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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 June 30, 2002
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 August 12, 2002 was 8,189,802.
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MDSI Mobile Data Solutions Inc.
INDEX TO THE FORM 10-Q
For the quarterly period ended June 30, 2002
Page
PART I - FINANCIAL INFORMATION*
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS..............................1
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS................... 2
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS....................3
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS...........4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...............................10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.........21
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS ................................................22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................................23
SIGNATURES..................................................................25
-i-
Part I - Financial Information
Item 1. Financial Statements
MDSI MOBILE DATA SOLUTIONS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Expressed in United States dollars)
(Unaudited)
As at
June 30, December 31,
--------------------------------
2002 2001
-------------- -------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $10,541,566 $ 13,176,080
Accounts receivable, net
Trade (net of allowance for doubtful accounts $3,502,273;
2001 - $3,587,303) 8,385,093 9,229,663
Unbilled 4,029,926 4,331,924
Income taxes receivable 582,570 366,506
Prepaid expenses and other assets 1,534,278 1,866,458
-------------- -------------
25,073,433 28,970,631
CAPITAL ASSETS, NET 6,883,454 7,635,248
LONG TERM ACCOUNTS RECEIVABLE 3,749,860 3,749,860
LONG TERM DEFERRED TAXES 534,640 364,640
-------------- -------------
36,241,387 40,720,379
ASSETS OF DISCONTINUED OPERATIONS (note 2) 3,792,274 3,856,440
-------------- -------------
TOTAL ASSETS $ 40,033,661 $ 44,576,819
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable 1,727,158 1,961,656
Accrued liabilities 4,480,371 5,421,807
Deferred revenue 7,422,251 7,685,068
Current obligations under capital leases 1,896,236 1,984,018
-------------- -------------
15,526,016 17,052,549
OBLIGATIONS UNDER CAPITAL LEASES 414,882 1,301,996
-------------- -------------
15,940,898 18,354,545
LIABILITIES OF DISCONTINUED OPERATIONS (note 2) 1,262,034 1,747,521
-------------- -------------
17,202,932 20,102,066
STOCKHOLDERS' EQUITY
Common stock 48,758,136 48,519,060
Additional paid-up capital 522,621 522,621
Treasury stock (85,043) (85,043)
Deficit (25,674,881) (23,791,781)
Comprehensive Income (690,104) (690,104)
-------------- -------------
22,830,729 24,474,753
-------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $40,033,661 $ 44,576,819
============== =============
Contingency (note 8)
See Notes to Condensed Consolidated Financial Statements
-1-
MDSI MOBILE DATA SOLUTIONS INC.
Condensed Consolidated Statements of Operations
(Expressed in United States dollars)
(Unaudited)
Three months ended June 30, Six months ended June 30,
-------------------------------- -------------------------------
2002 2001 2002 2001
-------------- --------------- -------------- ---------------
REVENUE
Software and services $ 4,885,062 $ 7,713,545 $ 10,692,155 $ 17,451,278
Maintenance and support 2,866,478 2,434,330 5,423,551 4,890,934
Third party products and services 279,431 292,479 515,821 1,409,051
-------------- --------------- -------------- ---------------
8,030,971 10,440,354 16,631,527 23,751,263
DIRECT COSTS 3,490,743 4,836,038 7,121,062 11,588,075
-------------- --------------- -------------- ---------------
GROSS PROFIT 4,540,228 5,604,316 9,510,465 12,163,188
-------------- -------------- -------------- --------------
OPERATING EXPENSES
Research and development 1,498,948 1,867,791 2,958,983 4,043,098
Sales and marketing 3,912,177 3,266,139 6,326,070 6,307,466
General and administrative 1,529,565 1,539,483 3,194,007 3,024,590
Restructuring Charge (note 6) - 4,905,927 - 6,105,927
Provision for doubtful accounts - - - 1,202,634
Amortization and provision for valuation
of intangible assets (note 5) - 11,000 - 1,648,058
-------------- -------------- -------------- --------------
6,940,690 11,590,340 12,479,060 22,331,773
-------------- --------------- -------------- ---------------
OPERATING LOSS
(2,400,462) (5,986,024) (2,968,595) (10,168,585)
VALUATION ALLOWANCE ON INVESTMENTS (note 7) - - - (2,749,992)
OTHER INCOME (EXPENSE) 86,032 (295,154) 162,264 (331,202)
-------------- --------------- -------------- ---------------
LOSS FROM CONTINUING OPERATIONS BEFORE TAX PROVISION (2,314,430) (6,281,178) (2,806,331) (13,249,779)
RECOVERY OF INCOME TAXES (688,919) (22,538) (814,619) (715,702)
-------------- --------------- -------------- ---------------
NET LOSS FOR THE PERIOD FROM CONTINUING OPERATIONS (1,625,511) (6,258,640) (1,991,712) (12,534,077)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS (note 2) 22,196 (31,611) 108,612 89,741
-------------- --------------- -------------- ---------------
NET LOSS FOR THE PERIOD (1,603,315) (6,290,251) (1,883,100) (12,444,336)
DEFICIT, BEGINNING OF PERIOD (24,071,566) (15,839,173) (23,791,781) (9,685,088)
============== =============== ============== ===============
DEFICIT, END OF PERIOD $(25,674,881) $(22,129,424) $(25,674,881) $(22,129,424)
============== =============== ============== ===============
Loss per common share
Loss from continuing operations
Basic $ (0.18) $ (0.73) $ (0.23) $ (1.45)
============== =============== ============== ===============
Diluted $ (0.18) $ (0.73) $ (0.23) $ (1.45)
============== =============== ============== ===============
Net loss
Basic $ (0.18) $ (0.73) $ (0.21) $ (1.44)
============== =============== ============== ===============
Diluted $ (0.18) $ (0.73) $ (0.21) $ (1.44)
============== =============== ============== ===============
Weighted average shares outstanding
Basic 8,843,392 8,621,897 8,784,657 8,620,548
============== =============== ============== ===============
Diluted 8,843,392 8,621,897 8,784,657 8,620,548
============== =============== ============== ===============
See Notes to Condensed Consolidated Financial Statements
-2-
MDSI MOBILE DATA SOLUTIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in United States dollars)
(Unaudited)
Six months ended June 30,
------------------------------------
2002 2001
----------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss from continuing operations $ (1,991,712) $ (12,534,077)
Items not affecting cash:
Depreciation, amortization and provision for
valuation of intangible assets 1,437,204 3,177,064
Write down in value of surplus capital assets - 563,780
Valuation allowance on investments - 2,749,992
Stock based compensation charge - 301,921
Deferred income taxes (170,000) (361,000)
Changes in non-cash operating working capital items (176,067) 7,601,699
----------------- ----------------
Net cash (used in) provided by operating activities (900,575) 1,499,349
----------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common shares 239,076 97,032
Repayment of capital leases (974,896) (1,128,986)
----------------- ----------------
Net cash used by financing activities (735,820) (1,031,954)
----------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Long term lease receivable - 133,723
Proceeds on settlement of investments - 331,458
Acquisition of capital assets (685,410) (1,107,140)
----------------- ----------------
Net cash used in investing activities (685,410) (641,959)
----------------- ----------------
Net cash used by continuing operations (2,321,805) (174,564)
Net cash used by discontinued operations (note 2) (312,709) (652,498)
----------------- ----------------
NET CASH OUTFLOW (2,634,514) (827,062)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 13,176,080 12,864,981
----------------- ----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 10,541,566 $ 12,037,919
================= ================
See Notes to Condensed Consolidated Financial Statements
-3-
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Condensed Consolidated Financial Statements
(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 Annual Report of MDSI Mobile
Data Solutions Inc. (the "Company" or "MDSI") filed on Form 10-K for
the year ended December 31, 2001.
(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. Estimates are used for, but not limited to, the accounting
for doubtful accounts, amortization, determination of the net
recoverable value of assets, revenue recognized on long term
contracts, taxes and contingencies. Actual results could differ from
those estimates.
