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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2003
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act. Yes [ ] No [X]
The number of outstanding shares of the Registrant's
common stock, no par value, at May 12, 2003 was 8,202,602.
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MDSI Mobile Data Solutions Inc.
INDEX TO THE FORM 10-Q
For the quarterly period ended March 31, 2003
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..........................11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...21
ITEM 4. CONTROLS AND PROCEDURES .....................................22
Part II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS ....................................... 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..........................24
SIGNATURES ...................................................................26
CERTIFICATIONS ...............................................................27
-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
March 31, December 31,
--------------------------------------
2003 2002
--------------- ---------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 12,549,244 $ 11,016,945
Accounts receivable, net
Trade (net of allowance for doubtful accounts $2,497,031;
2002 - $2,506,614) 7,899,974 6,705,088
Unbilled 3,130,912 5,347,993
Prepaid expenses and other assets 1,126,251 1,552,236
--------------- ---------------
24,706,381 24,622,262
CAPITAL ASSETS, NET 9,489,419 9,798,087
LONG TERM RECEIVABLE (note 6) 2,749,860 2,749,860
DEFERRED INCOME TAXES 534,640 534,640
--------------- ---------------
TOTAL ASSETS $ 37,480,300 $ 37,704,849
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,255,509 1,777,465
Accrued liabilities (note 5) 3,018,920 3,300,113
Income taxes payable 605,531 602,717
Deferred revenue 8,254,604 7,503,613
Current obligations under capital leases 1,901,935 2,073,906
--------------- ---------------
15,036,499 15,257,814
OBLIGATIONS UNDER CAPITAL LEASES 1,614,952 1,913,538
--------------- ---------------
TOTAL LIABILITIES 16,651,451 17,171,352
STOCKHOLDERS' EQUITY
Common stock 44,281,578 44,208,511
Additional paid-up capital 2,222,128 2,222,128
Deficit (24,984,753) (25,207,038)
Accumulated other comprehensive loss (690,104) (690,104)
--------------- ---------------
20,828,849 20,533,497
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 37,480,300 $ 37,704,849
=============== ===============
Commitments and Contingencies (note 6)
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 March 31,
-----------------------------------
2003 2002
--------------- ---------------
REVENUE
Software and services $ 7,850,659 $ 5,807,093
Maintenance and support 2,602,387 2,557,073
Third party products and services 1,852,745 236,390
--------------- ---------------
12,305,791 8,600,556
DIRECT COSTS 5,928,104 3,630,318
--------------- ---------------
GROSS PROFIT 6,377,687 4,970,238
--------------- ---------------
OPERATING EXPENSES
Research and development 1,279,026 1,460,035
Sales and marketing 2,947,943 2,413,893
General and administrative 1,570,066 1,664,442
--------------- ---------------
5,797,035 5,538,370
--------------- ---------------
OPERATING INCOME (LOSS) 580,652 (568,132)
OTHER (EXPENSE) INCOME (252,619) 76,233
--------------- ---------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE TAX PROVISION 328,033 (491,899)
INCOME TAX EXPENSE (RECOVERY) FROM CONTINUING OPERATIONS 105,748 (125,700)
--------------- ---------------
222,285 (366,199)
INCOME FROM DISCONTINUED OPERATIONS (note 2) - 86,415
--------------- ---------------
NET INCOME (LOSS) FOR THE PERIOD 222,285 (279,784)
DEFICIT, BEGINNING OF PERIOD (25,207,038) (23,791,781)
--------------- ---------------
DEFICIT, END OF PERIOD $(24,984,753) $(24,071,565)
=============== ===============
Earnings (Loss) per common share
Earnings (Loss) from continuing operations
Basic $ 0.03 $ (0.04)
=============== ===============
Diluted $ 0.03 $ (0.04)
=============== ===============
Net Earnings (Loss)
Basic $ 0.03 $ (0.03)
=============== ===============
Diluted $ 0.03 $ (0.04)
=============== ===============
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)
Three months ended March 31,
--------------------------------
2003 2002
-------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) from continuing operations $ 222,285 (366,199)
Items not affecting cash:
Depreciation 730,761 673,591
Changes in non-cash operating working capital items 1,398,836 125,285
-------------- -------------
Net cash provided by operating activities 2,351,882 432,677
-------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common shares 73,067 212,164
Repayment of capital leases (240,971) (508,800)
-------------- -------------
Net cash used by financing activities (167,904) (296,636)
-------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of capital assets (651,679) (210,894)
-------------- -------------
Net cash used in investing activities (651,679) (210,894)
-------------- -------------
Net cash provided by (used for) continuing operations 1,532,299 (74,853)
Net cash used for discontinued operations (note 2) - (253,768)
-------------- -------------
NET CASH INFLOW (OUTFLOW) 1,532,299 (328,621)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 11,016,945 13,176,080
-------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $12,549,244 $12,847,459
============== =============
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING AND FINANCING ACTIVITIES
During the year ended December 31, 2002 the Company entered into two capital
lease arrangements for the gross amount of $2,922,078 for newly purchased
capital assets. As a result of these arrangements the Company did not incur cash
outlays to purchase these assets but will pay lease obligations with interest
accruing at interest rates of up to 9.5% over terms of up to three years. Since
these asset purchases in 2002 are non cash transactions, the gross amount of the
leases have been excluded from both the Acquisition of Capital Assets and
Proceeds from Capital Leases line items for the year ended December 31, 2002,
and instead only the principal portion of repayments are included in acquisition
of capital assets and proceeds from capital leases in the period in which they
are paid. During the three months ended March 31, 2003 $229,586 (2002 - $ nil)
of principal repayments have been included in these line items.
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, 2002.
(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 other 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 April 2003 the Financial Accounting Standards Board (FASB) issued
Statement No. 149 ("SFAS 149"), Amendment of SFAS No. 133 on
Derivative Instruments and Hedging Activities. The Statement amends
and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133. In particular, it (1) clarifies under
what circumstances a contract with an initial net investment meets the
characteristic of a derivative as discussed in SFAS No. 133, (2)
clarifies when a derivative contains a financing component, (3) amends
the definition of an underlying to conform it to the language used in
FASB Interpretation No. 45, Guarantor Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others and (4) amends certain other existing
pronouncements.
