UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2002
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file Number: 0-28968
MDSI MOBILE DATA SOLUTIONS INC.
(Exact name of registrant as specified in its charter)
| CANADA (Jurisdiction of incorporation) |
NOT APPLICABLE (I.R.S. Employer Identification No.) |
10271 Shellbridge Way
Richmond, British Columbia,
Canada V6X 2W8
(604) 207-6000
(Address and telephone number of
registrant's principal executive offices)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
The
number of outstanding shares of the Registrant's
common stock, no par value, at November 7, 2002 was 8,189,802
MDSI Mobile Data Solutions Inc.
INDEX TO THE FORM 10-Q
For the quarterly period ended September 30, 2002
| |
|
Page No. |
||
|---|---|---|---|---|
| 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 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 |
24 |
||
ITEM 4. |
CONTROLS AND PROCEDURES |
24 |
||
PART II—OTHER INFORMATION |
||||
ITEM 1. |
LEGAL PROCEEDINGS |
25 |
||
ITEM 6. |
EXHIBITS AND REPORTS ON FORM 8-K |
25 |
||
SIGNATURES |
27 |
|||
CERTIFICATIONS |
28 |
|||
| As at | ||||||
|---|---|---|---|---|---|---|
| September 30, 2002 |
December 31, 2001 | |||||
| ASSETS | ||||||
| CURRENT ASSETS | ||||||
| Cash and cash equivalents | $ 11,279,557 | $ 13,176,080 | ||||
| Accounts receivable, net | ||||||
| Trade (net of allowance for doubtful accounts | ||||||
| $2,475,420; 2001 - $3,587,303) | 5,794,488 | 9,229,663 | ||||
| Unbilled | 4,344,738 | 4,331,924 | ||||
| Income taxes receivable | -- | 366,506 | ||||
| Prepaid expenses and other assets | 1,672,547 | 1,866,458 | ||||
| 23,091,330 | 28,970,631 | |||||
| CAPITAL ASSETS, NET | 7,048,119 | 7,635,248 | ||||
| LONG TERM ACCOUNTS RECEIVABLE | 2,749,860 | 3,749,860 | ||||
| LONG TERM DEFERRED TAXES | 534,640 | 364,640 | ||||
| 33,423,949 | 40,720,379 | |||||
| ASSETS OF DISCONTINUED OPERATIONS (note 2) | -- | 3,856,440 | ||||
| TOTAL ASSETS | $ 33,423,949 | $ 44,576,819 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||
| CURRENT LIABILITIES | ||||||
| Accounts payable | $ 1,529,910 | $ 1,961,656 | ||||
| Accrued liabilities | 4,224,817 | 5,421,807 | ||||
| Income Taxes Payable | 336,102 | -- | ||||
| Deferred revenue | 5,431,572 | 7,685,068 | ||||
| Current obligations under capital lease | 1,491,703 | 1,984,018 | ||||
| 13,014,104 | 17,052,549 | |||||
| OBLIGATIONS UNDER CAPITAL LEASES | 268,682 | 1,301,996 | ||||
| 13,282,786 | 18,354,545 | |||||
| LIABILITIES OF DISCONTINUED OPERATIONS (note 2) | -- | 1,747,521 | ||||
| 13,282,786 | 20,102,066 | |||||
| STOCKHOLDERS' EQUITY | ||||||
| Common stock | 44,280,513 | 48,519,060 | ||||
| Additional paid-up capital | 2,234,406 | 522,621 | ||||
| Treasury stock | (85,043 | ) | (85,043 | ) | ||
| Deficit | (25,598,609 | ) | (23,791,781 | ) | ||
| Comprehensive Income | (690,104 | ) | (690,104 | ) | ||
| 20,141,163 | 24,474,753 | |||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ 33,423,949 | $ 44,576,819 | ||||
Contingency (note 8)
See Notes to Condensed Consolidated Financial Statements
-1-
| Three months ended September 30, |
Nine months ended September 30, |
||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2002 | 2001 | 2002 | 2001 | ||||||
| REVENUE | |||||||||
| Software and services | $ 6,614,731 | $ 7,282,210 | $ 17,306,886 | $ 24,733,488 | |||||
| Maintenance and support | 2,604,604 | 2,647,399 | 8,028,155 | 7,538,333 | |||||
| Third party products and services | 1,608,091 | 265,982 | 2,123,912 | 1,675,033 | |||||
| 10,827,426 | 10,195,591 | 27,458,953 | 33,946,854 | ||||||
| DIRECT COSTS | 5,001,027 | 4,449,331 | 12,122,089 | 16,037,406 | |||||
| GROSS PROFIT | 5,826,399 | 5,746,260 | 15,336,864 | 17,909,448 | |||||
| OPERATING EXPENSES | |||||||||
| Research and development | 1,277,972 | 1,661,897 | 4,236,955 | 5,704,995 | |||||
| Sales and marketing | 3,029,914 | 2,276,970 | 9,355,984 | 8,584,436 | |||||
