AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 29, 2005
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________
FORM 20-F
_____________
[_] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 31, 2005
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 333-09768
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THE DESCARTES SYSTEMS GROUP INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
ONTARIO, CANADA
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(JURISDICTION OF INCORPORATION OR ORGANIZATION)
120 RANDALL DRIVE, WATERLOO, ONTARIO, CANADA N2V 1C6
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(ADDRESS OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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SECURITIES REGISTERED OR TO BE REGISTERED
PURSUANT TO SECTION 12(B) OF THE ACT:
N/A N/A
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(TITLE OF EACH CLASS) (NAME OF EACH EXCHANGE ON WHICH REGISTERED)
_____________
SECURITIES REGISTERED OR TO BE REGISTERED
PURSUANT TO SECTION 12(g) OF THE ACT:
Common Shares, no par value per share
Rights to Purchase Common Shares, no par value per share
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(TITLE OF CLASS)
SECURITIES FOR WHICH THERE IS A REPORTING OBLIGATION
PURSUANT TO SECTION 15(d) OF THE ACT:
N/A
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(TITLE OF CLASS)
Indicate the number of outstanding shares of each of the issuer's
classes of capital or common stock as of the close of the period covered by the
Annual Report.
40,705,811 shares of Common Stock as of January 31, 2005.
_____________
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 which financial statement item the registrant
has elected to follow.
Item 17 [_] Item 18 [X]
TABLE OF CONTENTS
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Page
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PART I.........................................................................1
Item 1. Identity of Directors, Senior Management and Advisers..........2
Item 2. Offer Statistics and Expected Timetable........................2
Item 3. Key Information................................................2
A. Selected Financial Data.......................................2
B. Capitalization and Indebtedness...............................2
C. Reasons for Offer and Use of Proceeds.........................2
D. Risk Factors..................................................3
Item 4. Information on the Company....................................15
A. History and Development of the Company.......................15
B. Business Overview............................................19
C. Organizational Structure.....................................31
D. Description of Property......................................31
Item 5. Operating and Financial Review and Prospects..................31
A. Operating Results............................................35
B. Liquidity and Capital Resources..............................43
C. Research and development, patents and licenses, etc..........49
D. Trend information............................................50
E. Off-balance sheet arrangements...............................51
F. Tabular disclosure of contractual obligations................51
G. Disclosure Pursuant to the Requirements of Nasdaq............52
Item 6. Directors, Senior Management and Employees....................52
A. Directors and Senior Management..............................52
B. Compensation.................................................55
C. Board Practices..............................................61
D. Employees....................................................64
E. Share Ownership..............................................65
Item 7. Major Shareholders and Related Party Transactions.............67
A. Major Shareholders...........................................67
B. Related Party Transactions...................................67
C. Interests of Experts and Counsel.............................68
Item 8. Financial Information.........................................68
A. Consolidated Statements and Other Financial Information......68
B. Significant Changes..........................................68
Item 9. The Offer and Listing.........................................69
A. Offer and Listing Details....................................70
B. Plan of Distribution.........................................72
C. Markets......................................................72
D. Selling Shareholders.........................................72
E. Dilution.....................................................72
F. Expenses of the Issue........................................72
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TABLE OF CONTENTS
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(continued)
Item 10. Additional Information........................................72
A. Share Capital................................................72
B. Memorandum and Articles of Incorporation.....................72
C. Material Contracts...........................................76
D. Exchange Controls............................................76
E. Taxation.....................................................77
F. Dividends and Paying Agents..................................81
G. Statement by Experts.........................................81
H. Documents on Display.........................................81
I. Subsidiary Information.......................................82
Item 11. Quantitative and Qualitative Disclosures about Market Risk....82
Item 12. Description of Securities Other than Equity Securities........83
PART II.......................................................................83
Item 13. Defaults, Dividend Arrearages and Delinquencies...............83
Item 14. Material Modifications to the Rights of Security Holders
and Use of Proceeds...........................................83
Item 15. Controls and Procedures.......................................83
Item 16. [Reserved]....................................................84
Item 16A. Audit Committee Financial Expert..............................84
Item 16B. Code of Ethics................................................84
Item 16C. Principal Accountant Fees and Services........................84
Item 16D. Exemptions from the Listing Standards for Audit Committees....86
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated
Purchasers....................................................86
PART III......................................................................86
Item 17. Financial Statements..........................................86
Item 18. Financial Statements..........................................86
Item 19. Exhibits......................................................86
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PART I
IN THIS ANNUAL REPORT, "DESCARTES," THE "COMPANY," "WE," "US" AND "OUR"
REFER TO THE DESCARTES SYSTEMS GROUP INC. AND ITS SUBSIDIARIES.
IN THIS ANNUAL REPORT, WE REFER TO OUR FISCAL PERIODS. WHERE THE ANNUAL
REPORT REFERENCES THE "CURRENT FISCAL YEAR," "FISCAL 2005," "2005," OR USING
SIMILAR WORDS, THE REFERENCE IS TO THE YEAR ENDED JANUARY 31, 2005, AND
REFERENCES TO THE "PREVIOUS FISCAL YEAR," "FISCAL 2004," "2004," OR USING
SIMILAR WORDS ARE TO THE FISCAL YEAR ENDED JANUARY 31, 2004. OTHER FISCAL YEARS
ARE REFERENCED BY THE APPLICABLE YEAR DURING WHICH THE FISCAL YEAR ENDS. FOR
EXAMPLE, FISCAL 2008 REFERS TO THE ANNUAL PERIOD ENDING JANUARY 31, 2008 AND THE
"THIRD QUARTER OF 2008" REFERS TO THE QUARTER ENDING OCTOBER 31, 2007.
IN THIS ANNUAL REPORT, ALL DOLLAR AMOUNTS ARE EXPRESSED IN UNITED
STATES DOLLARS, EXCEPT WHERE WE STATE OTHERWISE. ALL REFERENCES TO "U.S.$" OR
"$" ARE TO U.S. DOLLARS AND ALL REFERENCES TO "C$" OR "CDN.$" ARE TO CANADIAN
DOLLARS. UNLESS WE INDICATE OTHERWISE, ANY REFERENCE IN THIS ANNUAL REPORT TO A
CONVERSION BETWEEN U.S.$ AND C$ IS A CONVERSION AT THE EXCHANGE RATE IN EFFECT
AS OF THE LAST DAY OF THE APPLICABLE FISCAL PERIOD.
UNLESS WE INDICATE OTHERWISE, ALL INFORMATION IN THIS ANNUAL REPORT IS
STATED AS OF JANUARY 31, 2005.
FORWARD-LOOKING STATEMENTS
Item 4, "Information on the Company," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in Item 5
and other sections of this Annual Report contain forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, or the U.S. Exchange Act, including (without limitation) statements
concerning possible or assumed future results of operations of Descartes
preceded by, followed by or that include the words "believes," "expects,"
"anticipates," "estimates," "intends," "plans," or similar expressions or the
negative of such expressions. For those statements, we claim the protection of
the safe harbor for forward-looking statements contained in the U.S. Private
Securities Litigation Reform Act of 1995 and applicable safe harbors in other
jurisdictions where the securities of the Company trade.
Forward-looking statements are not guarantees of future performance.
They involve risks, uncertainties and assumptions. You should understand that
the following important factors, in addition to those discussed in Item 3, "Key
Information-D. Risk Factors," and elsewhere in this Annual Report, could affect
our future results and could cause those results to differ materially from those
expressed in such forward-looking statements: the impact of our cost containment
efforts and management changes, losses of significant customers, the volatility
of our stock price and our history of losses, declines in the industries that
some of our customers operate in, competitive pressures, litigation, the impact
of accounting treatments, risks related to our international operations, the
impact of currency fluctuations, our ability to keep pace with technological
advancements in our industry, and our ability to protect our intellectual
property.
Except as required by applicable law, we disclaim any intention or
obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise. You should read this
Annual Report and the documents, if any, that we incorporate by reference with
the understanding that the actual future results may be materially different
from what we expect. We may not
1
update these forward-looking statements, even if our situation changes in the
future. All forward-looking statements attributable to us are expressly
qualified by these cautionary statements.
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
A. SELECTED FINANCIAL DATA
You should read the following selected financial data together with
Item 5, "Operating and Financial Review and Prospects," the Consolidated
Financial Statements in Item 18, and the other information in this Annual
Report. The selected financial data is derived from the consolidated financial
statements for the years we present. The Consolidated Financial Statements and
the selected financial data have been prepared in accordance with U.S. GAAP.
(US DOLLARS IN THOUSANDS EXCEPT PER SHARE
AMOUNTS, US GAAP, AUDITED) 2005 2004 2003 2002 2001
---------- ---------- ---------- ---------- ----------
Total revenues 46,395 59,785 70,383 79,522 66,649
Loss from operations (53,804) (37,335) (140,790) (64,685) (36,585)
Loss from operations per basic and diluted share (1.32) (0.81) (2.70) (1.27) (0.83)
Loss (55,331) (38,493) (138,195) (58,718) (31,626)
Loss per basic and diluted share (1.36) (0.84) (2.65) (1.15) (0.72)
Total assets 72,572 128,659 242,275 388,522 400,964
Net assets 35,738 90,452 154,720 295,602 300,490
Capital stock 364,907 364,907 468,618 468,445 415,676
Basic and diluted weighted-average shares
outstanding (thousands) 40,706 45,951 52,234 50,858 44,218
Dividends -- -- -- -- --
B. CAPITALIZATION AND INDEBTEDNESS
Not applicable.
C. REASONS FOR OFFER AND USE OF PROCEEDS
Not applicable.
2
D. RISK FACTORS
ANY INVESTMENT IN THE COMPANY WILL BE SUBJECT TO RISKS INHERENT TO OUR
BUSINESS. BEFORE MAKING AN INVESTMENT DECISION, YOU SHOULD CAREFULLY CONSIDER
THE RISKS DESCRIBED BELOW TOGETHER WITH ALL OTHER INFORMATION INCLUDED IN THIS
ANNUAL REPORT. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES
FACING THE COMPANY. ADDITIONAL RISKS AND UNCERTAINTIES THAT WE ARE NOT AWARE OF
OR FOCUSED ON OR THAT WE CURRENTLY DEEM IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS
OPERATIONS. THIS ANNUAL REPORT IS QUALIFIED IN ITS ENTIRETY BY THESE RISK
FACTORS.
IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, THEY COULD MATERIALLY
ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION, LIQUIDITY OR RESULTS OF
OPERATIONS. IN THAT CASE, THE TRADING PRICE OF OUR SECURITIES COULD DECLINE AND
YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT.
EVENTS IN 2004 MAY HAVE A NEGATIVE IMPACT ON OUR BUSINESS.
In May 2004 we announced that we had reviewed our financial results for
2004 and that our audited results would differ materially from the unaudited
2004 results we had previously announced on March 10, 2004. While this review
did not result in any restatement of prior period financial statements, our
review did result in adjustments to our unaudited 2004 financial statements
originally issued on March 10, 2004. We also announced a significant downsizing
of our staff, office closures, the cancellation of certain leases and contracts,
related restructuring charges, the write-off of redundant assets, the
termination of our Chief Executive Officer, the commencement of class action
litigation against us and the write-down of $18.0 million of goodwill. Following
these announcements we experienced a significant drop in our stock price, a
negative impact on our ability to generate business with customers, difficulty
in retaining key employees, and a negative impact on our results of operations
and the morale of our remaining employees, including management employees. Since
these announcements, we have completed all our restructuring activities and
incurred aggregate charges and revisions related to the May 2004 restructuring
of $11.9 million, appointed Arthur Mesher as our new Chief Executive Officer and
reached an agreement-in-principle to settle the class action litigation for $1.5
million, with $1.1 million to be paid by our insurers and the remainder paid by
us. There can be no assurance that these announcements or the matters referred
to therein will not continue to have an adverse effect on our business and
results of operations in future fiscal periods.
WE HAVE A HISTORY OF LOSSES AND MAY INCUR LOSSES IN THE FUTURE, WHICH MAY
NEGATIVELY IMPACT THE PRICE OF OUR SECURITIES.
We incurred a loss in 2005 as well as in prior fiscal quarters and
fiscal years. We were profitable for the first time in the first quarter of
2006, by generating net income of $0.5 million. While we are encouraged by that
profit, it included a one-time gain on the disposition of an asset, and there
can be no assurance that we will not incur losses again in the future. As of
April 30, 2005, our accumulated deficit was $410.3 million. We believe that the
success of our business depends on our ability to keep our operating expenses to
a level at or below our revenues. There can be no assurance that we can generate
further expense reductions or achieved revenue growth, or that any expense
reductions or revenue growth that are achieved can be sustained, to enable us to
do so. Any failure to maintain profitability would increase the possibility that
the value of your investment will decline.
OUR REVENUES AND OPERATING RESULTS, WHICH MAY VARY SIGNIFICANTLY FROM QUARTER TO
QUARTER AND THEREFORE BE DIFFICULT TO PREDICT, MAY FAIL TO MEET INVESTMENT
COMMUNITY EXPECTATIONS. ANY SUCH FAILURE MAY NEGATIVELY IMPACT THE PRICE OF OUR
SECURITIES.
3
Our revenues and operating results have varied significantly from
quarter to quarter in the past, making them difficult to predict, and we expect
our revenues and operating results may continue to vary from quarter to quarter
in the future due to a variety of factors, many of which are outside of our
control. Such factors include, but are not limited to:
o The termination of any key customer contract, whether by the
customer or by us;
o Legal costs incurred in bringing or defending any litigation with
customers and third-party providers, and any corresponding
judgments or awards;
o Fluctuations in the demand for our services and products;
o Price and functionality competition in our industry;
o Changes in the productivity of, and costs associated with, our
distribution channels and international operations;
o Changes in legislation and accounting standards relating to revenue
recognition and stock-based compensation;
o Any further restructuring charges or changes in assumptions related
to our previously announced initiatives;
o Our ability to satisfy all contractual obligations in customer
contracts and deliver services and products to the satisfaction of
our customers; and
o Other risk factors discussed in this Annual Report.
Although our revenues may fluctuate from quarter to quarter,
significant portions of our expenses are not variable in the short term, and we
may not be able to reduce them quickly to respond to decreases in revenues. If
revenues are below expectations, this shortfall is likely to adversely and/or
disproportionately affect our operating results. Accordingly, we may not attain
positive operating margins in future quarters. This has caused our operating
results to be below the expectations of securities analysts and investors in
certain instances in the past and may do so again in the future. Our failure to
meet or exceed analyst and investor expectations could negatively affect the
price of our securities.
IF OUR EXISTING CUSTOMERS CANCEL ANY REMAINING PORTIONS OF THEIR CONTRACTS WITH
US, OR FAIL TO EITHER RENEW CONTRACTS FOR SERVICES AND PRODUCTS OR PURCHASE
ADDITIONAL SERVICES AND PRODUCTS, OUR BUSINESS WOULD BE ADVERSELY AFFECTED.
We depend on our installed customer base for a significant portion of
our revenues. In addition, our installed customer base has historically
generated additional new license and services revenues for us. Service contracts
are generally renewable at a customer's option, and there are generally no
mandatory payment obligations or obligations to license additional software or
subscribe for additional services. If our customers fail to renew their service
contracts or fail to purchase additional services or products then our revenues
could decrease and our operating results could be adversely affected. Further,
certain of our customers could delay or terminate implementations of our
services and products or be reluctant to migrate to new products for reasons
including the following:
o Budgetary constraints related to economic uncertainty;
o Dissatisfaction with product or service quality;
o Difficulty in prioritizing a surplus of information technology
projects;
o Changes in business strategy or priorities or for other reasons; or
o Recent events in the Company.
4
Such customers will not generate the revenues anticipated within the
timelines anticipated, if at all, and may be less likely to invest in additional
services or products from us in the future. This could have a material adverse
effect on our business.
SOME OF OUR CUSTOMERS OPERATE IN INDUSTRIES THAT HAVE BEEN EXPERIENCING
DECLINING DEMAND OR CONSOLIDATION OF PARTICIPANTS. IF THESE INDUSTRIES CONTINUE
TO EXPERIENCE ECONOMIC DIFFICULTIES OR CONSOLIDATE, THEN THESE CUSTOMERS MAY
GENERATE LESS REVENUE FOR OUR BUSINESS.
Some of our customers operate in industries that have experienced
declines in demand and reduced or negative growth. Other customers operate in
industries in which the volumes of trade and/or shipments have reduced
considerably. If these industries continue to experience difficulties, it could
adversely affect our business and our ability to collect receivables from these
customers. Also, some industries are experiencing consolidation of participants
to gain efficiencies, such as the ocean carrier market and the
less-than-truckload/truckload transportation industry, which could result in the
significant decline or disappearance in the revenues that we receive from
consolidating customers.
IF DOWNWARD PRICING PRESSURE ON CERTAIN PRODUCTS AND SERVICES IS NOT COMPENSATED
FOR BY INCREASED VOLUMES OF TRANSACTIONS OR INCREASED PRICES ELSEWHERE IN OUR
BUSINESS, THEN WE MAY GENERATE LESS REVENUE FOR OUR BUSINESS.
Some of our products and services are sold to industries where there is
downward pricing pressure on the particular product or service, either due to
competition, general industry conditions or otherwise. We may attempt to deal
with this pricing pressure by getting these customers to commit to volumes of
activity so that we may better control our costs. In addition, we may attempt to
offset this pricing pressure by securing better margins on other products or
services sold to the customer, or to other customers elsewhere in our business.
If any downward pricing pressure cannot be so offset, then the particular
customer may generate less revenue for our business or we may have less
aggregate revenue. This could have an adverse impact on our operating results.
FROM TIME TO TIME, WE MAY BE SUBJECT TO ADDITIONAL LITIGATION OR DISPUTE
RESOLUTION THAT COULD RESULT IN SIGNIFICANT COSTS TO US AND DAMAGE TO OUR
REPUTATION.
From time to time, we may be subject to additional litigation or
dispute resolution in the ordinary course of business relating to any number or
type of claims, including claims for damages related to undetected errors or
malfunctions of our services and products or their deployment and claims
relating to applicable securities laws. A product liability, patent infringement
or securities class action claim could seriously harm our business because of
the costs of defending the lawsuit, diversion of employees' time and attention,
and potential damage to our reputation.
Further, our services and products are complex and often implemented by
our customers to interact with third-party technology or networks. Claims may be
made against us for damages properly attributable to those third-party
technologies or networks, regardless of our responsibility for any failure
resulting in a loss - even if our services and products perform in accordance
with their functional specifications. We may also have disputes with key
suppliers for damages incurred which, depending on resolution of the disputes,
could impact the ongoing quality, price or availability of the services or
products we procure from the supplier. While our agreements with our customers,
suppliers and other third-parties may contain provisions designed to limit
exposure to potential claims, these limitation of liability provisions may not
be enforceable under the laws of some jurisdictions. As a result, we could be
required to pay substantial amounts of damages in settlement or upon the
determination of any of these
5
types of claims and incur damage to the reputation of the Company and our
products. The likelihood of such claims and the amount of damages we may be
required to pay may increase as our customers increasingly use our services and
products for critical business functions or rely on our services and products as
the systems of record to store data for use by other customer applications.
Although we carry general liability and directors and officers insurance, our
insurance may not cover potential claims or may not be adequate to cover all
costs incurred in defense of potential claims or to indemnify us for all
liability that may be imposed.
OUR RESTRUCTURING INITIATIVES MAY NOT ACHIEVE THEIR INTENDED RESULTS AND MAY
IMPAIR OUR ABILITY TO SUSTAIN PROFITABILITY.
We previously implemented separate restructuring plans in each of
August 2001, June 2002 and May 2003. In May 2004, we announced that we were
undertaking an additional restructuring. During 2005, we incurred restructuring
charges and revisions of $14.1 million and reduced our global workforce by 45%.
The objective of the restructuring plans was to reduce our cost structure in
support of our services model and generate greater operating efficiencies
through reductions in our workforce, and through consolidation of facilities and
termination of operating contracts. Workforce reductions negatively impacted,
and could continue to negatively impact, our remaining employees, including
those directly responsible for sales, thereby impacting our ability to pursue
new revenue opportunities. Further, any failure to retain and effectively manage
our remaining employees could increase our costs, hurt our development and sales
efforts, and impact the quality of our customer service. These restructuring
activities have affected and may continue to affect our ability to pursue new
transactions and maintain existing relationships with customers and prospects
and therefore negatively affect future revenues. This could continue to harm our
business, results of operations and financial condition.
WE REDUCED OUR WORKFORCE AS PART OF OUR COST REDUCTION INITIATIVES. IF WE FAIL
TO ATTRACT AND RETAIN KEY PERSONNEL, IT WOULD ADVERSELY AFFECT OUR ABILITY TO
DEVELOP AND EFFECTIVELY MANAGE OUR BUSINESS.
Our performance is substantially dependent on the performance of our
key technical and senior management personnel. We do not maintain life insurance
policies on any of our employees. Our success is highly dependent on our
continuing ability to identify, hire, train, motivate, promote, and retain
highly qualified management, technical, and sales and marketing personnel,
including key technical and senior management personnel. Competition for such
personnel is always strong. Our inability to attract or retain the necessary
management, technical, and sales and marketing personnel, or to attract such
personnel on a timely basis, could have a material adverse effect on our
business, results of operations, financial condition and the price of our
securities. Since March 2004, our workforce has been reduced by almost 45% and
included the departures of many members of management, including our CEO and
CFO. In May 2005 we announced further changes to our management team with the
addition of two executive vice-presidents, Chris Jones and Mark Weisberger, and
the departure of another executive vice-president, Bruce Gordon. There can be no
assurance that these changes and the resulting transition will not have a
material adverse effect on our business, results of operation, financial
condition and the price of our securities.
RECENT CHANGES IN REQUIREMENTS RELATING TO ACCOUNTING TREATMENT FOR EMPLOYEE
STOCK OPTIONS MAY FORCE US TO CHANGE OUR BUSINESS PRACTICES, WILL RESULT IN
ADDITIONAL EXPENSES THAT MAY MATERIALLY ADVERSELY AFFECT OUR BUSINESS.
6
Recent changes implemented by accounting standards organizations and
governmental authorities will soon require us to treat the value of past and
future stock options granted to employees as a compensation expense. As a
result, we may reevaluate our stock option compensation practices including the
number of stock options granted to employees. In the absence of alternative cash
or other compensation plans to replace any reduced benefits to employees under
the stock option plan, this change could affect our ability to retain existing
employees, attract qualified candidates and otherwise materially adversely
affect our business. In addition, the incremental expense will make it more
difficult to maintain profitability, which would in turn have a material adverse
effect on our business.
WE HAVE REACHED AN AGREEMENT-IN-PRINCIPLE TO SETTLE, BUT STILL FACE, SECURITIES
CLASS ACTION LITIGATION.
On or about May 19, 2004, we were named as a defendant in a securities
class action lawsuit captioned BRIJ WALIA V. THE DESCARTES SYSTEMS GROUP INC.,
ET AL., which was filed in the United States District Court for the Southern
District of New York purportedly on behalf of purchasers of our common stock
between June 4, 2003 and May 6, 2004. The complaint also names as defendants two
of our former officers. The complaint alleges, among other things, that the
defendants made misstatements to the investing public between June 4, 2003 and
May 6, 2004 regarding our financial condition. Three additional complaints were
also filed making substantially similar allegations, and all four actions were
consolidated before a single judge for pretrial purposes. On November 2, 2004,
we announced that we had reached an agreement-in-principle to settle the
consolidated class action litigation, subject to a formal written settlement
agreement and court approval. In January 2005, the parties to the litigation
executed a memorandum of understanding that memorialized the terms of the
settlement-in-principle. On April 11, 2005, the parties executed definitive
settlement papers, which were filed with the court along with a motion for
preliminary approval of the proposed settlement on April 12, 2005. On June 1,
2005, the court, among other things, preliminarily approved the proposed
settlement, ordered that notice of the proposed settlement be provided to
potential claimants and ordered that a settlement hearing be held before the
court on September 16, 2005 to consider final court approval of the proposed
settlement. While we indicated on November 2, 2004 that we did not expect the
settlement-in-principle to have any future impact on our operating results,
there can be no assurance that the class action litigation will not have a
material adverse effect on our results of operations or financial position if
the terms of the settlement-in-principle are altered, or if the agreed
settlement-in-principle is not approved by applicable courts.
WE MAY IN THE FUTURE HAVE INCREASING DIFFICULTY OBTAINING AND MAINTAINING
COST-EFFECTIVE INSURANCE WHICH MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION, AS WELL AS RESTRICT OUR
ABILITY TO ATTRACT AND RETAIN OUTSIDE DIRECTORS FOR OUR BOARD OF DIRECTORS.
We obtain insurance to cover a variety of potential risks and
liabilities. In the current market, insurance coverage is becoming more
restrictive. When insurance coverage is offered, the deductible for which we are
responsible is larger and premiums have increased substantially, particularly
with respect to our director and officer liability insurance. As a result, it
may, in the future, become more difficult to maintain insurance coverage at
historical levels, or if such coverage is available, the cost to obtain or
maintain it may increase substantially. This is especially so where we have
claims experience pursuant to a particular policy, such as our recent
agreement-in-principle to settle the class action litigation for $1.5 million of
which our insurers are paying $1.1 million. If insurance is more difficult, or
unable, to be obtained then this may result in our being forced to bear the
burden of an increased portion of risks for
7
which we have traditionally been covered by insurance, which could have a
material adverse effect on our business, results of operations and financial
condition. This could also restrict our ability to attract and retain outside
directors to our Board of Directors.
OUR COMMON STOCK PRICE HAS IN THE PAST BEEN VOLATILE AND MAY ALSO BE IN THE
FUTURE.
The trading price of our common stock has in the past been subject to
wide fluctuations and may also be in the future. This may make it more difficult
for you to resell your common shares when you want at prices that you find
attractive. These fluctuations may be caused by events unrelated to our
operating performance and beyond our control. Factors that may contribute to
fluctuations include, but are not limited to:
o Revenue or results of operations in any quarter failing to meet the
expectations, published or otherwise, of the investment community;
o Changes in recommendations or financial estimates by industry or
investment analysts;
o Changes in management;
o Outcomes of litigation or arbitration proceedings;
o Announcements of technological innovations or acquisitions by us or
by our competitors;
o Introduction of new products or significant customer wins or losses
by us or by our competitors;
o Developments with respect to our intellectual property rights or
those of our competitors;
o Rumors or dissemination of false and/or misleading information;
o Fluctuations in the stock prices of other companies in the
technology and emerging growth sectors;
o General market conditions; and
o Other risk factors set out in this Annual Report.
If the market price of a company's stock drops significantly,
stockholders could institute securities class action lawsuits against that
company, regardless of the merits of such claims. Such a lawsuit, such as the
ones in which we were named a defendant on or about May 19, 2004 (as discussed
above), could cause us to incur substantial costs and could divert the time and
attention of our management and other resources from our business.
WE COULD BE EXPOSED TO BUSINESS RISKS IN OUR INTERNATIONAL OPERATIONS THAT COULD
LIMIT THE EFFECTIVENESS OF OUR GROWTH STRATEGY AND CAUSE OUR OPERATING RESULTS
TO SUFFER.
While our headquarters are in North America, we currently have direct
operations in both Europe and the Asia Pacific region. Though we have reduced
our presence in these geographies, we anticipate that these international
operations will continue to require significant management attention and
financial resources to localize our services and products for delivery in these
markets, to develop compliance expertise relating to international regulatory
agencies, and to develop direct and indirect sales and support channels in those
markets. We face a number of risks associated with conducting our business
internationally that could negatively impact our operating results, including:
o Longer collection time from foreign clients, particularly in the
Asia Pacific region;
o Difficulty in repatriating cash from certain foreign jurisdictions;
8
o Language barriers, conflicting international business practices,
and other difficulties related to the management and administration
of a global business;
o Difficulties and costs of staffing and managing geographically
disparate direct and indirect operations;
o Currency fluctuations and exchange and tariff rates;
o Multiple, and possibly overlapping, tax structures and the burden
of complying with a wide variety of foreign laws;
o Trade restrictions;
o The need to consider characteristics unique to technology systems
used internationally;
o Economic or political instability in some international markets;
and
o Other risk factors set out in this Annual Report.
IF WE NEED ADDITIONAL CAPITAL IN THE FUTURE AND ARE UNABLE TO OBTAIN IT AS
NEEDED OR CAN ONLY OBTAIN IT ON UNFAVORABLE TERMS, OUR OPERATIONS AND GROWTH
STRATEGY MAY BE ADVERSELY AFFECTED, AND THE MARKET PRICE FOR OUR SECURITIES
COULD DECLINE.
Historically, we have financed our operations primarily through cash
flows from our operations, long-term borrowings, and the sale of our debt and
equity securities. As of April 30, 2005, we had cash, cash equivalents and
marketable securities of approximately $53.1 million and a $9.5 million
operating line of credit of which $8.5 million is unutilized. On June 30, 2005,
we paid $27.7 million to satisfy outstanding principal and interest on the
maturity of all of our remaining convertible debentures. While we believe we
have sufficient liquidity to fund our operating requirements for 2006, we may
need to raise additional debt or equity capital to fund expansion of our
operations, to enhance our services and products, or to acquire or invest in
complementary products, services, businesses or technologies. If we raise
additional funds through further issuances of convertible debt or equity
securities, our existing stockholders could suffer significant dilution, and any
new equity securities we issue could have rights, preferences, and privileges
superior to those attaching to our common stock. Any debt financing secured by
us in the future could involve restrictive covenants relating to our capital
raising activities and other financial and operational matters, which may make
it more difficult for us to obtain additional capital and to pursue business
opportunities, including potential acquisitions. In addition, we may not be able
to obtain additional financing on terms favorable to us, if at all. If adequate
funds are not available on terms favorable to us, our operations and growth
strategy may be adversely affected and the market price for our common stock
could decline.
CHANGES IN THE VALUE OF THE US DOLLAR, AS COMPARED TO THE CURRENCIES OF OTHER
COUNTRIES WHERE WE TRANSACT BUSINESS, COULD HARM OUR OPERATING RESULTS AND
FINANCIAL CONDITION.
To date, our international revenues have been denominated primarily in
US dollars. However, the majority of our international expenses, including the
wages of our non-US employees and certain key supply agreements, have been
denominated in currencies other than the US dollar. Therefore, changes in the
value of the US dollar as compared to these other currencies may materially
adversely affect our operating results. We generally have not implemented
hedging programs to mitigate our exposure to currency fluctuations affecting
international accounts receivable, cash balances and intercompany accounts. We
also have not hedged our exposure to currency fluctuations affecting future
international revenues and expenses and other commitments. Accordingly, currency
exchange rate fluctuations have caused, and may continue to cause, variability
in our foreign currency denominated revenue streams and our cost to settle
foreign currency denominated liabilities. In particular, we incur a significant
portion of our expenses in Canadian dollars relative to the amount of revenue we
receive in Canadian dollars, so
9
fluctuations in the Canadian-US dollar exchange rate could have a material
adverse effect on our business, results of operations and financial condition.
FAIR VALUE ASSESSMENTS OF OUR INTANGIBLE ASSETS REQUIRED BY GAAP MAY REQUIRE US
TO RECORD SIGNIFICANT NON-CASH CHARGES ASSOCIATED WITH INTANGIBLE ASSET
IMPAIRMENT.
Portions of our assets are intangible, which include customer
agreements and relationships, non-compete covenants, existing technologies and
trade names. We amortize intangible assets on a straight-line basis over their
estimated useful lives, which is generally five years. We review the carrying
value of these assets at least annually for evidence of impairment. In
accordance with SFAS No. 144, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of," an impairment loss is
recognized when the estimate of undiscounted future cash flows generated by such
assets is less than the carrying amount. Measurement of the impairment loss is
based on the present value of the expected future cash flows. Future fair value
assessments of intangible assets may require additional impairment charges to be
recorded in the results of operations for future periods. This could have a
material adverse effect on our business.
CONTINUED REGIONAL AND/OR GLOBAL ECONOMIC, POLITICAL AND MARKET CONDITIONS,
INCLUDING ACTS OF TERRORISM AND ARMED CONFLICT, MAY CAUSE A DECREASE IN DEMAND
FOR OUR SUPPLY CHAIN SERVICES AND SOFTWARE WHICH MAY NEGATIVELY AFFECT OUR
REVENUE AND OPERATING RESULTS.
Our revenue and profitability depend on the overall demand of our
current and potential customers for our supply chain services and products.
Regional and/or global changes in the economy and financial markets, viral
outbreaks, and political instability in geographic areas have resulted in
companies generally reducing spending for technology services and products and
delaying or reconsidering potential purchases of our supply chain services and
products. The economic uncertainty resulting from continuation or escalation of
military action or terrorist activity may continue to negatively impact our
customers and cause them to limit or reduce spending on our services and
products. Future declines in demand for our services and/or products could
adversely affect our revenues and operating results.
