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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 March 31, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ----------- to -----------.
Commission file number 0-28968
MDSI MOBILE DATA SOLUTIONS INC.
(Exact name of registrant as specified in its charter)
CANADA NOT APPLICABLE
(Jurisdiction of incorporation) (I.R.S. Employer Identification No.)
10271 Shellbridge Way
Richmond, British Columbia,
Canada V6X 2W8
(604) 207-6000
(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 March 31, 1999 was 7,241,664.
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MDSI MOBILE DATA SOLUTIONS INC.
<PAGE>
INDEX TO THE FORM 10-Q
For the quarterly period ended March 31, 1999
<TABLE>
Page
<S> <C>
Part I - FINANCIAL INFORMATION
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 .....16
Part II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS .............................................17
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS .....................17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES ...............................17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ...........17
ITEM 5. OTHER INFORMATION .............................................17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ..............................17
SIGNATURES ........................................................................18
</TABLE>
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<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
----------------------------------------
March 31, December 31,
1999 1998
------------------ ------------------
(Restated)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents...................................... $23,260,398 $ 6,136,711
Accounts receivable, net
Trade....................................................... 16,602,414 16,603,944
Unbilled.................................................... 8,106,288 7,789,586
Prepaid expenses .............................................. 2,973,160 3,458,348
Deferred income taxes.......................................... 914,474 1,016,766
Current portion of lease receivable............................ 560,583 560,478
------------------ ------------------
52,417,317 35,565,833
Lease receivable.................................................... 642,424 845,889
Capital assets, net................................................. 5,734,395 5,137,296
Intangible assets, net.............................................. 3,035,952 3,130,334
------------------ ------------------
61,830,088 44,679,352
Assets of discontinued operations (note 4).......................... 6,935,990 11,889,004
------------------ ------------------
Total assets........................................................ $ 68,766,078 $ 56,568,356
================== ==================
Liabilities and stockholders' equity
Current liabilities
Accounts payable .............................................. $ 3,947,957 $ 7,140,470
Accrued liabilities ........................................... 4,298,867 3,320,436
Income Taxes Payable .......................................... 1,448,291 2,442,571
Deferred revenue .............................................. 8,517,582 7,317,895
Current portion of long-term debt ............................. 72,800 377,332
Current obligations under capital leases ...................... 1,244,797 872,917
------------------ ------------------
19,530,294 21,471,621
Obligations under capital leases.................................... 2,526,105 1,907,037
Liabilities of discontinued operations (note 4)..................... 4,627,341 2,370,579
------------------ ------------------
Total liabilities................................................... 26,683,740 25,749,237
------------------ ------------------
Stockholders' equity
Common stock................................................... 60,846,289 44,637,778
Treasury stock................................................. (122,743) (122,743)
Deficit........................................................ (18,641,208) (13,695,916)
------------------ ------------------
42,082,338 30,819,119
------------------ ------------------
Total liabilities and stockholders' equity.......................... $ 68,766,078 $ 56,568,356
=================== ==================
</TABLE>
See notes to consolidated financial statements
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<PAGE>
MDSI MOBILE DATA SOLUTIONS INC.
