. STATEMENT OF PURPOSE
2.1 Principal Purposes - The principal purposes of the Plan are to provide the
Company with the advantages of the incentive inherent in share ownership on the
part of employees, officers, directors, and consultants responsible for the
continued success of the Company; to create in such individuals a proprietary
interest in, and a greater concern for, the welfare and success of the Company;
to encourage such individuals to remain with the Company; and to attract new
employees, officers, directors and consultants to the Company.
2.2 ISOs and Non-ISOs - Under this Plan, the Company may grant either ISOs or
Non-ISOs. Each ISO granted hereunder is intended to constitute an "incentive
stock option", for the purposes of section 422 of the Code, and this Plan and
each such ISO is intended to comply with all of the requirements of Section 422
of the Code and of all other provisions of the Code applicable to incentive
stock options and to plans issuing the same. Each Non-ISO granted hereunder is
intended to constitute an Option that is not an "incentive stock option" for the
purposes of section 422 of the Code, and that does not comply with the
requirements of Section 422 of the Code.
2.3 Benefit to Shareholders - The Plan is expected to benefit shareholders by
enabling the Company to attract and retain personnel of the highest caliber by
offering such personnel an opportunity to share in any increase in value of the
Shares resulting from their efforts.
3. ADMINISTRATION
3.1 Board or Committee - The Plan shall be administered by the Board or by a
Committee appointed in accordance with Section 3.2 or 3.5(b) below.
3.2 Appointment of Committee - The Board may at any time appoint a Committee,
consisting of not less than two of its members, to administer the Plan on behalf
of the Board in accordance with such terms and conditions as the Board may
prescribe, consistent with this Plan. Once appointed, the Committee shall
continue to serve until otherwise directed by the Board. From time to time, the
Board may increase the size of the Committee and appoint additional members,
remove members (with or without cause) and appoint new members in their place,
fill vacancies however caused, or remove all members of the Committee and
thereafter directly administer the Plan.
3.3 Quorum and Voting - A majority of the members of the Committee shall
constitute a quorum, and, subject to the limitations in this Section 3, all
actions of the Committee shall require the affirmative vote of members who
constitute a majority of such quorum. No member of the Committee who is a
director to whom an Option may be granted may participate in the decision to
grant such Option (but any such member may be counted in determining the
<PAGE>
existence of a quorum at any meeting of the Committee in which action is taken
with respect to the granting of an Option to him).
3.4 Administration of Plan upon Registration of Equity Securities -
Notwithstanding the foregoing provisions of this Section 3, in the event the
Company is or becomes subject to the provisions of Section 16 of the Exchange
Act, the Board shall attempt to provide for administration of the Plan, insofar
as it relates to the participation of officers, directors or stockholders of the
Company who are subject to the reporting and liability provisions of Section 16
of the Exchange Act, in a manner which shall qualify the grant, exercise,
expiration or surrender of Options under this Plan for the treatment afforded by
Securities and Exchange Commission Rule 16b-3, as amended from time to time, or
any successor rule or regulatory requirements.
3.5 Powers of Committee - Any Committee appointed under Section 3.2 or 3.4 above
shall have the authority to do the following:
(a) administer the Plan in accordance with its terms;
(b) determine all questions arising in connection with the
administration, interpretation, and application of the Plan,
including all questions relating to the value of the Shares;
(c) correct any defect, supply any information or reconcile any
inconsistency in the Plan in such manner and to such extent as shall
be deemed necessary or advisable to carry out the purposes of the
Plan;
(d) prescribe, amend and rescind rules and regulations relating to the
administration of the Plan;
(e) determine the duration and purpose of leaves of absence from
employment which may be granted to Optionees without constituting a
termination of employment for purposes of the Plan;
(f) do the following with respect to the granting of Options:
(i) determine the employees, officers, directors or consultants to
whom Options shall be granted, based on the eligibility
criteria set out in this Plan,
(ii) determine whether such Options shall be ISOs or Non-ISOs,
(iii) determine the terms and provisions of the Option Agreement
which shall be entered into with each Optionee (which need not
be identical with the terms of any other Option Agreement),
(iv) amend the terms and provisions of an Option Agreement,
provided the Committee obtains:
A. the consent of the Optionee; and
B. the approval of any stock exchange on which the Company
is listed,
(v) determine when Options shall be granted,
(vi) determine the number of Shares subject to each Option, and
(g) make all other determinations necessary or advisable for
administration of the Plan.
3.6 Obtain Regulatory Approvals - In administering this Plan, the Committee will
obtain any regulatory approvals which may be required pursuant to applicable
securities laws or the rules of any stock exchange or over the counter market on
which the Shares are listed.
<PAGE>
3.7 Administration by Committee - The Committee's exercise of the authority set
out in Section 3.5 shall be consistent with the intent that ISOs issued under
the Plan be qualified under the terms of Section 422 of the Code, and that
Non-ISOs shall not be so qualified. All determinations made by the Committee in
good faith on matters referred to in Section 3.5 shall be final, conclusive and
binding upon all Persons. The Committee shall have all powers necessary or
appropriate to accomplish its duties under this Plan. In addition, the
Committee's administration of the Plan shall in all respects be consistent with
the policies and rules of any stock exchange or over the counter market on which
the Shares are listed.
4. ELIGIBILITY
4.1 Eligibility for ISOs - ISOs may be granted to any employee of the Company or
any Related Company, including directors or officers who are employees of the
Company or any Related Company. An Optionee who is not an employee of the
Company or any Related Company is not eligible to receive an ISO under the Plan.
4.2 Eligibility for Non-ISOs - Non-ISOs may be granted to any employee, officer,
director or consultant of the Company or any Related Company.
4.3 No Violation of Securities Laws - No Option shall be granted to any Optionee
unless the Committee has determined that the grant of such Option and the
exercise thereof by the Optionee will not violate the securities law of the
jurisdiction in which the Optionee resides.
5. SHARES SUBJECT TO THE PLAN
5.1 Number of Shares - The Committee, from time to time, may grant Options to
purchase an aggregate of up to 2,100,000 Shares, subject to regulatory approval,
to be made available from authorized, but unissued, Shares. In calculating the
foregoing 2,100,000 Shares, the Committee shall include all Shares subject to
options outstanding prior to the Effective Date of the Plan, which as at the
Effective Date, comprises 1,569,249 Shares. The maximum number of 2,100,000
Shares shall be adjusted, where necessary, to take account of the events
referred to in Section 11 hereof.
5.2 Decrease in Number of Shares Subject to Plan - Upon exercise of an Option,
the number of Shares thereafter available under the Plan and under the Option
shall decrease by the number of Shares as to which the Option was exercised.
5.3 Expiry of Option - If an Option expires or terminates for any reason without
having been exercised in full, the unpurchased Shares subject thereto shall
again be available for the purposes of the Plan.
5.4 Reservation of Shares - The Company will at all times reserve for issuance
and keep available such number of Shares as shall be sufficient to satisfy the
requirements of the Plan.
6. OPTION TERMS
6.1 Option Agreement - With respect to each Option to be granted to an Optionee,
the Committee shall specify the following terms in the Option Agreement between
the Company and the Optionee:
(a) whether such Option is an ISO or a Non-ISO;
(b) the number of Shares subject to purchase pursuant to such Option,
provided that the number of Shares reserved for issuance to any one
person pursuant to Options does not exceed 5% of the outstanding
Shares;
(c) the Date of Grant;
(d) the Term, provided that:
<PAGE>
(i) the length of the Term shall in no event be greater than ten
years following the Date of Grant; and
(ii) if an ISO Option is granted to an Optionee who on the Date of
Grant beneficially owns more than 10% of the total combined
voting power of all classes of shares of the Company, the Term
of the Option shall not exceed five years;
(e) the Option Price, provided that:
(i) the Option Price shall not be less than the Fair Market Value
of the Shares on the Date of Grant; and
(ii) if an ISO Option is granted to an Optionee who on the Date of
Grant beneficially owns more than 10% of the total combined
voting power of all classes of shares of the Company or a
Related Company, then the Option Price shall be at least 110%
of the Fair Market Value of the Shares on the Date of Grant;
(f) any vesting schedule upon which the exercise of an Option is
contingent; provided that the Committee shall have complete
discretion with respect to the terms of any such vesting schedule,
including, without limitation, discretion to:
(i) allow full and immediate vesting upon the grant of such
Option,
(ii) to permit partial vesting in stated percentage amounts based
on the length of the Term of such Option, and
(iii) to permit full vesting after a stated period of time has
passed from the Date of Grant; and
(g) such other terms and conditions as the Committee deems advisable and
are consistent with the purposes of this Plan.
Amendments to Option Agreements are subject to regulatory approval, if required.
6.2 No Grant After Ten Years From Effective Date - No Option shall be granted
under the Plan later than ten years from the Effective Date of the Plan. Except
as expressly provided herein, nothing contained in this Plan shall require that
the terms and conditions of Options granted under the Plan be uniform.
6.3 No Disposition for Six Months - An Optionee who is subject to Section 16 of
the Exchange Act shall not make any disposition, as that term is used by Rule
16b-3 under the Exchange Act, of any Shares issued upon exercise of an Option
unless at least six months has elapsed between the Date of Grant of the Option
and the date of disposition of the Shares issued upon exercise of such Option.
7. LIMITATION ON GRANTS OF OPTIONS
7.1 Non-ISO if Exceed $100,000 (U.S.) - If the aggregate Fair Market Value of:
(a) Shares underlying Options which are ISOs which have been granted to
an Optionee under this Plan, and
(b) Shares underlying incentive stock options which have been granted to
such Optionee under any other plan of the Company or any Related
Company,
<PAGE>
which are exercisable for the first time during a calendar year, exceeds
$100,000 (U.S.), as such amount may be adjusted from time to time under Section
422(d) of the Code, then, to the extent of such excess, such Options shall be
treated as Non-ISOs.
7.2 ISO Optionee Owning Greater Than 10% of Voting Securities - The Committee
may grant an ISO to an employee of the Company or any Related Company who, at
the Date of Grant, owns securities of the Company or any Related Company
representing more than 10% of the total combined voting power of all classes of
shares of the Company or any Related Company, only if:
(a) the Option Price is at least 110% of the Fair Market Value of the
Shares at the Date of Grant; and
(b) the Term is five years or less.
8. EXERCISE OF OPTION
8.1 Method of Exercise - Subject to any limitations or conditions imposed upon
an Optionee pursuant to the Option Agreement or Section 6 hereof, an Optionee
may exercise an Option by giving written notice thereof to the Company at its
principal place of business.
8.2 Payment of Option Price - The notice described in Section 8.1 shall be
accompanied by full payment of the aggregate Option Price to the extent the
Option is so exercised, and full payment of any amounts the Company determines
must be withheld for tax purposes from the Optionee pursuant to the Option
Agreement. Such payment shall be:
(a) in lawful money (Canadian funds) by cheque;
(b) at the discretion of the Committee and if such form of payment is
permitted under the corporate laws then governing the Company, by
delivery of the Optionee's personal recourse note bearing interest
at a rate deemed appropriate by the Committee;
(c) at the discretion of the Committee, and subject to all applicable
securities laws, through delivery by the Optionee and/or withholding
by the Company, of Shares having a market value as of the date of
exercise equal to the cash exercise price of the Option plus any
amounts that the Company determines must be withheld from the
Optionee for U.S. or Canadian tax purposes. The market value of each
of the Shares on the date of delivery shall be determined in good
faith by the Committee, which determination shall be binding for all
purposes hereunder; or
(d) at the discretion of the Committee, by any combination of the
consideration contemplated by Sections 8.2(a) to 8.2(c) above.
8.3 Issuance of Certificates - As soon as practicable after exercise of an
Option in accordance with Sections 8.1 and 8.2 hereof, the Company shall issue a
certificate or certificates evidencing the Shares with respect to which the
Option has been exercised. Until the issuance of such certificate or
certificates, no right to vote or receive dividends or any other rights as a
shareholder shall exist with respect to such Shares, notwithstanding the
exercise of the Option. No adjustment will be made for a dividend or other right
for which the record date is prior to the date the certificate is issued, except
as provided by Section 11 hereof.
<PAGE>
9. TRANSFERABILITY OF OPTIONS
9.1 Non-Transferable - Except as provided otherwise in this Section 9, Options
are non-assignable and non-transferable.
9.2 Death of Optionee - If the employment of an Optionee as an employee or
consultant of the Company or any Related Company, or the position of an Optionee
as a director or officer of the Company or any Related Company, terminates as a
result of his or her death, any Options held by such Optionee shall pass to the
Qualified Successor of the Optionee, and
(a) in the case of an ISO, shall be exercisable by the Qualified
Successor for a period of six months following such death, and
(b) in the case of a Non-ISO, shall be exercisable by the Qualified
Successor for a period of 12 months following such death,
provided that in no case shall the Term of the Option extend beyond 10 years
from the Date of Grant.
9.3 Disability of Optionee - If the employment of an Optionee as an employee or
consultant of the Company or any Related Company, or the position of an Optionee
as a director or officer of the Company or any Related Company, is terminated by
the Company or any Related Company by reason of such Optionee's Disability, any
Option held by such Optionee that could have been exercised immediately prior to
such termination of service shall be exercisable by such Optionee, or by his
Guardian, for a period of one year following the termination of service of such
Optionee.
9.4 Disability and Death of Optionee - If an Optionee who has ceased to be
employed by the Company or any Related Company by reason of such Optionee's
Disability dies within six months after the termination of such employment, any
Option held by such Optionee that could have been exercised immediately prior to
his or her death shall pass to the Qualified Successor of such Optionee, and
shall be exercisable by the Qualified Successor:
(a) in the case of an ISO, for a period of six months following the
death of such Optionee, and
(b) in the case of a Non-ISO, for a period of 12 months following the
death of such Optionee,
provided that in no case shall the Term of the Option extend beyond 10 years
from the Date of Grant.
9.5 Vesting - Options held by a Qualified Successor or exercisable by a Guardian
shall, during the period prior to their termination, continue to vest in
accordance with any vesting schedule to which such Options are subject.
9.6 Unanimous Agreement - If two or more persons constitute the Qualified
Successor or the Guardian of an Optionee, the rights of such Qualified Successor
or such Guardian shall be exercisable only upon the unanimous agreement of such
persons.
9.7 Deemed Non-Interruption of Employment - Employment shall be deemed to
continue intact during any military or sick leave or other bona fide leave of
absence if the period of such leave does not exceed 90 days or, if longer, for
so long as the Optionee's right to reemployment with the Company or any Related
Company is guaranteed either by statute or by contract. If the period of such
leave exceeds 90 days and the Optionee's reemployment is not so guaranteed, then
his or her employment shall be deemed to have terminated on the ninety-first day
of such leave.
10. TERMINATION OF OPTIONS
10.1 Termination of Options - To the extent not earlier exercised or terminated
in accordance with section 9 above, an Option shall terminate at the earliest of
the following dates:
(a) the termination date specified for such Option in the Option
Agreement;
<PAGE>
(b) where the Optionee's position as an employee, consultant or director
of the Company or any Related Company is terminated for just cause,
the date of such termination for just cause;
(c) where the Optionee's position as an employee, consultant, officer or
director of the Company or any Related Company terminates for a
reason other than the Optionee's Disability, death, or termination
for just cause, 30 days after such date of termination, or upon the
Optionee making written application to the Committee and receiving
the written consent of the Committee, which consent may be given at
the discretion of the Committee, no later than the original expiry
date of such Option when it was granted;
(d) the date of any sale, transfer, assignment or hypothecation, or any
attempted sale, transfer, assignment or hypothecation, of such
Option in violation of Section 9.1 above; and
(e) the date specified in Section 11.2 below for such termination in the
event of a Terminating Event.
10.2 Lapsed Options - If Options are surrendered, terminated or expire without
being exercised in whole or in part, new Options may be granted covering the
Shares not purchased under such lapsed Options. If an Option has been
surrendered in connection with the regranting of a new Option to the same
Optionee on different terms than the original Option granted to such Optionee,
then the new Option is subject to approval of the stock exchange on which the
Shares are listed.
11. ADJUSTMENTS TO OPTIONS
11.1 Alteration in Capital Structure - If there is a material alteration in the
capital structure of the Company resulting from a recapitalization, stock split,
reverse stock split, stock dividend, or otherwise, the Committee shall make such
adjustments to this Plan and to the Options then outstanding under this Plan as
the Committee determines to be appropriate and equitable under the
circumstances, so that the proportionate interest of the holder of each such
Option shall, to the extent practicable, be maintained as before the occurrence
of such event. Such adjustments may include, without limitation (a) a change in
the number or kind of shares of the Company covered by such Options, and (b) a
change in the Option Price payable per share; provided, however, that the
aggregate Option Price applicable to the unexercised portion of existing Options
shall not be altered, it being intended that any adjustments made with respect
to such Options shall apply only to the price per share and the number of shares
subject thereto. For purposes of this Section 11.1, neither (i) the issuance of
additional shares of stock of the Company in exchange for adequate consideration
(including services), nor (ii) the conversion of outstanding preferred shares of
the Company into Shares shall be deemed to be material alterations of the
capital structure of the Company. If the Committee determines that the nature of
a material alteration in the capital structure of the Company is such that it is
not practical or feasible to make appropriate adjustments to this Plan or to the
Options granted hereunder, such event shall be deemed a Terminating Event for
the purposes of this Plan.
11.2 Terminating Events - Subject to Section 11.3, all Options granted under the
Plan shall terminate upon the occurrence of a Terminating Event.
11.3 Notice of Terminating Event - The Committee shall give notice to Optionees
not less than thirty days prior to the consummation of a Terminating Event. Upon
the giving of such notice, all Options granted under the Plan shall become
immediately exercisable, notwithstanding any contingent vesting provision to
which such Options may have otherwise been subject.
11.4 Corporate Reorganization - In the event of a reorganization as defined in
this Section 11.4 in which the Company is not the surviving or acquiring
corporation, or in which the Company is or becomes a wholly-owned subsidiary of
another corporation after the effective date of the reorganization, then unless
provision is made by the acquiring corporation for the assumption of each Option
granted under this Plan, or the substitution of an option therefor, such that no
Modification of any such Option occurs, all Options granted under this Plan
shall terminate and such event shall be deemed a Terminating Event. For purposes
of this Section 11.4, reorganization shall mean any statutory merger, statutory
consolidation, sale of all or substantially all of the assets of the Company, or
sale, pursuant to an agreement with the Company, of securities of the Company
pursuant to which the Company is or becomes a wholly-owned subsidiary of another
corporation after the effective date of the reorganization.
<PAGE>
11.5 Acceleration on Change of Control - Upon a Change in Control, all Options
shall become immediately exercisable, notwithstanding any contingent vesting
provisions to which such Options may have otherwise been subject.
11.6 Acceleration of Date of Exercise - The Committee shall have the right to
accelerate the date of exercise of any installment of any Option; provided that,
without the consent of the Optionee with respect to any Option, the Committee
shall not accelerate the date of any installment of any Option granted to an
employee as an ISO (and not previously converted into a Non-ISO pursuant to
Section 13 below) if such acceleration would violate the annual vesting
limitation contained in Section 422(d) of the Code, as described in Section 7.1
above.
11.7 Determinations to be Made By Committee - Adjustments and determinations
under this Section 11 shall be made by the Committee, whose decisions as to the
adjustments or determination which shall be made, and the extent thereof, shall
be final, binding, and conclusive.
11.8 Effect of a Take-over If a bona fide offer (the "Offer") for Shares is made
to an Optionee or to shareholders generally or to a class of shareholders which
includes the Optionee, which Offer, constitutes a take-over bid within the
meaning of section 89(1) of the Ontario Securities Act, as amended from time to
time, the Company shall, immediately upon receipt of notice of the Offer, notify
each Optionee of full particulars of the Offer, whereupon any Option held by an
Optionee may be exercised in whole or in part by the Optionee so as to permit
the Optionee to tender the Shares received upon such exercise (the "Optioned
Shares") to the Offer. If:
(a) the Offer is not completed within the time specified therein; or
(b) all of the Optioned Shares tendered by the Optionee pursuant to the
Offer are not taken up and paid for by the offeror pursuant thereto;
the Optioned Share or, in the case of clause (b) above, the optioned Shares that
are not taken up and paid for, may be returned by the Optionee to the Company
and reinstated as authorized but unissued shares and with respect to such
returned Optioned Shares, the Option shall be reinstated as if it had not been
exercised. If any Optioned Shares are returned to the Company under this
Section, the Company shall refund the exercise price to the Optionee for such
Optioned Shares.
12. TERMINATION AND AMENDMENT OF PLAN
12.1 Termination of Plan - Unless earlier terminated as provided in Section 11
above or in Section 12.2 below, the Plan shall terminate on, and no Option shall
be granted under the Plan on or after, the date which is ten years from the
Effective Date of the Plan.
12.2 Power of Committee to Terminate or Amend Plan - Subject to the approval of
any stock exchange on which the Company is listed, the Committee may terminate,
suspend or amend the terms of the Plan; provided, however, that, except as
provided in Section 11 above, the Committee may not do any of the following
without obtaining, within 12 months either before or after the Committee's
adoption of a resolution authorizing such action, approval by the affirmative
votes of the holders of a majority of the voting securities of the Company
present, or represented, and entitled to vote at a meeting duly held in
accordance with the applicable corporate laws, or by the written consent of the
holders of a majority of the securities of the Company entitled to vote:
(a) increase the aggregate number of Shares which may be issued under
the Plan;
(b) materially modify the requirements as to eligibility for
participation in the Plan, or change the designation of the
employees or class of employees eligible to receive ISOs under the
Plan;
(c) materially increase the benefits accruing to participants under the
Plan; or
(d) make any change in the terms of the Plan that would cause the ISOs
granted hereunder to lose their qualification as "incentive stock
options" under Section 422 of the Code;
<PAGE>
however, the Committee may amend the terms of the Plan to comply with the
requirements of any applicable regulatory authority, without obtaining the
approval of its shareholders.
