================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------------
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ---------------- to ---------------------.
Commission file number 0-28968
MDSI MOBILE DATA SOLUTIONS INC.
(Exact name of registrant as specified in its charter)
CANADA NOT APPLICABLE
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
10271 Shellbridge Way
Richmond, British Columbia,
Canada V6X 2W8
(Address of Principal Executive Offices)
(604) 207-6000
(Registrant's Telephone Number, Including Area Code)
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 common shares, no par value, of the Registrant
at June 30, 1999 was 7,317,197.
================================================================================
<PAGE>
MDSI MOBILE DATA SOLUTIONS INC.
INDEX TO THE FORM 10-Q
For the quarterly period ended June 30, 1999
<TABLE>
Page
Part I - FINANCIAL INFORMATION
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets................................................................3
Consolidated Statements of Operations and 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........................................................9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.................................18
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.......................................19
ITEM 5. OTHER INFORMATION.........................................................................20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..........................................................20
SIGNATURES ...........................................................................................21
</TABLE>
<PAGE>
Part I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MDSI MOBILE DATA SOLUTIONS INC.
Consolidated Balance Sheets
(Expressed in Canadian dollars)
(Unaudited)
<TABLE>
As at
-------------------------------------------
June 30 December 31
1999 1998
--------------------- -------------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents........................................ $ 20,685,754 $ 6,136,711
Accounts receivable, net
Trade......................................................... 17,882,092 16,603,944
Unbilled...................................................... 7,229,948 7,789,586
Prepaid expenses ................................................ 1,587,569 3,458,348
Deferred income taxes............................................ 723,929 1,016,766
Current portion of lease receivable.............................. 554,049 560,478
--------------------- -------------------
48,663,341 35,565,833
Lease receivable.................................................... 485,478 845,889
Investments, at cost ............................................... 5,532,730 -
Capital assets, net................................................. 7,593,845 5,137,296
Intangible assets, net.............................................. 2,941,569 3,130,334
--------------------- -------------------
65,216,963 44,679,352
Assets of discontinued operations (note 4).......................... 1,112,296 11,889,004
--------------------- -------------------
Total assets....................................................... $ 66,329,259 $ 56,568,356
===================== ===================
Liabilities and stockholders' equity
Current liabilities
Accounts payable ................................................ $ 3,260,517 $ 7,140,470
Accrued liabilities ............................................. 2,929,050 3,320,436
Income Taxes Payable ............................................ 2,292,455 2,442,571
Deferred revenue................................................. 6,571,405 7,317,895
Current portion of long-term debt ............................... - 377,332
Current obligations under capital leases ........................ 1,256,671 872,917
--------------------- -------------------
16,310,098 21,471,621
Obligations under capital leases..................................... 2,815,154 1,907,037
Liabilities of discontinued operations (note 4) ..................... 2,114,579 2,370,579
--------------------- -------------------
Total liabilities.................................................... 21,239,831 25,749,237
--------------------- -------------------
Stockholders' equity
Common stock..................................................... 62,006,315 44,637,778
Treasury stock................................................... (122,743) (122,743)
Deficit.......................................................... (16,794,144) (13,695,916)
--------------------- -------------------
45,089,428 30,819,119
--------------------- -------------------
Total liabilities and stockholders' equity........................... $ 66,329,259 $ 56,568,356
===================== ===================
</TABLE>
See notes to consolidated financial statements
-3-
<PAGE>
MDSI MOBILE DATA SOLUTIONS INC.
