==============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------------
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________.
Commission file number 0-28968
MDSI MOBILE DATA SOLUTIONS INC.
(Exact name of registrant as specified in its charter)
CANADA NOT APPLICABLE
(Jurisdiction of incorporation) (I.R.S. Employer Identification No.)
Suite 135 - 10551 Shellbridge Way
Richmond, British Columbia,
Canada V6X 2W9
(604) 270-9939
(Address and telephone number of registrant's principal executive offices)
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
The number of outstanding shares of the registrant's
common stock, no par value, at September 30, 1998 was 6,532,424.
==============================================================================
<PAGE>
MDSI MOBILE DATA SOLUTIONS INC.
INDEX TO THE FORM 10-Q
For the quarterly period ended September 30, 1998
Page
Part I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Balance Sheets ................................... 3
Consolidated Statements of Operations
and Retained Earnings (Deficit) .............................. 4
Consolidated Statements of Cash Flows ......................... 5
Notes to the Consolidated Financial Statements ................ 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ........................... 8
Part II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS............................................ 18
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.................... 18
ITEM 3. DEFAULTS UPON SENIOR SECURITIES ............................. 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......... 18
ITEM 5. OTHER INFORMATION.............................................18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................. 18
SIGNATURES....................................................................19
<PAGE>
Part I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MDSI MOBILE DATA SOLUTIONS INC.
Consolidated Balance Sheets
(Expressed in Canadian dollars)
As at
---------------------------------
September 30, December 31,
1998 1997
------------- ------------
ASSETS (Unaudited)
CURRENT ASSETS
Cash and cash equivalents............... $ 4,684,911 $ 110,117
Accounts receivable, net
Trade................................ 18,147,816 15,256,202
Unbilled............................. 10,140,847 9,604,060
Work in progress........................ 2,051,191 1,451,662
Prepaid expenses........................ 1,544,203 1,647,748
Deferred income taxes................... 1,392,187 2,096,544
------------- ------------
37,961,155 30,166,333
CAPITAL ASSETS, NET.......................... 5,078,410 4,291,755
INTANGIBLE ASSETS, NET....................... 5,537,584 6,185,926
------------- ------------
TOTAL ASSETS................................. $ 48,577,149 $ 40,644,014
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable........................ $ 8,660,584 $ 3,936,501
Accrued liabilities..................... 4,485,255 8,353,417
Deferred revenue........................ 5,617,321 3,985,261
Current portion of long-term debt....... 369,124 215,454
Current obligations under capital leases 507,907 20,621
------------- ------------
19,640,191 16,511,254
LONG-TERM DEBT............................... - 296,324
OBLIGATIONS UNDER CAPITAL LEASES............. 1,053,967 -
------------- ------------
TOTAL LIABILITIES............................ 20,694,158 16,807,578
------------- ------------
STOCKHOLDERS' EQUITY
Common stock............................ 44,223,588 43,154,039
Treasury stock.......................... (122,743) (122,743)
Retained earnings (deficit)............. (16,217,854) (19,194,860)
------------- ------------
27,882,991 23,836,436
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY... $ 48,577,149 $ 40,644,014
=============== ==============
See notes to consolidated financial statements
<PAGE>
MDSI MOBILE DATA SOLUTIONS INC.