12.3 No Grant During Suspension of Plan - No Option may be granted during any
suspension, or after termination, of the Plan. Amendment, suspension or
termination of the Plan shall not, without the consent of the Optionee, alter or
impair any rights or obligations under any Option previously granted.
13. CONVERSION OF ISOs INTO NON-ISOs
13.1 Conversion of ISOs into Non-ISOs - At the written request of any ISO
Optionee, the Committee may in its discretion take such actions as may be
necessary to convert such Optionee's ISOs (or any installments or portions of
installments thereof) that have not been exercised on the date of conversion
into Non-ISOs at any time prior to the expiration of such ISOs, regardless of
whether the Optionee is an employee of the Company or a Related Company at the
time of such conversion. Such actions include, but shall not be limited to,
extending the exercise period of such ISOs, provided, however, that such
exercise period shall in no event exceed 10 years following the Date of Grant
without approval of The Toronto Stock Exchange. At the time of such conversion,
the Committee, with the consent of the Optionee, may impose such conditions on
the exercise of the resulting Non-ISOs as the Committee in its discretion may
determine, provided that such conditions are consistent with this Plan. Nothing
in the Plan shall be deemed to give any Optionee the right to have such
Optionee's ISOs converted into Non-ISOs, and no such conversion shall occur
until and unless the Committee takes appropriate action. The Committee, with the
consent of the Optionee, may also terminate any portion of any ISO that has not
been exercised at the time of such conversion.
14. CONDITIONS PRECEDENT TO ISSUANCE OF SHARES
14.1 Compliance with Laws - Shares shall not be issued pursuant to the exercise
of any Option unless the Shares are fully paid and non-assessable and the
exercise of such Option and the issuance and delivery of such Shares comply with
all relevant provisions of law, including, without limitation, the United States
Securities Act of 1933, as amended, any applicable state or provincial
securities or corporate laws, the rules and regulations promulgated thereunder,
and the requirements of any stock exchange upon which the Shares may then be
listed or otherwise traded.
14.2 Representations by Optionee - As a condition precedent to the exercise of
any Option, the Company may require the Optionee to represent and warrant, at
the time of exercise, that the Shares are being purchased only for investment
and without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such representations and warranties are
required by any applicable law.
14.3 Regulatory Approval to Issuance of Shares - The Company's inability to
obtain authority from any regulatory body having jurisdiction, which authority
is deemed by the Company's counsel to be necessary to the lawful issuance and
sale of any Shares hereunder, shall relieve the Company of any liability with
respect to the failure to issue or sell such Shares.
15. USE OF PROCEEDS
15.1 Use of Proceeds - Proceeds from the sale of Shares pursuant to the Options
granted and exercised under the Plan shall constitute general funds of the
Company and shall be used for general corporate purposes.
16. NOTICES
16.2 Notices - All notices, requests, demands and other communications required
or permitted to be given under this Plan and the Options granted under this Plan
shall be in writing and shall be either served personally on the party to whom
notice is to be given, in which case notice shall be deemed to have been duly
given on the date of such service; telefaxed, in which case notice shall be
deemed to have been duly given on the date the telefax is sent; or mailed to the
party to whom notice is to be given, by first class mail, registered or
certified, return receipt requested, postage prepaid,
<PAGE>
and addressed to the party at his or its most recent known address, in which
case such notice shall be deemed to have been duly given on the tenth postal
delivery day following the date of such mailing.
17. MISCELLANEOUS PROVISIONS
17.1 No Obligation to Exercise - Optionees shall be under no obligation to
exercise Options granted under this Plan.
17.2 No Obligation to Retain Optionee - Nothing contained in this Plan shall
obligate the Company or any Related Company to retain an Optionee as an
employee, officer, director, or consultant for any period, nor shall this Plan
interfere in any way with the right of the Company or any Related Company to
reduce such Optionee's compensation.
17.3 Binding Agreement - The provisions of this Plan and each Option Agreement
with an Optionee shall be binding upon such Optionee and the Qualified Successor
or Guardian of such Optionee.
17.4 Use of Terms - Where the context so requires, references herein to the
singular shall include the plural, and vice versa, and references to a
particular gender shall include either or both genders.
17.5 Headings - The headings used in this Plan are for convenience of reference
only and shall not in any way affect or be used in interpreting any of the
provisions of this Plan.
17.6 No Representation or Warranty - The Company makes no representation or
warranty as to the future market value of any Shares issued in accordance with
the provisions of this Share Option Plan.
Date approved by the Board of Directors of the Company: February 25, 1999
/s/ M. Greg Beniston
------------------------------
M. Greg Beniston, Secretary
<PAGE>
MDSI MOBILE DATA SOLUTIONS INC.
1999 Stock Purchase Plan
Part A - Introduction
1. Purpose
The purpose of the Plan is to provide an incentive to employees and senior
officers from time to time to acquire a proprietary interest in MDSI, to
encourage their long term commitment and continued employment or involvement
with MDSI, and to increase their individual and combined efforts on behalf of
MDSI.
The Plan consists of the following two separate components as described below:
(a) the MDSI Purchase Plan; and
(b) the Employee Share Ownership Program.
2. Definitions
In this Plan, the following words have the following meanings:
(a) "Board" means the Board of Directors of MDSI;
(b) "Committee" means the Compensation Committee of MDSI;
(c) "Employee" means any full or part-time employee or Senior Officer of MDSI
who works on average at least 20 hours per week, has completed at least
three months of their probationary period and qualifies to purchase Shares
under the Plan, and such other persons as may be considered to be
employees or the equivalent thereof by the applicable regulatory
authorities for the purposes of this Plan;
(d) "Effective Date" means February 25, 1999;
(e) "ESOP" or "Employee Share Ownership Program" means the program
administered by the Province of British Columbia under the Employee
Investment Act (British Columbia) to provide employees with provincial tax
credits to invest in their employers.
(f) "MDSI" means MDSI Mobile Data Solutions Inc. and its subsidiaries.
(g) "ME" means the Montreal Exchange; and
(h) "Plan" means this Stock Purchase Plan;
(i) "President" means the president of MDSI;
(j) "Rules" means the rules adopted by MDSI from time to time for the
administration of the Plan in accordance with the Employee Investment Act
of British Columbia;
(k) "Senior Officer" means the President, a vice-president, the secretary, and
any such other person as is designated as an officer by the Board,
provided such person is an employee of MDSI;
(l) "Shares" means common shares without par value in the capital of MDSI to
be issued from treasury which Employees are entitled to purchase pursuant
to this Plan;
(m) "Subscription Price" means the greater of: (i) the TSE weighted average of
MDSI shares for the first five (5) business days in the third month of the
most recently completed fiscal quarter of MDSI prior to the commencement
date of the quarterly subscription period, less fifteen percent (15%), or
(ii) the average of
<PAGE>
the highest and lowest quoted selling prices of MDSI shares on the TSE on
the fifth business day in the third month of the most recently completed
fiscal quarter of MDSI prior to the commencement date of the quarterly
subscription period, less fifteen percent (15%); and
(n) "TSE" means the Toronto Stock Exchange.
3. Administration
The Plan shall be effective as of the Effective Date and shall terminate on the
earlier of (a) the date which is ten years from the Effective Date; and (b) such
other date as the Board may determine. The Plan shall be administered by the
Committee which shall be appointed by the Board from among its own members and
shall consist of not less than three (3) members. All decisions of the Committee
shall be approved by its members on a majority vote basis and shall be binding
and conclusive for all purposes and upon all persons.
Subject to any express direction by resolution of the Board and to the rules of
the TSE and ME from time to time, the Committee shall have full authority to:
(a) determine and designate from time to time Employees, as defined above, who
are eligible to participate under the Plan;
(b) determine the time or times when, and the manner in which, Shares may be
purchased under the Plan;
(c) determine from time to time the Subscription Price, as defined above, of
the Shares; and
(d) interpret the Plan and to make such rules and regulations and establish
such procedures as it deems appropriate for the administration of the
Plan.
Part B -MDSI Purchase Plan
4. Contributions
(a) Employees who are eligible to purchase Shares may do so through payroll
deduction and are permitted to contribute up to $10,000 annually. Payroll
deduction authorizations will continue indefinitely at the rate selected
(the "Contribution") unless the Employee changes or suspends the
designated deduction or terminates participation in the Plan.
(b) An Employee may change the designated payroll deduction quarterly by
giving MDSI thirty (30) days advance notice of such change on the
appropriate form provided by MDSI. If the Employee changes the designated
percentage of payroll deduction no further change shall be permitted until
the start of the next quarter following the effective date of such change.
(c) An Employee may suspend payroll deductions at any time by completing and
submitting the appropriate form provided by MDSI. If the Employee suspends
Contributions, further Contributions shall not be permitted to the Plan
until the start of the next quarter following the effective date of such
suspension.
(d) The MDSI Purchase Plan is intended to qualify as an "employee stock
purchase plan" within the meaning of Section 423 of the United States
Internal Revenue Code of 1986, as amended (the "Code"), and shall be
interpreted and administered in accordance with that intent.
5. Method of Operation
In accordance with section 2(m) hereof, a Subscription Price for Shares will be
established by MDSI. An Employee wishing to participate in the Plan must enter
into a subscription agreement for Shares with MDSI prior to the start of the
year or the quarter, as the case may be. Employees may also enter into an annual
or balance of year subscription
<PAGE>
agreement with MDSI at the start of the MDSI fiscal year or any quarter,
provided that the subscription price for the Shares subscribed will be
determined at the start of each quarter.
Notwithstanding any other provision to the contrary, no Employee shall be
permitted to subscribe for any shares under the MDSI Purchase Plan if such
Employee, immediately after such subscription, owns shares that account for
(including all Shares that may be purchased under outstanding subscriptions
under the MDSI Purchase Plan and any other outstanding options to purchase
shares) five percent (5%) or more of the total combined voting power or value of
all classes of shares of MDSI or its subsidiaries, taking into account the stock
ownership rules in Code Section 424(d).
A plan account will be established in the name of each Employee. All
Contributions to the MDSI Purchase Plan shall be held in trust by MDSI. MDSI
will not be required to segregate the Contributions under the Plan from its own
corporate funds or to pay interest thereon.
At the end of each MDSI fiscal quarter in which an Employee has subscribed for
Shares, the Employee will have the following options with respect to his
Contributions:
(a) Authorize MDSI to convert the total Contribution to Shares at the
previously established Subscription Price for that quarter, and issue such
Shares to the Employee;
(b) Authorize MDSI to continue to hold the total Contribution in trust for
that Employee to be applied against future purchases of Shares at the
Subscription Price to be established for the MDSI fiscal quarter in which
the Employee elects to purchase the Shares, as instructed by the Employee
from time to time.
In addition to the foregoing, each Employee's total Contribution may be refunded
to such Employee in any of the following circumstances:
(c) on the death of an Employee, in which case such Employee's total
Contribution may be refunded to such Employee's lawful heirs, executors or
administrators at their option;
(d) if the employment of an Employee is terminated for any reason other than
death, in which case such Employee's total Contribution may be refunded to
the Employee, at the Employee's option; or
(e) in the event of any statutory merger, plan of arrangement, amalgamation,
consolidation, sale of all or substantially all of the assets of MDSI, or
sale, pursuant to an agreement with MDSI, of securities of MDSI pursuant
to which MDSI is or becomes a wholly-owned subsidiary of another
corporation after the effective date of such transaction, such Employee's
total Contribution may be refunded to the Employee, at the Employee's
option.
During an Employee's lifetime, an Employee's right to purchase Shares under the
MDSI Purchase Plan is exercisable only by the Employee, and an Employee's rights
under the MDSI Purchase Plan, including rights to accumulated payroll
deductions, may not be pledged, assigned, encumbered or otherwise transferred
for any reason other than by will or the laws of descent and distribution.
6. Issue of Shares
Thirty (30) days after the end of each of MDSI fiscal quarter, unless instructed
otherwise by the Employee in writing, MDSI will issue from its treasury and
deliver to each Employee, Shares equal in the value to the Contribution held in
trust on such date by MDSI for such Employee converted at the Subscription Price
for such quarter. If such conversion would otherwise result in the issue to an
Employee of a fraction of a share, MDSI will issue only such whole shares as are
issuable. MDSI shall hold any unused balance of the Contribution in trust for an
Employee until used in accordance with the MDSI Purchase Plan.
7. Hold Period
<PAGE>
All Shares issued to Employees under the MDSI Purchase Plan will be subject to a
180 day hold period.
8. RSP Option
An Employee may make an agreement with a trustee selected by him or her, on
terms complying with the Income Tax Act (Canada), to create a retirement savings
plan (RSP) which would receive and hold shares purchased under the MDSI Purchase
Plan. An Employee must specify both the maximum amount and the proportion of his
or her Contributions that may be paid into the RSP annually. Each Employee
should ascertain the advantages and disadvantages or an RSP for himself or
herself. Information is available from a number of sources including Revenue
Canada.
Part C- Employee Share Ownership Program
9. Method of Operation
Unless expressly stated otherwise, all provisions contained in the MDSI Purchase
Plan with respect to Contributions from Employees will apply to this Part C.
10. Provincial Tax Incentives
The Government of British Columbia will provide tax incentives under certain
conditions to Employees who invest in MDSI through the Employee Investment Act
and the Rules. The provincial tax credit is equal to 20% of the amount invested,
subject to a maximum of $2,000 per year and a lifetime exemption of $10,000.
Shares fully paid for in the first sixty (60) days of the year can have the tax
credit applied against income for that year or the previous year. The provincial
tax credits do not have any carry forward or carry back provisions.
11. Maximum Individual Contributions
The maximum value of Shares that an Employee may purchase and receive provincial
tax credits on is $10,000 annually and $50,000 lifetime. (i.e. 20% credit of
$10,000 = $ 2000 tax credit annually) The maximum aggregate value of Shares that
an Employee can purchase under the MDSI Purchase Plan and the ESOP is $10,000
per year. These Shares may also be put into an RSP for an additional federal tax
deduction.
12. Hold Period
All Shares issued to Employees and used for provincial tax credits under the
ESOP are subject to a three year hold period with an escrow agent, subject to
exceptions for the sale of the Shares in situations of hardship.
13. Purchase Method
Shares must be purchased by Employees either through payroll deduction or lump
sum to be eligible for tax credits under this Part C of the Plan.
14. Residency Requirement
An Employee must be a resident of the Province of British Columbia to be
eligible to participate in the ESOP.
Part D - General
15. Payment
At the discretion of the Committee and with sufficient advance notice, the full
purchase price for each of the Shares may be paid by all or none of the
Employees in cash or by certified cheque. An Employee shall have none of the
rights of a shareholder in respect of the Shares until the shares are issued to
such Employee.
16. Employment/Appointment
<PAGE>
Nothing contained in the Plan shall confer upon any Employee any right with
respect to employment or to continue in the service of MDSI, or interfere in any
way with the right of MDSI or its directors to terminate such Employee's
employment or service at any time. Participation in any part of the Plan is
voluntary.
<PAGE>
17. Termination of Employment or Service
If an Employee shall cease to be employed by or provide services to MDSI or any
of its subsidiaries for any reason or shall receive notice from MDSI of the
termination of his employment or involvement, the Employee shall be deemed to be
no longer eligible to participate under the Plan. All applicable hold periods on
the Shares will remain after the cessation of employment with MDSI or provision
of services to it. Upon termination of employment or involvement with MDSI, an
Employee who has fully completed his/her probationary period or any extension
thereof may only elect to deal with his/her unconverted Contribution in
accordance with section 5(a) or (d) hereof. Any Employee who does not fully
complete his/her probationary period or any extension thereof may only elect to
deal with his/her unconverted Contribution in accordance with section 5(d)
hereof.
18. Tax Matters
All Employees participating under the Plan are encouraged to seek advice from
their professional advisors with respect to the tax implications of the Plan.
19. Record Keeping
MDSI shall maintain a register in which shall be recorded:
(a) the name and address of each Employee participating under the Plan;
(b) the parts of the Plan in which he or she participates;
(c) any Contributions made by such persons;
(d) the number of Shares issued and the number of Shares outstanding.
20. Effective Date and Term
Subject to any longer period of time which may be authorized by regulatory
approval, the Plan shall be effective as of the Effective Date and shall
terminate on the earlier of:
(a) the date which is ten years from the Effective Date; and
(b) such other date as the Board may determine.
21. Plan Subject to Regulatory & Shareholder Approval
Any rights granted by MDSI prior to the date of the first annual general meeting
of the shareholders of MDSI duly convened following the introduction of the Plan
will be subject to the approval of the TSE, the ME, the Employee Investment Act
administrator and shareholders of MDSI. If such approvals are not obtained, each
and every right granted under the Plan shall be null and void and shall convey
no rights to the Employee and all funds held in trust will be returned.
22. Risk
The Plan offers no guarantee against loss due to market declines. Each Employee
participating in the Plan must accept the risks of market fluctuations as well
as the benefits of share ownership.
23. Expenses of Plan
MDSI will pay all administrative costs of the Plan.
<PAGE>
24. Maximum Number of Shares
Without further approval by the shareholders of MDSI, the maximum number of
Shares to be reserved for issuance by MDSI under the MDSI Purchase Plan and the
Employee Share Ownership Program will not exceed 100,000 shares in the
aggregate.
Notwithstanding any other provision of this Plan, in any MDSI fiscal year, the
maximum aggregate amount that an Employee may contribute under this Plan is
$10,000 per annum.
25. Securities Law Requirements
MDSI shall use all reasonable efforts but shall not be obligated to issue any
Shares pursuant to the Plan, if such issuance would, in the opinion of counsel
for MDSI, violate the Securities Act of British Columbia (or any other
applicable statute), as it may be in effect at that time. Each Share shall be
subject to the further requirement that if at any time the Committee determines
that the listing or qualification of the Share under any securities legislation
or other applicable law, or the consent or approval of any governmental or other
regulatory body (including any applicable stock exchange), is necessary as a
condition of, or in connection with, the issue of the Share hereunder, such
Share shall not be issued unless such listing, qualification, consent or
approval has been effected or obtained free of any conditions not acceptable to
the Committee.
26. Amendment of the Plan
(a) The Board may subject to regulatory approval, amend the Plan if such
amendment is in compliance with the rules of the TSE, the ME and the ESOP.
The Committee may correct any defect or supply any omission or reconcile
any inconsistency in the Plan in the manner and to the extent it deems
desirable to carry the Plan into effect without action on the part of the
shareholders of MDSI; provided, however, that except as provided for
adjustment in this Section 26, unless the shareholders of MDSI shall have
first approved thereof the total number of Shares to be issued shall not
be increased beyond those contemplated in the Plan.
(b) The Board shall have the power, in the event of:
(i) any disposition of substantially all of the assets of MDSI,
dissolution or any merger, amalgamation or consolidation of MDSI,
with or into any other corporation, or the merger, amalgamation or
consolidation of any other corporation with or into MDSI; or
(ii) any acquisition pursuant to a public tender offer of a majority of
the then issued and outstanding common shares without par value of
MDSI;
to, subject to compliance with the rules of the Employee Investment Act,
the TSE and the ME, amend all outstanding subscription agreements with its
Employees to permit the issuance of all such Shares subscribed and paid
for in full prior to the effectiveness of any such transaction, and to
terminate such subscription agreements as of such effectiveness in the
case of transactions referred to in subsection (i) above, and as of the
effectiveness of such tender offer or such later date as the Board may
determine in the case of any transaction described in subsection (ii)
above. If the Board exercises such power, all Employee subscription
agreements then outstanding and subject to such requirements shall be
deemed to have been amended to permit the issuance of the exercise thereof
in whole or in part by the Employee at any time or from time to time as
determined by the Board prior to the effectiveness of such transaction,
and such subscription agreements shall also be deemed to have terminated
as provided above.
<PAGE>
MASTER PURCHASE AND SALE AGREEMENT
THIS Agreement dated as of the 1st day of June, 1999 is made
BETWEEN:
DIGITAL DISPATCH SYSTEMS INC., a company incorporated under the laws
of the Province of British Columbia
("DDS")
OF THE FIRST PART
AND:
MDSI MOBILE DATA SOLUTIONS INC., a corporation incorporated under
the federal laws of Canada
("MDSI")
OF THE SECOND PART
WHEREAS:
A. MDSI is the registered and beneficial owner of all the issued and
outstanding shares in the capital of MDSI Mobile Data Solutions (UK) Ltd.,
a company duly incorporated under the laws of the United Kingdom
("MDSI-UK"), being 558,450 ordinary shares with a par value of UK(pound)1
each (the "MDSI-UK Shares");
B. MDSI is the registered and beneficial owner of all of the issued and
outstanding shares in the capital of MDSI Singapore (Services) Pte Ltd. a
company duly incorporated under the laws of the country of Singapore
("MDSI-Singapore"), being 100,000 ordinary shares with a nominal or par
value of $1 (Singapore dollars) each (the "MDSI-Singapore Shares"); and
C. DDS and MDSI wish to enter into a transaction (the "Transaction") whereby
DDS shall acquire from MDSI, as a going concern, the business currently
carried out by MDSI's Transportation Business Unit ("MDSI-TBU") and all of
the undertaking and assets thereof, consisting of 100% of the MDSI-UK
Shares, 100% of the MDSI-Singapore Shares, 100% of the MDSI-TBU IP Assets
(as hereinafter defined), certain customer contracts, and certain other
assets currently held by MDSI, all as set out in Schedule "A" hereto
(collectively, the "MDSI-TBU Assets"), but excluding the assets set out in
Schedule "A1" hereto.
NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of the premises and
the representations, covenants, agreements and warranties hereinafter set forth
the parties hereto covenant and agree as follows:
1. INTERPRETATION
1.1 Definitions. In this Agreement the following words and phrases shall have
the meanings set forth after each unless the context otherwise requires:
(a) "Closing Date" or "date of Closing": means June 15, 1999, or as
otherwise mutually agreed to by the parties;
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(a2) "Closing" means completion of the Transaction upon the fulfillment
or waiver of all conditions set out in sections 10, 11 and 12 and
the delivery of all documents set out in section 13;
(b) "DDS Financial Statements": means the audited consolidated annual
financial statements of DDS for the year ended December 31, 1998 and
the unaudited interim financial statements of DDS for the
three-month period ended March 31, 1999;
(b2) "DDS Shares": means common shares without par value in the capital
of DDS;
(b3) "DDS-US": means Digital Dispatch, Ltd., a wholly-owned subsidiary of
DDS incorporated in the State of Washington;
(b4) "DDS Valuation Price": means, on any particular date, an amount per
DDS Share which is equal to 2 times the annual revenue of DDS for
the immediately preceding 4 quarters calculated in accordance with
Canadian GAAP, divided by the number of DDS Shares issued and
outstanding on such date;
(b5) "Effective Date" means June 1, 1999
(c1) "MDSI-TBU IP Assets": means the intellectual property assets, rights
or interests ("IP Assets") of the MDSI-TBU or used by it in or in
connection with its business, including copyrights, patents,
trademarks, trade names, service marks, trade secrets, and rights
and licenses pertaining thereto, that have been created by or owned
by or licensed to MDSI-TBU, as specifically set out in Schedule "G".
For greater certainty, the MDSI-TBU IP Assets shall include all IP
Assets owned or held by MDSI Software SRL which are licensed to or
used in or in connection with MDSI-TBU (including all IP Assets
acquired from MDSI-UK on December 31, 1997), but shall not include
any intellectual property assets relating to MDSI's Telco and Cable,
Utilities, Public Safety, Insurance or Field Service products
whatsoever, the Advantex Enterprise Gateway or any of the
application software derived from Advantex Courier with respect to
the Airborne Freight Corporation project;
(c2) "DDS IP Assets" means the intellectual property assets, rights or
interests of DDS. A summary of the DDS IP Assets, as described on
the DDS web page as of May 28, 1999 has been attached as Schedule G;
(d) "MDSI-Singapore Financial Statements": means the audited annual
financial statements of MDSI-Singapore for the year ended December
31, 1998, and the unaudited interim financial statements for
MDSI-Singapore for the three month period ended March 31, 1999;
(e) "MDSI-UK Financial Statements": means the audited annual financial
statements of MDSI-UK for the year ended December 31, 1998, and the
unaudited interim financial statements for MDSI UK for the
three-month period ended March 31, 1999;
(f) "MDSI Closing Financial Statements": means separate financial
statements for each of MDSI-UK and MDSI-Singapore for the five month
period ending May 31, 1999, in each case accompanied by a review
engagement report prepared by a nationally recognized firm of
chartered accountants and otherwise prepared and delivered in
accordance with section 5.5 of this Agreement; and
(g) "Person": means any individual, firm, corporation, partnership,
trust, joint venture, governmental authority or other entity, and
shall include any successor (by merger or otherwise) of such entity.
1.2 Schedules. The following are the Schedules attached hereto and
incorporated by reference and deemed to be part hereof:
Schedule A - Purchased MDSI-TBU Assets (other than MDSI-UK Shares and the
MDSI-Singapore Shares)
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Schedule A1 - Assets, Liabilities and Employees of MDSI UK unrelated to
MDSI-TBU
Schedule B - Outstanding Options to Acquire shares of DDS or DDS-US
Schedule C - Material Contracts of DDS and DDS-US
Schedule C2 - Precedent DDS Customer Contract
Schedule C3 - DDS and DDS-US Contractual Defaults or Breaches
Schedule D - Material Contracts and Employment Contracts of MDSI-TBU
(including all customer agreements)
Schedule D1 - MDSI-UK Contractual Defaults or Breaches
Schedule D2 - MDSI-Singapore Contractual Defaults or Breaches
Schedule D3 - MDSI-BV Contractual Defaults or Breaches
Schedule E - Permitted Encumbrances of DDS and DDS-US
Schedule F - Permitted Encumbrances of MDSI-TBU and relating to MDSI-UK
and MDSI-Singapore Shares
Schedule G - IP Assets of DDS and DDS-US
Schedule H - IP Assets of MDSI-TBU
Schedule I - Shareholders of DDS and DDS-US and their Shareholdings
Schedule J - Consolidated Pro Forma Balance Sheet of MDSI-TBU
Schedule K - Bank Accounts/Safe Deposit Boxes/Powers of Attorney of
MDSI-TBU
Schedule L - Accidents
Schedule M - Employees of MDSI-TBU
2. PURCHASE AND SALE
2.1 Transfer / Exchange of Assets. Upon and subject to the terms and
conditions set forth in this Agreement, at Closing (but then effective as
of the Effective Date), MDSI will transfer or cause to be transferred to
DDS (and/or DDS affiliates) 100% of the MDSI-TBU Assets (free and clear of
all liens, pledges, charges, encumbrances, claims, security interests and
liabilities other than those disclosed to DDS hereunder), in exchange for
the issuance from treasury by DDS to MDSI of 11% of the issued and
outstanding shares of DDS calculated on the Effective Date, which equals
853,005 DDS Shares (the "Purchased DDS Shares") (free and clear of all
liens, pledges, charges, encumbrances, claims, security interests and
liabilities other than those disclosed to MDSI) , and an unsecured
promissory note (the "Promissory Note") granted by DDS in favour of MDSI
in the principal amount of $500,000, with interest to be accrued and
calculated commencing on the Closing Date at a fixed interest rate of 8%
per annum, with repayment in full of accrued interest and principal on
January 1, 2001. MDSI agrees to assist DDS in effecting the transfer of
the MDSI-TBU Assets, including the MDSI-TBU IP Assets held by MDSI
Software SRL (including the royalty obligation of MDSI Software SRL to
MDSI-UK), to DDS in a tax-effective manner. MDSI also agrees that all
MDSI-TBU contracts held by MDSI Software B.V. shall be transferred to
MDSI-UK.
However, prior to the Closing:
(a) Assets, Liabilities and Employees Unrelated to MDSI-TBU: All assets
and liabilities of MDSI-UK which are unrelated to the MDSI-TBU (as
set out on Schedule "A1") shall, at MDSI's direction and with
disclosure to DDS, be transferred to and assumed by MDSI or other
MDSI affiliates with such capital assets and liabilities to be
transferred at net book value and all inventory to be transferred at
the lower of cost and net realizable value, and all employees of
MDSI-UK who are unrelated to MDSI-TBU (as listed on Schedule "A1",
including Roy Manktelow, Barry Edgar, Paul Wilkin, Jouni Rouppa and
Ian Matthews) and all employment obligations, fees, commissions and
claims whatsoever related thereto shall be transferred to and
assumed by MDSI or other MDSI affiliates on Closing but effective as
of the Effective Date. In connection with this transfer and
assumption, DDS agrees that for a period of up to 90 days following
Closing, DDS shall provide to MDSI, at a cost of (pound)1,500 per
month, the office space currently used and occupied by Barry Edgar,
Roy Manktelow and Paul Wilkin for the continued use of and
occupation by them, as well as providing telephone answering
services, access to coffee, kitchen and
<PAGE>
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washroom facilities and access to a boardroom based on availability.
DDS will charge telephone expenses attributable to Messrs. Edgar,
Manktelow and Wilkin during this period to MDSI based on the records
generated by MDSI-UK's telephone billing system. On or before the
expiry of this 90-day period, Messrs. Edgar and Wilkin will vacate
the premises.
(b) MDSI-TBU Restructuring: MDSI shall restructure the MDSI-TBU (with
full disclosure to DDS) such that on Closing (but then effective as
of the Effective Date) MDSI-UK and MDSI-Singapore shall have a net
book value of $1,000,000 calculated in accordance with Canadian GAAP
using as a currency exchange rate the noon buying rate as recorded
by the United States Federal Reserve Board on the Effective Date,
with the Consolidated Proforma Balance Sheet of MDSI-TBU as at the
Effective Date (consolidating the balance sheets of MDSI-UK and
MDSI-Singapore only), a draft of which is attached as Schedule "J"
hereto (the "MDSI-TBU Proforma"), which shall be superseded by a
final version delivered on the Closing Date and upon which such
calculation is based to include the following items as liabilities:
(i) the provision for redundancy costs (i.e., staff reductions,
lease redundancies, etc.) shall be $1,249,197; (ii) the provision
for RTL shall be UK(pound)150,000; (iii) the DHL warranty reserve
shall be $4,308; (iv) the provision for accrued vacation pay and
time off in lieu of overtime shall be UK(pound)40,000; (v) the
Copenhagen Taxi warranty reserve for 14 months shall be UK pounds
193,605; and to exclude as assets the $512,000 previously recognized
as a receivable regarding DHL Asia Pacific, as well as any other
accounts receivable and unbilled receivables which are not bona fide
and collectible in the ordinary course of business; Items (i), (ii),
(iii), (iv) and (v) above shall not be subject to any post-closing
adjustments. The MDSI-TBU Proforma shall also exclude any of the
assets, liabilities, employment obligations, fees, commissions or
claims referred to in and to be transferred pursuant to section 2.1
(a) above. The net book value shall be comprised of assets less
liabilities, with the provision for liabilities as detailed in
Schedule "J". The value of the capital assets on the MDSI-TBU
Proforma for the capital assets purchased per Schedule "A" shall be
equal to the net book value reflected in the MDSI-UK Financial
Statements, with depreciation applied at normal rates to and
including May 31, 1999 and after provision for transfer out of such
capital assets as provided for in section 2.1 (a) above. Inventory
is to be valued at the lower of costs or net realizable value. At
the date of Closing, all applicable assets and inventory are to be
in MDSI-UK's possession unless otherwise agreed in writing with DDS.
Any receivables at Closing not required by MDSI to make the
$1,000,000 net book value (the "Excess Receivables") will be
collected by DDS and remitted to MDSI (with the oldest receivable
being collected in priority to the newer receivables).
Within 30 days after the date of delivery by MDSI to DDS of the MDSI
Closing Financial Statements in accordance with section 5.5 hereof, MDSI
and DDS shall meet in order to make and settle post-Closing adjustments
with respect to the MDSI-TBU Proforma, including, without limitation,
matters relating to unbilled receivables, customer deposits and deferred
revenue. DDS shall prepare and present to MDSI at least 5 business days
prior to such meeting, a Statement of Adjustments, which shall be based on
said MDSI Closing Financial Statements and the currency exchange rate
referred to above, and a certified cheque for the net amount of
post-Closing adjustments owed by either MDSI or DDS to the other, as the
case may be, shall be delivered at the meeting by the applicable party to
the other party. If the post-Closing adjustments are not agreed on and so
paid for within such 30 day period, the matter shall be resolved by an
independent arbitrator in accordance with and subject to the arbitration
provisions set out in section 9.6 hereof, with the net amount of the
adjustments determined owing by the arbitrator to bear interest at the
rate of 10% per annum, calculated from the Closing Date to the date
payment in full is made. The amount so determined, plus interest, together
with any costs awarded by the arbitrator, shall be final and binding on
the parties and shall be paid by the applicable party to the other
forthwith following delivery of the arbitrator's decision. No amount so
payable shall be subject to any of the limitations set out at section 9.2
hereof .
2.2 Anti-Dilution Protection In Connection With Stock Option Exercises. With
respect to the possible post-Closing dilution of MDSI's shareholding in
DDS as a result of the exercise by others of existing or future options
("Third Party Options") to purchase DDS Shares, MDSI shall have the right,
while DDS is a private company, and within 30 days after each such
exercise of Third Party Options, to purchase from treasury at a price of
$6.50 per share,
<PAGE>
-5-
further DDS Shares sufficient to maintain MDSI's then current
proportionate shareholding in DDS. This purchase price of $6.50 per
further DDS Share shall survive for a period of 2 years following the date
of Closing and thereafter shall be such price per further DDS Share as is
equal to the greater of: (a) $6.50; and (b) the exercise price of such
Third Party Options. All waivers of pre-emptive rights required from other
DDS shareholders to enable MDSI to exercise this right shall be obtained
by DDS.
2.3 Permitted Dilution. With respect to the possible post-Closing dilution of
MDSI's shareholding in DDS by the future acquisition from time to time by
DDS of shares, assets or other property or services from an arm's length
party or parties through the issuance of DDS Shares (at fair market value,
determined by the directors of DDS acting reasonably), MDSI agrees to
waive its preemptive rights to participate with respect to the allotment
and issuance of any such DDS Shares.
2.4 Transfer of Ownership and Assumption of Liabilities. Except as
specifically provided elsewhere in this Agreement: up to the time of
Closing, MDSI shall own, have the full benefit of and be responsible for
all obligations and liabilities attaching to the MDSI-TBU Assets, and from
and after the time of Closing, DDS shall own, have the full benefit of and
be responsible for all obligations and liabilities attaching to the
MDSI-TBU Assets.
2.5 Investigation. Prior to Closing, DDS, MDSI and their respective
representatives shall be permitted to make such investigations of the
MDSI-TBU and the MDSI-TBU Assets (in the case of DDS) and of DDS (in the
case of MDSI) and of their respective financial and legal condition as
each of the parties deems necessary or desirable and without limiting the
generality of the foregoing, shall, during normal business hours, be
permitted full and complete access to the premises, books, minute books,
contracts, leases, documents, data and other records of the MDSI-TBU (in
the case of DDS) and of DDS (in the case of MDSI) (and each of the parties
shall provide photocopies to the other of all such written information and
documents as may be reasonably required by or on behalf of the other). Any
such investigation shall not, however, affect or mitigate the
representations, warranties and covenants of the parties (or those
relating to any of their applicable affiliates) hereunder (or under any
agreement or instrument delivered pursuant hereto or in connection
herewith), which shall continue in full force and effect as provided
hereunder.
2.6 Interim Period Management. During the period from the Effective Date to
the Closing (the "Interim Period"), DDS shall manage the MDSI-TBU, subject
to consultation with and approval by Chris Duncombe of MDSI on major
decisions. Notwithstanding the foregoing, if the Transaction is not
completed as contemplated herein, all risk associated with the Interim
Period shall be borne by MDSI. If the Transaction is completed as
contemplated herein, all risk associated with the Interim Period shall be
borne by DDS.
3. REPRESENTATIONS AND WARRANTIES OF MDSI
3.1 In order to induce DDS to enter into and to consummate the Transaction as
contemplated by this Agreement, MDSI represents and warrants, to DDS on
and as at the date of this Agreement, as follows:
(a) No Liabilities: The MDSI-UK Financial Statements disclose or reflect
all liabilities (whether accrued, absolute, contingent or otherwise)
of MDSI-UK as required by UK generally accepted accounting
principles and MDSI-UK has incurred no liabilities since March 31,
1999 except in the ordinary course of business, and none of such
subsequently incurred liabilities are or will be materially adverse
to its business, assets, results of operations or financial
condition;
(a2) No Liabilities: The MDSI-Singapore Financial Statements disclose or
reflect all liabilities (whether accrued, absolute, contingent or
otherwise) of MDSI-Singapore as required by Singapore generally
accepted accounting principles and MDSI-Singapore has incurred no
liabilities since March 31, 1999, except in the ordinary course of
business, and none of such subsequently incurred liabilities are or
will be materially adverse to its business, assets, results of
operations or financial condition;
<PAGE>
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(b) Organization and Good Standing of MDSI-UK: MDSI-UK is a company duly
incorporated and organized and validly existing under the laws of
the United Kingdom, and is in good standing under the laws of the
United Kingdom;
(b2) Organization and Good Standing of MDSI-Singapore: MDSI-Singapore is
a company duly incorporated and organized and validly existing under
the laws of Singapore, and is in good standing under the laws of
Singapore;
(c) Corporate Power and Authority: MDSI and each of its applicable
affiliates which owns and which at Closing will exchange or assign,
any of the MDSI-TBU Assets (the "MDSI Affiliates") is duly
incorporated, organized, validly existing and is in good standing
under the laws of its jurisdiction of incorporation, has full
corporate power and authority to own its properties and assets and
to carry on its business as presently carried on by it, to execute
and deliver this Agreement and/or the other agreements to be
executed and delivered at Closing (the "Other Agreements") and to
perform its obligations hereunder and thereunder and to consummate
the Transaction;
(d) Capitalization of MDSI-UK: The authorized capital of MDSI-UK
consists of 1,000,000 ordinary shares with a par value of (pound)1
each, of which 558,450 ordinary shares are duly and validly issued
and outstanding as fully paid and non-assessable shares, and no
other shares in the authorized capital of MDSI-UK are allotted or
issued and outstanding;
(d2) Capitalization of MDSI-Singapore: The authorized capital of
MDSI-Singapore is 100,000 Singapore dollars (S$), divided into
100,000 ordinary shares with a nominal or par value of S$1 each, of
which 100,000 ordinary shares of S$1 each have been issued at par
for cash of S$100,000 in the aggregate (being the MDSI-Singapore
Shares) are duly and validly issued and outstanding as fully paid
and non-assessable shares, and no other shares in the authorized
capital of MDSI-Singapore are allotted or issued and outstanding;
(e) MDSI-UK Shares: Except as set out in Schedule "F", MDSI is the
registered and beneficial owner of the MDSI-UK Shares and of all
right, title and interest therein, free and clear of all liens,
pledges, charges, encumbrances, security interests, options, rights
and claims of every nature and kind whatsoever and with all rights
and benefits attaching thereto, and MDSI has due and sufficient
right and authority to transfer the registered and beneficial title
and ownership of the MDSI-UK Shares to DDS;
(e2) MDSI-Singapore Shares: Except as set out in Schedule "F", MDSI is
the registered and beneficial owner of the MDSI-Singapore Shares and
of all right, title and interest therein, free and clear of all
liens, pledges, charges, encumbrances, security interests, options,
rights and claims of every nature and kind whatsoever and with all
rights and benefits attaching thereto, and MDSI has due and
sufficient right and authority to transfer the registered and
beneficial title and ownership of the MDSI-Singapore Shares to DDS;
(e3) IP Assets of MDSI Software SRL: MDSI Software SRL is the registered
and beneficial owner of the MDSI-TBU IP Assets owned by MDSI
Software SRL and of all right, title and interest therein, free and
clear of all liens, pledges, charges, encumbrances, security
interests, options, rights and claims of every nature and kind
whatsoever and with all rights and benefits attaching thereto, and
MDSI Software SRL has due and sufficient right and authority to
transfer the registered and beneficial title and ownership of the
MDSI TBU IP Assets owned by MDSI Software SRL to DDS, MDSI-UK or an
affiliate of DDS;
(e4) MDSI Software B.V. Contracts: The MDSI-TBU customer contracts which
have been entered into by MDSI Software B.V. ("MDSI BV") are all set
out in Schedule " D" and MDSI BV owns and holds all beneficial
right, title and interest therein, free and clear of all liens,
pledges, charges, encumbrances, security interests, options, rights
and claims of every nature and kind whatsoever and with all rights
and benefits attaching thereto, and MDSI BV has due and sufficient
right and authority to transfer said
<PAGE>
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contracts and its right, title and interest therein to DDS, MDSI-UK
or an affiliate of DDS; and, all said contracts have been duly
executed by MDSI BV and are valid obligations of MDSI BV enforceable
in accordance with their terms, subject to applicable bankruptcy,
insolvency, reorganization, arrangement, moratorium and other laws
of general application limiting the enforcement of creditors' rights
generally and to general principles of equity, including the fact
that equitable remedies, such as specific performance and injunctive
relief, are subject to the discretion of the court and may not be
awarded where damages are considered an adequate remedy;
(f) Due Authorization, Execution and Delivery: This Agreement has been
duly authorized, executed and delivered on behalf of MDSI and is a
valid obligation of MDSI enforceable in accordance with its terms,
and on or prior to Closing each of the Other Agreements will be duly
authorized, executed and delivered on behalf of MDSI and/or each of
the applicable MDSI Affiliates and will be a valid obligation of
MDSI and/or each of the applicable MDSI Affiliates, in each case
enforceable in accordance with its terms, subject to applicable
bankruptcy, insolvency, reorganization, arrangement, moratorium and
other laws of general application limiting the enforcement of
creditors' rights generally and to general principles of equity,
including the fact that equitable remedies, such as specific
performance and injunctive relief, are subject to the discretion of
the court and may not be awarded where damages are considered an
adequate remedy;
(g) Absence of Options: No Person other than DDS has any agreement or
option, or any right capable of becoming an agreement for the
purchase, subscription, allotment or issuance of any of the unissued
shares in the capital or any other securities of MDSI-UK;
(g2) Absence of Options: No Person other than DDS has any agreement or
option, or any right capable of becoming an agreement for the
purchase, subscription, allotment or issuance of any of the unissued
shares in the capital or any other securities of MDSI-Singapore;
(g3) Absence of Options: No Person other than DDS has any agreement or
option, or any right capable of becoming an agreement for the
purchase of any of the MDSI-TBU IP Assets owned by MDSI Software SRL
or for the assignment to it of any of the MDSI-TBU contracts held by
MDSI BV.