SFAS 149 is effective for contracts entered into or modified after
June 30, 2003, except as stated below and for hedging relationships
designated after June 30, 2003.
-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
The provisions of SFAS 149 that relate to SFAS No. 133 Implementation
Issues that have been effective for fiscal quarters that began prior
to June 15, 2003, should continue to be applied in accordance with
their respective effective dates. In addition, certain provisions
relating to forward purchases or sales of when-issued securities or
other securities that do not yet exist, should be applied to existing
contracts as well as new contracts entered into after June 30, 2003.
SFAS 149 should be applied prospectively.
The Company will adopt the provisions of SFAS 149 for any contracts
entered into after June 30, 2003 and is not affected by Implementation
Issues that would require earlier adoption. The Company is currently
evaluating the effect that the adoption of SFAS 149 will have on its
results of operations and financial condition.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities", an Interpretation of
ARB No. 51. FIN 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the equity
investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at
risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective
for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired
prior to February 1, 2003, the provisions of FIN 46 must be applied
for the first interim or annual period beginning after June 15, 2003.
The Company does not anticipate that the adoption of FIN 46 will have
a material impact on the results of operations and financial condition
of the Company.
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. Adoption of this statement did not impact the Company's
financial statements for quarter ended March 31, 2003.
In November 2002, the FASB issued FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others" (FIN45). FIN
45 requires that upon issuance of a guarantee, a guarantor must
recognize a liability for the fair value of an obligation assumed
under a guarantee. FIN 45 also requires additional disclosures by a
guarantor in its interim and annual financial statements about the
obligations associated with guarantees issued. Although the disclosure
provisions of FIN 45 previously were adopted by the Company, the
recognition provisions of FIN 45 became effective as of January 1,
2003. The adoption of the recognition provisions of FIN 45 did not
have a material impact on the Company's results of operations or
financial position.
-5-
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)
(e) Stock-based compensation
The Company accounts for stock-based compensation using the intrinsic
value based method whereby compensation cost is recorded for the
excess, if any, of the quoted market price of the common share over
the exercise price of the common stock option at the date granted.
The following pro forma financial information presents the net loss
for the quarter and loss per common share had the Company adopted
Statement of Financial Accounting Standard No. 123 (SFAS 123)
Accounting for Stock-based Compensation.
Three months ended March 31,
-------------------------------
2003 2002
---------- ----------
Net income (loss) for the period $5,446 $(473,043)
---------- ----------
Basic and fully diluted loss per common share $ 0.00 $ (0.05)
========== ==========
Using the fair value method for stock-based compensation, additional
compensation costs of approximately $216,839 would have been recorded
for the three months ended March 31, 2003 (2002 - $193,259). This
amount is determined using an option pricing model assuming no
dividends are to be paid, an average vesting period of four years,
average life of the option of 5 years a weighted average annualized
volatility of the Company's share price of 73% and a weighted average
annualized risk free interest rate at 2.7%.
2. DISCONTINUED OPERATIONS
During 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. The transaction closed in July
2002. Pursuant to the terms of the agreement, the Company received from the
former Connectria shareholders 824,700 shares of MDSI that had an
approximate market value of $2.8 million 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
received 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 has a face value of $100 per share, bears a dividend of
five percent per annum, bears 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 advanced 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. As at March 31, 2003 the
entire amount of the prepaid hosting services has been amortized to income.
The Company recognized a gain of $12,419 on the disposal of Connectria
during the quarter ended June 30, 2002. Connectria represented a
significant segment of the Company's business.
-6-
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,
--------------------------------------------------------------------------------------------------------------------
March 31, 2003 March 31, 2002
-------------- --------------
Revenues $ - $ 2,640,211
Income (loss) before income taxes - 86,415
Income tax - -
-------------- --------------
- 86,415
Income on disposal
net of income taxes - -
-------------- --------------
Income (loss) from discontinued operations $ - $ 86,415
============== ==============
Cash flows of discontinued operations
Three months ended,
--------------------------------------------------------------------------------------------------------------------
March 31, 2003 March 31, 2002
-------------- --------------
Operating activities $ - $ (10,488)
Investing activities - (114,663)
Financing activities - (128,617)
-------------- --------------
Cash used for discontinued operations $ - $ (253,768)
============== ==============
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
March 31,
------------------------------------
2003 2002
------------------ ----------------
Canada......................................... $ 278,837 $ 251,130
United States.................................. 5,358,483 6,433,789
Europe Middle East and Africa.................. 6,387,089 1,915,637
Asia and Other................................. 281,382 -
------------------ ----------------
$ 12,305,791 $ 8,600,556
================== ================
Major customers
During the three months ended March 31, 2003 revenue from two customers
accounted for approximately 25.0% and 19.3%, respectively of total revenue.
For the three months ended March 31, 2002 one customer did not account for
greater than 10% of total revenue.
-7-
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Condensed Consolidated Financial Statements
(Expressed in United States dollars)
(Unaudited)
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
March 31,
--------------------------
2003 2002
---------- ----------
Weighted average shares outstanding......... 8,185,445 8,726,314
Effect of dilutive securities
Stock options............................... 3,103 -
---------- ----------
Diluted weighted average shares outstanding. 8,188,548 8,726,314
=========== ===========
5. RESTRUCTURING CHARGE
During 2001, in response to uncertain economic conditions and poor
financial performance, the Company announced a restructuring plan approved
by the Company's Board of Directors designed to reduce operating costs. In
connection with the restructuring the Company recorded a charge of $6.1
million. 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 (4,996,153)
---------------------
Accrued restructuring charges included in
accrued liabilities at March 31, 2003 $ 1,109,774
=====================
Provisions relating to workforce reductions, write-down of capital assets,
and other items have been fully drawn-down, and no further expenditures
relating to these items are expected to be incurred.
The Company has recorded a $1.9 million provision relating 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 $0.8 million of cash costs
relating to this provision leaving an accrual of $1.1 million remaining as
at March 31, 2003. 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.