Consolidated Statements of Operations and Deficit
(Expressed in Canadian dollars)
(Unaudited)
<TABLE>
Three months ended Six months ended
June 30 June 30
---------------------------------------------------------------------------
1999 1998 1999 1998
------------------- ----------------- ---------------- ----------------
Revenue
<S> <C> <C> <C> <C>
Software and services.......................... $ 15,390,918 $ 9,905,559 $ 28,612,285 $ 17,728,783
Third-party products and services.............. 2,458,525 2,936,238 6,544,546 3,804,084
Maintenance and support........................ 1,912,800 1,272,905 3,436,979 2,405,716
------------------- ----------------- ---------------- ----------------
19,762,243 14,114,702 38,593,810 23,938,583
Direct costs........................................ 8,246,780 6,038,465 17,045,512 10,541,068
------------------- ----------------- ---------------- ----------------
Gross profit........................................ 11,515,463 8,076,237 21,548,298 13,397,515
------------------- ----------------- ---------------- ----------------
Operating expenses
Research and development....................... 2,514,881 1,788,046 4,954,428 3,441,124
Sales and marketing ........................... 3,696,827 2,874,546 7,576,813 5,594,675
General and administrative..................... 2,027,329 1,181,529 4,063,949 2,304,256
Amortization of intangible assets.............. 94,383 94,383 188,766 188,766
------------------- ----------------- ---------------- ----------------
8,333,420 5,938,504 16,783,956 11,528,821
------------------- ----------------- ---------------- ----------------
Operating income.................................... 3,182,043 2,137,733 4,764,342 1,868,694
Other income (expense).............................. (490,816) 122,849 (736,244) 300,290
------------------- ----------------- ---------------- ----------------
Income before tax provision......................... 2,691,227 2,260,582 4,028,098 2,168,984
Provision for income taxes.......................... (844,164) (710,844) (1,273,540) (712,185)
------------------- ----------------- ---------------- ----------------
Net income from continuing operations............... 1,847,063 1,549,738 2,754,558 1,456,799
Loss from discontinued operations (note 4).......... - (413,363) (5,852,786) (244,162)
------------------- ----------------- ---------------- ----------------
Net income (loss)................................... 1,847,063 1,136,375 (3,098,228) 1,212,637
Deficit, Beginning of period........................ (18,641,207) (19,118,598) (13,695,916) (19,194,860)
------------------- ----------------- ---------------- ----------------
Deficit, end of period.............................. $ (16,794,144) $ (17,982,223) $ (16,794,144) $(17,982,223)
=================== ================= ================ ================
Earnings (loss) per common share
Earnings from continuing operations
Basic ......................................... $ 0.25 $ 0.24 $ 0.39 $ 0.23
=================== ================= ================ ================
Diluted ....................................... $ 0.24 $ 0.23 $ 0.36 $ 0.22
=================== ================= ================ ================
Net earnings (loss)
Basic ......................................... $ 0.25 $ 0.18 $ (0.43) $ 0.19
=================== ================= ================ ================
Diluted ....................................... $ 0.24 $ 0.17 $ (0.43) $ 0.18
=================== ================= ================ ================
Weighted average shares outstanding
Basic.......................................... 7,276,439 6,479,089 7,148,723 6,472,712
=================== ================= ================ ================
Diluted........................................ 7,824,402 6,635,811 7,726,600 6,628,682
=================== ================= ================ ================
</TABLE>
See notes to consolidated financial statements
-4-
<PAGE>
MDSI MOBILE DATA SOLUTIONS INC.
Consolidated Statements of Cash Flows
(Expressed in Canadian dollars)
(Unaudited)
<TABLE>
Six months ended June 30
--------------------------------------------
1999 1998
-------------------- ---------------------
<S> <C> <C>
Cash flow from operating activities
Net income (loss) for the period................................. $ 2,754,558 $ 1,456,799
Items not affecting cash:
Depreciation and amortization............................... 1,250,331 982,611
Deferred income taxes....................................... 292,837 735,042
Changes in non-cash operating working capital items......... (4,015,676) 1,572,514
-------------------- ---------------------
Net cash provided by (used in) operating activities.............. 282,050 4,746,966
-------------------- ---------------------
Cash flows from financing activities
Issuance of common stock......................................... 17,368,537 639,765
Repayment of long-term debt...................................... (377,332) (124,454)
Proceeds from capital leases..................................... 1,291,871 1,367,156
-------------------- ---------------------
Net cash provided by financing activities........................ 18,283,076 1,882,467
-------------------- ---------------------
Cash flows from investing activities
Long term lease receivable....................................... 366,840 -
Acquisition of capital assets.................................... (3,518,116) (1,237,696)
-------------------- ---------------------
Net cash used in investing activities............................ (3,151,276) (1,237,696)
-------------------- ---------------------
Cash provided by continuing operations............................... 15,413,850 5,391,737
Cash provided by (used for) discontinued operations (note 4)......... (864,807) (2,248,603)
-------------------- ---------------------
Net cash inflow...................................................... 14,549,043 3,143,134
Cash and cash equivalents, beginning of period...................... 6,136,711 110,117
-------------------- ---------------------
Cash and cash equivalents, end of period............................ $ 20,685,754 $ 3,253,251
==================== =====================
</TABLE>
See notes to consolidated financial statements
-5-
<PAGE>
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the six months ended June 30, 1999
(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, 1998.
(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.
2. SEGMENTED INFORMATION
Segmented information
The Company develops, markets and supports mobile work force management
systems serving the needs of industry and government. Examples include the
utility, telecommunications/cable and public safety industries. At December
31, 1998, the Company reported two business segments - Field Service and
Delivery. In February 1999, the Company's Board of Directors approved a
plan to dispose of its Delivery segment (Transportation Business Unit -
note 4). As a result, the Company now has only one business segment.
