================================================================================
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, 2000
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 7,680,797.
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<PAGE>
MDSI MOBILE DATA SOLUTIONS INC.
INDEX TO THE FORM 10-Q
For the quarterly period ended March 31, 2000
<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 ....................................................................10
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>
<PAGE>
Part I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MDSI MOBILE DATA SOLUTIONS INC.
Consolidated Balance Sheets
(Expressed in United States dollars)
(Unaudited)
<TABLE>
As at
---------------------------------------
March 31, December 31,
2000 1999
------------------ ----------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents........................................ $16,707,829 $ 14,750,040
Accounts receivable, net
Trade......................................................... 9,556,909 13,151,828
Unbilled...................................................... 10,080,135 5,595,902
Prepaid expenses ................................................ 1,854,575 1,117,380
Deferred income taxes............................................ 577,427 577,427
Current portion of lease receivable.............................. 392,207 386,861
------------------ ----------------
39,169,082 35,579,438
Lease receivable.................................................... 33,645 133,723
Investments......................................................... 4,884,221 4,140,457
Capital assets, net................................................. 7,212,113 6,386,647
Intangible assets, net.............................................. 1,828,494 1,907,297
------------------ ----------------
53,127,555 48,147,562
Assets of discontinued operations (note 4).......................... 1,436,819 960,610
------------------ ----------------
Total assets....................................................... $ 54,564,374 $ 49,108,172
================== ================
Liabilities and stockholders' equity
Current liabilities
Accounts payable ................................................ $ 1,522,996 $ 1,571,143
Accrued liabilities ............................................. 2,956,369 2,466,095
Income Taxes Payable ............................................ 1,668,684 1,567,671
Deferred revenue................................................. 6,341,576 4,724,850
Current obligations under capital leases ........................ 1,299,639 1,176,957
--------------------- -------------------
13,789,264 11,506,716
Obligations under capital leases..................................... 1,942,630 2,422,525
Liabilities of discontinued operations (note 4) ..................... 440,226 173,424
--------------------- -------------------
Total liabilities.................................................... 16,172,120 14,102,665
--------------------- -------------------
Stockholders' equity
Common stock..................................................... 47,849,178 44,814,259
Treasury stock................................................... (85,043) (85,043)
Deficit.......................................................... (8,681,777) (9,294,272)
Accumulated comprehensive income (loss) (note 1a)................ (690,104) (429,437)
--------------------- -------------------
38,392,254 35,005,507
--------------------- -------------------
Total liabilities and stockholders' equity........................... $ 54,564,374 $ 49,108,172
===================== ===================
</TABLE>
See notes to consolidated financial statements
-3-
<PAGE>
MDSI MOBILE DATA SOLUTIONS INC.
Consolidated Statements of Operations and Deficit
(Expressed in United States dollars)
(Unaudited)
<TABLE>
Three months ended March 31,
----------------------------------------
2000 1999
------------------ -----------------
<S> <C> <C>
Revenue
Software and services.............................................. $ 9,669,190 $ 8,748,341
Third party products and services.................................. 497,696 2,703,647
Maintenance and support............................................ 2,024,346 1,008,522
------------------ -----------------
12,191,232 12,460,510
Direct cost........................................................... 4,588,533 5,814,621
------------------ -----------------
Gross profit.......................................................... 7,602,699 6,645,889
------------------ -----------------
Operating expenses
Research and development........................................... 1,938,706 1,614,204
Sales and marketing................................................ 2,750,406 2,567,317
General and administrative......................................... 1,728,217 1,347,595
Amortization of intangible assets.................................. 69,810 69,810
------------------ -----------------
6,487,139 5,598,926
------------------ -----------------
Operating income...................................................... 1,115,560 1,046,963
Other income (expense)................................................ (212,365) (162,395)
------------------ -----------------
Income before tax provision........................................... 903,195 884,568
Provision for income taxes............................................ (290,700) (284,110)
------------------ -----------------
Net income from continuing operations................................. 612,495 600,458
Loss from discontinued operations (note 4)............................ - (3,872,683)
------------------ -----------------
Net income (loss)..................................................... 612,495 (3,272,225)
Deficit, beginning of period.......................................... (9,294,272) (10,298,621)
------------------ -----------------
Deficit, end of period................................................ $(8,681,777) $(13,570,846)
================== =================
Earnings per Common Share
Earnings (loss) from continuing operations
Basic............................................................... $ 0.08 $ 0.09
================== =================
Diluted............................................................. $ 0.07 $ 0.08
================== =================
Net earnings (loss)
Basic............................................................... $ 0.08 $ (0.47)
================== =================
Diluted............................................................. $ 0.07 $ (0.47)
================== =================
Weighted average Common Shares outstanding
Basic............................................................... 7,546,446 7,021,007
================== =================
Diluted............................................................. 8,909,158 7,628,799
================== =================
</TABLE>
See notes to consolidated financial statements
-4-
<PAGE>
MDSI MOBILE DATA SOLUTIONS INC.
Consolidated Statements of Cash Flows
(Expressed in United States dollars)
(Unaudited)
<TABLE>
Three months ended March 31,
----------------------------------
2000 1999
---------------- -------------
<S> <C> <C>
Cash flow from operating activities
Net income from continuing operations............................ $ 612,495 $ 600,458
Items not affecting cash:
Depreciation and amortization............................... 491,632 373,305
Deferred income taxes....................................... - 56,591
Changes in non-cash operating working capital items......... 543,604 (1,342,469)
---------------- -------------
Net cash provided by (used in) operating activities.............. 1,647,731 (312,115)
---------------- -------------
Cash flows from financing activities
Issuance of common stock......................................... 3,034,919 10,717,137
Repayment of long-term debt...................................... - (197,492)
Proceeds from capital leases..................................... (357,213) 686,524
---------------- -------------
Net cash provided by financing activities........................ 2,677,706 11,206,169
---------------- -------------
Cash flows from investing activities
Long term lease receivable....................................... 94,733 119,240
Acquisition of investments....................................... (743,764) -
Acquisition of capital assets.................................... (1,248,543) (755,073)
---------------- -------------
Net cash used in investing activities............................ (1,897,574) (635,833)
---------------- -------------
Cash provided by continuing operations............................... 2,427,863 10,258,221
Cash provided by (used for) discontinued operations (note 4)......... (209,407) 796,514
---------------- -------------
Net cash inflow...................................................... 2,218,456 11,054,735
Effects of foreign exchange fluctuations on cash..................... (260,667) 349,648
Cash and cash equivalents, beginning of period...................... 14,750,040 3,995,775
---------------- -------------
Cash and cash equivalents, end of period............................ $ 16,707,829 $ 15,400,158
================ =============
</TABLE>
See notes to consolidated financial statements
-5-
<PAGE>
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the three months ended March 31, 2000
(Expressed in United States 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, 1999.