-8-
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Condensed Consolidated Financial Statements
(Expressed in United States dollars)
(Unaudited)
6. COMMITMENTS AND CONTINGENCIES
(a) Contingency
The Company is involved in a dispute with a customer. The Company
filed suit against the customer alleging that the customer had
breached a series of contracts, and failed to pay sums due of
approximately $3.7 million. The suit sought payment of the contract
balance, plus other damages, interest and attorneys' fees. The
customer filed an answer and counterclaim alleging the Company
breached the contracts, entitling the customer to repayment of all
sums paid to the Company of approximately $3.5 million. In addition,
the customer's counterclaims alleged fraud, negligent
misrepresentation, breach of express warranty and breach of implied
warranties. The customer sought all actual, special, incidental and
consequential damages associated with these counterclaims in addition
to punitive damages, interest and attorneys' fees. The Company
received notice that the customer settled its breach of contract and
warranty claims with the Company's insurance carrier on April 16,
2003. This settlement will not result in the Company recording any
charge to earnings, as discussed below.
On March 5, 2003, the court granted the customer's motion for summary
judgment, dismissing the Company's claims for lack of sufficient
evidence of damages. The Company filed a motion for reconsideration of
this ruling. On March 26, 2003, the court denied the Company's motion.
On March 26, 2003, the court granted the Company's motion for partial
summary judgment, finding that the customer breached the professional
services agreement by wrongfully terminating the agreement. On April
8, 2003, the court granted the Company's motion for summary judgment,
dismissing the customer's counterclaims for fraud and negligent
misrepresentation.
The Company tendered defense of the customer's counterclaims to its
insurance company. The insurance company accepted defense of the
counterclaims under a reservation of rights. On April 16, 2003, the
Company was informed that its insurer reached an agreement with the
customer to settle the customer's breach of contract and breach of
warranty counterclaims for $1 million. The Company is not a party to
the settlement agreement and the settlement amount is to be paid by
its insurer. The settlement agreement preserved the Company's right to
appeal the court's ruling that dismissed the Company's claims on
summary judgment for lack of sufficient evidence of damages and the
customer's right to appeal the court's ruling that dismissed the
customer's counterclaims of fraud and negligent misrepresentation. On
May 14, 2003, the Company filed its Notice of Appeal.
The Company intends to expense the costs of ongoing attorney's fees
and costs incurred in connection with the appeal and any subsequent
trial, and any counterclaims asserted by the customer for fraud and
negligent misrepresentation, as incurred. The Company believes 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 approximately $3.7 million as a long term receivable.
Due to the uncertain nature of the receivable the Company recorded an
allowance in a prior period of $1.0 million against the amounts due.
There is currently no provision in the Company's financial statements
to address any payment to the customer if the customer is successful
in any appeal and subsequent trial on its fraud and misrepresentation
counterclaims, as the Company, after consultation with counsel, views
this to be an unlikely event. Should the Company not be successful in
its claims against the customer, the Company may be required to take a
$2.7 million dollar charge to earnings. If the customer is successful
in any fraud or negligent misrepresentation counterclaims, the Company
may be required to take an additional charge to earnings to the extent
of the judgment. Although the amount of any such judgment against the
Company for fraud or negligent misrepresentation cannot be determined,
if the customer is successful in any appeal and subsequent trial, the
Company's financial condition and results of operations would be
materially adversely effected.
From time to time, the Company is a party to other 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.
(b) Guarantee
As part of the disposition agreement with Connectria Corporation,
Connectria is to use its best efforts to terminate, or obtain the
release of MDSI from approximately $0.3 million in loan guarantees and
equipment leases made by MDSI on behalf of Connectria. To date
termination or release from these obligations has not occurred, and as
a result MDSI could potentially be liable under these obligations
should Connectria default on a payment. Based on management's
estimates, the Company does not anticipate having to make payments in
connection with these guarantees and accordingly no amounts have been
accrued as a liability in the financial statements.
-9-
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Condensed Consolidated Financial Statements
(Expressed in United States dollars)
(Unaudited)
6. COMMITMENTS AND CONTINGENCIES (continued)
(c) Committment
The Company has entered into a significant customer contract in which
the Company has agreed to utilize a certain amount of local services
and create a certain amount of commercial activity in South Africa.
The Company is in the last stages of negotiating the terms and
conditions that relate to this obligation. Based on current
negotiations, the Company expects that it will be required to utilize
local content or obtain credits equivalent to approximately $7 million
over a seven year period. The Company expects that it will be required
to furnish a performance guarantee equal to approximately 5% of such
amounts. The Company expects to fulfill its obligation through a
number of activities, including the establishment of a software
development center in South Africa, the provision of technical
services, and the provision of training to local systems integrators
who will be able to provide implementations services with respect to
the Company's software products. As the Company expects to fulfill its
obligations through the purchase of services in the normal course of
business, no liability has been established for these future spending
commitments.
-10-
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 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: 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 reduction 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 slow 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, 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, 2002.
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, configuration, customization and
training; (ii) maintenance and support, consisting of the provision of
after-sale support services as well as hourly, annual or extended maintenance
contracts; and (iii) third party products and services, consisting of the
provision of non-MDSI products and services as part of the total contract.
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. While the Company believes that economic conditions in certain of its
vertical markets show signs of improvement, the Company believes that economic
and political conditions and general trends are likely to continue to affect
demand for the Company's products and services throughout the remainder of 2003,
particularly demand for software and related services. Such factors may also
increase the amount of doubtful accounts or adversely affect the likelihood of
collection of such accounts.
-11-
In order to address the uncertainties caused by these economic trends, MDSI
announced in 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 have been 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 exceeded the estimated quarterly savings. There can be no assurance that
the workforce reductions and other measures will not have a material adverse
affect on the Company's business operations.
In connection with the restructuring the Company recorded a charge of $6.1
million in 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 (4,996,153)
---------------------
Accrued restructuring charges included in
accrued liabilities at March 31, 2003 $ 1,109,774
=====================
Provisions relating to workforce reductions, write-down of capital assets,
and other items have been fully drawn-down, and no further expenditures for
these items are expected to be incurred.
The Company's remaining restructuring accruals relate 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 $0.8 million of cash costs relating to this
provision leaving an accrual of $1.1 million remaining as at March 31, 2003. 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.
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 workforces require or where additional departments of mobile workers are
added, additional mobile computing devices may be installed, which may result in
additional revenue for the Company. See "Forward-Looking Statements."