Geographic information
The Company earned revenue from sales to customers in the following
geographic locations:
<TABLE>
Three months ended Six months ended
June 30 June 30
------------------------------------------------------------------------------
1999 1998 1999 1998
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Canada............................ $ 1,024,214 $ 307,200 $ 2,160,800 $ 459,345
United States..................... 14,865,848 12,620,997 29,045,201 21,830,927
Europe............................ 3,128,241 931,580 6,002,182 1,148,666
Asia.............................. 743,940 0 1,385,627 244,720
South America..................... 0 254,925 0 254,925
--------------------------------------------------------------------------------
$ 19,762,243 $ 14,114,702 $ 38,593,810 $ 23,938583
==============================================================================
</TABLE>
-6-
<PAGE>
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the six months ended June 30, 1999
(Expressed in Canadian dollars)
(Unaudited)
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 Six months ended
June 30 June 30
-------------------------------- ---------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Weighted average shares outstanding......... 7,276,439 6,479,089 7,148,723 6,472,712
Common stock equivalents
Stock options............................... 547,963 148,282 577,877 145,662
Share purchase warrants .................... - 8,440 - 10,308
--------------- --------------- --------------- ----------------
Total shares for diluted earnings (loss) per
common share................................ 7,824,402 6,635,811 7,726,600 6,628,682
=============== =============== =============== ================
</TABLE>
4. DISCONTINUED OPERATIONS
In February 1999, the Company's Board of Directors approved a plan for the sale
of the Transportation Business Unit which develops mobile work force software
for the taxi, courier and roadside recovery market. The disposition was
completed June 24, effective June 1, 1999, for proceeds of $5,532,730. The
proceeds comprise common shares representing an 11% interest in Digital Dispatch
Systems Inc., a supplier of dispatch systems to the taxi market, and an 8%,
$500,000 promissory note due January 1, 2001.
This business is accounted for as a discontinued operation and for reporting
purposes the results of operations, financial position and cash flow are
segregated from those of continuing operations for the current and prior
periods. The Company has included in the results of the discontinued operation,
the sale proceeds, the costs of disposition, the results of operations from the
measurement date to the disposal date and an estimate of the costs to complete
the remaining contract.
-7-
<PAGE>
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the six months ended June 30, 1999
(Expressed in Canadian dollars)
(Unaudited)
4. DISCONTINUED OPERATIONS (continued)
Summarized financial information of the discontinued operations is as follows:
<TABLE>
Results of discontinued operations
- --------------------------------------------------------------------------------------------------------------
June 30, 1999 June 30, 1998
--------------------- ----------------------
<S> <C> <C>
Revenues $ 4,008,198 $ 8,084,819
===================== ======================
Loss before income taxes (2,375,492) (244,462)
Income tax - 300
--------------------- ----------------------
Operating loss to measurement date (2,375,492) (244,162)
Estimated loss on disposal
(net of nil income taxes) (3,477,294) -
===================== ======================
Income (loss) from discontinued operations $ (5,852,786) $ (244,162)
===================== ======================
Financial position of discontinued operations
- --------------------------------------------------------------------------------------------------------------
June 30, 1999 December 31, 1998
--------------------- ----------------------
Current assets $ 1,112,296 $ 9,147,621
Long term assets - 2,741,383
--------------------- ----------------------
Total assets of discontinued operations $ 1,112,296 $ 11,889,004
===================== ======================
Current liabilities $ 2,114,579 $ 2,370,579
Long term liabilities - -
--------------------- ----------------------
Total liabilities of discontinued operations $ 2,114,579 $ 2,370,579
===================== ======================
Cash flow of discontinued operations
- --------------------------------------------------------------------------------------------------------------
June 30, 1999 June 30, 1998
--------------------- ----------------------
Operating activities $ (733,327) $ (2,248,027)
Investing activities (131,480) (576)
Financing activities - -
--------------------- ----------------------
Cash provided by (used for) discontinued operations $ (864,807) $ (2,248,603)
===================== ======================
</TABLE>
-8-
<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 achievements 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, history of losses, 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, risks associated with
performance of pre-existing contracts assumed through 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, 1998.
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 and
public safety 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)
third-party products and services, consisting of the provision of non-MDSI
products and services as part of the total contract; and (iii) 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.
-9-
<PAGE>
Overview (Continued)
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 title to the customer. The Company
recognizes revenue for the supply of third-party services using a percentage of
completion method based on the costs incurred over the total estimated cost to
complete the third-party services contract.
The Company believes that it will often supply some portion of third-party
products and services to customers where it is successful in selling its own
products and services. There can be no assurance, however, that any contracts
entered into by the Company to supply third-party software and products in the
future will represent a substantial portion of revenue in any future period.
Since the revenue generated from the supply of third-party products and services
may represent a significant portion of certain contracts and the installation
and rollout of third-party products is generally at the discretion of the
customer, the Company may, depending on the level of third-party products and
services provided during a period, experience large quarterly fluctuations in
revenue.
The Company's 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 quarterly 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. 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.
Disposition of Transportation Business Unit
In February 1999, the Company's Board of Directors approved a plan to
dispose of its Delivery segment (Transportation Business Unit). Effective June
1, 1999, the Company completed the sale of the transporation business unit to
Digital Dispatch Systems, Inc. ("DDS"), a supplier of dispatch systems to the
taxi market for proceeds of $5,532,730. The proceeds were comprised of common
shares of DDS, representing an 11% interest in DDS, and a promissory note in the
initial principal amount of $500,000, due January 1, 2001, bearing interest at
8% per annum.