Consolidated Statements of Operations and Retained Earnings (Deficit)
(Expressed in Canadian dollars)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
------------------------- -------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
REVENUE
Software and services........$12,371,911 $ 9,175,389 $32,312,362 $27,450,138
Terminals and infrastructure. 1,889,460 1,358,967 6,314,828 7,878,285
Third party products and
services.................... 7,141,164 5,236,191 11,237,466 15,442,091
Maintenance and support...... 2,113,260 1,032,661 5,674,541 2,529,286
------------ ------------ ------------ ------------
23,515,795 16,803,208 55,539,197 53,299,800
DIRECT COSTS................. 13,086,612 14,425,235 29,343,914 35,322,991
------------ ------------ ------------ ------------
GROSS PROFIT................. 10,429,183 2,377,973 26,195,283 17,976,809
------------ ------------ ------------ ------------
OPERATING EXPENSES
Research and development..... 2,765,312 1,870,392 6,741,155 5,112,770
Sales and marketing ......... 3,193,732 3,452,724 9,599,862 8,474,126
General and administrative... 1,696,492 1,795,928 4,777,596 4,600,321
Restructuring costs.......... - 1,145,152 - 1,145,152
Amortization of intangible
assets...................... 216,114 238,101 648,342 599,062
Acquired research and
development................. - - - 10,002,982
------------ ------------ ------------ ------------
7,871,650 8,502,297 21,766,955 29,934,413
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS)...... 2,557,533 (6,124,324) 4,428,328 (11,957,604)
OTHER INCOME ................ 54,249 135,421 107,976 268,973
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE TAX
PROVISION................... 2,611,782 (5,988,903) 4,536,304 (11,688,631)
(PROVISION FOR) RECOVERY OF
INCOME TAXES................ (847,413) 43,040 (1,559,298) (1,385,629)
------------ ------------ ------------ ------------
NET INCOME (LOSS) FOR THE
PERIOD...................... 1,764,369 (5,945,863) 2,977,006 (13,074,260)
RETAINED EARNINGS (DEFICIT),
BEGINNING OF PERIOD.........(17,982,223) (14,776,221) (19,194,860) (7,647,824)
------------ ------------ ------------ ------------
RETAINED EARNINGS (DEFICIT),
END OF PERIOD............. $(16,217,854)$(20,722,084)$(16,217,854)$(20,722,084)
============ ============ ============ ============
Earnings (loss) per common share
Basic ...................... $ 0.27 $ (0.93) $ 0.46 $ (2.11)
Diluted .................... $ 0.26 $ (0.93) $ 0.45 $ (2.11)
Weighted average shares outstanding
Basic....................... 6,526,990 6,400,345 6,490,805 6,203,139
Diluted..................... 6,664,467 6,400,345 6,640,610 6,203,139
See notes to consolidated financial statements
<PAGE>
MDSI MOBILE DATA SOLUTIONS INC.
Consolidated Statements of Cash Flows
(Expressed in Canadian dollars)
(Unaudited)
Nine months ended
September 30,
---------------------------------------
1998 1997
------------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) for the period...... $ 2,977,006 $ (13,074,260)
Items not affecting cash:
Depreciation and amortization....... 2,056,438 1,540,636
Deferred income taxes............... 704,357 (238,264)
Acquired research development....... - 10,002,982
Changes in non-cash operating
working capital items............... (1,436,404) (5,703,035)
------------------- -------------------
Net cash provided by (used in)
operating activities................ 4,301,397 (7,471,941)
------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common shares............. 1,069,549 1,013,484
Repayment of long-term debt........... (142,654) (3,299,646)
Repayment of loan notes............... - (428,424)
Net proceeds from (repayment of)
capital leases........................ 1,541,253 (33,853)
------------------- -------------------
Net cash provided by (used in)
financing activities.................. 2,468,148 (2,748,439)
------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of Alliance............... - (1,892,426)
Acquisition of capital assets......... (2,194,751) (1,679,994)
------------------- -------------------
Net cash used in investing activities (2,194,751) (3,572,420)
------------------- -------------------
NET CASH INFLOW (OUTFLOW)............... 4,574,794 (13,792,800)
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD.............................. 110,117 20,207,019
------------------- -------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,684,911 $ 6,414,219
=================== ===================
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING AND FINANCING ACTIVITIES
During the nine months ended September 30, 1998, the Company issued 51,600
common shares on the exercise of 258,000 common share purchase warrants and cash
proceeds of $736,440.
During the nine months ended September 30, 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 nine
months ended September 30, 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 notes in the principal amount of $296,324 (US$214,219).