FAILURE TO ACHIEVE BROAD MARKET ACCEPTANCE OF THE WAY IN WHICH WE PRICE AND
DELIVER SERVICES AND PRODUCTS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS AND RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
We have two primary models for pricing and delivering services and
products: one whereby we deliver services and products over our proprietary
network, for which we charge customers on a per-transaction basis; and one
whereby we license our products to customers in exchange for a license fee. If
this business strategy is flawed, or if we are unable to execute on it
effectively, our business, operating results and financial condition could be
substantially harmed. Any factor adversely affecting market acceptance of the
ways by which our services and products are priced or delivered, including the
availability and price of competing services and products or negative industry
analyst commentary, could have a material adverse effect on our business,
results of operations and financial condition.
IF WE ARE UNABLE TO GENERATE BROAD MARKET ACCEPTANCE OF OUR SERVICES AND
PRODUCTS, SERIOUS HARM COULD RESULT TO OUR BUSINESS.
We currently derive substantially all of our revenues from our supply
chain services and products and expect to do so in the future. Broad market
acceptance of these types of services and products is therefore critical to our
future success. The demand for, and market acceptance of, our services and
10
products are subject to a high level of uncertainty. Our services and products
are often considered complex and may involve a new approach to the conduct of
business by our customers. Intensive marketing and sales efforts may be
necessary to educate prospective customers regarding the uses and benefits of
these services and products in order to generate demand. There can be no
assurance, however, that such efforts will enable us to maintain our current
level of market acceptance or to achieve any additional degree of market
acceptance. The market for our services and products may weaken, competitors may
develop superior services and products or we may fail to develop acceptable
services and products to address new market conditions. Any one of these events
could have a material adverse effect on our business, results of operations and
financial condition.
THE GENERAL CYCLICAL AND SEASONAL NATURE OF OUR BUSINESS MAY HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
Our business may be impacted from time to time by the general cyclical
and seasonal nature of particular modes of transportation and the freight market
in general, as well as the cyclical and seasonal nature of the industries that
such markets serve. Factors which may create cyclical fluctuations in such modes
of transportation or the freight market in general include legal and regulatory
requirements, timing of contract renewals between our customers and their own
customers, seasonal based tariffs, vacation periods applicable to particular
shipping or receiving nations, and amendments to international trade agreements.
Since some of our revenues from particular products and services are tied to the
volume of shipments being processed, adverse fluctuations in the volume of
global shipments or shipments in any particular mode of transportation may
affect our revenues and have a material adverse affect on our business, results
of operations and/or financial condition.
WE MAY NOT REMAIN COMPETITIVE. INCREASED COMPETITION COULD SERIOUSLY HARM OUR
BUSINESS.
The market for supply chain technology is highly competitive and
subject to rapid technological change. We expect that competition will increase
in the future. To maintain and improve our competitive position, we must
continue to develop and introduce in a timely and cost effective manner new
products, product features and network services to keep pace with our
competitors. Current and potential competitors include supply chain application
software vendors, customer internal development efforts, value-added networks
and business document exchanges, enterprise resource planning software vendors
and general business application software vendors. Many of our current and
potential competitors may have one or more of the following relative advantages:
o Longer operating history;
o Greater financial, technical, marketing, sales, distribution and
other resources;
o Lower cost structure and more profitable operations;
o Superior product functionality in specific areas;
o Greater name recognition;
o A broader range of products to offer;
o Better performance;
o A larger installed base of customers;
o Established relationships with customers that we are targeting; or
o Greater worldwide presence.
Further, current and potential competitors have established, or may
establish, cooperative relationships and business combinations among themselves
or with third parties to enhance their products,
11
which may result in increased competition. In addition, we expect to experience
increasing price competition and competition surrounding other commercial terms
as we compete for market share. In particular, larger competitors or competitors
with a broader range of services and products may bundle their products,
rendering our products more expensive and/or relatively less functional. As a
result of these and other factors, we may be unable to compete successfully with
our existing or new competitors.
SYSTEM OR NETWORK FAILURES IN CONNECTION WITH OUR SERVICES AND PRODUCTS COULD
REDUCE OUR SALES, IMPAIR OUR REPUTATION, INCREASE COSTS OR RESULT IN LIABILITY
CLAIMS, AND SERIOUSLY HARM OUR BUSINESS.
Any disruption to our services and products, our own information
systems or communications networks or those of third-party providers upon whom
we rely as part of our own product offerings, including the Internet, could
result in the inability of our customers to receive our products for an
indeterminate period of time. Our services and products may not function
properly for any of the following reasons:
o System or network failure;
o Interruption in the supply of power;
o Virus proliferation;
o Earthquake, fire, flood or other natural disaster; or
o An act of war or terrorism.
Although we have made significant investments, both internally and with
third-party providers, in redundant and back-up systems for some of our services
and products, these systems may be insufficient or may fail and result in a
disruption of availability of our products or services to our customers. Any
disruption to our services could impair our reputation and cause us to lose
customers or revenue, or face litigation, customer service or repair work that
would involve substantial costs and distract management from operating our
business.
SERIOUS HARM TO OUR BUSINESS COULD RESULT IF THERE IS A SECURITY FAILURE OR
VIRUS PROLIFERATION WITH OUR SERVICES AND PRODUCTS.
The secure exchange of customer information over public networks is a
significant concern of consumers engaging in on-line transactions and
interaction. Our services and products use various security methods to provide
the security necessary to enable the secure exchange of customer information. We
also implement commercial virus software. Advances in computer capabilities, new
discoveries in the field of computer security, or other events or developments
could result in a compromise or breach of the algorithms that these security
methods use to protect customer transaction data. Computer viruses may
nevertheless infiltrate our products or the networks over which we deliver our
services, resulting in unexpected results, unavailability of our services and
products and significant costs to eliminate the virus. If any compromise, breach
of security or virus infiltration were to occur, it could have a material
adverse effect on our reputation, business, results of operations and financial
condition.
IF THE DEVELOPMENT OF OUR SERVICES AND PRODUCTS FAILS TO KEEP PACE WITH OUR
INDUSTRY'S RAPID EVOLUTION, OUR FUTURE RESULTS MAY BE MATERIALLY AND ADVERSELY
AFFECTED.
The markets for our services and products are subject to rapid
technological change, changing customer needs, frequent new product
introductions and evolving industry standards. We have historically
12
been successful in keeping pace with, if not leading, these changes, but if we
fail to do so in the future, our services and products may be rendered less
competitive or obsolete. Our services and product development and testing
efforts have required, and are expected to continue to require, substantial
investments and may take significant periods of time. We may not possess
sufficient resources to continue to make future necessary investments in
technology on a timely basis or complete the developments that we have already
undertaken. Cutbacks in our workforce could lengthen the time necessary to
develop our products or cause us to abandon certain development. In addition, we
may not successfully identify new product opportunities or develop and bring new
services and products to market in a timely and efficient manner.
Our growth and future operating results will depend, in part, upon our
ability to continue to enhance existing services and products and develop and
introduce new services and products or capabilities that:
o Meet or exceed technological advances in the marketplace;
o Meet changing market and customer requirements, including rapid
realization of benefits and the need to rapidly manage and analyze
increasingly large volumes of data;
o Comply with changing industry standards and achieve market
acceptance;
o Integrate with system platforms, operating environments and user
interfaces commercially accepted from time to time; and
o Integrate third-party technology effectively and respond to
competitive offerings.
If we are unable, for technological or other reasons, to develop and
introduce new and enhanced services and products in a timely manner, we may lose
existing customers or fail to attract new customers, which may have a material
adverse effect on our results of operations and financial condition.
OUR EFFORTS TO DEVELOP AND SUSTAIN STRATEGIC RELATIONSHIPS TO IMPLEMENT AND
PROMOTE OUR SERVICES AND PRODUCTS MAY FAIL, WHICH COULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
We are developing, maintaining and enhancing significant working
relationships with complementary vendors, such as software companies, service
providers, consulting firms, resellers and others that we believe can play
important roles in marketing our services and products. We are currently
investing, and intend to continue to invest, significant resources to develop
and enhance these relationships, which could adversely affect our operating
margins. We may be unable to develop relationships with organizations that will
be able to market our products effectively. Our arrangements with these
organizations are not exclusive and, in many cases, may be terminated by either
party without cause. Many of the organizations with which we are developing or
maintaining marketing relationships have commercial relationships with our
competitors. There can be no assurance that any organization will continue its
involvement with us or with our products. The loss of relationships with
important organizations could materially and adversely affect our results of
operations and financial condition.
WE DEPEND ON OUR THIRD-PARTY PROVIDERS FOR OUR SERVICES AND PRODUCT OFFERINGS
AND OUR BUSINESS. IF OUR RELATIONSHIPS WITH ANY OF THESE THIRD-PARTY PROVIDERS
ARE IMPAIRED, OUR BUSINESS COULD BE HARMED.
We incorporate and include third-party services and products into and
with our own services and products. We are likely to incorporate third-party
services and products into our own services and
13
products, and include additional third-party products in our service and product
offerings, as we expand our own service and product offerings. In addition, we
use third-party services and products as part of our own internal financial
information systems. If our relations with any of our third-party providers are
impaired such that we cannot secure access to their services or products on
favorable terms, or if we are unable to obtain or develop a replacement for the
third-party service or product, our business could be harmed. The operation of
our own services and products or financial systems would be impaired if errors
occur in the third-party products, or failures occur in the third-party
services, that we utilize. It may be more difficult for us to correct any
defects in third-party services or products because the services or products are
not within our control. Accordingly, our business could be adversely affected in
the event of any errors in these third-party products or failures of third-party
services. There can be no assurance that these third-parties will continue to
invest the appropriate levels of resources in their services and products to
maintain and enhance their products' capabilities.
OUR SUCCESS AND ABILITY TO COMPETE DEPENDS UPON OUR ABILITY TO SECURE AND
PROTECT PATENTS, TRADEMARKS AND OTHER PROPRIETARY RIGHTS.
We consider certain aspects of our internal operations, our products,
services and related documentation to be proprietary, and we primarily rely on a
combination of patent, copyright, trademark and trade secret laws and other
measures to protect our proprietary rights. Patent applications or issued
patents, as well as trademark, copyright, and trade secret rights, may not
provide significant protection or competitive advantage and may require
significant resources to obtain and defend. We also rely on contractual
restrictions in our agreements with customers, employees, outsourced developers
and others to protect our intellectual property rights. There can be no
assurance that these agreements will not be breached, that we have adequate
remedies for any breach, or that our patents, copyrights, trademarks or trade
secrets will not otherwise become known. Moreover, the laws of some countries do
not protect proprietary intellectual property rights as effectively as do the
laws of the United States and Canada. Protecting and defending our intellectual
property rights could be costly regardless of venue.
Through an escrow arrangement, we have granted some of our customers a
contingent future right to use our source code for software products solely for
internal maintenance services. If our source code is accessed through an escrow,
the likelihood of misappropriation or other misuse of our intellectual property
may increase.
CLAIMS THAT WE INFRINGE THIRD-PARTY PROPRIETARY RIGHTS COULD TRIGGER
INDEMNIFICATION OBLIGATIONS AND RESULT IN SIGNIFICANT EXPENSES OR RESTRICTIONS
ON OUR ABILITY TO PROVIDE OUR SERVICES.
Competitors and other third-parties have claimed and in the future may
claim that our current or future services or products infringe their proprietary
rights or assert other claims against us. Many of our competitors have obtained
patents covering products and services generally related to our products and
services, and they may assert these patents against us. Such claims, with or
without merit, could be time consuming and expensive to litigate or settle and
could divert management attention from focusing on our core business. As a
result of such a dispute, we may have to pay damages, incur substantial legal
fees, suspend the sale or deployment of our services and products, develop
costly non-infringing technology, if possible, or enter into license agreements,
which may not be available on terms acceptable to us, if at all. Any of these
results would increase our expenses and could decrease the functionality of our
services and products, which would make our services and products less
attractive to our current or potential customers. We have agreed in some of our
agreements, and may agree in the future, to indemnify other parties for any
expenses or liabilities resulting from claimed infringements of the proprietary
rights of
14
third-parties. If we are required to make payments pursuant to these
indemnification agreements, it could have a material adverse effect on our
business, results of operations and financial condition.
ITEM 4. INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT OF THE COMPANY
We were amalgamated in Ontario, Canada under the name The Descartes
Systems Group Inc. on January 26, 1999. Our legal name and commercial name is
The Descartes Systems Group Inc. We are a corporation domiciled in the Province
of Ontario, Canada and operate under the Ontario Business Corporations Act. Our
principal executive offices are located at 120 Randall Drive, Waterloo, Ontario,
Canada N2V 1C6 and our telephone number is (519) 746-8110. Our agent for service
of process in the United States is our wholly-owned subsidiary Descartes Systems
(USA) LLC, Powers Ferry Business Park, Suite 510, Building 500, 2300 Powers
Ferry Rd. NW, Atlanta, GA 30339, telephone number (678) 247-0400. Our web-site
is http://www.descartes.com. Information on our web-site is not incorporated by
reference in this Annual Report.
Significant product and business developments over the last fiscal year
have been as follows:
FISCAL 2005
In the early part of fiscal 2005 we were presented with a number of
business challenges. In May 2004 we announced that we were undertaking a review
of our 2004 financial statements that were previously released in unaudited
form, that we had terminated the employment of our then-CEO, Mr. Manuel Pietra,
and that our first quarter revenues would be materially below previously
announced expectations. Following these announcements we were named as a
defendant in securities class action lawsuits initiated in the US.
To meet the challenges, we appointed an interim Office of the CEO that
included our then-EVP Strategic Development, Arthur Mesher, and our CFO, Brandon
Nussey, who had been appointed to that position in March 2004. We completed the
audit of our 2004 financial statements, and determined to make certain
adjustments to the previously announced unaudited financial statements,
including reducing revenues by $1.9 million; increasing the loss per share by
$0.16; decreasing total assets by approximately $6.5 million; and decreasing
total liabilities by $0.2 million. We undertook significant expense reduction
initiatives designed to produce recurring quarterly expense savings, which
initiatives included reducing our workforce by approximately 45%, closing
numerous global offices (particularly in the Asia Pacific geographic region) and
exiting various operating contracts.
By the latter-half of 2005, we had made significant advances in meeting
these challenges. We settled-in-principle all securities class action lawsuits
for $1.5 million (with a contribution of $1.1 million from our insurers and the
balance being contributed by us). We appointed Arthur Mesher as our CEO. We
completed the expense reduction initiatives and reduced our quarterly expenses
in the fourth quarter of 2005 to $12.0 million from $33.8 million in the second
quarter when the initiatives were commenced. By the fourth quarter of 2005 we
had significantly improved our operating performance from earlier in the year,
which resulted in our cash position increasing by $2.4 million from the end of
the third quarter and in our GAAP loss being further reduced.
Further detail regarding these events is as follows:
15
MANAGEMENT CHANGES - On May 6, 2004, we announced the termination of Manuel
Pietra as Chief Executive Officer and President of Descartes effective
immediately. Arthur Mesher, the former Executive Vice-President, Strategic
Development and Brandon Nussey, Chief Financial Officer, were appointed to
replace Mr. Pietra on an interim basis and together formed the Office of the
Chief Executive Officer reporting to the Board of Directors. On November 2,
2004, we announced that Arthur Mesher had been appointed Chief Executive Officer
and that Brandon Nussey would continue in his role as Chief Financial Officer.
EXPENSE REDUCTION INITIATIVES - On May 17, 2004, we announced that we were
taking action to significantly reduce expenses and implement a downsizing of our
global staff. In addition, we announced we would be closing certain offices, and
canceling certain leases and consulting and other operating contracts. The focus
of the downsizing was our regional operational structure and has resulted in a
significantly smaller global direct sales force and management level in the
organization. On September 2, 2004, we announced that we found and acted upon
additional opportunities for cost savings, particularly in the area of staff
reductions. The aggregate result of these initiatives was a downsizing of the
global workforce by approximately 45%. In relation to these expense reduction
initiatives, we recorded a charge of approximately $7.4 million in the second
quarter of 2005 and a charge of $0.6 million in the third quarter of 2005.
Additionally, as indicated in our May 17, 2004 press release, we reviewed our
assets for redundancy. As a result, we recorded a non-cash charge of $5.8
million in the second quarter of 2005 related to the write-off of assets such as
leaseholds, office furniture, and employee and network computer hardware and
software. The impact of the expense reduction initiatives on our financial
condition and results of operation is discussed in more detail later in this
Annual Report.
CLASS ACTION LITIGATION - On or about May 19, 2004, we were named as a defendant
in a securities class action lawsuit captioned BRIJ WALIA V. THE DESCARTES
SYSTEMS GROUP INC., ET AL., which was filed in the United States District Court
for the Southern District of New York purportedly on behalf of purchasers of our
common stock between June 4, 2003 and May 6, 2004. The complaint also names as
defendants two of our former officers. The complaint alleges, among other
things, that the defendants made misstatements to the investing public between
June 4, 2003 and May 6, 2004 regarding our financial condition. Three additional
complaints were filed making substantially similar allegations and,
subsequently, all four complaints were consolidated into a single complaint. On
November 2, 2004, we announced that we had reached an agreement in principle to
settle all of these class action claims. Under the terms of the
settlement-in-principle, a settlement fund will be established in the total
amount of $1.5 million, of which approximately $1.1 million will be paid by
Descartes' insurers and the remainder paid by us. In January 2005, the parties
to the litigation executed a memorandum of understanding that memorialized the
terms of the settlement-in-principle. On April 11, 2005, the parties executed
definitive settlement papers, which were filed with the court along with a
motion for preliminary approval of the proposed settlement on April 12, 2005. On
June 1, 2005, the court, among other things, preliminarily approved the proposed
settlement, ordered that notice of the proposed settlement be provided to
potential claimants and ordered that a settlement hearing be held before the
court on September 16, 2005 to consider final court approval of the proposed
settlement.
ADOPTION OF SHAREHOLDER RIGHTS PLAN - On November 30, 2004, we announced that
our Board of Directors had adopted a shareholder rights plan (the "Rights Plan")
to ensure the fair treatment of shareholders in connection with any take-over
offer, and to provide the Board of Directors and shareholders with additional
time to fully consider any unsolicited take-over bid. The Company did not adopt
the Rights Plan in response to any specific proposal to acquire control of the
Company. The Rights Plan was approved by the Toronto Stock Exchange and approved
by our shareholders on May 18, 2005.
16
The Rights Plan took effect as of November 29, 2004, and has an initial term of
three years. The Rights Plan is similar to plans adopted by other Canadian
companies and approved by their shareholders.
In addition to these challenges and changes, we had the following
business and product developments in 2005:
o Launched an industry-focused program to enable companies to measure
the costs and benefits of radio-frequency identification (RFID)
across a company's supply chain;
o Consolidated our operations in Waterloo, Ontario and Atlanta,
Georgia and closed various regional offices in the U.S., Brazil,
France, Germany, the Netherlands, Hong Kong and China;
o Signed a three-year global messaging gateway deal with British
Airways World Cargo, one of the largest air cargo carriers;
o Announced that Autozone, CVS/Pharmacy, Ashley Furniture Industries
and Peapod, all market-leaders in their respective fields, were
expanding their implementations of our solutions; and
o Announced that Ferrellgas Partners LP, a leading U.S. propane
distributor, was successfully deploying our real-time Routing and
Scheduling solution.
FISCAL 2006
Since January 31, 2005, we have had other developments in our business.
In March 2005 we announced that our Customer Global User Group Steering
Committee included representatives from Eastman Kodak, CVS Corporation, The
Schwan Food Company, Ferrellgas Partners, U.B.C.R., Kinetetsu, Integrated
Logistics, Capital Coors, and Ocado Limited. Later in March, we announced the
launch of our new Ocean rate management product, Ocean RateBuilder(TM). We also
announced expanded customer relationships with Exel and Hanjin for Ocean
Contract Management, and Kuehne & Nagel for Global Air Messaging.
In May 2005, we strengthened our management team by adding two industry
veterans: Chris Jones and Mark Weisberger. Mr. Jones, a former Senior
Vice-President in Aberdeen Group's Value Chain Reserve division, joined us as
Executive Vice-President, Solutions & Markets. Mr. Weisberger, an enterprise
software industry veteran with over 20 years experience specializing in field
operations, joined us as Executive Vice-President, Field Operations. In
addition, we announced the departure of Bruce Gordon, former Executive
Vice-President, Operations.
At our annual and special meeting of shareholders held on May 18, 2005
in Toronto, our shareholders elected 2 new directors to our existing 5-member
board of directors: Arthur Mesher, our CEO; and, Olivier Sermet. Additional
information about Messrs. Mesher and Sermet is included in Item 6 of this Annual
Report.
On May 25, 2005 we announced our financial results for the first
quarter of 2006, which results included the following:
17
o Record net income of $0.5 million, improved from a loss of $1.0
million in the previous quarter (Q4FY05) and significantly improved
from a loss of $28.9 million in the same quarter a year-ago
(Q1FY05);
o Record earnings per share of $0.01, improved from a loss per share
of $(0.02) in Q4FY05 and $(0.71) in Q1FY05;
o Revenue of $11.3 million, as compared to $11.0 million in Q4FY05
and $13.3 million in Q1FY05;
o Gross margin of 57%, as compared to 55% in Q4FY05;
o Further reduction in days-sales-outstanding (DSOs) to 52 days, down
from 58 days in Q4FY05 and down from 87 days in Q1FY05; and
o A $4.3 million increase in cash, cash equivalents and marketable
securities since the end of Q4FY05.
In June, we announced an expanded real-time routing and scheduling
relationship with Tomra Recycling, including use of the Nextel Nationwide
Network. We also announced that both Samsung Electronics and Meridian IQ (a
subsidiary of Yellow Freight) were customers of our products and services.
On June 30, 2005 we paid $27.7 million in principal and interest to
satisfy all of our outstanding convertible debentures on their maturity.
PRINCIPAL CAPITAL EXPENDITURES AND DIVESTITURES
In 2003, we used $16.8 million in cash in operating activities - $11.6
million of which was spent on restructuring, $4.0 million of which was interest
payments and the balance used in operations. In addition, we used $5.3 million
in cash to acquire capital assets (principally equipment and software to support
our global operations and build our global logistics network infrastructure) and
$2.2 million in cash to acquire Tradevision AB, a Sweden-based provider of
global operations and value-added software solutions for transportation
logistics. We also used $1.5 million in cash to purchase $1.5 million principal
amount of our outstanding convertible debentures.
In 2004, we used $32.6 million in cash in operating activities - $17.2
million of which was spent on restructuring, $2.8 million of which was interest
payments and the balance used in operations. In addition, we used $5.8 million
in cash to acquire capital assets (principally equipment and software to support
our global operations and centralize our support functions). We used $43.3
million in cash to purchase $45.0 million principal amount of our outstanding
convertible debentures. We also used $27.2 million to repurchase 11,578,000 of
our common shares.
In 2005, we used $15.0 million in cash in operating activities - $7.3
million of which was spent on restructuring, $1.5 million of which was interest
payments and the balance used in operations. In addition, we used $1.1 million
in cash to acquire capital assets (principally equipment and software to support
our global operations and centralize our support functions).
On June 30, 2005 we paid $27.7 million in principal and interest to
satisfy all of our outstanding convertible debentures on their maturity.
18
B. BUSINESS OVERVIEW
We develop, market, operate, implement and support software and
services for supply chain management. We have significant experience in
providing integrated software applications and network services to help our
customers manage their end-to-end supply chain. Our history of serving
industries with short order-to-fulfillment cycles has allowed us to develop
significant expertise regarding the requirements of logistics and to design
solutions that address the specific needs of enterprises seeking to reduce
costs, save time and enhance customer satisfaction. Our technology-based
solutions provide connectivity and business document exchange, route planning
and wireless dispatch, inventory and asset visibility, transportation
management, carrier contract management, and warehouse optimization. In
addition, we provide a variety of related services, including support and
maintenance services, consulting, implementation and training. Our primary
target industries are retail, consumer product goods, discrete manufacturing and
transportation. Companies in over 60 countries use our solutions.
Our origins are in providing logistics-focused software designed to
optimally plan and manage routes for direct delivery and retail customers with
private fleets. Over the past several years, supply chain management has been
changing, as companies across industry verticals are increasingly seeking
real-time control of their supply chain activities.
We offer solutions to retailers, discrete manufacturers, distributors
and transportation companies that go beyond traditional applications that only
address one particular point of a logistics problem. We provide an end-to-end
suite capable of combining business document exchange and mobile and wireless
applications with supply chain execution applications, such as transportation
management, routing and scheduling and inventory visibility.
Our solutions are offered as suites to target industries. Modular in
approach, the industry-focused suites enable our customers to purchase and use
one module at a time or combine several modules as part of their end-to-end,
real-time supply chain solution. This gives customers an opportunity to add
supply chain services and capabilities as their business needs grow and change.
To develop and support an end-to-end suite of solutions, in 2003, we
first introduced the LOGISTICS NETWORK OPERATING SYSTEM(TM) (LNOS) built on
Microsoft .NET standards. The LNOS is the foundation or architecture upon which
our newer product suites operate, enabling us to offer end-to-end solutions to
our existing and potential clients. As a result of the LNOS component-based
architecture, we can offer many of our applications to customers either hosted
by us or hosted by the customer behind its own firewall. Our flexible pricing
model offers customers the opportunity to either purchase solutions on a
subscription basis or license solutions for their own installation.
PRINCIPAL PRODUCTS AND SERVICES
Our solutions are offered as suites to our target industries. Modular
in approach, the industry-focused enterprise suites enable our customers to
purchase and use one module at a time or combine several modules as part of
their end-to-end, real-time supply chain solution. This gives our customers an
opportunity to add supply chain services and capabilities as their business
needs grow and change.
Helping us to develop and support our solutions is the LOGISTICS
NETWORK OPERATING SYSTEM(TM) (LNOS). The LNOS is the foundation or architecture
upon which our newer product suites operate, enabling us to integrate our
applications and offer end-to-end enterprise solutions.
19
GLOBAL LOGISTICS NETWORK
------------------------
We have solutions for different logistics communities that address
logistics connectivity and connect trading partners through value-added networks
to exchange logistics messages. For transportation service providers, we operate
the GLOBAL LOGISTICS NETWORK(TM) value-added networks for air messaging, ocean
messaging and road and land messaging.
Logistics connectivity consists of connecting a company to its trading
partners, and allowing that trading community to communicate logistics-related
information such as delivery status messages. Logistics connectivity is
available either by itself or together with one, or several, of our other
applications.
Our GLOBAL LOGISTICS NETWORK(TM) offers services for air carriers and
freight forwarders in Europe and North America. Our air messaging services help
simplify cargo management. We specialize in providing electronic services to the
cargo industry and to companies engaged in import and export via applications
such as Cargo 2000, LOGIMAN(TM), and PC PRO(TM).
CARGO 2000
Our CARGO 2000 application provides visibility of the air cargo supply
chain in compliance with the Cargo 2000 initiative launched by the International
Air Transport Association (IATA). The Cargo 2000 initiative seeks to set the
rules for agreed business processes and automation standards within the air
cargo industry. The application allows users to monitor, measure and report on
master air waybills for shipments airport-to-airport. Information provided by
the system includes quality reports, shipment status, exception alerts, route
maps and departure time reports.
LOGIMAN(TM)
LOGIMAN(TM) is designed to track the progress of air cargo as it moves
across borders, between forwarders and carriers, and through the world's freight
terminals. Features of the application include consignments generated from
electronic messages or via web forms, proactive web-based status reports matched
against estimated dates/times on consignment, and proactive alerts of shipment
status changes or missed milestones.
PC PRO(TM)
PC PRO(TM) is an electronic forwarding system designed to help
small-to-medium freight forwarders handle the complexities of freight cargo
management online. Through an electronic infrastructure connecting them to
customers and logistics partners, freight forwarders can optimize freight
booking capacity, send electronic waybills and ensure that consignments are
handled efficiently at freight terminals around the world.
We also offer ocean, road and land messaging services via the GLOBAL
LOGISTICS NETWORK(TM). We provide transaction exchange and connectivity services
including Internet electronic data interchange ("EDI"), trading ramp-up
programs, data standards and protocol conversion, transportation-specific
document compliance, audit and error checking and archiving.
20
TURNAROUND DOCUMENTS(TM)
For shippers and carriers without EDI capabilities, we offer an
application called Turnaround Documents(TM) which enables users to process
purchase orders, sales orders, bills of lading and the status of shipments in
standard format required for specific EDI transaction sets via our value-added
networks.
Supply Chain Solution Suites
----------------------------
Our solution suites include Supply Chain Execution Management,
Transportation Management, Ocean Rate and Contract Management and Routing and
Scheduling. The underlying architecture for these solution suites is our LNOS
architecture, and the applications described below are in varying stages of
being fully integrated to the LNOS architecture.
SUPPLY CHAIN EXECUTION MANAGEMENT
This solution suite includes applications such as VISIBILITY(TM),
MULTIMODAL ROUTE GUIDE(TM), APPOINTMENT SCHEDULER(TM), INVENTORY SNAPSHOTS(TM),
DC OPTIMIZER(TM), KPI METRICS(TM) and LNOS REPORTING SERVICES(TM). These
applications allow cOMPanies to monitor, measure and report on logistics
activities as inventory and shipments move through multiple organizations,
transportation modes and geographies across the supply chain.
VISIBILITY(TM)
VISIBILITY(TM) provides a framework that allows users to monitor,
measure, query and report on order and shipmeNT information at the line-item
level across the supply chain. VISIBILITY(TM) provides flexible exception
management aND notification of shipments moving through multiple organizations,
transportation modes, and geographies. Data representation and web access for
supply chain monitoring can also be facilitated, accommodating each customer's
own terms and references.
MULTIMODAL ROUTE GUIDE(TM)
MULTIMODAL ROUTE GUIDE(TM) allows supply chain planners to create route
itineraries for both domestic aND international shipments. This feature serves
as a baseline for lead-time monitoring and performance management. MULTIMODAL
ROUTE GUIDE(TM) enables dynamic re-calculation of expected arrival times when
conditions change in the supply chain. The trIP plans provided in the
itineraries are available to our other products and applications for functions
such as event monitoring.
APPOINTMENT SCHEDULER(TM)
APPOINTMENT SCHEDULER(TM) helps resolve loading dock congestion by
automating loading scheduling based ON configuration and resource availability.
Loading resources and activities can be defined and measured enabling better
planning and earlier use of inventory. As well, through collaboration between
shippers, consignees and carriers, warehouse efficiency and hours of service can
be improved.
INVENTORY SNAPSHOTS(TM)
INVENTORY SNAPSHOTS(TM) reports on inventory at-rest and in-transit
throughout the supply chain, including goods IN distribution facilities or
shipments at-rest or in-transit within carrier networks. A rule-based
21
application, INVENTORY SNAPSHOTS(TM) manages inventory across disparate
warehouses and systems and includes the ability to manage inventory at tHE
stock-keeping unit (SKU) level or at lower levels such as style, color, size,
lot, batch and batch expiration date.
DC OPTIMIZER(TM)
DC OPTIMIZER(TM) is a warehouse organization simulation tool to explore
"what-if" scenarios of warehouse layouts aND slotting before companies commit to
big changes and the associated costs. This product helps determine optimal
facility layout and product flow from the perspectives of cost and service and
allows users to perform scenario testing of alternative layouts.
KPI METRICS(TM)
KPI METRICS(TM) is a performance management feature of the LNOS
architecture for measuring and monitoring kEY performance indicators relating to
trading partners in the customer's supply chain. For example, delivery
performance can be measured according to the buyer's ship-to-arrive date, the
shipper's route guide or the carrier's contracted transit service. KPI
METRICS(TM) can also be used to measure order and shipment volumes, lead-times,
and other metrics in the suppLY chain. Indicators and metrics can be configured
according to the strategic and tactical metrics defined by the customer. A
flexible, rich calendar is provided that enables historical metrics at a daily,
weekly, monthly, and yearly level according to the unique business calendar of
the customer's business and industry.
LNOS REPORTING SERVICES(TM)
LNOS REPORTING SERVICES(TM) is a feature for departmental data analysis
and reporting across all of our products aND can be integrated with customer
proprietary data sources. LNOS REPORTING SERVICES(TM) provides simple
drag-and-drop repoRT definition, grouping and various mathematical operators. A
chart wizard is provided to assist in the visualization and analysis of the
supply chain scorecards, metrics and current operations.
TRANSPORTATION MANAGEMENT
Our Transportation Management solution suite enables users to create
and execute mode, carrier and rate combination for shipments. Inventory and
sourcing optimization allows users to assess the day's shipments and to select
the most appropriate, cost-effective source and carrier(s) based on entered
contracts. Applications with Transportation Management, such as Roadshow
Transport(TM), provide contract negotiation optimization, load building,
shipment rating, loAD booking and tendering and spot pricing.
ROADSHOW TRANSPORT(TM)
ROADSHOW TRANSPORT(TM) is designed to automate carrier selection with
user-established decision criteria. It assessES and selects from criteria such
as contractual obligations, shipping lanes, shipment priority, cost and carrier
past performance. The application supports order management through
consolidation, financial settlement and audit and functions across multiple
transportation, geographies, currencies and languages.