Under the terms of the agreement between the Company and DDS, the Company
has retained certain assets and liabilities of the discontinued operations. It
is expected that the Company will liquidate these assets and liabilities by
December 31, 1999. In addition, the Company has agreed to complete. The
implementation of a large contract with a taxi customer. The Company believes
that it has adequately provided for the costs to complete this contract. The
Company has experienced, and is continuing to experience delays in the
implementation of this contract. If the Company is unable to complete the
implementation of the contract on a timely basis, the taxi customer has the
right to cancel the contract. Any such cancellation may require the Company to
reimburse the customer for payments received to date.
As a result of the Company's decision to dispose of its Delivery segment,
the Delivery segment has been classified as a discontinued operation and the
results of operation, financial position and cash flow for this segment have
been segregated from those of continuing operations. The following discussion
and analysis of the Company's results of operations excludes the Delivery
segment for the current and corresponding prior period.
The Company's year-to-date loss of $3.1 million was comprised of $2.8
million after-tax profit from continuing operations and an after-tax loss of
$5.9 million on discontinued operations. The loss on discontinued operations is
comprised of loss on operations of $2.4 million and loss on disposal of $3.5
million. There is no tax effect on these losses. The discontinued operating loss
includes not only the results of operations but also foreign exchange losses and
provisions against contracts to the measurement date of February 25, 1999. The
estimated loss on disposal includes the operating results from measurement date
to the effective date, the costs of disposal, severance costs, and the estimated
costs to complete the remaining taxi contract.
-10-
<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:
<TABLE>
Three months ended Six months ended
June 30 June 30
-------------------------------- --------------------------------
1999 1998 1999 1998
--------------- --------------- -------------- ----------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenue
Software and services....................... 77.9 70.2% 74.1% 74.1%
Third-party products and services........... 12.4 20.8 17.0 15.9
Maintenance and support..................... 9.7 9.0 8.9 10.0
--------------- --------------- -------------- ----------------
100.0 100.0 100.0 100.0
Direct costs................................. 41.7 42.8 44.2 44.0
--------------- --------------- -------------- ----------------
Gross profit................................. 58.3 57.2 55.8 56.0
--------------- --------------- -------------- ----------------
Operating expenses
Research and development.................... 12.7 12.7 12.8 14.4
Sales and marketing ........................ 18.7 20.4 19.6 23.4
General and administrative.................. 10.3 8.4 10.6 9.6
Amortization of intangible assets........... 0.5 0.6 0.5 0.8
--------------- --------------- -------------- ----------------
42.2 42.1 43.5 48.2
--------------- --------------- -------------- ----------------
Operating income (loss)...................... 16.1 15.1 12.3 7.8
Other income ................................ (2.5) 0.9 (1.9) 1.3
--------------- --------------- -------------- ----------------
Income (loss) before tax provision........... 13.6 16.0 10.4 9.1
Provision for income taxes................... (4.3) (5.0) (3.3) (3.0)
--------------- --------------- -------------- ----------------
Net income (loss) from continuing operations. 9.3 11.0 7.1 6.1
--------------- --------------- -------------- ----------------
Income (loss) from discontinued operations... (0.0) (2.9) (15.1) (1.0)
--------------- --------------- -------------- ----------------
Net income (loss).............................. 9.3% 8.1% (8.0)% 5.1%
=============== =============== ============== ================
</TABLE>
-11-
<PAGE>
Three Months Ended June 30, 1999 Compared to the Three Months Ended June 30,
1998
Revenue. Revenue increased by $5.6 million (40.0%) for the three months
ended June 30, 1999 as compared to the three months ended June 30, 1998. This
increase was due primarily to the increase in revenue for software and services
delivered in the second quarter of 1999 relative to the same period in 1998.
Software and services revenue increased by $5.5 million (55.3%) for the
three months ended June 30, 1999 as compared to the three months ended June 30,
1998. This increase is due to increased revenue from customers in both the
telecommunications and utility markets.
Third-party products and services revenue decreased by $477,713 (16.3%) for
the three months ended June 30, 1999 as compared to the three months ended June
30, 1998. These third-party products typically include 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 and nature of
certain contracts and the rollout schedules which are established primarily by
the customers. In addition, not all customers under contract require the
provision of third-party products and services. Accordingly, there may be large
fluctuations in revenue, direct costs, gross profits and income from operations
from one period to another.
Maintenance and support revenue was $1.9 million for the three months ended
June 30, 1999 as compared to $1.3 million for the three months ended June 30,
1998. Maintenance and support revenue has increased primarily due to the
increased growth in the Company's installed customer base. Such revenue is
expected to fluctuate as it generally corresponds to the level of software and
services revenue the Company is engaged to provide in support of its
installations.
