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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, 2005

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          

        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 10, 2005 was 8,402,413





MDSI Mobile Data Solutions Inc.
INDEX TO THE FORM 10-Q

For the quarterly period ended March 31, 2005

 
    
   Page
Part I—FINANCIAL INFORMATION    

ITEM 1.   
FINANCIAL STATEMENTS (UNAUDITED)
 
 

 
 
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
 
13

ITEM 3.   
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
24

ITEM 4.   
CONTROLS AND PROCEDURES
 
25


Part II—OTHER INFORMATION

 

 

ITEM 6.   
EXHIBITS
 
27

SIGNATURES
 
29


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Part I — FINANCIAL INFORMATIONITEM

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
2005 2004
Assets      
Current assets  
   Cash and cash equivalents  $ 20,674,430   $ 19,842,920  
   Accounts receivable 
     Trade (net of allowance for doubtful accounts of $220,591; 2004 - $288,246)  11,547,826   10,139,104  
     Unbilled  1,140,696   822,323  
   Prepaid expenses and other assets  775,626   1,118,143  
   Current deferred income taxes  148,107   171,451  
   34,286,685   32,093,941  
 
Capital assets, net   6,398,440   6,694,021  
   $ 40,685,125   $ 38,787,962  
Liabilities and stockholders’ equity  
Current liabilities  
   Accounts payable  $   1,125,346   $   1,929,785  
   Accrued liabilities  4,066,223   3,686,527  
   Accrued restructuring charges (note 4)  593,859   921,052  
   Income taxes payable  1,377,544   1,382,017  
   Deferred revenue  14,987,085   12,653,199  
   Current obligations under capital lease  838,786   1,073,883  
   22,988,843   21,646,463  
 
Long term deferred income taxes   44,263   43,273  
   23,033,106   21,689,736  
Commitments and Contingencies (note 5) 
 
Stockholders’ equity  
   Common stock  45,003,189   44,793,898  
     Authorized: unlimited common shares with no par value 
     Issued: 8,402,163 shares; December 31, 2004 – 8,353,179 shares 
   Additional paid-up capital  2,406,049   2,406,049  
   Accumulated other comprehensive loss  (690,104 ) (690,104 )
   Deficit  (29,067,115 ) (29,411,617 )
   17,652,019   17,098,226  
   $ 40,685,125   $ 38,787,962  

See Notes to Condensed Consolidated Financial Statements



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MDSI MOBILE DATA SOLUTIONS INC.
Condensed Consolidated Statements of Operations
(Expressed in United States Dollars)
(Unaudited)

Three months ended March 31,
2005 2004
Revenue      
   Software and professional services  $   6,404,270   $   7,481,714  
   Maintenance and support  4,740,229   4,302,727  
   Third party products and services  582,721   866,257  
   11,727,220   12,650,698  
 
Direct costs   5,342,604   6,589,989  
Gross profit   6,384,616   6,060,709  
 
Operating Expenses  
   Research and development  1,985,420   1,535,344  
   Sales and marketing  2,010,725   2,135,051  
   General and administrative  1,877,854   1,753,061  
   Strategic expenses  --   350,000  
   5,873,999   5,773,456  
 
Operating income   510,617   287,253  
 
Other (expense) income   (50,566 ) 226,118  
Income from operations before tax provision  460,051   513,371  
 
Provision for income taxes   115,549   169,788  
Net income for the period   344,502   343,583  
 
Deficit, beginning of the period   (29,411,617 ) (29,919,095 )
Deficit, end of period   $(29,067,115 ) $(29,575,512 )
Earnings per common share (note 3)  
   Basic  $             0.0   $            0.04  
   Diluted  $             0.0   $            0.04  
Weighted average shares outstanding  
   Basic  8,384,287   8,226,068  
   Diluted  8,604,420   8,369,954  


See Notes to Condensed Consolidated Financial Statements



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MDSI MOBILE DATA SOLUTIONS INC.
Condensed Consolidated Statements of Cash Flows
(Expressed in United States Dollars)
(Unaudited)

Three months ended March 31,
2005 2004
Cash flows from operating activities      
 
Net income for the period  $      344,502   $      343,583  
Items not affecting cash: 
   Depreciation  543,522   579,061  
   Deferred income taxes  24,334   (1,012 )
   Stock-based compensation charge  --   135,000  
Changes in non-cash operating working capital items: 
   Accounts receivable  (1,727,095 ) (325,828 )
   Prepaid expenses and other assets  342,517   542,714  
   Income taxes payable  (4,473 ) (1,272 )
   Accounts payable, accrued liabilities, and accrued restructuring charge  (751,936 ) 639,090  
   Deferred revenue  2,333,886   (203,570 )
Net cash provided by operating activities  1,105,257   1,707,766  
Cash flows from investing activity  
 