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
-12-
agreements typically have a term of one to three years and are invoiced either
annually, quarterly, 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 and software
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. 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 this
market did not represent a material portion of MDSI's revenues. On May 24, 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 prior to 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.
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. The transaction closed in July 2002. Pursuant to the
terms of the agreement, the Company received from the former Connectria
shareholders 824,700 shares of MDSI that had a market value of approximately
$2.8 million 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 also received 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 has a face value of $100 per share,
bears a dividend of five percent per annum, bears 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 advanced 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. On closing, the Company realized a small
gain as a result of the disposition of Connectria.
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.
-13-
Recent Accounting Pronouncements
In April 2003 the Financial Accounting Standards Board (FASB) issued
Statement No. 149 ("SFAS 149"), Amendment of SFAS No. 133 on Derivative
Instruments and Hedging Activities. The Statement amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under SFAS No. 133. In
particular, it (1) clarifies under what circumstances a contract with an initial
net investment meets the characteristic of a derivative as discussed in SFAS No.
133, (2) clarifies when a derivative contains a financing component, (3) amends
the definition of an underlying to conform it to the language used in FASB
Interpretation No. 45, Guarantor Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others and (4)
amends certain other existing pronouncements.
SFAS 149 is effective for contracts entered into or modified after June 30,
2003, except as stated below and for hedging relationships designated after June
30, 2003.
The provisions of SFAS 149 that relate to SFAS No. 133 Implementation
Issues that have been effective for fiscal quarters that began prior to June 15,
2003, should continue to be applied in accordance with their respective
effective dates. In addition, certain provisions relating to forward purchases
or sales of when-issued securities or other securities that do not yet exist,
should be applied to existing contracts as well as new contracts entered into
after June 30, 2003. SFAS 149 should be applied prospectively.
The Company will adopt the provisions of SFAS 149 for any contracts entered
into after June 30, 2003 and is not affected by Implementation Issues that would
require earlier adoption. The Company is currently evaluating the effect that
the adoption of SFAS 149 will have on its results of operations and financial
condition.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities", an Interpretation of ARB No. 51.
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period beginning after June 15, 2003. The Company does not anticipate
that the adoption of FIN 46 will have a material impact on the results of
operations and financial condition of the Company.
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. Adoption of this statement did not impact the Company's financial
statements for quarter ended March 31, 2003.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN45). FIN 45 requires that upon
issuance of a guarantee, a guarantor must recognize a liability for the fair
value of an obligation assumed under a guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. Although the
disclosure provisions of FIN 45 previously were adopted by the Company, the
recognition provisions of FIN 45 became effective as of January 1, 2003. The
adoption of the recognition provisions of FIN 45 did not have a material impact
on the Company's results of operations or financial position.
Critical Accounting Policies and Significant Estimates
The significant accounting policies are outlined within Note 1 to the
Financial Statements. Some of those accounting policies require the Company to
make estimates and assumptions that affect the amounts reported by the Company.
The following items require the most significant judgment and involve complex
estimation:
-14-
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. 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 March 31, 2003, the allowance for doubtful
accounts was $3.5 million, composed of $2.5 million relating to current trade
receivables and $1.0 million relating to a long term receivable. 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.
Revenue Recognition - Percentage Completion
The Company uses estimates based on inputs to determine the percentage
completion of its software and service implementation contracts and thus its
revenue recognition. Under the percentage-of-completion method, sales and gross
profit are recognized as the work is performed based on the relationship between
costs incurred and the total estimated costs of completion. These estimates and
contracts are reviewed regularly and are adjusted prospectively to reflect the
Company's best estimate at the time. Provision for estimated losses on contracts
are recorded when identifiable. 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.
Contingencies
The Company is involved in a dispute with Citizens Telcom Services Co., L.L.C.
The Company filed suit against Citizens alleging that Citizens had breached a
series of contracts, and failed to pay sums due. Citizens filed an answer and
counterclaim alleging the Company breached the contracts, entitling Citizens to
repayment of all sums paid to the Company of approximately $3.5 million. In
addition, Citizens' counterclaims alleged fraud, negligent misrepresentation,
breach of express warranty and breach of implied warranties. Citizens sought all
actual, special, incidental and consequential damages associated with these
counterclaims, in addition to punitive damages, interest and attorneys' fees.
The Company received notice on April 16, 2003 that Citizens settled its breach
of contract, and warranty claim with the Company's insurance company. This
settlement will not result in the Company recording any charge to earnings, as
discussed below.
On March 5, 2003, the court granted Citizens' motion for summary judgment,
dismissing the Company's claims for lack of sufficient evidence of damages. The
Company filed a motion for reconsideration of this ruling. On March 26, 2003,
the court denied the Company's motion. On March 26, 2003, the court granted the
Company's motion for partial summary judgment, finding that Citizens breached
the professional services agreement by wrongfully terminating the agreement. On
April 8, 2003, the court granted the Company's motion for summary judgment on
the Citizens' counterclaims for fraud and negligent misrepresentation.
-15-
The Company tendered defense of the customer's counterclaims to its
insurance Company. The insurance company accepted defense of the counterclaims
under a reservation of rights. On April 16, 2003, the Company was informed that
its insurer reached an agreement with Citizens to settle Citizens' breach of
contract and breach of warranty counterclaims for $1 million. The Company is not
a party to the settlement agreement and the settlement amount is to be paid by
its insurer. The settlement agreement preserved the Company's right to appeal
the court's ruling that dismissed the Company's claims on summary judgment for
lack of sufficient evidence of damages and Citizens' right to appeal the court's
ruling that dismissed Citizens' counterclaims of fraud and negligent
misrepresentation. On May 14, 2003, the Company filed its Notice of Appeal.
The Company intends to expense the costs of ongoing attorney's fees and
costs incurred in connection with the appeal and any subsequent trial, and any
counterclaims asserted by the customer for fraud and negligent
misrepresentation, as incurred. The Company has classified the $3.7 million
receivable from Citizens as a long term receivable on its consolidated balance
sheet as of March 31, 2003, and due to the uncertain nature of the receivable
has recorded an allowance in a prior period of $1.0 million against the amounts
due. There is currently no provision in the Company's financial statements to
address any payment to the customer if the customer is successful in any appeal
and subsequent trial on its fraud and misrepresentation counterclaims, as the
Company, after consultation with counsel, views this to be an unlikely event.