(h) Agreements Valid: The entering into, execution and delivery of this
Agreement by MDSI as of the date hereof, and the entering into,
execution and delivery of each of the Other Agreements by MDSI
and/or each of the applicable MDSI Affiliates on or prior to the
Closing Date, and the consummation of the transactions contemplated
by this Agreement and each of the Other Agreements shall not result
in the breach of any term or provisions of the Memorandum or
Articles of MDSI and/or each of the applicable MDSI Affiliates or
result in the breach of any term or provision of, or constitute a
default under, any contract, agreement, indenture, mortgage, lien,
pledge, charge, encumbrance, security interest, deed of trust or
other instrument to which MDSI and/or each of the applicable MDSI
Affiliates is a party, or result in the breach of any applicable
laws or regulations, or result in the creation of any lien, pledge,
charge, encumbrance, security interest, right or claim of any kind
whatsoever in, or in respect of, any or all of MDSI's assets and/or
each of the applicable MDSI Affiliates' assets;
(i) MDSI-UK Financial Statements: The MDSI-UK Financial Statements:
(i) were prepared in accordance with UK generally accepted
accounting principles applied on a basis consistent with that
of previous years; and
(ii) present fairly in all material respects the financial position
of MDSI-UK as at the date thereof and the results of MDSI-UK's
operations and the changes in MDSI-UK-s financial position for
the period then ended;
(i2) MDSI-Singapore Financial Statements: The MDSI-Singapore Financial
Statements:
<PAGE>
-8-
(i) were prepared in accordance with Singapore generally accepted
accounting principles applied on a basis consistent with that
of previous years; and
(ii) present fairly in all material respects the financial position
of MDSI-Singapore as at the date thereof and the results of
MDSI-Singapore's operations and the changes in
MDSI-Singapore's financial position for the period then ended;
(j) Absence of Changes: Since March 31, 1999:
(i) there has not been any change in the business of MDSI-UK or
any development or occurrence which has had, or to the best of
its knowledge, information and belief, may reasonably be
expected to have, a material adverse effect, financial or
otherwise, on its assets or business;
(ii) MDSI-UK has not waived or surrendered any right of material
value, issued any bonds, debentures, notes or other corporate
securities or granted any security interest in or otherwise
encumbered any of its assets;
(iii) MDSI-UK has not sold or disposed of, or agreed to sell or
dispose of, any of its undertaking, property, assets or
rights, other than in the ordinary course of its business,
other than as required to restructure the MDSI-TBU as
contemplated in subsection 2.1(b);
(iv) MDSI-UK has not declared or made any payment of any dividend
or other distribution in respect of any of its shares or
purchased or redeemed any of its shares or split, consolidated
or reclassified any of its shares, other than as required to
restructure the MDSI-TBU as contemplated in subsection 2.1(b);
(v) to the best of its knowledge, information and belief, MDSI-UK
has conducted its business in its usual and normal manner;
(vi) no capital expenditures or commitments therefor have been made
by MDSI-UK save and except in the ordinary course of business;
and
(vii) MDSI-UK has not increased the pay of, or paid or agreed to pay
any pension, bonus or share of profits or other similar
benefit to or for the benefit of, any employee, director or
officer of MDSI-UK and no payments, loans or advances of any
kind have been made or authorized to any employee, director or
officer of MDSI-UK save and except in the ordinary course of
business;
(j2) Absence of Changes: Since March 31, 1999:
(i) there has not been any change in the business of
MDSI-Singapore or any development or occurrence which has had,
or to the best of its knowledge, information and belief, may
reasonably be expected to have, a material adverse effect,
financial or otherwise, on its assets or business;
(ii) MDSI-Singapore has not waived or surrendered any right of
material value, issued any bonds, debentures, notes or other
corporate securities or granted any security interest in or
otherwise encumbered any of its assets;
(iii) MDSI-Singapore has not sold or disposed of, or agreed to sell
or dispose of, any of its undertaking, property, assets or
rights, other than in the ordinary course of its business
other than as required to restructure the MDSI-TBU as
contemplated in subsection 2.1(b);
<PAGE>
-9-
(iv) MDSI-Singapore has not declared or made any payment of any
dividend or other distribution in respect of any of its shares
or purchased or redeemed any of its shares or split,
consolidated or reclassified any of its shares, other than as
required to restructure the MDSI-TBU as contemplated in
subsection 2.1(b);
(v) to the best of its knowledge, information and belief,
MDSI-Singapore has conducted its business in its usual and
normal manner;
(vi) no capital expenditures or commitments therefor have been made
by MDSI-Singapore save and except in the ordinary course of
business; and
(vii) MDSI-Singapore has not increased the pay of, or paid or agreed
to pay any pension, bonus or share of profits or other similar
benefit to or for the benefit of, any employee, director or
officer of MDSI-Singapore and no payments, loans or advances
of any kind have been made or authorized to any employee,
director or officer of MDSI-Singapore save and except in the
ordinary course of business;
(k) Conduct of Business: The minute books and corporate records of
MDSI-UK, all of which have been provided to DDS, contain accurate
and complete copies of its constating documents and any amendments
thereto, and there are no outstanding applications or filings which
would alter the constating documents or corporate status of MDSI-UK.
MDSI-UK has properly recorded all material transactions and has
filed the appropriate notices with respect to such transactions. The
directors' and shareholders' resolutions and minutes contained in
the corporate records of MDSI-UK are accurate and complete;
(k2) Conduct of Business: The minute books and corporate records of
MDSI-Singapore, all of which have been provided to DDS, contain
accurate and complete copies of its constating documents and any
amendments thereto, and there are no outstanding applications or
filings which would alter the constating documents or corporate
status of MDSI-Singapore. MDSI-Singapore has properly recorded all
material transactions and has filed the appropriate notices with
respect to such transactions. The directors' and shareholders'
resolutions and minutes contained in the corporate records of
MDSI-Singapore are accurate and complete;
(l) Employment Contracts and Labour Matters: Except as set out in
Schedule "D", to the best of its knowledge, information and belief,
there are no written or verbal contracts or arrangements of
employment or engagement or collective agreements entered into by
MDSI-UK, MDSI or any of MDSI's other affiliates with or with respect
to any employees, directors, officers, consultants or agents of
MDSI-UK or MDSI-TBU for which DDS will be liable, directly or
indirectly, through MDSI-UK after the Effective Date. All employees,
directors, officers, consultants or agents of MDSI-UK or MDSI-TBU
have been paid all wages, income, fees, commissions and any other
sums due and owing to them by MDSI-UK, MDSI or any of MDSI's other
affiliates as at the end of the most recent completed pay or
compensation period. No union or association is certified as a
bargaining agent for any employees of MDSI-UK, no negotiations by
MDSI-UK are currently underway with any such union or association,
no certification proceedings are currently in existence or
threatened with respect to MDSI-UK and MDSI is not aware of any
efforts which are currently being made or threatened by any union or
association or any employees of MDSI-UK to unionize or to organize
the employees of MDSI-UK in any manner whatsoever. MDSI is not aware
of any labour conflict with any of MDSI-UK's employees which might
reasonably be expected to have a materially adverse effect on the
operations of MDSI-UK;
(l2) Employment Contracts and Labour Matters: Except as set out in
Schedule "D", to the best of its knowledge, information and belief,
there are no written or verbal contracts or arrangements of
employment or engagement or collective agreements entered into by
MDSI-Singapore, MDSI or any of MDSI's other affiliates with or with
respect to any employees, directors, officers, consultants or agents
of
<PAGE>
-10-
MDSI-Singapore or MDSI-TBUfor which DDS will be liable, directly or
indirectly (through MDSI Singapore), after the Effective Date. All
employees, directors, officers, consultants or agents of MDSI-UK or
MDSI-TBU have been paid all wages, income, fees, commissions and any
other sums due and owing to them by MDSI-Singapore, MDSI or any of
MDSI's other affiliates as at the end of the most recent completed
pay or compensation period. No union or association is certified as
a bargaining agent for any employees of MDSI-Singapore, no
negotiations by MDSI-Singapore are currently underway with any such
union or association, no certification proceedings are currently in
existence or threatened with respect to MDSI-Singapore and MDSI is
not aware of any efforts which are currently being made or
threatened by any union or association or any employees of
MDSI-Singapore to unionize or to organize the employees of
MDSI-Singapore in any manner whatsoever. MDSI is not aware of any
labour conflict with any of MDSI-Singapore's employees which might
reasonably be expected to have a materially adverse effect on the
operations of MDSI-Singapore;
(l3) No Agents or Distributors: Other than as set out in Schedule "D",
the MDSI-TBU does not have any agreements with agents or
distributors;
(m) Employee Plans: Other than as set out in Schedule "D", there are no
employee benefit plans maintained or contributed to by MDSI-UK;
(m2) Employee Plans: Other than as set out in Schedule "D", there are no
employee benefit plans maintained or contributed to by
MDSI-Singapore;
(n) Legal Position and Litigation: MDSI-UK has held and holds, free and
clear of any claim, lien, encumbrance or security interest, all
permits, licenses, registrations and authorizations needed to own
and operate its assets and to carry on its business. MDSI-UK has not
been and is not now in breach of any national, local or municipal
statute, regulation or by-law, and all such licenses, registrations
and authorizations are valid and subsisting and in good standing and
none of the same contains any term, provision, condition or
limitation which has or may have a material adverse effect on the
business or operations of MDSI-UK or which may be adversely affected
by the completion of the Transaction. There is not any suit, action,
litigation, arbitration proceeding or governmental proceeding,
including appeals and applications for review, in progress, pending
or threatened against MDSI-UK which might materially adversely
affect the assets or business of MDSI-UK; and there is not currently
outstanding against MDSI-UK any judgment, decree, injunction, rule
or order of any court, governmental department, commission, agency
or arbitrator;
(n2) Legal Position and Litigation: MDSI-Singapore has held and holds
free and clear of any claim, lien, encumbrance or security interest
all permits, licenses, registrations and authorizations needed to
own and operate its assets and to carry on its business.
MDSI-Singapore has not been and is not now in breach of any
national, local or municipal statute, regulation or by-law, and all
such licenses, registrations and authorizations are valid and
subsisting and in good standing and none of the same contains any
term, provision, condition or limitation which has or may have a
material adverse effect on the business or operations of
MDSI-Singapore or which may be adversely affected by the completion
of the Transaction. There is not any suit, action, litigation,
arbitration proceeding or governmental proceeding, including appeals
and applications for review, in progress, pending or threatened
against MDSI-Singapore which might materially adversely affect the
assets or business of MDSI-Singapore; and there is not currently
outstanding against MDSI-Singapore any judgment, decree, injunction,
rule or order of any court, governmental department, commission,
agency or arbitrator;
(o) Withholding: All amounts to be withheld by MDSI-UK from its
employees' salaries and to be paid to any governmental body pursuant
to any statute have been withheld and paid in a timely manner;
(o2) Withholding: All amounts to be withheld by MDSI-Singapore from its
employees' salaries and to be paid to any governmental body pursuant
to any statute have been withheld and paid in a timely manner;
<PAGE>
-11-
(p) Filings and Other Tax Matters: Except for an ongoing tax
investigation of MDSI-UK by British tax authorities regarding its
tax return for the 1996 taxation year and that, MDSI-UK has not
filed a tax return for the 1997 and 1998 taxation years, and except
as may be otherwise disclosed in the MDSI-UK Financial Statements,
to the best of its knowledge, information and belief, MDSI-UK:
(i) has duly filed in a timely manner:
A. all tax returns, election forms and information returns
and all such returns and forms have been completed
accurately and correctly in all aspects; and
B. all reports and information required to be filed with
all applicable government authorities, agencies and
regulatory bodies;
(ii) has paid all taxes (including all assessments in respect of
its income, business, assets or property) and all interest and
penalties thereon with respect to MDSI-UK for all previous
years and all required installments due for the current fiscal
year. MDSI shall reimburse MDSI-UK or DDS for any costs
incurred related to the 1996 tax year investigation, and if
MDSI-UK becomes liable for any taxes due for the 1996, 1997,
1998 and 1999 (up to the Effective Date) taxation years, MDSI
shall reimburse MDSI UK for such taxes , provided that (a)
MDSI shall be notified immediately upon MDSI-UK becoming aware
of any inquiry from any tax authority with respect to the
prior years, (b) MDSI shall have the right to complete all
such filings, and to control the response to any inquiries
with respect to such filings; (c) MDSI shall have access to
the records of MDSI UK with respect to these years for such
purposes; and (d) MDSI shall have the right to apply all
losses available as of the Effective Date for the years 1996,
1997, 1998 and 1999 (up to the Effective Date) to such tax
liability;
(iii) has retained in its possession copies of all tax returns as
far back as and including the tax return for the year 1991 and
all accounting books and records required to be maintained by
any government or government bodies, other than tax returns,
as far back as and including the books and records for the
1991 taxation year; and
(iv) is not aware of any contingent tax liabilities or grounds for
reassessment of tax;
and there is no agreement, waiver or other arrangement providing for
an extension of time with respect to the filing of any tax return,
or payment of any tax, governmental charge or deficiency by MDSI-UK
nor is there any action, suit, proceeding, investigation or claim
now threatened or pending against MDSI-UK in respect of, or
discussions underway with any governmental authority relating to,
any such tax or governmental charge or deficiency. This section 3.1
(p) and the representations contained in this section 3.1 (p) shall
survive the Closing and continue in full force and effect
indefinitely for the benefit of DDS;
(p2) Filings and Other Tax Matters: Except as may be otherwise disclosed
in the MDSI-Singapore Financial Statements, to the best of its
knowledge, information and belief, MDSI-Singapore:
(i) has duly filed in a timely manner:
A. all tax returns, election forms and information returns
and all such returns and forms have been completed
accurately and correctly in all aspects; and
B. all reports and information required to be filed with
all applicable government authorities, agencies and
regulatory bodies;
(ii) has paid all taxes (including all assessments in respect of
its income, business, assets or
<PAGE>
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property) and all interest and penalties thereon with respect
to MDSI-Singapore for all previous years and all required
installments due for the current fiscal year;
(iii) has retained in its possession copies of all tax returns as
far back as and including the tax return for the year 1997 and
all accounting books and records required to be maintained by
any government or government bodies, other than tax returns,
as far back as and including the books and records for the
1997 taxation year; and
(iv) is not aware of any contingent tax liabilities or grounds for
reassessment of tax;
and there is no agreement, waiver or other arrangement providing for
an extension of time with respect to the filing of any tax return,
or payment of any tax, governmental charge or deficiency by
MDSI-Singapore nor is there any action, suit, proceeding,
investigation or claim now threatened or pending against
MDSI-Singapore in respect of, or discussions underway with any
governmental authority relating to, any such tax or governmental
charge or deficiency. This section 3.1 (p2) and the representations
contained in this section 3.1 (p2) shall survive the Closing and
continue in full force and effect indefinitely for the benefit of
DDS;
(q) Directors and Officers: The directors and officers of MDSI-UK
currently are:
Name Position
Erik Dysthe Director
Kenneth R. Miller Director
Erik Dysthe Managing Director
Verne Pecho Secretary
all of whom were validly elected and appointed;
(q2) Directors and Officers: The directors and officers of MDSI-Singapore
currently are:
Name Position
Erik Dysthe Director
Kenneth R. Miller Director
Lee Kay Beng Company Secretary
Kenneth R. Miller Officer
Verne Pecho Officer
all of whom were validly elected and appointed;
(q3) Material Contracts: Except as set out in Schedule "D", to the best
of its knowledge, information and belief, none of MDSI, MDSI-UK,
MDSI-Singapore or any other MDSI affiliate is a party to or bound by
any material contract or commitment (which for these purposes means
a contract or commitment in excess of or having a value in excess of
$5,000), written or oral, pertaining to the MDSI-TBU or the MDSI-TBU
Assets (collectively, the "MDSI-TBU Material Contracts"). MDSI has
made available to DDS true and complete copies of all MDSI-TBU
Material Contracts in effect on the date hereof;
(r) MDSI-UK Contracts: Except as set out in Schedule "D1", to the best
of its knowledge, information and belief, MDSI-UK is not in default
or breach of any contract or commitment to which it is a party and
to its knowledge there exists no condition, event or act that, with
the giving of notice or lapse of time, would constitute such a
default or breach of any such contract or commitment or result in
the acceleration of any obligation thereunder, and all such
contracts and commitments are in good standing
<PAGE>
-13-
and in full force and effect without amendment thereto and MDSI-UK
is entitled to all benefits thereunder;
(r2) MDSI-Singapore Contracts: Except as set out in Schedule "D2", to the
best of its knowledge, information and belief, MDSI-Singapore is not
in default or breach of any contract or commitment to which it is a
party and to its knowledge there exists no condition, event or act
that, with the giving of notice or lapse of time, would constitute
such a default or breach of any such contract or commitment or
result in the acceleration of any obligation thereunder, and all
such contracts and commitments are in good standing and in full
force and effect without amendment thereto and MDSI-Singapore is
entitled to all benefits thereunder;
(r3) MDSI-BV Contracts: Except as set out in Schedule "D3", to the best
of its knowledge, information and belief, MDSI-BV is not in default
or breach of any contract or commitment relating to MDSI-TBU to
which it is a party and to its knowledge there exists no condition,
event or act that, with the giving of notice or lapse of time, would
constitute such a default or breach of any such contract or
commitment or result in the acceleration of any obligation
thereunder, and all such contracts and commitments are in good
standing and in full force and effect without amendment thereto and
MDSI-BV is entitled to all benefits thereunder;
(r4) MDSI-TBU Contracts: Except as has been otherwise disclosed hereunder
to DDS and to the best of MDSI's knowledge and belief:
1) All past contracts of MDSI-TBU have successfully met the
acceptance requirements under the terms of those contracts or
have been accepted by the customer in writing.
2) There are no rebates or pricing discounts granted or
contingently owing or accruing to any past or present customer
of the MDSI-TBU other than those provided for in the MDSI-UK
Material Contracts.
3) Other than provided for in the MDSI-TBU Proforma there are no
liabilities of MDSI TBU under "project agreements" with past
and present customers.
4) None of the present customers of the MDSI-TBU have advised
MDSI that they would, as a result of the Transaction
contemplated herein, discontinue purchasing goods and services
from MDSI in accordance with their past practice.
5) There are no volume or discounts or other material price
advantages which are likely to be lost to the MDSI-TBU by
reason of the Transaction contemplated herein.