Consolidated Statements of Operations and Deficit
(Expressed in Canadian dollars)
(Unaudited)
<TABLE>
Three months ended March 31,
----------------------------------------
1999 1998
------------------ ------------------
(Restated)
<S> <C> <C>
Revenue
Software and services................................................ $ 13,221,367 $ 7,823,224
Third party products and services.................................... 4,086,021 867,846
Maintenance and support.............................................. 1,524,179 1,132,811
------------------ ------------------
18,831,567 9,823,881
Direct cost............................................................. 8,798,732 4,502,603
------------------ -------------------
Gross profit............................................................ 10,032,835 5,321,278
------------------ -------------------
Operating expenses
Research and development............................................. 2,439,547 1,653,078
Sales and marketing.................................................. 3,879,986 2,720,129
General and administrative........................................... 2,036,620 1,122,727
Amortization of intangible assets.................................... 94,383 94,383
------------------ -------------------
8,450,536 5,590,317
------------------ -------------------
Operating income (loss)................................................. 1,582,299 (269,039)
Other income (expense).................................................. (245,428) 177,441
------------------ -------------------
Income (loss) before tax provision...................................... 1,336,871 (91,598)
Provision for income taxes.............................................. (429,376) (1,341)
------------------ -------------------
Net income (loss) from continuing operations............................ 907,495 (92,939)
Profit (loss) from discontinued operations (note 4)..................... (5,852,786) 169,201
------------------ -------------------
Net income (loss)....................................................... (4,945,291) 76,262
Deficit, beginning of period............................................ (13,695,916) (19,194,860)
------------------ -------------------
Deficit, end of period.................................................. $ (18,641,207) $(19,118,598)
================== ===================
Earnings per Common Share
Earnings (loss) from continuing operations
Basic................................................................. $ 0.13 $ (0.01)
================== ===================
Diluted............................................................... $ 0.12 $ (0.01)
================== ===================
Net earnings (loss)
Basic................................................................. $ (0.70) $ 0.01
================== ===================
Diluted............................................................... $ (0.70) $ 0.01
================== ===================
Weighted average Common Shares outstanding
Basic................................................................. 7,021,007 6,466,336
================== ===================
Diluted............................................................... 7,628,799 6,621,553
================== ===================
</TABLE>
See notes to consolidated financial statements
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<PAGE>
MDSI MOBILE DATA SOLUTIONS INC.
Consolidated Statements of Cash Flows
(Expressed in Canadian dollars)
(Unaudited)
<TABLE>
Three months ended March 31,
----------------------------------------
1999 1998
------------------- ------------------
(Restated)
<S> <C> <C>
Cash flow from operating activities
Net income (loss)for the period................................. $ 907,495 $ (92,939)
Items not affecting cash:
Depreciation and amortization.............................. 564,176 422,593
Deferred income taxes...................................... 102,292 819,056
Changes in non-cash operating working capital items........ (1,838,764) 1,361,534
------------------- ------------------
Net cash provided by (used in) operating activities............. (264,801) 2,510,244
------------------- ----
- --------------
Cash flows from financing activities
Issuance of common stock........................................ 16,208,511 285,420
Repayment of long-term debt..................................... (304,532) -
Proceeds from capital leases.................................... 990,947 990,767
------------------- ------------------
Net cash provided by financing activities....................... 16,894,926 1,276,187
------------------- ------------------
Cash flows from investing activities
Long term lease receivable...................................... 203,465 -
Acquisition of capital assets................................... (1,066,893) (520,009)
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Net cash used in investing activities........................... (863,428) (520,009)
------------------- ------------------
Cash provided by continuing operations............................... 15,766,697 3,266,422
Cash provided by (used for) discontinued operations (note 4)......... 1,356,990 (1,229,592)
------------------- ------------------
Net cash inflow...................................................... 17,123,687 2,036,830
Cash and cash equivalents, beginning of period....................... 6,136,711 110,117
------------------- ------------------
Cash and cash equivalents, end of period............................. $ 23,260,398 $ 2,146,947
=================== ==================
</TABLE>
See notes to consolidated financial statements
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<PAGE>
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the three months ended March 31, 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 decided 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:
Three months ended March 31,
-----------------------------------
1999 1998
---------------- ---------------
Canada $ 1,136,586 $ 152,145
United States 14,179,353 9,209,930
Europe 2,873,941 217,086
Asia 641,687 -
South America - 244,720
---------------- ---------------
$ 18,831,567 $ 9,823,881
================ ===============
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<PAGE>
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the three months ended March 31, 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:
Three months ended
March 31,
---------------------------------
1999 1998
---------------- --------------
Weighted average shares outstanding ......... 7,021,007 6,466,336
Common stock equivalents
Stock options........................... 607,792 143,040
Share purchase warrants ................ 12,177
---------------- --------------
Total shares for diluted earnings (loss) 7,628,799 6,621,553
================ ==============
4. DISCONTINUED OPERATIONS
In February 1999, the Company adopted a plan for the sale of the Transportation
Business Unit which develops mobile workforce software for the taxi, courier and
roadside recovery market. The transaction is expected to be completed in 1999.
