EXHIBIT 99.1
Safe Harbor for Forward Looking Statements
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 -
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a safe harbor
for forward looking statements made by public companies. This safe harbor
protects a company from securities law liability in connection with
forward-looking statements if the company complies with the requirements of the
safe harbor. As a public company, MDSI has relied and will continue to rely on
the protection of the safe harbor in connection with its written and oral
forward-looking statements.
When evaluating MDSI's business, you should consider:
|_| all of the information in this quarterly report on Form 10-Q;
|_| the risk factors described in the Company's Annual report for the year
ended December 31, 1999 filed with the Securities and Exchange
Commission; and
|_| the risk factors described below.
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. Risk Factors
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.
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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 e-Business
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 is
in the process of implementing its e-Business 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 e-Business 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 e-Business to offset such
costs.
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. For the three
month periods ended September 30, 2000 and 1999, 6.2% and 10.7%, respectively,
of the Company's revenue was attributable to third party products and services.
Because the revenue generated from the supply of third party products and
services may represent a significant portion of certain contracts and the
installation and rollout of third party products is generally at the discretion
of the customer, the Company may, depending on the level of third party products
and services provided during a period, experience large quarterly fluctuations
in revenue. See "Forward Looking Statements". In addition, because the Company's
gross margins on third party products and services are substantially below gross
margins historically achieved on revenue associated with MDSI products and
services, large fluctuations in quarterly revenue from the sale of third party
products and services will result in significant fluctuations in direct costs,
gross profits, operating results, cash flows and other items expressed as a
percentage of revenue.
Certain of the vertical markets targeted by the Company include
industries with implementation requirements that vary seasonally. For example,
utility companies in North America generally have decreased implementation
activity in winter months when such utilities face their greatest consumer
demand. As a result, the Company's results of operations may also vary
seasonally, and such variation may be significant.
Lengthy Sales Cycles 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
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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 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 $4.6 million,
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including $795,000 with respect to restructuring certain operations and $3.8
million due to changes in estimates to complete certain contracts in the UK
operations taken in September 1997, restructuring and reorganization charges of
$1.5 million and $503,000, respectively, taken in connection with the
reorganization of the Company and the acquisition of TelSoft in December 1995,
and write-offs of $6.2 million and $7.2 million for acquired research and
development taken in connection with the acquisitions of MDSI UK in September
1996 and Alliance effective April 1997, respectively, the Company incurred net
losses of $8.4 million, $4.4 million, and $1.1 million in the years ended
December 31, 1997, 1996 and 1995, respectively. As of December 31, 1999, the
Company had an accumulated deficit of $9.1 million, and as of September 30,
2000, the Company had an accumulated deficit of $10.5 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 e-Business
strategy, expand its sales and marketing operations, fund greater levels or
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 issuance's of equity securities, the
incurrence of debt and contingent liabilities, amortization of expenses related
to goodwill and other intangible assets and write-off of restructuring costs and
acquired research and development costs, all of which could materially and
adversely affect the Company's financial condition, results of operations and
cash flows.
New Product Development
The Company expects that a significant portion of its future revenue will
be derived from the sale of newly introduced products and from enhancement of
existing products. See "Forward-Looking Statements. The Company's success will
depend in part upon its ability to enhance its current products on a timely and
cost-effective basis and to develop new products that meet changing market
conditions, including changing customer needs, new competitive product offerings
and enhanced technology. There can be no assurance that the Company will be
successful in developing and marketing on a timely and cost-effective basis new
products and enhancements that respond to such changing market conditions. If
the Company is unable to anticipate or adequately respond on a timely or
cost-effective basis to changing market conditions, to develop new software
products and enhancements to existing products, to correct errors on a timely
basis or to complete products currently under development, or if such new
products or enhancements do not achieve market acceptance, the Company's
business, financial condition, operating results and cash flows could be
materially adversely affected. In light of the difficulties inherent in software
development, the Company expects that it will experience delays in the
completion and introduction of new software products. See "Forward-Looking
Statements."
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e-Business Development
The Company intends to provide access to its mobile workforce management
and wireless connectivity application software products over the Internet from a
wirelessly-enabled ASP site on a subscription or "per transaction" basis.
Currently the Company dervives e-Business revenue from consulting and hosting
services; the Company anticipates it will not realize revenues from its new
e-Business products prior to the first quarter of 2001. The Company's e-Business
products are targeted at Internet intermediaries who offer a wide range of
services, including home services 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 e-Business
customers and increases its development and marketing efforts. The Company does
not currently have any e-Business customers, operating on a commercial basis
although field trials have commenced, and there can be no assurance that the
Company will successfully implement its e-Business 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 556 employees located in
Canada, the United States and other international locations at September 30,
2000. In addition, the recent acquisition of Connectria has increased the number
of products the Company supports and markets, as well as the number of vertical
markets into which it sells products. 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 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
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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 e-Business 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 e-Business 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 e-Business 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 (server, wireless carrier, and mobile workstation), ability to
implement mobile workforce management solutions domestically and internationally
while meeting customer schedules, integration of products with other enterprise
solutions, availability of project consulting services and timely ongoing
customer service and support. Within these markets, there are a small number of
new ventures, either small companies attempting to establish a business in this
market or large companies attempting to diversify their product offerings. 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
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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 iMedeon, Inc. 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 is Telcordia.