(c) Reporting Currency
The Company changed its reporting currency to the U.S. dollar
effective January 1, 2000. The change in reporting currency was made
to improve investors' ability to compare the Company's results with
those of most other publicly traded businesses in the industry. These
consolidated financial statements and those amounts previously
reported in Canadian dollars 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 as a separate component
of shareholder equity and described as accumulated comprehensive
income (loss). There was no effect on comprehensive income for any of
the periods presented in this report.
(d) Recently issued accounting standards
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS 141"),
"Business Combinations." SFAS 141 requires the purchase method of
accounting for business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interests method. The adoption of SFAS 141
has not had a significant impact on the Company's financial
statements.
In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible
Assets", which is effective January 1, 2002. SFAS 142 requires, among
other things, the discontinuance of goodwill amortization. In
addition, the standard includes provisions for the reclassification of
certain existing recognized intangibles as goodwill, reassessment of
the useful lives of existing recognized intangibles, reclassification
of certain intangibles out of previously reported goodwill and the
identification of reporting units for purposes of assessing potential
future impairments of goodwill. SFAS 142 also requires the Company to
complete a transitional goodwill impairment test six months from the
date of adoption. The adoption of SFAS 142 has not had a significant
impact on the Company's financial statements.
-4-
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Condensed Consolidated Financial Statements
(Expressed in United States dollars)
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(d) Recently issued accounting standards (continued)
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. This statement supersedes FASB Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," and the accounting and reporting provisions
of APB Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." This Statement also amends ARB No. 7, "Consolidated
Financial Statements," to eliminate the exception to consolidation for
a subsidiary for which control is likely to be temporary. This
Statement requires that one accounting model be used for long-lived
assets to be disposed of by sale, whether previously held and used or
newly acquired. This Statement also broadens the presentation of
discontinued operations to include more disposal transactions. The
provisions of this standard have been adopted as at the beginning of
fiscal 2002 and have had no significant impact on the Company's
financial statements.
In June 2002, the FASB issued SFAS No. 146 ("SFAS 146"), "Accounting
for Costs Associated with Exit or Disposal Activities". SFAS 146
requires that the liability for a cost associated with an exit or
disposal activity be recognized at its fair value when the liability
is incurred. Under previous guidance, a liability for certain exit
costs was recognized at the date that management committed to an exit
plan, which was generally before the actual liability had been
incurred. As SFAS 146 is effective only for exit or disposal
activities initiated after December 31, 2002, the Company does not
expect the adoption of this statement to have a material impact on the
Company's financial statements.
2. DISCONTINUED OPERATIONS
In June 2002, MDSI adopted a plan for sale and entered into an agreement to
sell its Hosting and IT Services business segment, Connectria Corporation
(Connectria) to former Connectria shareholders who are currently both
shareholders and employees of the Company. Pursuant to the terms of the
agreement, on closing the Company will receive from the former Connectria
shareholders 824,700 shares and the cancellation of 103,088 previously
issued stock options of MDSI as consideration for Connectria. In addition
to the share consideration, a wholly-owned subsidiary of MDSI will also
receive a warrant allowing it to purchase up to 50,380 shares of Series A
Nonvoting Preferred Stock of Connectria at a price of $50 per share
exercisable for a period of five years. The Series A Nonvoting Preferred
Stock of Connectria will have a face value of $100 per share, bear a
dividend of five percent per annum, bear a liquidation preference equal to
to the face value, may be redeemed at Connectria's option at any time, and
must be redeemed by Connectria upon a capital infusion of $10 million or
greater. In addition MDSI has agreed to advance to Connectria $500,000,
consisting of a loan in the principal amount of $250,000 with a two year
term, bearing interest at 5%, and $250,000 for prepaid hosting services.
The disposition of the business has been accounted for as a discontinued
operation and accordingly, the results of operations, financial position
and cash flow of this business are segregated from those of continuing
operations for the current and prior periods. The Company has included in
the results of discontinued operations, the sale proceeds, the costs of
disposition, the results of operations from the measurement date to the
period end and does not expect to have any significant gain or loss on
disposal. The transaction subsequently closed in July 2002 and as a result,
the Company will recognize a small gain in the third quarter of 2002.
-5-
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Condensed Consolidated Financial Statements
(Expressed in United States dollars)
(Unaudited)
2. DISCONTINUED OPERATIONS (continued)
Summarized financial information of the discontinued operations is as
follows:
Results of discontinued operations Three months ended, Three months ended,
----------------------------------------------------------------------------------------------------------------
June 30, 2002 June 30, 2001
------------------- -------------------
Revenues $ 2,417,890 $ 3,572,810
Income (loss) before income taxes 22,196 (31,611)
Income tax - -
------------------- -------------------
22,196 (31,611)
Estimated loss on future operations and disposal
net of income taxes - -
------------------- -------------------
Income (loss) from discontinued operations $ 22,196 $ (31,611)
=================== ===================
Results of discontinued operations Six months ended, Six months ended,
----------------------------------------------------------------------------------------------------------------
June 30, 2002 June 30, 2001
------------------- -------------------
Revenues $ 5,058,101 $ 7,773,002
Income before income taxes 108,612 89,741
Income tax - -
------------------- -------------------
108,612 89,741
Estimated loss on future operations and disposal
net of income taxes - -
------------------- -------------------
Income from discontinued operations $ 108,612 $ 89,741
=================== ====================
Financial position of discontinued operations As at, As at,
----------------------------------------------------------------------------------------------------------------
June 30, 2002 December 31, 2001
------------------- -------------------
Current assets $ 2,420,930 $ 2,242,633
Long term assets 1,371,344 1,613,807
------------------- -------------------
Total assets of discontinued operations $ 3,792,274 $ 3,856,440
=================== ====================
Current liabilities $ 1,055,370 $ 1,426,638
Long term liabilities 206,664 320,883
------------------- -------------------
Total liabilities of discontinued operations $ 1,262,034 $ 1,747,521
=================== ====================
Changes in cash flow of discontinued operations Six months ended, Six months ended,
----------------------------------------------------------------------------------------------------------------
June 30, 2002 June 30, 2001(1)
------------------- -------------------
Operating activities $ (51,500) $ 3,023
Investing activities (43,775) (583,819)
Financing activities (217,434) (71,702)
------------------- -------------------
Cash used for discontinued operations $ (312,709) $ (652,498)
=================== ====================
(1) Cash generated from operating activities for the six months ended June
30, 2001 includes $118,272 generated by the Company's Transportation
Business Unit, previously disclosed as a discontinued operation, and
$(120,329) used in the operating activities of Connectria.
-6-
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Condensed Consolidated Financial Statements
(Expressed in United States dollars)
(Unaudited)
3. SEGMENTED INFORMATION
As described in Note 2, the Company has reclassified the results of
operations of Connectria Corporation as discontinued operations. The
business was previously disclosed as a separate operating segment. As a
result of discontinuing this business, the Company now only operates in a
single business segment, the Field Service business segment. The segment
data below has been restated to exclude amounts related to the discontinued
operations.
The Company earned revenue from sales to customers in the following
geographic locations:
Three months ended June 30, Six months ended June 30,
------------------------------- ----------------------------
2002 2001 2002 2001
-------------- ------------- ------------- ------------
Canada.................... $ 243,774 $ 358,761 $ 494,904 $ 636,637
United States............. 5,616,244 8,039,082 12,050,033 17,194,468
Europe.................... 2,001,552 1,884,588 3,917,189 4,927,058
Asia and other............ 169,401 157,923 169,401 993,100
-------------- ------------- ------------- ------------
$ 8,030,971 $ 10,440,354 $ 16,631,527 $ 23,751,263
============== ============= ============= =============
4. 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 is 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 loss
per common share calculations for the periods indicated:
Three months ended Six months ended
June 30, June 30,
----------------------------- ------------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Basic weighted average shares outstanding... 8,843,392 8,621,897 8,784,657 8,620,548
Effect of dilutive securities;
Stock options............................... - - - -
------------ ------------ ------------ ------------
Diluted weighted average shares outstanding 8,843,392 8,621,897 8,784,657 8,620,548
============ ============ ============ ============
-7-
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Condensed Consolidated Financial Statements
(Expressed in United States dollars)
(Unaudited)
5. INTANGIBLE ASSETS
June 30, December 31,
2002 2001
---------------- ---------------
Goodwill $ 2,615,751 $ 2,615,751
Commercial web site domain name 220,000 220,000
Less: accumulated amortization and impairment provision (2,835,751) (2,835,751)
---------------- ---------------
$ - $ -
================ ===============
In connection with the Company's announced restructuring (note 6), the
Company determined that an impairment in the value of Goodwill that arose
on acquisition of Alliance Systems Inc., had occurred during the year ended
December 31, 2001. The Company determined an impairment had occurred due to
poor current and forecasted performance in the acquired Company's business.