Direct Costs. Direct costs were 41.7% of revenue for the three months ended
June 30, 1999 as compared to 42.8% for the three months ended June 30, 1998.
Direct costs include labor and other costs directly related to a project,
including the provision of services and support, production and costs related to
host equipment and mobile devices on behalf of third-party product sales. Labor
costs included direct payroll, benefits and overhead charges.
Gross Margins. Gross margins were 58.3% of revenue for the three months
ended June 30, 1999 as compared to 57.2% for the three months ended June 30,
1998. The increase in gross margin as a percentage of revenue relates primarily
to the change in the mix of revenues and the increase in the proportion of
higher margined software and services. During the three months ended June 30,
1999 there was an increase in software and services revenue, which typically has
a higher gross margin than third-party products and services, which typically
has a lower gross margin, relative to the same period in 1998.
Research and Development. Research and development expenses were 12.7% of
revenue for both the three months periods ended June 30, 1999 and 1998. Total
research and development expenditures for the three months ended June 30, 1999
of $2.5 million represents an increase of $727,000 (40.6%) as compared to the
same period in 1998. The increase in research and development expenses in 1999
is a result of the continued development and enhancement of the Company's
Advantex products. The Company intends to continue committing a significant
portion of its product revenues to enhance existing products and develop new
products, resulting in an anticipated increase in the dollar amounts of research
and development expenses.
Sales and Marketing. Sales and marketing expenses were 18.7% of revenue for
the three months ended June 30, 1999 and 20.4% of revenue for the three months
ended June 30, 1998. This represents an increase of $822,000 (28.6%) as compared
to the same period in 1998. The increase was primarily due to an increase in
marketing, sales and technical support personnel supporting 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
a result of the Company's commitment to its international marketing efforts.
General and Administrative. General and administrative expenses were 10.3%
of revenue for the three months ended June 30, 1999 and 8.4% of revenue for the
three months ended June 30, 1998. Total general and administrative expenses of
$2.0 million represents an increase of $846,000 (71.6%) for the three months
ended June 30, 1999 as compared to the same period in 1998. The increase
represents expanded administrative activity to support the Company's growth. The
Company expects that the dollar amounts will continue to increase as the Company
expands its staffing, information systems and other administrative requirements
necessary to support this growth.
-12
<PAGE>
Three Months Ended March 31, 1999 Compared to the Three Months Ended March 31,
1998 (Continued)
Other Income (Expense). Other income (expense) was $(491,000) for the three
months ended June 30, 1999 as compared to $123,000 for the three months ended
June 30, 1998. Substantially all of other income (expense) relates to
fluctuations in the currencies of the Company's foreign operations, interest on
cash and short term deposits, short-term borrowings under the line of credit and
capital lease obligations.
Income Taxes. The Company provided for income taxes on earnings for the
three months ended June 30, 1999 at the rate of 30.0%, after adjusting for the
amortization of intangible assets. The Company's effective tax rate reflects the
application of certain operating loss carry forwards against taxable income and
the blended effect of Canadian, US, and other foreign jurisdictions' tax rates.
Six months ended June 30, 1999 Compared to the Six months ended June 30, 1998
Revenue. Revenue increased by $14.7 million (61.2%) for the six months
ended June 30, 1999 as compared to the six months ended June 30, 1998. This
represents an increase in all revenue components for the six months ended June
30, 1999 relative to the same period in 1998.
Software and services revenue increased by $10.9 million (61.4%) for the
six months ended June 30, 1999 as compared to the six months ended June 30,
1998.
Third-party products and services revenue increased by $2.7 million (72.0%)
for the six months ended June 30, 1999 compared to the six months ended June 30,
1998. 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 $3.4 million for the six months ended
June 30, 1999 as compared to $2.4 million for the six months ended June 30,
1998. Maintenance and support revenue increased as a result of an increase in
the level of the Company's installed customer base.
Direct Costs. Direct costs were 44.2% of revenue for the six months ended
June 30, 1999 as compared to 44.0% for the six months ended June 30, 1998. The
change in direct costs as a percentage of revenue is reflective of the
proportional increases in the individual revenue components.
Gross Margins. Gross margins were 55.8% of revenue for the six months ended
June 30, 1999 as compared to 56.0% for the six months ended June 30, 1998. The
decrease in gross margin as a percentage of revenue relates primarily to the
change in the mix of revenues during the six months ended June 30, 1999 relative
to the same period in 1998
Research and Development. Research and development expenses were 12.8% of
revenue for the six months ended June 30, 1999 and 14.4% of revenue for the six
months ended June 30, 1998. Total research and development expenditures for the
six months ended June 30, 1999 of $5.0 million represents an increase of $1.5
million (44.0%) as compared to the same period in 1998. The increase in the
dollar amount of research and development expenses in 1998 is a result of the
continued development and enhancement of the Company's Advantex products. The
Company intends to continue committing a significant portion of its product
revenues to enhance existing products and develop new products, resulting in an
anticipated increase in the dollar amounts of research and development expenses.