22
OCEAN RATE AND CONTRACT MANAGEMENT
This solution suite allows ocean carriers to produce their own service
contracts for containerized shipments. The suite provides integrated access to a
robust ocean carrier rate tariff database where users can store, retrieve and
coordinate critical pricing information. It contains applications to calculate
bottom-line service rates via the Internet, including inland charges, fuel
adjustments and currency conversions. Applications include CARRIER
NEGOTIATION(TM), CARRIER RATE RETRIEVAL(TM), CARRIER SELECTION(TM), Automated
Manifest Service and OCEAN RATE BUILDER(TM).
CARRIER NEGOTIATION(TM)
CARRIER NEGOTIATION(TM) helps transportation managers speed up the
process of initiating requests for proposal (RFP) with carriers. It performs
comparisons of RFP responses in order to help select the most suitable carriers.
The application electronically notifies preferred carriers about RFP
opportunities and accepts responses. It also standardizes and speeds up the RFP
process and ensures that all relevant information from both parties is included,
from container types to transit times.
CARRIER RATE RETRIEVAL(TM)
CARRIER RATE RETRIEVAL(TM) can store, amend, update, search, retrieve,
quote and calculate rates. It can BE customized as a "private-label" solution
for publicly posting rates and is securely deployable across a global enterprise
using the Internet. Price quotes can be saved, printed, faxed, or emailed.
CARRIER SELECTION(TM)
CARRIER SELECTION(TM) allows companies to optimize how they negotiate,
implement and manage service contracts. UseRS can create "what-if" scenarios
that reflect actual conditions to better evaluate options and costs.
AUTOMATED MANIFEST SERVICE
Our Automated Manifest Service helps users easily manage shipment
information electronically, and enables compliance with the requirement to
electronically submit shipment information to the U.S. Customs Department's
Automated Manifest System for ocean cargo.
OCEAN RATE BUILDER(TM)
OCEAN RATE BUILDER(TM) is a newly released product that enables ocean
carriers to use a single application TO negotiate rates with their customers
using workflow management functionality. OCEAN RATE BUILDER(TM) also allows
oceAN carriers to manage and retrieve both regulated and non-regulated tariff
rates and rate contracts from a single application. The first release on the
product is currently being tested by initial users and we plan for additional
releases, including improved workflow functionality, throughout 2006.
ROUTING AND SCHEDULING
Our Routing and Scheduling solution suite allows users to efficiently
route private or dedicated fleets and schedule delivery times. It integrates
delivery order fulfillment with customer service. The technology allows
dispatchers to optimally plan and manage routes. The technology also enables
23
interaction with wireless devices to allow remote communication from and updates
to the technology. The Routing and Scheduling solution suite includes
ROADSHOW(TM), FLEETWISE(TM), MONITOR(TM) and MOBILELINK(TM) applications.
ROADSHOW(TM) AND FLEETWISE(TM)
As part of our Routing & Scheduling solution, the Roadshow(TM) and
Fleetwise(TM) applications optimize routes. Users can plan routes and schedules
to most effectively deploy a constant number of trucks in a fleet.
ROADSHOW(TM) applications optimize static and fixed routes and are
available to be used as stand-alone applicationS or as centralized, multi-user
enterprise applications.
Fleetwise(TM) applications optimize "dynamic" (changing) routes.
Companies with pick-up and delivery operations caN enter orders throughout the
day to incrementally optimize routes and schedules. The applications connect the
dispatch manager, driver and customer service representative for better planning
and customer service.
There are several applications within the Roadshow(TM) and
Fleetwise(TM) application groups, including Roadshow SAles and Territory
Planner(TM), Fleetwise Reservations(TM), Fleetwise Dispatch(TM) and Monitor(TM).
ROADSHOW SALES AND TERRITORY PLANNER(TM)
ROADSHOW SALES AND TERRITORY PLANNER(TM) is a strategic planning
application to create territories or routes foR delivery, sales, presales, and
merchandising personnel to optimize revenue potential. It evaluates geographic
distribution and sales potential for each customer to establish optimal
territory and route distributions. Factors considered include minimized travel
time, related costs and balanced opportunities, and other parameters, such as
stops, miles, time and sales volume.
FLEETWISE RESERVATIONS(TM)
The Fleetwise Reservations(TM) application facilitates online
scheduling for pick-ups and deliveries: eitheR self-service or as a
decision-support tool for customer service agents. Companies can tailor delivery
service to key customers while achieving internal profitability goals.
FLEETWISE DISPATCH(TM)
The FLEETWISE DISPATCH(TM) solution facilitates assigning and executing
same-day pick-ups and deliveries. WitH real-time visibility and shipment status
updates, operations can keep pace with delivery cycles to improve customer
service.
MONITOR(TM)
Through integrated and automatic wireless updates, MONITOR(TM) provides
rapid notification of critical events thaT affect distribution. As part of our
fleet management & routing offering, it provides real-time, event-based
information on an ongoing basis and is not limited to visibility into arrivals
at distribution centers or hubs.
24
MOBILELINK(TM)
Our MOBILELINK(TM) group of applications provides integrated 1-way and
2-way wireless communications betweeN dispatchers and drivers for route planning
and dispatch.
Mobile devices in the field feed data to a wireless communications
server called MOBILELINK GATEWAY(TM) providing A single point of access across
multiple networks. This service is available for set-up behind a firewall or as
a hosted service for users who don't want to incur hardware/software expenses
and other additional costs. Applications within the MOBILELINK(TM) product group
include MOBILELINK: FREIGHT(TM) and MOBILELINK: STATUS(TM).
MOBILELINK: FREIGHT(TM)
MOBILELINK: FREIGHT(TM) provides 2-way wireless communications and
allows drivers to submit detailed status updateS using either freeform or
predefined messages. It provides the ability to collect data such as order
line-item detail, signature capture and barcode scanning.
MOBILELINK: STATUS(TM)
MOBILELINK: STATUS(TM) allows drivers to transmit messages using
consumer-class devices to capture events such aS arrivals, departures and delays
for feeding back to dispatch systems.
Consulting, Implementation and Training Services
------------------------------------------------
Our consultants provide a variety of professional services to
customers. These services include project management and consulting services to
assist in configuration, implementation and deployment of our solutions. We
offer a variety of site-specific technical and consulting services to assist in
all phases of the implementation process. We also provide assistance in
integrating our products with the customer's existing software. In addition, we
offer training services that provide customers with a formalized program to
ensure that applications are implemented and utilized in an efficient and
cost-effective manner.
Customer Service and Support and Maintenance
--------------------------------------------
We are committed to deploying customer support practices consistent
with those of large software and network companies. We provide worldwide support
to our customers through our central support center. Customer support is
available 24-hours-a-day, 7-days-per-week via telephone, fax or e-mail.
REVENUE SOURCES
We generate our revenues from sales of each of the products and
services identified in the previous section - sometimes sold on a stand-alone
basis and sometimes sold in bundles of products and services. As such, we do not
measure our revenues by the particular products or services referenced above.
Instead, we measure our revenue performance based on whether the customer is
buying a license to our technology, or is buying technology services or other
services from us. Based on this, our revenues are measured in the following two
categories: (a) license revenues derived from licenses to our customers to use
our software products; and (b) service revenues, composed of (i) ongoing
transactional and/or subscription fees for use of our services and products by
our customers; (ii) professional services
25
revenues from consulting, implementation and training services related to our
services and products; and (iii) maintenance and other related revenues, which
include revenues associated with maintenance and support of our services and
products.
The following table sets forth our revenue sources for the fiscal years
ended January 31, 2005 and 2004:
------------------------------------------------------------------------------------------------
REVENUES Fiscal year ended January 31
----------------------------------------------------------------------------
2005 2004
----------------------------------------------------------------------------
Amount Percentage of Amount Percentage
(US dollars Total Revenues (US dollars of Total
in millions) in millions) Revenues
----------------------------------------------------------------------------
Services 41.8 90% 48.9 82%
------------------------------------------------------------------------------------------------
License 4.6 10% 10.9 18%
------------------------------------------------------------------------------------------------
Total revenues 46.4 100% 59.8 100%
------------------------------------------------------------------------------------------------
CUSTOMER BASE
Our customers are globally diverse, located in the Americas, Europe,
Middle East and Africa ("EMEA") and Asia Pacific regions. Customers range from
small- and medium-size enterprises to established, "blue-chip" leaders across a
variety of industry verticals. Customers include manufacturers, retailers,
consumer product goods suppliers, distributors, transportation carriers,
third-party logistics providers, freight forwarders, as well as companies in
industries such as healthcare, pharmaceuticals, oil and gas, data management and
logistics and procurement exchanges.
In the fiscal year ended January 31, 2005, 71% of our revenues were
derived from the Americas, 24% were derived from EMEA and the remaining 5% of
revenues were derived from Asia Pacific.
SALES AND MARKETING
Sales Force
-----------
Our sales force is expected to sell across our solutions, targeting
specific industry verticals and geographies. At present, we sell most of our
products and services through a direct sales team that is focused primarily on
the North American and EMEA markets, with particular expertise and business
contacts in the targeted verticals. Channel partners, such as distributors and
value-added resellers, play a central role in our strategy to address global
customers, particularly in the Asia Pacific region and in Latin America. As of
January 31, 2005, we employed a total of 43 individuals in sales and marketing
and had relationships with 26 distributors and resellers.
We are headquartered in Waterloo, Ontario. Our primary representative
office in the United States is in Atlanta, Georgia. In Europe, the primary
representative offices are in Sweden and the United Kingdom. In Asia Pacific,
the primary representative offices are in Australia and South Korea.
26
Strategic Marketing Alliances
-----------------------------
We also form strategic alliances with various companies in different
geographic markets, in different industries and for different products with the
goal of expanding our market base. Typically, an alliance participant will
market our products in certain geographic and vertical markets and refer
customers to us, in exchange for a fee in respect of new customers generated by
the alliance participant.
We have established several working relationships with
telecommunication companies, management consulting firms, and complementary
hardware and software firms. An example of one such strategic relationship is
our relationship with Nextel, a leading digital wireless provider that offers
customers two DESCARTES MOBILELINK(TM) applications, MOBILELINK: Freight(TM) and
MOBILELINK: STATUS(TM), for real-time fleet management and dispatch capabilities
using Nextel's JAva(TM) technology-enabled phones and the Nextel Nationwide
Network.
RESEARCH AND DEVELOPMENT
We believe that our future success depends in large part on our ability
to maintain and enhance our current product lines. Accordingly, we invest in
product development to ensure that sufficient resources are focused on
developing new products or enhancements to our existing products. We believe
that such expenditures are critical to our success. In the year ended January
31, 2005, we incurred research and development expenses of approximately $10.4
million, or approximately 22% of our annual consolidated revenues for 2005.
We have made substantial investments in research and development over
the last several years. Our growth and future financial performance will depend
in part on our ability to enhance existing applications, develop and introduce
new applications that keep pace with technological advances, meet changing
customer requirements, respond to competitive products and achieve market
acceptance.
Although we typically conduct research and development initiatives
internally, our modular solutions and component-based architecture have allowed
us to use outsourced developers on an as needed basis. In 2005, our outsourced
development was primarily with one particular provider through their facilities
in India, however, we terminated this relationship in October 2004 in connection
with our cost reduction initiatives. As of January 31, 2005, the majority of all
development work was being performed internally.
Our research and development program requires a high degree of detail
in business analysis, technical design, and quality assurance. Particular
expertise in solving operations research or logistics problems is a benefit to
us, as is practical experience in dealing with the day-to-day challenges that
our customers face in dealing with logistics providers and deliveries in
general. We believe that we are well positioned to address our needs internally,
however, we continue to evaluate potential new employees to help us expand or
expedite our development processes as needed.
To build applications, we have implemented an application development
process based on a six-month cycle. The cycle requires one month for solution
analysis and design, three months for building, one month for review and quality
assurance testing, and one month for packaging the application and training our
pre-sales and post-sales representatives.
During 2005, we completed the migration of the majority of our
applications to the LNOS architecture. A service-oriented architecture providing
distributed, scalable and reliable deployment
27
options, the LNOS architecture speeds development and deployment of industry
solution sets based on our supply chain suites.
Utilizing our regular release schedule, all generally available
products were upgraded in 2005. We delivered a number of new products in 2005,
including INVENTORY SNAPSHOTS(TM), MULTIMODAL ROUTE GUIDE(TM), APPOINTMENT
SCHEDULER(TM), KPI Metrics(TM) and LNOS REPORTING SERVICES(TM).
We currently plan to provide one or more releases for our generally
available products in 2006. Additional new products are currently planned for
delivery in 2006, including OCEAN RATE BUILDER(TM), MONITOR(TM), AUTOMATED
VEHICLE LOCATION(TM) (AVL) and additional releases of our existing products in
alignment with the regular release schedule.
COMPETITION
Although we have experienced limited competition to-date from companies
with broad application suites with comparable capabilities, the market for our
applications is nevertheless highly competitive and subject to rapid
technological change and we expect competition to increase in the future. On an
application-by-application basis, especially in markets where similar technology
has been available for some time such as routing and scheduling software and
value-added networks, we do experience competition from established vendors,
however, we have found that our particular expertise in solving complex
logistics problems on a network basis has enabled us to penetrate those markets.
On a geographic basis, we experience competition from both multinational
companies and local competitors. We face disadvantages in entering new markets
where competitors have existing customer and distribution relationships and
experience in the market, and existing solutions with user interfaces that are
advanced in local language presentation. To maintain and improve our competitive
position on a global basis, we intend to develop and introduce new applications
with functionality that may be easily adapted to local user interface needs
(either by Descartes or its distributors in a particular region).
We compete or may compete, directly or indirectly, with the following:
(i) application software vendors positioned as supply chain execution and other
best-of-breed vendors, such as i2 Technologies, Inc.; (ii) internal development
efforts by corporate information technology departments; (iii) middleware
vendors that provide integration software, such as Webmethods, Inc.; (iv)
application software vendors, including enterprise resource planning software
vendors who may expand their current offerings into supply chain network service
offerings, some of whom may from time to time jointly market our products as a
complement to their own systems, such as SAP AG and Oracle Corporation; (v)
other business application software vendors, including supply chain planning
software vendors that may broaden their product offerings by internally
developing, or by acquiring or partnering with, independent developers of supply
chain network solutions, particularly on the execution (rather than planning)
side, such as Manugistics Corporation and Manhattan Associates, Inc.; and (vi)
other value-added network messaging networks, such as Global eXchange Services,
Inc. and Traxon AG. We also expect to face additional competition as other
established and emerging companies enter the market for supply chain network
solutions and new products and technologies are introduced. In addition, current
and potential competitors may make strategic acquisitions or establish
co-operative relationships among themselves or with third parties, thereby
increasing the ability of their products to address the needs of our prospective
customers.
The principal competitive factors affecting the market for our
solutions include vendor and product reputation; expertise and experience in
implementing products in the customer's industry sector;
28
product architecture, functionality and features; cost of ownership; ease and
speed of implementation; customer support; product quality, price and
performance; and product attributes such as flexibility, scalability,
compatibility, functionality and ease of use. In order to be successful in the
future, we must continue to respond promptly and effectively to technological
change and competitors' innovations.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
Our success depends significantly on our proprietary technology. We
rely primarily on a combination of patent, copyright, trademark and trade secret
laws, license agreements, non-disclosure agreements and other contractual
provisions to establish, maintain and protect our proprietary rights in our
products and technology. The source codes and routing algorithms for our
applications and technology are protected both as trade secrets and as
unregistered copyrighted works. We currently have one US patent for technology
used in our dynamic vehicle routing application and have another U.S. patent,
based on a patent that has been issued to us in the Netherlands, for certain
technological processes contained in our network architecture. We have
registered or applied for registration of certain trademarks and service marks,
and will continue to evaluate the registration of additional trademarks and
service marks as appropriate.
We also utilize certain other software technologies, such as geographic
data, shipping rate data, translation software applications and business
intelligence software applications that we license from third parties, generally
on a non-exclusive basis, including software that is integrated with internally
developed software and used in our products to perform key functions. These
third-party licenses generally require the payment of royalties based on sales
of the product in which the technology is used.
Our network customers may use electronic logistics information
generated by the customer, or by third parties on behalf of the customer, in
connection with the customer's use of our network services. Our customers are
responsible for procuring and paying for the generation of such electronic
logistics information and the right to use such electronic logistics information
in connection with our network services.
On January 23, 2004, we announced that a complaint alleging patent
infringement had been filed against us in the United States District Court for
the Southern District of New York by ArrivalStar, Inc. The complaint alleged
that certain of our products infringed certain patents of ArrivalStar, Inc. No
specific amount was claimed in the complaint. In late-April 2005 we settled the
lawsuit and obtained a fully paid-up license in and to ArrivalStar's patents.
ArrivalStar's patents generally relate to advance notification systems using GPS
technology.
CONTRACTS
Customer Contracts
------------------
We license our software products to our customers primarily by way of
written license agreements. The license agreements specify the applicable terms
and restrictions on use of the software, the terms and conditions of any
enrolment by the customer in our software maintenance program, and the
applicable fees to be paid by the customer.
We provide our supply chain services to our customers primarily by way
of written service agreements. The service agreements set out the applicable
terms and restrictions on use of the service, the length of time the customer
can use the service, and the applicable fees to be paid by the customer.
29
Typically, these service agreements renew at a customer's option and, in some
cases, are subject to earlier termination by the customer on appropriate notice.
We depend on our installed customer base for a significant portion of
our revenues. In addition, our installed customer base has historically
generated additional new license and service revenues for us. If our customers
fail to renew their service contracts or fail to purchase additional services or
products, then our revenues could decrease and our operating results could be
adversely affected. Further, certain of our customers could delay or terminate
implementations of our services and products or be reluctant to migrate to new
products for various reasons, including budgetary constraints related to
economic uncertainty; dissatisfaction with product or service quality;
difficulty in prioritizing a surplus of information technology projects; or
changes in business strategy or priorities or for other reasons. Such customers
will not generate the revenues anticipated within the timelines anticipated, if
at all, and may be less likely to invest in additional services or products from
us in the future. This could have an adverse impact on our operating results. We
anticipate and have planned our expenditures assuming that in 2006 we will have
some customers who either stop using our products and services, or will amend
their contracts or use of the products or services such that their aggregate
payments to us will decrease.
Outsourcing Contracts
---------------------
The Company delivers some of its supply chain services over its
proprietary networks, which are hosted by commercial hosting providers such as
T-Systems Inc., Emergis Inc., Nocom AB, Q9 Networks Inc. and Inflow, Inc. These
hosting contracts, on which we are substantially dependent as they relate to the
delivery of our network services, typically contemplate services to be provided
for a term at a defined service level, with applicable rights of termination and
renewal. We typically pay monthly fees under these contracts, most often based
on the volume of network activity flowing through the hosting provider. If any
of these contracts were terminated without our consent, we could incur
substantial costs in migrating to an alternate hosting provider. In such an
event, the costs and related management effort could materially adversely affect
our operating results and the service that we provide to our customers.
In the fiscal year ended January 31, 2005, we used a third-party
provider to assist with the offshore development of certain of our supply chain
products. This relationship ended in October 2004 as we reduced costs in
connection with our restructuring initiative first announced in May 2004.
Further details of these development arrangements are provided under the
"Research and Development" heading above.
EMPLOYEES
As at January 31, 2005, the Company employed 230 full-time staff. Of
the 230 employees, 74 of the individuals were engaged in customer service roles
(which includes customer support, activations and implementation services), 46
were in research and development roles, 43 were engaged in sales and marketing
roles, 36 under network and product support roles and 31 were in general
administration roles. Geographically, 198 employees were located in North
America, 21 were located in EMEA, and 11 were located in Asia Pacific.
30
C. ORGANIZATIONAL STRUCTURE
We conduct our business through subsidiaries operating on a worldwide
basis. The following is a list of our material subsidiaries with each
subsidiary's jurisdiction of incorporation or organization and the percentage of
all voting securities or membership interests we beneficially own, control or
direct:
Descartes U.S. Holdings, Inc. Delaware 100%
Descartes Systems (USA) LLC Delaware 100%
Descartes Systems AB Sweden 100%
D. DESCRIPTION OF PROPERTY
The following table summarizes our principal facilities as of January
31, 2005. Our executive offices, sales support staff and global finance groups
are in Waterloo, Canada. Our research and development is primarily performed in
our Atlanta, U.S. office along with additional sales support and our primary
U.S. sales office. Our office in Pittsburgh is principally personnel dedicated
to developing and servicing our ocean-made produces and services.
FACILITY SQUARE FOOTAGE OWNED/LEASED
---------------------------- -------------- ------------
(IN THOUSANDS)
Waterloo, Canada 60,000 Leased
Atlanta, U.S. 11,500 Leased
Pittsburgh, U.S. 8,000 Leased
Our tangible fixed assets are primarily comprised of computer equipment and
software that is used in research and development. Globally, our offices are
leased and are treated as operating leases for financial reporting purposes.
Listed below is a summary of our tangible fixed assets.
-----------------------------------------
YEAR ENDED JANUARY 31, 2005 January 31, 2004
(US DOLLARS IN THOUSANDS)
-----------------------------------------
Cost
Computer equipment and software 11,214 26,235
Furniture and fixtures 1,607 3,430
Leasehold improvements 1,953 3,260
-----------------------------------------
14,774 32,925
Accumulated amortization
Computer equipment and software 5,537 15,286
Furniture and fixtures 970 2,298
Leasehold improvements 1,301 1,889
-----------------------------------------
7,808 19,473
-----------------------------------------
6,966 13,452
=========================================
31
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The MD&A refers to our fiscal years. Our fiscal year commences on February 1st
of each year and ends on January 31st of the following year. The fiscal year
ended on January 31, 2005 is referred to as the "current fiscal year", "fiscal
2005", "2005" or using similar words, and the fiscal year ended January 31, 2004
is referred to as the "previous fiscal year", "fiscal 2004", "2004" or using
similar words. Other fiscal years are referenced by the applicable year during
which the fiscal year ends. For example, 2002 refers to the annual period ending
January 31, 2002 and the "fourth quarter of 2002" refers to the quarter ending
January 31, 2002.
The MD&A is prepared as of March 31, 2005. You should read the MD&A in
conjunction with our audited consolidated financial statements for 2005. We
prepare and file our consolidated financial statements and MD&A in United States
("US") dollars and in accordance with US generally accepted accounting
principles ("GAAP"). We have also prepared and filed our consolidated financial
statements in accordance with Canadian generally accepted accounting principles,
in US dollars, and mailed them to all Canadian shareholders and made them
available to US shareholders. All dollar amounts we use in the MD&A are in US
currency, unless we indicate otherwise.
Additional information about us, including copies of our continuous disclosure
materials such as our annual information form, is available through the EDGAR
website at http://www.sec.gov or through the SEDAR website at
http://www.sedar.com. Certain statements made in the MD&A, including, but not
limited to, statements relating to our expectations concerning future revenues
and earnings, mix of revenues between services revenues and license revenues,
use of cash, product development, sales and marketing expenditures, regional
break-down of business, the impact of our expense reduction initiatives,
business trends, market opportunity and the sufficiency of capital to meet
working capital and capital expenditure requirements, constitute forward-looking
statements. When used in this document, the words "believe", "plan", "expect",
"anticipate", "intend", "continue", "may", "will", "should" or the negative of
such terms and similar expressions are intended to identify forward-looking
statements. These forward-looking statements are subject to risks and
uncertainties that may cause future results to differ materially from those
expected. Factors that may cause such differences include, but are not limited
to, the factors discussed in Item 3, "Key Information -- Risk Factors". If any
of such risks actually occur, they could materially adversely affect our
business, financial condition or results of operations. In that case, the
trading price of our common shares could decline, perhaps materially. Readers
are cautioned not to place undue reliance upon any such forward-looking
statements, which speak only as of the date made. We do not undertake or accept
any obligation or undertaking to release publicly any updates or revisions to
any forward-looking statements to reflect any change in our expectations or any
change in events, conditions or circumstances on which any such statement is
based.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our financial statements and accompanying notes are prepared in accordance with
US GAAP. Preparing financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses. These estimates and assumptions are affected by
management's application of accounting policies. Estimates are deemed critical
when a different estimate could have reasonably been used or where changes in
the estimates are reasonably likely to occur from period to period and would
materially impact our financial condition or results of operation. Our
32
significant accounting policies are discussed in Note 2 of the 2005 Notes to
Consolidated Financial Statements.
Our management has discussed the development, selection and application of our
critical accounting policies with the audit committee of the Board of Directors.
The following discusses the critical accounting estimates and assumptions that
management has made under these policies and how they affect the amounts
reported in the 2005 consolidated financial statements.
REVENUE RECOGNITION
We follow the accounting guidelines and recommendations contained in the AICPA
Statement of Position 97-2 ("SOP 97-2"), "Software revenue recognition" and the
US Securities and Exchange Commission's Staff Accounting Bulletin 104, "Revenue
recognition in financial statements" ("SAB 104").
We recognize revenue when it is realized or realizable and earned. We consider
revenue realized or realizable and earned when it has persuasive evidence of an
arrangement, the product has been delivered or the services have been provided
to the customer, the sales price is fixed or determinable and collectibility is
reasonably assured. In addition to this general policy, the specific revenue
recognition policies for each major category of revenue are included below.
Services Revenues - Services revenues are principally comprised of the
following: (i) ongoing transactional fees for use of our services and products
by our customers, which are recognized as the transactions occur; (ii)
professional services revenues from consulting, implementation and training
services related to our services and products, which are recognized as the
services are performed; and (iii) maintenance, subscription and other related
revenues, which include revenues associated with maintenance and support of our
services and products, which are recognized ratably over the term of the
maintenance or subscription period.
License Revenues - License revenues derive from licenses granted to our
customers to use our software products, and are recognized in accordance with
SOP 97-2.
We sometimes enter into transactions that represent multiple-element
arrangements, which may include any combination of services and software
licenses. These multiple element arrangements are assessed to determine whether
they can be separated into more than one unit of accounting or element for the
purpose of revenue recognition. Fees are allocated to the various elements using
the residual method as outlined in SOP 98-9 "Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions". Pursuant to the
residual method, we defer recognition of the fair value of any undelivered
elements and determine such fair value using vendor-specific objective evidence.
This vendor-specific objective evidence of fair value is established through
prices charged for each revenue element when that element is sold separately. We
then allocate any residual portion of the arrangement fee to the delivered
elements. The revenue recognition policies described in this section are then
applied to each unit of accounting or element.
We evaluate the collectibility of our trade receivables based upon a combination
of factors on a periodic basis. When we become aware of a specific customer's
inability to meet its financial obligations to us (such as in the case of
bankruptcy filings or material deterioration in the customer's operating results
or financial position, payment experiences and existence of credit risk
insurance for certain customers), we
33
record a specific bad debt provision to reduce the customer's related trade
receivable to its estimated net realizable value. If circumstances related to
specific customers change, the estimate of the recoverability of trade
receivables could be further adjusted.
LONG-LIVED ASSETS
SFAS 142, "Goodwill and Other Intangible Assets", requires that goodwill be
tested for impairment at the reporting unit level (operating segment or one
level below an operating segment) on an annual basis (October 31 for us) and
between annual tests in certain circumstances. Application of the goodwill
impairment test requires judgment, including the identification of reporting
units, assigning assets and liabilities to reporting units, assigning goodwill
to reporting units, and determining the fair value of each reporting unit.
Significant judgments required to estimate the fair value of reporting units
include estimating future cash flows, determining appropriate discount rates and
other assumptions. Changes in these estimates and assumptions could materially
affect the determination of fair value and/or goodwill impairment for each
reporting unit.
Other long-lived assets include capital assets and intangible assets. Capital
assets are depreciated according to the methods and rates described in the Notes
to Consolidated Financial Statements for 2005. Intangible assets include
customer agreements and relationships, non-compete covenants, existing
technologies and trade names. Intangible assets are amortized on a straight-line
basis over their estimated useful lives, which are generally five years. We
review the carrying value of these assets at least annually for evidence of
impairment. In accordance with SFAS 144, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of", an impairment
loss is recognized when the estimate of undiscounted future cash flows generated
by such assets is less than the carrying amount. Measurement of the impairment
loss is based on the present value of the expected future cash flows. Our
impairment analysis contains estimates due to the inherently judgmental nature
of forecasting long-term estimated cash flows and determining the ultimate
useful lives of assets. Actual results will differ, which could materially
impact our impairment assessment.
RESTRUCTURING
In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with
Exit or Disposal Activities." SFAS 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized and measured
initially at its fair value in the period in which the liability is incurred,
except for a liability for one-time termination benefits that are incurred over
time. The provisions of SFAS 146 are effective for exit or disposal activities
initiated after December 31, 2002. The provisions of Emerging Issues Task Force
("EITF") Issue 94-3 shall continue to apply for an exit activity initiated under
an exit plan that met the criteria of EITF Issue 94-3 prior to the initial
application of SFAS 146. These plans require us to make critical estimates
regarding employee termination, contract termination, our ability to sub-lease
and other exit costs. We make these estimates based on the terms of the
contracts involved, the number and pay scale of employees affected by the
restructuring and other related factors. Because such activities are complex
processes that take several months to complete, they will involve periodically
reassessing the estimates made. As a result, we may have to change originally
reported estimates when actual payments are made or the related activities are
completed.
LITIGATION
We are currently involved in litigation that is described in the Contractual
Obligations, Commitments, Contingencies, Guarantees and Variable Interest
Entities section of this MD&A and in Note 11 to the 2005 Consolidated Financial
Statements. We are also subject to a variety of other claims and suits that
arise from time to time in the ordinary course of our business. We account for
contingences in accordance
34
with the provisions of SFAS 5 "Accounting for Contingencies," which requires
management to make certain judgments and estimates relating to potential future
gains or losses that will ultimately be resolved when one or more future events
occurs or fail to occur, and the likelihood of such events occurring or failing
to occur.
INCOME TAXES
SFAS 109, "Accounting for Income Taxes", establishes financial accounting and
reporting standards for the effect of income taxes. The objectives of accounting
for income taxes are to recognize the amount of taxes payable or refundable for
the current year and deferred tax liabilities and assets for the future tax
consequences of events that have been recognized in an entity's financial
statements or tax returns. Judgment is required in assessing the future tax
consequences of events that have been recognized in our financial statements or
tax returns.
A. OPERATING RESULTS
The following table shows, for the years indicated, our results of operations in
millions of dollars (except per share and weighted average share amounts):
-------------------------------------------------------------
YEAR ENDED JANUARY 31, 2005 January 31, 2004 January 31, 2003
-------------------------------------------------------------
Total revenues 46.4 59.8 70.4
Cost of revenues 21.1 19.4 26.6
--------------------------------------------------------------------------------------------------------------------
Gross margin 25.3 40.4 43.8
Operating expenses 42.7 53.6 58.1
--------------------------------------------------------------------------------------------------------------------
Net margin (17.4) (13.2) (14.3)
Acquisition-related expenses (22.3) (5.3) (114.8)
Restructuring costs and asset impairment (14.1) (18.8) (11.7)
--------------------------------------------------------------------------------------------------------------------
Loss from operations (53.8) (37.3) (140.8)
Investment income (expense) net of interest expense (1.2) (1.8) 1.9
Gain (loss) on purchase of convertible debentures -- 0.9 (0.1)
--------------------------------------------------------------------------------------------------------------------
Loss before income taxes and minority interest (55.0) (38.2) (139.0)
Income tax expense (recovery) 0.3 0.3 (0.4)
--------------------------------------------------------------------------------------------------------------------
Loss before minority interest (55.3) (38.5) (138.6)
Minority interest -- -- 0.4
--------------------------------------------------------------------------------------------------------------------
Loss (55.3) (38.5) (138.2)
--------------------------------------------------------------------------------------------------------------------
LOSS PER SHARE - BASIC AND DILUTED (1.36) (0.84) (2.65)
--------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC AND DILUTED 40,706 45,951 52,234
(thousands)
--------------------------------------------------------------------------------------------------------------------
Other Pertinent Information:
--------------------------------------------------------------------------------------------------------------------
Total assets 72.6 128.7 242.3
--------------------------------------------------------------------------------------------------------------------
Convertible debentures 27.0 27.0 72.0
--------------------------------------------------------------------------------------------------------------------
35
TOTAL REVENUES consist of SERVICES REVENUES and LICENSE REVENUES. Services
revenues are principally comprised of the following: (i) ongoing transactional
fees for use of our services and products by our customers, which are recognized
as the transactions occur; (ii) professional services revenues from consulting,
implementation and training services related to our services and products, which
are recognized as the services are performed; and (iii) maintenance,
subscription and other related revenues, which include revenues associated with
maintenance and support of our services and products, which are recognized
ratably over the term of the maintenance or subscription period. License
revenues derive from licenses granted to our customers to use our software
products.
Our May 2004 restructuring initiative, described in Note 9 to the consolidated
financial statements for 2005, and related events had a significant effect on
our revenues in 2005, beginning with the quarter ended July 31, 2004. In
general, revenues declined as we reduced our sales force, concentrated on our
existing customers and our services-based business model and tempered our
pursuit of new license transactions.