   Acquisition of capital assets  (247,941 ) (324,761 )
   Net cash used in investing activity  (247,941 ) (324,761 )
Cash flows from financing activities  
 
   Issuance of common shares  209,291   27,957  
   Repayment of capital leases  (235,097 ) (364,200 )
Net cash used in financing activities  (25,806 ) (336,243 )
Net cash inflow   831,510   1,046,762  
 
Cash and cash equivalents, beginning of period   19,842,920   15,827,043  
Cash and cash equivalents, end of the period  
   $ 20,674,430   $ 16,873,805  
Supplemental disclosure of cash flow information  
   Cash payment for interest  44,749   48,863  
   Cash payment (refund) for taxes  74,121   (6,722 )


See Notes to Condensed Consolidated Financial Statements



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MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Condensed Consolidated Financial Statements
(Expressed in United States Dollars)
(Unaudited)


1.   Significant accounting policies

  (a)   Basis of presentation

  These condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial reporting and pursuant to the instructions of the United States Securities and Exchange Commission (“SEC”) 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, 2004.

  The results of operations for the interim periods are not necessarily indicative of results to be expected in future periods.

  (b)   Use of estimates

  The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent 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, accrual for restructuring charges, amortization, determination of net recoverable value of assets, revenue recognized on long-term contracts, taxes and contingencies. Actual results could differ from those estimates.

  (c)   Revenue recognition

  We recognize revenue in accordance with the American Institute of Certified Public Accountants Statement of Position (“SOP”) 97-2 “Software Revenue Recognition”, as amended by SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions”, SOP 81-1, “Accounting for Performance of Construction-type and Certain Production-type Contracts”, the Securities and Exchange Commission’s Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements”, SAB No. 104, “Revenue Recognition”, Emerging Issues Task Force Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables” and other authoritative accounting literature. We derive revenues from the following sources: license fees, professional services, maintenance and support fees and third party products and services. The recognition of gross revenue is in accordance with criteria established in Emerging Issues Task Force Issue (EITF) No. 99-19.

  We generally provide services with our supply agreements that include significant production, modification, and customisation of the software. These services are not separable and are essential to the functionality of the software, and as a result we account for these licence and service arrangements under SOP 81-1 using contract accounting. We use the percentage of completion method when we can reliably estimate the cost to complete and extent of progress toward completion. If we do not have a sufficient basis to measure progress towards completion, revenue is recognized when we receive final acceptance from the customer.


-4-





MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Condensed Consolidated Financial Statements
(Expressed in United States Dollars)
(Unaudited)


1.   Significant accounting policies (continued)

  (c)   Revenue recognition (continued)

  License Fees and Professional Services

  Our supply agreements generally include multiple products and services, or “elements.” We use the residual method to recognize revenue when a supply agreement includes one or more elements to be delivered at a future date and vendor specific objective evidence of the fair value of all undelivered elements exists. The fair value of the undelivered elements is determined based on the historical evidence of stand-alone sales, or renewal terms of these elements to customers. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee, which relates to the license and implementation services, is recognized as revenue on a percentage of completion basis. If evidence of the fair value of one or more undelivered elements does not exist, the total revenue is deferred and recognized when delivery of those elements occurs or when fair value is established.

  We estimate the percentage of completion on contracts with fixed fees on a monthly basis utilizing hours incurred to date as a percentage of total estimated hours to complete the project. When the total cost estimate for a project exceeds revenue, we accrue for the estimated losses immediately. The complexity of the estimation process and issues related to the assumptions, risks and uncertainties inherent with the application of the percentage-of-completion method of accounting affect the amounts of revenue and related expenses reported in our Consolidated Financial Statements.

  We are engaged on a continuous basis in the production and delivery of software under contractual agreements. As a result we have developed a history of being able to estimate costs to complete and the extent of progress toward completion of contracts, which supports the use of the percentage of completion method of contract accounting.

  Professional services revenue primarily consists of consulting and customer training revenues, which are usually charged on a time and materials basis and are recognized as the services are performed.

  Maintenance Revenue

  Generally, maintenance is initially sold as an element of a master supply arrangement, with subsequent annual renewals, and is priced as a percentage of software license fees. Maintenance revenue is recognized ratably over the term of the maintenance period, which typically is one year. Maintenance and support revenue includes software license updates that provide customers with rights to unspecified software product upgrades, maintenance releases and patches released during the term of the support period. Product support services also include internet and telephone access to technical support personnel.