See notes to consolidated financial statements
<PAGE>
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the nine months ended September 30, 1998
(Expressed in Canadian dollars)
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of presentation
These financial statements have been prepared in accordance with
accounting principles generally accepted in the United States for
interim financial reporting and pursuant to the instructions of the
United States Securities and Exchange Commission Form 10-Q and Article
10 of Regulation S-X. While these financial statements reflect all
normal recurring adjustments which are, in the opinion of management,
necessary for fair presentation of the results of the interim period,
they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. For further information, refer to the financial statements
and footnotes thereto included in the Company's Annual Report filed on
Form 10-K for the year ended December 31, 1997.
(b Use of estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from those
estimates.
(c) Recent pronouncements
In June 1998, the Financial Accounting Standards Board issued
Statement No. 133 (SFAS 133), Accounting for Derivative Instruments
and Hedging Activities, which standardizes the accounting for
derivative instruments. SFAS 133 is effective for all fiscal quarters
of all fiscal years beginning after June 15, 1999. The impact on the
Company's financial statements is not expected to be material.
2. SEGMENTED INFORMATION
Segmented information
The Company develops, markets and supports mobile work force
management systems primarily to the utility, telecommunications/cable,
transportation (taxi, courier and roadside recovery) and general field
service market sectors. The Company considers its business to consist of
one reportable operating segment.
<PAGE>
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the nine months ended September 30, 1998
(Expressed in Canadian dollars)
(Unaudited)
2. SEGMENTED INFORMATION (CONTINUED)
Geographic information
The Company earned revenue from sales to customers in the following
geographic locations:
<TABLE>
Three months ended Nine months ended
September 30, September 30,
----------------------------- ------------------------------
1998 1997 1998 1997
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Canada............ $ 861,570 $ 397,533 $ 1,564,657 $ 1,598,769
United States..... 17,719,353 12,419,843 39,784,394 34,176,955
Europe............ 3,814,487 2,522,827 11,808,419 15,455,998
Asia.............. 1,058,133 568,322 2,064,550 1,173,395
South America..... 62,252 894,683 317,177 894,683
---------- ---------- ---------- ----------
$23,515,795 $16,803,208 $55,539,197 $53,299,800
========== ========== ========== ==========
</TABLE>
3. EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per common share is calculated by dividing net
income (loss) by the weighted average number of common shares outstanding
during the period. Diluted earnings (loss) per share was calculated by
dividing net income (loss) by the sum of the weighted average number of
common shares outstanding plus all additional common shares that would have
been outstanding if potentially dilutive common shares had been issued. In
periods for which there is a reported net loss, potentially dilutive
securities have been excluded from the calculation as their effect would be
anti-dilutive.
The following table reconciles the number of shares utilized in the
earnings (loss) per common share calculations for the periods indicated:
<TABLE>
Three months ended Nine months ended
September 30, September 30,
------------------------- -------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Weighted average shares
outstanding................. 6,526,990 6,400,345 6,490,805 6,203,139
Common stock equivalents
Stock options.............. 137,271 - 142,864 -
Share purchase warrants.... 206 - 6,941 -
------------ ------------ ------------ ------------
Total shares for diluted
earnings (loss) per common
share...................... 6,664,467 6,400,345 6,640,610 6,203,139
============ ============ ============ ============
</TABLE>
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements and information contained in this report constitute
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors that may cause the actual results,
performance or achievement of 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, the Company's ability to
protect its intellectual property rights and the other risks and uncertainties
detailed in the Company's Securities and Exchange Commission filings, including
the Company's Annual Report on Form 10-K for the year ended December 31, 1997.
All financial information in this report is expressed in Canadian dollars
unless otherwise noted.
Overview
The Company 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 utility, telecommunications and cable companies, taxi
services, courier companies and public safety and roadside recovery
organizations. The Company'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)
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) third party products and services, consisting
of the provision of non-MDSI products and services as part of the total
contract; 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.
From time to time, the Company is required to provide, through its UK
operations in the taxi, courier and roadside recovery markets, mobile computing
devices and wireless data communications network equipment.