-13-
<PAGE>
Six months ended June 30, 1999 Compared to the Six months ended June 30, 1998
(Continued)
Sales and Marketing. Sales and marketing expenses were 19.6% of revenue for
the six months ended June 30, 1999 and 23.4% of revenue for the six months ended
June 30, 1998. This represents an increase of $2.0 million (35.4%) as compared
to the same period in 1998. The increase was primarily due to an increase in
marketing, sales and technical support personnel supporting 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 10.6%
of revenue for the six months ended June 30, 1999 and 9.6% of revenue for the
six months ended June 30, 1998. Total general and administrative expenses of
$4.1 million represents an increase of $1.8 million (76.4%) for the six months
ended June 30, 1999, as compared to the same period in 1998. The Company expects
that its general and administrative expenses will increase in the future as the
Company expands its staffing, information systems and other administrative costs
to support its expanding operations.
Other Income. Other income (expense) was ($736,244) for the six months
ended June 30, 1999 as compared to $300,000 for the six months ended June 30,
1998. Substantially all of other income relates to fluctuations in the
currencies of the Company's foreign operations and interest income on cash and
short-term deposits.
Income Taxes. The Company provided for income taxes on earnings for the six
months ended June 30, 1999 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 and other foreign jurisdictions' tax rates.
-14-
<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 June 30, 1999, the Company had cash
and cash equivalents of $20.7 million and working capital of $32.4 million.
Cash provided by (used in) operating activities was $282,000 for the six
months ended June 30, 1999 compared to $4.7 million for the six months ended
June 30, 1998. The inflow of cash from operating activities, during the period
is generated from the $4.3 million net income after adjusting for depreciation
and amortization and deferred taxes offset by $4.0 million increase in non-cash
working capital.
Cash provided by financing activities of $18.3 million during the six
months ended June 30, 1999 primarily relates to proceeds from common shares
issued for $17.4 million pursuant to the exercise of stock options, purchases
pursuant to the Company's Employee Share Purchase Plan and net proceeds of $14.7
million from a public share issue of 575,000 shares completed January 29, 1999.
The Company also had proceeds of $1.2 million from its capital lease program.
The capital leases are to be repaid evenly over a 36 month period ending
September 30, 2002, bear interest at 7.23% and are secured by certain computer
hardware and software assets of the Company.
Cash used in investing activities was $3.2 million for the six months ended
June 30, 1999 as compared to $1.2 million for the six months ended June 30,
1998. Total investing activity during the six months ended June 30, 1999 and
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.
Existing sources of liquidity at June 30, 1999 include $20.7 million of
cash and cash equivalents and up to $8.0 million available under the Company's
operating line of credit. The Company also had provided as performance bonds an
irrevocable revolving letter of credit expiring May 28, 2001 for Belgian Franc
101,068,000 ($4.2 million) and a bank guarantee expiring February 2, 2000 in the
amount of Danish Kroner 9,740,000 ($2.2 million). 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 June 30, 1999, 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. The Company may look to
obtain additional equity or debt financing to fund future growth or other
investing activities, which may or may not be available on attractive terms, or
at all, and may be dilutive to current or future shareholders.
Year 2000
General
The Year 2000 issue is the result of computer programs being written using
two digits rather than four digits to define the applicable year. Computer
equipment, software and other devices with embedded technology that are
time-sensitive may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in system failures or miscalculations causing
disruption of operations, including, among other things, a temporary inability
to manufacture products, acquire or ship products, process transactions, send
invoices, or engage in other normal business activities. The inability of
business processes to function correctly in 2000 could have serious adverse
effects on companies and entities throughout the world.
In 1997 the Company established a team of professionals within the company
to plan and implement its year 2000 compliance initiative.
-15-
<PAGE>
Year 2000 (Continued)
The Company has developed and is implementing a Company-wide Year 2000 Plan
to ensure that its computer equipment and software with date sensitive embedded
technology will be able to distinguish between the year 1900 and the year 2000
and will function properly with respect to all dates (referred to as "Year 2000
Compliant"). The Company presently believes that its planned modifications or
replacements of certain existing computer equipment and software will be
completed on a timely basis so as to minimize any of the potential Year
2000-related disruptions or malfunctions of its computer equipment and software.
The Company's Plan consists of two major focus areas: 1) internal systems
including personal computing, facilities and business systems and 2) third-party
considerations including products and suppliers. The tasks common to each of
these areas are: 1) the identification and assessment of Year 2000 issues; 2)
assessment of remediation required to meet compliance requirements; 3)
prioritization of risk; 4) remediation and testing; and 5) contingency planning
Projects
Internal systems
The Company's compliance team has evaluated all significant internal
personal computing and business systems that are critical to the ongoing
operation of the Company and has identified computer software and hardware
upgrades and replacements necessary to make such systems Year 2000 Compliant.