| General and administrative | 1,485,729 | 1,510,008 | 4,679,736 | 4,534,598 | |||||
| Restructuring Charge (note 6) | -- | -- | -- | 6,105,927 | |||||
| Provision for doubtful accounts, | |||||||||
| net of recoveries | -- | -- | -- | 1,202,634 | |||||
| Amortization and provision for | |||||||||
| valuation of intangible assets (note 5) | -- | 11,000 | -- | 1,659,058 | |||||
| 5,793,615 | 5,459,875 | 18,272,675 | 27,791,648 | ||||||
| OPERATING INCOME (LOSS) | 32,784 | 286,385 | (2,935,811 | ) | (9,882,200 | ) | |||
| VALUATION ALLOWANCE ON INVESTMENTS (note 7) | -- | -- | -- | (2,749,992 | ) | ||||
| OTHER INCOME (EXPENSE) | 70,509 | 203,349 | 232,773 | (127,853 | ) | ||||
| INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE TAX PROVISION | 103,293 | 489,734 | (2,703,038 | ) | (12,760,045 | ) | |||
| PROVISION FOR (RECOVERY OF) INCOME TAXES | 39,440 | 45,293 | (775,179 | ) | (670,409 | ) | |||
| NET INCOME (LOSS) FOR THE PERIOD FROM CONTINUING OPERATIONS | 63,853 | 444,441 | (1,927,859 | ) | (12,089,636 | ) | |||
| INCOME (LOSS) FROM DISCONTINUED OPERATIONS (note 2) | 12,419 | (402,271 | ) | 121,031 | (312,530 | ) | |||
| NET INCOME (LOSS) FOR THE PERIOD | 76,272 | 42,170 | (1,806,828 | ) | (12,402,166 | ) | |||
| DEFICIT, BEGINNING OF PERIOD | (25,674,881 | ) | (22,129,424 | ) | (23,791,781 | ) | (9,685,088 | ) | |
| DEFICIT, END OF PERIOD | $(25,598,609 | ) | $(22,087,254 | ) | $(25,598,609 | ) | $(22,087,254 | ) | |
| Earnings (Loss) per common share | |||||||||
| Earnings (Loss) from continuing operations | |||||||||
| Basic | $ 0.01 | $ 0.05 | $ (0.22 | ) | $ (1.40 | ) | |||
| Diluted | $ 0.01 | $ 0.05 | $ (0.22 | ) | $ (1.40 | ) | |||
| Net Earnings (Loss) | |||||||||
| Basic | $ 0.01 | $ 0.00 | $ (0.21 | ) | $ (1.44 | ) | |||
| Diluted | $ 0.01 | $ 0.00 | $ (0.21 | ) | $ (1.44 | ) | |||
| Weighted average shares outstanding | |||||||||
| Basic | 8,170,330 | 8,622,480 | 8,582,379 | 8,621,192 | |||||
| Diluted | 8,223,309 | 9,002,871 | 8,582,379 | 8,621,192 | |||||
See Notes to Condensed Consolidated Financial Statements
-2-
| Nine months ended September 30, |
||||||
|---|---|---|---|---|---|---|
| 2002 | 2001 | |||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||
| Net loss from continuing operations | $(1,927,859 | ) | $(12,089,636 | ) | ||
| Items not affecting cash: | ||||||
| Depreciation, amortization and provision for | ||||||
| valuation of intangible assets | 1,949,747 | 3,915,927 | ||||
| Write down in value of surplus capital assets | -- | 563,780 | ||||
| Valuation allowance on investments | -- | 2,749,992 | ||||
| Stock based compensation charge | -- | 301,921 | ||||
| Deferred income taxes | (170,000 | ) | (361,000 | ) | ||
| Changes in non-cash operating working capital items | 1,436,648 | 5,587,344 | ||||
| Net cash provided by (used in) operating activities | 1,288,536 | 668,328 | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||
| Issuance of Common Shares | 277,218 | 98,516 | ||||
| Repayment of capital leases | (1,525,629 | ) | (1,572,152 | ) | ||
| Net cash used by financing activities | (1,248,411 | ) | (1,473,636 | ) | ||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||
| Long Term Lease Receivable | -- | 133,723 | ||||
| Proceeds on settlement of investments | -- | 331,458 | ||||
| Acquisition of capital assets | (1,362,618 | ) | (1,117,068 | ) | ||
| Net cash used in investing activities | (1,362,618 | ) | (651,887 | ) | ||
| Net cash used for Continuing operations | (1,322,493 | ) | (1,457,195 | ) | ||
| Net cash used by discontinued operations (note 2) | (574,030 | ) | (669,441 | ) | ||
| NET CASH OUTFLOW | (1,896,523 | ) | (2,126,636 | ) | ||
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 13,176,080 | 12,864,981 | ||||
| CASH AND CASH EQUIVALENTS, END OF PERIOD | $ 11,279,557 | $ 10,738,345 | ||||
See Notes to Condensed Consolidated Financial Statements
-3-
MDSI MOBILE DATA
SOLUTIONS INC.