The following table provides additional analysis of our services and license
revenues (in millions of dollars and as a proportion of total revenues)
generated over each of the years indicated:
-------------------------------------------------------------
YEAR ENDED JANUARY 31, 2005 January 31, 2004 January 31, 2003
-------------------------------------------------------------
Services revenues 41.8 48.9 53.0
PERCENTAGE OF TOTAL REVENUES 90% 82% 75%
License revenues 4.6 10.9 17.4
PERCENTAGE OF TOTAL REVENUES 10% 18% 25%
-------------------------------------------------------------
Total revenues 46.4 59.8 70.4
=============================================================
Our SERVICES REVENUES were $41.8 million, $48.9 million and $53.0 million in
2005, 2004 and 2003, respectively. The decline in our 2005 services revenues
from 2004 was primarily due to the loss of certain customers on our network
services, largely in our legacy Descartes Visibility services and business
document exchange services. These customer losses resulted from various factors
including customers deciding to perform the services in-house (and, in some
cases, switching to alternative providers of such services) as well as our own
decision to terminate certain unprofitable customer relationships. Additionally,
in the final three quarters of 2005, revenues from professional services related
to the implementation of our routing and scheduling applications decreased due
to the conclusion of previously undertaken larger scale projects and decreased
deal activity in those quarters resulting in fewer newly initiated projects. In
the final two quarters of fiscal 2005, we focused on transitioning our business
to a services-based model that improved our opportunity to demonstrate the value
of our products to our end-users. This emphasis resulted in new contracts
resulting in additional services revenue in this period, partially offsetting
the decline in 2005 total services revenues.
The decline in our 2004 services revenues from 2003 was largely due to some of
our ocean carrier customers not renewing their service contracts with us, as
well as the loss of certain customers on other network applications. These
non-renewals were primarily due to industry consolidation and certain of these
customers deciding to perform the services internally that they previously
received from us - sometimes using a license to our software. The negative
impact of these non-renewals was partially offset by higher services revenues
derived from existing routing and scheduling implementations and
36
maintenance contracts, as well as from the impact of new customers for our
business document exchange and network services in 2004.
Our services revenues is dependant on the number of shipments being moved by our
customers and, accordingly, our services revenues are somewhat subject to
seasonal shipment volume trends across the various modes of transportation (i.e.
air, ocean, truck) we serve. In our first fiscal quarter, we generally see lower
shipment volumes in air and truck which impact the aggregate number of
transactions flowing through our business document exchange. In our second
fiscal quarter, we typically see an increase in ocean services revenues as ocean
carriers are in the midst of their customer contract negotiation period. In the
third quarter, we typically see shipment volumes, and transactional volumes, at
their highest. In the fourth quarter, the various international holidays impact
the aggregate number of shipping days in the quarter, and adversely impact the
number of transactions our network processes.
Our LICENSE REVENUES were $4.6 million, $10.9 million and $17.4 million in 2005,
2004 and 2003, respectively. The decline in our 2005 license revenues from 2004
is the result of our focus on a services-based business model. In addition,
historically our license revenues have principally derived from new transactions
with customers. With our recent downsizing of our global sales force, fewer new
transactions have subsequently been concluded globally.
The decline in our 2004 license revenue from 2003 is primarily the result of the
transition by some of our prospects and customers to subscription-based
contracts from licensing arrangements as well as general market conditions
impacting the ability to generate license revenues for supply chain solutions.
As a PERCENTAGE OF TOTAL REVENUES, our services revenues were 90%, 82% and 75%
in 2005, 2004 and 2003, respectively. The higher percentage of services revenues
in 2005 compared to 2004 is a consequence of our increased focus on being a
services organization, rather than a company primarily focused on license
revenue. In addition, our focus in 2005 has been on serving our existing
customer base, which typically produces services revenues, as compared to
selling to new customers where initial license revenues are a typical part of
the new relationship.
The higher percentage of services revenues in 2004 compared to 2003 was due to
the softness in economic conditions on license revenues and increased customer
preference for acquiring our solutions under our services pricing model.
We operate in one business segment providing supply chain solutions. The
following table provides additional analysis of our SEGMENTED REVENUES BY
GEOGRAPHIC AREAS OF OPERATION (in millions of dollars):
-------------------------------------------------------------
YEAR ENDED JANUARY 31, 2005 January 31, 2004 January 31, 2003
-------------------------------------------------------------
Americas 32.9 40.7 48.2
PERCENTAGE OF TOTAL REVENUES 71% 68% 69%
Europe, Middle-East and Africa ("EMEA") 11.1 14.3 17.1
PERCENTAGE OF TOTAL REVENUES 24% 24% 24%
Asia Pacific 2.4 4.8 5.1
PERCENTAGE OF TOTAL REVENUES 5% 8% 7%
-------------------------------------------------------------
Total revenues 46.4 59.8 70.4
=============================================================
37
REVENUES FROM THE AMERICAS REGION were $32.9 million, $40.7 million and $48.2
million in 2005, 2004 and 2003, respectively, and have remained at a fairly
consistent level over these periods as a percentage of total revenues. The
decrease in the dollar amount of revenue from 2003 to 2005 is primarily
attributable to lower license revenues, lower business document exchange
revenues, and lower professional services revenues as described above.
REVENUES FROM THE EMEA REGION were $11.1 million, $14.3 million and $17.1
million in 2005, 2004 and 2003, respectively, and identical over each of the
periods as a percentage of total revenues. The decrease in the dollar amount of
revenues from 2003 to 2005 is primarily due to general softness for technology
sales in this market, as well as the loss of some recurring contracts over that
period.
REVENUES FROM THE ASIA PACIFIC REGION were $2.4 million, $4.8 million and $5.1
million in 2005, 2004 and 2003, respectively, and are fairly consistent over
these periods as a percentage of total revenues. The dollar amount of revenues
for the Asia Pacific region for 2005 decreased compared to both 2004 and 2003
largely due to the reduction in our global sales force that occurred during the
second quarter of 2005.
The following table provides additional analysis of COST OF REVENUES (in
millions of dollars) and the related gross margins for the years indicated:
--------------------------------------------------------------------
YEAR ENDED JANUARY 31, 2005 January 31, 2004 January 31, 2003
--------------------------------------------------------------------
Services
--------
Services revenues 41.8 48.9 53.0
Cost of services revenues 20.2 17.9 25.7
--------------------------------------------------------------------
Gross margin 21.6 31.0 27.3
--------------------------------------------------------------------
GROSS MARGIN PERCENTAGE 52% 63% 52%
License
-------
License revenues 4.6 10.9 17.4
Cost of license revenues 0.9 1.5 0.9
--------------------------------------------------------------------
Gross margin 3.7 9.4 16.5
--------------------------------------------------------------------
GROSS MARGIN PERCENTAGE 80% 86% 95%
Total
-----
Revenues 46.4 59.8 70.4
Cost of revenues 21.1 19.4 26.6
--------------------------------------------------------------------
Gross margin 25.3 40.4 43.8
====================================================================
GROSS MARGIN PERCENTAGE 55% 68% 62%
COST OF SERVICES REVENUES consists of internal costs of running our systems and
applications as well as the cost of salaries and other personnel-related
expenses incurred in providing professional service and maintenance work,
including consulting and customer support.
GROSS MARGIN PERCENTAGE FOR SERVICE REVENUES were 52%, 63% and 52% in 2005, 2004
and 2003, respectively. The lower services revenues in 2005 contributed to the
lower gross margin in 2005 compared to 2004, as the costs of operating our
network consist predominately of fixed costs. In addition,
38
higher costs associated with third-party professional service providers incurred
during the first two quarters of the year contributed to the lower gross margin
percentage in 2005.
The increase in the gross margin percentage from 2003 to 2004 was primarily due
to moving profit and loss responsibilities for certain services revenues to the
geographic sales regions and to a reduction in the cost of revenues achieved
from our restructuring initiatives, including consolidation of our
infrastructure.
COST OF LICENSE REVENUES consists of costs related to our sale of third-party
software, such as third-party license fees, referral fees and/or royalties.
GROSS MARGIN PERCENTAGE FOR LICENSE REVENUES were 80%, 86% and 95% in 2005, 2004
and 2003, respectively. The gross margin on license revenues declined in 2005
from 2004, principally as a result of higher third-party software costs on the
license transactions completed during the year.
The gross margin on license revenues declined in 2004 from 2003 due to higher
map royalty costs and referral fees in the fourth quarter, particularly related
to certain contracts in the Asia Pacific region.
OPERATING EXPENSES (consisting of sales and marketing, research and development
and general and administrative expenses) were $42.7 million, $53.6 million and
$58.1 million for 2005, 2004 and 2003, respectively. The decline is primarily
the result of efficiencies generated by our restructuring initiatives.
The following table provides additional analysis of operating expenses (in
millions of dollars) for the years indicated:
------------------------------------------------------------
YEAR ENDED JANUARY 31, 2005 January 31, 2004 January 31, 2003
------------------------------------------------------------
Total revenues 46.4 59.8 70.4
------------------------------------------------------------
Sales and marketing expenses 18.2 31.8 30.0
PERCENTAGE OF TOTAL REVENUES 39% 53% 42%
Research and development expenses 10.4 9.4 15.2
PERCENTAGE OF TOTAL REVENUES 22% 16% 22%
General and administrative expenses 14.1 12.4 12.9
PERCENTAGE OF TOTAL REVENUES 31% 21% 18%
------------------------------------------------------------
Total operating expenses 42.7 53.6 58.1
============================================================
SALES AND MARKETING EXPENSES include salaries, commissions and other
personnel-related costs, bad debt expenses, travel expenses, advertising
programs and services and other promotional activities associated with selling
and marketing our services and products. Sales and marketing expenses as a
percentage of total revenues were 39%, 53% and 42% in 2005, 2004 and 2003,
respectively. The decrease in 2005 from 2004 was primarily attributable to a
reduction in our sales force and marketing department in connection with our
most recent restructuring initiative.
39
The increase in 2004 from 2003 was a result of our investment in international
sales and marketing activities in the Asia Pacific and Latin American regions,
and an increase in our bad debts expense primarily relating to accounts
receivables based in the Asia Pacific region and a significant account
receivable based on a contract with a customer in Europe that was signed in the
second quarter of 2004.
RESEARCH AND DEVELOPMENT EXPENSES consist primarily of salaries and other
personnel-related costs of technical and engineering personnel associated with
our research and product development activities as well as costs for third-party
outsourced development providers. We expensed all costs related to research and
development of our products in the past three years. The increase in research
and development costs for 2005 compared to 2004 was primarily attributable to a
termination penalty associated with the cancellation of a product development
agreement with an outsourcing provider, as well as an increased investment in
the development of our supply chain solutions.
The decline in research and development costs for 2004 compared to 2003 was
attributable to our restructuring initiatives in the past two years as well as
the benefits of certain product development outsourcing in North America and
internationally.
GENERAL AND ADMINISTRATIVE expenses consist primarily of salaries and other
personnel-related costs of administrative personnel, as well as professional
fees and other administrative expenses. General and administrative costs were
$14.1 million, $12.4 million and $12.9 million in 2005, 2004 and 2003,
respectively. The increase in 2005 from 2004 was primarily attributable to
severance costs of approximately $1.5 million included in the first quarter of
2005 relating to the departure of certain members of senior management.
Additionally, general and administrative expenses increased due to the reserve
for defense costs related to the class action lawsuit (which lawsuit has now
been settled in principle), increased directors and officers liability insurance
premiums over the second half of 2005, and an increase in professional fees in
the second quarter of 2005.
The decrease in general and administrative expenses in 2004 from 2003 was
attributable to our reduced workforce resulting from prior restructuring
initiatives. Additionally, in 2003 general and administrative expenses were
higher because of an arbitration award relating to a customer dispute.
ACQUISITION-RELATED EXPENSES include amortization and impairments of goodwill
and intangible assets acquired on business combinations that we have completed
to date. Acquisition-related expenses were $22.3 million, $5.3 million, and
$114.8 million for 2005, 2004 and 2003, respectively. The following table
provides an additional analysis of acquisition related expenses for the years
indicated (in millions of dollars):
----------------------------------------------------------
YEAR ENDED JANUARY 31, 2005 January 31, 2004 January 31, 2003
----------------------------------------------------------
Amortization of intangible assets 4.1 5.3 10.1
Impairment of goodwill 18.2 -- 86.7
Impairment of intangible assets -- -- 18.0
----------------------------------------------------------
Total acquisition-related expenses 22.3 5.3 114.8
==========================================================
Amortization of intangible assets includes customer agreements and
relationships, non-compete covenants, existing technologies and trade names
associated with the acquisitions completed by us to date. Intangible assets with
a finite life are amortized to income over their useful life, which historically
has not exceeded 5 years. The amount of amortization expense in a fiscal period
is dependent on our
40
acquisition activities as well as our asset impairment tests. Amortization of
intangible assets was $4.1 million, $5.3 million and $10.1 million in 2005, 2004
and 2003, respectively.
The decline in amortization expense from 2003 to 2005 is attributable to an
$18.0 million impairment provision recorded against certain of our intangible
assets in the fourth quarter of 2003 in accordance with SFAS 144, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," which reduced the carrying value of intangible assets to be amortized in
future periods. As of January 31, 2005, the unamortized portion of intangible
assets amounted to $4.1 million compared with $8.3 million at January 31, 2004.
Effective February 1, 2002, we adopted the requirements of Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets", thereby ceasing the amortization of all goodwill acquired in all
business combinations. SFAS 142 replaces the amortization of goodwill with an
annual impairment test as well as a transition test for impairment at the date
of the adoption of the new standard. The impairment test, using an enterprise
valuation approach based on market capitalization and discounted cash flow
models, indicated an excess of carrying or book value over enterprise value and
resulted in a goodwill impairment charge of $18.2 million, nil and $86.7 million
that was recorded in the results of operations in 2005, 2004 and 2003,
respectively.
As of the end of the first quarter of 2005, there is no goodwill recorded on our
balance sheet. Accordingly, we will no longer be performing tests for impairment
of goodwill. If additional goodwill is recorded in future periods as a result of
acquisitions or otherwise, we will resume our annual goodwill impairment tests
on October 31st of each year. In addition, we will perform further quarterly
analysis of whether any event has occurred that would more likely than not
reduce our enterprise value below our carrying amount, and, if so, we will
perform a goodwill impairment test between the annual dates. Any future
impairment adjustment will be recognized as an expense in the period that the
adjustment is identified.
RESTRUCTURING COSTS AND ASSET IMPAIRMENT were $14.1 million, $18.8 million and
$11.7 million in 2005, 2004 and 2003, respectively, relating to the
restructuring plans described in Note 9 in the accompanying Notes to
Consolidated Financial Statements for 2005. Our primary reason for initiating
these restructuring plans was to align our cost structure with our
services-based revenue model and to streamline our corporate operations. As of
January 31, 2005, activities under all restructuring plans had been completed,
including a 45% reduction in our global workforce, with the remaining
restructuring provision of $1.7 million to be drawn-down over time as cash is
paid in connection with ongoing restructured contracts such as closed office
leases. We do not expect any significant additional restructuring expenses in
connection with any of our restructuring initiatives.
-----------------------------------------------------------------------------------------
Remaining
Provision as Additional Cumulative Cumulative Provision as
at January Charges Revisions Non-cash Cash at January 31,
31, 2004 During 2005 During 2005 Drawdowns Drawdowns 2005
-----------------------------------------------------------------------------------------
AUGUST 2001
-----------
Office closure costs 4 -- 13 -- (17) --
JUNE 2002
---------
Office closure costs 160 -- 402 -- (562) --
MAY 2003
--------
Workforce reduction 97 -- 202 -- (299) --
Office closure costs 477 -- 1,581 -- (901) 1,157
MAY 2004
--------
Workforce reduction -- 4,217 332 -- (4,413) 136
Office closure costs -- 1,743 (210) -- (1,092) 441
Redundant assets -- 5,770 -- (5,770) -- --
-----------------------------------------------------------------------------------------
738 11,730 2,320 (5,770) (7,284) 1,734
=========================================================================================
41
During 2005, we incurred initial charges relating to our May 2004 restructuring
initiative and additional revisions to each of our restructuring initiatives of
cumulatively $14.1 million, comprised of $4.8 million for workforce reduction,
$3.5 million for office closure costs and $5.8 million for redundant assets.
Our restructuring provisions were drawn-down in 2005 as a result of cash
payments related to these initiatives of $7.3 million and a non-cash write-off
of redundant assets in connection with the May 2004 initiative of $5.8 million,
relating primarily to software, hardware and office-related assets.
During 2004, we incurred aggregate restructuring charges and revisions of $18.8
million, broken down into workforce reduction expenses of $8.1 million, office
closure costs of $6.4 million, redundant asset write-offs of $1.8 million, data
center consolidations of $0.9 million and network system consolidations of $1.6
million. Restructuring provisions were drawn-down in 2004 as a result of cash
payments related to these initiatives of $17.2 million and a non-cash write-off
of redundant assets in connection with the May 2003 and June 2002 initiatives of
cumulatively $1.8 million, relating primarily to software, hardware and
office-related assets.
During 2003, we incurred aggregate restructuring charges and revisions of $11.7
million, broken down into workforce reduction expenses of $5.3 million, office
closure costs of $5.2 million, redundant asset write-offs of $0.6 million, data
center consolidations of $0.2 million and network system consolidations of $0.4
million. Restructuring provisions were drawn-down in 2003 as a result of cash
payments related to these initiatives of $11.6 million and a non-cash write-off
of redundant assets in connection with the June 2002 and August 2001 initiative
of cumulatively $0.9 million, relating primarily to software, hardware and
office-related assets.
Investment income (expense) net of interest expense was an expense of $1.2
million and $1.8 million in 2005 and 2004, respectively, compared to income of
$1.9 million in 2003. The decrease in each year is attributable to a decrease in
investment income caused by declining yields from cash, cash equivalents and
marketable securities as well as lower investment balances as a result of cash
usage, compared to the higher 5.5% fixed interest rate paid on our convertible
debentures, discussed in more detail in Note 10 to the Consolidated Financial
Statements.
GAIN (LOSS) ON PURCHASE OF CONVERTIBLE DEBENTURES was nil, $0.9 million, and
($0.1) million in 2005, 2004 and 2003, respectively. The gain in 2004 resulted
from our purchase of $45.0 million principal amount of our convertible
debentures during 2004, while the loss in 2003 related to the purchase of
approximately $1.5 million principal amount of our convertible debentures in
2003, all as further described in Note 10 to the Consolidated Financial
Statements.
INCOME TAX EXPENSE (RECOVERY) was $0.3 million for each of 2005 and 2004 with a
tax recovery of $0.4 million in 2003. The income tax recovery in 2003 was the
result of carrying back US losses for one of our US subsidiaries in order to
recover taxes we paid in prior years for that subsidiary.
42
Overall, we incurred a loss of $55.3 million in 2005, compared to losses in 2004
and 2003 of $38.5 million and $138.2 million, respectively. The increase in the
loss between 2005 and 2004 is primarily attributable to the charges related to
the impairment of goodwill and to lower revenues, and was partially offset by
lower operating and restructuring expenses.
B. LIQUIDITY AND CAPITAL RESOURCES
Historically, we have financed our operations and met our capital expenditure
requirements primarily through cash flows provided from operations, long-term
borrowings and sales of debt and equity securities. As of April 30, 2005, we had
$53.1 million in cash, cash equivalents and marketable securities, and $8.5
million in available lines of credit. On June 30, 2005 we used $27.7 million in
cash to satisfy all of our outstanding convertible debentures on their maturity.
We believe we have sufficient liquidity to fund our operating requirements for
2006. Should additional financing be undertaken, the proceeds from any such
transaction could be utilized to fund strategic transactions, for reducing debt
or for general corporate purposes. We may, from time to time, consider selective
strategic transactions to create value and improve performance, which may
include acquisitions, dispositions, restructurings, joint ventures and
partnerships, and we may undertake a financing transaction in connection with
such a potential strategic transaction. In addition, as opportunities arise from
time-to-time, we may liquidate certain of our long-term investments to improve
our cash position.
The table set forth below provides a summary statement of cash flows for the
years indicated in millions of dollars:
-------------------------------------------
JANUARY 31, January 31, January 31,
2005 2004 2003
-------------------------------------------
Cash used in operating activities (15.0) (32.6) (16.8)
Additions to capital assets (1.1) (5.8) (5.3)
Acquisition (0.2) (0.3) (2.2)
Purchase of convertible debentures -- (43.3) (1.5)
Purchase of common shares -- (27.2) --
Issuance of common shares -- 0.2 0.2
Purchase of long-term investment -- -- (0.1)
-------------------------------------------
Net change in cash and cash equivalents and marketable securities (16.3) (109.0) (25.7)
Cash and cash equivalents and marketable securities, beginning of year 65.1 174.1 199.8
-------------------------------------------
Cash and cash equivalents and marketable securities, end of year 48.8 65.1 174.1
===========================================
CASH USED IN OPERATING ACTIVITIES was $15.0 million, $32.6 million and $16.8
million for 2005, 2004 and 2003, respectively. The decrease in cash used in
operating activities in 2005 from 2004 was principally due to stronger cash
collections and improved operating performance. Included in the cash used in
operating activities in 2005 was $7.3 million related to cash payments directly
related to our restructuring initiatives, $1.5 million for our semi-annual
debenture interest and $6.2 million for cash used in other operating activities.
ADDITIONS TO CAPITAL ASSETS of $1.1 million in 2005 represents investments that
we have made in computing equipment and software to support our global
operations and the centralization of our support functions.
ACQUISITION represents the purchase price and costs related to our acquisition
of Tradevision AB ("Tradevision"). In 2003 and 2002 we undertook a focused
acquisition strategy designed to complement
43
and enhance our product offering and our distribution capabilities. Pursuant to
this strategy, we purchased 70% of the outstanding shares of Tradevision in 2002
and the remaining 30% interest in 2003.
The total purchase price for Tradevision at the time of acquisition was $7.6
million, which included the cash consideration, the integration costs and other
acquisition related expenses. In addition, $1.4 million in acquisition costs
have been incurred since October 2002, including $0.5 million in purchase price
`earn-out' to the vendors. Accordingly, the total cash purchase price for
Tradevision as of January 31, 2005 is $9.0 million ($0.2 million, $0.3 million,
$2.2 million and $6.3 million paid in 2005, 2004, 2003 and 2002, respectively).
The remaining potential purchase price `earn-out' payable by us to the vendors
is $0.2 million.
PURCHASE OF CONVERTIBLE DEBENTURES. In 2004, we purchased for cancellation $45.0
million aggregate principal amount of our debentures through a wholly owned
subsidiary for $43.3 million, including costs associated with the offer. In
December 2001, March 2002, and August 2002, pursuant to a normal course issuer
bid, we cumulatively purchased for cancellation $3.0 million principal amount of
the debentures for $2.6 million, including costs associated with the offer.
PURCHASE OF COMMON SHARES. In July 2003, we purchased for cancellation
11,578,000 of our common shares for an aggregate cost of $27.2 million,
including costs associated with the offer. As of March 31, 2005, there were
40,705,811 shares issued and outstanding.
ISSUANCE OF COMMON SHARES represents the proceeds from the issuance of common
shares on the exercise of granted stock options. In 2004, 59,300 stock options
were exercised for proceeds of $0.2 million.
PURCHASE OF LONG-TERM INVESTMENT of $0.1 million in 2003 represents additions to
our existing investment in Ocado, an online food retailer based in the United
Kingdom. On May 25, 2005 we announced that we had disposed 22% of this long-term
investment for aggregate proceeds of $1.2 million.
As of January 31, 2005, our current assets exceeded our current liabilities by
$21.4 million. Current assets included $17.2 million of cash and cash
equivalents, $31.5 million in short-term marketable securities and $7.1 million
in current trade receivables. Our working capital has decreased from January 31,
2004 to January 31, 2005 by $34.7 million, principally as a result of the
reclassification of $27.0 million of our convertible debentures to current
liabilities from long-term liabilities, the reclassification of $10.0 million of
our DRD investments from long-term to short-term assets, as well as the use of
cash in operations and restructuring activities.
CASH AND CASH EQUIVALENTS AND MARKETABLE SECURITIES. Cash and cash equivalents
include short-term deposits and marketable debt securities with original
maturities of three months or less. Short-term marketable securities are
comprised of debt securities maturing between three and 12 months from the
balance sheet date. Long-term marketable securities are comprised of debt
securities maturing in excess of 12 months from the balance sheet date.
Effective October 31, 2002, debt securities were marked to market with the
resulting gain or loss included in other comprehensive income (loss). Marketable
securities represent cash invested in investment-grade corporate bonds and
commercial paper, and in investment-grade DRD eligible securities issued by US
corporations.
Our investments in marketable securities are governed by our Investment Policy
Guidelines as approved by the Board of Directors, which were updated during the
first quarter of 2005. The updated provision stipulated a more conservative
investment philosophy whereby all maturing investments will be re-invested in
AAA-rated marketable securities and, to the extent deemed necessary to avoid
adverse tax
44
consequences, in DRD eligible securities. Since many of our investments had
maturities in May 2004 and June 2004, the proceeds of these investments were
reinvested in AAA-rated investments.
As of January 31, 2005, 35% of the total cash and investment portfolio was in
interest-bearing cash deposits and 65% was in short-term marketable securities.
The table below provides an analysis of our consolidated holdings of cash and
investments in millions of dollars with their credit ratings as of January 31,
2005:
STANDARD & POOR'S PERCENTAGE OF AMOUNT
(S&P) RATING TOTAL
--------------------------------------------------------
Interest-bearing cash deposits -- 35% 17.2
Marketable securities AAA 65% 31.6
-----------------------------------
100% 48.8
===================================
COMMITMENTS
CONTRACTUAL OBLIGATIONS
To facilitate a better understanding of our contractual obligations, the
following information is provided (in millions of dollars) in respect of our
convertible debentures and operating lease obligations as at January 31, 2005:
------------------------------------------------------------
LESS THAN 1-3 3-5 MORE THAN 5
1 YEAR YEARS YEARS YEARS TOTAL
------------------------------------------------------------
Convertible debentures (plus interest payments) 27.7 -- -- -- 27.7
Operating lease obligations 3.0 2.4 0.9 0.2 6.5
------------------------------------------------------------
TOTAL 30.7 2.4 0.9 0.2 34.2
============================================================
CONVERTIBLE DEBENTURES
----------------------
On June 30, 2000, we issued $75.0 million aggregate principal amount of
convertible unsecured subordinated debentures maturing on June 30, 2005. The
debentures bore interest at the rate of 5.5% per annum, which had accrued from
June 30, 2000 and had been paid in equal semi-annual installments in arrears on
June 30th and December 30th of each year. In December 2001, March 2002, August
2002 and July 2003, we cumulatively purchased for cancellation $48.0 million
principal amount of the debentures. At January 31, 2005, we had $27.0 million of
these debentures outstanding. On June 30, 2005 we paid $27.7 million in
principal and interest to satisfy all of the outstanding convertible debentures
on their maturity.
Operating Leases
----------------
We are committed under non-cancelable operating leases for business premises and
computer equipment with terms expiring at various dates through 2012. The future
minimum amounts payable under the lease agreements in millions of dollars are
described in the chart above.
We have initiated the exit of various equipment and real property leases in
connection with previously announced restructuring activities. Some of these
leases have outstanding balances pending full and final resolution and
settlement of such lease obligations with the applicable lessor. The aggregate
outstanding restructuring provision related to these leases at January 31, 2005
was $1.6 million.
45
CONTINGENCIES
On January 23, 2004, we announced that a complaint alleging patent infringement
had been filed against us in the United States District Court for the Southern
District of New York by ArrivalStar, Inc. In late-April 2005, we settled the
lawsuit by making a one-time payment to acquire a fully paid license to the
patent of ArrivalStar, Inc. in connection with the confidential settlement of
outstanding patent litigation. ArrivalStar's patents generally relate to advance
notification systems using GPS technology.
On or about May 19, 2004, we were named as a defendant in a securities class
action lawsuit captioned BRIJ WALIA V. THE DESCARTES SYSTEMS GROUP INC., ET AL.,
which was filed in the United States District Court for the Southern District of
New York purportedly on behalf of purchasers of our common stock between June 4,
2003 and May 6, 2004. The complaint also names as defendants two of our former
officers. The complaint alleges, among other things, that the defendants made
misstatements to the investing public between June 4, 2003 and May 6, 2004
regarding our financial condition. Three additional complaints were filed and,
subsequently, all four actions were consolidated before a single judge for
pretrial purposes. On November 2, 2004, we announced that we had reached an
agreement-in-principle to settle the consolidated securities class action
litigation. Under the terms of the settlement-in-principle, a settlement fund
will be established in the total amount of $1.5 million, of which our insurance
providers will pay approximately $1.1 million and the balance paid by us. In
January 2005, the parties to the litigation executed a Memorandum of
Understanding that memorialized the terms of the settlement-in-principle. On
April 11, 2005, the parties executed definitive settlement papers, which were
filed with the court along with a motion for preliminary approval of the
proposed settlement on April 12, 2005. On June 1, 2005, the court, among other
things, preliminarily approved the proposed settlement, ordered that notice of
the proposed settlement be provided to potential claimants, and ordered that a
settlement hearing be held before the court on September 16, 2005 to consider
final court approval of the proposed settlement. The proposed settlement remains
subject to final approval by the court. In the second quarter of 2005, we
accrued $0.5 million for anticipated defense costs related to the class action
litigation. With the settlement-in-principle in the third quarter of 2005, this
accrual was sufficient to encompass both our defense costs and our contribution
to the settlement-in-principle. Our contribution to the settlement-in-principle
was paid in the third quarter of 2005.
We have commenced arbitration proceedings against a supplier of hosting services
to recover damages relating to that supplier's invoicing of fees in excess of
the contractual agreement and refusal to deliver working source code for
technology purchased from the supplier. At this time, the arbitration is in its
initial stages.
We are also subject to a variety of other claims and suits that arise from time
to time in the ordinary course of our business. The consequences of these
matters are not presently determinable but, in the opinion of management after
consulting with legal counsel, the ultimate aggregate liability is not currently
expected to have a material effect on our annual results of operations or
financial position.
GUARANTEES
In November 2002, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Other" ("FIN 45"),
which expands previously issued accounting guidance and requires additional
disclosure by a guarantor in its interim and annual financial statements issued
after December 15, 2002, for certain guarantees. FIN 45 requires a guarantor to
recognize, at the inception of a guarantee, a liability for the fair value of an
obligation assumed by issuing a guarantee. As of January 31, 2005, our
guarantees that were issued or modified after February 1, 2003 were not
material.
46
VARIABLE INTEREST ENTITIES
In December 2003, FASB issued Interpretation No. 46R (FIN 46R), a revision to
Interpretation No. 46 (FIN 46), CONSOLIDATION OF VARIABLE INTEREST ENTITIES. FIN
46R clarifies some of the provisions of FIN 46 and exempts certain entities from
its requirements. FIN 46R is effective at the end of the first interim period
ending after March 15, 2004. Entities that have adopted FIN 46 prior to this
effective date can continue to apply the provisions of FIN 46 until the
effective date of FIN 46R or elect early adoption of FIN 46R. The adoption of
FIN 46 and FIN 46R did not have a material impact on our financial statements,
as we have not been involved in any transactions requiring consolidation as
prescribed by FIN 46 or FIN 46R.
OUTSTANDING SHARE DATA
We have an unlimited number of common shares authorized for issuance. As of
January 31, 2005, we had 40,705,811 common shares issued and outstanding.
We also have a shareholder-approved stock option plan and other option plans
that were assumed or adopted in connection with various previously completed
acquisitions. As of January 31, 2005, there were options granted to purchase
4,470,608 common shares pursuant to these plans.
On November 30, 2004, we announced that our Board of Directors had adopted the
Rights Plan to ensure the fair treatment of shareholders in connection with any
take-over offer, and to provide the Board of Directors and shareholders with
additional time to fully consider any unsolicited take-over bid. We did not
adopt the Rights Plan in response to any specific proposal to acquire control of
the company. The Rights Plan was approved by the Toronto Stock Exchange and was
approved by our shareholders on May 18, 2005. The Rights Plan took effect as of
November 29, 2004, and has an initial term of three years. The Rights Plan is
similar to plans adopted by other Canadian companies and approved by their
shareholders.
UNAUDITED QUARTERLY FINANCIAL HIGHLIGHTS
The following table provides an analysis of our unaudited operating results (in
thousands of dollars, except per share and number of share amounts) for each of
the quarters ended on the date indicated:
-------------------------------------------------------------------------
APRIL 30, JULY 31, OCTOBER 31, JANUARY 31, TOTAL
2004 2004 2004 2005
-------------------------------------------------------------------------
2005
----
Revenues 13,256 11,065 11,045 11,029 46,395
Gross margin 7,791 5,173 6,334 6,044 25,342
Operating expenses 16,781 13,163 7,064 5,708 42,716
Loss (28,943) (22,699) (2,730) (959) (55,331)
Basic and diluted loss per share (0.71) (0.56) (0.07) (0.02) (1.36)
Weighted average shares outstanding 40,706 40,706 40,706 40,706 40,706
- basic and diluted (thousands)
47
-------------------------------------------------------------------------
APRIL 30, JULY 31, OCTOBER 31, JANUARY 31, TOTAL
2003 2003 2003 2004
-------------------------------------------------------------------------
2004
----
Revenues 14,187 15,219 16,026 14,353 59,785
Gross margin 9,407 10,529 11,239 9,223 40,398
Operating expenses 12,848 11,576 12,204 16,982 53,610
Loss (9,018) (14,706) (4,194) (10,575) (38,493)
Basic and diluted loss per share (0.17) (0.29) (0.10) (0.26) (0.84)
Weighted average shares outstanding 52,230 50,470 40,654 40,655 45,951
- basic and diluted (thousands)
Our May 2004 restructuring initiative, described in Note 9 to the 2005
Consolidated Financial Statements, had a significant effect on our quarterly
operating results, beginning with the quarter ended July 31, 2004. Revenues
declined as we reduced our sales force, concentrated on our existing customers
and our services-based business model and tempered our pursuit of new license
transactions. In addition, our operating expenses were significantly reduced as
a result of this restructuring initiative, beginning in the quarter ended
October 31, 2004.