For purposes of these consolidated financial statements, the Company
has adopted the U.S. dollar as the reporting currency. This improves
investors' ability to compare the Company's results with those of most
other publicly traded businesses in the industry. These consolidated
financial statements have been translated from Canadian dollars to
U.S. dollars by translating assets and liabilities at the rate in
effect at the respective balance sheet date and revenues and expenses
at the average rate for the reporting period. Any resulting foreign
exchange gains and losses are recorded in accumulated comprehensive
income (loss).
Comprehensive Income for the period can be summarized as follows:
Three months ended March 31,
---------------------------
2000 1999
------------ -----------
Net income from continuing operations $ 612,495 $ 600,458
Comprehensive items
- Translation adjustment (260,667) 349,647
------------ -----------
Comprehensive income for the period $ 351,828 $ 950,105
============ ===========
(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.
-6-
<PAGE>
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the three months ended March 31, 2000
(Expressed in United States dollars)
(Unaudited)
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, 1999, the Company reported only one business segments - Field Service.
On February 1, 2000, the Company announced its intentions to sell its
products of mobile workforce management and wireless connectivity
application software over the internet from a wirelessly-enabled
Applications Service Provider ("ASP) site. As a result of that decision,
the Company now has two business segments.
Business Segments
<TABLE>
Three months ended March 31, 2000
---------------------------------
Field
Service e-Business Total
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $ 12,191,232 $ - $ 12,191,232
Operating earnings 1,628,829 (513,269) 1,115,560
Depreciation & Amortization 491,632 - 491,632
Long Lived Assets 13,958,473 - 13,958,473
Capital Expenditures 1,248,543 - 1,248,543
</TABLE>
Geographic information
The Company earned revenue from sales to customers in the following
geographic locations:
Three months ended March 31,
-----------------------------------------
2000 1999
-------------------- -------------------
Canada.................... $ 236,307 $ 752,058
United States............. 10,563,287 9,382,224
Europe.................... 1,370,251 1,901,635
Asia...................... 21,387 424,593
-------------------- -------------------
$ 12,191,232 $ 12,460,510
==================== ===================
-7-
<PAGE>
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the three months ended March 31, 2000
(Expressed in United States 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
March 31,
-------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Weighted average shares outstanding...... 7,546,446 7,021,007
Common stock equivalents
Stock options....................... 1,362,711 607,792
------------- -------------
Total shares for diluted earnings (loss).. 8,909,158 7,628,799
============= =============
</TABLE>
4. DISCONTINUED OPERATIONS
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.
-8-
<PAGE>
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the three months ended March 31, 2000
(Expressed in United States dollars)
(Unaudited)
4. DISCONTINUED OPERATIONS (continued)
Summarized financial information of the discontinued operations is as
follows:
<TABLE>
Results of discontinued operations
- --------------------------------------------------------------------------------------------------------------------
March 31, 2000 March 31, 1999
------------------------ -------------------------
<S> <C> <C>
Revenues $ - $ 1,912,378
======================== =========================
Loss before income taxes - (1,572,278)
Income tax - -
------------------------ -------------------------
- (1,572,278)
Estimated loss on future operations and disposal
net of income taxes - (2,300,405)
------------------------ -------------------------
Income (loss) from discontinued operations $ - $ (3,872,683)
======================== =========================
Financial position of discontinued operations
- --------------------------------------------------------------------------------------------------------------------
March 31, 2000 December 31, 1999
------------------------ -------------------------
Current assets $ 1,436,819 $ 960,610
Long term assets - -
------------------------ -------------------------
Total assets of discontinued operations $ 1,436,819 $ 960,610
======================== =========================
Current liabilities $ 440,226 $ 173,424
Long term liabilities - -
------------------------ -------------------------
Total liabilities of discontinued operations $ 440,226 $ 173,424
======================== =========================
Changes in cash flow of discontinued operations
- --------------------------------------------------------------------------------------------------------------------
March 31, 2000 March 31, 1999
------------------------ -------------------------
Operating activities $ (209,407) $ 859,232
Investing activities - (62,718)
Financing activities - -
------------------------ -------------------------
Cash provided by (used for) discontinued operations $ (209,407) $ 796,514
======================== =========================
</TABLE>
5. SUBSEQUENT EVENTS
On May 9, 2000, the Company announced it had entered into an agreement to
purchase Connectria Corporation, an online service management and ASP
company through an exchange of shares. The acquisition is expected to close
in the second quarter of 2000.
-9-
<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, 1999.
All financial information in this Form is expressed in United States
dollars unless otherwise noted.
Overview
MDSI develops, markets, implements and supports mobile workforce management
and wireless connectivity software for use by a wide variety of companies that
have substantial mobile workforces, such as utilities, telecommunications
companies, cable companies and insurance companies. MDSI's products are used by
such companies in conjunction with public and private wireless data
communications networks to provide comprehensive solutions for the automation of
business processes associated with the scheduling, dispatching and management of
a mobile workforce. The Company's products provide a cost-effective method for
companies with mobile workers to utilize data communications to communicate with
such workers, and for such workers to interface on a real-time basis with their
corporate information systems.
The Company's revenue is derived from (i) software and services, consisting
of the licensing of software and provision of related services, including
project management, installation, integration, customization and training; (ii)
third party products and services, consisting of the provision of non-MDSI
products and services as part of the total contract; 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 like MDSI's, 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.
10
<PAGE>
The Company's customers typically enter into ongoing maintenance agreements
that provide for maintenance and technical support services for a period
commencing after expiration of the initial warranty period. Maintenance
agreements typically have a term of twelve months and are invoiced either
annually or monthly. Revenue for these services is recognized ratably over the
term of the contract.
Prior to 1996, MDSI typically supplied only the MDSI application and
wireless connectivity software and related services as part of its contract with
a customer. The portion of contracts requiring the supply of third party
products and services was not material and was not separated for revenue
purposes. Beginning in 1996, however, the Company was called on to provide, in
addition to MDSI products and services, certain third party products, such as
host computer hardware and operating system software, and mobile computing. The
Company recognizes revenue for the supply of third party hardware upon transfer
of title to the customer. The Company recognizes revenue for the supply of third
party services using a percentage of completion method based on the costs
incurred over the total estimated cost to complete the third party services
contract.
The Company believes that it will often supply some portion of third party
products and services to customers where it is successful in selling its own
products and services. There can be no assurance, however, that any contracts
entered into by the Company to supply third party software and products in the
future will represent a substantial portion of revenue in any future period.
Since the revenue generated from the supply of third party products and services
may represent a significant portion of certain contracts and the installation
and rollout of third party products is generally at the discretion of the
customer, the Company may, depending on the level of third party products and
services provided during a period, experience large quarterly fluctuations in
revenue.