Notes to the Condensed Consolidated Financial Statements
(Expressed in United States dollars)
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of presentation
| These financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial reporting and pursuant to the instructions of the United States Securities and Exchange Commission Form 10-Q and Article 10 of Regulation S-X. While these financial statements reflect all normal recurring adjustments which are, in the opinion of management, necessary for fair presentation of the results of the interim period, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the financial statements and footnotes thereto included in the Annual Report of MDSI Mobile Data Solutions Inc. (the “Company” or “MDSI”) filed on Form 10-K for the year ended December 31, 2001. |
(b) Use of estimates
| The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Estimates are used for, but not limited to, the accounting for doubtful accounts, amortization, determination of the net recoverable value of assets, revenue recognized on long term contracts, taxes and contingencies. Actual results could differ from those estimates. |
(c) Reporting Currency
| The Company changed its reporting currency to the U.S. dollar effective January 1, 2000. The change in reporting currency was made to improve investors’ ability to compare the Company’s results with those of most other publicly traded businesses in the industry. These consolidated financial statements and those amounts previously reported in Canadian dollars have been translated from Canadian dollars to U.S. dollars by translating assets and liabilities at the rate in effect at the respective balance sheet date and revenues and expenses at the average rate for the reporting period. Any resulting foreign exchange gains and losses are recorded as a separate component of shareholder equity and described as accumulated comprehensive income (loss). There was no effect on comprehensive income for any of the periods presented in this report. |
(d) Recently issued accounting standards
| In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 141 (“SFAS 141”), “Business Combinations.” SFAS 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. The adoption of SFAS 141 has not had a significant impact on the Company’s financial statements. |
| In July 2001, the FASB issued Statement of Financial Accounting Standards No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets”, which is effective January 1, 2002. SFAS 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill. SFAS 142 also requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The adoption of SFAS 142 has not had a significant impact on the Company’s financial statements. |
-4-
MDSI MOBILE DATA
SOLUTIONS INC.
Notes to the Condensed Consolidated Financial Statements
(Expressed in United States dollars)
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(d) Recently issued accounting standards (continued)
| In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supersedes FASB Statement No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” and the accounting and reporting provisions of APB Opinion No. 30, “Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.” This Statement also amends ARB No. 7, “Consolidated Financial Statements,” to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. This Statement requires that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired. This Statement also broadens the presentation of discontinued operations to include more disposal transactions. The provisions of this standard have been adopted as at the beginning of fiscal 2002 and have had no significant impact on the Company’s financial statements. |
| In June 2002, the FASB issued SFAS No. 146 (“SFAS 146”), “Accounting for Costs Associated with Exit or Disposal Activities”. SFAS 146 requires that the liability for a cost associated with an exit or disposal activity be recognized at its fair value when the liability is incurred. Under previous guidance, a liability for certain exit costs was recognized at the date that management committed to an exit plan, which was generally before the actual liability had been incurred. As SFAS 146 is effective only for exit or disposal activities initiated after December 31, 2002, the Company does not expect the adoption of this statement to have a material impact on the Company’s financial statements. |
2. DISCONTINUED OPERATIONS
| In June 2002, MDSI adopted a plan for sale and entered into an agreement to sell its Hosting and IT Services business segment, Connectria Corporation (Connectria) to former Connectria shareholders who 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 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. |
| The disposition of the business has been accounted for as a discontinued operation and accordingly, the results of operations, financial position and cash flow of this business are segregated from those of continuing operations for the current and prior periods. The Company has included in the results of discontinued operations, the sale proceeds, the costs of disposition, and the results of operations from the measurement date to the disposal date. The Company recognized a gain of $12,419 on the disposal of Connectria. |
-5-
MDSI MOBILE DATA
SOLUTIONS INC.