Our losses over the quarters detailed in the table above were also impacted by
significant charges in particular quarters. In the quarter ended July 31, 2003,
we incurred a restructuring charge of $7.3 million in connection with our May
2003 restructuring initiative described in Note 9 to the 2005 Consolidated
Financial Statements. In the quarter ended April 30, 2004, we incurred a
goodwill impairment charge of $18.0 million. In the quarter ended July 31, 2004,
we incurred a restructuring charge of $11.7 million in connection with the May
2004 restructuring initiative.
The number of common shares used in the loss per share calculation has reduced
over the quarterly periods shown as a result of the repurchase of 11,578,000
common shares in May 2003. The stepped decline shown in the table above is the
result of the weighted average outstanding share calculation required by
applicable accounting principles.
In the fourth quarter of 2005, we substantially completed our May 2004
restructuring initiative and reduced both our total expenses and loss by $1.8
million from their corresponding levels in the previous quarter. Our improved
operating results contributed to our cash, cash equivalents and marketable
securities being $2.4 million higher than at the end of the third quarter. Other
events in the fourth quarter of 2005 included the adoption by our Board of
Directors of the Rights Plan to ensure the fair treatment of shareholders in
connection with any take-over offer, and to provide the Board of Directors and
shareholders with additional time to fully consider any unsolicited take-over
bid; the settlement-in-principle of the securities class action lawsuit
(discussed above); and the appointment of Arthur Mesher as Chief Executive
Officer.
CHANGES IN ACCOUNTING POLICIES
At January 31, 2005, we had various stock-based employee compensation plans. We
account for those plans in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related
Interpretations. No stock-based employee compensation cost is reflected in
income (other than certain options that relate to a specific acquisition, the
amount of which is described in Note 2 to the 2005 Notes to Consolidated
Financial Statements), as no options granted under those plans had an exercise
price less than the market value of the underlying common stock on the date of
grant.
On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004) "Share Based
Payment." Statement 123(R) requires all entities to recognize compensation
expense in an amount equal to the fair
48
value of share based-payments. This statement is effective for public companies
for the first annual or interim reporting period beginning after June 15, 2005.
On April 14, 2005, the United States Securities and Exchange Commission ("SEC")
announced the adoption of a new rule that amends the compliance dates for FAS
123(R) allowing SEC registrants to implement FAS 123(R) for their first fiscal
year commencing after June 15, 2005 (which, for us, would be fiscal 2007). Given
the foregoing, absent any further pronouncements impacting the effective date of
FAS 123(R), we currently intend to adopt FAS 123(R) effective for fiscal 2007.
The following table provides the pro forma impact of expensing stock options for
the periods indicated (in thousands of dollars, except per share data):
--------------------------------------
YEAR ENDED JANUARY 31, January 31, January 31,
2005 2004 2003
--------------------------------------
Loss - As reported (55,331) (38,493) (138,195)
Add: Stock-based compensation - As reported 137 171 467
Less: Total stock-based compensation expense determined
under the fair value based method for all awards (1,874) (5,458) (8,546)
--------------------------------------
Loss - Pro forma (57,068) (43,780) (146,274)
======================================
Loss per share - Basic and diluted
--------------------------------------
As reported (1.36) (0.84) (2.65)
======================================
Pro forma (1.40) (0.95) (2.80)
======================================
The fair value of stock option grants is estimated using the Black-Scholes
option-pricing model with the following assumptions:
--------------------------------------
YEAR ENDED JANUARY 31, January 31, January 31,
2005 2004 2003
--------------------------------------
Black-Scholes average assumptions:
Expected dividend yield 0.0% 0.0% 0.0%
Expected volatility 68.0% 83.0% 91.0%
Risk-free rate 3.6% 3.9% 4.2%
Expected option life in years 4.4 4.0 3.6
--------------------------------------
Weighted average fair value per option $0.84 $1.64 $3.43
======================================
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
We believe that our future success depends in large part on our ability
to maintain and enhance our current product lines. Accordingly, we invest in
product development to ensure that sufficient resources are focused on
developing new products or enhancements to our existing products. We believe
that such expenditures are critical to our success. In 2005, we incurred
research and development expenses of approximately $10.4 million, or
approximately 22% of our annual consolidated revenues for 2005. In 2004, we
incurred research and development expenses of approximately $9.4 million, or
approximately 16% of our annual consolidated revenues for 2004. In 2003, we
incurred research and development expenses of approximately $15.2 million, or
approximately 22% of our annual consolidated revenues for 2003.
49
We have made substantial investments in research and development over
the last several years. Our growth and future financial performance will depend
in part on our ability to enhance existing applications, develop and introduce
new applications that keep pace with technological advances, meet changing
customer requirements, respond to competitive products and achieve market
acceptance.
Although we typically conduct research and development initiatives
internally, our modular solutions and component-based architecture have allowed
us to use outsourced developers on an as needed basis. In 2005, our outsourced
development was primarily with one particular provider through their facilities
in India, however, we terminated this relationship in October 2004 in connection
with our cost reduction initiatives. As of January 31, 2005, the majority of all
development work was being performed internally.
Our research and development program requires a high degree of detail
in business analysis, technical design, and quality assurance. Particular
expertise in solving operations research or logistics problems is a benefit to
us, as is practical experience in dealing with the day-to-day challenges that
our customers face in dealing with logistics providers and deliveries in
general. We believe that we are well positioned to address our needs internally,
however, we continue to evaluate potential new employees to help us expand or
expedite our development processes as needed.
To build applications, we have implemented an application development
process based on a six-month cycle. The cycle requires one month for solution
analysis and design, three months for building, one month for review and quality
assurance testing, and one month for packaging the application and training our
pre-sales and post-sales representatives.
During 2005, we completed the migration of the majority of our
applications to the LNOS architecture. A service-oriented architecture providing
distributed, scalable and reliable deployment options, the LNOS architecture
speeds development and deployment of industry solution sets based on our supply
chain suites.
Utilizing our regular release schedule, all generally available
products were upgraded in 2005. We delivered a number of new products in 2005,
including INVENTORY SNAPSHOTS(TM), MULTIMODAL ROUTE GUIDE(TM), APPOINTMENT
SCHEDULER(TM), KPI Metrics(TM) and LNOS REPORTING SERVICES(TM).
We currently plan to provide one or more releases for our generally
available products in 2006. Additional new products are currently planned for
delivery in 2006, including OCEAN RATE BUILDER(TM), MONITOR(TM), AUTOMATED
VEHICLE LOCATION(TM) (AVL) and additional releases of our existing products in
alignment with the regular release schedule.
D. TREND INFORMATION.
Our business may be impacted from time to time by the general cyclical
and seasonal nature of particular modes of transportation and the freight market
in general, as well as the cyclical and seasonal nature of the industries that
such markets serve. Factors which may create cyclical fluctuations in such modes
of transportation or the freight market in general include legal and regulatory
requirements, timing of contract renewals between our customers and their own
customers, seasonal based tariffs, vacation periods applicable to particular
shipping or receiving nations, and amendments to international trade agreements.
50
In the fourth quarter and year ended January 31, 2005, our services
revenues comprised approximately 91% and 90%, respectively, of our total
revenues for the period, with the balance being license revenues. We currently
anticipate that during 2006 our revenues will again be predominantly services
revenues, fueled by our continued migration of our legacy license-based products
to our LNOS architecture. We do, however, anticipate maintaining the flexibility
to license our products to those customers who prefer to buy the products in
that fashion.
In 2006 we intend to continue to manage our business to align our
operating expenses with our visible and recurring revenues. We believe that our
existing services infrastructure provides us with opportunities to increase our
services gross margin if aggregate services revenues increase above their 2005
levels. In addition, we intend to maintain the flexibility in our business model
to enable our customers to elect to license technology rather than subscribe to
services, though we intend to manage and plan cost levels for the business with
minimal expectations of license revenue. Given this, and given the historically
higher gross margin we have seen from licenses of our technology, we anticipate
that if license revenues are higher than our expectations that this will
contribute positively to our bottom line.
As a consequence of our May 2004 restructuring initiative, the amount
we spent on sales and marketing was significantly reduced as we focused our
sales efforts on our existing customer base. We anticipate that in the latter
half of 2006, as the development of our LNOS-based products mature, we will
advance our efforts in selling our products to new customers and that this will
correspondingly increase the amount that we spend on sales and marketing. This
can already be seen in 2006 with our additions of Chris Jones as EVP, Solutions
and Markets, and Mark Weisberger as EVP, Field Operations.
We currently anticipate that in 2006 the significant majority of our
business will continue to be in the Americas, with the EMEA region being the
bulk of the remainder of our business. On March 3, 2005 we announced the hiring
of Vincent Ho as General Manager, Asia-Pacific and, accordingly, we currently
anticipate that in the latter half of 2006 our business activities in the
Asia-Pacific region may increase.
In 2005 we spent $1.1 million on capital expenditures. We currently
estimate similar levels of capital expenditures in 2006.
E. OFF-BALANCE SHEET ARRANGEMENTS.
The Company does not have any off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on the Company's financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that is
material to investors.
F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS.
To facilitate a better understanding of our contractual obligations, the
following information is provided (in millions of dollars) in respect of our
convertible debentures and operating lease obligations as of April 30, 2005:
---------------------------------------------------------
LESS THAN 1-3 3-5 MORE THAN TOTAL
1 YEAR YEARS YEARS 5 YEARS
---------------------------------------------------------
Convertible Debentures (plus
interest payments) 27.7 -- -- -- 27.7
Operating Lease Obligations 3.0 2.4 0.9 0.2 6.5
---------------------------------------------------------
TOTAL 30.7 2.4 0.9 0.2 34.2
=========================================================
51
G. DISCLOSURE PURSUANT TO THE REQUIREMENTS OF NASDAQ
We were granted an exemption from the Nasdaq Marketplace Rules requiring each
issuer to provide for a quorum at any meeting of the holders of common stock of
no less than 33 1/3% of the outstanding shares of the issuer's common voting
stock. This exemption was granted because Nasdaq's requirements regarding the
quorum required for meetings of the holders of common stock are contrary to
generally accepted business practices in Canada. In particular, Section 101 of
the Ontario Business Corporations Act provides that a company's by-laws may set
the quorum requirements for a meeting of shareholders. The relevant provisions
of our by-laws state that "two shareholders, in person or by proxy, holding
shares of the Corporation entitled to vote at a meeting of shareholders, shall
constitute a quorum at such meeting unless there is only one holder of any class
or series of shares, in which case the shareholder present in person or by proxy
constitutes a quorum. A quorum is required only at the opening of the meeting."
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT
The following table sets forth the name, location of residence and
office held by each of our executive officers and directors as at July 1, 2005.
Each director is elected at the annual meeting of shareholders or appointed
pursuant to the provisions of our bylaws and applicable laws to serve until the
next annual meeting or until a successor is elected or appointed, subject to
earlier resignation by the director.
NAME AND LOCATION OF RESIDENCE OFFICE HELD
------------------------------ -----------
DR. STEPHEN WATT(2)(3)(4) Director, Chairman of the Board
London, Ontario, Canada
JOHN ALBRIGHT(1)(2)(4) Director
Toronto, Ontario, Canada
JAMES BALSILLIE(1)(5) Director
Waterloo, Ontario, Canada
J. IAN GIFFEN(1)(3)(4)(5) Director
Unionville, Ontario, Canada
CHRIS HEWAT(3) Director
Toronto, Ontario, Canada
ARTHUR MESHER Director, Chief Executive Officer
Waterloo, Ontario, Canada
OLIVIER SERMET(2)(5) Director
Walnut Creek, California, U.S.A.
CHRIS JONES Executive Vice-President,
Atlanta, Georgia, U.S.A. Solutions and Markets
52
NAME AND LOCATION OF RESIDENCE OFFICE HELD
------------------------------ -----------
BRANDON NUSSEY Chief Financial Officer
Waterloo, Ontario, Canada
J. SCOTT PAGAN General Counsel & Corporate Secretary
Cambridge, Ontario, Canada
MARK WEISBERGER Executive Vice President, Field Operations
Houston, Texas, U.S.A.
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Corporate Governance Committee.
(4) Member of the Nominating Committee.
(5) Member of the Operations Committee.
Information about each of our directors and executive officers,
including his respective principal occupation during at least the five years
preceding January 31, 2005 is as follows:
DR. STEPHEN WATT, has been an outside member of our board of directors
since June 2001. For the past five years, Dr. Watt has been a professor in the
Department of Computer Science at the University of Western Ontario, and was
Chair of the Department from 1996 to 2002.
JOHN ALBRIGHT has been an outside member of our board of directors
since November 1996. Since May 1996, Mr. Albright has been President of J.L.
Albright Venture Partners Inc., a venture capital firm that specializes in
making investments in the ordinary course of business in emerging information
technology companies which involve substantial risks. Mr. Albright resigned as a
director of Indian Motorcycle Company effective January 1, 2003 prior to it
ceasing operations and appointing an assignee to manage its assets in September
2003. Indian Motorcycle Company was not a reporting issuer. Mr. Albright
currently serves as a director on publicly traded Bioscrypt Inc. (TSX:BYT); Nuvo
Network Management Inc. (TSX: NNM); and FUN Technologies plc (TSX:FUN, AIM:FUN).
JAMES BALSILLIE has been an outside member of our board of directors
since November 1996 and is presently Chairman and Co-Chief Executive Officer of
Research in Motion Limited, a company engaged in the business of developing and
supplying radios and other access devices for use in wireless communications
systems, which he joined in 1992.
J. IAN GIFFEN has been an outside member of our board of directors
since March 2004. Since 1996, he has been a consultant and advisor to/director
of software companies and technology investment funds. From January 1992 to
January 1996, Mr. Giffen was Vice President and Chief Financial Officer at Alias
Research, a developer of 3D graphics software. Mr. Giffen is currently a
director of 724 Solutions Inc., Financial Models Company Inc., Macromedia Inc.,
MKS Inc., Sierra Systems Group Inc., Strategic Vista Inc., and a
director/advisor to a number of other private companies. Mr. Giffen is a
Chartered Accountant and has a Bachelor of Arts degree in business
administration from the University of Strathclyde in Glasgow.
CHRIS HEWAT has been an outside member of our board of directors since
June 2000. Mr. Hewat has been a partner at the law firm of Blake, Cassels &
Graydon LLP since 1993, having joined the firm in 1987. Blake, Cassels & Graydon
LLP provided legal services to us during the fiscal year ended
53
January 31, 2005 and is expected to provide legal services to the Company in the
fiscal year ending January 31, 2006.
ARTHUR MESHER is our Chief Executive Officer. Mr. Mesher first joined
our management team in May 1998 and served as Executive Vice President,
Corporate Strategy and Business Development until his appointment as Chief
Executive Officer in November 2004. Mr. Mesher also occupied the interim Office
of the CEO from May 2004 to November 2004 with Mr. Nussey. He was elected to the
board of directors on May 18, 2005.
OLIVIER SERMET has been an outside member of our board of directors
since May 18, 2005. Mr. Sermet was previously CEO and President of Softface,
Inc. for four years from 2000 until its sale to Ariba, Inc. in April 2004. Prior
to his role at Softface, Mr. Sermet was Senior Vice-President of Worldwide Field
Operations for OnDisplay, Inc. from 1996, through its initial public offering in
1999 and eventual sale to Vignette Corporation in 2000. Prior to OnDisplay, Mr.
Sermet was Vice-President and General Manager for the western half of the U.S.
and Canada for Dun and Bradstreet Software, Inc. Mr. Sermet is currently a
limited partner with venture capital firms Northwest Venture Associates and
Matrix Partners.
CHRIS JONES is our Executive Vice President, Solutions and Markets and
joined us in May 2005. Mr. Jones was previously SVP, Research at Aberdeen Group,
Inc., starting in November 2003. Prior to Aberdeen Group, Mr. Jones was
President of PassKey Research from January 2003. Prior to PassKey Research, Mr.
Jones was EVP, Marketing and Corporate Development at SynQuest, Inc. from 1998,
through its initial public offering in 2000 and eventual sale to Viewlocity in
November 2002. Prior to SynQuest, Mr. Jones was a Vice President and Research
Director for Gartner, Inc. from 1994. Mr. Jones holds a Bachelor of Science in
Electrical Engineering from Lehigh University.
BRANDON NUSSEY is our Chief Financial Officer. Mr. Nussey joined
Descartes' finance department in June 2000 from Inscriber Technologies. Mr.
Nussey held various senior positions in the finance department until his
appointment to Senior Vice-President, Operations in May 2003. Mr. Nussey was
appointed Chief Financial Officer in March 2004. Mr. Nussey also occupied the
interim Office of the CEO from May 2004 to November 2004 with Mr. Mesher.
J. SCOTT PAGAN is our General Counsel & Corporate Secretary. Mr. Pagan
joined our legal department in May 2000 and was appointed Corporate Secretary in
May 2003, and General Counsel & Corporate Secretary in June 2004. Prior to
joining Descartes, Mr. Pagan was in private legal practice in Ontario.
MARK WEISBERGER is our Executive Vice-President, Field Operations and
joined us in May 2005. Mr. Weisberger was previously VP, Sales at Sychron Inc.,
starting in July 2004. Prior to Sychron, Mr. Weisberger was VP, Field Operations
for Softface, Inc. from February 2001 until its sale to Ariba, Inc. in April
2004. Prior to his role at Softface, Mr. Weisberger was Vice-President, Field
Operations for OnDisplay, Inc. from 1997, through its initial public offering in
1999 and eventual sale to Vignette Corporation in 2000, following which he
served as the Vice-President and General Manager of the Marketplace Division of
Vignette Corporation from June 2000 to January 2001. Mr. Weisberger holds a
Masters of Business Administration from the University of Arkansas.
There are no family relationships among any of the foregoing persons, and there
are no arrangements or understandings with any person pursuant to which any of
our directors or members of senior management were selected.
54
B. COMPENSATION
AGGREGATE COMPENSATION OF DIRECTORS AND OFFICERS
COMPENSATION OF DIRECTORS
Up until June 28, 2004, the Company's policy respecting the compensation of
outside directors provided for the payment of an annual cash retainer of
Cdn.$7,500 and a fee for each meeting of the Board of Directors or any committee
thereof attended of Cdn.$500 per meeting.
Following a review by the Board of Directors of the Company's board compensation
policy, which was last revised as of February 1, 2002, the Board of Directors
approved new compensation arrangements for outside directors effective June 28,
2004. These new arrangements reflect consideration of the need to compensate
outside directors appropriately for the time and effort expended and the
responsibilities assumed in their capacity as directors, and the level of
compensation paid to directors of comparable public companies. In addition,
these arrangements reflect the Board of Directors' experience that the
responsibilities of the Board of Directors are discharged by the directors'
respective efforts undertaken on behalf of the Company outside of their formal
meetings. Based on these considerations, the annual retainers were increased as
described below, and meeting fees were eliminated. In addition, the Board of
Directors approved the adoption of a deferred stock unit plan (the "DSU Plan"),
the terms of which are discussed below, under which outside directors are
eligible to be issued Deferred Stock Units ("DSUs") in partial satisfaction of
their annual retainers.
Under the new director compensation arrangements, outside directors receive an
annual base retainer of $15,000. In addition, members of the Audit Committee of
the Board of Directors receive an annual retainer of $6,000, while the Chair of
that committee receives an annual retainer of $8,000. Members of the Corporate
Governance and Compensation Committees receive an additional annual retainer of
$4,000, while the Chairs of those respective committees receive an additional
annual retainer of $6,000. Members of the Nominating Committee are not
compensated for serving on that committee. All annual retainers are paid in cash
and/or DSUs as described below.
The Board of Directors adopted the DSU Plan effective June 28, 2004. Under the
DSU Plan, outside directors are entitled to elect to receive DSUs in full or
partial satisfaction of their annual retainers, with each DSU having a value
equal to the market price of the common shares, which under the DSU Plan is
equal to the weighted-average closing price of the common shares in the period
of five trading days preceding the date of grant. Each director is required to
hold DSUs received until the director resigns or is not re-elected, following
which they will be redeemed for cash during a prescribed period at a value equal
to the market price of the common shares prevailing at the date of redemption.
No securities have or will be issued pursuant to the DSU Plan. There are no
restrictions on a director assigning his or her entitlement to payment pursuant
to the DSU Plan. The Board of Directors may amend the DSU Plan as it deems
necessary or appropriate, but no such amendment may adversely affect the rights
of an eligible director in DSUs granted to the date of amendment without the
consent of the eligible director.
Concurrent with the approval of the DSU Plan, the Board of Directors approved an
Equity Ownership Policy for outside directors. Under this policy, outside
directors are required to acquire and hold an aggregate number of common shares
and DSUs equal to the equivalent of 2.5 times the annual base retainer in effect
as at June 28, 2004 (which was $15,000), within a period of five years after the
earlier of the date of adoption of the Equity Ownership Policy and the date the
individual becomes a director. Until such time as an outside director attains
the minimum equity ownership prescribed under the Equity
55
Ownership Policy, the director will be required to receive at least one-half of
his annual base retainer in DSUs.
On March 11, 2004, the Board of Directors appointed J. Ian Giffen to serve on
the Board of Directors. Co-incident with Mr. Giffen's appointment, Mr. Giffen
was granted an option under the Company's Stock Option Plan to purchase 43,500
common shares at a price of Cdn. $3.18 vesting over a five-year period.
The Board of Directors undertook a review of the compensation to be paid to Dr.
Stephen Watt in connection with his role as Chairman of the Board, which he
assumed in September 2003. Following this review, on April 5, 2004 the Board of
Directors granted Dr. Watt an option under the Company's Stock Option Plan to
purchase 54,796 common shares at a price of Cdn.$3.10 vesting over a four-year
period.
On September 30, 2004, the Board of Directors undertook an additional review of
the compensation to be paid to the outside directors, particularly focused on
long-term compensation awards pursuant to the Company's Stock Option Plan. After
consideration of the amounts and exercise prices of the existing grants to
outside directors, the Company's current trading price for common shares, the
necessity to appropriately incentivize independent outside directors to continue
to serve on the Board of Directors, and compensation levels for outside
directors in other U.S. and Canadian public companies, the Board of Directors
granted each director an option to purchase 45,000 common shares at a price of
Cdn. $1.35 vesting quarterly over a 5 year period. Dr. Watt was also granted an
option to purchase an additional 30,000 common shares (for an aggregate of
75,000 common shares) on these same terms in consideration of his role as
Chairman of the Board.
Outside board members are also entitled to be granted options granted in
accordance with the Company's Stock Option Plan. Directors of the Company are
entitled to reimbursement for expenses incurred by them in their capacity as
directors. Directors of the Company who are also officers or employees of the
Company are not entitled to compensation for serving as directors of the
Company.
In accordance with the foregoing policies applicable to 2005, the outside
directors of the Company were compensated for serving as directors during the
fiscal year ended January 31, 2005 as detailed in the table below.
56
MARKET
CASH VALUE OF
COMPENSATION DEFERRED % OF TOTAL
(OTHER THAN DEFERRED STOCK UNITS SECURITIES OPTIONS
REIMBURSEMENT STOCK GRANTED AT UNDERLYING GRANTED TO EXERCISE OR
OF TRAVEL AND UNITS JANUARY 31, OPTIONS PARTICIPANTS BASE PRICE
OTHER EXPENSES) GRANTED 2005 GRANTED IN FISCAL ($ /
NAME ($) (#) ($) (#) YEAR SECURITY)
---------------- -------------- -------- ----------- ---------- ------------ -----------
John Albright 21,315 -- -- 45,000 1.5% Cdn. 1.35
James Balsillie 22,908 -- -- 45,000 1.5% Cdn. 1.35
J. Ian Giffen 17,041 2,624 4,644 43,500 1.5% Cdn. 3.18
45,000 1.5% Cdn. 1.35
Chris Hewat 11,702 2,624 4,644 45,000 1.5% Cdn. 1.35
Dr. Stephen Watt 13,570 4,812 8,517 54,796 1.8% Cdn. 3.10
75,000 1.5% Cdn. 1.35
On May 24, 2005, the board of directors resolved that any director who travels
from a residence outside Canada to attend in-person a meeting of the board of
directors would receive additional compensation of $1,000 for the day of the
meeting, in addition to reimbursement of applicable travel costs.
Also on May 24, 2005, the board of directors resolved that outside directors be
granted an annual grant of an option to purchase 15,000 common shares in
accordance with the Company's stock option plan at the first regularly scheduled
board meeting following the Company's annual meeting of shareholders.
Accordingly, on May 27, 2005 the outside directors were each granted an option
to purchase 15,000 common shares, at a price of Cdn. $2.64 vesting quarterly
over a five-year period. In addition, as a new appointee to the Board of
Directors, Olivier Sermet was granted an option under the Company's Stock Option
Plan to purchase 45,000 common shares at a price of Cdn. $2.64 vesting quarterly
over a five-year period.
DIRECTORS' AND OFFICERS' LIABILITY INSURANCE
Effective July 1, 2004, the Company's directors' and officers' liability
insurance policy was renewed for a period of 12 months with a total coverage
amount of $25,000,000, which required the Company to pay a deductible of up to
$250,000 for each non-securities claim and a deductible of $500,000 for each
securities claim, and has annual premiums of $1,350,000. This policy was renewed
for the annual period commencing July 1, 2005 with the same coverage and
deductibles.
SUMMARY COMPENSATION TABLE
The following table sets forth information regarding compensation earned during
the Company's last three fiscal years by each of the individuals who served as
Chief Executive Officers of the Company, Chief Financial Officers and the three
other most highly compensated executive officers of the Company during the
fiscal year ended January 31, 2005 (collectively, the "Named Executive
Officers"):
57
LONG TERM
COMPENSATION
ANNUAL COMPENSATION(1) AWARDS
------------------------- ----------
SECURITIES
FISCAL UNDER
YEAR OPTIONS
ENDED SALARY BONUS OTHER GRANTED
NAME AND PRINCIPAL POSITION JANUARY 31, ($) ($) ($) (#)
------------------------------------ ---------- ------- ------- ------- ----------
Arthur Mesher 2005 262,595 -- -- 400,000
Chief Executive Officer(2) 2004 214,920 -- -- 100,000
2003 189,000 -- -- --
Manuel Pietra 2005 106,250 -- 314,000 500,000
Former CEO and President(3) 2004 300,050 -- -- 200,000
2003 248,115 75,000 --
Brandon Nussey 2005 190,322 -- -- 225,000
Chief Financial Officer(4)
Colley Clarke 2005 34,446 -- 172,229 --
Former Chief Financial Officer(5) 2004 252,852 -- -- --
2003 219,382 -- -- 50,000
Bruce Gordon 2005 205,000 -- -- 300,000
Executive Vice-President, 2004 205,000 -- -- --
Operations(6)
Edward Ryan 2005 200,000 24,626 -- 275,000
GM, Global Logistics Network (7)
J. Scott Pagan 2005 151,668 -- -- 125,000
General Counsel & Corporate
Secretary(8)
Notes:
(1) All compensation not paid in U.S. dollars has been converted into U.S.
dollars at the closing foreign exchange rate on January 31st of the applicable
year. Each U.S. employee is eligible to participate in the Company's 401(k) plan
and is entitled to receive up to a $1,000 contribution from the Company, based
on the employee's contribution.
(2) Mr. Mesher was appointed to the interim Office of the CEO on May 6, 2004 and
was appointed CEO on November 30, 2004. Mr. Mesher joined the Company in 1998
and held the role of EVP, Strategic Development until May 6, 2004.
(3) Mr. Pietra's employment with the Company terminated on May 6, 2004 and
amounts included in the "Other" column in the table above represent amounts paid
as compensation for severance. On May 6, 2003, Mr. Pietra was appointed CEO and
President of the Company and, in February 2002, appointed co-CEO and President.
58
(4) Mr. Nussey was appointed CFO on March 10, 2004. Together with Mr. Mesher,
Mr. Nussey occupied the interim Office of the CEO from May 6, 2004 to November
30, 2004. Prior to his appointment as CFO, Mr. Nussey held various senior
positions within the Company's finance department. Mr. Nussey joined the Company
in May 2000.
(5) Mr. Clarke left the Company on March 10, 2004 to pursue other opportunities.
Mr. Clarke provided the Company with assistance, on a consultancy basis, in
transitioning his responsibilities following his departure. Amounts included in
the "Other" column in the table above represent amounts paid as compensation for
severance and for such consultancy services.
(6) Mr. Gordon left the Company on May 20, 2005 to pursue other opportunities.
Mr. Gordon was previously appointed Executive Vice-President, Operations in June
2004. Prior to that appointment, Mr. Gordon was appointed Senior Vice-President
in February 2003. Prior to February 2003, Mr. Gordon held various senior roles
in the sales and professional services organizations of the Company. Mr. Gordon
first joined the Company in 1999.
(7) Mr. Ryan was appointed GM, Global Logistics Network in June 2004. Prior to
this appointment, Mr. Ryan held various senior sales positions with the Company.
Mr. Ryan joined the Company in February 2000 in connection with the Company's
acquisition of E-Transport Incorporated.
(8) Mr. Pagan was appointed General Counsel & Corporate Secretary in June 2004.
Mr. Pagan was previously appointed Corporate Secretary in May 2003. Mr. Pagan
has been a member of the Company's legal department since May 2000.
Chris Jones joined the Company as Executive Vice-President, Solutions and
Markets in May 2005. Mr. Jones' annual base salary is $165,000 and he is
eligible for an annual bonus of up to $16,500 if the Company achieves
performance objectives in 2006 established by the CEO. On May 27, 2005, Mr.
Jones was granted an option to purchase 200,000 common shares of the Company at
an exercise price of Cdn. $2.64, expiring on May 27, 2012.
Mark Weisberger joined the Company as Executive Vice-President, Field Operations
in May 2005. Mr. Weisberger's annual base salary is $200,000. Mr. Weisberger is
also eligible to earn a variable bonus in 2006 of up to $150,000, calculated as
a percentage of the 2006 aggregate operating revenues. On May 27, 2005, Mr.
Weisberger was granted three options to purchase common shares of the Company,
as follows: (a) an option to purchase 200,000 common shares at an exercise price
of Cdn. $2.64, expiring on May 27, 2012; (b) a conditional option to purchase
100,000 common shares at an exercise price of Cdn. $2.64, expiring on May 27,
2012, conditional on the Company achieving revenue and operating result
objectives in 2006 as established by the CEO; and (c) a conditional option to
purchase 100,000 common shares at an exercise price of Cdn. $2.64, expiring on
May 27, 2012, conditional on the Company achieving revenue and operating result
objectives in 2007 as established by the CEO.
OPTION GRANTS DURING THE YEAR ENDED JANUARY 31, 2005
The following table sets forth information regarding grants of options to
acquire common shares made to each of the Named Executive Officers during the
fiscal year ended January 31, 2005.
59
MARKET
VALUE OF
% OF TOTAL SECURITIES
SECURITIES OPTIONS UNDERLYING
UNDER GRANTED TO OPTIONS ON
OPTIONS PARTICIPANTS EXERCISE OR THE DATE
GRANTED IN FISCAL BASE PRICE OF GRANT
NAME (#) YEAR ($/SECURITY) ($) EXPIRATION DATE
-------------- ---------- ------------ ----------- ---------- ------------------
Arthur Mesher 400,000 13.1% Cdn.$1.35 Cdn.$1.35 September 30, 2011
Brandon Nussey 100,000 3.3% Cdn.$3.18 Cdn.$3.18 March 12, 2011
Brandon Nussey 125,000 4.1% Cdn.$1.35 Cdn.$1.35 September 30, 2011
Bruce Gordon 100,000 3.3% Cdn.$3.18 Cdn.$3.18 March 12, 2011
Bruce Gordon 200,000 6.6% Cdn.$1.35 Cdn.$1.35 September 30, 2011
Edward Ryan 100,000 3.3% Cdn.$3.18 Cdn.$3.18 March 12, 2011
Edward Ryan 175,000 5.7% Cdn.$1.35 Cdn.$1.35 September 30, 2011
J. Scott Pagan 25,000 0.8% Cdn.$3.18 Cdn.$3.18 March 12, 2011
J. Scott Pagan 100,000 3.3% Cdn.$1.35 Cdn.$1.35 September 30, 2011
The grants of options to the Named Executive Officers during fiscal 2005
provided for quarterly vesting of the options over a period of five (5) years.