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,
an estimate of sale proceeds, costs of disposition and expected results of
operations from the measurement date to the expected disposal date.
The Company is in the preliminary stages of the selling process, and it is
possible that the actual selling price or costs or results of operations could
differ from the Company's current estimates which could result in material
differences from the results presented here.
Summarized financial information of the discontinued operations is as follows:
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<PAGE>
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the three months ended March 31, 1999
(Expressed in Canadian dollars)
(Unaudited)
4. DISCONTINUED OPERATIONS (continued)
<TABLE>
Results of Discontinued Operations
- -------------------------------------------------------------------------------------------
March 31, 1999 March 31, 1998
------------------ ------------------
<S> <C> <C>
Revenues $ 2,890,177 $ 4,256,483
================== ==================
Loss before income taxes (2,375,492) 293,886
Income tax - (124,685)
------------------ ------------------
(2,375,492) 169,201
Estimated loss on future operations and disposal
net of income taxes (3,477,294) -
================== ==================
Income (Loss) from discontinued operations $(5,852,786) $ 169,201
================== ==================
Financial position of discontinued operations
- -------------------------------------------------------------------------------------------
March 31, 1999 December 31, 1998
------------------ ------------------
Current assets $ 6,442,979 $ 9,147,621
Long term assets 493,011 2,741,383
================== ==================
Total assets of discontinued operations $ 6,935,990 $ 11,889,004
================== ==================
Current liabilities $ 4,627,341 $ 2,370,579
Long term liabilities - -
================== ==================
Total liabilities of discontinued operations $ 4,627,341 $ 2,370,579
================== ==================
Changes in cash flow of discontinued operations
- ------------------------------------------------------------------------------------------
March 31, 1999 March 31, 1998
------------------ -----------------
Operating activities $ 1,451,829 $ (1,134,806)
Investing activities (94,839) (94,786)
Financing activities - -
================== =================
Cash provided by (used for) discontinued
operations $ 1,356,990 $ (1,229,592)
================== =================
</TABLE>
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<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements and information contained in this Form 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, 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 Form 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.
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
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<PAGE>
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. 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.
-10-
<PAGE>
Results of Operations
In February 1999, the Company decided to dispose of its Delivery segment
(Transportation Business Unit). As a result of this decision, the Delivery
segment has been classified as a discontinued operation and the results of
operation, financial position and changes in cash flow for this segment have
been segregated from those of continuing operations. The following discussion
and analysis excludes the Delivery segment for the current and corresponding
prior period.
The first quarter 1999 loss of $4.9 million was comprised of $907,000
after-tax profit from continuing operations offset by an after-tax loss of $5.9
million on discontinued operations. The loss on discontinued operations resulted
from an after-tax loss on operations of $2.4 million and an after-tax loss on
future operations prior to disposal and loss on disposal of $3.5 million. The
operating loss includes not only the results of operations but also foreign
exchange losses and provision against current contracts to the measurement date
of February 25, 1999. The provision for estimated loss on future operations
includes the operating results from measurement date forward and the estimated
costs of disposal, severance costs and loss on disposal.