The Company's revenue is dependent, in large part, on significant contracts
from a limited number of customers. As a result, any substantial delay in the
Company's completion of a contract, the inability of the Company to obtain new
contracts or the cancellation of an existing contract by a customer could have a
material adverse effect on the Company's results of operations. Some of the
Company's contracts are cancelable upon notice by the customer. The loss of
certain contracts could have a material adverse effect on the Company's
business, financial condition, operating results and cash flows. As a result of
these and other factors, the Company's results of operations have fluctuated in
the past and may continue to fluctuate from period-to-period.
11
<PAGE>
Disposition of Transportation Business Unit
In February 1999, the Company's Board of Directors approved a plan to
dispose of its Delivery segment (Transportation Business Unit). Effective June
1, 1999, the Company completed the sale of the transportation business unit to
Digital Dispatch Systems, Inc. ("DDS"), a supplier of dispatch systems to the
taxi market for proceeds of $3,805,476. The proceeds comprised of common shares
of DDS, representing an 11% interest in DDS, and a promissory note in the
principal amount of $343,905, due January 1, 2001, bearing interest at 8% per
annum.
Under the terms of the agreement between the Company and DDS, the Company
has retained certain assets and liabilities of the discontinued operations. The
Company expects that it will liquidate these assets and liabilities by June 30,
2000. In addition, the Company has agreed to complete the implementation of a
large contract with a taxi customer. The Company has experienced, and is
continuing to experience delays in the implementation of this contract. If the
Company is unable to complete the implementation of the contract on a timely
basis, the taxi customer has the right to cancel the contract. Any such
cancellation may require the Company to reimburse the customer for payments
received to date. The Company believes that it has adequately provided for the
costs to complete this contract.
As a result of the Company's decision to dispose of its Delivery segment,
the Delivery segment has been classified as a discontinued operation and the
results of operation, financial position and cash flow for this segment have
been segregated from those of continuing operations. The following discussion
and analysis of the Company's results of operations excludes the Delivery
segment for the current and corresponding prior period.
The Company's net income was $612,000 for the period ended March 31, 2000.
This compares to a net loss of $3.3 million for the period ended March 31, 1999,
comprised of an after-tax profit from continuing operations of $600,000 and an
after-tax loss of $3.9 million on discontinued operations. The loss on
discontinued operations is comprised of a loss on operations of $1.6 million and
a loss on disposal of $2.3 million. There is no tax effect on these losses. The
discontinued operating loss includes not only the results of operations but also
foreign exchange losses and provisions against contracts to the measurement date
of February 25, 1999. The loss on disposal includes the operating results from
the measurement date to the effective date, the costs of disposal, severance
costs, and the estimated costs to complete the remaining taxi contract.
12
<PAGE>
Results of Operations
The following table sets forth, for the years indicated, certain components
of the selected financial data of the Company:
<TABLE>
Three months ended March 31,
--------------------------------------
2000 1999
------------------ ------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Revenue
Software and services................................................. 79.3% 70.2%
Third party products and services..................................... 4.1 21.7
Maintenance and support............................................... 16.6 8.1
------------------ ------------------
100.0 100.0
Direct costs............................................................. 37.6 46.7
------------------ ------------------
Gross profit............................................................. 62.4 53.3
------------------ ------------------
Operating expenses
Research and development.............................................. 15.9 13.0
Sales and marketing................................................... 22.6 20.6
General and administrative............................................ 14.2 10.8
Amortization of intangible assets..................................... 0.6 0.5
------------------ ------------------
53.3 44.9
------------------ ------------------
Operating income......................................................... 9.1 8.4
Other income (expense)................................................... (1.7) (1.3)
------------------ ------------------
Income before tax provision.............................................. 7.4 7.1
Provision for income taxes............................................... (2.4) (2.3)
------------------ ------------------
Net income (loss)from continuing operations.............................. 5.0 4.8
Income (loss) from discontinued operations............................... 0.0 (31.1)
------------------ ------------------
Net income (loss)........................................................ 5.0% (26.3)%
================== ==================
</TABLE>
-13-
<PAGE>
Three Months Ended March 31,2000 Compared to the Three Months Ended March 31,
1999
Revenue. Revenue decreased by $269,000 (2.2%) for the three months ended
March 31, 2000 as compared to the three months ended March 31, 1999. This
decrease was primarily due to the decrease in revenue from third party products
and services delivered during the first quarter of 2000 relative to the same
period in 1999.
Software and services revenue increased by $920,000 (10.5%) for the three
months ended March 31, 2000 as compared to the three months ended March 31,
1999. This increase is due to additional revenue from telecommunications
customers.
Third party products and services revenue decreased by $(2.2) million
(81.6%) for the three months ended March 31, 2000 as compared to the three
months ended March 31, 1999. These third party products typically include host
computer equipment and mobile computing devices, delivered 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 $2.0 million for the three months ended
March 31, 2000 as compared to $1.0 million for the three months ended March 31,
1999. 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 37.6% of revenue for the three months ended
March 31, 2000 as compared to 46.7% for the three months ended March 31, 1999.
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 62.4% of revenue for the three months
ended March 31, 2000 as compared to 53.3% for the three months ended March 31,
1999. The increase 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, 2000 there was a decrease 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 1999.
Research and Development. Research and development expenses were 15.9% of
revenue for the three months ended March 31, 2000 and 13.0% of revenue for the
three months ended March 31, 1999. Total research and development expenditures
for the three months ended March 31, 2000 of $1.9 million represents an increase
of $325,000 (20.1%) as compared to the same period in 1999. The increase in
research and development expenses in 2000 is a result of the continued
development and enhancement of the Company's Advantex products as well as
development in the Company new e-Business strategy. 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.
-14-
<PAGE>
Three Months Ended March 31, 2000 Compared to the Three Months Ended March 31,
1999 (Continued)
Sales and Marketing. Sales and marketing expenses were 22.6% of revenue for
the three months ended March 31, 2000 and 20.6% of revenue for the three months
ended March 31, 1999. This represents an increase of $183,000 (7.1%) as compared
to the same period in 1999. The increase was primarily due to an increase in
marketing, sales and technical support personnel to support the Company's
increased marketing activities worldwide. The Company anticipates that the
dollar amounts of its sales and marketing expenses will continue to increase as
the result of the Company's commitment to its international marketing efforts.
General and Administrative. General and administrative expenses were 14.2%
of revenue. Total general and administrative expenses of $1.7 million represents
an increase of $381,000 (28.2%) for the three months ended March 31, 2000 as
compared to the same period in 1999. 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 $(212,000) for the three
months ended March 31, 2000 as compared to $(162,000) for the three months ended
March 31, 1999. 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, 2000 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, 2000, the Company had cash
and cash equivalents of $16.7 million and working capital of $25.4 million.
Cash provided by (used in) operating activities was $1.6 million for the
three months ended March 31, 2000 compared to $(312,000) for the three months
ended March 31, 1999. The net inflow of cash from operating activities, after
adding back depreciation and amortization of $492,000, is due to a net increase
in non-cash working capital items of $544,000. The net increase in non-cash
operating working capital items is due primarily to a net increase in trade
payables of $442,000 plus an increase in deferred revenue of $1.6 million, which
was offset by an increase in accounts receivable of $890,000 and an increase in
prepaids of $737,000.