Should the Company not be successful in its claims against the customer, the
Company may be required to take a $2.7 million dollar charge to earnings. If the
customer is successful in any fraud or negligent misrepresentation
counterclaims, the Company may be required to take an additional charge to
earnings to the extent of the judgment. Although the amount of any such judgment
against the Company for fraud or negligent misrepresentation cannot be
determined, if the customer is successful in any appeal and subsequent trial,
the Company's financial condition and results of operations would be materially
adversely effected. See the "Litigation" risk factor in Exhibit 99.1 hereto and
see "Forward-Looking Statements".
Results of Operations
The Company's net income was $0.2 million for the three months ended March
31, 2003. This compares to a net loss of $0.3 million for the three months ended
March 31, 2002. The increase in income for the period is due primarily to
increased revenues derived from several significant contracts during the period.
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 March 31,
----------------------------
2003 2002
------------ -----------
REVENUE
Software and services 63.8% 67.5%
Maintenance and support 21.2% 29.7%
Third party products and services 15.0% 2.8%
------------ -----------
100.0% 100.0%
DIRECT COSTS 48.2% 42.2%
------------ -----------
GROSS PROFIT 51.8% 57.8%
------------ -----------
OPERATING EXPENSES
Research and development 10.4% 17.0%
Sales and marketing 24.0% 28.1%
General and administrative 12.8% 19.3%
------------ -----------
47.1% 64.4%
------------ -----------
OPERATING INCOME (LOSS) 4.7% (6.6)%
OTHER (EXPENSE) INCOME (2.0)% 0.9%
------------ -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE TAX PROVISION 2.7% (5.7)%
INCOME TAX EXPENSE (RECOVERY) FROM CONTINUING OPERATIONS 0.9% (1.4)%
------------ -----------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS 1.8% (4.3)%
INCOME FROM DISCONTINUED OPERATIONS -% 1.0%
------------ -----------
NET INCOME (LOSS) FOR THE PERIOD 1.8% (3.3)%
============= ==============
Three Months Ended March 31, 2003 Compared to the Three Months Ended March 31,
2002
Revenue. Revenue increased by $3.7 million or 43.1% for the three months
ended March 31, 2003 as compared to the three months ended March 31, 2002. This
increase was primarily due to increases in revenue from software and services
and third party products and services, during the first quarter of 2003 relative
to the same period in 2002.
-16-
Three Months Ended March 31, 2003 Compared to the Three Months Ended March 31,
2002 (continued)
Software and services revenue increased by $2.0 million or 35.2% for the
three months ended March 31, 2003 as compared to the three months ended March
31, 2002. The increase in revenue is attributable to several significant
contracts the Company has entered into over the last several quarters,
representing increased success in the core markets the Company serves. These
contracts continue to generate significant revenue for the Company. The Company
was not earning revenue from these contracts for the three months ended March
31, 2002 and therefore the Company's Software and Service revenues have
significantly increased for the three months ended March 31, 2003 as compared to
the three months ended March 31, 2002. The Company expects that these contracts
will continue to make up a significant portion of revenues over the next year.
"See Forward Looking Statements". While the Company believes that economic
conditions in certain of its vertical markets show signs of improvement, the
Company anticipates that economic conditions and general trends are likely to
continue to have an adverse impact on software and services revenues in future
periods. See "Forward-Looking Statements".
Maintenance and support revenues were $2.6 million for the three months
ended March 31, 2003 as compared to $2.6 million for the three months ended
March 31, 2002. Maintenance and support revenue has increased marginally
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 which the Company is engaged to provide in support of its
installations.
Third party products and services revenue increased by $1.6 million for the
three months ended March 31, 2003, compared to the three months ended March 31,
2002. Third party products and services revenue is primarily earned from certain
customers in the utilities market pursuant to agreements under which the Company
provides third party products and services, typically host computer equipment
and mobile computing devices, as part of the installation of software and
provision of services. 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 at no
margin, in connection with one particular contract, and therefore expects that
future revenues from third party products and services will increase in the near
term. For the three months ended March 31, 2003 approximately $1.1 million of
these third party services were provided. See "Forward Looking Statements."
Direct Costs. Direct costs were 48.2% of revenue for the three months ended
March 31, 2003, compared to 42.2% for the three months ended March 31, 2002.
Direct costs include labor and other costs directly related to a project
including those related to the provision of services and support, and costs
related to equipment purchased for sale to third parties. Labor costs include
direct payroll, benefits and overhead charges. The increase in direct costs as a
percentage of revenue occurred as the Company has recently entered into an
agreement whereby it has agreed to supply a large amount of third-party services
at no margin, in connection with one particular contract. As a result, direct
costs as a percentage of revenue have increased, and the Company expects that
direct costs as a percentage of revenue will remain relatively consistent with
the current period in the near term. See "Forward-Looking Statements."
Gross Margins. Gross margins were 51.8% of revenue for the three months
ended March 31, 2003, compared to 57.8% for the three months ended March 31,
2002. The decrease in gross margin as a percentage of revenue relates primarily
to a recent agreement whereby the Company has agreed to supply a large amount of
third-party services at no margin. During the current period the Company
recognized approximately $1.1 million in third party revenues and costs related
to this project and as a result of this work, the Company's gross margins as a
percentage of revenue decreased. The Company expects that in the near term that
its gross margins as a percentage of revenue will remain consistent with the
current period. "See "Forward-Looking Statements."