As a result of this impairment the Company recorded a valuation allowance
in its field service business segment of $1,558,578 which was equal to the
remaining net book value of the Goodwill.
During the year ended December 31, 2001 the Company announced that it would
not direct future resources to develop its e-Service Manager product line.
As a result the Company has taken a valuation allowance in its Hosting and
IT business segment of $165,000 which was equal to the remaining value of
the commercial web site domain name purchased to support the e-Service
Manager product.
6. RESTRUCTURING CHARGE
On March 30, 2001, the Company, in response to uncertain economic
conditions and poor financial performance, announced a restructuring plan
approved by the Company's Board of Directors designed to reduce operating
costs that resulted in the elimination of 34 full time and contractor
positions. In connection with the March 30, 2001 restructuring the Company
recorded a charge of $1.2 million for the three months ended March 31,
2001. On May 11, 2001, the Company announced a Board approved update to
this plan, that resulted in the elimination of an additional 115 positions.
As part of the May 11, 2001 restructuring, the Company recorded a charge of
$4.9 million, resulting in a total charge to earnings for the year ended
December 31, 2001 of $6.1 million. These charges were reflected in the
"restructuring charge" line item of the Company's Consolidated Statement of
Operations. A breakdown of the nature of the charges and the costs incurred
to date is as follows:
Total Restructuring
Charge
-------------------
Workforce reduction $ 3,375,000
Provision for excess office space 1,861,000
Non cash writedown of capital assets 563,780
Other 306,147
-------------------
Total restructuring charges 6,105,927
Cumulative draw-downs (4,579,132)
-------------------
Accrued restructuring charges included in accrued
liabilities at June 30, 2002 $1,526,795
===================
During the three and six month periods ended June 30, 2002 the Company made
cash payments of $1,215,705 and $1,606,865 respectively relating to the
restructuring accruals.
-8-
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Condensed Consolidated Financial Statements
(Expressed in United States dollars)
(Unaudited)
6. RESTRUCTURING CHARGE (continued)
Workforce reduction charges of $3.4 million were taken relating to
severance and continued benefits for the elimination of 149 positions
across all operating departments and segments of the organization. As of
June 30, 2002, the provision balance has been fully drawn down by cash
payments with no additional amounts expected to be paid out.
The provision for excess office space of $1.9 million for the year ended
December 31, 2001, relates to surplus office space under long term lease by
the Company at two locations, one of which the Company has entered into
fixed cost lease arrangements expiring in 2004. The Company has incurred
approximately $0.5 million of cash costs relating to this provision leaving
an accrual of $1.4 million remaining as at June 30, 2002. The Company
expects that the charge will be fully drawn down no later than the time the
lease expires in the fourth quarter of 2004.
Due to the elimination of 149 positions, certain capital assets belonging
to the Company have been declared surplus and a charge of $0.6 million has
been recorded to reflect the difference between the previous carrying value
and the estimated fair market value, net of disposal costs. As at June 30,
2002, the full amount of the charge has been applied to the assets to value
them at their estimated net realizable value. These assets are expected to
be disposed of by the end of 2002.
The Company has recorded a $0.3 million charge for the year ended December
31, 2001 for other items including, costs of outplacement services, and
legal and consulting fees. As at June 30, 2002, the Company has incurred
cash costs of approximately $0.2 million in connection with these charges,
leaving a provision of $0.1 million. The Company expects to fully draw down
this provision by the end of 2002.
7. INVESTMENTS AND ADVANCES
June 30, December 31,
2002 2001
-------------- --------------
Investment in private companies, at cost $ 2,499,992 $ 2,499,992
Other advances 500,000 500,000
Valuation Allowance (2,999,992) (2,999,992)
-------------- --------------
Total Investments $ - $ -
============== ===============
During the year ended December 31, 2000 the Company made equity investments
of $2,499,992 in two private companies and made advances to a third Company
of $500,000. These investments do not represent significant influence in
the companies and at December 31, 2000 were valued at cost which was the
valuation as at the latest round of financing.
As a result of significant uncertainty over the future realization of any
return on investment or capital, the Company has recorded a valuation
allowance equal to the full cost of the investments and advances during the
year ended December 31, 2001.
8. CONTINGENCY
The Company is involved in a dispute with a customer. The Company has filed
suit against the customer alleging that the customer had breached a series
of contracts, and failed to pay sums due. The customer has filed an answer
and counter claim alleging the Company breached the contracts, entitling
the customer to repayment of all sums paid to the Company of approximately
$3.5 million. The Company believes that its position in the matter is
strong and intends to vigorously pursue collection. The Company expects
that collection of monies due from the customer is not likely to occur
within one year and as a result has reclassified the amounts due from the
customer of $3,749,860 as a long term receivable.
From time to time, the Company is a party to litigation and claims incident
to the ordinary course of its 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, operating results and cash
flows.
-9-
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward-Looking Statements
Certain statements in this Quarterly Report on Form 10-Q constitute
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of MDSI, or developments in the MDSI's
industry, to differ materially from the anticipated results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, but are not limited to: the Company's limited operating
history, lengthy sales cycles, the Company's dependence upon large contracts and
relative concentration of customers, the failure of MDSI to achieve anticipated
levels of cost savings and the risk that such cost reductions may adversely
affect the ability of MDSI to achieve its business objectives, the failure of
MDSI to successfully execute its business strategies, the effect of slowing
United States and international economies generally, as well as economic trends
and conditions in the vertical markets that MDSI serves, the effect of the risks
associated with technical difficulties or delays in product introductions and
improvements, product development, product pricing or other initiatives of
MDSI's competitors, the possibility that our potential customers will defer
purchasing decisions due to economic or other conditions or will purchase
products offered by our competitors, the effect, if any, of any sale or
disposition of assets, the risks associated with the collection of accounts
receivable, risks associated with litigation and the other risks and
uncertainties described in the risk factors attached as Exhibit 99.1 hereto and
in other Securities and Exchange Commission filings, including the Company's
Annual Report on Form 10-K for the year ended December 31, 2001.
Unless otherwise noted, all financial information in this report is
expressed in the Company's functional currency, United States dollars. See Item
3, "Quantitative and Qualitative Disclosures About Market Risk".
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 and,
cable/broadband 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 are designed to 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.
Restructuring
The Company believes that economic conditions and trends have adversely
affected and may continue to affect levels of capital spending by companies in a
variety of industries, including companies in the vertical markets that the
Company serves. The current excess supply of capacity in the telecommunications
industry has adversely affected the financial condition of many
telecommunications companies worldwide. In addition, economic conditions and
developments in the energy markets have had an adverse effect on the financial
condition of energy and utility companies in certain geographic areas of North
America. The Company believes that these and other factors have adversely
affected demand for products and services offered by the Company, as certain
prospective and existing customers have delayed or deferred purchasing decisions
or have sought to terminate existing contracts for the Company's products and
services. The Company believes that these factors will continue to affect demand
for the Company's products and services in 2002, particularly in software and
services. Such factors may also increase the amount of doubtful accounts or
adversely affect the likelihood of collection of such accounts. The Company
believes that these trends are likely to continue to adversely affect the
Company's revenues and results of operations in future periods.
-10-
In order to address the uncertainties caused by these economic trends, MDSI
announced in March 2001 its intention to reduce its operating expenses through
workforce reductions and other measures. These measures have been gradually
implemented with incremental reductions in costs each quarter, and were expected
to result in an estimated $2.9 million in cost reductions per quarter by the end
of 2002. A majority of the savings have been realized by reduced salary and
payroll costs, and the remaining savings are expected to be realized from the
subleasing of excess space, and a reduction in discretionary spending. As a
result of the sale of the public safety operations during the second quarter of
2002, the Company has exceeded the estimated quarterly savings. There can be no
assurance that the work force reductions and other measures will not have a
material adverse affect on the Company's business operations.