Remediation requirements related to the replacement and upgrades to specific
computer hardware and software have been determined and are expected to be
completed by the end of the third quarter of 1999.
The assessment of the Company's facilities identified certain upgrade
requirements which at the end of the second quarter of 1999 have been completed.
The Company is reviewing its present financial systems and its long-term
requirements. Any decision to purchase and implement new systems will include
the requirement that such systems be Year 2000 compliant.
Third-party considerations
Customers
The Company is a software developer and has been testing its software
internally and in conjunction with customers for Year 2000 readiness. The
Company believes that all its current products are Year 2000 compliant and
believes that it has identified and informed all its customers of the steps that
are required to make existing software in the hands of customers Year 2000
compliant. The Company's software runs on a variety of computers and operating
systems which are not the responsibility of the Company but for which the
company has suggested to customers to apply available Year 2000 remedies. The
Company is assisting its customers with Year 2000 validation efforts, including
synchronization of Year 2000 upgrades and testing to eliminate implementation of
non-compatible solutions by customers.
Suppliers
The Company has identified its third-party software and, in conjunction
with its vendors, has considered aspects of possible remediation requirements.
After review and consultation, the Company has determined that no updates are
required to make existing software Year 2000 compliant. Business operations will
also be dependent on the Year 2000 readiness of infrastructure suppliers such as
banking, communications, transportation and other services. In this environment,
there will likely be instances of failure that could cause disruptions in
business processes. The likelihood and effects of such failures in
infrastructure systems and the supply chain cannot be estimated.
-16-
<PAGE>
Year 2000 (Continued)
Costs
The total cost of the Company's Year 2000 Plan is not considered material
to the Company's financial condition. The estimated total cost of the Plan is
expected to be approximately $400,000, and is being funded through operating
cash flow. To June 30, 1999, the Company has incurred approximately $325,000 in
costs related to its Year 2000 identification, assessment, remediation and
testing efforts. At June 30, 1999 the major portion of the of the Company's Year
2000 compliance efforts have been completed with the balance to be expended
thereafter monitoring the compliance process. None of the Company's other
projects have been delayed or deferred as a result of the implementation of the
Year 2000 Compliance Plan.
Risks
To date, the Company has not incurred, and does not expect to incur,
material costs to review and remedy Year 2000 compliance problems. Although the
Company believes that its products are Year 2000 compliant, failure to provide
Year 2000 compliant solutions to its customers or to receive such business
solutions from its suppliers could have a material adverse effect on the
Company's business, financial condition, operating results and cash flows.
Furthermore, the Company may incur additional expense if its products are used
by customers on third-party hardware and operating systems that are not Year
2000 compliant, which could result in a material adverse effect on the Company's
business, operating results, financial condition, and cash flows. There can be
no assurance that the systems or products of other entities, including the
Company's suppliers on which the Company relies, disruptions in the economy
generally resulting from Year 2000, issues, and disruptions caused by customers
deferring their purchase decisions or implementation plans due to their own
internal Year 2000 remediation activities, will not have a material adverse
effect on the Company.
Contingency Plans
As part of its continuing assessment of its Year 2000 compliance
requirements, the Company has developed contingency plans to deal with what it
feels is its worst case scenario. This contingency plan revolves around a staff
team of information technology professionals that will be available during the
Year 2000 date change period and the facilities to support that staff.
The preceding "Year 2000" discussion contains various forward-looking
statements which represent the Company's beliefs or expectations regarding
future events. These forward-looking statements include the Company's
expectations and beliefs as to the most likely scenarios or occurrences. All
forward-looking statements, however, involve a number of risks which and
uncertainties that could cause actual results to differ from projected results.
-17-
<PAGE>
ITEM 3: QUANTITIATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's primary market risk is foreign currency exchange rates. The
Company's foreign currency exposure is primarily with the United States and
Western Europe. Foreign exchange risk arises when the Company enters into
transactions denominated in local currencies and not the functional currency.
The Company has established procedures to manage sensitivity to foreign
currency exchange rate market risk. These procedures include the monitoring of
the Company's net exposure to each foreign currency and the use of foreign
currency forward contracts to hedge firm exposures to currencies other than the
Canadian and United States dollars. The Company has operations in the United
States in addition to its Canadian operations and did not hedge these exposures
in 1999. However, the Company may from time-to-time hedge any net exposure to
the United States dollar.
As of June 30, 1999, the potential reduction in future earnings from a
hypothetical instantaneous 10% change in quoted foreign currency exchange rates
applied to the foreign currency sensitive contracts would be approximately $3.5
million. The majority of the Company's foreign exchange exposure is to United
States dollar. The foreign currency sensitivity model is limited by the
assumption that all foreign currencies to which the Company is exposed, would
simultaneously change by 10%. The sensitivity model does not include the
inherent risks associated with anticipated future transactions denominated in
foreign currencies or future forward contracts entered into for hedging
purposes.