6) None of the present suppliers have advised MDSI that they
would discontinue supplying goods and services to the MDSI-TBU
in accordance with their past practice by reason of the
Transaction contemplated herein;
(r5) Customers/Suppliers: Except as set out in Schedule "D", there are no
material or long term contracts or commitments for the supply of
goods or services to the MDSI-TBU;
(r6) Accounts Receivable: The accounts receivable of MDSI-TBU are bona
fide and are good and collectable in the ordinary course of business
of the MDSI-TBU;
(r7) Unbilled Receivable: The unbilled receivables, customer deposits,
percentage complete amounts and prepaid and recoverable expenses
represented to DDS are bona fide and accurately represented in the
MDSI-TBU Proforma;
(s) Absence of Guarantees: MDSI-UK is not a party to or bound by any
guarantee, indemnification, surety or similar obligation other than
those that may be contained in contracts listed in Schedule "D", and
to the best of its knowledge, information and belief, there are no
unresolved claims or disputes with respect to
<PAGE>
-14-
any such obligation;
(s2) Absence of Guarantees: MDSI-Singapore is not a party to or bound by
any guarantee, indemnification, surety or similar obligation other
than those that may be contained in contracts listed in Schedule
"D", and to the best of its knowledge, information and belief there
are no unresolved claims or disputes with respect to any such
obligation;
(t) Absence of Royalties, etc.: Except as set out in the contracts
listed in Schedule "D" MDSI-UK is not a party to or bound by any
contract or commitment to pay any royalty or license fee, and all
amounts due or payable in respect of any such royalty or license fee
have been paid;
(t2) Absence of Royalties, etc.: Except as set out in the contracts
listed in Schedule "D", MDSI-Singapore is not a party to or bound by
any contract or commitment to pay any royalty or license fee, and
all amounts due or payable in respect of any such royalty or license
fee have been paid;
(u) Assets: MDSI-UK has good and marketable title to and possession of
all of its assets, free and clear of all liens, pledges, charges,
encumbrances, security interests, rights and claims of every nature
and kind whatsoever (save for those Permitted Encumbrances of
MDSI-UK listed at Schedule "F"), and to the best of its knowledge,
information and belief, is not in default of any lien, pledge,
charge, encumbrance, security interest, right or claim;
(u2) Assets: MDSI-Singapore has good and marketable title to and
possession of all of its assets, free and clear of all liens,
pledges, charges, encumbrances, security interests, rights and
claims of every nature and kind whatsoever (save for those Permitted
Encumbrances of MDSI-Singapore listed at Schedule "F"), and to the
best of its knowledge, information and belief, is not in default of
any lien, pledge, charge, encumbrance, security interest, right or
claim;
(v) Absence of Other Interest: MDSI-UK does not own or have the right or
obligation to acquire, directly or indirectly, any shares or
interest in or any assets, liabilities or indebtedness of any other
corporation, partnership or firm;
(v2) Absence of Other Interest: MDSI-Singapore does not own or have the
right or obligation to acquire, directly or indirectly, any shares
or interest in or any assets, liabilities or indebtedness of any
other corporation, partnership or firm;
(w) Environmental: To MDSI's knowledge, having made due inquiries,
(i) the property and assets of MDSI-UK are free from any
pollutants, contaminants, wastes or hazardous or toxic
substances of any kind;
(ii) no underground storage tanks exist on any property owned or
occupied by MDSI-UK, and MDSI-UK has not discharged or caused
or permitted nor does it have any knowledge of, any discharge
of a contaminant of a waste on, in, under or from any property
owned or occupied by MDSI-UK;
(iii) MDSI-UK has handled, stored, treated and disposed of any
pollutants, wastes, hazardous substances or contaminants in
compliance with all applicable environmental laws; and
(iv) MDSI-UK is not in default in making any report or giving any
notice required by any environmental law;
(w2) Environmental: To MDSI's knowledge, having made due inquiries,
<PAGE>
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(i) the property and assets of MDSI-Singapore are free from any
pollutants, contaminants, wastes or hazardous or toxic
substances of any kind;
(ii) no underground storage tanks exist on any property owned or
occupied by MDSI-Singapore, and MDSI-Singapore has not
discharged or caused or permitted nor does it have any
knowledge of, any discharge of a contaminant of a waste on,
in, under or from any property owned or occupied by
MDSI-Singapore;
(iii) MDSI-Singapore has handled, stored, treated and disposed of
any pollutants, wastes, hazardous substances or contaminants
in compliance with all applicable environmental laws; and
(iv) MDSI-Singapore is not in default in making any report or
giving any notice required by any environmental law;
(x) Consents, Authorizations, and Binding Effect: MDSI may execute,
deliver and perform this Agreement without the necessity of MDSI
obtaining any consent, approval, authorization or waiver, or giving
any notice or otherwise, except:
(i) those, with respect to consents, approvals, authorizations and
waivers, which have already been obtained, are unconditional,
and are in full force and effect and, with respect to notices,
which have been given on a timely basis;
(ii) the authorization and approval of the transfer of the MDSI-UK
Shares by the directors of MDSI-UK and MDSI, and the
authorization and approval of the transfer of the
MDSI-Singapore Shares by the directors of MDSI-Singapore and
MDSI;
(iii) those which, if not obtained or made, would not prevent or
delay the consummation of the Transaction or otherwise prevent
MDSI from performing its obligations under this Agreement and
the Other Agreements and would not be reasonably likely to
have a material adverse effect on MDSI-UK and MDSI-Singapore;
and
(iv) those consents set out in section II.6 (b) of the March 18,
1999 Timetable and List of Documents for the Transaction (as
superseded by any subsequent version of that list) (the
"Document List");
(y) Insurance: MDSI-UK has its assets insured under policies of
insurance issued by responsible insurers against loss or damage with
coverage of a type and in an amount consistent with the types and
amounts of insurance maintained by corporations of a size and
carrying on businesses of the type carried on by MDSI-UK. To the
best of its knowledge, information and belief, all such policies of
insurance are set forth in Schedule "D" and are in full force and
effect and there is no default, whether as to the payment of premium
or otherwise, under the terms of any such policies;
(y2) Insurance: MDSI-Singapore has its assets insured under policies of
insurance issued by responsible insurers against loss or damage with
coverage of a type and in an amount consistent with the types and
amounts of insurance maintained by corporations of a size and
carrying on businesses of the type carried on by MDSI-Singapore. To
the best of its knowledge, information and belief, all such policies
of insurance are set forth in Schedule "D" and are in full force and
effect and there is no default, whether as to the payment of premium
or otherwise, under the terms of any such policies;
(z) No Bankruptcy, etc.: There has not been filed any petition or
application, or any proceedings commenced which have not been
discharged, by or against MDSI-UK with respect to any of the MDSI-UK
Shares or any of its assets under any law, domestic or foreign,
relating to bankruptcy, receivership or
<PAGE>
-16-
winding up, reorganization, compromise arrangements, insolvency,
readjustment of debt or creditors' rights, and no assignment or
proposal for the benefit of creditors has been made by MDSI-UK;
(z2) No Bankruptcy, etc.: There has not been filed any petition or
application, or any proceedings commenced which have not been
discharged, by or against MDSI-Singapore with respect to any of the
MDSI-Singapore Shares or any of its assets under any law, domestic
or foreign, relating to bankruptcy, receivership or winding up,
reorganization, compromise arrangements, insolvency, readjustment of
debt or creditors' rights, and no assignment or proposal for the
benefit of creditors has been made by MDSI-Singapore;
(aa) Intellectual Property: The MDSI-TBU IP Assets are valid and
subsisting. No registered user agreements have been issued or have
been executed or recorded in any trade marks office and no licenses
or sub-licenses have been granted to MDSI (or any of its affiliates
other than MDSI-UK or MDSI-Singapore) or any third party to use any
of the MDSI-TBU IP Assets, except as set out in Schedule "H". There
are no unresolved conflicts with, written threats or pending claims
of, or potential, threatened or pending claims by the MDSI-TBU
against, any other Person, whether in litigation or otherwise,
involving the MDSI-TBU IP Assets and, except as set out in Schedule
"H", there are no liens, pledges, charges, encumbrances, claims,
security interests or rights of any other Person, including moral
rights, with respect to the MDSI-TBU IP Assets or which would
prevent MDSI (or any of the MDSI Affiliates) from fulfilling its (or
their) obligations under this Agreement and the Other Agreements. No
activity of any employee of MDSI, any of the MDSI Affiliates or
MDSI-TBU as or while an employee thereof has caused a violation of
any trade secret of MDSI-TBU. To the best of MDSI's knowledge,
information and belief, there is no patent or application therefor
or investigation by any Person that would adversely affect the
MDSI-TBU or any product, apparatus, method, process or design of
MDSI-TBU. Upon Closing, neither MDSI or any of its affiliates nor
any of their respective officers, directors or employees, nor any
third party will have an interest in any of the MDSI-TBU IP Assets.
To the best of MDSI's knowledge, information and belief, there is no
government restriction or any limitation, domestic or foreign, on
the manner in which any of the MDSI-TBU IP Assets may be used;
(bb) Bank Accounts/Safe Deposit Boxes/Power of Attorney: Schedule "K" is
a true and complete list showing:
(i) the name of each bank, trust company, brokerage company or
similar institution in which MDSI-TBU holds accounts or safe
deposit boxes and the names of all Persons authorized to sign
or draw thereon or to have access thereto; and
(ii) the name of each Person holding a general or special power of
attorney from MDSI-UK, MDSI-Singapore or, with respect to the
MDSI-TBU, MDSI or any other MDSI Affiliate and a summary of
the terms thereof;
(cc) Leases: Schedule "D" contains an accurate and complete list of
leases (the "Leases") of real or personal property (the "Leasehold
Property") to which MDSI-UK or MDSI-Singapore is a party, excluding
those car and mobile leases previously disclosed to DDS. MDSI has
made available to DDS true and complete copies of all the Leases.
None of the Leases has been or is being further modified or amended
or assigned and all rents and additional rents required to be paid
and all obligations required to be performed by the lessee
thereunder have paid and performed. The Leases have not been
encumbered and all the Leases are good, valid and subsisting and are
in full force and effect. Schedule "D" identifies the Leases in
respect of which consents of landlords and/or others are required to
the Transaction. None of the Leases contains any provision which as
a result of the Transaction will: (i) increase the lessee's cost of
operating the Leasehold Property; (ii) result in the lessee being
deprived of any right under such Lease; nor (iii) interfere with the
lessee's ability to conduct or continue to conduct its business on
such Leasehold Property in accordance with the terms of the Lease.
The Leasehold Properties are all in a good state of repair and
comply with all statutes, regulations, codes and by-laws. All of the
Leasehold
<PAGE>
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Properties are properly zoned to permit the current use of such
Leasehold Properties. Neither MDSI-UK nor MDSI-Singapore has
received, with respect to any Leasehold Property, any notice from
any municipal or other governmental authority relating to work
orders, or other compliance orders, or relating to any local
improvement charges, levies or assessments or relating to
expropriation;
(dd) Accidents: Schedule "L" is a true and complete list of all reported
accidents and/or injuries suffered by any Person in connection with
the MDSI-TBU within the past three years together with details of
any action, claim, demand or other proceeding pending or threatened
arising therefrom and any settlement (including insurance
settlements) made in relation thereto, none of which are or will be
materially adverse to the MDSI-TBU or the MDSI-TBU Assets; and
(ee) Y2K Definitions and Representation:
(a) Y2K Definitions: The following terms shall have the meanings
assigned to them herein
(i) "MDSI-TBU Software" shall include all "Software Products"
included in the MDSI-TBU IP Assets, including microcode,
firmware, application programs, files and database developed
or acquired by MDSI to form part of the MDSI-TBU Software.
(ii) "Leap Year" shall mean a year during which an extra day is
added in February (February 29th). Leap Year occurs in all
years evenly divisible by 400 or evenly divisible by 4 and not
evenly divisible by 100. For example, the year 1996 is a Leap
Year since it is evenly divisible by 4 and not evenly
divisible by 100. The year 2000 is a Leap Year since it is
evenly divisible by 400.
(iii) The terms "process" "processes" and "processing" of data shall
include, but shall not be limited to, the functions of
comparing, sorting, or otherwise manipulating, performing
calculations, reading, storing and retrieving.
(iv) With respect to the MDSI-TBU Software, "Year 2000 Compliant"
shall mean that such MDSI-TBU Software correctly processes
valid, accurate and correct date data (including, but not
limited to, calculating, comparing, and sequencing) from,
into, and between the twentieth and twenty-first centuries,
including Leap Year calculations, without impairing the
performance, output or accuracy of the system or products
based on the MDSI-TBU Software.
(b) Y2K Representation: MDSI represents and warrants that the MDSI-TBU
Software when used with the hardware, operating system software and
database software chosen by MDSI to meet the MDSI obligation set out
in the Material Contracts is Year 2000 Compliant. Notwithstanding
any other provision of this Agreement, MDSI's sole obligation and
liability under this representation is set out in Section 7.6 below.
4. REPRESENTATIONS AND WARRANTIES OF DDS
4.1 In order to induce MDSI to enter into and to consummate the Transaction as
contemplated by this Agreement, DDS represents and warrants to MDSI on and
as at the date of this Agreement as follows:
(a) No Liabilities: The DDS Financial Statements disclose or reflect all
liabilities of DDS (whether, accrued, absolute, contingent or
otherwise) as required by generally accepted accounting principles
and DDS has incurred no liabilities since March 31, 1999 except in
the ordinary course of business, and none of such subsequently
incurred liabilities are or will be materially adverse to its
business, assets, results of operations or financial condition;
<PAGE>
-18-
(b) Organization and Good Standing of DDS: DDS is a company duly
incorporated and organized and validly existing under the laws of
the Province of British Columbia, is not a "reporting company"
within the meaning of the Company Act (British Columbia), is a
"private issuer" within the meaning of the Securities Act (British
Columbia), is in good standing in the Office of the Registrar of
Companies of the Province of British Columbia with respect to the
filing of annual reports, and does not carry on business in any
other province or territory of Canada or in any other country.
(b1) Organization and Good Standing of DDS-US: DDS-US is a company duly
incorporated and organized and validly existing and in good standing
under the laws of the State of Washington;
(c) Corporate Power and Authority: DDS has full corporate power and
authority to own its properties and assets and to carry on its
business as presently carried on by it and to execute and deliver
this Agreement and the Other Agreements and to perform its
obligations hereunder and thereunder and to consummate the
Transaction;
(d) Capitalization of DDS: The authorized capital of DDS consists of
55,000,000 shares divided into 50,000,000 common shares without par
value and 5,000,000 preferred shares without par value, of which
6,901,585 common shares are duly and validly issued and outstanding
as fully paid and non-assessable shares, and no other shares in the
authorized capital of DDS are allotted or issued and outstanding,
except for 658,915 allotted but unissued DDS Shares remaining in a
certain allotment originally made January 27, 1993 and amended April
10, 1996, July 10, 1998 and April 30, 1999;
(d2) Capitalization of DDS-US: The authorized capital of DDS-US consists
of 100,000 common shares without par value ("DDS-US Shares"), of
which 1,000 shares are duly and validly issued and outstanding as
fully paid and non-assessable shares, and no other shares in the
authorized capital of DDS are allotted or issued and outstanding;
(e) Shareholders of DDS: The current shareholders of DDS and their
respective shareholdings in DDS are as set out in Schedule "I";
(e2) DDS-US Shares: DDS is the registered and beneficial owner of all of
the issued and outstanding DDS-US Shares and of all right, title and
interest therein, free and clear of all liens, pledges, charges,
encumbrances, security interests, options, rights and claims of
every nature and kind whatsoever and with all rights and benefits
attaching thereto;
(f) Due and Valid Issuance of Purchased DDS Shares: On Closing the
Purchased DDS Shares will have been duly authorized and validly
issued by DDS and will be outstanding as fully paid and
non-assessable shares;
(g) Due Authorization, Execution and Delivery: This Agreement has been
duly authorized, executed and delivered on behalf of DDS and is a
valid obligation of DDS enforceable in accordance with its terms,
and on or prior to Closing each of the Other Agreements will be,
duly authorized, executed and delivered on behalf of DDS and will be
a valid obligation of DDS, in each case enforceable in accordance
with its terms, subject to applicable bankruptcy, insolvency,
reorganization, arrangement, moratorium and other laws of general
application limiting the enforcement of creditors' rights generally
and to general principles of equity, including the fact that
equitable remedies, such as specific performance and injunctive
relief, are subject to discretion of the court and may not be
awarded where damages are considered an adequate remedy;
(h) Absence of Options: Except for MDSI and except as has been disclosed
by DDS to MDSI in Schedule "B" hereto, no Person has any agreement
or option, or any right capable of becoming an agreement, for the
purchase, subscription, allotment or issuance of any of the unissued
shares in the capital of DDS or DDS-US;
<PAGE>
-19-
(i) Agreements Valid: The entering into, execution and delivery of this
Agreement by DDS as of the date hereof, and the entering into,
execution and delivery of each of the Other Agreements by DDS on or
prior to the Closing Date, and the consummation of the transactions
contemplated by this Agreement and the Other Agreements shall not
result in the breach of any term or provision of the Memorandum or
Articles of DDS or the constating documents of DDS-US or result in
the breach of any term or provision of, or constitute a default
under, any contract, agreement, indenture, mortgage, lien, pledge,
charge, encumbrance, security interest, deed of trust or other
instrument to which DDS or DDS-US is a party, or result in the
breach of any applicable laws or regulations, or result in the
creation of any lien, pledge, charge, encumbrance, security interest
right or claim of any kind whatsoever in, or in respect of, any or
all of DDS's or DDS-US's assets;
(j) DDS Financial Statements: The DDS Financial Statements:
(i) were prepared in accordance with Canadian generally accepted
accounting principles applied on a basis consistent with that
of previous years; and
(ii) present fairly in all material respects the financial position
of DDS as at the date thereof and the results of DDS's
operations and the changes in DDS's financial position for the
period then ended;
(k) Absence of Changes: Since March 31, 1999:
(i) there has not been any change in the business of DDS or DDS-US
or any development or occurrence which has had, or to the best
of its knowledge, information and belief, may reasonably be
expected to have, a material adverse effect, financial or
otherwise, on either of their assets or business;
(ii) neither DDS nor DDS-US has waived or surrendered any right of
material value, issued any bonds, debentures, notes or other
corporate securities or granted any security interest in or
otherwise encumbered any of its assets;
(iii) neither DDS nor DDS-US has sold or disposed of, or agreed to
sell or dispose of, any of its undertaking, property, assets
or rights, other than in the ordinary course of its business;
(iv) neither DDS nor DDS-US has declared or made any payment of any
dividend or other distribution in respect of any of its shares
or purchased or redeemed any of its shares (except as
disclosed to MDSI in Schedule "I") or split, consolidated or
reclassified any of its shares ;
(v) to the best of its knowledge, information and belief, DDS and
DDS-US have conducted their respective businesses in their
usual and normal manner;
(vi) no capital expenditures or commitments therefor have been made
by DDS or DDS-US save and except in the ordinary course of
business; and
(vii) neither DDS nor DDS-US has increased the pay of, or paid or
agreed to pay any pension, bonus or share of profits or other
similar benefit to or for the benefit of, any employee,
director or officer of DDS or DDS-US and no payments, loans or
advances of any kind have been made or authorized to any
employee, director or officer of DDS or DDS-US save and except
in the ordinary course of business;
(l) Conduct of Business: The minute books and corporate records of DDS,
all of which have been provided to MDSI, contain accurate and
complete copies of its constating documents and any amendments
thereto, and there are no outstanding applications or filings which
would alter the
<PAGE>
-20-
constating documents or corporate status of DDS. DDS has properly
recorded all material transactions and has filed the appropriate
notices with respect to such transactions. The directors' and
shareholders' resolutions and minutes contained in the corporate
records of DDS are accurate and complete;
(l1) Conduct of Business: The minute books and corporate records of
DDS-US, all of which have been provided to MDSI, contain accurate
and complete copies of its constating documents and any amendments
thereto, and there are no outstanding applications or filings which
would alter the constating documents or corporate status of DDS-US.
DDS-US has properly recorded all material transactions and has filed
the appropriate notices with respect to such transactions. The
directors' and shareholders' resolutions and minutes contained in
the corporate records of DDS-US are accurate and complete;
(m) Employment Contracts and Labour Matters: The employment contracts
between DDS and DDS-US and its employees contain terms (including,
but not limited to, with respect to compensation) which are
reasonable and similar to and commensurate with employment contracts
in DDS's line of business. All employees, directors, officers,
consultants or agents have been paid all wages, income, fees,
commissions and any other sums due and owing to them by DDS or
DDS-US as at the end of the most recent completed pay or
compensation period. No union or association is certified as a
bargaining agent for any employees of DDS, no negotiations by DDS
are currently underway with any such union or association, no
certification proceedings are currently in existence or threatened
with respect to DDS and DDS is not aware of any efforts which are
currently being made or threatened by any union or association or
any employees of DDS to unionize or to organize the employees of DDS
in any manner whatsoever. DDS is not aware of any labour conflict
with any of DDS's employees which might reasonably be expected to
have a materially adverse effect on the operations of DDS;
(n) Employee Plans: Other than as set out in Schedule "C", there are no
employee benefit plans maintained or contributed to by DDS;
(o) Legal Position and Litigation: DDS and DDS-US have held and now
hold, free and clear of any claim, lien, encumbrance or security
interest, all permits, licenses, registrations and authorizations
needed to own and operate their assets and to carry on their
businesses. Neither DDS nor DDS-US has been or is now in breach of
any federal, provincial, state, local or municipal statute,
regulation or by-law, and all such licenses, registrations and
authorizations are valid and subsisting and in good standing and
none of the same contains any term, provision, condition or
limitation which has or may have a material adverse effect on the
business or operations of DDS or DDS-US or which may be adversely
affected by the completion of the Transaction. There is not any
suit, action, litigation, arbitration proceeding or governmental
proceeding, including appeals and applications for review, in
progress, pending or threatened against DDS or DDS-US which might
materially adversely affect the assets or business of DDS or DDS-US;
and there is not currently outstanding against DDS or DDS-US any
judgment, decree, injunction, rule or order of any court,
governmental department, commission, agency or arbitrator;
(p) Withholding: All amounts to be withheld by DDS from its employees'
salaries and to be paid to any governmental body pursuant to any
statute have been withheld and paid in a timely manner;
(q) Filings and Other Tax Matters: Except as may be otherwise disclosed
in the DDS Financial Statements, DDS to the best of its knowledge,
information and belief,:
(i) has duly filed in a timely manner:
A. all federal and provincial tax returns, election forms
and information returns and
<PAGE>
-21-
except for U.S. income tax returns of a foreign
corporation subsequent to 1993, the tax returns of any
other jurisdictions required to be filed, and all such
returns and forms have been completed accurately and
correctly in all aspects; and
B. all reports and information required to be filed with
all applicable government authorities, agencies and
regulatory bodies;
(ii) has paid all taxes (including all federal, provincial and
local taxes and assessments in respect of its income,
business, assets or property) and all interest and penalties
thereon with respect to DDS for all previous years and all
required quarterly installments due for the current fiscal
year;
(iii) has retained in its possession copies of all tax returns as
far back as and including the tax return for the year 1991 and
all accounting books and records required to be maintained by
any government or government bodies, other than tax returns,
as far back as and including the books and records for the
1991 taxation year;
(iv) is not aware of any contingent tax liabilities or grounds for
reassessment of tax; and
(v) is a Canadian Controlled Private Corporation within the
meaning of the Income Tax Act (Canada);
and there is no agreement, waiver or other arrangement providing for
an extension of time with respect to the filing of any tax return,
or payment of any tax, governmental charge or deficiency by DDS nor
is there any action, suit, proceeding, investigation or claim now
threatened or pending against DDS in respect of, or discussions
underway with any governmental authority relating to, any such tax
or governmental charge or deficiency;
(r) Directors and Officers: The directors and officers of DDS currently
are:
Name Position
Vari Ghai President and Director
Neera Ghai Secretary/Treasurer
all of whom were validly elected and appointed;
(r1) Directors and Officers: The directors and officers of DDS-US
currently are:
Name Position
Vari Ghai President/Secretary
and Director
all of whom were validly elected and appointed;
(s) Accounts Receivable: The accounts receivable of DDS are bona fide
and are good and collectible in the ordinary course of the business
of DDS; the accounts receivable of DDS-US are bona fide and are good
and collectible in the ordinary course of the business of DDS-US
(t) Material Contracts: Other than in DDS customer contracts, except as
set out in Schedule "C", to the
<PAGE>
-22-
best of its knowledge, information and belief, neither DDS nor
DDS-US is a party to or bound by any material contract or commitment
(which for these purposes means a contract or commitment in excess
of or having a value in excess of $5,000), written or oral
(collectively, the "DDS Material Contracts"). DDS has made available
to MDSI true and complete copies of all DDS Material Contracts in
effect on the date hereof. All DDS customer contracts contain terms
materially similar to the terms and conditions contained in the
precedent attached as Schedule C2 (except provisions in certain
customer contracts where DDS has provided financing for a portion of
the unpaid purchase price);
(t2) Contracts: Except as set out in Schedule "C3", to the best of its
knowledge, information and belief, neither DDS nor DDS-US is in
default or breach of any contract or commitment to which DDS or
DDS-US is a party and to its DDS's knowledge there exists no
condition, event or act that, with the giving of notice or lapse of
time or both, would constitute such a default or breach of any such
contract or commitment or result in the acceleration of any
obligation thereunder, and all such contracts and commitments are in
good standing and in full force and effect without amendment thereto
and DDS or DDS-US, as the case may be, is entitled to all benefits
thereunder;
(u) Absence of Guarantees: Neither DDS nor DDS-US is a party to or bound
by any guarantee, indemnification, surety or similar obligation
other than those that may be contained in the DDS customer
contracts, and to the best of its knowledge, information and belief,
there are no unresolved claims or disputes with respect to any such
obligation;
(v) Absence of Royalties, etc.: Except as set out in the contracts
listed in Schedule "C", neither DDS nor DDS-US is a party to or
bound by any contract or commitment to pay any royalty or license
fee;
(w) Assets: DDS and DDS-US have good and marketable title to and
possession of all of their assets, free and clear of all liens,
pledges, charges, encumbrances, security interests, rights and
claims of every nature and kind whatsoever (save for those Permitted
Encumbrances of DDS listed at Schedule "E"), and to the best of its
knowledge, information and belief, are not in default of any lien,
pledge, charge, encumbrance, security interest, right or claim;
(x) Absence of Other Interest: Except for DDS's interest in DDS-US and
except for certain marketable securities referred to in the DDS
Financial Statements, neither DDS nor DDS-US owns, directly or
indirectly, any shares or interest in any other corporation,
partnership or firm;
(y) Environmental: To DDS's knowledge, having made due inquiries,
(i) the property and assets of DDS and DDS-US are free from any
pollutants, contaminants, wastes or hazardous or toxic
substances of any kind;
(ii) no underground storage tanks exist on any property owned or
occupied by DDS or DDS-US, and DDS and DDS-US have not
discharged or caused or permitted nor do they have any
knowledge of, any discharge of a contaminant of a waste on,
in, under or from any property owned or occupied by DDS or
DDS-US;
(iii) DDS and DDS-US have handled, stored, treated and disposed of
any pollutants, wastes, hazardous substances or contaminants
in compliance with all applicable environmental laws; and
(iv) Neither DDS nor DDS-US is in default in making any report or
giving any notice required by any environmental law;
(z) Consents, Authorizations, and Binding Effect: DDS may execute,
deliver and perform this Agreement and the Other Agreements without
the necessity of DDS or DDS-US obtaining any consent, approval,
<PAGE>
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authorization or waiver, or giving any notice or otherwise, except:
(i) waivers of pre-emptive rights of the existing DDS shareholders
under the Company Act (British Columbia) and under the
Shareholders' Agreement made as of February 8, 1993, as
amended, among DDS and the existing DDS shareholders (the "DDS
Shareholders' Agreement");
(ii) those, with respect to consents, approvals, authorizations and
waivers, which have already been obtained, are unconditional,
and are in full force and effect and, with respect to notices,
which have been given on a timely basis;
(iii) the authorization and approval of the issuance of the
Purchased DDS Shares by the sole director of DDS;
(iv) those which, if not obtained or made, would not prevent or
delay the consummation of the Transaction or otherwise prevent
DDS from performing its obligations under this Agreement and
the Other Agreements and would not be reasonably likely to
have a material adverse effect on DDS; and
(v) those consents set out in section II.6 (a) of the Document
List;
(aa) Insurance: DDS and DDS-US have their assets insured under policies
of insurance issued by responsible insurers against loss or damage
with coverage of a type and in an amount consistent with the types
and amounts of insurance maintained by corporations of a size and
carrying on businesses of the type carried on by DDS and DDS-US. To
the best of its knowledge, information and belief, all such policies
of insurance are set forth in Schedule "C" and are in full force and
effect and there is no default, whether as to payment of premium or
otherwise, under the terms of any such policies;
(bb) No Bankruptcy, etc.: There has not been filed any petition or
application, or any proceedings commenced which have not been
discharged, by or against DDS with respect to any of the DDS Shares
or any of its assets under any law, domestic or foreign, relating to
bankruptcy, receivership or winding up, reorganization, compromise
arrangements, insolvency, readjustment of debt or creditors' rights,
and no assignment or proposal for the benefit of creditors has been
made by DDS;
(cc) Intellectual Property: The DDS IP Assets are valid and subsisting.