Cash provided by financing activities of $2.7 million during the three
months ended March 31, 2000 primarily relates to proceeds from common shares
issued for $3.0 million pursuant to the exercise of stock options and the
Company's Employee Share Purchase Plan. The Company repaid $357,000 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 $1.9 million for the three months
ended March 31, 2000 as compared to $636,000 for the three months ended March
31, 1999. Total investing activity during the three months ended March 31, 2000
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, and acquisition of
investments. Purchases in 1999 related only to capital assets.
-15-
<PAGE>
Liquidity and Capital Resources (Continued)
Existing sources of liquidity at March 31, 2000 include $16.7 million of
cash and cash equivalents and up to $8.0 million available under the Company's
operating line of credit. At March 31, 2000, the Company had provided as a
performance bond an irrevocable revolving letter of credit expiring May 28, 2001
for Belgian Franc 101,068,000 ($4.2 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, 2000, 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.
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, 2000, 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%. 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 the British
Pound. 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 $3.2
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.
-16-
<PAGE>
Part II - OTHER INFORMATION
ITEM 1. Legal Proceedings
As of the date hereof, there is no material litigation pending against the
Company. From time to time, the Company is a party to litigation and claims
incident to the ordinary course of business. While the results of litigation and
claims cannot be predicted with certainty, the Company believes that the final
outcome of such matters will not have a material adverse effect on the Company's
business, financial condition, results of operations and cash flows.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
a) Sales of Unregistered Securities
None
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
(a) Exhibits
Exhibit
Number Description
------ -----------
99.1 Private Securities Litigation Reform Act of 1995 -
Safe Harbor for Forward-Looking Statements
(b) Reports on Form 8-K
None
-17-
<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: May 15, 2000 By: /s/ KENNETH R. MILLER
----------------------------------------
Name: Kenneth R. Miller
Title: Chief Executive Officer
Date: May 15, 2000 By: /s/ VERNE D. PECHO
----------------------------------------
Name: Verne D. Pecho
Title: Vice President Finance &
Administration and Chief Financial
Officer
(Principal Financial and Accounting
Officer)
-18-
<PAGE>
Exhibit
Number Description
------ -----------
99.1 Private Securities Litigation Reform Act of 1995 -
Safe Harbor for Forward-Looking Statements
EXHIBIT 99.1
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 - SAFE HARBOR FOR
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a safe harbor
for forward-looking statements made by public companies. This safe harbor
protects a company from securities law liability in connection with
forward-looking statements if the company complies with the requirements of the
safe harbor. As a public company, MDSI has relied and will continue to rely on
the protection of the safe harbor in connection with its written and oral
forward-looking statements.
When evaluating MDSI's business, you should consider:
o all of the information in this quarterly report on Form 10-Q;
o the risk factors described in Infowave's Annual Report for the year
ended December 31, 1999 filed with the Securities and Exchange
Commission; and
o the risk factors described below.
RISK FACTORS
The Company's business is subject to the following risks. These risks also
could cause actual results to differ materially from results projected in any
forward-looking statement in this report.
Potential Fluctuations in Quarterly Operating Results
The Company's results of operations have fluctuated in the past and are
likely to continue to fluctuate from period to period depending on a number of
factors, including the timing and receipt of significant orders, the timing of
completion of contracts, increased competition, changes in the demand for the
Company's products and services, the cancellation of contracts, the timing of
new product announcements and introductions, changes in pricing policies by the
Company and its competitors, delays in the introduction of products or
enhancements by the Company, expenses associated with the acquisition of
products or technology from third parties, the mix of sales of the Company's
products and services and third party products, seasonality of customer
purchases, personnel changes, the mix of international and North American
revenue, tax policies, foreign currency exchange rates and general economic
conditions.
The Company relies upon its ability to implement and integrate mobile
workforce management solutions on schedule and to the satisfaction of its
customers. The Company from time to time has experienced certain implementation
and other problems that have delayed the completion of certain projects,
including the failure of third parties to deliver products or services on a
timely basis and delays caused by customers. Because the Company currently
recognizes revenue on a percentage of completion method, delays in completion of
certain contracts has caused delays in recognition of revenue and, consequently,
unanticipated fluctuations in quarterly results. There can be no assurance that
the Company will be able to complete current projects or implement future
systems on a timely and cost-effective basis or that delays will not result in
cancellations of contracts or result in the imposition of substantial penalties.
Any such material delay, cancellation or penalty could have a material adverse
effect upon the Company's business, financial condition, operating results and
cash flows.
Because the Company is unable to forecast with certainty the receipt of
orders for its products and services and the Company's expense levels are
relatively fixed and are based, in part, upon its expectation of future revenue,
if revenue levels fall below expectations as a result of a delay in completing a
contract, the inability to obtain new contracts, the cancellation of an existing
contract or otherwise, operating results are likely to be adversely effected. As
a result, net income may be disproportionately affected because a relatively
small amount of the Company's expenses vary with its revenue. In particular, the
Company plans to increase its operating expenses to implement its eBusiness
strategy, expand its sales and marketing operations, expand its distribution
channels, fund greater levels of research and development, broaden its customer
support capabilities and increase its administrative resources. The Company has
also implemented its eBusiness strategy, from which it anticipates it will
receive revenues on a month-to-month or per-transaction basis. The Company
anticipates that costs associated with implementing its eBusiness strategy will
increase the Company's operating expenses. Such expenses may not be offset by
increased revenue until the Company successfully penetrates the market for its
<PAGE>
ASP-based service. There can be no assurance that the Company will effectively
compete in this market or receive sufficient revenues from its eBusiness to
offset such costs.
Based upon all of the foregoing factors, the Company believes that its
quarterly revenue, direct expenses and operating results are likely to vary
significantly in the future, that period-to-period comparisons of the results of
operations are not necessarily meaningful and that such comparisons should not
be relied upon as an indication of future performance. The Company may also
choose to reduce prices or increase spending in response to competition, or to
pursue new market opportunities. See "Forward-Looking Statements". If new
competitors, technological advances by existing competitors or other competitive
factors require the Company to reduce its prices or invest significantly greater
resources in research and development efforts, the Company's operating results
in the future may be adversely affected. There can be no assurance that the
Company will be able to grow in future periods or that it will be able to
sustain its level of total revenue or its rate of revenue growth on a quarterly
or annual basis. It is likely that in some future quarter the Company's
operating results will be below the expectations of public market analysts and
investors. See "Forward Looking Statements". In such event, the price of the
Company's Common Shares would likely be materially adversely affected.