In connection with this restructuring, on March 30, 2001, MDSI terminated
34 employee and contractor positions in Canada and the United States. On May 11,
2001, the Company continued the restructuring by announcing the elimination of
an additional 115 positions, which in combination with the workforce reductions
of March 30, 2001 amounted to approximately 25% of MDSI's staff as of March 30,
2001. The Company recorded a one-time charge of $1.2 million in the first
quarter of 2001 relating to the workforce reductions, and leasing of excess
office space. The Company also recorded an additional charge of approximately
$4.9 million in the second quarter of 2001 relating to elimination of 115
positions, leasing of excess office space, and fixed asset write-downs announced
on May 11, 2001. A breakdown of the nature of the charges and the costs incurred
to date is as follows:
Total Restructuring
Charge
--------------------
Workforce reduction $3,375,000
Provision for excess office space 1,861,000
Non cash writedown of capital assets 563,780
Other 306,147
--------------------
Total restructuring charges 6,105,927
Cumulative draw-downs (4,579,132)
--------------------
Accrued restructuring charges as at June 30, 2002 $1,526,795
====================
During the three and six month periods ended June 30, 2002 the Company made
cash payments of $1,215,705 and $1,606,865 respectively relating to the
restructuring accruals.
Workforce reduction charges of $3.4 million were taken relating to
severance and continued benefits for the elimination of 149 positions across all
operating departments and segments of the organization. As of June 30, 2002, the
provision balance has been fully drawn down by cash payments with no additional
amounts expected to be paid out.
The provision for excess office space of $1.9 million for the year ended
December 31, 2001, relates to surplus office space under long term lease by the
Company at two locations, one of which the Company has entered into fixed cost
lease arrangements expiring in 2004. The Company has incurred approximately $0.5
million of cash costs relating to this provision leaving an accrual of $1.4
million remaining as at June 30, 2002. The Company expects that the charge will
be fully drawn down no later than the time the lease expires in the fourth
quarter of 2004.
Due to the elimination of 149 positions, certain capital assets belonging
to the Company have been declared surplus and a charge of $0.6 million has been
recorded to reflect the difference between the previous carrying value and the
estimated fair market value, net of disposal costs. As at June 30, 2002, the
full amount of the charge has been applied to the assets to value them at their
estimated net realizable value. These assets are expected to be disposed of by
the end of 2002.
The Company has recorded a $0.3 million charge for the year ended December
31, 2001 for other items including, costs of outplacement services, and legal
and consulting fees. As at June 30, 2002, the Company has incurred cash costs of
approximately $0.2 million in connection with these charges, leaving a provision
of $0.1 million. The Company expects to fully draw down this provision by the
end of 2002.
-11-
Field Service Business
The implementation of a complete mobile data solution requires a wireless
data communications network, mobile computing devices integrated with wireless
data communication modems, host computer equipment, industry specific
application software such as MDSI's Advantex products, 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'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 one to three years and are invoiced either
annually or monthly. Revenue for these services is recognized ratably over the
term of the contract.
The Company is periodically required 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 devices. The
Company recognizes revenue on the supply of third party hardware upon transfer
of title to the customer. The Company recognizes revenue on 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 periodically supply 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 fluctuations in revenue.
During 2001, MDSI decided not to continue pursuing opportunities in the
Public Safety market of its field service segment. These opportunities consisted
of federal, state and local agencies that provide police, fire, medical and
other emergency services. The Company had installed solutions for a limited
number of customers, and the market has not represented a material portion of
MDSI's revenues. During the three months ended June 30, 2002 the Company entered
into an agreement with Datamaxx Applied Technologies Inc. (Datamaxx), granting
exclusive license to Datamaxx for MDSI's Public Safety products in North
America, and non exclusive license rights for these products outside North
America. The Company also assigned its existing contracts in the Public Safety
market to Datamaxx. MDSI will receive royalty payments under the agreement for
any license and implementation revenue earned by Datamaxx in relation to the
licensed products, subject to a maximum royalty payout of $1,500,000. As a
result of this licensing agreement the Company has now exited the Public Safety
market, and all employees related to the Public Safety market were terminated by
June 30, 2002.
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.
-12-
Disposition of Hosting and Information Technology (IT) Services Business Segment
In June 2002, MDSI adopted a plan for sale and entered into an agreement to
sell its Hosting and IT Services business segment, Connectria Corporation
(Connectria) to former Connectria shareholders who were both shareholders and
employees of the Company. Pursuant to the terms of the agreement, on closing the
Company will receive from the former Connectria shareholders 824,700 shares and
the cancellation of 103,088 previously issued stock options of MDSI as
consideration for Connectria. In addition to the share consideration, a
wholly-owned subsidiary of MDSI will also receive a warrant allowing it to
purchase up to 50,380 shares of Series A Nonvoting Preferred Stock of Connectria
at a price of $50 per share exercisable for a period of five years. The Series A
Nonvoting Preferred Stock of Connectria will have a face value of $100 per
share, bear a dividend of five percent per annum, bear a liquidation preference
equal to the face value, may be redeemed at Connectria's option at any time, and
must be redeemed by Connectria upon a capital infusion of $10 million or
greater. In addition MDSI has agreed to advance to Connectria $500,000,
consisting of a loan in the principal amount of $250,000 with a two year term,
bearing interest at 5%, and $250,000 for prepaid hosting services. The
transaction subsequently closed on July 25, 2002 resulting in a small gain being
recorded by the Company.
As a result of its decision to dispose of Connectria, MDSI has treated this
business segment as a discontinued operation and the results of operations,
financial position and changes in 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 Connectria for the
current and corresponding prior periods.
Disposition of Transportation Business Unit
In February 1999, the Company's Board of Directors approved a plan to
dispose of the delivery segment of its business ("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 $3,805,746. The
proceeds were comprised of common shares of DDS, representing an 11% interest in
DDS, and a promissory note in the principal amount of $331,455 ($500,000 CDN),
due January 1, 2001, bearing interest at 8% per annum. During the year ended
December 31, 2000, DDS exercised its option to buyback the DDS shares that MDSI
received as compensation on the sale of the Transportation Business Unit.
Proceeds on sale of the DDS shares were $3,273,392. The note, with interest, was
paid in the first quarter of 2001.
Under the terms of the agreement between the Company and DDS, the Company
retained certain assets and liabilities of the discontinued operations. The
Company liquidated all remaining assets and liabilities relating to the
Transportation Business Unit as of the second quarter of 2001.
As a result of the Company's disposal of its Transportation Business Unit,
the Transportation Business Unit 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
Transportation Business Unit for the current and corresponding prior periods.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations." SFAS 141 requires the purchase method of accounting for business
combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. The adoption of SFAS 141 did not have a significant
impact on its financial statements.
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which is effective
January 1, 2002. SFAS 142 requires, among other things, the discontinuance of
goodwill amortization. In addition, the standard includes provisions for the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the identification of reporting units for purposes of assessing potential future
impairments of goodwill. SFAS 142 also requires the Company to complete a
transitional goodwill impairment test six months from the date of adoption. The
adoption of SFAS 142 has not had a significant impact on the Company's financial
statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This statement supersedes FASB Statement No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." This Statement also amends ARB No. 7, "Consolidated Financial
Statements," to eliminate the exception to consolidation for a subsidiary for
which control is likely to be temporary. This Statement requires that one
accounting model be used for long-lived assets to be
-13-
disposed of by sale, whether previously held and used or newly acquired. This
Statement also broadens the presentation of discontinued operations to include
more disposal transactions. The provisions of this standard have been adopted as
at the beginning of fiscal 2002 and have had no significant impact on the
Company's financial statements.
In June 2002, the FASB issued SFAS No. 146 ("SFAS 146"), "Accounting for
Costs Associated with Exit or Disposal Activities". SFAS 146 requires that the
liability for a cost associated with an exit or disposal activity be recognized
at its fair value when the liability is incurred. Under previous guidance, a
liability for certain exit costs was recognized at the date that management
committed to an exit plan, which was generally before the actual liability had
been incurred. As SFAS 146 is effective only for exit or disposal activities
initiated after December 31, 2002, the Company does not expect the adoption of
this statement to have a material impact on the Company's financial statements.