The option agreements provide that in the event of a "Change of Control", as
defined in the Named Executive Officer's option agreement, all unvested options
pursuant to such grant then held by the Named Executive Officer will immediately
vest.
OPTIONS EXERCISED DURING THE YEAR ENDED JANUARY 31, 2005 AND OPTIONS HELD AT
JANUARY 31, 2005
None of the Named Executive Officers exercised options during fiscal 2005. The
following table sets forth information regarding the value of unexercised
options held by the Named Executive Officers at January 31, 2005.
SECURITIES AGGREGATE VALUE OF UNEXERCISED
ACQUIRED VALUE UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
ON EXERCISE REALIZED AT END OF PERIOD AT END OF PERIOD
----------- --------- -------------------------- --------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
NAME (#) ($) (#) (#) ($) ($)
-------------- ----------- --------- ----------- ------------- ----------- -------------
Arthur Mesher -- -- 539,020 455,000 14,200 269,794
Brandon Nussey -- -- 18,250 224,250 4,438 84,311
Bruce Gordon -- -- 104,800 297,000 7,100 134,897
Edward Ryan -- -- 51,800 297,250 6,518 118,035
J. Scott Pagan -- -- 16,000 129,890 3,550 67,448
60
EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT
The Company has an employment agreement with each of Messrs. Mesher, Nussey and
Pagan (collectively, the "Senior Officers"). Employment agreements are currently
being finalized with Messrs. Jones and Weisberger that are substantially similar
to those of the Senior Officers. Mr. Mesher's employment agreement provides that
if he is terminated without cause, the Company will pay him fifteen months' pay
as compensation for severance. The employment agreements with the other Senior
Officers provide that if the Senior Officer is terminated without cause, the
Company will pay the Senior Officer up to twelve months' pay as compensation for
severance, subject to a 50% reduction of such severance amount from the date the
departed Senior Officer finds alternate employment. Each employment agreement
with a Senior Officer provides that if the Senior Officer resigns within
eighteen months after a "Change of Control" (as defined in each Senior Officer's
respective employment agreement), then the Senior Officer will continue to be
eligible for the applicable severance pay detailed above. Amounts to be paid are
based on the base salary of the Senior Officer as identified in the above
"Executive Compensation -Summary Compensation Table".
Mr. Mesher has been granted options to purchase common shares that, in the event
of either (i) a "Change in Control" of the Company (as defined in his option
agreement) or (ii) the termination of his employment without cause, become fully
exercisable (to the extent not already fully vested) and expire no later than
six months after such event. The other Senior Officers have been granted options
during the fiscal year ended January 31, 2005 that provide that in the event of
a "Change in Control" of the Company (as defined in the respective option
agreements of the Senior Officers), the options become fully exercisable (to the
extent not already fully vested) and expire no later than six months after such
event
Mr. Clarke's employment with the Company and appointment as CFO terminated in
March of 2004. Mr. Clarke provided the Company with assistance, on a consultancy
basis, in transitioning his responsibilities following his departure.
Mr. Pietra's employment with the Company and appointment as CEO and President
were terminated on May 6, 2004.
Mr. Gordon's employment with the Company and appointment as EVP, Operations was
terminated on May 20, 2005.
C. BOARD PRACTICES
Members of the Board of Directors are elected until the next annual meeting or
until their successors are elected or appointed.
The Board of Directors has determined that, as of May 24, 2005, Messrs.
Albright, Balsillie, Giffen, Sermet and Dr. Watt meet the independence
requirements of the Nasdaq stock exchange, while Messrs. Hewat and Mesher do not
meet these independence requirements.
61
The Board of Directors has established five standing committees, each with a
specific mandate, the Audit Committee; the Compensation Committee; the Corporate
Governance Committee; the Nominating Committee; and the Operations Committee.
The committees, their mandates and membership are discussed below.
AUDIT COMMITTEE
The primary functions of the Audit Committee are to oversee our
accounting and financial reporting practices and the audits of our financial
statements and to exercise the responsibilities and duties set forth in the
Audit Committee Charter, including, but not limited to, assisting the Board of
Directors in fulfilling its responsibilities in reviewing the following:
financial disclosures and internal controls over financial reporting; monitoring
the system of internal control; monitoring our compliance with requirements
promulgated by any exchange upon which our securities are traded, or any
governmental or regulatory body exercising authority over us, as are in effect
from time to time; selecting the auditors for shareholder approval; reviewing
the qualifications, independence and performance of the auditors; and reviewing
the qualifications, independence and performance of our financial management.
On March 2, 2005, the Board of Directors adopted an amended audit
committee charter setting out the scope of the Audit Committee's functions,
responsibilities and membership requirements. A copy of that charter can be
accessed at www.descartes.com/investors/governance/resources.
As of the last day of fiscal 2005, the Audit Committee was composed of
three outside, unrelated and independent directors: Mr. J. Ian Giffen (Chair),
Mr. John Albright and Mr. James Balsillie. In May 2004, the Board of Directors
resolved that Mr. Giffen is an "audit committee financial expert" as defined in
Item 401(h)(2) of Regulation S-K and Item 16A(b) of Form 20-F promulgated by the
Securities and Exchange Commission and is financially sophisticated for the
purposes of NASDAQ Rule 4350(d)(2).
The Audit Committee met formally seven times during fiscal 2005, all of
which meetings were fully attended by the members of the Audit Committee except
for one meetings that Mr. Albright was unable to attend. In addition, the Audit
Committee met several times informally with two or more committee members
present by telephone or otherwise. Further, on at least a quarterly basis, the
Chair of the Audit Committee met with the Company's CFO and the Company's
auditors.
The following sets out the education and experience of the members of
the Audit Committee, each of whom is financially literate:
JOHN L. ALBRIGHT, B.B.A., CFA - Mr. Albright is a partner and founder
of J.L. Albright Venture Partners, a venture capital firm established in 1996.
As a venture capitalist, Mr. Albright has gained extensive experience assisting
entrepreneurs and managers shape their vision and capital plans into successful
long-term growth programs. Mr. Albright is a Chartered Financial Analyst and
received his Bachelor of Business Administration degree from the Schulich School
of Business at York University. Mr. Albright currently serves as a director on
publicly traded Bioscrypt Inc. (TSX:BYT); Nuvo Network Management Inc. (TSX:
NNM); and FUN Technologies plc (TSX:FUN, AIM:FUN).
JAMES L. BALSILLIE, B. Comm., M.B.A., C.A. - Mr. Balsillie is Chairman
and Co-Chief Executive Officer of Research in Motion Limited ("RIM"), a leading
designer, manufacturer and marketer of innovative wireless solutions for
worldwide mobile communications. Mr. Balsillie joined RIM in 1992 and is
primarily responsible for directing strategy, business development and finance
at the company. Prior to RIM and after completing his M.B.A. at Harvard, Mr.
Balsillie held senior positions with
62
Sutherland-Schultz Limited, Prudential-Bache Securities in New York, and the
Strategy Consulting and Entrepreneurial Services Group of Ernst & Young.
J. IAN GIFFEN, C.A., B.A. - Mr. Giffen is a chartered accountant with
an extensive technology background. Since 1996 he has acted as a senior advisor
and board member to software companies and technology investment funds. From
1992 to 1996, Mr. Giffen was Vice President and Chief Financial Officer at Alias
Research Inc., a developer of 3D software, which was sold to Silicon Graphics
Inc. Mr. Giffen is currently a director of 724 Solutions Inc., Financial Models
Company Inc., Macromedia Inc., MKS Inc., Sierra Systems Group Inc. and Strategic
Vista Inc.
The Audit Committee has adopted specific policies and procedures for
the engagement of non-audit services from our independent auditor. Those
procedures can be accessed at www.descartes.com/investors/governance/resources.
COMPENSATION COMMITTEE
The Compensation Committee is appointed by the Board of Directors to
discharge the Board of Directors' duties and responsibilities relating to the
compensation of our CEO and other members of management, as well as to review
the human resource policies and practices that cover our employees.
On March 2, 2005, the Board of Directors adopted the amended
Compensation Committee Charter setting out the scope of the Compensation
Committee's functions, responsibilities and membership requirements.
As of January 31, 2005, the Compensation Committee was composed of
three outside, unrelated and independent directors: Mr. James Balsillie (Chair),
Mr. John Albright and Dr. Stephen Watt. The Compensation Committee met formally
one time during fiscal 2005, which meeting was fully attended by the members of
the Compensation Committee. In addition, the Compensation Committee met several
times informally with two or more committee members present by telephone or
otherwise, and the Chair of the Compensation Committee met with the CEO of the
Company on several occasions.
On May 24, 2005, the Compensation Committee was reconstituted to be
composed of three outside, unrelated and independent directors: Mr. John
Albright (Chair), Mr. Olivier Sermet and Dr. Stephen Watt.
CORPORATE GOVERNANCE COMMITTEE
The primary function of the Corporate Governance Committee is to assist
the Board of Directors in fulfilling its corporate governance oversight
responsibilities.
On March 2, 2005, the Board of Directors adopted the amended Corporate
Governance Committee Charter setting out the scope of the Corporate Governance
Committee's functions, responsibilities and membership requirements.
The Corporate Governance Committee is currently composed of three
outside, unrelated and independent directors: Dr. Stephen Watt (Chair), Mr. Ian
Giffen, and Mr. Chris Hewat. The Corporate Governance Committee met formally two
times during fiscal 2005, both of which meetings were fully attended by the
members of the Corporate Governance Committee. In addition, the Corporate
Governance Committee met several times informally with two or more committee
members present by telephone or
63
otherwise, and the Chair and other members of the Corporate Governance Committee
met with the General Counsel & Corporate Secretary of the Company on several
occasions.
NOMINATING COMMITTEE
The Nominating Committee was established following the conclusion of
the fiscal year ended January 31, 2005, with its primary responsibility being to
assist the Board of Directors in identifying, recruiting and nominating suitable
candidates to serve on the Board of Directors.
On March 2, 2005, the Board of Directors adopted the Nominating
Committee Charter setting out the scope of the Nominating Committee's functions,
responsibilities and membership requirements.
The Nominating Committee is currently composed of three outside,
unrelated and independent directors: Mr. John Albright (Chair), Mr. Ian Giffen,
and Dr. Stephen Watt. As the committee was established following fiscal 2005,
there were no Nominating Committee meetings during fiscal 2005. Prior to the
Nominating Committee being established, the Corporate Governance Committee and
Board of Directors had the responsibilities now encompassed by the Nominating
Committee Charter.
OPERATIONS COMMITTEE
The Operations Committee was established following the conclusion of
fiscal 2005, with its primary responsibility being to assist the Board of
Directors in its oversight of the Company's operations and to provide counsel to
the CEO and senior management.
The Operations Committee is currently composed of three outside,
unrelated and independent directors: Mr. Olivier Sermet (Chair), Mr. James
Balsillie and Mr. Ian Giffen. As the committee was established following the
January 31, 2005 fiscal year-end, there were no Operations Committee meetings
during the fiscal year.
D. EMPLOYEES
As at January 31, 2005, the Company employed 230 full-time staff. Of
the 230 employees, 74 of the individuals were engaged in customer service roles
(which includes customer support, activations and implementation services), 46
were in research and development roles, 43 were engaged in sales and marketing
roles, 36 under network and product support roles and 31 were in general
administration roles. Geographically, 198 employees were located in North
America, 21 were located in EMEA, and 11 were located in Asia Pacific.
As at January 31, 2004, the Company employed 404 full-time staff. Of
the 404 employees, 74 of the individuals were engaged in customer service roles
(which includes customer support, activations and implementation services), 81
were in research and development roles, 137 were engaged in sales and marketing
roles, 37 under network and product support roles and 71 were in general
administration roles. Geographically, 316 employees were located in North
America, 51 were located in EMEA, and 34 were located in Asia Pacific and 3 were
located in Central America.
As at January 31, 2003, the Company employed 556 full-time staff. Of
the 556 employees, 199 of the individuals were engaged in sales and marketing,
70 were in professional services (which included implementation services), 98
were in research and development and 189 were in administration and
64
finance. Geographically, 440 employees were located in North America, 71 were
located in EMEA, and 44 were located in Asia Pacific and 1 was located in
Central America.
The Company has gone through three significant restructurings from 2003 to 2005.
In 2003, a restructuring was implemented that impacted 120 employees across all
geographic areas, concentrated in finance, customer care, research and
development, and network services functional areas. In 2004, we implemented a
downsizing of our global operations impacting 130 employees. In 2005, we
implemented a cost reduction initiative that impacted an aggregate of 150
employees or approximately 45% of our then-current workforce.
E. SHARE OWNERSHIP
To our knowledge, as of July 1, 2005, our directors and executive
officers as a group beneficially owned, directly or indirectly, or exercised
control or direction over, approximately 133,829 of our common shares,
representing approximately 0.33% of the 40,705,811 common shares then
outstanding. The following table summarizes the share, option and deferred share
unit ownership of the directors and officers of the Company as of July 1, 2005:
Name of Beneficial Owner # of Common % of Voting Power Deferred Share Options to Purchase
Shares Owned, of Issued and Units Common Shares
Controlled or Outstanding Common
Directed Shares (40,705,811)
John L. Albright 52,298 0.1% 0 113,500
James L. Balsillie 55,122 0.1% 0 113,500
J. Ian Giffen - - 3,552 103,500
Chris Hewat 1,000 0.0% 3,552 103,500
Arthur Mesher 17,800 0.0% - 1,194,450
Olivier Sermet - - - 60,000
Dr. Stephen M. Watt - - 6,514 198,296
Chris Jones - - - 200,000
Brandon Nussey 60 0.0% - 347,746
J. Scott Pagan - - - 250,890
Mark Weisberger - - - 400,000
65
The following table details the above-listed option holdings of the directors
and officers of the Company as of July 1, 2005:
Name of Common Shares Under Exercise Price of Expiration Date
Beneficial Owner Option Granted Option to Purchase
Common Shares
John L. Albright 10,000 Cdn. $42.50 July 11, 2007
43,500 Cdn. $5.04 May 27, 2009
45,000 Cdn. $1.35 September 30, 2011
15,000 Cdn. $2.64 May 27, 2012
James L. Balsillie 10,000 Cdn. $42.50 July 11, 2007
43,500 Cdn. $5.04 May 27, 2009
45,000 Cdn. $1.35 September 30, 2011
15,000 Cdn. $2.64 May 27, 2012
J. Ian Giffen 43,500 Cdn. $3.18 March 12, 2011
45,000 Cdn. $1.35 September 30, 2011
15,000 Cdn. $2.64 May 27, 2012
Chris Hewat 10,000 Cdn. $42.50 July 11, 2007
43,500 Cdn. $5.04 May 27, 2009
45,000 Cdn. $1.35 September 30, 2011
15,000 Cdn. $2.64 May 27, 2012
Arthur Mesher 15,000 Cdn. $19.75 March 6, 2008
100,000 Cdn. $3.69 January 7, 2011
400,000 Cdn. $1.35 September 30, 2011
679,450 Cdn. $2.46 March 7, 2012
Olivier Sermet 60,000 Cdn. $2.64 May 27, 2005
Dr. Stephen M. Watt 10,000 Cdn. $8.63 September 5, 2008
43,500 Cdn. $5.04 May 27, 2009
54,796 Cdn. $3.10 April 4, 2011
75,000 Cdn. $1.35 September 30, 2011
15,000 Cdn. $2.64 May 27, 2012
Chris Jones 200,000 Cdn. $2.64 May 27, 2012
Brandon Nussey 5,000 Cdn. $56.80 August 21, 2007
2,500 Cdn. $36.00 December 4, 2007
66
10,000 Cdn. $6.40 October 9, 2008
100,000 Cdn. $3.18 March 12, 2011
125,000 Cdn. $1.35 September 30, 2011
105,246 Cdn. $2.46 March 7, 2012
J. Scott Pagan 5,000 Cdn. $56.80 August 21, 2007
5,000 Cdn. $16.40 April 5, 2008
5,000 Cdn. $6.40 October 9, 2008
5,000 Cdn. $3.24 June 6, 2010
25,000 Cdn. $3.18 March 12, 2011
100,000 Cdn. $1.35 September 30, 2011
105,890 Cdn. $2.46 March 7, 2012
Mark Weisberger 400,000 Cdn. $2.64 May 27, 2012
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
The following table sets out the shareholders who, as of July 1, 2005, to the
knowledge of the directors and executive officers of the Company, beneficially
own, directly or indirectly, or exercise control or direction over, more than
10% of the votes attached to the outstanding common shares:
--------------------------- --------------------- ------------------------
NAME OF SHAREHOLDER APPROXIMATE NUMBER OF % OF TOTAL COMMON SHARES
COMMON SHARES OWNED OUTSTANDING AS AT
JULY 1, 2005
--------------------------- --------------------- ------------------------
PRIMECAP Management Company 5,826,290 14.31%
--------------------------- --------------------- ------------------------
B. RELATED PARTY TRANSACTIONS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Except as otherwise disclosed in this Annual Report, no director, executive
officer, informed person, proposed nominee for election as a director of the
Company or any associate or affiliate of any insider or proposed nominee has or
had a material interest, direct or indirect, in any transaction since the
beginning of the Company's last fiscal year or in any proposed transaction which
has materially affected or would materially affect the Company or any of its
subsidiaries.
INDEBTEDNESS OF DIRECTORS AND SENIOR OFFICERS
67
No director, executive officer or any of their respective associates and no
employee, former executive officer, former director or former employee of the
Company or its subsidiaries is, as at July 1, 2005, or has been, at any time
since the beginning of 2005, indebted, in connection with a purchase of
securities or otherwise, to (i) the Company or its subsidiaries; or (ii) another
entity in respect of which the indebtedness is the subject of a guarantee,
support agreement, letter of credit or other similar arrangement or
understanding provided by the Company or its subsidiaries.
C. INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
ITEM 8. FINANCIAL INFORMATION
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
See Item 18, "Financial Statements".
LITIGATION
See Item 4, "Information on the Company -- Class Action Litigation" and
Item 4, "Information on the Company -- Intellectual Property and Other
Proprietary Rights".
DIVIDEND POLICY
We have not paid any dividends on our common shares to date. We may
consider paying dividends on our common shares in the future when operational
circumstances permit, having regard to, among other things, our earnings, cash
flow and financial requirements as well as relevant legal and business
considerations.
B. SIGNIFICANT CHANGES
Since January 31, 2005, we have had other developments in our business.
In March 2005 we announced that our Customer Global User Group Steering
Committee included representatives from Eastman Kodak, CVS Corporation, The
Schwan Food Company, Ferrellgas Partners, U.B.C.R., Kinetetsu, Integrated
Logistics, Capital Coors, and Ocado Limited. Later in March, we announced the
launch of our new Ocean rate management product, Ocean RateBuilder(TM). We also
announced expanded customER relationships with Exel and Hanjin for Ocean
Contract Management, and Kuehne & Nagel for Global Air Messaging.
In May, we announced that we had earned a Certificate of Finalist
Recognition in the Best Business Turnaround and the Best Turnaround Executive
categories in the 2005 International Business Awards.
Later in May we strengthened our management team by adding two industry
veterans: Chris Jones; and Mark Weisberger. Jones, a former Senior
Vice-President in Aberdeen Group's Value Chain Reserve division, joined us as
Executive Vice-President, Solutions & Markets. Weisberger, an enterprise
software industry veteran with over 20 years experience specializing in field
operations, joined us as Executive Vice-President, Field Operations. In
addition, we announced the departure of Bruce Gordon, former Executive
Vice-President, Operations.
68
At our annual and special meeting of shareholders held on May 18, 2005
in Toronto, our shareholders elected 2 new directors to our existing 5-member
board of directors: Arthur Mesher, our CEO; and Olivier Sermet. Additional
information about Messrs. Mesher and Sermet is included in Item 6 of this Annual
Report.
On May 25, 2005 we announced our financial results for the first
quarter of 2006, which results included the following:
o Record net income of $0.5 million, improved from a loss of $1.0
million in the previous quarter (Q4FY05) and significantly
improved from a loss of $28.9 million in the same quarter a
year-ago (Q1FY05);
o Record earnings per share of $0.01, improved from a loss per share
of $(0.02) in Q4FY05 and $(0.71) in Q1FY05;
o Revenues of $11.3 million, up from $11.0 million in Q4FY05 and
compared to $13.3 million in Q1FY05;
o Gross margin of 57%, improved from 55% in Q4FY05;
o Further reduction in days-sales-outstanding (DSOs) to 52 days,
down from 58 days in Q4FY05 and down from 87 days in Q1FY05; and
o A $4.3 million increase in cash, cash equivalents and marketable
securities since the end of Q4FY05.
In June, we announced an expanded real-time routing and scheduling
relationship with Tomra Recycling, including use of the Nextel Nationwide
Network. We also announced that both Samsung Electronics and Meridian IQ (a
subsidiary of Yellow Freight) were customers of our products and services.
On June 30, 2005 we paid $27.7 million in principal and interest to
satisfy all of our outstanding convertible debentures on their maturity.
ITEM 9. THE OFFER AND LISTING
A. OFFER AND LISTING DETAILS
MARKET INFORMATION
The Company's common shares are listed on the Nasdaq National Market
("Nasdaq") and the Toronto Stock Exchange (the "TSX").
THE ANNUAL HIGH AND LOW MARKET PRICES FOR THE FIVE MOST RECENT FISCAL YEARS
NASDAQ
---------------------
HIGH LOW
----- -----
2005 3.15 0.75
2004 3.65 2.00
2003 6.41 2.04
2002 28.62 3.81
2001 91.61 17.12
69
TSX
---------------------
HIGH LOW
----- -----
CDN. CDN.
2005 $4.25 $3.25
CDN. CDN.
2004 $4.93 $2.83
CDN. CDN.
2003 $10.20 $3.21
CDN. CDN.
2002 $42.75 $6.00
CDN. CDN.
2001 $134.95 $25.55
THE HIGH AND LOW MARKET PRICES FOR EACH FULL FISCAL QUARTER FOR THE TWO
MOST RECENT FISCAL YEARS
NASDAQ
---------------------
HIGH LOW
----- -----
2005
Q4 2.36 1.10
Q3 1.26 0.98
Q2 2.23 0.75
Q1 3.15 2.13
2004
Q4 3.65 2.45
Q3 3.21 2.05
Q2 2.65 2.00
Q1 3.26 2.15
TSX
---------------------
HIGH LOW
----- -----
2005
CDN. CDN.
Q4 $2.10 $1.35
CDN. CDN.
Q3 $1.50 $1.25
CDN. CDN.
Q2 $3.05 $1.26
CDN. CDN.
Q1 $4.25 $2.89
70
2004
CDN. CDN.
Q4 $4.65 $3.31
CDN. CDN.
Q3 $4.20 $2.98
CDN. CDN.
Q2 $3.75 $2.83
CDN. CDN.
Q1 $4.93 $3.20
THE HIGH AND LOW MARKET PRICES FOR EACH MONTH FOR THE MOST RECENT SIX MONTHS
(JANUARY 1, 2005 - JUNE 30, 2005)
NASDAQ
---------------------
HIGH LOW
----- -----
JANUARY 2005 2.00 1.63
FEBRUARY 2005 2.00 1.60
MARCH 2005 2.20 1.70
APRIL 2005 1.86 1.46
MAY 2005 2.25 1.75
JUNE 2005 2.20 1.95
TSX
---------------------
HIGH LOW
----- -----
CDN. CDN.
JANUARY 2005 $2.40 $2.01
CDN. CDN.
FEBRUARY 2005 $2.45 $2.00
CDN. CDN.
MARCH 2005 $2.73 $2.06
CDN. CDN.
APRIL 2005 $2.34 $1.95
CDN. CDN.
MAY 2005 $2.83 $2.20
CDN. CDN.
JUNE 2005 $2.76 $2.45
71
B. PLAN OF DISTRIBUTION
Not applicable.
C. MARKETS
The Company's common shares are listed on the Nasdaq under the symbol "DSGX" and
on the TSX under the symbol "DSG".
D. SELLING SHAREHOLDERS
Not applicable.
E. DILUTION
Not applicable.
F. EXPENSES OF THE ISSUE
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A. SHARE CAPITAL
Not applicable.
B. MEMORANDUM AND ARTICLES OF INCORPORATION
ARTICLES OF INCORPORATION
The Company was amalgamated under the BUSINESS CORPORATIONS ACT
(Ontario) (the "OBCA") on January 26, 1999. The Company's articles are on file
with the Ontario Ministry of Consumer and Commercial Relations under the Ontario
Corporation Number 1336900. The Company's articles of amalgamation do not place
any restrictions on the Company's objects and purposes.
CERTAIN POWERS OF DIRECTORS
The Company's by-laws provide that at all meetings of the board of
directors, every question shall be decided by a majority of the votes cast on
the question. The by-laws also provide for a resolution of the board of
directors in writing, signed by all the directors entitled to vote on that
resolution, being as valid as if it had been passed at a meeting of the
directors.
72
In accordance with the OBCA, a director who is a party to a material
contract or transaction or a proposed material contract or transaction with a
corporation, or who is a director or officer of, or has a material interest in,
any person who is a party to a material contract or transaction or a proposed
material contract or transaction with the Company, shall disclose in writing to
the Company or request to have entered in the minutes of the meetings of
directors the nature and extent of his or her interest. In such circumstances,
such a director shall not vote on any resolution to approve the material
contract or transaction or proposed material contract or transaction unless the
contract or transaction is: (a) an arrangement by way of security for money lent
to, or obligations undertaken by the director for the benefit of the Company or
an affiliate; (b) one relating primarily to his or her remuneration as a
director, officer, employee or agent of the Company or an affiliate; (c) one for
indemnity of, or insurance for directors, as contemplated under the OBCA; or (d)
one with an affiliate.
In accordance with the OBCA, the directors of the Company may fix the
remuneration of the directors, officers and employees of the Company. Where a
material contract or a material transaction (including a contract involving
director remuneration) is entered into between the Company and a director or
officer, or between the Company and another person of which a director or
officer of the Company is a director or officer or in which he or she has a
material interest, the director or officer is not accountable to the Company or
its shareholders for any profit or gain realized from the contract or
transaction and the contract or transaction is neither void nor voidable, by
reason only of the relationship or by reason only that the director is present
at or is counted to determine the presence of a quorum at a meeting of directors
that authorized the contract or transaction, if the director or officer
disclosed his or her interest in accordance with the OBCA and the contract or
transaction was reasonable and fair to the Company at the time it was so
approved.
The by-laws provide that the directors may from time to time on behalf
of the Company: (a) borrow money upon the credit of the Company; (b) issue,
reissue, sell or pledge bonds, debentures, notes or other similar obligations or
guarantees of the Company, whether secured or unsecured; (c) to the extent
permitted under the OBCA, give a guarantee on behalf of the Company to secure
performance of an obligation of any person; and (d) mortgage, hypothecate,
charge, pledge or otherwise create a security interest in all or any property of
the Company, owned or subsequently acquired, to secure any obligations of the
Company. The board may, by resolution, delegate to a committee of the board or a
director or officer of the Company all or any of the above-mentioned borrowing
powers conferred on them by the by-laws, to such extent and in such manner as
the board by resolution determines.
ELIGIBILITY TO SERVE AS A DIRECTOR
Our by-laws require that any person may be a director of the Company,
provided that person is not disqualified by the OBCA. Under the OBCA, the
following persons are disqualified from being a director of the Company: (i) a
person who is less than eighteen years of age; (ii) a person who is of unsound
mind and has been so found by a court in Canada or elsewhere; (iii) a person who
is not an individual; and (iv) a person who has the status of bankrupt. The
by-laws and the OBCA also require that a majority of the directors of the
Company be resident Canadians. There is no provision in the articles of
amalgamation or the by-laws imposing a requirement for retirement or
non-retirement of directors under an age limit requirement.
The OBCA provides that unless the articles of a corporation otherwise
provide, a director of a corporation is not required to hold shares issued by
the corporation. There is no provision in the articles of amalgamation or the
by-laws imposing a requirement that a director hold any shares issued by the
73
Company in order to be qualified to act as a director. However, the Board of
Directors has approved, effective June 28, 2004, an Equity Ownership Policy for
outside directors. Under this policy, outside directors are required to acquire
and hold an aggregate number of common shares and DSUs equal to the equivalent
of 2.5 times the annual base retainer in effect as at June 28, 2004 (which is
$15,000), within a period of five years after the earlier of the date of
adoption of the Equity Ownership Policy and the date the individual becomes a
director. Until such time as an outside director attains the minimum equity
ownership prescribed under the Equity Ownership Policy, the director will be
required to receive at least one-half of his annual base retainer in DSUs.
SHAREHOLDER RIGHTS AND LIMITATIONS
The Company is authorized to issue an unlimited number of common
shares. The rights, privileges, restrictions and conditions attaching to the
common shares include payment of dividends, participation upon liquidation,
dissolution or winding-up and voting rights.
The holders of the common shares are entitled to receive dividends, if,
as and when declared by the Board of Directors of the Company out of the assets
of the Company properly applicable to the payment of dividends in such amounts
and payable in such manner as the Board of Directors may from time to time
determine. Subject to the rights of the holders of any other class of shares of
the Company entitled to receive dividends in priority to or ratably with the
holders of common shares, the Board of Directors may in their sole discretion
declare dividends on the common shares to the exclusion of any other class of
shares in the Company.
In the event of the liquidation, dissolution or winding up of the
Company or other distribution of assets of the Company among its shareholders
for the purpose of winding up its affairs, the holders of the common shares
shall, subject to the rights of holders of any other class of shares of the
Company entitled to receive the assets of the Company upon such a distribution
in priority to or ratably with the holders of the common shares, be entitled to
participate ratably in any distribution of the assets of the Company.
The holders of the common shares shall be entitled to receive notice of
and to attend all annual and special meetings of the shareholders of the Company
and to one vote in respect of each common share held at all such meetings.
ACTION NECESSARY TO CHANGE RIGHTS OF SHAREHOLDERS
Pursuant to the requirements of the OBCA, the articles are required to
be amended in order to add to, change or remove any of the rights, privileges,
restrictions or conditions of any of the Company's shares. Such an amendment
would require approval by special resolution, which is a resolution that is
submitted to a special meeting of shareholders of the Company duly called for
the purpose of considering the resolution and passed by at least two-thirds of
the votes cast, or consented to in writing by each shareholder entitled to vote
at such a meeting.
MEETINGS OF SHAREHOLDERS
An annual meeting of shareholders is held each year for the purpose of
considering the Company's financial statements and auditor's report, electing
directors, appointing auditors and for the transaction of other business as may
be brought before the meeting. The Board of Directors has the power to call a
special meeting of the shareholders at any time. In addition, in accordance with
the OBCA, the holders of not less than 5% of the Company's shares carrying the
right to vote at a meeting
74
sought to be held may requisition our directors to call a special shareholders'
meeting for the purposes stated in the requisition. The Company's by-laws
provide that a quorum for a meeting of the Company's shareholders is two
shareholders, in person or by proxy, holding shares of the Company entitled to
vote at the meeting.
The OBCA requires the Company to call an annual shareholders' meeting
not later than 15 months after holding the last preceding annual meeting. The
Company is required to mail a notice of meeting and management information
circular not less than 21 days and not more than 50 days prior to the date of
any annual or special shareholders' meeting to each director, to the auditor of
the Company and to each shareholder entitled to vote at the meeting. Notice of a
meeting of shareholders called for any purpose other than consideration of the
minutes of an earlier meeting, the financial statements and auditor's report,
election of directors and reappointment of the incumbent auditor, must state the
nature of the business to be transacted in sufficient detail to permit the
shareholder to form a reasoned judgment thereon and must state or be accompanied
by the text of any special resolution or by-law to be submitted to the meeting.
These materials are also filed with Canadian securities regulatory authorities
and the SEC.
The only persons entitled to be present at a meeting of shareholders
are those entitled to vote, the directors of the Company and the auditor of the
Company. Any other person may be admitted only on the invitation of the chairman
of the meeting or with the consent of the meeting. If a corporation is
winding-up, the OBCA permits a liquidator appointed by the shareholders, during
the continuance of a voluntary winding-up, to call meetings of the shareholders
of the corporation for any purpose the liquidator thinks fit. In circumstances
where a court orders a meeting of shareholders, the court may direct how the
meeting may be held.
LIMITATION ON RIGHT TO OWN SECURITIES
There are no limitations on the rights to own common shares of the
Company, including the rights of non-resident or foreign shareholders to hold or
exercise voting rights on the common shares, imposed by the laws of Canada or
the laws of the Province of Ontario or by the articles or by-laws of the Company
except as follows:
(a) foreign investors who acquire control of the Company must comply
with the Investment Canada Act; and
(b) the majority of directors of the Company must be resident
Canadians, as defined in the OBCA.