Since 1996, the Company has been, and anticipates that from time to time it
will be, engaged to provide, in addition to its own products and services, third
party hardware, software and services, which the Company purchases from vendors
and sells to its customers. For the years ended December 31, 1999, 1998 and
1997, 12.9%, 27.7% and 28.6%, respectively, of the Company's revenue was
attributable to third party products and services. Because the revenue generated
from the supply of third party products and services may represent a significant
portion of certain contracts and the installation and rollout of third party
products is generally at the discretion of the customer, the Company may,
depending on the level of third party products and services provided during a
period, experience large quarterly fluctuations in revenue. See "Forward Looking
Statements". In addition, because the Company's gross margins on third party
products and services are substantially below gross margins historically
achieved on revenue associated with MDSI products and services, large
fluctuations in quarterly revenue from the sale of third party products and
services will result in significant fluctuations in direct costs, gross profits,
operating results, cash flows and other items expressed as a percentage of
revenue.
Certain of the vertical markets targeted by the Company include industries
with implementation requirements that vary seasonally. For example, utility
companies in North America generally have decreased implementation activity in
winter months when such utilities face their greatest consumer demand. As a
result, the Company's results of operations may also vary seasonally, and such
variation may be significant.
Lengthy Sales Cycles for Advantex Products
The purchase of a mobile workforce management solution is often an
enterprise-wide decision for prospective customers and requires the Company to
engage in sales efforts over an extended period of time and to provide a
significant level of education to prospective customers regarding the use and
benefits of such systems. Due in part to the significant impact that the
application of mobile workforce management solutions has on the operations of a
business and
<PAGE>
the significant commitment of capital required by such a system, potential
customers tend to be cautious in making acquisition decisions. As a result, the
Company's products generally have a lengthy sales cycle ranging from several
months to several years. Consequently, if sales forecasted from a specific
customer for a particular quarter are not realized in that quarter, the Company
may not be able to generate revenue from alternative sources in time to
compensate for the shortfall. The loss or delay of a large contract could have a
material adverse effect on the Company's quarterly financial condition,
operating results and cash flows, which may cause such results to be less than
analysts' expectations. Moreover, to the extent that significant contracts are
entered into and required to be performed earlier than expected, operating
results for subsequent quarters may be adversely affected. In particular, the
Company has recently experienced an increase in the time necessary to complete
the negotiation and signing of certain contracts with some of its larger
customers.
Dependence on Large Contracts and Concentration of Customers
The Company's revenue is dependent, in large part, on significant contracts
from a limited number of customers. During the years ended December 31, 1999,
1998 and 1997, approximately 36.6%, 32.6% and 42.5%, respectively, of the
Company's consolidated revenue was attributable to five or fewer customers.
During the years ended December 31, 1999, 1998 and 1997, one customer accounted
for 12.2%, 9.1% and 14.4%, respectively, of the Company's consolidated revenue.
The Company believes that revenue derived from current and future large
customers will continue to represent a significant portion of its total revenue.
See "Forward Looking Statements". The inability of the Company to continue to
secure and maintain a sufficient number of large contracts would have a material
adverse effect on the Company's business, financial condition, operating results
and cash flows. Moreover, the Company's success will depend in part upon its
ability to obtain orders from new customers, as well as the financial condition
and success of its customers and general economic conditions.
The size of a contract for a particular customer can vary substantially
depending on whether the Company is providing only its own products and services
or is also responsible for supplying third party products and services. The
Company recognizes revenue using the percentage of completion method, which the
Company calculates based on total costs incurred compared to total costs
estimated by the Company for completion. Therefore, any significant increase in
the costs required to complete a project, or any significant delay in a project
schedule, could have a material adverse effect on that contract's profitability
and because of the size of each contract, on the Company's overall results of
operations. The Company from time to time has also experienced certain
implementation and other problems that have delayed the completion of certain
projects, including the failure of third parties to deliver products or services
on a timely basis and delays caused by customers. The Company's contracts
generally provide for payments upon the achievement of certain milestones.
Therefore, any significant delay in the achievement of milestones on one or more
contracts would affect the timing of the Company's cash flows and could have a
material adverse effect on the Company's business, financial condition,
operating results and cash flows. Any significant failure by the Company to
accurately estimate the scope of work involved, plan and formulate a contract
proposal, effectively negotiate a favorable contract price, properly manage a
project or efficiently allocate
<PAGE>
resources among several projects could have a material adverse effect on the
Company's business, financial condition, operating results and cash flows.
Potential Fluctuations in Backlog
The Company's backlog consists of a relatively small number of large
contracts relating to sales of its mobile workforce management and wireless
connectivity software and related equipment and services, and sales of third
party products and services. Due to the long, complex sales process and the mix
of sales of the Company's products and services and third party products and
services, the Company's backlog may fluctuate significantly from
period-to-period. In addition, under the terms of the Company's contracts, the
Company's customers may elect to terminate their contracts with the Company at
any time after notice to the Company or to delay certain aspects of
installation. Due to the relative size of a typical contract compared to the
Company's annual and quarterly revenue, a termination or installation delay of
one or more contracts could have a material adverse effect on the Company's
business, financial condition, operating results and cash flows. Contracts for
software maintenance and support are generally renewable every year and are
subject to renegotiation upon renewal. There can be no assurance that the
Company's customers will renew their maintenance contracts or that renewal terms
will be as favorable to the Company as existing terms.
Limited Operating History; History of Losses; Increased Expenses
The Company commenced operations in February 1993 and therefore has only a
limited operating history upon which an evaluation of its business and prospects
can be based. Due to non-recurring charges of $4.6 million, including $795,000
with respect to restructuring certain operations and $3.8 million due to changes
in estimates to complete certain contracts in the UK operations taken in
September 1997, restructuring and reorganization charges of $1.5 million and
$503,000, respectively, taken in connection with the reorganization of the
Company and the acquisition of TelSoft in December 1995, and write-offs of $6.2
million and $7.2 million for acquired research and development taken in
connection with the acquisitions of MDSI UK in June 1996 and Alliance effective
April 1997, respectively, the Company incurred net losses of $8.4 million, $4.4
million , and $1.1 million in the years ended December 31, 1997, 1996 and 1995,
respectively. As of December 31, 1999, the Company had an accumulated deficit of
$9.3 million.
Although the Company was profitable in its most recently completed fiscal
year, there can be no assurance that, in the future, the Company will realize
revenue growth or be profitable on a quarterly or annual basis. In addition, the
Company plans to increase its operating expenses to implement its eBusiness
strategy, expand its sales and marketing operations, fund greater levels of
research and development, broaden its customer support capabilities and increase
its administration resources. A relatively high percentage of the Company's
expenses is typically fixed in the short term as the Company's expense levels
are based, in part, on its expectations of future revenue. To the extent that
such expenses precede or are not subsequently followed by increased revenue, the
Company's business, financial condition, operating results and cash flows would
be materially adversely affected. In addition, in view of the Company's recent
revenue growth, the rapidly evolving nature of its business and markets, the
Company's limited operating
<PAGE>
history and the recent acquisitions, the Company believes that period-to-period
comparisons of financial results are not necessarily meaningful and should not
be relied upon as an indication of future performance.