-17-
Three Months Ended March 31, 2003 Compared to the Three Months Ended March 31,
2002 (continued)
Research and Development. Research and development expenses were $1.3
million, or 10.4% of revenue, for the three months ended March 31, 2003,
compared to $1.5 million, or 17.0% of revenue, for the three months ended March
31, 2002. The decrease in research and development expenses is a result of
research and development personnel being utililized on revenue producing
projects in the current period, and corresponding portions of the associated
salary costs for these staff being reflected as direct costs as opposed to
research and development expenses. 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 $2.9 million or
24.0% of revenue for the three months ended March 31, 2003 and $2.4 million or
28.1% of revenue for the three months ended March 31, 2002. Total sales and
marketing expenses represents an increase of approximately $0.5 million as
compared to the same period of 2002. The increase in expenditures in the current
period was due to an increase in commission costs 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 $1.6
million, or 12.8% of revenue, for the three months ended March 31, 2003 and $1.7
million, or 19.3% of revenue, for the three months ended March 31, 2002. General
and administrative expenses remained relatively consistent with the comparative
period as a result of cost control efforts initiated by the Company. The Company
expects that in the near future, general and administrative expenditures will
remain relatively consistent with current levels. See "Forward-Looking
Statements".
Other (Expense) Income. Other (expense) income was ($0.3) million for the
three months ended March 31, 2003 as compared to approximately $80,000 for the
three months ended March 31, 2002. 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. In
particular the U.S. dollar weakened during the current period and the Company's
foreign denominated liabilities increased in value which when reflected in U.S.
dollars caused an unrealized foreign exchange loss.
Income Taxes. The Company provided for income tax expense (recovery) on
income (losses) for the three months ended March 31, 2003 and 2002 at rates of
32.2% and (26%) respectively. 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 its Hosting and IT
services subsidiary Connectria Corporation (Connectria). As a result, the
historical results of operations for Connectria have been presented as
Discontinued Operations. Income from Discontinued Operations for the three
months ended March 31, 2002 was $86,000. As the transaction was completed in
July of 2002 all assets and liabilities of Connectria were liquidated by the end
of July 2002 and no income or loss was incurred from discontinued operations
during the current period. Going forward, the Company expects no further
financial statement impact from this disposition. See "Forward-Looking
Statements".
Liquidity and Capital Resources
The Company has financed its operations, acquisitions and capital
expenditures with cash generated from operations, loans, private placements and
public offerings of its securities. At March 31, 2003, the Company had cash and
cash equivalents of $12.5 million and working capital of $9.7 million.
Cash provided by operating activities was $2.4 million for the three months
ended March 31, 2003 compared to $0.4 million for the three months ended March
31, 2002. The net inflow of cash from operating activities, after adding back
depreciation and amortization of $0.7 million is due to a net decrease in
non-cash working capital items of $1.4 million and net income of $0.2 for the
three months ending March 31, 2003. The net decrease in non-cash operating
working capital items is due primarily to a net decrease in unbilled trade
receivables, and an increase in deferred revenue, partially offset by an
increase in trade accounts receivable. The decrease in unbilled trade
receivables and increase in deferred revenue are due to timing differences
arising between revenue recognition and
-18-
billing milestones in multiphase projects. The increase in trade receivables is
a result of increased billings during the three months ended March 31, 2003.
The Company maintains as at March 31, 2003 a provision of $3.5 million with
respect to doubtful accounts including $1.0 million classified as non current.
The Company intends to vigorously pursue collection of these accounts; however,
due to uncertainty with regards to ultimate collection, the Company determined
that it would be prudent to maintain an allowance to address this uncertainty.
The Company is currently involved in a dispute with a customer, and as a
result had previously 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. As part of its total $3.5 million dollar doubtful accounts provision,
the Company has, in a prior period, recorded an allowance of $1.0 million,
against this receivable given the uncertain nature of collection. The Company is
currently involved in litigation to collect the amounts due. The nature and
amount of the Company's claims, the customer's counterclaims and recent
developments in the litigation are described more fully under Part II, Item 1 of
this Quarterly Report. The Company intends to expense the costs of ongoing
attorney's fees and costs incurred in connection with the appeal and any
subsequent trial, and any counterclaims asserted by the customer for fraud and
negligent misrepresentation, as incurred. Should the Company not be successful
in its claims against the customer, the Company may be required to take a $2.7
million dollar charge to earnings. If the customer is successful in any fraud or
negligent misrepresentation counterclaims, the Company may be required to take
an additional charge to earnings to the extent of the judgment. Although the
amount of any such judgment against the Company for fraud or negligent
misrepresentation cannot be determined, if the customer is successful in any
appeal and subsequent trial, the Company's financial condition and results of
operations would be materially adversely effected. There is currently no
provision in the Company's financial statements to address any payment to the
customer with respect to these counterclaims as the Company, after consultation
with counsel, views this to be an unlikely event. The Company believes that its
position in the matter is strong and intends to vigorously pursue collection. If
the Company is not successful in the litigation, the Company's financial
position, results of operations, and liquidity would be materially adversely
affected. See the "Litigation" risk factor in Exhibit 99.l hereto and see
"Forward-Looking Statements".
Cash used by financing activities of $168,000 during the three months ended
March 31, 2003 primarily relates to $241,000 in repayments of capital leases
made during the quarter, partially offset by proceeds of $73,000 from the
issuance of shares under the employee share purchase plan. The capital leases
are to be repaid over a 36 month period ending December 22, 2006, bear interest
at various interest rates to a maximum of approximately 9% and are secured by
certain computer hardware and software assets of the Company.
Cash used in investing activities was $0.7 million for the three months
ended March 31, 2003 as compared to $0.2 million for the three months ended
March 31, 2002. Total investing activity during the three months ended March 31,
2003 consisted of $0.7 million in purchases of capital assets. Purchases of
capital assets include computer hardware and software for use in implementation
activities. Investing activities in 2002 also related to purchases of capital
assets.
Existing sources of liquidity at March 31, 2003 include $12.5 million of
cash and cash equivalents and additional funds available under the Company's
operating line of credit. At March 31, 2003, the Company's borrowing capacity
under the line of credit was up to $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 accounts receivable. Borrowings accrue interest at the bank's
prime rate plus 0.5%. At March 31, 2003, the Company was not using this line of
credit, other than to secure performance guarantees.
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 the risk factors in Exhibit
99.1 hereto and see "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. 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. See "Forward Looking
Statements".