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 March 31,
------------------------------------
1999 1998
----------------- ---------------
(Unaudited) (Unaudited)
Revenue
<S> <C> <C>
Software and services................................................ 70.2% 79.7%
Third party products and services.................................... 21.7 8.8
Maintenance and support.............................................. 8.1 11.5
----------------- ---------------
100.0 100.0
Direct costs............................................................ 46.7 45.8
----------------- ---------------
Gross profit............................................................ 53.3 54.2
----------------- ---------------
Operating expenses
Research and development............................................. 13.0 16.8
Sales and marketing.................................................. 20.6 27.7
General and administrative........................................... 10.8 11.4
Amortization of intangible assets.................................... 0.5 1.0
----------------- ---------------
44.9 56.9
----------------- ---------------
Operating income........................................................ 8.4 (2.7)
Other income (expense).................................................. (1.3) 1.8
----------------- ---------------
Income before tax provision............................................. 7.1 (0.9)
Provision for income taxes.............................................. (2.3) (0.0)
----------------- ---------------
Net income (loss)from continuing operations............................. 4.8 (0.9)
Income (loss) from discontinued operations.............................. (31.1) 1.7
----------------- ---------------
Net income (loss)....................................................... (26.3)% 0.8%
================= ===============
</TABLE>
-11-
<PAGE>
Three Months Ended March 31, 1999 Compared to the Three Months Ended March 31,
1998
Revenue. Revenue increased by $9.0 million (91.7%) for the three months
ended March 31, 1999 as compared to the three months ended March 31, 1998. This
increase was due to the increase in revenue for both software and services and
third party products and services delivered during the first quarter of 1999
relative to the same period in 1998.
Software and services revenue increased by $5.4 million (69.0%) for the
three months ended March 31, 1999 as compared to the three months ended March
31, 1998. This increase is due to additional revenue from customers in both the
telecommunications and utility markets.
Third party products and services revenue increased by $3.2 million
(370.8%) for the three months ended March 31, 1999 as compared to the three
months ended March 31, 1998. The increase in third party products and services
revenue is due primarily to revenue earned in the first quarter of 1999 from
certain third party deliveries to customers in the utility market. 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 $1.5 million for the three months ended
March 31, 1999 as compared to $1.1 million for the three months ended March 31,
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 46.7% of revenue for the three months ended
March 31, 1999 as compared to 45.8% for the three months ended March 31, 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 53.3% of revenue for the three months
ended March 31, 1999 as compared to 54.2% for the three months ended March 31,
1998. The decrease in gross margin as a percentage of revenue relates primarily
to the change in the mix of revenues during the period. During the three months
ended March 31, 1999 there was an increase in third party products and services
revenue which typically has a lower gross margin, than software and services
revenue , which typically has a higher gross margin, relative to the same period
in 1998.
Research and Development. Research and development expenses were 13.0% of
revenue for the three months ended March 31, 1999 and 16.8% of revenue for the
three months ended March 31, 1998. Total research and development expenditures
for the three months ended March 31, 1999 of $2.4 million represents an increase
of $786,000 (47.6%) 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
anticipates continuing to commit a significant portion of its product revenues
to enhancement of existing products and the development of new products,
resulting in an anticipated increase in the dollar amounts of research and
development expenses.
Sales and Marketing. Sales and marketing expenses were 20.6% of revenue for
the three months ended March 31, 1999 and 27.7% of revenue for the three months
ended March 31, 1998. This represents an increase of $1.2 million (42.6%) as
compared to the same period in 1998. The increase was primarily due to an
increase in marketing, sales and technical support personnel to support the
Company's increased marketing activities worldwide. The Company
-12-
<PAGE>
Three Months Ended March 31, 1999 Compared to the Three Months Ended March 31,
1998 (Continued)
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 efforts.
General and Administrative. General and administrative expenses were 10.8%
of revenue for the three months ended March 31, 1999 and 11.4% of revenue for
the three months ended March 31, 1998. Total general and administrative expenses
of $2.0 million represents an increase of $914,000 (81.4%) for the three months
ended March 31, 1999 as compared to the same period in 1998. The increase
represents expanded administrative activity to support the Company's growth and
the Company expects that the dollar amounts will continue to increase as the
Company continues to expand its staffing, information systems and other
administrative requirements necessary to support this growth.
Other Income (Expense). Other income (expense) was $(245,000) for the three
months ended March 31, 1999 as compared to $177,000 for the three months ended
March 31, 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 March 31, 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.
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 March 31, 1999, the Company had cash
and cash equivalents of $23.3 million and working capital of $32.9 million.