There are no unresolved conflicts with, threatened or pending claims
of, or potential, written threats or pending claims by DDS against,
any other Person, whether in litigation or otherwise, involving the
DDS IP Assets and, except as set out in Schedule "G", there are no
liens, pledges, charges, encumbrances, claims, security interests or
rights of any other Person, including moral rights, with respect to
the DDS IP Assets or which would prevent DDS from fulfilling its
obligations under this Agreement and the Other Agreements. No
activity of any employee of DDS as or while an employee thereof has
caused a violation of any trade secret of DDS. To the best of DDS's
knowledge, information and belief, there is no patent or application
therefor or investigation by any Person that would adversely affect
DDS or any product, apparatus, method, process or design of DDS. To
the best of DDS's knowledge, information and belief, there is no
government restriction or any limitation, domestic or foreign, on
the manner in which any of the DDS IP Assets may be used which
materially negatively affects DDS's business;
(dd) Leases and Real Property Interests: Schedule "C" contains an
accurate and complete list of leases (the "Leases") of real or
personal property (the "Leasehold Property") to which DDS or DDS-US
is a party and a list of the real property held by DDS or DDS-US
(the "Freehold Property"). DDS has made available to MDSI true and
complete copies of all the Leases and the summary title documents
relating to the Freehold Property. None of the Leases has been or is
being further modified or amended or assigned and all rents and
additional rents required to be paid and all obligations required to
be performed by the lessee thereunder have paid and performed.
Except as disclosed in Schedule "E", the
<PAGE>
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Leases and the Freehold Property have not been encumbered and all
the Leases are good, valid and subsisting and are in full force and
effect. Schedule "C" identifies the Leases in respect of which
consents of landlords and/or others are required to the Transaction,
and Schedule "E" identifies all encumbrances on the Freehold
Property in respect of which consents of encumbrancers are required
to the Transaction. None of the Leases contains any provision which
as a result of the Transaction will: (i) increase the lessee's cost
of operating the Leasehold Property; (ii) result in the lessee being
deprived of any right under such Lease; nor (iii) interfere with the
lessee's ability to conduct or continue to conduct its business on
such Leasehold Property in accordance with the terms of the Lease.
The Leasehold Properties and the Freehold Property are all in a good
state of repair and comply with all statutes, regulations, codes and
by-laws. All of the Leasehold Properties and the Freehold Property
are properly zoned to permit the current use of such Leasehold
Properties and the Freehold Property. Neither DDS nor DDS-US has
received, with respect to any Leasehold Property or the Freehold
Property, any notice from any municipal or other governmental
authority relating to work orders, or other compliance orders, or
relating to any local improvement charges, levies or assessments or
relating to expropriation; and
(ee) Y2K Representation: DDS represents and warrants that the latest
version of each of the products of comprising the DDS Software is
year 2000 compliant.
5. COVENANTS OF MDSI
MDSI hereby covenants and agrees with DDS as follows:
5.1.1 Copenhagen Taxi Costs and Revenue. MDSI will manage the Copenhagen Taxi
contract of MDSI-UK to the point in time (the "Site Acceptance Time") that
MDSI has successfully passed a site acceptance test with Copenhagen Taxi,
with no material variation from the acceptance terms contained within the
terms of the Copenhagen contract unless agreed to in writing with the
Customer and agreed to in writing by DDS, and throughout this period MDSI
shall provide all disclosure to DDS as reasonably requested by DDS. DDS
shall be entitled, at its own expense, to have any of its employees or
representatives attend the site acceptance test or any other significant
meetings or tests, provided that such attendance will be strictly in the
capacity of an observer, and such employees or representatives shall not
participate in or influence any discussions with the customer. All
revenues, benefits, costs, penalties, discounts and other liabilities
associated with the Copenhagen Taxi project accrued and owing up to and
including the Site Acceptance Time will be for MDSI's account. Effective
at the Site Acceptance Time, MDSI will transfer on an orderly basis and
DDS will assume management of the Copenhagen Taxi project and all the
benefits and the obligations thereunder, however, all liability for
penalties under the supply contract shall be borne solely by MDSI and all
such discounts shall be paid for solely by MDSI in cash to the customer or
to DDS. Accordingly, all of the benefits and obligations under the support
and maintenance contract will be solely for the account of DDS. In
furtherance of this covenant, the supply contract will be assigned to MDSI
at Closing and then assigned to DDS effective at the Site Acceptance Time.
In addition, MDSI agrees not to make any amendments to the existing
maintenance agreement with respect to incurring any additional discounts
without DDS's consent. From the Site Acceptance Time forward, all
revenues, benefits, costs and other liabilities (except for penalties
accrued and owing prior to the Site Acceptance Time) associated with the
Copenhagen Taxi project will be for DDS's account. MDSI acknowledges and
agrees that, from and after Closing, all MDSI-TBU IP Assets associated
with or developed in connection with the Copenhagen Taxi project (except
for the Oracle licenses registered in the name of MDSI) shall be the sole
property of DDS directly or indirectly (through MDSI-UK), that MDSI shall
have no right, title and interest therein and that MDSI shall not use such
MDSI-TBU IP Assets except for the purpose of performing its management
obligations set out above. MDSI shall not duplicate any of such MDSI-TBU
IP Assets and it shall not disclose or permit access to any of such
MDSI-TBU IP Assets to any Person other than disclosure on a "need to know"
basis to its direct employees or contractors working on the project (a
list of whom shall be provided to DDS on Closing and updated from time to
time) and who have signed appropriate confidentiality agreements and
agreements relinquishing and assigning any and all rights in and to such
MDSI-TBU IP Assets. MDSI shall indemnify and hold harmless DDS for costs,
losses or damages it may incur arising from a breach by it of such
confidentiality and non-use covenants. MDSI
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also agrees that on a timely basis following the Site Acceptance Time, it
shall deliver to DDS all MDSI-TBU IP Assets, data and materials (and all
copies thereof) associated with the project, and that within 30 days
following the Site Acceptance Time it shall separately transfer to DDS, at
DDS' discretion, all assets used by MDSI in connection with the Copenhagen
project for a price equal to their aggregate net book value as of the Site
Acceptance Time. At such time, MDSI and DDS shall also adjust and settle
all other amounts owing or claims between them regarding the Copenhagen
Taxi project, and any dispute between them regarding such settlement shall
be resolved by arbitration on the same terms and conditions as apply for
resolving post-Closing adjustments set out in section 2.1 above including
that such adjustment shall not be subject to the limitations set out in
section 9.2 hereof.
5.1.2 Copenhagen Warranty Reserve. The Copenhagen warranty reserve provided in
section 2.1(b) is provided on the basis that DDS will provide warranty
services for a 14 month warranty period under the service agreement to
Copenhagen Taxi, and DDS shall indemnify MDSI for any liability incurred
under the MDSI guarantee granted to Copenhagen Taxi for any breaches under
the service agreement with Copenhagen Taxi.
5.2 Underwriters' Terms and Restrictions. MDSI will agree to the commercially
reasonable terms of the underwriting agreement entered into by DDS when
DDS initially becomes a publicly traded entity, including any hold period
on the disposition of DDS Shares required by the underwriters, provided
that such hold period is no longer than 6 months.
5.3 Marketing to Airborne Freight Corporation. MDSI shall provide reasonable
support to DDS in DDS's efforts to market DDS's products and services to
Airborne Freight Corporation. If, with respect to a future DDS project
involving Airborne Freight Corporation, resources are required from MDSI
with respect to installation, testing or support, MDSI will provide such
services on a "time and materials" basis to DDS at MDSI's standard market
rates at that time. Such support shall not include any access to the
Advantex Courier software source code used on the Airborne Freight
Corporation project by DDS. Any licenses to the Advantex Courier software
executable code to be sublicensed to Airborne Freight Corporation will be
negotiated between MDSI and DDS.
5.4 Accounts Receivable. If any accounts receivable of MDSI-TBU in the MDSI
TBU Proforma delivered at Closing (other than those Excess Receivables
described in section 2.1(b))are not recovered by DDS within 90 days after
Closing (provided that reasonable efforts to recover such receivables have
been made by DDS), MDSI shall pay DDS the amounts of such accounts
receivable, provided that DDS assigns the right to collect such accounts
receivable to MDSI.
5.4.1 Unbilled Receivables. If any unbilled receivable of MDSI-TBU in the
MDSI-TBU Proforma delivered at Closing are not recovered by DDS within 90
days after Closing (provided that reasonable efforts have been made by DDS
to collect if billable) MDSI shall pay DDS the amounts of such
receivables, provided that DDS assigns the right to collect such
receivables to MDSI. DDS will use all reasonable commercial efforts to
complete all bug fixes with respect to the Radio Taxi London installation
and DDS will support MDSI with respect to MDSI's collection of such
receivables.
5.5 Financial Statements. On or prior to Closing, MDSI shall provide DDS with
copies of the MDSI-UK Financial Statements and of the MDSI-Singapore
Financial Statements and, as soon as practicable after Closing, MDSI shall
provide DDS with copies of the MDSI Closing Financial Statements. In
connection with the review engagement process regarding the MDSI Closing
Financial Statements, DDS agrees to provide all necessary assistance to
the auditor or auditors carrying out such reviews, and MDSI shall be
responsible for all costs in connection with obtaining these review
engagement reports, such that these costs will not form part of the
post-Closing adjustments. The MDSI Closing Financial Statements shall be
prepared in accordance with generally accepted accounting principles
applied on a basis consistent with that of previous years and shall
present fairly in all material respects the financial position of MDSI-UK
and MDSI-Singapore as at Closing and the results of their respective
operations and the changes in their respective financial positions for the
5 month period then ended. Also in connection with the review engagement
process, DDS agrees to give MDSI full and free access to, and the right to
supervise and direct,
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the process of preparing the MDSI Closing Financial Statements and review
engagement reports, and DDS will deliver at Closing a Direction of DDS
addressed to MDSI-UK and MDSI-Singapore to that effect.
5.6 RTL Voice Fall Back. MDSI shall retain DDS at the rate of $600 per man day
plus expenses at cost, to assist MDSI in the completion of the RTL voice
fall back functionality. If after Closing, RTL decides to submit to
arbitration the matter of whether MDSI has met the voice fallback
requirements as set out in MDSI-UK's contract with RTL and such
arbitration results in a finding that MDSI has not met such requirements,
at the direction of MDSI, DDS will make the human resources available so
that DDS can modify the code or supply any software or hardware required
to satisfy the arbitrator's decision. MDSI shall have full control of the
applications made in respect of such arbitration and DDS will cooperate
fully in support of MDSI's application to the arbitrator and support
MDSI's position. In such case MDSI shall be liable to DDS for the costs of
such modifications to software and hardware (including any related
expenses) with such costs of any DDS services to be at the same man day
rate and expenses noted above.
5.7 DDS Shareholders' Agreement. MDSI shall execute the DDS Shareholders'
Agreement at Closing.
5.8 Release of Certain Encumbrances. MDSI shall obtain a release or consent to
transfer in respect of the sale of the MDSI-TBU Assets which are currently
encumbered under any security instrument or agreement, including without
limitation, under the General Security Agreement between MDSI and the Bank
of Montreal.
5.9 Documents and Data. On the Closing Date, MDSI shall deliver or cause to be
delivered to DDS all minute books, corporate seals and corporate records
relating to MDSI-UK and MDSI-Singapore, together with all documents (or
copies thereof) and other data (technical, financial or otherwise) in the
possession of MDSI and its affiliates, which relate to the MDSI-TBU and/or
the MDSI-TBU Assets or which will be necessary for the conduct of the
MDSI-TBU after the Closing Date including, without limitation, such
operating manuals, books of account and financial records as DDS may
request.
5.10 Grants. If DDS or MDSI UK is required to repay all or any part of the
150,000 British pound grant from the British Government to MDSI UK , MDSI
shall repay DDS, and the threshold limitations set out in section 9.2
shall not apply to any claim by DDS based on this covenant. DDS shall not
initiate any communications with the British Government with respect to
this grant and will not answer any questions with respect to this grant
(without due consultation with MDSI), except as required by law. This
section 5.10 and the covenants contained in this section 5.10 shall
survive the Closing and continue in full force and effect indefinitely for
the benefit of DDS.
6. COVENANTS OF DDS
DDS hereby covenants and agrees with MDSI as follows:
6.1 DDS Options. In addition to the anti-dilution protection set out at
section 2.2, DDS will not, pursuant to any share compensation arrangement,
reserve for issuance DDS Shares, or grant share options to directors,
officers, employees, consultants or any other service providers
exerciseable for an amount of DDS Shares representing in the aggregate
greater than 20% of the issued and outstanding shares of DDS at the time
of grant, and DDS will not grant to any one director, officer, employee,
consultant or other service provider of DDS share options pursuant to
share compensation arrangements exerciseable for an amount of DDS Shares
representing greater than 5% of the issued and outstanding shares of DDS
at the time of grant. For the purposes of this section 6.1, "share
compensation arrangement" and "service provider" shall have the meanings
ascribed to such terms in section 627 of The Toronto Stock Exchange
Company Manual.
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6.2 DDS To Be Taken Public. DDS shall use all commercially reasonable efforts
and shall become a publicly traded entity by the later of the following
three deadlines (the "First Penalty Date"): (a) two years from the Closing
Date (the "First Deadline"); (b) six months from the date of the First
Deadline if, at the time of the First Deadline, DDS has entered into a
bonafide enforceable underwriting or agency agreement with a registered
dealer to take DDS public or DDS has entered into any other binding
agreement (e.g., amalgamation) the completion of which will result in DDS
becoming a publicly traded entity; or (c) one year from the First
Deadline, if either of the following two circumstances exists on the First
Deadline: (i) "market out" conditions exist as evidenced by the figure on
the IPO index to be agreed to by the parties prior to Closing, , or (ii)
DDS has not been offered terms by an underwriter or registered dealer to
be taken public on a "best efforts" agency basis or better for a value
that represents 1.5 times the annual revenue of DDS or 15 times the net
earnings of DDS (the foregoing circumstances being the "Market Out
Conditions"), both such circumstances being measured on the 4 financial
quarters prior to the First Deadline Date proposed to be included in the
offering memorandum, prospectus or other securities document regarding the
proposed offering.. If DDS is not a publicly traded entity by the First
Penalty Date, then DDS shall issue 170,601DDS Shares from treasury to MDSI
forthwith (which amount equals 20% of the Purchased DDS Shares on the
Effective Date). If DDS is not a publicly traded entity by the first
anniversary date after the First Deadline and by each subsequent
anniversary date thereafter (each such date being a "Subsequent
Deadline"), then DDS shall issue 85,301 DDS Shares from treasury forthwith
to MDSI (which amount equals 10% of the Purchased DDS Shares on the
Effective Date). Notwithstanding the foregoing, if on the First Penalty
Date or any Subsequent Deadline, either of the Market Out Conditions still
exists and DDS is not a publicly traded entity, DDS shall not be required
to issue the DDS Shares which are due on the First Penalty Date or that
Subsequent Deadline (and the First Penalty Date and/or the Subsequent
Deadline shall be moved one year into the future). In addition to the
foregoing, and notwithstanding Part 5 of the DDS Shareholders' Agreement,
at any time after 6 months prior to the First Deadline, DDS shall have the
right to purchase or arrange for another party or parties to purchase
MDSI's interest in DDS for an amount equal to the number of DDS Shares
held by MDSI on the date DDS gives written notice to MDSI of its intention
to exercise such purchase right, multiplied by the DDS Valuation Price on
that date (provided that if DDS goes public within 9 months of such
purchase, the purchase price will be adjusted to reflect the net proceeds
per share realized on the public offering, as further adjusted, if
necessary for example, for stock splits and share consolidations and
similar matters).
6.3 Permitted Encumbrance of MDSI's Shareholding. MDSI shall have the right to
encumber its shareholding in DDS under MDSI's security agreements with its
bankers, provided that the terms of such security agreements do not
prohibit the transfer of such shareholding by MDSI pursuant to the DDS
Shareholders' Agreement or hereunder and the same is acknowledged in
writing by such bankers. DDS hereby consents to any such encumbrance for
the purpose of section 2.2 of the DDS Shareholders' Agreement.
6.4 Provision of Financial Information. DDS shall provide quarterly unaudited
and annual audited financial statements to MDSI as soon as possible upon
such financial statements being produced, and MDSI agrees to keep any such
financial statements confidential.
6.5 Payment of Taxes. DDS will be liable for and will pay all sales and
transfer taxes, federal taxes and all other taxes, duties or other like
charges properly payable upon and in connection with the conveyance and
transfer of the MDSI-TBU Assets by MDSI to DDS including but not limited
to GST, sales tax under the Social Services Tax Act (British Columbia) and
Stamp Duties in connection with the transfers of the MDSI-TBU IP Assets,
the MDSI-UK and, if any, the MDSI-Singapore Shares, and DDS will indemnify
and hold harmless MDSI for any such outstanding amounts.
6.6 Financial Statements. On or prior to Closing, DDS shall provide MDSI with
copies of the DDS Financial Statements.
6.7 Airborne Freight Corporation Settlement. DDS acknowledges that MDSI is
currently involved in a contractual dispute with Airborne Freight
Corporation. DDS agrees that MDSI shall have the right to pursue Airborne
Freight Corporation with respect to payment under this contract, provided
that MDSI does not commence any litigation proceedings. DDS further agrees
that MDSI shall be entitled to and shall retain 100% of any and all
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settlement proceeds obtained by MDSI from Airborne Freight Corporation in
connection with this matter, provided that such settlement shall occur
either prior to Closing or up to 90 days after the Closing Date (except
that any payments to be made by Airborne Freight Corporation to MDSI
relating to such settlement may be made over time, beyond such time
period).