<PAGE>
The Company is also called on to provide, in addition to MDSI products and
services, certain third party products, such as host computer hardware and
operating system software, mobile computing devices and radio data network
infrastructure equipment, or sub-contract services, such as radio data system
design and implementation. The Company recognizes revenue for the supply of
third party hardware upon transfer of beneficial ownership 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 customers typically enter into ongoing maintenance agreements
that provide for maintenance, product enhancement 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.
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 or the introduction of new products, 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, cash flows and financial condition. Delays in
the implementation of contracts may result in delays in the implementation or
cancellation of subsequent contracts. The Company's contracts are generally
cancelable upon notice by the customer. The loss of certain contracts could have
a material adverse effect on the Company's business, operating results, cash
flows and financial condition. 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.
<PAGE>
Effects of Acquisition
These consolidated financial statements reflect the acquisition of Alliance
Systems, Incorporated ("Alliance") effective April 17, 1997. This acquisition
has been 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
nine months ended September 30, 1997 include only the results of operations of
Alliance from April 17, 1997.
<PAGE>
Results of Operations
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:
Three months ended Nine months ended
September 30, September 30,
------------------------- -------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
REVENUE
Software and services........ 52.6% 54.6% 58.2% 51.5%
Terminals and infrastructure. 8.0 8.1 11.4 14.8
Third party products and
services.................... 30.4 31.2 20.2 29.0
Maintenance and support...... 9.0 6.1 10.2 4.7
------------ ------------ ------------ ------------
100.0 100.0 100.0 100.0
DIRECT COSTS................. 55.7 85.8 52.8 66.3
------------ ------------ ------------ ------------
GROSS PROFIT................. 44.3 14.2 47.2 33.7
------------ ------------ ------------ ------------
OPERATING EXPENSES
Research and development..... 11.8 11.1 12.1 9.6
Sales and marketing ......... 13.6 20.5 17.3 15.9
General and administrative... 7.2 10.7 8.6 8.6
Restructuring costs.......... - 6.8 - 2.1
Amortization of intangible
assets...................... 0.9 1.4 1.2 1.1
Acquired research and
development................. - - - 18.8
------------ ------------ ------------ ------------
33.5 50.5 39.2 56.1
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS)...... 10.8 (36.3) 8.0 (22.4)
OTHER INCOME................. 0.3 0.6 0.2 0.5
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE
TAX PROVISION............... 11.1 (35.7) 8.2 (21.9)
(PROVISION FOR) RECOVERY
OF INCOME TAXES............. (3.6) 0.3 (2.8) (2.6)
------------ ------------ ------------ ------------
NET INCOME (LOSS) FOR THE
PERIOD...................... 7.5% (35.4)% 5.4% (24.5)%
============ ============ ============ ============
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1997
Revenue. Revenue increased by $6.7 million (39.9%) for the three months
ended September 30, 1998 as compared to the three months ended September 30,
1997.
Software and services revenue increased by $3.2 million (34.8%) for the
three months ended September 30, 1998 as compared to the three months ended
September 30, 1997. This increase is due primarily to the continued growth of
the existing business in the utility and telecommunication/cable market sectors.
In addition, during the three months ended September 30, 1997, the Company
experienced delays in the signing and implementation of certain contracts which
resulted in a reduction of revenue for the comparable period in 1997.
Terminals and infrastructure revenue increased by $530,000 (39.0%) for the
three months ended September 30, 1998 as compared to the three months ended
September 30, 1997. Terminals and infrastructure revenue is derived solely from
the MDSI UK operations.
Third party products and services revenue increased by $1.9 million (36.4%)
for the three months ended September 30, 1998 as compared to the three months
ended September 30, 1997. Third party products and services revenue primarily
represents revenue earned from certain customers 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 $2.1 million for the three months ended
September 30, 1998 as compared to $1.0 million for the three months ended
September 30, 1997. Maintenance and support revenue generally corresponds to the
level of the Company's installed customer base.
Direct Costs. Direct costs were 55.7% of revenue for the three months ended
September 30, 1998 as compared to 85.8% for the three months ended September 30,
1997. During the three months ended September 30, 1997, the Company recorded
direct costs of $5.2 million relating to estimated losses due to delays in the
completion of certain pre-existing contracts in the MDSI UK operations.