  Periodically, we provide a warranty phase during the supply agreement. Services provided during this warranty phase include elements of maintenance and support. As a result, we defer a portion of the supply agreement fee, based on vendor specific objective evidence of the value of these services, and recognize the deferred amount as revenue over the warranty period.


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MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Condensed Consolidated Financial Statements
(Expressed in United States Dollars)
(Unaudited)


1.   Significant accounting policies (continued)

  (c)   Revenue recognition (continued)

  Third party products and services

  Revenue from sales of third party products is recognized upon transfer of title to the customer. Revenue from certain fixed price contracts is recognized on a proportional performance basis, which involves the use of estimates related to total expected man-days of completing the contract derived from historical experience with similar contracts. When supply agreements include third-party products we recognize the gross amount of revenue from the third-party product as revenue. On occasion, we utilize third-party consultants to assist in implementations or installations originated by the Company. The revenue for these implementations and installations is typically recognized on a gross basis as we ultimately manage the engagement.

  (d)   Recent accounting pronouncements

  In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 123R “Share-Based Payment” (“SFAS 123R”). This Statement is a revision of SFAS 123 “Accounting for Stock-Based Compensation”. SFAS 123R establishes standards for the accounting for transactions in which an entity receives employee services in exchange for an award of equity instruments. This Statement does not change the accounting guidance for share-based payment transactions with parties other than employees.

  In March 2005, the SEC staff issued guidance on SFAS 123(R). Staff Accounting Bulletin No. 107 (“SAB 107”) was issued to assist preparers by simplifying some of the implementation challenges of SFAS 123(R) while enhancing the information that investors receive. SAB 107 creates a framework that is premised on two overarching themes: (a) considerable judgment will be required by preparers to successfully implement SFAS 123(R), specifically when valuing employee stock options; and (b) reasonable individuals, acting in good faith, may conclude differently on the fair value of employee stock options. Key topics covered by SAB 107 include: (a) valuation models – SAB 107 reinforces the flexibility allowed by SFAS 123(R) to choose an option-pricing model that meets the standard’s fair value measurement objective; (b) expected volatility – SAB 107 provides guidance on when it would be appropriate to rely exclusively on either historical or implied volatility in estimating expected volatility; and (c) expected term – the new guidance includes examples and some simplified approaches to determining the expected term under certain circumstances. The Company will apply the principles of SAB 107 in conjunction with its adoption of SFAS 123(R).

  On April 14, 2005, the Securities Exchange Commission announced the adoption of a new rule that amends the compliance date for SFAS 123R. This Statement is now effective for all awards granted, modified, repurchased, or cancelled after the beginning of the next fiscal year beginning after June 15, 2005. Therefore, the Company intends to adopt this standard commencing January 1, 2006, on a prospective basis.

  (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.


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MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Condensed Consolidated Financial Statements
(Expressed in United States Dollars)
(Unaudited)


1.   Significant accounting policies (continued)

  (e)   Stock-based compensation (continued)

  The following pro forma financial information presents the net income for the three months ended March 31, 2005 and 2004 and earnings 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,
2005 2004
Net income (as reported)   $ 344,502   $ 343,583  
Stock-based compensation costs, net of related tax effects, that would have 
    been included in net income for the period if the fair value based method 
    had been applied  (93,112 ) (240,081 )
Pro forma net income from continuing operations  $ 251,390   $ 103,502  
Basic and fully diluted earnings per common share  $       0.04   $       0.04  
Pro forma basic and fully diluted earnings per common share  $       0.03   $       0.01  

  The fair value of the Company’s stock-based compensation awards to employees was estimated using an option pricing model recognizing forfeitures as they occur, assuming no expected dividends, using the following weighted average assumptions: expected life of 5 years (2004 – 5 years), expected annualized volatility of the Company’s share price of 43% (2004 – 43%) and an expected annualized risk free interest rate at 2.2% (2004 – 2.2%).

2.   Segmented information

  The Company operates in a single business segment, the Field Service business segment.

  The Company earned revenue from sales to customers and has long-lived assets in the following geographic locations:

Three months ended March 31,
2005 2004
Revenue Long-lived
assets		 Revenue Long-lived
assets
Canada   $     562,107   $  5,827,506   $     484,167   $7,023,958  
United States  6,220,381   494,261   6,931,318   583,293  
Europe, Middle East and Africa  4,732,645   76,673   5,055,657   128,907  
Asia and other  212,087   --   179,556   --  
   $11,727,220   $  6,398,440   $12,650,698   $7,736,158  

  Major customers and concentration of credit risk

  During the three months ended March 31, 2005 revenue from two customers accounted for approximately 24.1% (2004 – 18.1%) and 8.4% (2004 – 13.1%) of revenue, respectively.