The Company has entered into foreign currency forward contracts in respect
of net exposures under customer contracts to the Belgian Franc 134,000,000 ($5.6
million) and 104,000,000 ($4.3 million), Danish Kroner 5,000,000 ($1.1 million)
and Great Britain Pounds 150,000, 350,000 and 180,000 ($349,110, $814,660 and
$418,860, respectively). Effective January 1, 1999, the Belgian Franc is tied to
the Euro, the new European Union common currency. The effect of the these
transactions is to reduce the potential reduction in future earnings from a
hypothetical instantaneous 10% change in quoted foreign currency exchange rates
to $2.7 million.
The Company believes that it does not have any material exposure to
interest or commodity risks. The Company is exposed to economic and political
changes in international markets where the Company competes such as inflation
rates, recession, foreign ownership restrictions, domestic and foreign
government spending, budgetary and trade policies and other external factors
over which the Company has no control.
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, results of operations and cash flows.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
-18-
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 1999 Annual General Meeting of Shareholders was held on May
6, 1999. A total of 3,692,158 shares of the Company were represented in person
or by proxy at the Meeting, consisting of 50.98% of the total number of common
shares of the Company outstanding on March 31, 1999, the record date for the
Meeting.
At the Meeting, all of the current Directors of the Company, were
re-elected to serve as Directors until the 2000 Annual General Meeting or until
their earlier retirement, resignation, or removal. The following table sets
forth the voting in the election for Directors:
<TABLE>
Votes Cast Votes Cast Votes
Nominee For Nominee Against Withheld Abstentions Not Voted
- ------------------------- --------------- -------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Erik Dysthe 3,689,939 500 0 580 1,139
Kenneth R. Miller 3,689,639 500 0 880 1,139
John T. McLennan 3,689,239 900 0 880 1,139
Terrence P. McGarty 3,630,629 29,500 30,010 880 1,139
Robert C. Harris, Jr. 3,688,789 1,350 0 880 1,139
Gerald F. Chew 3,630,229 29,900 30,010 880 1,139
Bruno Ducharme 3,630,329 29,800 30,010 880 1,139
Marc Rochefort 3,630,629 29,500 30,010 880 1,139
</TABLE>
The shareholders approved the proposed 1999 Stock Option Plan. The
following table sets forth the information regarding the voting on the proposal:
<TABLE>
Votes Cast For Votes Cast Against Votes Withheld Abstentions Not Voted
- ----------------------- ------------------- ------------------- ------------------ --------------------
<S> <C> <C> <C> <C>
1,862,838 949,231 0 2,057 878,031
</TABLE>
The shareholders approved the proposed 1999 Stock Purchase Plan. The
following table sets forth the information regarding the voting on the proposal:
<TABLE>
Votes Cast For Votes Cast Against Votes Withheld Abstentions Not Voted
- ----------------------- ------------------- ------------------- ------------------ --------------------
<S> <C> <C> <C> <C>
2,809,081 3,988 0 1,057 878,031
</TABLE>
The shareholders ratified the appointment of Deloitte & Touche LLP as the
Company's Auditors for the fiscal year ending December 31, 1999 and
authorization for the directors to fix the remuneration of the auditors. The
following table sets forth the information regarding the voting on the proposal:
<TABLE>
Votes Cast For Votes Cast Against Votes Withheld Abstentions Not Voted
- ----------------------- ------------------- ------------------- ------------------ --------------------
<S> <C> <C> <C> <C>
3,679,841 380 0 10,798 1,139
</TABLE>
The shareholders ratified the adoption of a Shareholder Rights Plan. The
following table sets forth the information regarding the voting on the proposal:
<TABLE>
Votes Cast For Votes Cast Against Votes Withheld Abstentions Not Voted
- ---------------------- ------------------- ------------------- ------------------ --------------------
<S> <C> <C> <C> <C>
1,838,199 944,680 0 31,248 878,031
</TABLE>
-19-
<PAGE>
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits.
None.
b) Reports on Form 8-K
During the three month period ended June 30, 1999, the Registrant filed the
following reports on Form 8-K:
1. On May 19, 1999, the Registrant reported that it had mailed its Notice
of Annual and Special Meeting of Shareholders, with accompanying proxy
materials, to its shareholders on March 25, 1999.
2. On May 20, 1999, the Registrant reported that, on April 27, 1999, it
had filed a Material Change Report with the Provincial Securities
Commissions in Canada announcing that the Registrant had chosen to
sell its transportation business unit.
-20-
<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: August 13, 1999 By: /s/ KENNETH R. MILLER
-----------------------------------
Name: Kenneth R. Miller
Title: Chief Executive Officer
Date: August 13, 1999 By: /s/ VERNE D. PECHO
-----------------------------------
Name: Verne D. Pecho
Title: Vice President Finance &
Administration and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
-21-