Excluding these contracts, the Company's direct costs were 54.7% of revenue for
the three months ended September 30, 1997.
Direct costs include labor and other costs directly related to a project
including those related to the provision of services and support, production and
inventory costs associated with terminals and infrastructure equipment provided
by MDSI UK 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.
GrossMargins. Gross margins were 44.3% of revenue for the three months
ended September 30, 1998 as compared to 14.2% for the three months ended
September 30, 1997. After adjusting for the margins on the pre-existing
contracts in the MDSI UK operations, the Company's gross margins were 45.3% of
revenue for the three months ended September 30, 1997. The comparative adjusted
gross margin for 1997 is similar to the gross margin for the same period in 1998
and is consistent with the similar mix of revenue during these periods.
Research and Development. Research and development expenses were 11.8% of
revenue for the three months ended September 30, 1998 and 11.1% of revenue for
the three months ended September 30, 1997. Total research and development
expenditures for the three months ended September 30, 1998 of $2.8 million
represents an increase of $895,000 (47.8%) as compared to the same period in
1997. The 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.
<PAGE>
Sales and Marketing. Sales and marketing expenses were 13.6% of revenue for
the three months ended September 30, 1998 and 20.5% of revenue for the three
months ended September 30, 1997. This represents a decrease of $259,000 (7.5%)
as compared to the same period in 1997. The Company anticipates that the dollar
amounts of its sales and marketing expenses will increase in the future as the
result of the Company's commitment to its international marketing effort.
General and Administrative. General and administrative expenses were 7.2%
of revenue for the three months ended September 30, 1998 and 10.7% of revenue
for the three months ended September 30, 1997. Total general and administrative
expenses of $1.7 million represents a decrease of $99,000 (5.5%) for the three
months ended September 30, 1998 as compared to the same period in 1997. The
Company expects that the dollar amount of 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 $54,000 for the three months ended September
30, 1998 as compared to $135,000 for the three months ended September 30, 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
three months ended September 30, 1998 at the rate of 30.0%, after adjusting for
the amortization of intangible assets. The Company's effective tax rate reflects
the blended effect of Canadian, US, UK and other foreign jurisdictions' tax
rates.
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1997
Revenue. Revenue increased by $2.2 million (4.2%) for the nine months ended
September 30, 1998 as compared to the nine months ended September 30, 1997.
Software and services revenue increased by $4.9 million (17.7%) for the
nine months ended September 30, 1998 as compared to the nine months ended
September 30, 1997. This increase is due primarily to revenue contributed by
Alliance during the period and the continued growth of the existing business in
the utility and telecommunication/cable market sectors.
Terminals and infrastructure revenue decreased by $1.6 million (19.8%) for
the nine months ended September 30, 1998 as compared to the nine months ended
September 30, 1997. This decrease is due primarily to delays in the completion
of certain pre-existing contracts in the MDSI UK operations and the resulting
delays in delivery of terminals under subsequent contracts. Terminals and
infrastructure revenue is derived solely from the MDSI UK operations.
Third party products and services revenue decreased by $4.2 million (27.2%)
for the nine months ended September 30, 1998 compared to the nine months ended
September 30, 1997. Third party products and services revenue primarily
represents revenue earned from certain customers 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 nine months ended
September 30, 1998 as compared to $2.5 million for the nine months ended
September 30, 1997. Maintenance and support revenue generally corresponds to the
level of the Company's installed customer base.
Direct Costs. Direct costs were 52.8% of revenue for the nine months ended
September 30, 1998 as compared to 66.3% for the nine months ended September 30,
1997. During the nine months ended September 30, 1997, the Company recorded
direct costs of $5.2 million relating to estimated losses due to delays in the
completion of certain pre-existing contracts in the MDSI UK operations.
Excluding these contracts, the Company's direct costs were 56.5% of revenue for
the nine months ended September 30, 1997.