Integration of Acquisitions
The Company may, when and if the opportunity arises, acquire other
products, technologies or businesses involved in activities, or having product
lines, that are complementary to the Company's business. Acquisitions involve
numerous risks, including difficulties in the assimilation of the operations,
technologies and products of the acquired companies, the diversion of
management's attention from other business concerns, risks associated with
entering markets or conducting operations with which the Company has no or
limited direct prior experience and the potential loss of key employees of the
acquired company. Moreover, there can be no assurance that any anticipated
benefits of an acquisition will be realized. Future acquisitions by the Company
could result in potentially dilutive issuances of equity securities, the
incurrence of debt and contingent liabilities, amortization of expenses related
to goodwill and other intangible assets and write-off of restructuring costs and
acquired research and development costs, all of which could materially and
adversely affect the Company's financial condition, results of operations and
cash flows.
New Product Development
The Company expects that a significant portion of its future revenue will
be derived from the sale of newly introduced products and from enhancement of
existing products. See "Forward-Looking Statements." The Company's success will
depend in part upon its ability to enhance its current products on a timely and
cost-effective basis and to develop new products that meet changing market
conditions, including changing customer needs, new competitive product offerings
and enhanced technology. There can be no assurance that the Company will be
successful in developing and marketing on a timely and cost-effective basis new
products and enhancements that respond to such changing market conditions. If
the Company is unable to anticipate or adequately respond on a timely or
cost-effective basis to changing market conditions, to develop new software
products and enhancements to existing products, to correct errors on a timely
basis or to complete products currently under development, or if such new
products or enhancements do not achieve market acceptance, the Company's
business, financial condition, operating results and cash flows could be
materially adversely affected. In light of the difficulties inherent in software
development, the Company expects that it will experience delays in the
completion and introduction of new software products. See "Forward-Looking
Statements."
eBusiness Development
The Company intends to sell its Advantex family of mobile workforce
management and wireless connectivity application software products over the
Internet from a wirelessly-enabled ASP site on subscription or "per transaction"
basis. The Company's eBusiness products are targeted at Internet intermediaries
who offer a wide range of services, including home services that to consumers
and small and medium-sized businesses. The Company anticipates that its
<PAGE>
operating expenses will increase as the Company establishes a comprehensive 7
day, 24 hour customer service support center to provide various levels of
customer support for its eBusiness customers and increases its development and
marketing efforts. The Company does not currently have any eBusiness customers,
and there can be no assurance that the Company will successfully implement its
eBusiness strategy. There also can be no assurance that the Company will be able
to compete successfully against current or future competitors or alliances of
such competitors, or that competitive pressures faced by the Company will not
materially adversely affect its business, financial condition, operating results
and cash flows.
Management of Growth
Since its inception, the Company has experienced rapid growth in product
sales, personnel, research and development activities, number and complexity of
products, the number and geographic focus of its targeted vertical markets and
product distribution channels. The total number of employees of the Company has
grown from nine employees in Canada in February 1993 to 453 employees located in
Canada, the United States and other international locations at December 31,
1999. In addition, the recent acquisition of Alliance has increased the number
of products the Company supports and markets, as well as the number of vertical
markets into which it sells products. The Company has also recently expanded the
geographical areas in which it operates. The Company believes that continued
growth in the number and complexity of products and in the number of personnel
will be required to maintain the Company's competitive position. The Company's
rapid growth, coupled with the rapid evolution of the Company's markets, has
placed, and is likely to continue to place, significant strains on its
management, administrative, operational and financial resources, as well as
increased demands on its internal systems, procedures and controls. The
Company's ability to manage recent and future growth will require the Company to
continue to improve its financial and management controls, reporting systems and
procedures on a timely basis, to implement new systems as necessary and to
expand, train, motivate and manage its sales and technical personnel. There can
be no assurance that the Company will be able to manage its growth successfully.
Failure to do so could have a material adverse effect on the Company's business,
financial condition, operating results and cash flows.
Dependence on Key Personnel
The Company's performance and future operating results are substantially
dependent on the continued service and performance of its senior management and
key technical and sales personnel. The Company intends to hire a significant
number of additional technical and sales personnel in the next year. See
"Forward-Looking Statements." Competition for such personnel is intense, and
there can be no assurance that the Company can retain its key technical, sales
and managerial employees or that it will be able to attract or retain
highly-qualified technical and managerial personnel in the future. The loss of
the services of any of the Company's senior management or other key employees or
the inability to attract and retain the necessary technical, sales and
managerial personnel could have a material adverse effect upon the Company's
business, financial condition, operating results and cash flows.
Dependence on Selected Vertical Markets
<PAGE>
Prior to 1996, substantially all of the Company's revenue was derived from
the sale of products and services to customers in the utility market. For the
years ended December 31, 1997 and 1996, the utility market accounted for greater
than 50% of the Company's revenue. In those years, the Company sought to reduce
its reliance on the utility market by developing or acquiring compatible
products for organizations with mobile workforces in other vertical markets. In
1998, the utility market accounted for greater than 40% of the Company's
revenue. In 1999, the telecommunications market accounted for 48% of the
Company's revenue. The Company anticipates that a significant portion of its
future revenue will be generated by sales of products to the telecommunications
market. See "Forward-Looking Statements." A decline in demand for the Company's
products in the utility or telecommunications markets as a result of
competition, technological change or otherwise, would have a material adverse
effect on the Company's business, financial condition, operating results and
cash flows. There can be no assurance that the Company will be able to continue
to diversify its product offerings or revenue base by entering into new vertical
markets.
Dependence on Marketing Relationships
The Company's products are marketed by the Company's direct field sales
force as well as by resellers. The Company's existing agreements with resellers
of its products are nonexclusive and may be terminated by either party without
cause. Such organizations are not within the control of the Company, are not
obligated to purchase products from the Company and may also represent and sell
competing products. There can be no assurance that the Company's existing
resellers will continue to provide the level of services and technical support
necessary to provide a complete solution to the Company's customers or that they
will not emphasize their own or third-party products to the detriment of the
Company's products. The loss of these resellers, the failure of such parties to
perform under agreements with the Company or the inability of the Company to
attract and retain new resellers with the technical, industry and application
experience required to market the Company's products successfully could have a
material adverse effect on the Company's business, financial condition,
operating results and cash flows. The Company expects that it may enter into
certain joint ventures in order to facilitate its expansion into other vertical
markets and geographic areas. See "Forward Looking Statements". To the extent
that such joint ventures are not successful, there could be a material adverse
effect on the Company's business, financial condition, operating results and
cash flows.