Notes to the Condensed Consolidated Financial Statements
(Expressed in United States dollars)
(Unaudited)
2. DISCONTINUED OPERATIONS (continued)
Summarized financial information of the discontinued operations is as follows:
| Results of discontinued operations | Three months ended, | |||||
|---|---|---|---|---|---|---|
| September 30, 2002 |
September 30, 2001 | |||||
| Revenues | $ -- | $ 2,810,507 | ||||
| Income (loss) before income taxes | -- | (402,271 | ) | |||
| Income tax | -- | -- | ||||
| -- | (402,271 | ) | ||||
| Income on disposal net of income taxes | 12,419 | -- | ||||
| Income (loss) from discontinued operations | $ 12,419 | $ (402,271 | ) | |||
| Results of discontinued operations | Nine months ended, | |||||
|---|---|---|---|---|---|---|
| September 30, 2002 |
September 30, 2001 | |||||
| Revenues | $ 5,058,101 | $ 10,583,510 | ||||
| Income before income taxes | 108,612 | (312,530 | ) | |||
| Income tax | -- | -- | ||||
| 108,612 | (312,530 | ) | ||||
| Income on disposal | ||||||
| net of income taxes | 12,419 | -- | ||||
| Income from discontinued operations | $ 121,031 | $ (312,530 | ) | |||
| Financial position of discontinued operations | As at, | |||||
|---|---|---|---|---|---|---|
| September 30, 2002 |
December 31, 2001 | |||||
| Current assets | $ -- | $2,242,633 | ||||
| Long term assets | -- | 1,613,807 | ||||
| Total assets of discontinued operations | $ -- | $3,856,440 | ||||
| Current liabilities | $ -- | $1,426,638 | ||||
| Long term liabilities | -- | 320,883 | ||||
| Total liabilities of discontinued operations | $ -- | $1,747,521 | ||||
| Changes in cash flow of discontinued operations | Nine months ended, | |||||
|---|---|---|---|---|---|---|
| September 30, 2002 |
September 30, 2001(1) | |||||
| Operating activities | $ 2,491,158 | $ 219,673 | ||||
| Investing activities | (43,775 | ) | (691,212 | ) | ||
| Financing activities | (3,021,413 | ) | (197,902 | ) | ||
| Cash used for discontinued operations | $ (574,030 | ) | $(669,441 | ) | ||
| (1) | Cash generated from operating activities for the nine months ended September 30, 2001 includes $418,381 generated by the Company's Transportation Business Unit, previously disclosed as a discontinued operation, and $(198,708) used in the operating activities of Connectria. |
-6-
MDSI MOBILE DATA
SOLUTIONS INC.
Notes to the Condensed Consolidated Financial Statements
(Expressed in United States dollars)
(Unaudited)
3. SEGMENTED INFORMATION
| As described in Note 2, the Company has reclassified the results of operations of Connectria Corporation as discontinued operations. The business was previously disclosed as a separate operating segment. As a result of discontinuing this business, the Company now only operates in a single business segment, the Field Service business segment. The segment data below has been restated to exclude amounts related to the discontinued operations. |
| The Company earned revenue from sales to customers in the following geographic locations: |
| Three months ended September 30, | Nine months ended September 30, | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2002 | 2001 | 2002 | 2001 | ||||||
| Canada | $ 195,362 | $ 244,324 | $ 690,266 | $ 880,961 | |||||
| United States | 7,419,997 | 8,140,975 | 19,470,030 | 25,335,446 | |||||
| Europe, Middle East, and Africa | 2,872,927 | 1,734,365 | 6,790,116 | 6,661,420 | |||||
| Asia and other | 339,140 | 75,927 | 508,541 | ||||||