Direct costs include labor and other costs directly related to a project
including those related to the provision of services and support, production and
inventory costs associated with terminals and infrastructure equipment provided
by MDSI UK 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 47.2% of revenue for the nine months
ended September 30, 1998 as compared to 33.7% for the nine months ended
September 30, 1997. After adjusting for the margins on the pre-existing
contracts in the MDSI UK operations, the Company's gross margins were 43.5% of
revenue for the nine months ended September 30, 1997. During the nine months
ended September 30, 1998 there was an increase in software and services revenue,
which typically has a higher gross margin, and a decrease in third party
products and services revenue, which typically has a lower gross margin,
relative to the same period in 1997.
Research and Development. Research and development expenses were 12.1% of
revenue for the nine months ended September 30, 1998 and 9.6% of revenue for the
nine months ended September 30, 1997. Total research and development
expenditures for the nine months ended September 30, 1998 of $6.7 million
represents an increase of $1.6 million (31.8%) as compared to the same period in
1997. The 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.
<PAGE>
Sales and Marketing. Sales and marketing expenses were 17.3% of revenue for
the nine months ended September 30, 1998 and 15.9% of revenue for the nine
months ended September 30, 1997. This represents an increase of $1.1 million
(13.3%) as compared to the same period in 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 8.6%
of revenue for the nine months ended September 30, 1998 and 8.6% of revenue for
the nine months ended September 30, 1997. Total general and administrative
expenses of $4.8 million represents an increase of $177,000 (3.9%) for the nine
months ended September 30, 1998, as compared to the same period in 1997. The
Company expects that the dollar amount of 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 $108,000 for the nine months ended September
30, 1998 as compared to $269,000 for the nine months ended September 30, 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
nine months ended September 30, 1998 at the rate of 30.1%, after adjusting for
the amortization of intangible assets. The Company's effective tax rate reflects
the blended effect of Canadian, US, UK and other foreign jurisdictions' tax
rates.
<PAGE>
Liquidity and Capital Resources
The Company finances its operations, acquisitions and capital expenditures
with cash generated from operations, loans, capital leases, private placements
and public offerings of its securities. At September 30, 1998, the Company had
cash and cash equivalents of $4.7 million and working capital of $18.3 million.
Cash provided by operating activities was $4.3 million for the nine months
ended September 30, 1998 compared to an outflow of $(7.5) million for the same
period in 1997. The net inflow of cash from operating activities during the nine
months ended September 30, 1998 is generated from net income of $3.0 million
after adjusting for depreciation and amortization expenses and the net decrease
in non-cash net operating working capital items.
Cash provided by financing activities of $2.5 million during the nine
months ended September 30, 1998 relates to proceeds from common shares issued
for $1.1 million pursuant to the exercise of stock options and share purchase
warrants, net of the repayment of certain long-term debt for $143,000 and the
proceeds from capital lease financing of equipment for $1.5 million. The capital
leases are to be repaid evenly over periods expiring substantially between June,
2001 and December, 2001 and are secured by certain capital assets of the
Company.
Cash used in investing activities was $2.2 million for the nine months
ended September 30, 1998 as compared to $3.6 million for the same period in
1997. Total investing activity during the nine months ended September 30, 1998
consisted of purchases of capital assets, including computer hardware and
software for use in research and development activities and to support the
growth of the Company's corporate information systems. Cash used in investing
activities during the nine months ended September 30, 1997 included cash
payments of $1.9 million on behalf of the Alliance acquisition.
Existing sources of liquidity at September 30, 1998 include $4.7 million of
cash and cash equivalents and up to $7.0 million available under the Company's
operating line of credit. At September 30, 1998, 200,000 Sterling pounds of such
amount was committed to securing the Company's obligations under outstanding
letters of credit. 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 September 30,
1998, the Company had no borrowings under the line of credit.
The Company believes that future cash flows, in addition to funds on hand
and its borrowing capacity under the 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 may use cash to fund other acquisitions of
businesses or products complementary to the Company's business although the
Company has no plans to do so. The Company has no material additional
commitments other than operating and capital 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.
<PAGE>
Year 2000
The Company is currently in the process of addressing the Year 2000 issue.