The Company intends to market its eBusiness products through a direct sales
force and through marketing relationships with ASP's that are offering
end-to-end suites of operating solutions to MDSI's targeted vertical markets,
wireless carriers and operators of Internet sites that aggregate smaller service
providers for home services. The Company anticipates that these marketing
relationships will be nonexclusive and may be terminated by either party without
cause. There can be no assurance that the Company's eBusiness solutions will be
compatible with these marketing partners or that they will not emphasize their
own or third-party products to the detriment of the Company's products. The
Company's failure to enter into marketing relationships, the failure of the
parties to perform under these agreements or the inability of the Company to
provide effective eBusiness solutions successfully could have a material adverse
effect on the Company's business, financial condition, operating results and
cash flows.
<PAGE>
Competition
The markets for mobile workforce management applications, wireless
connectivity software, mobile data network equipment and mobile computing
devices are highly competitive. Numerous factors affect the Company's
competitive position, including price, product features, product performance and
reliability, ease of use, product scalability, product availability on multiple
platforms (both server and mobile workstation), ability to implement mobile
workforce management solutions domestically and internationally while meeting
customer schedules, integration of products with other enterprise solutions,
availability of project consulting services and timely ongoing customer service
and support.
Within these markets, there are a small number of new ventures, either
small companies attempting to establish a business in this market or large
companies attempting to diversify their product offerings. The Company expects
such competition to intensify as acceptance and awareness of mobile data
communications and technology continue. See "Forward Looking Statements". In
addition, a small number of the Company's potential customers develop software
solutions internally, thereby eliminating the requirement for suppliers such as
the Company. Current or potential competitors may establish cooperative
arrangements among themselves or with third parties to increase the ability of
their products to address customer requirements.
Certain of the Company's competitors have substantially greater financial,
technical, marketing and distribution resources than the Company. As a result,
they may be able to respond more quickly to new or emerging technologies and
changing customer requirements, or to devote greater resources to the
development and distribution of existing products. There can be no assurance
that the Company will be able to compete successfully against current or future
competitors or alliances of such competitors, or that competitive pressures
faced by the Company will not materially adversely affect its business,
financial condition, operating results and cash flows.
The Company primarily competes in the utility market with Utility
Partners, L.C., M3i Systems, Inc. and Alterra Corp. The Company has several
competitors in the telecommunications market, a few of which have historical
relationships with certain of the large telecommunications companies. The
Company's primary competitor for telecommunications customers are Lucent
Technologies, Inc. and Telcordia. The Company's principal competitors in the
cable market are Telcordia and MobileForce Technologies, Inc. In the general
field service market, the Company's principal competitors are Astea
International Inc. and Metrix Inc. In the public safety market, the Company's
principal competitors are Cerulean, PRC, Tiberon Systems and New World Systems.
The Company's eBusiness will face competition from a number of existing
competitors and emerging Internet-based competitors, including iMedion,
ClickService (formerly IET), FieldCentrix, eDispatch, PointServe, ServeClick and
X-Time.
Risk of Product Defects
Software products, including those offered by the Company, from
time-to-time contain undetected errors or failures. There can be no assurance
that, despite testing by the Company and by current and potential customers,
errors will not be found in the Company's products. Such
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errors could result in loss of or delay in market acceptance of the Company's
products, which could have a material adverse effect on the Company's business,
financial condition, operating results and cash flows.
Proprietary Technology
The Company's success is dependent on its ability to protect its
intellectual property rights. The Company relies principally upon a combination
of copyright, trademark, trade secret and patent laws, non-disclosure agreements
and other contractual provisions to establish and maintain its rights. To date,
the Company has been granted trademark registrations or has registrations
pending in the United States, Canada and the European Community for the MDSI,
Advantex and Compose marks. Other than one patent pending for certain
technology, MDSI has not sought patent protection for its products. As part of
its confidentiality procedures, the Company generally enters into nondisclosure
and confidentiality agreements with each of its key employees, consultants,
distributors, customers and corporate partners, to limit access to and
distribution of its software, documentation and other proprietary information.
There can be no assurance that the Company's efforts to protect its intellectual
property rights will be successful. Despite the Company's efforts to protect its
intellectual property rights, unauthorized third parties, including competitors,
may be able to copy or reverse engineer certain portions of the Company's
software products, and use such copies to create competitive products.
Policing the unauthorized use of the Company's products is difficult, and,
while the Company is unable to determine the extent to which piracy of its
software products exists, software piracy can be expected to continue. In
addition, the laws of certain countries in which the Company's products are or
may be licensed do not protect its products and intellectual property rights to
the same extent as do the laws of Canada and the United States. As a result,
sales of products by the Company in such countries may increase the likelihood
that the Company's proprietary technology is infringed upon by unauthorized
third parties.
In addition, because third parties may attempt to develop similar
technologies independently, the Company expects that software product developers
will be increasingly subject to infringement claims as the number of products
and competitors in the Company's industry segments grow and the functionality of
products in different industry segments overlaps. See "Forward Looking
Statements". Although the Company believes that its products do not infringe on
the intellectual property rights of third parties, there can be no assurance
that third parties will not bring infringement claims (or claims for
indemnification resulting from infringement claims) against the Company with
respect to copyrights, trademarks, patents and other proprietary rights. Any
such claims, whether with or without merit, could be time consuming, result in
costly litigation and diversion of resources, cause product shipment delays or
require the Company to enter into royalty or licensing agreements. Such royalty
or licensing agreements, if required, may not be available on terms acceptable
to the Company or at all. A claim of product infringement against the Company
and failure or inability of the Company to license the infringed or similar
technology could have a material adverse effect on the Company's business,
financial condition, operating results and cash flows.
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Dependence on Third Parties
Certain contracts require the Company to supply, coordinate and install
third party products and services. The Company believes that there are a number
of acceptable vendors and subcontractors for most of its required products, but
in many cases, despite the availability of multiple sources, the Company may
select a single source in order to maintain quality control and to develop a
strategic relationship with the supplier or may be directed by a customer to use
a particular product. The failure of a third party supplier to provide a
sufficient supply of parts and components or products and services in a timely
manner could have a material adverse effect on the Company's results of
operations. In addition, any increase in the price of one or more of these
products, components or services could have a material adverse effect on the
Company's business, financial condition, operating results and cash flows. \
Additionally, under certain circumstances, the Company supplies products
and services to a customer through a larger company with a more established
reputation acting as a project manager or systems integrator. In such
circumstances, the Company has a sub-contract to supply its products and
services to the customer through the prime contractor. In these circumstances,
the Company is at risk that situations may arise outside of its control that
could lead to a delay, cost over-run or cancellation of the prime contract which
could also result in a delay, cost over-run or cancellation of the Company's
sub-contract. The failure of a prime contractor to supply its products and
services or perform its contractual obligations to the customer in a timely
manner could have a material adverse effect on the Company's financial
condition, results of operations and cash flows.