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MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Condensed Consolidated Financial Statements
(Expressed in United States Dollars)
(Unaudited)


3.   Earnings per share

  Basic earnings per common share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated by dividing net income 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.

  The following table reconciles the number of shares utilized in the earnings per common share calculations for the periods indicated:

Three months ended March 31,
2005 2004
Weighted average shares outstanding   8,384,287   8,226,068  
Effect of dilutive securities - stock options  220,133   143,886  
Diluted weighted average shares outstanding  8,604,420   8,369,954  

4.   Restructuring charge

  Fiscal  2001

  On March 30, 2001, the Company, in response to uncertain economic conditions and poor financial performance, announced a restructuring plan approved by the Company’s Board of Directors designed to reduce operating costs that resulted in the elimination of 34 full time and contractor positions. On May 11, 2001, the Company announced an update to this plan, approved by the Board of Directors, which resulted in the elimination of an additional 115 positions. As part of this restructuring, the Company recorded a charge to earnings of $6.1 million in the year ended December 31, 2001, which includes a $1.9 million provision relating to surplus office space under long-term leases held by the Company at two locations. The Company has incurred approximately $1.6 million of cash costs relating to this provision leaving an accrual of $249,760 remaining as at March 31, 2005:

Provision for
excess office
space
Reserve balance at December 31, 2004   $ 255,800  
Cash payments  (6,040 )
Reserve balance at March 31, 2005  $ 249,760  

  Fiscal 2004

  During the year ended 2004 the Company announced a restructuring plan approved by the Company’s Board of Directors to enable the Company to operate in a more effective and efficient manner and reduce costs. The Company recorded a charge of $1.6 million in connection with this restructuring. The $1.6 million charge relates to costs of workforce reduction for approximately 30 affected employees, stock-based compensation charges and other related costs.


-8-





MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Condensed Consolidated Financial Statements
(Expressed in United States Dollars)
(Unaudited)


4.   Restructuring charge (continued)

  Fiscal 2004 (continued)

  A breakdown of the remaining restructuring reserves and the costs incurred to date as at March 31, 2005 are as follows:

Workforce
Reduction		 Other Total
Reserve balance at December 31, 2004   $ 582,924   $82,328   $ 665,252  
Cash payments  (321,153 ) --   (321,153 )
Reserve balance at March 31, 2005  $ 261,771   $82,328   $ 344,099  

  Other restructuring costs of $82,328 relate to outplacement and related expenses the Company expects to incur as a result of the 2004 restructuring. As at March 31, 2005 no amounts have been paid in relation to these costs.

5.   Commitments and contingencies

  (a)   Contingency

  From time to time, the Company is party to litigation and claims incidental 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)   Commitment

  During the year ended December 31, 2002, the Company entered into a significant customer contract in which the Company agreed to utilize a certain amount of local services and create a certain amount of commercial activity in South Africa. The Company is required to utilize local content or obtain credits equivalent to approximately $7.1 million over a seven-year period ending May 2010. The Company has furnished 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 implementation 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. As at March 31, 2005 the Company has generated an estimated $1.1 million of credits relating to this obligation. The Company’s obligation is expected to increase as a result of contract expansions. In the event that the Company determines that it will be unable to meet this commitment in the normal course of operations it will record a liability in the period such circumstances are determinable.


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MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Condensed Consolidated Financial Statements
(Expressed in United States Dollars)
(Unaudited)


5.   Commitments and contingencies (continued)

  (c)   Line and letters of credit

  The Company has provided a letter of credit, to support a capital leasing project, in the amount of CDN $1.4 million (USD $1.2 million) expiring October 1, 2005. The Company has pledged an amount equal to the letter of credit against its operating line of credit as security for the letter of credit.

  (d)   Indemnification

  The Company typically includes indemnification provisions within license and implementation service agreements, which are consistent with those prevalent in the software industry. Such provisions indemnify customers against actions arising from patent infringements that may arise through the normal use or proper possession of the Company’s software. To date the Company has not experienced any significant obligations under customer indemnification provisions and accordingly, no amounts have been accrued for such potential indemnification obligations.

6.   Differences between United States generally accepted accounting principles (“US GAAP”) and Canadian generally accepted accounting principles (“Canadian GAAP”)

  At December 31, 2004, as permitted by Canadian securities regulations, the Company adopted US GAAP reporting for Canadian regulatory purposes. As a result, the Company filed annual audited consolidated and interim unaudited condensed consolidated financial statements for fiscal 2004 in accordance with US GAAP and provided an explanation and quantification of material differences between Canadian and US GAAP relating to recognition, measurement, and presentation.