Critical Accounting Policies and Significant Estimates
The significant accounting policies are outlined within Note 1 to the
financial statements included in the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2001. Some of those accounting policies
require the Company to make estimates and assumptions that affect the amounts
reported by the Company. For the quarter ended June 30, 2002 the following items
require the most significant judgment and involve complex estimation:
Restructuring Charges
In calculating the cost to dispose of excess facilities the Company was
required to estimate for each location the amount to be paid in lease
termination payments, the future lease and operating costs to be paid until the
lease is terminated, and the amount, if any, of sublease revenues. This required
estimating the timing and costs of each lease to be terminated, the amount of
operating costs, and the timing and rate at which the Company might be able to
sublease the site. From the estimates for these costs the Company performed an
assessment of the affected facilities and considered the current market
conditions for each site. A charge of $1.9 million was recorded for the
restructuring of excess facilities as part of the restructuring plan, and at
June 30, 2002 the remaining provision is $1.4 million. The Company's assumptions
on either the lease termination payments, operating costs until terminated, or
the offsetting sublease revenues may be proven incorrect and actual cost may be
materially different from the estimates.
Accounts Receivable
The Company periodically reviews the collectability of its accounts
receivable balances. Where significant doubt exists with regards to the
collection of a certain receivable balance, an allowance and charge to the
income statement is recorded. At June 30, 2002, the allowance for doubtful
accounts was $3.5 million. The Company intends to continue vigorously pursuing
these accounts. If future events indicate additional collection issues, the
Company may be required to record an additional allowance for doubtful accounts.
In addition, the Company has recorded as long term receivable of $3.7
million related to a dispute with a customer. The Company is currently involved
in litigation to collect the amounts due. If the Company is unsuccessful in
collection of amounts due or if future events indicate that a portion or all of
the amounts due may not be collected, a provision against the receivable may be
required. See "Forward-Looking Statements."
Revenue Recognition - Percentage Completion
The Company uses estimates based on inputs to determine the percentage
completion of its contracts and thus its revenue recognition. These estimates
and contracts are reviewed regularly and are adjusted to meet the Company's best
estimate at the time. The Company's assumptions used to form these estimates may
be proven to be erroneous and materially different outcomes may result.
Income Taxes
The Company has incurred losses and other costs that can be applied against
future taxable earnings to reduce the tax liability on those earnings. As the
Company is uncertain of realizing the future benefit of those losses and
expenditures, the Company has recorded a valuation allowance against most
non-capital loss carry forwards, and other deferred tax assets arising from
differences in tax and accounting bases. Actual results may be materially
different from the current estimate.
-14-
Results of Operations
The Company's net loss was $1.6 million for the three months ended June 30,
2002. This compares to a net loss of $6.3 million for the three months ended
June 30, 2001. The change in income for the period is due primarily to a one
time restructuring charges of $4.9 million incurred during the three months
ended June 30, 2001 relating to staff reductions and leasing of excess office
space. The following table sets forth, for the periods indicated, certain
components of the selected financial data of the Company as a percentage of
total revenue:
Three months ended June 30, Six months ended June 30,
----------------------------- ----------------------------
2002 2001 2002 2001
----------------------------- ----------------------------
REVENUE
Software and services 60.8% 73.9% 64.3% 73.5%
Maintenance and support 35.7% 23.3% 32.6% 20.6%
Third party products and services 3.5% 2.8% 3.1% 5.9%
----------------------------- ----------------------------
100.0% 100.0% 100.0% 100.0%
DIRECT COSTS 43.5% 46.3% 42.8% 48.8%
----------------------------- ----------------------------
GROSS PROFIT 56.5% 53.7% 57.2% 51.2%
----------------------------- ----------------------------
OPERATING EXPENSES
Research and development 18.7% 17.9% 17.8% 17.0%
Sales and marketing 48.7% 31.3% 38.0% 26.6%
General and administrative 19.0% 14.7% 19.2% 12.7%
Restructuring Charge - 47.0% - 25.7%
Provision for doubtful accounts - - - 5.1%
Amortization and provision for valuation
of intangible assets - 0.1% - 6.9%
----------------------------- ----------------------------
86.4% 111.0% 75.0% 94.0%
----------------------------- ----------------------------
OPERATING LOSS (29.9%) (57.3%) (17.9%) (42.8%)
VALUATION ALLOWANCE ON INVESTMENTS - - - (11.6%)
OTHER INCOME (EXPENSE) 1.1% (2.8%) 1.0% (1.4%)
----------------------------- ----------------------------
NET LOSS FROM CONTINUING OPERATIONS (28.8%) (60.1%) (16.9%) (55.8%)
BEFORE TAX PROVISION
RECOVERY OF INCOME TAXES 8.6% 0.2% (4.9%) 3.0%
----------------------------- ----------------------------
NET LOSS FROM CONTINUING OPERATIONS (20.2%) (59.9%) (12.0%) (52.8%)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS 0.2% (0.3%) 0.7% 0.4%
----------------------------- ----------------------------
NET LOSS FOR THE PERIOD (20.0%) (60.2%) (11.3%) (52.4%)
============================= ============================
Three Months Ended June 30, 2002 Compared to the Three Months Ended June 30,
2001
Revenue. Revenue decreased by $2.4 million (23.1%) for the three months
ended June 30, 2002 as compared to the three months ended June 30, 2001. This
decrease was primarily due to decreases in revenue from software and services
revenue, partially offset by an increase in maintenance and support revenues,
during the first quarter of 2002 relative to the same period in 2001.
-15-
Three Months Ended June 30, 2002 Compared to the Three Months Ended June 30,
2001 (continued)
Software and services revenue decreased by $2.8 million (36.7%) for the
three months ended June 30, 2002 as compared to the three months ended June 30,
2001. The Company believes its software and service revenue was adversely
impacted by an increase in time taken for the decision-making cycle, and
reduction of capital expenditures by customers. This delay in purchasing
decisions by customers and reductions in expenditures resulted in a reduction in
the number of contracts worked on by the Company in the three months ended June
30, 2002 as compared to the three months ended June 30, 2001 and a corresponding
reduction in revenue. The Company anticipates that continued economic
uncertainty in the telecommunications and utility markets will continue to have
an adverse impact on software and services revenues in future periods. See
"Forward-Looking Statements"
Maintenance and support revenues were $2.9 million for the three months
ended June 30, 2002 as compared to $2.4 million for the three months ended June
30, 2001. Maintenance and support revenue has increased primarily due to the
growth in the Company's installed customer base. Such revenue is expected to
fluctuate as it corresponds to the level of software and services that the
Company is engaged to provide in support of its installations.
Third party products and services revenue was materially unchanged during
the three months ended June 30, 2002 as compared to the three months ended June
30, 2001. 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. The Company has recently entered into an agreement
whereby it has agreed to supply a large amount of third party services, and
therefore expects that future revenues from third party products and services
will increase in the near term. See "forward looking statements."
Direct Costs. Direct costs were 43.5% of revenue for the three months ended
June 30, 2002 as compared to 46.3% for the three months ended June 30, 2001.
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. The decrease in
direct costs as a percentage of revenue occurred as the Company increased its
efficiency due to its restructuring, and as a result of increased experience
with Advantex r7 installations.
Gross Margins. Gross margins were 56.5% of revenue for the three months
ended June 30, 2002 as compared to 53.7% for the three months ended June 30,
2001. The increase in gross margin as a percentage of revenue relates primarily
to the increased efficiency in the installation of Advantex r7. The Company does
not believe that its gross margins will fluctuate significantly in the near
future. See "Forward-Looking Statements".
Research and Development. Research and development expenses were 18.7% of
revenue for the three months ended June 30, 2002 and 17.9% of revenue for the
three months ended June 30, 2001. Total research and development expenditures
for the three months ended June 30, 2002 of $1.5 million represents a decrease
of $0.4 million (19.7%) as compared to the same period in 2001. The decrease in
research and development expenses in 2002 is a result of the Company's
restructuring efforts, and cost control initiatives. The Company intends to
continue committing a significant portion of its product revenues to enhance
existing products and develop new products. See "Forward-Looking Statements".