6.8 Retention of MDSI-UK Employees Required to Complete Copenhagen Taxi
Contract. DDS shall use commercially reasonable efforts to retain , David
Weeden, Bernie Goosman, and Steve Burt (the "Retained Employees"), whose
services MDSI has confirmed it requires to fulfill its obligations
regarding the Copenhagen Taxi project under section 5.1 hereof, as
employees of MDSI-UK after Closing, and DDS shall not terminate or
constructively dismiss the Retained Employees, or take any steps in
furtherance of same, until after the Site Acceptance Time. MDSI shall pay
DDS for the services of the Retained Employees at the rates set out in
section 7.2 below.
6.9 Employment Contract and Employee Information. Prior to Closing, DDS shall
provide to Kenneth R. Miller, CEO of MDSI, on a strictly confidential
basis for his review only the following information in written form: a
list of the range of salaries (including all bonuses, incentives, benefits
and other compensation) of all DDS employees and a copy of the standard
form of employment agreement used by DDS for its employees.
6.10 Discontinuance of Use of Names, Trademarks, Etc. Within 90 days of
Closing, DDS shall discontinue, and cease and desist from, the use of all
names, trademarks, slogans and logos currently used by MDSI and its
affiliates in connection with the MDSI-TBU. Provided DDS takes or causes
to be taken all commercially reasonable steps required to effect and
complete the change of name of MDSI-UK to Digital Despatch (UK) Ltd. and
of MDSI-Singapore to Digital Despatch Pte. Ltd., or any such similar names
on Closing (and DDS will promptly provide MDSI with evidence of same) no
later than 30 days from the date of such name changes, DDS shall ensure
that all new proposals and letterhead and any legal agreements are entered
into under the applicable DDS legal name.
6.11 Auselda or other commission: If MDSI brings a substantial customer to DDS
or its affiliates (the total consideration being over UK Pounds 1,000,000,
such as for example Rome Taxi or Milan Taxi through Auselda) which results
in a signed contract, within 12 months of the Closing Date DDS will pay
MDSI a commission of 3% of the gross margin on the total consideration
under such customer contracts. MDSI (or as MDSI may direct) will be paid
such commission when DDS receives its milestone payments from such
customers so that MDSI receives its commission on a pro-rata basis with
each milestone payment.
7. MUTUAL COVENANTS AND OF DDS AND MDSI
DDS and MDSI each mutually covenant and agree with one another as follows:
7.1 No Solicitation. Subject to section 7.2 below, both MDSI and DDS will not
solicit each other's existing employees for a period of 3 years from the
date of Closing, except that DDS shall be entitled to solicit any or all
MDSI employees who are employed by MDSI-TBU at Closing, as set out in the
list at Schedule "M".
7.2 Provision of Employee Services. The parties acknowledge and agree that
during the transition period immediately following the Effective Date, DDS
will require the services of certain MDSI employees and, in order to
complete the Copenhagen Taxi project, MDSI will require the services of
certain employees of DDS, and each of the parties agrees to make such
services available to the other. In connection with these arrangements, ,
the party receiving such services will pay the other party an amount per
employee equal to that employee's salary or hourly rate multiplied by 1.4.
For greater certainty, each party shall hire and be responsible for their
own contractors from and after the Effective Date (except for S. Bond who
shall be DDS's responsibility).
7.3 Confidential Information. Any Confidential Information provided by either
party to the other during the course of the due diligence investigation
carried out in connection with the Transaction shall be kept confidential
by the receiving party, its employees and professional advisors and will
not be disclosed to any other Person for a period expiring on May 31,
2004. Any obligations hereunder relating to the non-disclosure of the
source code and trade secrets of a party shall remain in force and effect
indefinitely. For the purposes of this section 7.3, "Confidential
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Information" shall mean all information regarding the business and affairs
of DDS or MDSI, as the case may be, furnished by or on behalf of the other
party or its affiliates, directors, officers, employees, agents,
professional advisors or controlling persons in connection with the due
diligence investigation carried out by each of DDS and MDSI in connection
with the Transaction. Any information provided by either party to the
other will not be deemed Confidential Information if it is generally
available to the public, it is or becomes known to the receiving party
independently of the party providing the information, or it is obtained
from a third party without restriction and without breach of this
Agreement.
7.4 Consents and Notices. After the Closing of the Transaction:
(a) each of DDS and MDSI shall use all reasonable efforts, and the
parties shall cooperate with each other to obtain, all consents,
waivers, approvals, and authorizations, which may be necessary to
effect the Transaction; and
(b) each of DDS and MDSI will promptly execute and file, or join in the
execution and filing of, any application or other document that may
be necessary in order to obtain the authorization, approval or
consent of any governmental entity which may be reasonably required,
or which the other party may reasonably request in connection with
the consummation of the Transaction. Each of DDS and MDSI will use
reasonable efforts to obtain promptly all such authorizations,
approvals and consents.
7.5 Press Releases. Before issuing any press release or otherwise making any
public statements with respect to the Transaction, DDS and MDSI shall
consult with each other and shall undertake reasonable efforts to agree
upon the terms of such press release, and shall not issue any such press
release or make any such public statement prior to such consultation,
except as may be required by applicable law or by obligations pursuant to
any listing agreement with any stock exchange or national securities
exchange.
7.6 Y2K Covenant. Notwithstanding anything in this Agreement to the contrary,
MDSI's sole liability with respect to Year 2000 Compliance and Y2K defects
is set out in this section 7.6. For the purposes of this section 7.6,
"Material Contracts" shall mean the customer agreements (in the form in
which such agreements exist at Closing) included with the MDSI-TBU
Material Contracts acquired by DDS under this Agreement.
7.6.1 MDSI shall continue and complete its Y2K testing on the MDSI-TBU Software
Products until and on the Closing Date (except for the Copenhagen project
which will continue until the Site Acceptance Time). DDS shall perform all
reasonable further Y2K testing on the MDSI-TBU Software Products for the
remainder of the year 1999. If DDS discovers and demonstrates that there
is a substantial Y2K defect (meaning a single defect or batch of defects
requiring an aggregate of more than 15 man days to correct in the MDSI-TBU
Software Products supplied under one or more Material Contracts, primarily
attributable to MDSI and not materially attributable to any other party
including DDS; a "Substantial Y2K Defect"), and MDSI's sole
responsibility, except as described in section 7.6.3, shall be to pay the
costs for DDS to remedy such Substantial Y2K Defect(s) at the rate
calculated in accordance with section 7.2. If DDS's estimates for the
costs to remedy are unreasonable, MDSI may submit such dispute to be
resolved by arbitration. The correction of any non Substantial Y2K Defects
shall be the sole responsibility of DDS. For greater certainty any work
done by DDS or MDSI UK employees to assist MDSI in the completion of the
Copenhagen taxi project to the Site Acceptance Time and to assist MDSI in
the completion of the RTL voice fall back functionality shall be deemed to
be work that is solely attributable to MDSI for Y2K liability.
7.6.2 DDS shall respond to customer requests for support and/or maintenance
related to Year 2000 Compliance issues within the time frames set out in
the maintenance and support agreements included as Material Contracts. For
greater certainty, DDS shall not be in breach of such response time
obligations if it responds within the applicable time period, but is
unable to resolve the defect because of a Substantial Y2K Defect. From
December 1, 1999 through and including April 30, 2000 if DDS knows or
suspects that a request for support or maintenance arises from a
Substantial Y2K Defect (or after this date if DDS knows that a defect
relates to a year 2000 compliance issue arising directly from the MDSI-TBU
Software): (i) if there are any requests for support or maintenance
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under the Material Contracts, DDS shall notify MDSI of any such requests
forthwith upon receiving the request from the customer; (ii) DDS shall
also notify MDSI of DDS' response time in connection with such customer
request and whether or not such response was within the time period set
out in the applicable support and maintenance agreement; and (iii) DDS
shall also notify MDSI of the particulars of the resolution of a customer
request for support or maintenance where the request is related to a year
2000 compliance issue arising directly from the MDSI-TBU Software. In
addition to the foregoing, throughout this period DDS shall provide all
disclosure to MDSI as reasonably requested by MDSI and MDSI shall be
entitled, at its own expense, to have any of its employees or
representatives attend any significant meetings or tests, provided that
such attendance will be strictly in the capacity of an observer, and such
employees or representatives shall not participate in or influence any
discussions with the customer.
7.6.3 If at any time during the period beginning on December 1, 1999 to the end
of the survival period of the representations and warranties under this
Agreement, DDS can demonstrate that the MDSI-TBU Software contains a
Substantial Y2K Defect:
(a) MDSI shall pay the costs to remedy any such Substantial Y2K Defect
at the rate calculated in accordance with section 7.2 (or at MDSI's
option, in full consultation with DDS, MDSI may perform such
remedial work); and
(b) MDSI shall also indemnify DDS from and against any and all
liabilities, claims, demands, costs, expenses, losses, damages,
actions, causes of action and judgements whatsoever incurred or
suffered by or asserted against DDS arising from any Substantial Y2K
Defects, provided that DDS has not amended and shall not amend any
provision relating to the limitation of liability in any Material
Contract.
If DDS has not amended the applicable limitation of liability provision in
a Material Contract, MDSI may be liable for a Substantial Y2K Defect for
an amount in excess of this limit of liability, if a court of competent
jurisdiction delivers a final and non-appealable judgement that states
that such limitation of liability is not enforceable. Any claims for
indemnification by DDS under this section shall not be limited by the
threshold limits set out in section 9.2 of this Agreement, but in all
other respects the provisions of section 9 shall apply to any such claims.
If any customer or other third party commences or threatens to commence
any legal action against DDS arising from any such Substantial Y2K Defect,
DDS shall immediately give written notice of the particulars of such
action or threatened action to MDSI. Moreover where DDS wishes to rely
upon the indemnification provisions set out in section 9 or otherwise make
a claim for indemnity in connection with such Substantial Y2K Defect
against MDSI, MDSI shall have the right to participate in and, to the
extent it may wish to do so, assume the defence of such legal action in
accordance with section 9.7. Notwithstanding the foregoing, in the year
2000, if DDS discovers and demonstrates that there is a Substantial Y2K
Defect in the MDSI-TBU Software supplied by MDSI to RTL, MDSI shall pay
one half of the amount of any claim for loss of profits and/or liquidated
damages relating to such Substantial Y2K Defect and DDS shall pay the
other half of such amount. The correction of any non Substantial Y2K
Defects shall be the sole responsibility of DDS.
7.7 DHL AP. If prior to the Closing Date MDSI is able to settle the
outstanding account of $512,000 with DHL AP, MDSI shall keep all of the
funds in connection with such settlement. If MDSI is not able to settle
the outstanding accounts with DHL AP prior to the Closing Date, at Closing
MDSI shall cause MDSI-UK to assign all rights to recover the account
(including any documents reasonably required to assist MDSI in collecting
such accounts) to MDSI so that MDSI may pursue the collection of the
outstanding account after the Closing Date. For a period of 3 months from
the Closing Date, MDSI shall attempt to settle this account amicably with
DHL AP and accordingly MDSI will not threaten or commence legal action
against DHL AP during this period to collect this outstanding account.
After this 3 month period expires: if MDSI has not settled this account
and DHL AP indicates that it is not prepared to continue to take delivery
of products and services under the existing terms of its customer
agreement with MDSI-UK, MDSI may commence legal action against DHL AP to
collect this account; if DHL AP indicates that it is prepared to continue
to take delivery of products and services under the existing terms of its
customer agreement with MDSI-UK, DDS shall pay to MDSI MDSI's pro rata
share of all funds received by DDS under this agreement, such share being
(pound)86.44 per unit shipped.
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7.8 Kolding Agreement. On or before Closing, MDSI shall procure from Kolding
Taxi: (i) an assignment and transfer of the Kolding Taxi agreements from
MDSI Software B.V. to MDSI UK; (ii) the agreement from Kolding Taxi that
Kolding Taxi will not make claims under the existing bank guarantee for
any breach relating to the failure to meet the delivery time schedule for
the Kolding Taxi project; (iii) a signed written waiver or deletion of
Kolding Taxi's right under section 23 of its Taxi Despatch supply contract
with MDSI BV to terminate such contract; (iv) the proviso that if the taxi
despatch system being supplied by MDSI UK to Kolding is not delivered by
December 31, 1999, MDSI UK will provide a Y2K workaround for the existing
taxi despatch system used by Kolding so that it can despatch orders, in a
reasonable period of time prior to December 31, 1999, and that MDSI's UK's
maximum liability with respect to the provision of such a workaround shall
be limited to DKK 500.000 (as this is the current estimate of the price of
such workaround). In consideration of MDSI supporting and causing to be
maintained the bank guarantee referenced above, , DDS shall indemnify MDSI
for any claims made by Kolding Taxi for breach of any of the agreements
between Kolding Taxi and MDSI UK (such as for example, all penalties
charged by Kolding for delay), other than the liability for the provision
of the Y2K workaround described in 7.8 (iv) above (for which MDSI shall
pay MDSI UK or DDS on a time and materials basis). MDSI's maximum
liability for the provision of the workaround described in 7.8 (iv) above
shall be limited to DKK 500,000. However, for greater certainty, MDSI
shall remain liable to DDS for Substantial Y2K Defects for the MDSI-TBU
Software supplied by MDSI to DDS at the Site Acceptance Time under the
Copenhagen contract (as this is the MDSI-TBU Software which will be used
by DDS in connection with the Kolding project). DDS will be responsible
for any Y2K defects that arise from any changes made to the MDSI-TBU
Software by or at the direction of DDS.
7.9 Source Code Escrow. DDS agrees that MDSI shall have the right, and DDS
shall take all reasonable steps to ensure access to such right, to
immediate access to and possession of the source code for all of the
MDSI-TBU Software being acquired by DDS under this Agreement and all
documentation related to such source code (the "Source Code", which Source
Code is to be placed into escrow in connection with the Closing), so that
MDSI can complete the Copenahagen Taxi project to the Site Acceptance
Time, so that MDSI can take appropriate steps in the event that MDSI is
required to take remedial steps to address Substantial Y2K Defects, and
otherwise as specifically described in this Agreement, with respect to any
of the MDSI-TBU Software after Closing. At Closing, the Source Code shall
be placed into escrow with a mutually agreeable escrow agent, and the
terms of the escrow agreement shall include the release conditions set out
above.
7.10 Delivery of Consents, Etc. Each of the parties shall deliver all consents,
authorizations and approvals of, and all filings, recordings and
registrations with, any governmental authority or regulatory body or any
other third party that are reasonably required in order to consummate of
the Transaction, including, but not limited to, those consents set out at
section II.6 of the Document List.
8. REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS TO SURVIVE CLOSING
8.1 All of the representations, warranties, covenants and agreements of the
parties hereto contained in this Agreement will not merge on, and shall
survive, the Closing and will continue in full force and effect for the
benefit of DDS and MDSI. Except as specifically set out or contemplated in
certain representations, warranties, covenants and agreements contained
elsewhere in this Agreement (any such provisions being "Excepted
Provisions", which will continue in full force and effect for the benefit
of DDS or MDSI, as the case may be, in accordance with the terms thereof,
such as the provisions relating to taxes and grants), the representations,
warranties, covenants and agreements contained in this Agreement shall
survive for a period of three years from the Closing Date.
9. INDEMNIFICATION
9.1 Mutual Indemnification. DDS and MDSI (the "Indemnifying Party") each
mutually covenant and agree to indemnify the other (the "Indemnified
Party") against all liabilities, claims, demands, actions, causes of
action,
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damages, losses, costs or expenses suffered or incurred by or asserted
against the Indemnified Party (each being referred to as a "Claim"),
directly or indirectly, by reason of or arising out of:
(a) a breach of any warranties or representations on the part of the
Indemnifying Party herein contained or contained in any of the Other
Agreements; and
(b) a breach of any agreement, term or covenant on the part of the
Indemnifying Party made or to be observed or performed pursuant
hereto or pursuant to any of the Other Agreements.
The amount of any Claim shall bear interest at a fixed rate of interest of
8% per annum (the "Claim Rate"), calculated from and after the date such
Claim is incurred or suffered by or asserted against the Indemnified Party
to the date payment in full is made by the Indemnifying Party.
9.2 Limitations. No claim for indemnity shall be made pursuant to the forgoing
section 9.1 unless and until the aggregate amount of all Claims to be made
by the Indemnified Party equals $100,000 or more (the "Threshold Amount"),
and each individual Claim included in such Threshold Amount must equal at
least $10,000 (an "Eligible Claim") in order to be included in such
Threshold Amount, however, after its aggregate Eligible Claims equal or
exceed the Threshold Amount the Indemnified Party shall be entitled to
indemnification in respect of the full amount of any such Eligible Claims.
9.3 MDSI Liability Re: MDSI-TBU Customer Contracts. As set out and
contemplated in section 2.4 and except as specifically set out herein,
from and after the time of Closing, MDSI shall not be responsible for any
liabilities or obligations arising under any customer contracts or
commitments of MDSI-TBU, all of which contracts and commitments MDSI
confirms are listed in Schedule "D" and complete and accurate copies of
which (disclosing all such liabilities and obligations) MDSI confirms it
has provided to DDS. Subject to the limitations set out at section 9.2
above, if after the time of Closing, any customer of MDSI-TBU claims and
proves that MDSI or any of its affiliates had an obligation under the
aforementioned contracts which was not disclosed to DDS, MDSI shall be
responsible for and shall indemnify and hold harmless DDS for the amount
of such claim.
9.4 Set-Off. DDS shall also be entitled (in addition to the foregoing right to
indemnification or any other rights or remedies of DDS) to set-off against
or make a reduction against any amount or amounts owing or payable by DDS
to MDSI (including without limitation any amounts owing or payable
pursuant to the Promissory Note), the amount of any Claim described in
Section 9.1, together with interest thereon at the Claim Rate calculated
from and after the date such Claim is incurred by or asserted against DDS
to the date upon which set-off or payment so reduced is made by DDS. If at
any time, any Claim referred to in this section 9.4 (plus interest
thereon) exceeds the amount or amounts owing by DDS to MDSI, DDS shall
have a general claim against MDSI for the payment of such excess and MDSI
shall pay such excess to DDS forthwith upon written notification by DDS.
MDSI shall also be entitled (in addition to the foregoing right to
indemnification or any other rights or remedies of MDSI) to set-off
against or make a reduction against any amount or amounts owing or payable
by MDSI to DDS, the amount of any Claim described in Section 9.1, together
with interest thereon at the Claim Rate calculated from and after the date
such Claim is incurred by or asserted against MDSI to the date upon which
set-off or payment so reduced is made by MDSI. If at any time, any Claim
referred to in this section 9.4 (plus interest thereon) exceeds the amount
or amounts owing by MDSI to DDS, MDSI shall have a general claim against
DDS for the payment of such excess and DDS shall pay such excess to MDSI
forthwith upon written notification by MDSI.
9.5 Expiry. The right of an Indemnified Party to indemnification or the right
of DDS or MDSI to set-off under this Article 9 shall terminate on the date
which is exactly three years following the Closing Date or, in the case of
any Excepted Provision, on the date when such obligation terminates in
accordance with the terms thereof (the "Expiry Date"), unless on or prior
to the Expiry Date the Indemnified Party gives notice to the Indemnifying
Party pursuant to section 9.6 of its intention to seek indemnification or
set-off.
9.6 Notice. If an Indemnified Party intends to exercise its right of
indemnification or set-off, it shall first give written notice thereof to
the Indemnifying Party (a "9.6 Notice"), setting forth therein particulars
of the nature of the
<PAGE>
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Claim and estimated quantum of damages and attaching all relevant
documentation in support of such Claim. The Indemnifying Party shall have
15 days after receipt of the 9.6 Notice to pay or remedy the Claim,
provided that if the Claim cannot, in the reasonable opinion of the
Indemnifying Party by its nature be remedied within such 15 day period,
the Indemnifying Party shall have up to a maximum of a further 45 days to
remedy the Claim, if it proceeds immediately after receipt of the 9.6
Notice and continues with all due diligence to take the necessary remedial
action. Any such 9.6 Notice shall be final and binding on the Indemnifying
Party, and the Indemnifying Party shall be deemed to agree to indemnify
the Indemnified Party (or to set-off against any amount owing by the
Indemnifying Party to the Indemnified Party, as the case may be) in
respect of the amounts indicated in such 9.6 Notice, unless, within 15
days of receipt of such 9.6 Notice, written notice of objection is given
by the Indemnifying Party to the Indemnified Party. If notice of objection
is given pursuant to this section 9.6, the Indemnifying Party and the
Indemnified Party shall consult with one another with respect to the
objection. If the foregoing parties are not able to reach agreement within
15 days after the notice of objection is given, the dispute shall be
resolved by an independent arbitrator, to be agreed upon by such parties.
If no agreement concerning the identity of the arbitrator is reached
within 30 days after the notice of objection is given, either of the
Indemnifying Party or the Indemnified Party may apply to a court of
competent jurisdiction for an order, under the Commercial Arbitration Act
(British Columbia) or any successor legislation thereto, appointing an
independent arbitrator. The resolution of the dispute, including the issue
of responsibility for costs in respect of the arbitration and any motions
to appoint the arbitrator, shall be provided by the independent arbitrator
in a written decision to be delivered simultaneously to the Indemnifying
Party and the Indemnified Party, which decision shall be final and binding
on the parties and shall not be subject to appeal or judicial review.
9.7 Third Party Claims. Notwithstanding the provisions of section 9.6,
promptly after receiving notice of any action, suit, proceeding or claim
against an Indemnified Party or receipt of notice of the commencement of
any investigation which is based, directly or indirectly, upon any matter
in respect of which indemnification may be sought from the Indemnifying
Party (a "Third Party Claim"), such Indemnified Party will notify the
Indemnifying Party in writing of the particulars thereof, will provide
copies of all relevant documentation to the Indemnifying Party and, unless
the Indemnifying Party assumes the defence thereof, will keep the
Indemnifying Party advised of the progress thereof and will discuss all
significant actions proposed. The omission so to notify the Indemnifying
Party shall relieve the Indemnifying Party of any liability which the
Indemnifying Party may have to the Indemnified Party under this Agreement.