-19-
As at March 31, 2003 the Company had the following contractual obligations
and commercial commitments:
--------------------------------------------------------------------------------------------------
Contractual Payments Due by Period
Obligations
--------------------------------------------------------------------------------------------------
Total Less Than One 1-3 Years 4-5 Years After 5
Year Years
--------------------------------------------------------------------------------------------------
Capital Lease $ 3,768,555 $2,116,635 $1,651,920 - -
Obligations
--------------------------------------------------------------------------------------------------
Operating Leases $ 7,279,126 $1,539,678 $2,801,583 $2,203,399 $734,466
--------------------------------------------------------------------------------------------------
Total Contractual $11,047,681 $3,656,313 $4,453,503 $2,203,399 $734,466
Obligations
--------------------------------------------------------------------------------------------------
In addition to these commercial commitments the Company has provided, as
performance bonds, an irrevocable revolving letter of credit in the amount of
$516,114 (EUR 501,082) expiring May 31, 2003, $397,760 expiring May 1, 2003, and
$1,187,623 (CAD $1,864,568) expiring October 1, 2003. The Company has pledged an
amount equal to the letters of credit as guarantees against its operating line
of credit as security.
The Company has entered into a significant customer contract in which the
Company has agreed to utilize a certain amount of local services and create a
certain amount of commercial activity in South Africa. The Company is in the
last stages of negotiating the terms and conditions that relate to this
obligation. Based on current negotiations, the Company expects that it will be
required to utilize local content or obtain credits equivalent to approximately
$7 million over a seven year period. The Company expects that it will be
required to furnish a performance guarantee equal to approximately 5% of such
amounts. The Company expects to fulfill its obligation through a number of
activities, including the establishment of a software development center in
South Africa, the provision of technical services, and the provision of training
to local systems integrators who will be able to provide implementations
services with respect to the Company's software products. As the Company expects
to fulfill its obligations through the purchase of services in the normal course
of business, no liability has been established for these future spending
commitments.
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 are made mostly by the Company and on occasion are denominated in
Canadian dollars. International sales are made mostly from a foreign subsidiary
and are typically denominated in either U.S. dollars or Euros. The Company also
incurs a significant portion of expenses outside the United States, principally
in Canada and Europe, which are typically denominated in Canadian dollars, Euros
or British pounds. 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 nonfunctional 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 March 31, 2003, the Company had no foreign currency forward contracts
outstanding.
-20-
ITEM 3: QUANTITIATIVE 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 as at March 31, 2003.
However, the Company may from time-to-time hedge any net exposure to currencies
other than the United States dollar.
As of March 31, 2003, 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 $2.5 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.
The Company does not have any material exposure to interest or commodity
risks. The Company is exposed to economic and political changes in international
markets where the Company competes such as inflation rates, recession, foreign
ownership restrictions and other external factors over which the Company has no
control; domestic and foreign government spending, budgetary and trade policies.
-21-
ITEM 4: CONTROLS AND PROCEDURES
Under the supervision and with the participation of the Company's
management, including its Chief Executive Officer and Chief Financial Officer,
the Company evaluated the effectiveness of the design and operation of its
disclosure controls and procedures (as defined in Rule 13a-14(c) under the
Exchange Act as of a date (the "Evaluation Date") within 90 days prior to the
filing date of this report. Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that, as of the Evaluation Date,
the Company's disclosure controls and procedures were effective in timely
alerting them to the material information relating to the Company (or its
consolidated subsidiaries) required to be included in the Company's periodic SEC
filings and Form 8-K reports.
There were no significant changes made in the Company's internal controls
during the period covered by this report or, to the Company's knowledge, in
other factors that could significantly affect these controls subsequent to the
date of their execution.
The Company's management, including the Chief Executive Officer and Chief
Financial Officer, does not expect that its disclosure controls and procedures
or internal controls and procedures will prevent all error and all fraud. A
control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. The design of any system of controls also is based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions; over time, control may become inadequate
because of changes in conditions, or the degree of compliance with the policies
or procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.
-22-
Part II - OTHER INFORMATION
ITEM 1. Legal Proceedings
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 alleged that
Citizens has wrongfully terminated the contracts and failed to pay sums due of
approximately $3.7 million. The suit sought payment of the contract balance,
plus other damages, interest and attorneys' fees. In late February 2001,
Citizens filed an answer and counterclaim 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
began discovery. In October 2002, Citizens filed amended counterclaims alleging
fraud, negligent misrepresentation, breach of express warranty and breach of
implied warranties. Citizens sought all actual, special, incidental and
consequential damages associated with these counterclaims, in addition to
punitive damages, interest and attorneys' fees. In March 2003, Citizens
submitted an expert report estimating that Citizens had incurred approximately
$6.1 million in damages due to lost productivity and direct costs, and that
Citizens may be entitled to additional contractual penalties from MDSI of
approximately $1.1 million. MDSI disputed these counterclaims and believes them
to be without merit. On April 16, 2003 the Company received notice that Citizens
reached a settlement on its breach of contract and warranty claims with MDSI's
insurer as discussed below, which settles Citizens claims for refunds under the
contract and any contractual or consequential damages. This settlement will not
result in the Company recording any charge to earnings, as discussed below.
On March 5, 2003, the court granted Citizens' motion for summary judgment,
dismissing MDSI's claims for lack of sufficient evidence of damages. MDSI filed
a motion for reconsideration of this ruling. On March 26, 2003, the court denied
MDSI's motion.
On March 26, 2003, the court granted MDSI's motion for partial summary
judgment, finding that Citizens breached the professional services agreement by
wrongfully terminating the agreement. On April 8, the court granted MDSI's
motion for summary judgment, dismissing Citizens' fraud and negligent
misrepresentation counterclaims.
MDSI tendered the prosecution of its claim and the defense of Citizens'
counterclaims to its insurance company. The insurance company accepted the
claims under a reservation of rights. The trial started on April 7, 2003 in
Texas District Court Collin County. On April 16, 2003, during the trial, the
Company was informed that its insurer, reached an agreement with Citizens to
settle Citizens' breach of contract and breach of warranty counterclaims for $1
million. The Company is not a party to the settlement agreement and the
settlement amount is to be paid by the insurance company. The settlement
agreement preserved the Company's right to appeal the court's ruling that
dismissed the Company's claims on summary judgment for lack of sufficient
evidence of damages and Citizens' right to appeal the court's ruling that
dismissed Citizens' counterclaims of fraud and negligent misrepresentation. On
May 14, 2003, the Company filed its Notice of Appeal.