Sales and Marketing. Sales and marketing expenses were 48.7% of revenue for
the three months ended June 30, 2002 and 31.3% of revenue for the three months
ended June 30, 2001. This represents an increase of $646,000 (19.8%) as compared
to the same period in 2001. The increase was primarily due to commission costs
expensed during the period relating to contracts entered into during the period
that are expected to generate significant revenues in future periods. See
"Forward-Looking Statements". The Company anticipates that the dollar amounts of
its sales and marketing expenses will continue to be significant as a result of
the Company's commitment to its international marketing efforts and attempt to
penetrate additional markets for its products. See "Forward-Looking Statements".
General and Administrative. General and administrative expenses were 19.0%
of revenue for the three months ended June 30, 2002 and 14.7% of revenue for the
three months ended June 30, 2001. Total general and administrative expenses of
$1.5 million were materially unchanged from the same period in 2001. The Company
expects that in the near future, general and administrative expenditures will
remain relatively consistent with current levels. See "Forward-Looking
Statements".
-16-
Three Months Ended June 30, 2002 Compared to the Three Months Ended June 30,
2001 (continued)
Restructuring Charge. No charges for restructuring were taken during the
three months ended June 30, 2002. During the three months ended June 30, 2001
the Company announced a restructuring, designed to increase operational
efficiencies and reduce costs. As part of the restructuring, the Company
recorded a provision of $4.9 million for the three months ended June 30, 2001
relating to staff reductions and leasing of excess space.
Amortization and provision for valuation of Intangible Assets. No charges
for amortization of intangible assets were taken during the three months ended
June 30, 2002, as the Company has taken a provision for valuation equal to the
remaining value of intangible assets during the year ended December 31, 2001.
Amortization and impairment charges for intangible assets for the three months
ended June 30, 2001 were $11,000 relating to amortization of a purchased web
site domain name.
Other Income (Expense). Other income was $86,000 for the three months ended
June 30, 2002 as compared to a loss of $(295,000) for the three months ended
June 30, 2001. Substantially all of other income (expense) relates to
fluctuations in the currencies of the Company's foreign operations, interest
income on cash and short-term deposits, and interest expense on short-term
borrowings under the line of credit and capital lease obligations.
Income Taxes. The Company provided for income tax recoveries on losses for
the three months ended June 30, 2002 at the rate of 30.0%. The Company's
effective tax rate reflects the blended effect of Canadian, US, and other
foreign jurisdictions' tax rates.
Income (loss) from Discontinued Operations. During the three months ended
June 30, 2002 the Company announced its intention to divest itself of its
Hosting and IT services subsidiary Connectria Corporation (Connectria). As a
result, Connectria results of operations for the current and comparative periods
have been presented as Discontinued Operations. Income from Discontinued
Operations for the three months ended June 30, 2002 was $22,000 compared to a
loss of $(31,000) for the three months ended June 30, 2001. The increase in the
income from discontinued operations was due to cost control efforts implemented
at Connectria in the current period.
Six Months Ended June 30, 2002 Compared to the Six Months Ended June 30, 2001
Revenue. Revenue decreased by $7.1 million (30.0%) for the six months ended
June 30, 2002 as compared to the six months ended June 30, 2001. This decrease
was primarily due to decreases in revenue from software and services and third
party products and services, during the six months ended June 30, 2002 relative
to the same period in 2001.
Software and services revenue decreased by $6.8 million (38.7%) for the six
months ended June 30, 2002 as compared to the six months ended June 30, 2001.
The Company believes its software and service revenue was adversely impacted by
an increase in time taken for the decision-making cycle, and reduction of
capital expenditures by customers. This delay and reduction in expenditure has
caused fewer contracts to be worked on by the Company in the six months ended
June 30, 2002 as compared to the six months ended June 30, 2001 and as a result
has caused a reduction in revenue. The Company anticipates that continued
economic uncertainty in the telecommunications and utility markets will continue
to have an adverse impact on software and services revenues in future periods.
See "Forward-Looking Statements".
Maintenance and support revenues were $5.4 million for the six months ended
June 30, 2002 as compared to $4.9 million for the six months ended June 30,
2001. Maintenance and support revenue has increased primarily due to the growth
in the Company's installed customer base. Such revenue is expected to fluctuate
as it corresponds to the level of software and services for which the Company is
engaged to provide in support of its installations.
Third party products and services revenue decreased by $0.9 million during
the six months ended June 30, 2002 as compared to the six months ended June 30,
2001. 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.
Direct Costs. Direct costs were 42.8% of revenue for the six months ended
June 30, 2002 as compared to 48.8% for the six months ended June 30, 2001.
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. The decrease in
direct costs as a percentage of revenue occurred as the Company increased its
efficiency due to its restructuring, and as a result of increased experience
with Advantex r7 installations.
-17-
Six Months Ended June 30, 2002 Compared to the Six Months Ended June 30, 2001
(continued)
Gross Margins. Gross margins were 57.2% of revenue for the six months ended
June 30, 2002 as compared to 51.2% for the six months ended June 30, 2001. The
increase in gross margin as a percentage of revenue relates primarily to the
increased efficiencies for the installations of Advantex r7. The Company expects
that the current restructuring will enable the Company to maintain, on a
relative basis, stable gross margins in the near future. See "Forward-Looking
Statements".
Research and Development. Research and development expenses were 17.8% of
revenue for the six months ended June 30, 2002 and 17.0% of revenue for the six
months ended June 30, 2001. Total research and development expenditures for the
six months ended June 30, 2002 of $3.0 million represents a decrease of $1.1
million (26.8%) as compared to the same period in 2001. The decrease in research
and development expenses in 2002 is a result of the Company's restructuring
efforts, and the completion of a major development project in the first quarter
of 2001. As a result, the Company did not expend as many resources on research
and development in 2002 as in 2001. The Company intends to continue committing a
significant portion of its product revenues to enhance existing products and
develop new products. See "Forward-Looking Statements".
Sales and Marketing. Sales and marketing expenses were 38.0% of revenue for
the six months ended June 30, 2002 and 26.6% of revenue for the six months ended
June 30, 2001. Total sales and marketing expenses of $6.3 million were
materially unchanged from the same period in 2001. The decrease in expenditures
in the current year due to the Company's restructuring program implemented in
2001 was offset by an increase in commission costs expensed during the period
relating to contracts entered into during the period that are expected to
generate significant revenues in future periods. See "Forward-Looking
Statements". The Company anticipates that the dollar amounts of its sales and
marketing expenses will continue to be significant as a result of the Company's
commitment to its international marketing efforts and attempts to penetrate
additional markets for its products. See "Forward-Looking Statements".
General and Administrative. General and administrative expenses were 19.2%
of revenue for the six months ended June 30, 2002 and 12.7% of revenue for the
six months ended June 30, 2001. Total general and administrative expenses of
$3.2 million represents a increase of $0.2 million (5.6%) for the six months
ended June 30, 2002 as compared to the same period in 2001. General and
administrative expenses remained relatively consistent with the comparative
period as a result of a cost control effort initiated by the Company, offset by
one-time severance costs expensed during the period. The Company expects that in
the near future, general and administrative expenditures will remain relatively
consistent with current levels. See "Forward-Looking Statements".
Restructuring Charge. No charges for restructuring were taken during the
six months ended June 30, 2002. During the six months ended June 30, 2001 the
Company announced a restructuring, designed to increase operational efficiencies
and reduce costs. As part of the restructuring, the Company recorded a provision
of $6.1 million for the six months ended June 30, 2001 relating to staff
reductions and leasing of excess space.
Provision for doubtful accounts. No charges for doubtful accounts were
taken during the six months ended June 30, 2002. During the six months ended
June 30, 2001 the Company recorded a charge of $1.2 million as a provision
against several trade accounts receivable balances. Due to significant
uncertainty surrounding collection of several specific accounts the Company took
a charge to value the accounts at the most likely amount to be collected. This
provision arose due to the increased economic uncertainty in the vertical
industries the Company services.
Amortization and provision for valuation of Intangible Assets. No charges
for amortization of intangible assets were taken during the six months ended
June 30, 2002, as the Company has taken a provision for valuation equal to the
remaining value of intangible assets during the year ended December 31, 2001.