CHANGE IN CONTROL PROVISIONS
The Company and Computershare Trust Company of Canada entered into an
agreement dated as of November 29, 2004 to implement the Rights Plan. The Rights
Plan creates a right (which may only be exercised if a person acquires control
of 20% or more of the Company's common shares) for each shareholder, other than
the person that acquires 20% or more of the common shares, to acquire additional
common shares at one-half of the market price at the time of exercise. This
significantly dilutes the share position of the person that acquires 20% or more
of the common shares and practically prevents that person from acquiring control
of 20% or greater of the Company's common shares unless the Rights Plan has been
withdrawn or the buyer makes a Permitted Bid, as that term is defined in the
Rights Plan. The most common approaches that a buyer may take to have a rights
plan withdrawn are to negotiate with the
75
Board of Directors to have the rights plan waived, or to apply to a securities
commission to order withdrawal of the rights plan if the Company cannot develop
an auction. Both of these approaches will give the Board of Directors more time
and control over any sale process and increase the likelihood of a better offer
to the Company's shareholders. The primary objectives of the Rights Plan are to
ensure that, in the context of a bid for control of the Company through an
acquisition of the Company's common shares, the Board of Directors has
sufficient time to explore and develop alternatives for maximizing shareholder
value, to provide adequate time for competing bids to emerge, to ensure that
shareholders have an equal opportunity to participate in such a bid and to give
them adequate time to properly assess the bid and lessen the pressure to tender
typically encountered by a security holder of an issuer that is subject to a
bid.
DISCLOSURE OF SHAREHOLDER OWNERSHIP
Neither the Company's articles of amalgamation nor by-laws contain
provisions governing the ownership threshold above which shareholder ownership
must be disclosed. However, the SECURITIES ACT (Ontario) provides that a person
or company who beneficially owns, directly or indirectly, voting securities of
an issuer or who exercises control or direction over voting securities of an
issuer or a combination of both, carrying more than 10% of the voting rights
attached to all the issuer's outstanding voting securities (an "insider") must,
within 10 days of becoming an insider, file a report in the required form
effective the date on which the person became an insider, disclosing any direct
or indirect beneficial ownership of, or control or direction over, securities of
the reporting issuer. In addition, if the Company's directors or executive
officers have knowledge that any person or company beneficially owns, directly
or indirectly, or controls or directs, voting securities carrying 10 percent or
more of the voting rights attached to any class of voting securities of the
Company, the Company is required, in its management information circular, to
name each such person or company and state the approximate number of voting
securities and the corresponding percentage of the class of outstanding voting
securities so owned.
C. MATERIAL CONTRACTS
On November 30, 2004, we announced that our Board of Directors had adopted the
Rights Plan to ensure the fair treatment of shareholders in connection with any
take-over offer, and to provide the Board of Directors and shareholders with
additional time to fully consider any unsolicited take-over bid. In connection
with the adoption of the Rights Plan, the Company entered a Shareholder Rights
Plan Agreement with Computershare Trust Company of Canada dated November 29,
2004. The Company did not adopt the Rights Plan in response to any specific
proposal to acquire control of the Company. The Rights Plan was approved by the
Toronto Stock Exchange and approved by our shareholders on May 18, 2005. The
Rights Plan took effect as of November 29, 2004, and has an initial term of
three years. The Rights Plan is similar to plans adopted by other Canadian
companies and approved by their shareholders.
D. EXCHANGE CONTROLS
The INVESTMENT CANADA ACT generally prohibits implementation of a
reviewable investment by an individual, government or agency thereof,
corporation, partnership, trust or joint venture that is not a "Canadian" as
defined in the INVESTMENT CANADA ACT (a "non-Canadian"), unless after review,
the minister responsible for the INVESTMENT CANADA ACT is satisfied that the
investment is likely to be of net benefit to Canada. An investment in common
shares of the Company by a non-Canadian (other than a "WTO Investor" as defined
in the INVESTMENT CANADA ACT) would be reviewable under the INVESTMENT CANADA
76
ACT if it was a direct investment to acquire control of the Company and the
value of the assets of the Company was $5,000,000 or more.
An investment in Common Shares of the Company by a WTO Investor,
assuming the Company is not involved in a "cultural business", "financial
service" business or "transportation service" business, each as defined in the
INVESTMENT CANADA ACT, would be reviewable under the INVESTMENT CANADA ACT if it
was a direct investment to acquire control of the Company and the value of the
assets of the Company equals or exceeds a specified amount (the "Review
Threshold"), which is adjusted for inflation annually, The Review Threshold is
$237 million for investments completed in 2004 and $250 million for investments
completed in 2005 and is indexed as of the first of January every year.
A non-Canadian, whether a WTO Investor or otherwise, would acquire
control of the Company for the purposes of the INVESTMENT CANADA ACT if it
acquired a majority of the common shares of the Company. The acquisition of less
than a majority but one-third or more of the common shares of the Company would
be presumed to be an acquisition of control of the Company for the purposes of
the INVESTMENT CANADA ACT unless it could be established the Company was not
controlled in fact by the acquirer through the ownership of common shares.
Certain transactions in relation to the common shares would be exempt
from the INVESTMENT CANADA ACT, including:
o an acquisition of common shares by a person in the ordinary course
of that person's business as a trader or dealer in securities;
o an acquisition of control of the Company in connection with the
realization of security granted for a loan or other financial
assistance and not for any purpose related to the provisions of
the Investment Canada Act; and
o an acquisition of control of the Company by reason of an
amalgamation, merger, consolidation or corporate reorganization
following which the ultimate direct or indirect control in fact of
the Company, through the ownership of voting interests, remains
unchanged.
E. TAXATION
CERTAIN CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain material Canadian federal income
tax considerations under the Tax Act generally applicable to a holder of common
shares of the Company or rights issued under the Rights Plan ("Rights") who at
all times: (i) for purposes of the Tax Act, is not and is not deemed to be
resident in Canada, deals at arm's length with and is not affiliated with the
Company, holds the common shares and Rights as capital property, does not use or
hold and is not deemed to use or hold common shares or Rights in the course of
carrying on a business in Canada, and (ii) for purposes of the Canada-United
States Income Tax Convention (1980), as amended (the "Convention"), is a
resident of the U.S. and not a resident of Canada and does not hold and has not
held common shares or Rights as part of the business property of a permanent
establishment in Canada or in connection with a fixed base in Canada
(hereinafter, a "U.S. Holder"). Special rules which are not discussed in this
summary may apply to a
77
holder that is an insurer for whom common shares or Rights are "designated
insurance property" under the Tax Act.
This summary is based upon the current provisions of the Tax Act, the
regulations thereunder, the Convention, all proposed amendments to the Tax Act,
the regulations thereunder and the Convention publicly announced by the
Department of Finance, Canada prior to the date hereof, and the administrative
policies and assessing practices of the Canada Revenue Agency made publicly
available prior to the date hereof. Except for the foregoing, this summary does
not take into account or anticipate any changes in the law or the Convention or
the administrative policies or assessing practices of the Canada Revenue Agency
whether by legislative, governmental or judicial action or decision. This
summary does not take into account provincial, territorial or foreign tax
legislation or considerations, which may differ significantly from the Canadian
federal income tax considerations described herein.
Amounts in respect of common shares paid or credited or deemed to be
paid or credited as, on account or in lieu of payment of, or in satisfaction of,
dividends to a U.S. Holder will generally be subject to Canadian non-resident
withholding tax. Under the Tax Act, such withholding tax is levied at a rate of
25%, which may be reduced pursuant to the terms of the Convention. Under the
Convention, the rate of Canadian non-resident withholding tax on the gross
amount of dividends beneficially owned by a U.S. Holder is generally 15%.
However, where such beneficial owner is a company which owns at least 10% of the
voting stock of the Company, the rate of such withholding is 5%.
A U.S. Holder will not be subject to tax under the Tax Act in respect
of any disposition of common shares or Rights (other than a disposition to the
Company) unless at the time of such disposition such common shares or Rights
constitute "taxable Canadian property" of the holder for purposes of the Tax
Act. If the common shares are listed on a prescribed stock exchange for the
purposes of the Tax Act (which currently includes the TSX and NASDAQ) at the
time of disposition, neither the common shares nor the Rights will generally
constitute "taxable Canadian property" of the U.S. Holder at the time of such
disposition unless at any time during the 60-month period immediately preceding
the disposition, 25% or more of the issued shares of any class or series of the
Company was owned by the U.S. Holder, by persons with whom the U.S. Holder did
not deal at arm's length or by the U.S. Holder and persons with whom the U.S.
Holder did not deal at arm's length. The common shares or Rights may be taxable
Canadian property in certain other circumstances. Under the Convention, gains
derived by a U.S. Holder from the disposition of common shares or Rights that
constitute "taxable Canadian property" will generally not be taxable in Canada
unless the value of the common shares is derived principally from real property
situated in Canada. If the common shares are listed on a prescribed stock
exchange for the purposes of the Tax Act at the time of disposition by a U.S.
Holder, the U.S. Holder will not be required to comply with the provisions of
Section 116 of the Tax Act in connection with the disposition, which requires a
certificate to be obtained from the Canada Revenue Agency when certain property
is disposed of.
The foregoing summary of certain material Canadian federal income tax
considerations is of a general nature only and is not intended to be, nor should
it be construed to be, legal or tax advice to any particular holder of common
shares or Rights. Holders should consult their own tax advisors with respect to
their particular circumstances, including in respect of any exercise of Rights.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
78
The following discussion is a summary of the principal United States
federal income tax consequences of the ownership and disposition of the
Company's common shares by "U.S. Holders" as defined below. The summary is for
general information purposes only and does not purport to be complete. It does
not address all of the United States federal income tax considerations that may
be relevant to U.S. Holders, including considerations that may be relevant to
shareholders subject to special rules, such as persons who own or have owned
(directly or by attribution) more than 10% of the Company's common shares, U.S.
Holders carrying on a business in Canada, financial institutions, regulated
investment companies, tax-exempt organizations, dual residents, insurance
companies, dealers in securities, traders who mark to market, shareholders who
hold common shares as part of a straddle, hedge, or conversion transaction,
shareholders who acquired their common shares pursuant to the exercise of
employee stock options or otherwise as compensation, shareholders who are
subject to an alternative minimum tax, and shareholders not holding their
Company common shares as a capital asset. The discussion also does not address
any non-income tax consequences or any state or local tax consequences.
The summary below is based on the current provisions of the United
States Internal Revenue Code of 1986, as amended (the "Code"), the Tax Act and
the Convention, currently applicable United States Treasury Regulations, and
administrative and judicial rulings and decisions. All of those authorities are
subject to change, possibly with retroactive effect. The Company has not
obtained any rulings from the Internal Revenue Service or Revenue Canada, or any
opinion of counsel, with respect to the tax consequences discussed below. Either
the Internal Revenue Service or Revenue Canada (or both) could challenge one or
more of the statements made or the conclusions expressed below. THE COMPANY
URGES HOLDERS AND PROSPECTIVE HOLDERS OF COMMON SHARES TO CONSULT THEIR OWN TAX
ADVISORS TO DETERMINE THE UNITED STATES INCOME TAX AND ANY OTHER TAX
CONSEQUENCES TO THEM OF THE OWNERSHIP AND DISPOSITION OF THE COMPANY'S COMMON
SHARES.
For purposes of this discussion, a "U.S. Holder" is a holder of Company
common shares:
o who is a citizen or resident of the United States, as determined
for U.S. federal income tax purposes, who is a resident of the
United States for purposes of the Convention and is otherwise
entitled to benefits under the Convention;
o that is an entity treated as a domestic corporation or a domestic
partnership for U.S. federal income tax purposes that is a
resident of the United States for purposes of the Convention and
is otherwise entitled to benefits under the Convention;
o that is an estate the income of which is includable in gross
income for U.S. federal income tax purposes regardless of its
source, that is a resident of the United States for purposes of
the Convention and is otherwise entitled to benefits under the
Convention; or
o that is a trust if (i) a court within the United States is able
to exercise primary supervision over the administration of the
trust and one or more United States persons (within the meaning
of the Code) has the authority to control all substantial
decisions of the trust, (ii) the trust is a resident of the
United States for purposes of the Convention and (iii) the trust
is otherwise entitled to benefits under the Convention.
POSSIBLE PASSIVE FOREIGN INVESTMENT COMPANY STATUS
79
A non-U.S. corporation is classified as a "passive foreign investment
company" or "PFIC" in any taxable year in which, after taking account of the
income and assets of certain subsidiaries pursuant to applicable look-through
rules, at least 75% of its gross income is passive income, or at least 50% of
the average value of its assets is attributable to assets that produce passive
income. The Company does not believe that it is or anticipate that it will
become a PFIC , and the discussion under the headings below assumes that the
Company will not be a PFIC. If, however, the Company were a PFIC during any year
in which a U.S. Person owned common shares, that shareholder would be subject to
additional taxes and interest charges on "excess distributions" from the Company
and on any gain from the sale or disposition of common shares.
The Code permits shareholders of certain PFICs to make one of two
different elections to mitigate the effect of the PFIC rules. A "qualified
electing fund" or "QEF" election will not be available to holders of the
Company's common shares because the Company does not intend to furnish to
shareholders the information required by the Internal Revenue Service in order
to make such an election. A "mark-to-market" election is available to
shareholders who own stock in a PFIC that is considered "marketable" stock as
defined in Section 1296 of the Code. So long as the Company's common shares are
traded on the NASDAQ National Market, the shares will be considered "marketable"
for purposes of Section 1296.
A shareholder making a "mark-to-market" election with respect to
Company common shares would be required to take into account as ordinary income
for each taxable year the excess of the fair market value of the common shares
over the shareholder's adjusted basis in the common shares. The shareholder
would also be permitted a deduction if the fair market value of the common
shares at the end of a year was less than the shareholder's adjusted basis, but
such deductions would be allowed only to the extent of the unreversed
mark-to-market inclusions from prior years. Any gain on the sale of Company
common shares would also be treated as ordinary income.
DISTRIBUTIONS ON COMMON SHARES OF THE COMPANY
Distributions on the Company's common shares will be treated as
dividends, taxable to U.S. Holders as ordinary income, to the extent of the
Company's current or accumulated earnings and profits. Any distributions in
excess of current and accumulated earnings and profits will be treated as a
return of capital to the extent of the shareholder's adjusted tax basis in the
shares, with the remainder treated as a gain from disposition of the shares (see
"Disposition of Common Shares of the Company," below). Dividends will be
eligible to be treated as "qualified dividend income" (which is taxed at
preferential rates for non-corporate shareholders) subject to generally
applicable holding period and other limitations. Dividends generally will not be
eligible for the dividends-received deduction for corporations.
FOREIGN TAX CREDIT/DEDUCTION
A U.S. Holder who pays Canadian income tax with respect to
distributions on common shares (including tax that is withheld from such
distributions) is generally entitled to a deduction or, at the option of the
U.S. Holder, a credit against the U.S. Holder's federal income tax liability for
such Canadian tax. The election is made on an annual basis and applies to all
foreign taxes paid by the U.S. Holder. Foreign tax credits are subject to
significant and complex limitations, including the requirement that the U.S.
Holder hold its common shares for the requisite holding period and a limitation
based on the amounts of foreign-source and U.S.-source income earned by the U.S.
Holder. Each holder or prospective holder of
80
common shares should consult his or her own tax advisor as to the availability
and limitations upon foreign tax credits in the holder's particular tax
situation.
DISPOSITION OF COMMON SHARES OF THE COMPANY
Upon the sale, exchange or other disposition of common shares of the
Company, a U.S. Holder generally will recognize gain or loss in an amount equal
to the difference between the amount realized on such sale, exchange or other
disposition and the holder's adjusted tax basis in the shares disposed of. The
gain or loss will be a capital gain or loss if the shares were held as a capital
asset; it will be a long-term capital gain or loss if the holder has held the
shares for more than one year at the time of the disposition, and otherwise will
be a short-term capital gain or loss. Long-term capital gains are subject to tax
at preferential rates for non-corporate shareholders. Capital losses are
deductible only to the extent of a U.S. Holder's capital gains (except for
individual U.S. Holders, who may deduct $3,000 of capital losses per year
against ordinary income). Losses in excess of the deductible amount may be
carried back three years and forward five years for corporate shareholders, and
may be carried forward indefinitely for non-corporate shareholders.
F. DIVIDENDS AND PAYING AGENTS
Not applicable.
G. STATEMENT BY EXPERTS
Not applicable.
H. DOCUMENTS ON DISPLAY
Any statement in this Annual Report about any of our contracts or other
documents is not necessarily complete. If the contract or document is filed as
an exhibit to this Annual Report or is incorporated by reference, the contract
or document is deemed to modify our description. You must review the exhibits
themselves for a complete description of the contract or document.
You may review a copy of our filings with the SEC, including exhibits
and schedules filed with this Annual Report, at the SEC's public reference
facilities in Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549. You may also obtain copies of such materials from the Public
Reference Section of the SEC, Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. You may call the SEC at
1-800-SEC-0330 for further information on the public reference rooms. The SEC
maintains a web-site (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the SEC. We began to file electronically with the SEC in
November 2000.
You may read and copy any reports, statements or other information that
we file with the SEC at the addresses indicated above and you may also access
some of them electronically at the web-site set forth above. These SEC filings
are also available to the public from commercial document retrieval services.
We also file reports, statements and other information with the
Canadian Securities Administrators, or the CSA, and these can be accessed
electronically at the CSA's System for Electronic Document Analysis and
Retrieval web-site (http://www.sedar.com).
81
I. SUBSIDIARY INFORMATION
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
Market risk represents the risk of loss that may impact our financial position
due to adverse changes in financial market prices and rates. Our market risk
exposure is primarily a result of fluctuations in interest rates, foreign
currency exchange rates, and the creditworthiness of issuer of the instrument.
We do not use any type of speculative financial instruments, including but not
limited to foreign exchange contracts, futures, swaps and option agreements, to
manage our foreign exchange or interest rate risks. We do not hold or issue
financial instruments for trading purposes.
Further discussion of our investment and foreign exchange policies can be found
in Notes 2 and 3 to the 2005 Consolidated Financial Statements.
FOREIGN CURRENCY RISK
As we operate internationally, a substantial portion of our business is also
conducted in foreign currencies other than the U.S. dollar. Accordingly, our
results are affected, and may be affected in the future, by exchange rate
fluctuations of the U.S. dollar relative to the Canadian dollar, to various
European currencies, and, to a lesser extent, other foreign currencies. Revenues
and expenses generated in foreign currencies are translated at exchange rates
during the month in which the transaction occurs. We cannot predict the effect
of foreign exchange losses in the future; however, if significant foreign
exchange losses are experienced, they could have a material adverse effect on
our business, results of operations, and financial condition.
INTEREST RATE RISK
Our exposure to market rate risk for changes in interest rates relates primarily
to our investment portfolio. The investment of cash is regulated by our
investment policy of which the primary objective is security of principal. Among
other selection criteria, the investment policy states that the term to maturity
of investments cannot exceed three years in length. We do not use derivative
financial instruments in our investment portfolio.
Interest income on our cash, cash equivalents, and short-term investments is
subject to interest rate fluctuations, but we believe that the impact of these
fluctuations does not have a material effect on our financial position due to
the short-term nature of these financial instruments. We have no long-term debt.
Our interest income and interest expense are most sensitive to the general level
of interest rates in Canada and the U.S. Sensitivity analysis is used to measure
our interest rate risk. For the fiscal year ending January 31, 2005, a 100
basis-point adverse change in interest rates would not have had a material
effect on our consolidated financial position, earnings, or cash flows.
CREDIT RISK
We are exposed to credit risk through investments in marketable securities and
accounts receivable. We hold our investments with reputable financial
institutions and in highly liquid and high quality investment-grade financial
instruments. The lack of concentration of accounts receivable from a single
customer and the dispersion of customers among industries and geographical
locations mitigate this risk.
82
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
On November 30, 2004, we announced that our Board of Directors had adopted a
Rights Plan to ensure the fair treatment of shareholders in connection with any
take-over offer, and to provide the Board of Directors and shareholders with
additional time to fully consider any unsolicited take-over bid. In connection
with the adoption of the Rights Plan, the Company entered a Shareholder Rights
Plan Agreement with Computershare Trust Company of Canada dated November 29,
2004. The Company did not adopt the Rights Plan in response to any specific
proposal to acquire control of the Company. The Rights Plan was approved by the
Toronto Stock Exchange and approved by our shareholders on May 18, 2005. The
Rights Plan took effect as of November 29, 2004, and has an initial term of
three years. The Rights Plan is similar to plans adopted by other Canadian
companies and approved by their shareholders.
USE OF PROCEEDS
Not applicable.
ITEM 15. CONTROLS AND PROCEDURES
(A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.
Under the supervision and with the participation of our management,
including the Chief Executive Officer and Chief Financial Officer, we have
evaluated the disclosure controls and procedures as of the end of the period
covered by this Annual Report. Based on this evaluation, the Chief Executive
Officer and Chief Financial Officer conclude that the disclosure controls and
procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934) effectively ensure that information required to be
disclosed in our filings and submissions under the Exchange Act is accumulated
and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosure, and is recorded, processed, summarized, and reported within
the time periods specified in the Securities and Exchange Commission's rules and
forms.
(B) CHANGES IN INTERNAL CONTROLS
There have been no changes in the Company's internal control over
financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during
our most recently completed fiscal quarter that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
LIMITATIONS ON CONTROLS
83
Management does not expect that our disclosure controls and procedures
or our internal control over financial reporting will prevent or detect all
error and fraud. Any control system, no matter how well designed and operated,
is based upon certain assumptions and can provide only reasonable, not absolute,
assurance that its objectives will be met. Further, no evaluation of controls
can provide absolute assurance that misstatements due to error or fraud will not
occur or that all control issues and instances of fraud, if any, within the
Company have been detected.
ITEM 16. [RESERVED]
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
The Board of Directors has considered the extensive financial
experience of Mr. J. Ian Giffen and has determined that he is an audit committee
financial expert within the meaning of the U.S. Sarbanes-Oxley Act of 2002.
The Board of Directors also determined that Mr. Giffen is an
independent director, as that term is defined in the NASDAQ listing standards.
ITEM 16B. CODE OF ETHICS
The Company has adopted a Code of Business Conduct and Ethics (the "Code of
Ethics") that applies to the Company's principal executive officers, principal
financial officer, principal accounting officer or controller, or persons
performing similar functions.
A copy of the Code of Ethics is posted on the Company's corporate website at
www.descartes.com.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
The aggregate fees billed in respect of the fiscal years ending January 31, 2005
and January 31, 2004 for professional services rendered by Deloitte & Touche LLP
("D&T"), the Company's principal accountant, are as follows:
-------------------- --------------------- ---------------------
Fiscal Year Ended Fiscal Year Ended
January 31, 2005 January 31, 2004
-------------------- --------------------- ---------------------
Audit Fees $464,500 $532,000
-------------------- --------------------- ---------------------
Audit-Related Fees $16,700 $66,000
-------------------- --------------------- ---------------------
Tax Fees $326,700 $411,000
-------------------- --------------------- ---------------------
All Other Fees $0 $0
-------------------- --------------------- ---------------------
TOTAL $807,900 $1,009,000
==================== ===================== =====================
AUDIT FEES
84
Audit fees consist of fees for professional services rendered for the audit of
the Registrant's annual financial statements and services provided in connection
with statutory and regulatory filings or engagements including fees for
statutory audit of the Company's foreign subsidiaries.
AUDIT RELATED FEES
Audit-related fees consist of fees for assurance and related services that are
reasonably related to the performance of the audit or review of the Registrant's
financial statements and are not reported as "Audit Fees". These services
included research of accounting and audit-related issues and assurance services
related to the Company's share and debenture buy-back.
TAX FEES
Tax fees consist of fees for professional services rendered for tax compliance,
tax advice and tax planning. These services included the preparation of tax
returns and assistance and advisory services regarding income, capital and
indirect tax compliance matters.
PRE-APPROVAL POLICIES AND PROCEDURES
The Company's audit committee is responsible for overseeing the work of the
independent auditors and has adopted the following policy requiring its
pre-approval of all audit and permissible non-audit services provided by the
independent auditors.
The policy provides that an annual program of work will be approved each year
for the following categories of services: audit, audit-related, and tax. Each
engagement or category of service will be presented in appropriate detail by
business function and geographic area to provide the audit committee sufficient
understanding of the services provided. Under the policy, additional engagements
may be brought forward from time to time for pre-approval by the audit
committee.
The audit committee will consider whether any service to be obtained from the
independent auditors is consistent with applicable rules on auditor
independence. Also, the audit committee will consider the level of audit and
audit-related fees in relation to all other fees paid to the independent
auditors, and will review such level each year. In carrying out this
responsibility, the audit committee may obtain input from Company management on
the general level of fees, and the process for determining and reporting fees
from the numerous locations where the Company operates and the independent
auditors provide services.
The term of any pre-approval applies to the Company's financial year. Thus,
audit fees for the financial year may include work performed after the close of
the calendar year. The pre-approval for audit-related and tax fees is on a
calendar-year basis. Unused pre-approval amounts will not be carried forward to
the next financial year. Pre-approvals will apply to engagements within a
category of service, and cannot be transferred between categories. If fees might
otherwise exceed pre-approved amounts for any category of permissible services,
then time will be scheduled so that incremental amounts can be reviewed and
pre-approved prior to commitment.
The policy permits the audit committee to delegate pre-approval authority to one
or more of its members. The member or members to whom such authority is
delegated shall report any pre-approval decisions to the audit committee at its
next scheduled meeting. However, the policy does not allow the audit committee
to delegate to management the audit committee's responsibilities to pre-approve
services performed by the independent auditor.
85
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
None.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS
Not applicable.
PART III
ITEM 17. FINANCIAL STATEMENTS
Not applicable.
ITEM 18. FINANCIAL STATEMENTS
The following financial statements have been filed as part of this
Annual Report:
Report of Independent Registered Chartered Accountants F-1
Consolidated Balance Sheets as of January 31, 2005 and January 31, 2004 F-2
Consolidated Statements of Operations for the years ended January 31, 2003, 2004 and 2005 F-4
Consolidated Statements of Shareholders' Equity for the years ended January 31, 2003, 2004 and 2005 F-5
Consolidated Statements of Cash Flows for the years ended January 31, 2003, 2004 and 2005 F-6
Notes to Consolidated Financial Statements F-8
ITEM 19. EXHIBITS
The following exhibits have been filed as part of this Annual Report:
EXHIBIT
NUMBER DESCRIPTION INCORPORATED BY REFERENCE FILED HEREWITH
------ ----------- ------------------------- --------------
1.1 ARTICLES OF AMALGAMATION OF THE COMPANY FORM 8-12G, SEC FILE NO.
000-29970, DATED 11/30/04
1.2 BY-LAWS OF THE COMPANY FORM 8-12G, SEC FILE NO.
000-29970, DATED 11/30/04
1.3 SHAREHOLDER RIGHTS PLAN AGREEMENT, DATED AS OF NOVEMBER 29, FORM 8-A, SEC FILE NO.
2004, BY AND BETWEEN THE DESCARTES SYSTEMS GROUP INC. AND 000-29970, DATED 11/30/04
COMPUTERSHARE TRUST COMPANY OF CANADA
86
4.1 EMPLOYMENT AGREEMENT BY AND BETWEEN THE COMPANY AND ARTHUR
MESHER, DATED AS OF MAY 17, 2005 *
4.2 EMPLOYMENT AGREEMENT BY AND BETWEEN THE COMPANY AND BRANDON
NUSSEY, DATED AS OF MAY 17, 2005 *
4.3 EMPLOYMENT AGREEMENT BY AND BETWEEN THE COMPANY AND J.
SCOTT PAGAN, DATED AS OF MAY 17, 2005 *
4.4 OPTION AGREEMENT BY AND BETWEEN THE COMPANY AND ARTHUR
MESHER, DATED AS OF MARCH 6, 2001 *
4.5 OPTION AGREEMENT BY AND BETWEEN THE COMPANY AND ARTHUR
MESHER, DATED AS OF DECEMBER 23, 2003 *
4.6 OPTION AGREEMENT BY AND BETWEEN THE COMPANY AND ARTHUR
MESHER, DATED AS OF SEPTEMBER 30, 2004 *
4.7 OPTION AGREEMENT BY AND BETWEEN THE COMPANY AND ARTHUR
MESHER, DATED AS OF MARCH 7, 2005 *
4.8 OPTION AGREEMENT BY AND BETWEEN THE COMPANY AND BRANDON
NUSSEY, DATED AS OF MARCH 12, 2004 *
4.9 OPTION AGREEMENT BY AND BETWEEN THE COMPANY AND BRANDON
NUSSEY, DATED AS OF SEPTEMBER 30, 2004 *
4.10 OPTION AGREEMENT BY AND BETWEEN THE COMPANY AND BRANDON
NUSSEY, DATED AS OF MARCH 7, 2005 *
4.11 OPTION AGREEMENT BY AND BETWEEN THE COMPANY AND J. SCOTT
PAGAN, DATED AS OF MARCH 12, 2004 *
4.12 OPTION AGREEMENT BY AND BETWEEN THE COMPANY AND J. SCOTT
PAGAN, DATED AS OF SEPTEMBER 30, 2004 *
87
4.13 OPTION AGREEMENT BY AND BETWEEN THE COMPANY AND J. SCOTT
PAGAN, DATED AS OF MARCH 7, 2005 *
4.14 OPTION AGREEMENT BY AND BETWEEN THE COMPANY AND CHRIS
JONES, DATED AS OF MAY 27, 2005 *
4.15 OPTION AGREEMENT BY AND BETWEEN THE COMPANY AND MARK
WEISBERGER, DATED AS OF MAY 27, 2005 *
4.16 OPTION AGREEMENT BY AND BETWEEN THE COMPANY AND MARK
WEISBERGER, DATED AS OF MAY 27, 2005 *
4.17 OPTION AGREEMENT BY AND BETWEEN THE COMPANY AND MARK
WEISBERGER, DATED AS OF MAY 27, 2005 *
4.18 DIRECTORS' DEFERRED SHARE UNIT PLAN *
4.19 STOCK OPTION PLAN *
8.1 LIST OF SUBSIDIARIES OF THE COMPANY *
12.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER OF THE COMPANY
REQUIRED BY RULE 13A-14(A) OR RULE 15D-14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 *
12.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER REQUIRED BY RULE
13A-14(A) OR RULE 15D-14(A) OF THE SECURITIES EXCHANGE ACT
OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002 *
13.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF
FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS
ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT
OF 2002 *
23.1 CONSENT OF DELOITTE & TOUCHE LLP *
88
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing
on Form 20-F and that it has duly caused and authorized the undersigned to sign
this Annual Report on its behalf.
THE DESCARTES SYSTEMS GROUP INC.
By: /s/ Brandon Nussey
-------------------------------
Name: Brandon Nussey
Title: Chief Financial Officer
Date: July 29, 2005
DELOITTE
REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS
KITCHENER, ONTARIO, CANADA
To the Shareholders of The Descartes Systems Group Inc.
We have audited the consolidated balance sheets of The Descartes Systems Group
Inc. (the "Company") as at January 31, 2005 and 2004 and the consolidated
statements of operations, shareholders' equity, and cash flows for each of the
years in the three-year period ended January 31, 2005. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards and the standards of the Public Company Accounting Oversight Board
(United States). These standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at January 31, 2005
and 2004 and the results of its operations and its cash flows for each of the
years in the three-year period ended January 31, 2005 in conformity with
accounting principles generally accepted in the United States of America.
The Company is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audit included consideration
of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly we express no such opinion.
On March 2, 2005, we reported separately to the shareholders of the Company on
financial statements for the same periods, prepared in accordance with Canadian
generally accepted accounting principles.
Independent Registered Chartered Accountants
March 2, 2005
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
F-1
THE DESCARTES SYSTEMS GROUP INC.