Cash provided by (used in) operating activities was $(265,000) for the
three months ended March 31, 1999 compared to $2.5 million for the three months
ended March 31, 1998. The outflow of cash from operating activities, after
adding back depreciation and amortization of $564,000, is due to a net decrease
in non-cash working capital items of $1.8 million. The net decrease in non-cash
operating working capital items of $1.8 million is due primarily to a net
decrease in trade payables of $3.1 million which was offset by an increase in
deferred revenue of $1.2 million.
Cash provided by financing activities of $16.9 million during the three
months ended March 31, 1999 primarily relates to proceeds from common shares
issued for $16.2 million pursuant to the exercise of stock options and the
Company's Employee Share Purchase Plan and net proceeds of $14.7 million from a
public share issue of 575,000 shares. The Company also had proceeds of $1.0
million from its capital lease program. The capital leases are to be repaid
evenly over a 36 month period ending April 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 $863,000 for the three months ended
March 31, 1999 as compared to $520,000 for the three months ended March 31,
1998. Total investing activity during the three months ended March 31, 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 March 31, 1999 include $23.3 million of
cash and cash equivalents and up to $8.0 million available under the Company's
operating line of credit. At March 31, 1999, (pound)200,000 of such amount was
committed to securing any overdraft position which may arise in the accounts of
MDSI UK. The Company also had provided as two 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 March 31, 1999, the Company had no borrowings under the line
of credit.
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Liquidity and Capital Resources (continued)
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.
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 avoid any of the potential Year
2000-related disruptions of 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 identified 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.
Also, all 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 second quarter of 1999.
The assessment of the Company's facilities identified certain upgrade
requirements which are also expected to be completed by the end of the second
quarter of 1999. 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.
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<PAGE>
Year 2000 (continued)
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 has ensured 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 tracking progress on all customer 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 all 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 were
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.
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. As at March 31, 1999, the Company had incurred approximately $235,000
in costs related to its Year 2000 identification, assessment, remediation and
testing efforts. The major portion of the remaining amount of the estimate is
expected to have been incurred by the end of the second quarter of 1999 when the
Company's Year 2000 compliance efforts are expected to be completed with the
balance 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 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.
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.
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<PAGE>
Year 2000 (continued)
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.
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 and the Great Britain pound. The Company has
operations in the United States and Great Britain in addition to its Canadian
operations and did not hedge these exposures in 1999. However, the Company may
from time-to-time hedge any net exposure to the United States dollar and the
Great Britain pound.
As of March 31, 1999, the potential reduction in future earnings from a
hypothetical instantaneous 10% change in quoted foreign currency exchange rates
applied to the foreign currency sensitive contracts would be approximately $3.7
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%. Such synchronized changes are unlikely to occur.
The sensitivity model does not include the inherent risks associated with
anticipated future transactions denominated in foreign currencies or future
forward contracts entered into for hedging purposes.
The Company has entered into foreign currency forward contracts in respect
of net exposures under customer contracts to the Belgian Franc and Danish
Kroner. 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 $2.8
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 and other external factors over
which the Company has no control; domestic and foreign government spending,
budgetary and trade policies.
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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
a) Sales of Unregistered Securities
On January 29, 1999, the Company sold 575,000 common shares in a public
offering outside the United States pursuant to the terms of an Underwriting
Agreement among the Company, Sprott Securities Limited, Dundee Securities
Corporation, First Associates Investments Inc. and Pacific International
Securities Inc. The aggregate offering price was $15,956,250 or 27.75 per common
share. The aggregate underwriting discounts and commissions paid in the offering
were $797,812.50 or 5% of the aggregate offering price. The offering was made
outside the United States pursuant to the provisions applicable to Category 1
issuers under Regulation S of the Securities Act of 1933, as amended.
b) Use of Proceeds from Sales of Registered Securities
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
None.
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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: May 14, 1999 By: /s/ KENNETH R. MILLER
-----------------------------------
Name: Kenneth R. Miller
Title: Chief Executive Officer
Date: May 14, 1999 By: /s/ VERNE D. PECHO
-----------------------------------
Name: Verne D. Pecho
Title: Vice President Finance &
Administration and Chief
Financial Officer (Principal
Financial and Accounting Officer)
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