Amortization and impairment charges for intangible assets for the six months
ended June 30, 2001 were $1.6 million. The charge was a result of a
determination by the Company that an impairment in the value of the Goodwill
acquired on the acquisition of Alliance Systems Inc. had occurred during the six
months ended June 30, 2001. The Company determined an impairment had occurred
due to poor historical and forecasted performance in the acquired company's
business, and as a result the Company wrote off the remaining Goodwill of $1.6
million relating to the acquisition of Alliance Systems Inc. during the six
months ended June 30, 2001.
Valuation Allowance on Investments. No charge was recorded for valuation
allowance on investments during the six months ended June 30, 2002, as a
valuation allowance equal to the remaining book value of investments was
recorded during the six months ended June 30, 2001. As part of its e-Business
strategy the Company invested in or advanced funds to three private companies in
2000. As a result of significant uncertainty over the future realization of any
return on investment or capital, the Company recorded a valuation allowance
equal to the full cost of the investments during the six months ended June 30,
2001.
-18-
Six Months Ended June 30, 2002 Compared to the Six Months Ended June 30, 2001
(continued)
Other Income (Expense). Other income was $162,000 for the six months ended
June 30, 2002 as compared to $(331,000) for the six months ended June 30, 2001.
Substantially all of other income (expense) relates to fluctuations in the
currencies of the Company's foreign operations, interest income on cash and
short-term deposits, and interest expense on short-term borrowings under the
line of credit and capital lease obligations.
Income Taxes. The Company provided for income tax recoveries on losses for
the six months ended June 30, 2002 at the rate of 29.0%. The Company's effective
tax rate reflects the blended effect of Canadian, US, and other foreign
jurisdictions' tax rates.
Income (loss) from Discontinued Operations. During the six months ended
June 30, 2002 the Company announced its intention to divest itself of its
Hosting and IT services subsidiary Connectria Corporation (Connectria). As a
result Connectria results of operations for the current and comparative periods
have been presented as Discontinued Operations. Income from Discontinued
Operations for the six months ended June 30, 2002 was $109,000 as compared to
income of $90,000 for the six months ended June 30, 2001. The increase in the
income from discontinued operations was due to strict cost control efforts
implemented at Connectria in the current period.
Liquidity and Capital Resources
The Company finances its operations, acquisitions and capital expenditures
with cash generated from operations, loans, private placements and public
offerings of its securities. At June 30, 2002, the Company had cash and cash
equivalents of $10.5 million and working capital of $9.5 million.
Cash (used in) provided by operating activities was $(0.9) million for the
six months ended June 30, 2002 compared to $1.5 million for the six months ended
June 30, 2001. The net outflow of cash from operating activities is due to a
loss from continuing operations of $2.0 million and a net increase in non-cash
working capital items of $0.3 million, partially offset by depreciation and
amortization of $1.4 million. The net increase in non-cash operating working
capital items is due primarily to a decrease in accounts payable and accruals,
partially offset by a decrease in accounts receivable. The decrease in trade
receivables is a result of increased collections during the six months ended
June 30, 2002. The decrease in accounts payable and accruals resulted from
ordinary fluctuations in the Company's business, and from the payments made on
account of certain restructuring accruals recorded during 2001.
The Company maintains as at June 30, 2002 a provision of $3.5 million with
respect to doubtful accounts. The Company intends to vigorously pursue
collection of these accounts; however, due to uncertainty with regards to these
customers' financial conditions, the Company determined that it would be prudent
to record an allowance to address this uncertainty.
The Company is currently involved in a dispute with a customer, and as a
result has reclassified $3.7 million in accounts receivable as long term as the
Company determined it is not likely to collect the amounts within one year. The
Company is currently involved in litigation to collect the amounts due. The
Company believes that its position in the matter is strong and intends to
vigorously pursue collection, but due to uncertainty regarding timing of
collection has elected to classify the receivable as long term. If the Company
is unsuccessful in collection of amounts due, or is made to refund monies
previously collected under the contract, the Company's liquidity and working
capital would be adversely affected.
Cash used by financing activities of $736,000 during the six months ended
June 30, 2002 primarily relates to $975,000 in repayments of capital leases made
during the six months ended June 30, 2002, partially offset by proceeds of
$239,000 from the issuance of shares under the employee share purchase plan. The
capital leases are to be repaid evenly over a 36 month period ending December
22, 2003, bear interest at 7.675% and are secured by certain computer hardware
and software assets of the Company.
Cash used in investing activities was $0.7 million for the six months ended
June 30, 2002 as compared to $0.6 million for the six months ended June 30,
2001. Total investing activity during the six months ended June 30, 2002
consisted of, $0.7 million in purchases of capital assets. Purchases of capital
assets relate primarily to computer hardware and software for use in
implementation activities. Investing activities in 2001 related primarily to
purchases of capital assets, offset by proceeds on settlement of the note
receivable and proceeds on sale of investments.
Existing sources of liquidity at June 30, 2002 included $10.5 million of
cash and cash equivalents and funds available under the Company's operating line
of credit. As at June 30, 2002, the Company's borrowing capacity under the line
of credit was $10 CDN million. Under the terms of the agreement, borrowings and
letters of credit under the line are limited to 75% to 90% of eligible
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accounts receivable. Borrowings accrue interest at the bank's prime rate plus
0.5%. At June 30, 2002, the Company had not drawn upon this line of credit.
The Company believes that the principal source of its liquidity is
operating cash flow. Certain circumstances including a reduction in the demand
for the Company's products, an increase in the length of the sales cycle for the
Company's products, an increase in operating costs, unfavorable results of
litigation, or general economic slowdowns could have a material impact on the
Company's operating cash flow and liquidity. See Exhibit 99.1 and
"Forward-Looking Statements".
The Company believes that future cash flows from operations and its
borrowing capacity under the operating line of credit combined with current cash
balances 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 has no material
additional commitments other than capital and operating leases. Future growth or
other investing activities may require the Company to obtain additional equity
or debt financing, which may or may not be available on attractive terms, or at
all, or may be dilutive to current or future shareholders.
In addition to these commercial commitments the Company has also provided,
as performance bonds, an irrevocable revolving letter of credit in the amount of
EUR 751,623 ($665,801) expiring May 31, 2003, and an additional letter of credit
in the amount of EUR 75,855 ($66,752) expiring February 28, 2003. The Company
has pledged an amount equal to the letters of credit and guarantee against its
operating line of credit as security.
Derivative Financial Instruments
The Company generates a significant portion of sales from sales to
customers located outside the United States, principally in Canada and Europe.
Canadian sales made by the Company are usually denominated in Canadian dollars.
International sales are made from a foreign wholly owned subsidiary and are
typically denominated in either U.S. dollars or Euros. The Company's
international business is subject to risks typical of an international business
including, but not limited to: differing economic conditions, changes in
political climate, differing tax structures, other regulations and restrictions,
and foreign exchange rate volatility. Accordingly, the Company's future results
could be materially adversely impacted by changes in these or other factors. The
Company may enter into foreign exchange forward contracts to offset the impact
of currency fluctuations on certain non-functional currency assets and
liabilities, primarily denominated in the Canadian dollar, Euro and British
pound. The foreign exchange forward contracts the Company enters into generally
have original maturities ranging from three to eighteen months. The Company does
not enter into foreign exchange forward contracts for trading purposes, and does
not expect gains or losses on these contracts to have a material impact on the
Company's financial results.
The Company's foreign currency forward contracts are executed with credit
worthy banks and are denominated in currencies of major industrial countries. As
at June 30, 2002 the Company had no foreign currency forward contracts
outstanding.
-20-
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk is foreign currency exchange rates. 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 United States
dollars. The Company has operations in Canada and Europe in addition to its
United States operations and did not hedge these exposures during the quarterly
period ended June 30, 2002. However, the Company may from time-to-time hedge any
net exposure to currencies other than the United States dollar.
As of June 30, 2002, 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 and assets would be
approximately $3.5 million. 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.
-21-
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
MDSI Mobile Data Solutions Inc. v. Citizens Telecom Services Co., L.L.C. -
U.S. District Court, Texas District Court Collin County - 366 Judicial District
(Docket No. 366-01914-00).