The Company intends to expense the costs of ongoing attorney's fees and
costs incurred in connection with the appeal and any subsequent trial, and any
counterclaims asserted by the customer for fraud and negligent
misrepresentation, as incurred.
MDSI believes that its claims against Citizens are strong and it intends to
vigorously pursue its claims for damages on appeal. If, contrary to MDSI's
expectations, MDSI is not successful in its claims against the customer, the
Company may be required to take a $2.7 million dollar charge to earnings. If the
customer is successful in any fraud or negligent misrepresentation
counterclaims, the Company may be required to take an additional charge to
earnings to the extent of the judgment. Although the amount of any such judgment
against the Company for fraud or negligent misrepresentation cannot be
determined, if the customer is successful in any appeal and subsequent trial,
the Company's financial condition and results of operations would be materially
adversely effected. See the "Litigation" risk factor in Exhibit 99.1 and see
"Forward-Looking Statements".
From time to time, the Company is a party to other 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, results of operations, financial condition or liquidity.
For Items 2, 3, 4 and 5 there was no reportable information for the three months
ended March 31, 2003.
-23-
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(2)(3) 2000 Stock Option Plan
10.2(1) Form of Indemnification Agreement between the Company and
certain officers of the Company
10.3(1) Lease dated September 25, 1997 between Sun Life Assurance
Company of Canada and the Company
10.4(2)(4) Employment Agreement dated March 26, 2001 between the
Company and Erik Dysthe
10.5(2)(4) Employment Agreement dated April 24, 2001 between the
Company and Gerald F. Chew
10.6(2)(4) Employment Agreement dated May 7, 2001 between the Company
and Peter H. Rankin
10.7(5) Lease dated October 12, 2001 between Crown Diversified
Industries Corporation and Connectria Corporation a
subsidiary of the Company
10.8(5) Lease dated May 14, 1999 between California Public
Employees' Retirement System and Mobile Data Solutions Inc.
a subsidiary of the Company
10.9(5) Amending Agreement dated December 1, 1998 between Sun Life
Assurance Company of Canada and the Company
10.10(2)(5) Employment Agreement dated May 9, 2001 between the Company
and Richard S. Waidmann
10.11(2)(5) Employment Agreement dated May 9, 2001 between the Company
and Eric Y. Miller
10.12(2)(6) Employment Agreement dated January 2, 2002 between the
Company and Verne Pecho
10.13(2)(7) 2002 Stock Purchase Plan
10.14(8) Exchange Agreement dated as of June 26, 2002 among the
Company, Connectria Corporation, Richard S. Waidmann and
Eric Y. Miller
10.15(8) Amendment to Exchange Agreement dated as of June 30, 2002
among the Company, Connectria Corporation, Richard S.
Waidmann and Eric Y. Miller
10.16(8) Warrant dated as of June 29, 2002 to purchase 50,380 shares
of Series A Nonvoting Preferred Stock of Connectria
Corporation
10.17(8) $250,000 Promissory Note dated as of June 30, 2002 made by
Connectria Corporation in favor of the Company
10.18(8) Security Agreement dated as of June 30, 2002 between
Connectria Connectria and the Company
10.19(2)(9) Employment Agreement dated January 1, 1999 between the
Company and Glenn Y. Kumoi
10.20(2)(9) Settlement Agreement dated March 15, 2002 between the
Company and Gerald F. Chew
10.21(2)(9) Settlement Agreement dated May 31, 2002 between the Company
and Gene Mastro*
10.22(2) Employment Agreement dated September 12, 2001 between the
Company and Walter J. Beisheim
99.1 Risk Factors
99.2 Certification of Chief Executive Officer in connection with
the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2003
99.3 Certification of Chief Financial Officer in connection with
the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2003
- -------------------
(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 exhibits with the Registrant's Registration Statement
on Form S-8 filed on November 22, 2000.
(4) Previously filed as exhibits with the Registrant's Form 10-Q for the
quarterly period ended June 30, 2001.
(5) Previously filed as exhibits with the Registrant's Form 10-K for the year
ended December 31, 2001.
(6) Previously filed as exhibits with the Registrant's Form 10-Q for the
quarterly period ended March 31, 2002.
(7) Previously filed as exhibits with the Registrant's Form 10-Q for the
quarterly period ended June 30, 2002.
(8) Previously filed as exhibits with the Registrant's Form 8-K filed on August
14, 2002.
(9) Previously filed as exhibits with the Registrant's Form 10-K for the year
ended December 31, 2002.
* Confidential portions of this exhibit have been omitted and filed
separately with the Commission pursuant to an application for Confidential
Treatment under Rule 24b-2 promulgated under the Securities Exchange act of
1934, as amended.
-24-
(b) Reports on Form 8-K
The Company furnished a Form 8-K on March 31, 2003 pursuant to Item 9
attaching the certifications of the Company's Chief Executive Officer and Chief
Financial Officer made pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
in connection with the Company's Quarterly Report on Form 10-Q filed on March
31, 2003. The information in a Form 8-K furnished pursuant to Item 9 shall not
be deemed to be filed under the Exchange Act.
-25-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MDSI MOBILE DATA SOLUTIONS INC.
Date: May 15, 2003 By: /s/ Erik Dysthe
---------------------------------------
Name: Erik Dysthe
Title: President, Chief Executive Officer,
Chairman of the Board and Director
Date: May 15, 2003 By: /s/ Verne D. Pecho
---------------------------------------
Name: Verne D. Pecho
Title: Vice President Finance &
Administration and Chief Financial
Officer
(Principal Financial and Accounting
Officer)
-26-
CERTIFICATIONS
I, Erik Dysthe, President, Chief Executive Officer, Chairman of the Board
and Director of MDSI Mobile Data Solutions Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of MDSI Mobile Data
Solutions Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ Erik Dysthe
------------------------------------
Erik Dysthe
President, Chief Executive Officer,
Chairman of the Board and Director
-27-
I, Verne D. Pecho, Vice President Finance & Administration and Chief
Financial Officer of MDSI Mobile Data Solutions Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of MDSI Mobile Data
Solutions Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ Verne D. Pecho
------------------------------------
Verne D. Pecho
Vice President Finance &
Administration and Chief Financial
Officer
-28-