The Company's principal competitors in the cable market are Telcordia ,
MobileForce Technologies, Inc. and ClickSoftware, Inc. (formerly IET). In the
general field service market, the Company's principal competitors are Astea
International Inc. and Metrix Inc. In the public safety market, the Company's
principal competitors are Cerulean, PRC, Tiberon Systems and New World Systems.
The Company's e-Business will face competition from a number of existing
competitors and emerging Internet-based competitors, including iMedeon,
ClickSoftware, Inc., 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.
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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 United States dollar, its
operations outside the United States face additional risks, including
fluctuating currency values and exchange rates, hard currency shortages and
controls on currency exchange. The Company has operations outside the United
States and is hedged, to some extent, from foreign exchange risks because of its
ability to purchase, develop and sell in the local currency of those
jurisdictions. In addition, the Company does enter into foreign currency
contracts under certain circumstances to reduce the Company's exposure to
foreign exchange risks. There can be no assurance, however, that the attempted
matching of foreign currency receipts with disbursements or hedging activities
will adequately moderate the risk of currency or exchange rate fluctuations
which could have a material adverse effect on the Company's business, financial
condition, operating results and cash flows. In addition, to the extent the
Company has operations outside the United States, the Company is subject to the
impact of foreign currency fluctuations and exchange rate charges on the
Company's reporting in its financial statements of the results from such
operations outside the United States.
Risks Associated with International Operations
In the years ended December 31, 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.
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Product Liability
The license and support of products by the Company may entail the risk of
exposure to product liability claims. A product liability claim brought against
the Company or a third party that the Company is required to indemnify, whether
with or without merit, could have a material adverse effect on the Company's
business, financial condition, operating results and cash flows. The Company
carries insurance coverage for product liability claims which it believes to be
adequate for its operations.
Concentration of Stock Ownership; Anti-Takeover Effects; Investment Canada Act
The Company's directors, officers and their respective affiliates, in the
aggregate, beneficially own approximately 24.6% of the outstanding Common
Shares. As a result, these shareholders, if acting together, may be able to
exercise significant influence over the Company and many matters requiring
shareholder approval, including the election of directors and approval of
significant corporate transactions. Such concentration of ownership may under
certain circumstances also have the effect of delaying, deferring or preventing
a change in control of the Company.
An investment in the Common Shares of the Company which results in a change
of control of the Company may, under certain circumstances, be subject to review
and approval under the Investment Canada Act if the party or parties acquiring
control is not a Canadian person (as defined therein). Therefore, the Canadian
regulatory environment may have the effect of delaying, deferring or preventing
a change in control of the Company.
The Company is organized under the laws of Canada and, accordingly, is
governed by the Canada Business Corporations Act "CBCA". The CBCA differs in
certain material respects from laws generally applicable to United States
corporations and shareholders, including the provisions relating to interested
directors, mergers and similar arrangements, takeovers, shareholders' suits,
indemnification of directors and inspection of corporate records.
In December 1998, the Company implemented a stock rights plan (the "Plan").
Pursuant to the Plan, shareholders of record on December 17, 1998 received a
dividend of one right to purchase, for CDN$140, one Common Share of the Company.
The rights are attached to the Company's Common Shares and will also become
attached to Common Shares issued in the future. The rights will not be traded
separately and will not become exercisable until the occurrence of a triggering
event, defined as an accumulation by a single person or group of 20% or more of
the Company's Common Shares. After a triggering event, the rights will detach
from the Common Shares. If the Company is then merged into, or is acquired by,
another corporation, the Company may either (i) redeem the rights or (ii) permit
the rights holder to receive in the merger Common Shares of the Company or of
the acquiring company equal to two times the exercise price of the right
(i.e.,CDN $280). In the latter instance, the rights attached to the acquirer's
stock become null and void. The effect of the rights program is to make a
potential acquisition of the Company more expensive for the acquirer if, in the
opinion of the Company's Board of Directors, the offer is inadequate. While the
Company is not aware of any circumstance that might result in the acquisition of
a sufficient number of shares of the Company's Common Shares to trigger
distribution of the Rights, existence of the Rights could discourage offers for
the Company's stock that may exceed the current market price of the stock, but
that the Board of Directors deems inadequate.
As a result of being a reporting issuer in certain provinces of Canada, the
Company is required to file certain reports in such jurisdictions. As part of
such reports, the Company is required to file consolidated financial statements
prepared in accordance with generally accepted accounting principles as applied
in Canada ("Canadian GAAP"). Canadian and US GAAP differ in certain respects,
including the treatment of certain reorganization costs, acquired research and
development costs, and treatment of business combinations. As a result, the
Company's Consolidated Financial Statements included in this report 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
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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.