This includes a comprehensive project to upgrade its information systems and
development software that will consistently and properly recognize the Year
2000. Certain of the Company's systems include new hardware and packaged
software purchased from vendors who have represented that the systems are Year
2000 compliant. The Company is in the process of obtaining assurances from
vendors that timely updates will be made available to make all remaining
purchased software Year 2000 compliant.
The Company believes that it has identified all significant information
systems and software development applications that will require modification to
ensure Year 2000 compliance. Internal and external resources are being used to
make the required modifications and test Year 2000 compliance. The Company
intends to complete the testing process of all significant applications by
December 31, 1998.
The Company is also in the process of initiating formal communications with
all of its significant suppliers and customers to determine the extent to which
the Company may be at risk as a result of the failure of third parties to
remediate their own Year 2000 issues. The Company can give no guarantee that the
systems of other companies on which the Company's systems rely will be converted
on time or that a failure to convert by another company or a conversion that is
incompatible with the Company's systems, would not have a material adverse
effect on the Company.
The total cost to the Company of these Year 2000 compliance activities has
not been and is not anticipated to be material to its financial position,
results of operations or cash flows in any given year. The estimate of costs and
the date on which the Company plans to complete the Year 2000 modification and
testing processes are based on management's best estimates, which were derived
utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ from those plans.
<PAGE>
Part II - OTHER INFORMATION
ITEM 1. 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 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 and results of operations.
ITEM 2. CHANGES IN SECURITIES USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit 3.1 Articles of Amalgamation
b) Reports on Form 8-K
None.
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MDSI MOBILE DATA SOLUTIONS INC.
Date: November 12, 1998 By: /s/ ERIK DYSTHE
------------------------------------
Name: Erik Dysthe
Title: Chairman and Chief Executive Officer
Date: November 12, 1998 By: /s/ VERNE D. PECHO
------------------------------------
Name: Verne D. Pecho
Title: Vice President Finance &
Administration and Chief Financial
Officer (Principal Financial and
Accounting Officer)
<PAGE>
Index to Exhibits
Exhibit No. Description
3.1 Articles of Amalgamation
Exhibit 3.1
CANADA BUSINESS CORPORATIONS ACT
FORM 9
ARTICLES OF AMALGAMATION
------------------------
(SECTION 185)
1. Name of Amalgamated Corporation
MDSI Mobile Data Solutions Inc.
2. The place in Canada where the registered office is to be situated
Greater Vancouver Regional District, British Columbia
3. The classes and any maximum number of shares that the Corporation is
authorized to issue
Unlimited number of one class of shares to be designated as common shares.
4. Restrictions, if any, on share transfers
None.
5. Number (or minimum and maximum number) of directors
Minimum of three and maximum of fifteen.
6. Restrictions, if any, on business the corporation may carry on
None
7. Other provisions, if any
Between successive annual meetings, the directors shall have the power to
appoint one or more directors to the Board, provided that the number of
directors so appointed may not exceed one-third of the number of directors
elected at the previous annual meeting of the Shareholders of the
Corporation and the number of directors on the Board of Directors shall not
exceed the maximum number of directors set out in the Articles of
Incorporation. Any directors so appointed by the Board of Directors shall
hold office only until the next following annual meeting of the
Shareholders of the Corporation, but shall be eligible for re-election as a
director at such annual meeting.
8. Th amalgamation has been approved pursuant to that section or subsection of
the Act which is indicated as follows:
[ ] 183
[X] 184(1)
[ ] 184(2)
<TABLE>
9. Name of the amalgamating corporations Corporation No. Signature Date Title
------------------------------------- -------------- --------- ---- -----
<S> <C> <C> <C> <C>
MDSI Mobile Data Solutions Inc. 318191-0 /s/ Greg Beniston Sep 10/98 Secretary
MDSI Mobile Data Solutions Canada Inc. 353225-9 /s/ Greg Beniston Sep 10/98 Secretary
</TABLE>
- --------------------------------------------------------------------------------
For Department Use Only
Filed 353414-6 September 25, 1998
- --------------------------------------------------------------------------------