Exchange Rate Fluctuations
Because the Company's reporting currency is the Canadian dollar, its
operations outside Canada face additional risks, including fluctuating currency
values and exchange rates, hard currency shortages and controls on currency
exchange. The Company has operations outside Canada and is hedged, to some
extent, from foreign exchange risks because of its ability to purchase, develop
and sell in the local currency of those jurisdictions. In addition, the Company
does enter into foreign currency contracts under certain circumstances to reduce
the Company's exposure to foreign exchange risks. There can be no assurance,
however, that the attempted matching of foreign currency receipts with
disbursements or hedging activities will adequately moderate the risk of
currency or exchange rate fluctuations which could have a material adverse
effect on the Company's business, financial condition, operating results and
cash flows. In addition, to the extent the Company has operations outside
Canada, the Company is subject to the impact of foreign currency fluctuations
and exchange rate charges on the Company's reporting in its financial statements
of the results from such operations outside Canada. Since such financial
statements are prepared utilizing Canadian dollars as the basis for
presentation, results from operations outside Canada reported in the financial
statements must be restated into Canadian dollars utilizing the appropriate
foreign currency exchange rate, thereby subjecting such results to the impact of
currency and exchange rate fluctuations.
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Risks Associated with International Operations
In the years ended December 31, 1999, 1998 and 1997 revenue derived from
sales outside of North America accounted for approximately 24.8%, 3.4% and
10.1%, respectively of the Company's total revenue. Because the Company's
revenue is dependent, in large part, on significant contracts with a limited
number of customers, the percentage of the Company's revenues that is derived
from sales outside of North America has fluctuated, and may continue to
fluctuate, from period-to-period. The Company believes that its continued growth
and profitability will require additional expansion of its sales in foreign
markets, and that revenue derived from international sales will account for a
significant percentage of the Company's revenue for the foreseeable future. This
expansion has required and will continue to require significant management
attention and financial resources. The inability of the Company to expand
international sales in a timely and cost-effective manner could have a material
adverse effect on the Company's business, financial condition, operating results
and cash flows. There are a number of risks inherent in the Company's
international business activities, including changes in regulatory requirements,
tariffs and other trade barriers, costs and risks of localizing products for
foreign markets, longer accounts receivable payment cycles, difficulties in
collecting payments, reduced protection for intellectual property, potentially
adverse tax consequences, limits on repatriation of earnings, the burdens of
complying with a wide variety of foreign laws, nationalization, war,
insurrection, terrorism and other political risks and factors beyond the
Company's control. Fluctuations in currency exchange rates could adversely
affect sales denominated in foreign currencies and cause a reduction in revenue
derived from sales in a particular country. In addition, revenue of the Company
earned abroad may be subject to taxation by more than one jurisdiction, thereby
adversely affecting the Company's earnings. There can be no assurance that such
factors will not materially adversely affect the Company's future international
sales and, consequently, the Company's business, financial condition operating
results and cash flows.
Product Liability
The license and support of products by the Company may entail the risk of
exposure to product liability claims. A product liability claim brought against
the Company or a third party that the Company is required to indemnify, whether
with or without merit, could have a material adverse effect on the Company's
business, financial condition, operating results and cash flows. The Company
carries insurance coverage for product liability claims which it believes to be
adequate for its operations.
Concentration of Stock Ownership; Anti-Takeover Effects; Investment Canada Act
The Company's directors, officers and their respective affiliates, in the
aggregate, beneficially own approximately 21.0% of the outstanding Common
Shares. As a result, these shareholders, if acting together, may be able to
exercise significant influence over the Company and many matters requiring
shareholder approval, including the election of directors and approval of
significant corporate transactions. Such concentration of ownership may under
certain circumstances also have the effect of delaying, deferring or preventing
a change in control of the Company.
<PAGE>
An investment in the Common Shares of the Company which results in a change
of control of the Company may, under certain circumstances, be subject to review
and approval under the Investment Canada Act if the party or parties acquiring
control is not a Canadian person (as defined therein). Therefore, the Canadian
regulatory environment may have the effect of delaying, deferring or preventing
a change in control of the Company.
The Company is organized under the laws of Canada and, accordingly, is
governed by the CBCA. The CBCA differs in certain material respects from laws
generally applicable to United States corporations and shareholders, including
the provisions relating to interested directors, mergers and similar
arrangements, takeovers, shareholders' suits, indemnification of directors and
inspection of corporate records.
In December 1998, the Company implemented a stock rights plan (the "Plan").
Pursuant to the Plan, shareholders of record on December 17, 1998 received a
dividend of one right to purchase, for CDN$140, one Common Share of the Company.
The rights are attached to the Company's Common Shares and will also become
attached to Common Shares issued in the future. The rights will not be traded
separately and will not become exercisable until the occurrence of a triggering
event, defined as an accumulation by a single person or group of 20% or more of
the Company's Common Shares. After a triggering event, the rights will detach
from the Common Shares. If the Company is then merged into, or is acquired by,
another corporation, the Company may either (i) redeem the rights or (ii) permit
the rights holder to receive in the merger Common Shares of the Company or of
the acquiring company equal to two times the exercise price of the right (i.e.,
CDN$280). In the latter instance, the rights attached to the acquirer's stock
become null and void. The effect of the rights program is to make a potential
acquisition of the Company more expensive for the acquirer if, in the opinion of
the Company's Board of Directors, the offer is inadequate. While the Company is
not aware of any circumstance that might result in the acquisition of a
sufficient number of shares of the Company's Common Shares to trigger
distribution of the Rights, existence of the Rights could discourage offers for
the Company's stock that may exceed the current market price of the stock, but
that the Board of Directors deems inadequate.
As a result of being a reporting issuer in certain provinces of Canada, the
Company is required to file certain reports in such jurisdictions. As part of
such reports, the Company is required to file consolidated financial statements
prepared in accordance with generally accepted accounting principles as applied
in Canada ("Canadian GAAP"). Canadian and US GAAP differ in certain respects,
including the treatment of certain reorganization costs and acquired research
and development costs. As a result, the Company's Consolidated Financial
Statements included in this report may differ materially from the financial
statements filed by the Company in Canada.
Market for the Common Shares; Potential Volatility of Stock Price
The trading prices of the Common Shares have been subject to wide
fluctuations since trading of the Company's shares commenced in December 1995.
There can be no assurance that the market price of the Common Shares will not
significantly fluctuate from its current level. The market price of the Common
Shares may be subject to wide fluctuations in response to quarterly
<PAGE>
variations in operating results, announcements of technological innovations or
new products by the Company or its competitors, changes in financial estimates
by securities analysts, or other events or factors. In addition, the financial
markets have experienced significant price and volume fluctuations for a number
of reasons, including the failure of the operating results of certain companies
to meet market expectations that have particularly affected the market prices of
equity securities of many high-technology companies that have often been
unrelated to the operating performance of such companies. These broad market
fluctuations, or any industry-specific market fluctuations, may adversely affect
the market price of the Common Shares. In the past, following periods of
volatility in the market price of a company's securities, securities class
action litigation has often been instituted against such a company. Such
litigation, whether with or without merit, could result in substantial costs and
a diversion of management's attention and resources, which would have a material
adverse effect on the Company's business, financial condition, operating results
and cash flows.