The Indemnifying Party shall be entitled, at its own expense, to
participate in and, to the extent it may wish to do so, assume the defence
of any Third Party Claim, provided such defence is conducted by
experienced and competent counsel. Upon the Indemnifying Party notifying
the Indemnified Party in writing of the Indemnifying Party's election to
assume the defence and retaining counsel, the Indemnifying Party shall not
be liable to the Indemnified Party for any legal expenses subsequently
incurred by the Indemnified Party in connection with such defence. If such
defence is assumed by the Indemnifying Party, the Indemnifying Party
throughout the course thereof will provide copies of all relevant
documentation to the Indemnified Party, will keep the Indemnified Party
advised of the progress thereof and will discuss with the Indemnified
Party all significant actions proposed. Notwithstanding the foregoing, any
Indemnified Party shall have the right, at the Indemnifying Party's
expense (except as specifically set out in (iii) below), to employ counsel
of such Indemnified Party's choice, in respect of the defence of any Third
Party Claim if: (i) the employment of such counsel has been authorized by
the Indemnifying Party; or (ii) the Indemnifying Party has not assumed the
defence and employed counsel therefor within a reasonable time after
receiving notice of such Third Party Claim; or (iii) counsel retained by
the Indemnifying Party or the Indemnified Party has advised the
Indemnified Party that representation of both parties by the same counsel
would be inappropriate because there may be legal defences available to
the Indemnified Party which are different from or in addition to those
available to the Indemnifying Party (in which event and to that extent,
the Indemnified Party shall be responsible for its own expenses and the
Indemnifying Party shall not have the right to assume or direct the
defence on the Indemnified Party's behalf) or that there is a conflict of
interest between the Indemnifying Party and the Indemnified Party (in
which event the Indemnifying Party shall not have the right to assume or
direct the defence on the Indemnified Party's behalf). No admission of
liability and no settlement of any Third Party Claim shall be made without
the consent of the Indemnified Party affected, such consent not to be
unreasonably withheld. No admission of liability shall be made and the
Indemnifying Party shall not be liable for any settlement of any Third
Party Claim made without its consent, such consent not to be unreasonably
withheld.
<PAGE>
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9.8 Postponement of Amounts Payable. During the period from and after the date
a 9.6 Notice is given to and including the date the Claim is paid,
set-off, remedied or resolved by agreement or arbitration, the payment of
any amount which becomes due by the Indemnified Party to the Indemnifying
Party hereunder, under any of the Other Agreements or otherwise shall be
postponed; PROVIDED THAT any amount so postponed shall bear interest at
the Claim Rate calculated from and after the date such amount was
otherwise due to and including the date upon which the Claim giving rise
to such postponement is paid, set-off, remedied or resolved. For greater
certainty, to the extent that any amount is validly set off from any other
amount so postponed, interest shall only be calculated and owing on the
net amount.
9.9 No Indemnity for Negligence of Indemnified Party. Notwithstanding any of
the foregoing provisions in this section 9, this right of indemnity shall
not apply to the extent that an arbitrator or a court of competent
jurisdiction in a final judgment that has become non-appealable shall
determine that such expenses, losses, claims, actions, damages or
liabilities to which the Indemnified Party may be subject were directly
caused by the negligence or willful misconduct of the Indemnified Party or
the breach of this Agreement or any of the Other Agreements by the
Indemnified Party.
10. DDS'S CONDITIONS OF CLOSING
10.1 All obligations of DDS under this Agreement are subject to the
fulfillment prior to, or at, the Closing of the following conditions:
(a) the representations and warranties of MDSI set forth in this
Agreement shall be true and correct as of the Closing as if made by
MDSI at the Closing;
(b) MDSI shall have complied with all terms, covenants and agreements in
this Agreement to be performed or caused to be performed by it on or
before the Closing except as otherwise specifically agreed to by
DDS;
(c) Subject to the post-closing adjustments, MDSI will have restructured
the MDSI-TBU so that MDSI-UK and MDSI-Singapore will have a net book
value of $1,000,000 calculated in accordance with Canadian GAAP as
provided in section 2.1 (b);
(d) No substantial damage to or alteration in the undertaking and assets
of the MDSI-TBU or any changes or amendments to statutes,
regulations or orders relating to the MDSI-TBU or the MDSI-TBU
Assets shall have occurred on or prior to the Closing Date, which in
DDS's sole opinion would materially adversely affect their value;
and
(e) The parties shall have entered into a non-competition agreement
whereby MDSI shall agree not to compete directly with DDS in
marketing or developing a dispatch product for the taxi, courier,
airport, asset management and roadside recovery products for a
period of 5 years from the date of Closing.
10.2 DDS's conditions of closing are for the sole benefit of DDS. In case any
of the foregoing conditions shall not be fulfilled and/or performed at or
before the Closing to the satisfaction of DDS, DDS may rescind this
Agreement by notice to MDSI and in such event DDS shall be released from
all obligations hereunder; provided that any of the said conditions may be
waived in whole or in part by DDS without prejudice to any rights of
rescission it may have in the event of the non-fulfillment of any other
condition or conditions, any such waiver to be binding upon DDS only if
the same is in writing.
11. MDSI'S CONDITIONS OF CLOSING
11.1 All obligations of MDSI under this Agreement are subject to the
fulfillment prior to, or at, the Closing of the following conditions:
(a) the representations and warranties of DDS set forth in this Agreement
shall be true and correct as of the Closing as if made by DDS at the
Closing;
(b) DDS shall have complied with all terms, covenants and agreements in this
Agreement to be performed or caused to be performed by it on or before the
Closing except as otherwise specifically agreed to by MDSI;
<PAGE>
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(c) MDSI and Ghai Investments Ltd. ("GIL") shall have executed a side
agreement (the "Side Agreement") concurrently with the execution of this
Agreement, which Side Agreement shall include the following provisions:
(i) a covenant granted by GIL that provides that the combined salaries,
benefits and loans taken directly or indirectly by Vari and Neera Ghai
shall not exceed a certain specified amount (which amount shall be
increased each year by a specified percentage); and (ii) a covenant
granted by GIL that provides that MDSI's shareholding interest in DDS will
not be diluted under section 6.12 of the DDS Shareholders' Agreement;
(d) The parties shall have entered into a non-competition agreement such that
DDS shall not compete directly with MDSI in developing or marketing a
dispatch or work management product for the telco, cable, utilities or
field service markets. During the 5 year term of this covenant not to
compete, such covenant shall terminate prior to the end of this 5 year
period if DDS becomes a public company or MDSI's shareholding in DDS falls
below 7%;
(e) DDS shall have procured waivers of pre-emptive rights from all of the
existing DDS shareholders with respect to the issuance of the Purchased
DDS Shares; and
(f) The assets of MDSI-UK which are not related to the MDSI-TBU shall be
transferred to MDSI or its affiliates prior to Closing.
11.2 MDSI's conditions of closing are for the sole benefit of MDSI. In case any
of the foregoing conditions shall not be fulfilled and/or performed at or before
the Closing to the satisfaction of MDSI, MDSI may rescind this Agreement by
notice to DDS and in such event MDSI shall be released from all obligations
hereunder; provided that any of the said conditions may be waived in whole or in
part by MDSI without prejudice to any rights of rescission it may have in the
event of the non-fulfillment of any other condition or conditions, any such
waiver to be binding upon MDSI only if the same is in writing.
12 MUTUAL CONDITIONS OF CLOSING OF DDS AND MDSI
12.1 The obligations of DDS and MDSI to consummate the Transaction are subject
to the satisfaction of the following conditions on or prior to the Closing
Date, each of which may be waived only with the consent in writing of DDS
and MDSI:
(a) the execution by MDSI and DDS of this Agreement and the Other
Agreements containing such representations, warranties, covenants,
terms and conditions as may mutually be agreed between the parties
acting reasonably;
(b) the delivery of all other consents, authorizations and approvals of,
and all filings, recordings and registrations with, any governmental
authority or regulatory body or any other third party that are
required as a condition to the consummation of the transactions
contemplated by this Agreement, including but not limited to those
consents set out at section II.6 of the Document List;
(c) the entering into, simultaneously with this Agreement, of an
non-exclusive cooperative marketing agreement (the "Marketing
Agreement") between MDSI and DDS with respect to the promotion and
marketing of certain prospective taxi, courier and roadside recovery
customers by MDSI to DDS, and certain prospective telco, cable,
utilities and field service customers by DDS to MDSI, with a 5 year
term, pursuant to which MDSI and DDS will work together to find ways
to sell each of the other's products to each of the other's markets;
(d) no temporary or permanent retraining order, preliminary injunction,
permanent injunction or other order preventing the consummation of
the Transaction shall have been issued by any national, federal,
state, provincial or other court (whether domestic or foreign)
having jurisdiction and remaining in effect;
(e) there shall not be pending or threatened any suit, action or
proceeding by any governmental entity, before any court or
governmental authority, agency, or tribunal, domestic or foreign,
that has a significant likelihood of success, seeking to restrain or
prohibit the consummation of the Transaction or any of the other
transactions contemplated by this Agreement or seeking to obtain
from DDS or MDSI or any of their subsidiaries any damages that are
material in relation to DDS, MDSI and their subsidiaries
<PAGE>
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taken as a whole; and
(f) the amendment to the Kolding Taxi contract referred to in section
7.8 shall be made to the satisfaction of both MDSI and DDS.
13. TRANSACTION AT CLOSING
13.1 DDS's Covenants at Closing. The Closing shall take place at the offices of
MDSI at10:00a.m. on June 15, 1999 (the "Closing Date"), or at such other
place and time as the parties shall mutually agree upon. DDS covenants and
agrees that at Closing it shall:
(a) Delivery and Issuance of DDS Shares: deliver to MDSI a share
certificate in the name of MDSI representing the Purchased DDS
Shares, and cause all necessary corporate action and proceedings of
DDS to be taken to permit the due and valid authorization,
allotment, issuance and registration of the Purchased DDS Shares to
and in the name of MDSI;
(b) Delivery of Documents and Ancillary Agreements: deliver to MDSI:
(i) a certificate of incumbency of Vari Ghai;
(ii) directors' resolutions of DDS authorizing the Transaction, including
the issuance of the Purchased DDS Shares in the name of MDSI and the
issuance of new share certificates;
(iii) a certificate, dated on closing, attesting to the accuracy of the
representations and warranties contained in this Agreement;
(iv) evidence of appropriate entries in the Register of Members of DDS;
(v) the Promissory Note, duly executed;
(vi) the Direction of DDS referred to in section 5.5; and
(vii) such other documents, instruments and agreements as shall be
reasonably required by MDSI to complete the Transaction.
13.2 MDSI's Covenants at Closing. MDSI covenants and agrees that at Closing it
shall:
(a) Delivery and Transfer of MDSI-UK and MDSI-Singapore Shares: deliver
to DDS the share certificates in the name of MDSI representing the
MDSI-UK Shares and the MDSI-Singapore Shares duly endorsed for
transfer to DDS, and cause all necessary corporate action and
proceedings of MDSI-UK and MDSI-Singapore to be taken to permit the
due and valid transfer and registration of the MDSI-UK Shares and
the MDSI-Singapore Shares to and in the name of DDS; and
(b) Delivery of Documents and Ancillary Agreements: deliver to DDS:
(i) a certificate of incumbency of the officers and directors of MDSI-UK
and MDSI Singapore;
(ii) a copy of sole shareholder's resolutions of MDSI-UK and
MDSI-Singapore changing their names to Digital Despatch (UK) Ltd.
and Digital Despatch Pte. Ltd., respectively;
(iii) the respective resignations as a director and/or officer and or
employee of all of the directors and officers of MDSI-UK and
MDSI-Singapore, and their respective personal releases, in form and
substance
<PAGE>
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satisfactory to DDS, acting reasonably, of all contracts with and
claims against MDSI-UK and/or MDSI-Singapore, entered into or
arising prior to the time of Closing;
(iv) directors' resolutions of MDSI-UK and MDSI-Singapore authorizing the
transfer to and registration of the MDSI-UK Shares and the
MDSI-Singapore Shares in the name of DDS and the issuance of new
share certificates, accepting resignations of current directors and
officers and installing new directors and officers;
(v) directors' resolutions of MDSI approving the Transaction;
(vi) a certificate, dated on closing, attesting to the accuracy of the
representations and warranties contained in this Agreement;
(vii) Schedule of Additional Shareholders to the DDS Shareholders'
Agreement, undertaking to be bound by and comply with the DDS
Shareholders' Agreement;
(viii) evidence of appropriate entries in Register of Members and
Transfers of MDSI-UK and MDSI-Singapore;
(ix) such other documents, instruments and agreements as shall be
reasonably required by DDS to complete the Transaction; and
(ii) Delivery of Source Code to Escrow Agent: deliver to the escrow agent
the Source Code.
13.3 Mutual Covenants at Closing. DDS and MDSI each covenant and agree that at
closing they shall deliver, or cause to be delivered, final executed copies of
the following agreements:
(a) this Agreement;
(b) the Side Agreement;
(c) an escrow agreement among DDS, MDSI and an escrow agent
acceptable to both parties, with respect to the deposit with the
escrow agent of the Source Code;
(d) the Marketing Agreement;
(e) the Non-Competition Agreement referred to at section 10.1(d);
(f) the Employment Agreements;
(g) an Assignment and Assumption Agreement providing for the
assignment of all of the MDSI-TBU IP Assets from certain related
entities or affiliates of MDSI to MDSI-UK or DDS, or a wholly
owned subsidiary of DDS. This Assignment and Assumption Agreement
may provide that some or all of the Purchased DDS Shares to be
issued to MDSI are issued to MDSI Software SRL;
(h) an Assignment and Assumption Agreement providing for the
assignment or subcontracting of the MDSI-TBU customer agreements
(as set out in and included as part of Schedule "D") from certain
related entities or affiliates of MDSI to MDSI-UK; and
(i) the agreement with Kolding Taxi referred to in section 7.8.
<PAGE>
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13.4 Deadline for Closing. The Closing of the Transaction shall in no event
take place later than June 15, 1999, unless such date is extended by both
parties in writing.
14. GENERAL PROVISIONS
14.1 Time. Time shall be of the essence hereof.
14.2 Expenses. Except as specifically provided for elsewhere in this Agreement,
all costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the party incurring such
expenses.
14.3 Notices. Any notice or other writing required or permitted to be given
hereunder or for the purpose hereof shall be sufficiently given if hand
delivered or telecopied to the party to whom it is given or if mailed, by
prepaid registered mail, in any such case addressed to such party:
if to DDS at:
11920 Forge Place
Richmond, B.C.
V7A 4V9
Attention: Vari Ghai
Telecopier: (604) 241-1440
if to MDSI at:
10271 Shellbridge Way
Richmond, British Columbia
V6X 2W8
Attention: Ken Miller
Telecopier: (604) 207-6060
or to such other address or telecopier number as is specified by the
particular party by notice to the others. Any notice delivered or sent in
accordance with this Agreement shall be deemed to have been given and
received, if delivered, on the next day after the day of delivery and if
sent by telecopier on the first business day following the day of
transmittal.
14.4 Governing Law. This Agreement, including the performance and
enforceability hereof, shall be governed by and construed in accordance
with the laws of the Province of British Columbia and the federal laws of
Canada applicable therein, without reference to the principles of
conflicts of law. Each of the parties hereby submits itself for the sole
purpose of this Agreement and any controversy arising hereunder to the
exclusive jurisdiction of the courts of the Province of British Columbia,
and any courts of appeal therefrom, and waives any objection (on the
grounds of lack of jurisdiction, or forum non conveniens or otherwise) to
the exercise of such jurisdiction over it by any such courts.
14.5 Severability. If any one or more of the provisions contained in this
Agreement is found to be invalid, illegal or unenforceable in any respect
in any jurisdiction, the validity, legality and enforceability of such
provision or provisions shall not in any way be affected or impaired
thereby in any other jurisdiction and the validity, legality and
enforceability of the remaining provisions contained herein shall not in
any way be affected or impaired thereby.
<PAGE>
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14.6 Further Assurances. DDS and MDSI shall each execute and deliver all such
further documents and instruments and do all such acts and things as MDSI
or DDS respectively may, either before or after the Closing, reasonably
require to carry out the full intent and meaning of this Agreement.
14.7 Entire Agreement. This Agreement represents the entire understanding of
the parties with reference to the Transaction and all understandings and
agreements heretofore made by the parties and any other persons acting on
behalf of the parties are merged in this Agreement, except to the extent
that the subject matter contained in any of the Other Agreements is not
covered by or contained in this Agreement. In the event of a conflict
between any of the provisions of this Agreement and any of the provisions
of any of the Other Agreements, the provisions of this Agreement shall
prevail.
14.8 Assignment. No party may assign in whole or in part any of its interest
hereunder without the prior written agreement of the other.
14.9 Enurement. This Agreement shall enure to the benefit of and be binding
upon DDS, MDSI and their respective successors and permitted assigns.
14.10 Waivers. No waiver of any of the provisions of this Agreement shall be
deemed to constitute a waiver of any other provisions, nor shall such
waiver constitute a continuing waiver unless otherwise expressly agreed to
in writing by the party bound thereby.
14.11 Amendment. This Agreement may not be amended except in writing executed by
all the parties hereto.
14.12 Canadian Currency. All monetary amounts in this Agreement and in any
related agreements, documents or certificates are in Canadian currency,
unless otherwise specifically indicated.
14.13 Gender and Number. Any word herein contained importing the singular number
shall include the plural (and vice versa) and any word importing the
masculine gender shall include the feminine gender (and vice versa) and
any word importing a person shall include a corporation, partnership and
firm (and vice versa).
14.14 Headings. The headings appearing in this Agreement are inserted for
convenience of reference only and shall not affect the interpretation of
this Agreement.
14.15 Counterparts. This Agreement may be executed in counterparts and by
facsimile and each counterpart when so executed shall be deemed to be an
original, and the counterparts together shall constitute one and the same
instrument.
14.16 Conflicts with DDS Shareholders' Agreement. To the extent that there is or
may be any conflict or inconsistency between the terms of this Agreement
and the terms of the DDS Shareholders' Agreement, the terms of this
Agreement shall prevail and govern the relations between the parties to
this Agreement, and to the extent that amendments to the DDS Shareholders'
Agreement may be needed in order to make the terms thereof consistent with
this Agreement, DDS shall use its best efforts to make, or cause to be
made, such changes.
IN WITNESS WHEREOF this Agreement has been executed by the parties hereto this
7 day of June, 1999.
THE CORPORATE SEAL of DIGITAL DISPATCH SYSTEMS )
INC. was hereunto affixed in the presence of: )
)
/s/ ILLEGIBLE )
)
Authorized Signatory ) c/s
)
)
Authorized Signatory )
)
<PAGE>
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)
THE CORPORATE SEAL of MDSI MOBILE DATA )
SOLUTIONS INC. was hereunto affixed in the )
presence of: )
)
/s/ Kenneth Miller )
) c/s
Authorized Signatory )
)
)
Authorized Signatory )
)
<PAGE>
SCHEDULE "E"
PERMITTED ENCUMBRANCES OF DDS
<PAGE>
SCHEDULE "F"
PERMITTED ENCUMBRANCES OF MDSI-TBU
<PAGE>
SCHEDULE "G"
IP ASSETS OF DDS
<PAGE>
SCHEDULE "H"
IP ASSETS OF MDSI-TBU
<PAGE>
SCHEDULE "I"
SHAREHOLDERS OF DDS AND THEIR SHAREHOLDINGS
<PAGE>
SCHEDULE "J"
CONSOLIDATED PRO FORMA BALANCE SHEET OF MDSI-TBU AT CLOSING
<PAGE>
SCHEDULE "K"
BANK ACCOUNTS/ SAFE DEPOSIT BOXES/ POWERS
OF ATTORNEY OF MDSI-TBU
<PAGE>
SCHEDULE "L"
ACCIDENTS
<PAGE>
SCHEDULE "M"
EMPLOYEES OF MDSI-TBU
<PAGE>
MDSI SUBSIDIARY LIST
MDSI MOBILE DATA SOLUTIONS INC.--PARENT COMPANY
MDSI SOFTWARE BV--Netherlands
518495 B.C. Ltd.--BC
518496 B.C. Ltd.--BC
MOBILE DATA SOLUTIONS INC.--Delaware
MDSI SERVICES (DANMARK) APS--Denmark
MDSI SERVICES (UK) LTD.--England and Wales
MDSI INTERNATIONAL LTD.--Bermuda
MDSI SOFTWARE SRL--Barbados
SERVICE SYSTEMS INTERNATIONAL LTD.--Kansas
TELSOFT MOBILE DATA (USA) INC.--Delaware (Dormant)
SERVICE SYSTEMS INTERNATIONAL SOFTWARE LTD.--UK (Dormant)
ALLIANCE SYSTEMS LTD.--BVI (Dormant)
<PAGE>
EXHIBIT 23.1
CONSENT OF DELOITTE & TOUCHE LLP, INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference to the Registration
Statement on Form S-8 (Registration Number 333-06616) of our report dated
February 3, 2000 on our audits of the consolidated financial statements of
MDSI Mobile Data Solutions Inc. and its subsidiaries as of December 31, 1998
and 1999, which report is included in the Annual Report on Form 10-K of MDSI
Mobile Data Solutions Inc. for the year ended December 31, 1999.
/s/ Deloitte & Touche LLP
CHARTERED ACCOUNTANTS
Vancouver, British Columbia
March 30, 2000