On November 22, 2000, MDSI filed suit in Texas District Court Collin County
against Citizens Telecom Services Co., L.L.C., generally alleging that Citizens
breached a series of contracts dated October 15, 1998. The suit alleges that
Citizens has wrongfully terminated the contracts and failed to pay sums due of
approximately $3.7 million. The suit seeks damages, interest and attorneys'
fees. In late February 2001, Citizens filed an answer and counter claim alleging
that MDSI breached the contracts, justifying Citizens' termination of the
contracts and entitling Citizens to repayment of all sums paid to MDSI of
approximately $3.5 million in addition to interest and attorneys' fees. At
Citizens request the parties held a mediation on April 2, 2001. Mediation was
not successful and both parties have begun discovery, in preparation for a court
trial in April 2003. MDSI disputes Citizens' claims and intends to pursue the
lawsuit vigorously.
From time to time, the Company is a party to litigation and claims incident
to the ordinary course of its 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, operating results and cash flows.
For ITEMS 2 and 3 there was no reportable information for the three months
ended June 30, 2002.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 2002 Annual General Meeting of Shareholders was held on June
27, 2002. A total of 5,292,321 common shares of the Company were represented in
person or by proxy at the meeting, consisting of 59.5% of the total number of
common shares of the Company outstanding on May 16, 2002, the record date for
the meeting.
At the meeting, the following directors of the Company were re-elected to
serve as directors until the 2003 Annual General Meeting or until their earlier
retirement, resignation, or removal. The following table sets forth the voting
in the election for directors:
Nominee Votes Cast For Votes Cast Against Votes Withheld Abstentions Not Voted
- ------- -------------- ------------------ -------------- ----------- ---------
Erik Dysthe 4,992,659 - 284,414 15,248 -
Terrence P. McGarty 5,065,073 - 212,000 15,248 -
Robert C. Harris, Jr. 4,993,473 - 283,600 15,248 -
Mark Rochefort 4,983,473 - 293,600 15,248 -
Peter Ciceri 5,064,873 - 212,200 15,248 -
David Van Valkenberg 5,065,173 - 211,900 15,248 -
The shareholders also ratified the appointment of Deloitte & Touche LLP as
the Company's auditors, and approved the establishment of the 2002 Stock
Purchase Plan, which provides for the purchase of up to 100,000 common shares of
the Company by the Company's employees. The following table sets forth
information regarding the voting on the proposals:
Proposal Votes Cast For Votes Cast Against Votes Withheld Abstentions Not Voted
- -------- -------------- ------------------ -------------- ----------- ---------
Appointment of Deloitte & 5,281,022 1,967 3,529 5,803 -
Touche LLP
Approval of 2002 Stock 4,273,455 316,860 - 36,425 -
Purchase Plan
For ITEM 5, there was no reportable information for the three months ended
June 30, 2002.
-22-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------ -----------
2.1(3) Agreement and Plan of Merger dated April 17, 1997 among the
Company, MDSI Acquisition Corp., Alliance, Geoffrey Engerman
and Doug Engerman
3.1(1) Articles of Incorporation of the Company
3.2(1) Articles of Amendments of the Company
3.3(1) By-laws of the Company
4.1(1) Form of Common Share Certificate
10.1(1)(2) 1996 Stock Option Plan
10.2(2)(4) 1997 Stock Option Plan
10.3(2)(4) 1998 Stock Option Plan
10.4(2)(5) 2000 Stock Purchase Plan
10.5(2)(5) 1999 Stock Option Plan
10.6(2)(6) 1998 Stock Option Plan for Connectria Corporation (formerly,
Catalyst Solutions Group, Inc.)
10.7(2)(7) 2000 Stock Option Plan
10.8(1) Form of Indemnification Agreement between the Company and
certain officers of the Company
10.9(1)(2) Employment Agreement dated April 1, 1996 between the Company
and Erik Dysthe
10.10(1) Lease dated September 25, 1997 between Sun Life Assurance
Company of Canada and the Company
10.11(1) Lease dated April 8, 1993 between Cambridge Scanning Company
Limited and Spectronics Micro Systems Limited
10.12(5) Master Purchase and Sale Agreement dated June 1, 1999
between Digital Dispatch Systems Inc. and the Company
(without schedules or exhibits)*
10.13(8) Agreement and Plan of Reorganization, dated as of May 9,
2000, among MDSI, MDSI Acquisition Corporation, Connectria
and Certain Principal Shareholders*
10.14(8) Form of Voting, Lockup and Registration Rights Agreement
among MDSI, MDSI Acquisition Corporation, Connectria and
Certain Principal Shareholders
10.15(2)(9) Employment Agreement dated March 26, 2001 between the
Company and Erik Dysthe
10.16(2)(9) Employment Agreement dated April 24, 2001 between the
Company and Gerald F. Chew
10.17(2)(9) Employment Agreement dated May 7, 2001 between the Company
and Peter H. Rankin
10.18(10) Lease dated October 12, 2001 between Crown Diversified
Industries Corporation and Connectria Corporation a
subsidiary of the Company
10.19(10) Lease dated May 14, 1999 between California Public
Employees' Retirement System and Mobile Data Solutions Inc.
a subsidiary of the Company
10.20(10) Amending Agreement dated December 1, 1998 between Sun Life
Assurance Company of Canada and the Company
10.21(2)(10) Employment Agreement dated May 9, 2001 between the Company
and Richard S. Waidmann
10.22(2)(10) Employment Agreement dated May 9, 2001 between the Company
and Eric Y. Miller
10.23(2) Employment Agreement dated January 2, 2002 between the
Company and Verne Pecho
10.24(11) Exchange Agreement dated as of June 26, 2002 among the
Company, Connectria Corporation, Richard S. Waidmann and
Eric Y. Miller
10.25(11) Amendment to Exchange Agreement dated as of June 30, 2002
among the Company, Connectria Corporation, Richard S.
Waidmann and Eric Y. Miller
10.26(11) Warrant dated as of June 29, 2002 to purchase 50,380 shares
of Series A Nonvoting Preferred Stock of Connectria
Corporation
10.27(11) $250,000 Promissory Note dated as of June 30, 2002 made by
Connectria Corporation in favor of the Company
10.28(11) Security Agreement dated as of June 30, 2002 between
Connectria Connectria and the Company
10.29 2002 Stock Purchase Plan
99.1 Risk Factors
--------------------
(1) Previously filed as exhibits with the same corresponding number with
the Registrants' Registration Statement on Form F-1 (Registration No.
J33-5872) and amendments numbers 1 and 2 thereto, filed with the
Securities and Exchange Commission on October 28, 1996, November 13,
1996 and November 25, 1996, respectively.
(2) This document has been identified as a management contract or
compensatory plan or arrangement.
(3) Previously filed as an exhibit to Registrant's Registration Statement
on Form F-4.
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(4) Previously filed as exhibits with the same corresponding number with
the Registrant's Form 10-K for the year ended December 31, 1998.
(5) Previously filed as exhibits with the same corresponding number with
the Registrant's Form 10-K for the year ended December 31, 1999.
(6) Previously filed as exhibits with the Registrant's Registration
Statement on Form S-8 filed on July 12, 2000.
(7) Previously filed as exhibits with the Registrant's Registration
Statement on Form S-8 filed on November 22, 2000.
(8) Previously filed as exhibits with the Registrant's Current Report on
Form 8-K filed on June 15, 2000.
(9) Previously filed as exhibits with the Registrant's Form 10-Q for the
quarterly period ended September 30, 2001.
(10) Previously filed as exhibits with the Registrant's Form 10-K for the
year ended December 31, 2001.
(11) Previously filed as exhibits with the Registrant's Form 8-K filed on
August 14, 2002.
* The Company agrees to supplementally furnish a copy of any omitted
schedule or exhibit to the Securities and Exchange Commission upon
request.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three month period ended June
30, 2002.
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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: August 14, 2002 By: /s/ Erik Dysthe
---------------------------------------------
Name: Erik Dysthe
Title: President, Chief Executive Officer,
Chairman of the Board and Director
Date: August 14, 2002 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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