CONSOLIDATED BALANCE SHEETS
(US DOLLARS IN THOUSANDS; US GAAP)
========================================================================================================
------------ ------------
JANUARY 31, January 31,
2005 2004
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents (Note 3) 17,220 13,187
Marketable securities (Note 3) 31,534 34,586
Accounts receivable
Trade (Note 4) 7,097 12,986
Other 1,008 3,501
Prepaid expenses and other 1,325 3,045
------------ ------------
58,184 67,305
MARKETABLE SECURITIES (Note 3) -- 17,279
CAPITAL ASSETS (Note 5) 6,966 13,452
LONG-TERM INVESTMENT (Note 6) 3,300 3,300
GOODWILL (Note 7) -- 18,038
INTANGIBLE ASSETS (Note 7) 4,122 8,264
DEFERRED CHARGES AND OTHER ASSETS -- 1,021
------------ ------------
72,572 128,659
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable 1,805 4,743
Accrued liabilities 5,429 3,609
Deferred revenue 2,605 2,860
Convertible debentures (Note 10) 26,995 --
------------ ------------
36,834 11,212
CONVERTIBLE DEBENTURES (Note 10) -- 26,995
------------ ------------
36,834 38,207
------------ ------------
COMMITMENTS, CONTINGENCIES AND GUARANTEES (Note 11)
SHAREHOLDERS' EQUITY
Common shares - unlimited shares authorized; Shares issued and
outstanding totaled 40,705,811 at January 31, 2005 and 2004 (Note 12) 364,907 364,907
Additional paid-in capital 81,658 81,667
Unearned deferred compensation (193) (339)
Accumulated other comprehensive income (loss) (Note 12) 93 (387)
Accumulated deficit (410,727) (355,396)
------------ ------------
35,738 90,452
------------ ------------
72,572 128,659
============ ============
F-2
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
Approved by the Board:
Director Director
F-3
THE DESCARTES SYSTEMS GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(US DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS; US GAAP)
================================================================================
------------ ------------ ------------
JANUARY 31, January 31, January 31,
2005 2004 2003
------------ ------------ ------------
REVENUES 46,395 59,785 70,383
COST OF REVENUES 21,053 19,387 26,631
------------ ------------ ------------
GROSS MARGIN 25,342 40,398 43,752
------------ ------------ ------------
EXPENSES
Sales and marketing 18,172 31,843 29,943
Research and development 10,419 9,402 15,223
General and administrative 14,125 12,365 12,895
Amortization of intangible assets 4,142 5,339 10,100
Impairment of goodwill (Note 7) 18,238 -- 86,689
Impairment of intangible assets (Note 7) -- -- 17,980
Restructuring costs and asset impairment (Note 9) 14,050 18,784 11,712
------------ ------------ ------------
79,146 77,733 184,542
------------ ------------ ------------
LOSS FROM OPERATIONS (53,804) (37,335) (140,790)
------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest expense (1,718) (3,020) (4,619)
Investment income 516 1,245 6,493
Gain (loss) on purchase of convertible debentures (Note 10) -- 904 (89)
------------ ------------ ------------
(1,202) (871) 1,785
------------ ------------ ------------
LOSS BEFORE INCOME TAXES AND MINORITY INTEREST (55,006) (38,206) (139,005)
INCOME TAX EXPENSE (RECOVERY) - CURRENT (Note 14) 325 287 (362)
------------ ------------ ------------
LOSS BEFORE MINORITY INTEREST (55,331) (38,493) (138,643)
MINORITY INTEREST -- -- 448
------------ ------------ ------------
LOSS (55,331) (38,493) (138,195)
============ ============ ============
LOSS PER SHARE
Basic and diluted (1.36) (0.84) (2.65)
============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic and diluted (thousands) 40,706 45,951 52,234
============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-4
THE DESCARTES SYSTEMS GROUP INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(US DOLLARS IN THOUSANDS; US GAAP)
================================================================================
------------ ------------ ------------
JANUARY 31, January 31, January 31,
2005 2004 2003
------------ ------------ ------------
COMMON SHARES
Balance, beginning of year 364,907 468,618 468,445
Stock options exercised -- 163 223
Shares repurchased (Note 12) -- (103,874) --
Issuance of shares in conjunction with acquisitions -- -- (50)
------------ ------------ ------------
Balance, end of year 364,907 364,907 468,618
------------ ------------ ------------
ADDITIONAL PAID-IN CAPITAL
Balance, beginning of year 81,667 5,201 5,201
Shares repurchased (Note 12) -- 76,646 --
Unearned compensation related to issuance of stock options (9) (180) --
------------ ------------ ------------
Balance, end of year 81,658 81,667 5,201
------------ ------------ ------------
UNEARNED DEFERRED COMPENSATION
Balance, beginning of year (339) (690) (1,157)
Deferred compensation earned on stock options 146 351 467
------------ ------------ ------------
Balance, end of year (193) (339) (690)
------------ ------------ ------------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance, beginning of year (387) (1,506) (200)
Foreign currency translation adjustment 444 1,253 (1,341)
Net unrealized investment gains (losses) 36 (134) 35
------------ ------------ ------------
Balance, end of year 93 (387) (1,506)
------------ ------------ ------------
ACCUMULATED DEFICIT
Balance, beginning of year (355,396) (316,903) (176,687)
Loss (55,331) (38,493) (138,195)
Coterminous year-end adjustment -- -- (2,021)
------------ ------------ ------------
Balance, end of year (410,727) (355,396) (316,903)
------------ ------------ ------------
------------ ------------ ------------
Total Shareholders' Equity 35,738 90,452 154,720
============ ============ ============
COMPREHENSIVE LOSS
Loss (55,331) (38,493) (138,195)
Other comprehensive loss
Foreign currency translation adjustment 444 1,253 (1,341)
Net unrealized investment gains (losses) 36 (134) 35
------------ ------------ ------------
Total other comprehensive income (loss) 480 1,119 (1,306)
------------ ------------ ------------
Comprehensive loss (54,851) (37,374) (139,501)
============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-5
THE DESCARTES SYSTEMS GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(US DOLLARS IN THOUSANDS; US GAAP)
================================================================================
------------ ------------ ------------
JANUARY 31, January 31, January 31,
2005 2004 2003
------------ ------------ ------------
OPERATING ACTIVITIES
Loss (55,331) (38,493) (138,195)
Adjustments to reconcile loss to cash used in operating
activities:
Depreciation 2,328 2,782 2,514
Amortization of intangible assets 4,142 5,339 10,100
Impairment of goodwill 18,238 -- 86,689
Impairment of intangible assets -- -- 17,980
Write-off of redundant assets 5,770 -- --
Amortization of convertible debenture costs 256 451 726
Amortization of deferred compensation 137 171 467
Minority interest -- -- 448
Loss (gain) on purchase of convertible debentures -- (904) 89
Changes in operating assets and liabilities:
Accounts receivable
Trade 5,889 1,050 3,288
Other 2,493 (682) 4,180
Prepaid expenses and deferred charges 1,933 (616) 851
Accounts payable (2,938) 779 1,306
Accrued liabilities 2,300 (2,446) (4,887)
Deferred revenue (255) (63) (2,375)
------------ ------------ ------------
Cash used in operating activities (15,038) (32,632) (16,819)
------------ ------------ ------------
INVESTING ACTIVITIES
Maturities of marketable securities 26,365 132,029 73,964
Sale of marketable securities 8,198 -- --
Purchase of marketable securities (14,232) (30,987) (61,942)
Additions to capital assets (1,060) (5,744) (5,287)
Long-term investments -- -- (50)
Acquisition of subsidiaries, net of cash acquired (200) (335) (2,175)
------------ ------------ ------------
Cash provided by investing activities 19,071 94,963 4,510
------------ ------------ ------------
FINANCING ACTIVITIES
Purchase of convertible debentures, including purchase costs -- (43,274) (1,545)
Purchase of common shares, including purchase costs -- (27,228) --
Issuance of common shares for cash -- 163 223
------------ ------------ ------------
Cash used in financing activities -- (70,339) (1,322)
------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,033 (8,008) (13,631)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 13,187 21,195 34,826
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR 17,220 13,187 21,195
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest 1,484 2,821 3,977
Cash paid during the year for income taxes 162 159 7
============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-6
-------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS OF US DOLLARS,
EXCEPT PER SHARE AMOUNTS; US GAAP)
-------------------------------------------
NOTE 1 - DESCRIPTION OF THE BUSINESS
The Descartes Systems Group Inc. ("Descartes", "Company", "our" or "we")
operates in one business segment providing on-demand supply chain solutions that
help companies efficiently deliver their products and services to their
customers. Our technology-based solutions, which consist of services and
software, provide connectivity and document exchange, route planning and
wireless dispatch, inventory and asset visibility, transportation management,
and warehouse optimization.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
We prepare our consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America. Due to the
predominance of US dollar denominated assets, liabilities and transactions, we
have adopted the US dollar as our reporting currency.
Our fiscal year commences on February 1st of each year and ends on January 31st
of the following year. Our fiscal year, which ended on January 31, 2005, is
referred to as the "current fiscal year", "fiscal 2005", "2005" or using similar
words. Our previous fiscal year, which ended on January 31, 2004, is referred to
as the "previous fiscal year", "fiscal 2004", "2004" or using similar words.
Other fiscal years are referenced by the applicable year during which the fiscal
year ends. For example, "2008" refers to the annual period ending January 31,
2008 and the "fourth quarter of 2008" refers to the quarter ending January 31,
2008.
Certain reclassifications have been made to prior year financial statements and
the notes to conform to the current year presentation.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Descartes, its
wholly owned subsidiaries and majority-owned subsidiaries over which we exercise
control. Investments in companies in which we exercise significant influence,
but not control, are accounted for using the equity method of accounting.
Investments in shares of companies non-publicly traded in which we have less
than a 20% ownership interest, and do not exercise significant influence, are
accounted for at cost. All intercompany accounts and transactions have been
eliminated during consolidation.
FINANCIAL INSTRUMENTS
Fair value of financial instruments
-----------------------------------
Financial instruments are comprised of cash and cash equivalents, short-term and
long-term marketable securities, accounts receivable, accounts payable and
accrued liabilities, long-term investments, and convertible debentures. The
estimated fair values of cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities are approximate to book values because
of the short-term maturities of these instruments. Our investments in short- and
long-term marketable securities are carried at fair market value. In the opinion
of management, the carrying value of our long-term minority position investments
in certain private companies are recorded at their fair values at January 31,
2005. We do not use any type of speculative financial instruments, including but
not limited to foreign exchange contracts, futures, swaps and option agreements,
to manage our foreign exchange or interest rate risks. In addition, we do not
hold or issue financial instruments for trading purposes.
Foreign exchange risk
---------------------
We are exposed to foreign exchange risk in that a higher proportion of our
revenues are denominated in US dollars relative to expenditures.
F-7
Interest rate risk
------------------
We are exposed to reductions in interest rates, which could adversely impact
expected returns from our reinvestment of corporate funds in marketable
securities upon maturity of such instruments.
Credit risk
-----------
We are exposed to credit risk through investments in marketable securities and
accounts receivable. We hold our investments with reputable financial
institutions and in highly liquid and high quality investment-grade financial
instruments. The lack of concentration of accounts receivable from a single
customer and the dispersion of customers among industries and geographical
locations mitigate this risk.
FOREIGN CURRENCY TRANSLATION
We conduct business in a variety of foreign currencies and, as a result, all of
our foreign operations are subject to foreign exchange fluctuations. All
operations operate in their local currency environment, with the exception of
Canada. The functional currency for our Canadian operations is the US dollar.
Assets and liabilities of foreign operations are translated into US dollars at
the exchange rate in effect at the balance sheet date. Revenues and expenses of
foreign operations are translated using monthly average exchange rates.
Translation adjustments resulting from this process are accumulated in other
comprehensive income (loss) as a separate component of shareholders' equity.
Transactions incurred in currencies other than the functional currency are
converted to the functional currency at the transaction date. All foreign
currency transaction gains and losses are included in net income.
USE OF ESTIMATES
Preparing financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts that are reported in the
consolidated financial statements and accompanying note disclosures. Although
these estimates and assumptions are based on management's best knowledge of
current events, actual results may be different from the estimates. Estimates
and assumptions are used when accounting for items such as allowance for
doubtful accounts, depreciation of capital assets, amortization of intangible
assets, valuation of assets for impairment assessment and restructuring costs.
CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
Cash and cash equivalents include short-term deposits and cash invested in money
market securities. Marketable securities are comprised of short- and long-term
marketable securities. Short-term marketable securities comprise debt securities
with original maturities of 12 months from the balance sheet date and Dividend
Received Deduction ("DRD") eligible investments. Long-term marketable securities
comprise debt securities with original maturities in excess of 12 months from
the balance sheet date.
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for certain investments in debt and equity securities", we classify
all investments in debt securities as available-for-sale. These debt securities
are carried at fair value on the balance sheet with unrealized investment gains
(losses) excluded from net loss and reported in accumulated other comprehensive
loss as a separate component of shareholder's equity. Total unrealized
investment gains (losses) were ($63), ($99) and $35 in 2005, 2004 and 2003,
respectively.
Our investment portfolio is subject to market risk due to changes in interest
rates. We place our investments with high credit quality issuers and, by policy,
limit the amount of credit exposure to any one issuer. As stated in our
investment policy, we are averse to principal loss and seek to preserve our
invested funds by limiting default risk, market risk and reinvestment risk.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
We record an allowance for doubtful accounts based on the historical experience
of write-offs and a detailed assessment of accounts receivable. In estimating
the allowance for doubtful accounts, we consider the age of the receivables,
historical write-offs, and the creditworthiness of the customer, among other
factors. Accounts receivable are written off if it is determined that the
specific balance is no longer collectible.
F-8
INTANGIBLE ASSETS
Intangible assets include customer agreements and relationships, non-compete
covenants, existing technologies and trade names. Intangible assets are
amortized on a straight-line basis over their estimated useful lives, which are
generally five years. We review the carrying value of these assets at least
annually for evidence of impairment. An impairment loss is recognized when the
estimate of undiscounted future cash flows generated by such assets is less than
the carrying amount. Measurement of the impairment loss is based on the present
value of the expected future cash flows.
SOFTWARE DEVELOPED FOR INTERNAL USE
We capitalize certain costs to develop or obtain internal use software in
accordance with American Institute of Certified Public Accountants ("AICPA")
Statement of Position 98-1 ("SOP 98-1"), "Accounting for the costs of computer
software developed or obtained for internal use." These capitalized costs are
amortized using the 30% declining balance depreciation method after completion
or acquisition of the software. Software that was developed or obtained for
internal use and that was capitalized was nil and $4.4 million for the periods
ended January 31, 2005 and January 31, 2004, respectively. Costs to develop or
obtain internal use software that are not material are expensed in the period in
which the costs were incurred.
CAPITAL ASSETS
Capital assets are recorded at cost. Depreciation of our capital assets is
generally recorded at the following rates:
Computer equipment and software 30% declining balance
Furniture and fixtures 20% declining balance
Leasehold improvements Straight-line over term of lease
We review the carrying value of these assets at least annually for evidence of
impairment. If impaired, an impairment loss is recognized when the estimate of
undiscounted future cash flows generated by such assets is less than the
carrying amount.
REVENUE RECOGNITION
We follow the accounting guidelines and recommendations contained in the AICPA
Statement of Position 97-2 ("SOP 97-2"), "Software revenue recognition" and the
US Securities and Exchange Commission's Staff Accounting Bulletin 104, "Revenue
recognition in financial statements" ("SAB 104").
We recognize revenue when it is realized or realizable and earned. We consider
revenue realized or realizable and earned when it has persuasive evidence of an
arrangement, the product has been delivered or the services have been provided
to the customer, the sales price is fixed or determinable and collectibility is
reasonably assured. In addition to this general policy, the specific revenue
recognition policies for each major category of revenue are included below.
Services Revenues - Services revenues are principally comprised of the
following: (i) ongoing transactional fees for use of our services and products
by our customers, which are recognized as the transactions occur; (ii)
professional services revenues from consulting, implementation and training
services related to our services and products, which are recognized as the
services are performed; and (iii) maintenance, subscription and other related
revenues, which include revenues associated with maintenance and support of our
services and products, which are recognized ratably over the term of the
maintenance or subscription period.
License Revenues - License revenues derive from licenses granted to our
customers to use our software products, and are recognized in accordance with
SOP 97-2.
We sometimes enter into transactions that represent multiple-element
arrangements, which may include any combination of services and software
licenses. These multiple element arrangements are assessed to determine whether
they can be separated into more than one unit of accounting or element for the
purpose of revenue recognition. Fees are allocated to the various elements using
the residual method as outlined in SOP 98-9 "Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions". Pursuant to the
residual method, we defer recognition of the fair value of any undelivered
elements and determine such fair value
F-9
using vendor-specific objective evidence. This vendor-specific objective
evidence of fair value is established through prices charged for each revenue
element when that element is sold separately. We then allocate any residual
portion of the arrangement fee to the delivered elements. The revenue
recognition policies described in this section are then applied to each unit of
accounting or element.
We evaluate the collectibility of our trade receivables based upon a combination
of factors on a periodic basis. When we become aware of a specific customer's
inability to meet its financial obligations to us (such as in the case of
bankruptcy filings or material deterioration in the customer's operating results
or financial position, payment experiences and existence of credit risk
insurance for certain customers), we record a specific bad debt provision to
reduce the customer's related trade receivable to its estimated net realizable
value. If circumstances related to specific customers change, the estimate of
the recoverability of trade receivables could be further adjusted.
With respect to deferred revenue, we expect to complete the applicable services
or obligations corresponding to such deferred revenue within the next 12 months.
RESEARCH AND DEVELOPMENT COSTS
We incur costs related to research and development of our software products. To
date, we have not capitalized any development costs under SFAS No. 86,
"Accounting for the costs of computer software to be sold, leased or otherwise
marketed." Costs incurred between the time of establishment of a working model
and the point where products are marketed are expensed as they are
insignificant.
STOCK-BASED COMPENSATION
At January 31, 2005, we had various stock-based employee compensation plans,
which are described more fully in Note 13. We account for those plans in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"), and related Interpretations. No
stock-based employee compensation cost is reflected in income (other than those
options that relate to acquisitions as described in Note 8), as no options
granted under those plans had an exercise price less than the market value of
the underlying common stock on the date of grant. The following table
illustrates the effect on net income and earnings per share if we had applied
the fair value recognition provisions of SFAS No. 123, "Accounting for
stock-based compensation."
F-10
--------------------------------------------
JANUARY 31, January 31, January 31,
YEAR ENDED 2005 2004 2003
--------------------------------------------
Loss - As reported (55,331) (38,493) (138,195)
Add: Stock-based compensation - As reported 137 171 467
Less: Total stock-based compensation expense determined (1,874) (5,458) (8,546)
under the fair value based method for all awards
--------------------------------------------
Loss - Pro forma (57,068) (43,780) (146,274)
============================================
Loss per share - Basic and diluted
--------------------------------------------
As reported (1.36) (0.84) (2.65)
============================================
Pro forma (1.40) (0.95) (2.80)
============================================
The fair value of stock option grants is estimated using the Black-Scholes
option-pricing model with the following assumptions:
--------------------------------------------
JANUARY 31, January 31, January 31,
YEAR ENDED 2005 2004 2003
--------------------------------------------
Black-Scholes average assumptions:
Expected dividend yield 0.0% 0.0% 0.0%
Expected volatility 68.0% 83.0% 91.0%
Risk-free rate 3.6% 3.9% 4.2%
Expected option life in years 4.4 4.0 3.6
--------------------------------------------
Weighted average fair value per option $ 0.84 $ 1.64 $ 3.43
============================================
PRODUCT WARRANTY
We have not experienced significant warranty claims to date and, as a result, we
have not recorded a provision for product warranty claims for 2005 or 2004.
INCOME TAXES
We account for income taxes in accordance with SFAS No. 109. SFAS 109 requires
the determination of deferred tax assets and liabilities based on the
differences between the financial statement and income tax bases of assets and
liabilities, using enacted tax rates in effect for the year in which the
differences are expected to reverse. The measurement of a deferred tax asset is
adjusted by a valuation allowance, if necessary, to recognize tax benefits only
to the extent that, based on available evidence, it is more likely than not that
they will be realized.
LOSS PER SHARE
Basic and diluted loss per share amounts are calculated by dividing the loss by
the weighted average number of common shares outstanding during the period. As a
result of losses applicable to common shares, the options granted under stock
option plans and the conversion privileges on the convertible debentures were
excluded in the diluted loss per share calculation, as their inclusion would
have been antidilutive.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004) "Share Based
Payment". Statement 123(R) requires all entities to recognize compensation
expense in an amount equal to the fair value of share based-payments. This
statement is effective for all public companies for the first reporting period
(interim or annual) beginning after June 15, 2005. We will adopt FAS 123(R) in
the third quarter ending October 31, 2005. The pro-forma impact on our 2005,
2004 and 2003 fiscal periods of expensing unvested stock options is disclosed,
as required under SFAS No.123, above in this Note 2.
NOTE 3 - CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
The following is a summary of cash, cash equivalents and marketable securities
as at January 31, 2005 and 2004.
F-11
------------------------------------------------------------
COST UNREALIZED UNREALIZED MARKET
JANUARY 31, 2005 BASIS GAINS LOSSES VALUE
------------------------------------------------------------
CASH
Cash 15,086 -- -- 15,086
Money market funds 2,134 -- -- 2,134
------------------------------------------------------------
Total cash and cash equivalents 17,220 -- -- 17,220
------------------------------------------------------------
MARKETABLE SECURITIES
Corporate bonds 21,597 (63) 21,534
DRD eligible investments 10,000 -- -- 10,000
------------------------------------------------------------
Total marketable securities 31,597 -- (63) 31,534
------------------------------------------------------------
Total cash, cash equivalents and marketable securities 48,817 -- (63) 48,754
============================================================
------------------------------------------------------------
COST UNREALIZED UNREALIZED MARKET
JANUARY 31, 2004 BASIS GAINS LOSSES VALUE
------------------------------------------------------------
CASH
Cash 12,190 -- -- 12,190
Money market funds 997 -- -- 997
------------------------------------------------------------
Total cash and cash equivalents 13,187 -- -- 13,187
------------------------------------------------------------
MARKETABLE SECURITIES
Corporate bonds 41,464 -- (100) 41,364
DRD eligible investments 10,500 1 -- 10,501
------------------------------------------------------------
Total marketable securities 51,964 1 (100) 51,865
------------------------------------------------------------
Total cash, cash equivalents and marketable securities 65,151 1 (100) 65,052
============================================================
We do not have any investments that have been held greater than 12 months as at
January 31, 2005 with unrealized losses.
We have operating lines of credit of $9.7 million (Canadian $12.0 million) in
Canada. Borrowings under this facility bear interest at the prime rate based on
the borrowed currency (4.25% on Canadian dollar borrowings and 5.5% on US dollar
borrowings at January 31, 2005), are due on demand and are secured by our bond
portfolio and a general assignment of inventory and accounts receivable. At
January 31, 2005, we had issued letters of credit with balances outstanding of
$1.4 million, which reduced the available operating line of credit by a
corresponding amount.
F-12
NOTE 4 - TRADE RECEIVABLES
----------------------------
YEAR ENDED JANUARY 31, January 31,
2005 2004
----------------------------
Trade receivables 9,040 17,359
Less: Allowance for doubtful accounts (1,943) (4,373)
----------------------------
7,097 12,986
============================
NOTE 5 - CAPITAL ASSETS
----------------------------
YEAR ENDED JANUARY 31, January 31,
2005 2004
----------------------------
Cost
Computer equipment and software 11,214 26,235
Furniture and fixtures 1,607 3,430
Leasehold improvements 1,953 3,260
----------------------------
14,774 32,925
Accumulated amortization
Computer equipment and software 5,537 15,286
Furniture and fixtures 970 2,298
Leasehold improvements 1,301 1,889
----------------------------
7,808 19,473
----------------------------
6,966 13,452
============================
The carrying amount of assets under development or obtained for internal use
that are not being depreciated was nil and $4.4 million as at January 31, 2005
and January 31, 2004, respectively.
NOTE 6 - LONG-TERM INVESTMENT
In June 2000, in conjunction with the licensing of our technology solutions to
Ocado, formerly LM Solutions, we took a minority position in Ocado. Ocado is an
online food retailer based in the United Kingdom. The aggregate investment in
Ocado, which is accounted for using the cost method, was $5.1 million. During
the quarter ended April 30, 2001, management conducted a review of the carrying
value of this investment and as a result recorded a provision of $1.8 million
against the carrying value of this investment as the impairment was considered
to be other than temporary. Since the quarter ended April 30, 2001, management
has conducted a quarterly assessment of this investment. No impairment of this
long-term investment has been identified since the quarter ended April 30, 2001.
F-13
NOTE 7 - GOODWILL AND INTANGIBLE ASSETS
----------------------------
YEAR ENDED JANUARY 31, January 31,
2005 2004
----------------------------
GOODWILL
Cost 18,238 18,038
Impairment (18,238) --
----------------------------
-- 18,038
============================
INTANGIBLE ASSETS
Cost
Customer agreements and relationships 24,809 24,809
Non-compete covenants 1,162 1,162
Existing technology 15,799 15,799
Trade names 11,110 11,110
----------------------------
52,880 52,880
Accumulated amortization and impairment
Customer agreements and relationships 22,987 20,552
Non-compete covenants 1,049 893
Existing technology 14,396 13,363
Trade names 10,326 9,808
----------------------------
48,758 44,616
----------------------------
4,122 8,264
============================
GOODWILL
When we acquire a subsidiary, we determine the fair value of the net tangible
and intangible assets acquired and compare the total amount to the amount that
we paid for the investment. Any excess of the amount paid over the fair value of
those net assets is considered to be goodwill. Goodwill is tested at least
annually for impairment to ensure that its fair value is greater than or equal
to carrying value. Any excess of carrying value over fair value is charged to
income in the period in which impairment is determined. We determined that there
were impairment write-downs of $18.2 million, nil, and $86.7 million due to
impairment conditions in 2005, 2004 and 2003, respectively.
As of the end of the first quarter of 2005, there is no goodwill recorded on our
balance sheet. Accordingly, we will no longer be performing tests for impairment
of goodwill. If additional goodwill is recorded in future periods as a result of
acquisitions or otherwise, we will resume our annual goodwill impairment tests
on October 31st of each year. In addition, we will perform further quarterly
analysis of whether any event has occurred that would more likely than not
reduce our enterprise value below our carrying amount, and, if so, we will
perform a goodwill impairment test between the annual dates. Any future
impairment adjustment will be recognized as an expense in the period that the
adjustment is identified.
INTANGIBLE ASSETS
Intangible assets related to our acquisitions are recorded at their fair value
at the acquisition date. Intangible assets with a finite life are amortized to
income over their useful lives, which historically have not exceeded five years.
We write down intangible assets with a finite life to fair value when the
related undiscounted cash flows are not expected to allow for recovery of the
carrying value. Fair value of intangibles is determined by discounting the
expected related future cash flows. We determined that there were impairment
write-downs of nil in 2005 and 2004, and $18.0 million in 2003.
Intangible assets with an indefinite life are not subject to amortization; they
are tested at least annually for impairment to ensure that their fair value is
greater than or equal to the carrying value. Any excess is charged to income in
the period in which impairment is determined. We had no intangible assets with
an indefinite life for any of the fiscal years reported.
F-14
Future amortization expense for intangible assets that we own as at January 31,
2005 is estimated to be $2.7 million for 2006, $1.0 million for 2007, $0.2
million for 2008 and $0.2 million for 2009.
NOTE 8 - ACQUISITIONS
We account for acquisitions of businesses using the purchase method. This
involves allocating the purchase price paid for a business to the assets
acquired, including identifiable assets, and the liabilities assumed, based on
their fair values at the date of acquisition. Any excess is then recorded as
goodwill. We account for acquisitions of assets at the fair value of assets
acquired, including identifiable intangible assets. We did not complete any
acquisitions in 2005 or 2004, but completed the following acquisition in 2003.
2003 ACQUISITIONS -DESCARTES SYSTEMS AB (FORMERLY TRADEVISION AB)
("TRADEVISION")
In two separate transactions occurring on December 21, 2001 and October 15,
2002, we completed the acquisition of all outstanding voting shares of
Tradevision, a Sweden-based provider of global connectivity and value-added
software solutions for transportation logistics.
On December 21, 2001, in a cash transaction of $2.5 million, we acquired a 70%
ownership interest in Tradevision. In October 2002, in a cash transaction of
$0.7 million, we acquired the remaining 30% interest of Tradevision AB from SAS
Cargo Group A/S, a transport solution provider headquartered in Denmark. The
share purchase agreement with SAS Cargo Group A/S also provides for an
additional purchase price earn-out amount of a maximum of $0.7 million over a
four-year period. To date, we have paid $0.5 million of this additional purchase
price, with the potential for up to $0.2 million more to be paid. We issued
78,250 options to purchase common shares of Descartes to employees of
Tradevision pursuant to our Stock Option Plan. At January 31, 2005, 23,300 of
these options were outstanding of which 13,980 were exercisable.
The total purchase price for Tradevision at the time of acquisition was $7.6
million, which included the cash consideration, the integration costs and other
acquisition related expenses, and has been accounted for using the purchase
method.
In addition, an additional $1.4 million in acquisition costs were incurred since
October 2002. Accordingly, the total cash purchase price for Tradevision is $9.0
million ($0.2 million in 2005, $0.3 million in 2004, $2.2 million in 2003 and
$6.3 million in 2002), which included the cash consideration, the integration
costs, earn-out payments and other acquisition related expenses, which have been
accounted for using the purchase method.
NOTE 9 - RESTRUCTURING COSTS
MAY 2004 ANNOUNCEMENT
On May 17, 2004, we announced that we were taking actions to significantly
reduce our expenses, which actions included a downsizing of our global staff by
approximately 130 employees, or approximately 35% of our total staff. These
reductions were focused on our regional operational structure and resulted in a
significantly smaller global direct sales force and management level of the
organization. In addition, we announced that we would be closing certain
offices, and canceling certain leases, consulting and other operating contracts.
We announced that we expected to record restructuring charges of approximately
$5.5 million to $6.5 million and that the majority of these charges would be
recorded in the second quarter of 2005. In addition, we identified that we would
be examining whether certain assets were redundant as a result of the cost
reduction initiatives. On September 2, 2004 we announced that we had identified
additional opportunities for cost savings and efficiencies and, accordingly, in
executing on these expense reduction activities our workforce ended up being
reduced by approximately 45%.
Our initial provision under this initiative was $11.7 million, comprised of $4.2
million in workforce reduction charges, $1.7 million of office closure costs and
$5.8 million of redundant asset write-offs. Additional revisions of $0.1 million
were made to this initial provision in 2005 comprised of $(0.2) million relating
to office closure costs and $0.3 million related to workforce reduction.
Including the revisions, as of January 31, 2005 we have incurred $11.8 million
of restructuring charges under this initiative comprised of $4.5 million in
workforce reduction charges, $1.5 million of office closure costs and $5.8
million of redundant assets write-offs. The provisions for this initiative
F-15
were drawn-down in 2005 by an aggregate amount of $11.3 million, comprised of
cash payments of $5.5 million and a non-cash write-down of redundant assets of
$5.8 million.
As at January 31, 2005, our remaining provision under this initiative was $0.6
million, comprised of $0.4 million in office closure costs and $0.2 million in
workforce reductions. We do not anticipate any further significant charges under
this restructuring initiative as our plan has been fully implemented. We expect
that the remaining office closure provision will be drawn down by the end of the
fourth quarter in 2008 as existing real property leases expire and that the
remaining provision for workforce reduction obligations will be drawn down by
the end of the second quarter of 2006 as remaining employee benefit obligations
for departed employees conclude.
---------------------------------------------------------
WORKFORCE OFFICE REDUNDANT
REDUCTION CLOSURE COSTS ASSETS TOTAL
---------------------------------------------------------
Provision as at May 17, 2004 4,217 1,743 5,770 11,730
Revisions to accruals 332 (210) -- 122
---------------------------------------------------------
Restructuring cost 4,549 1,533 5,770 11,852
Cash drawdowns (4,413) (1,092) -- (5,505)
Non-cash drawdowns -- -- (5,770) (5,770)
---------------------------------------------------------
Provision as at January 31, 2005 136 441 -- 577
=========================================================
MAY 2003 ANNOUNCEMENT
Based on a review of cost levels, we announced on May 6, 2003 a downsizing of
our global operations by approximately 130 employees. In addition to workforce
reduction across all operations, the plans included consolidation of office
facilities, lease terminations, and write-down of redundant assets. The
following table shows the changes in the restructuring provision for the May
2003 initiative.
---------------------------------------------------------
WORKFORCE OFFICE REDUNDANT
REDUCTION CLOSURE COSTS ASSETS TOTAL
---------------------------------------------------------
Provision as at May 6, 2003 3,845 1,825 1,661 7,331
Revisions to accruals 944 1,012 -- 1,956
---------------------------------------------------------
Restructuring cost 4,789 2,837 1,661 9,287
Cash drawdowns (4,692) (2,360) -- (7,052)
Non-cash drawdowns -- -- (1,661) (1,661)
---------------------------------------------------------
Provision as at January 31, 2004 97 477 -- 574
Revisions to accruals 202 1,581 -- 1,783
---------------------------------------------------------
Restructuring cost 202 1,581 -- 1,783
Cash drawdowns (299) (901) -- (1,200)
Non-cash drawdowns -- -- -- --
---------------------------------------------------------
Provision as at January 31, 2005 -- 1,157 -- 1,157
=========================================================
Our initial provision under this initiative was $7.3 million, comprised of $3.8
million in workforce reduction charges, $1.8 million of office closure costs and
$1.7 million of redundant asset write-offs. As of January 31, 2005, we have
incurred $11.1 million of restructuring charges under this initiative comprised
of $5.0 million in workforce reduction charges, $4.4 million of office closure
costs and $1.7 million of redundant assets write-offs.
During 2005, we revised our estimates for recoverability on certain offices and
recorded a $1.6 million charge for office closure costs. In addition, we
recorded a further charge of $0.2 million related to the workforce reduction
initiative. The provisions for this initiative were reduced in 2005 by cash
payments of $1.2 million.
As at January 31, 2005, our remaining obligation under this initiative is $1.2
million. We do not anticipate any further significant charges under this
restructuring initiative as our plan has been fully implemented. Our remaining
activity is to comply with the contractual terms of our cash obligations. We
expect that the remaining office closure provision will be drawn down by the end
of the fourth quarter in 2008.
F-16
JUNE 2002 ANNOUNCEMENT
On June 19, 2002, we announced that we had commenced restructuring plans in
order to align our cost structure with our network-based revenue model and to
streamline our corporate operations. The plans included the centralization of
certain support functions such as finance, customer care, research and
development, and network services primarily in Waterloo, Ontario. The plans also
included the consolidation of our network infrastructure and data center
facilities in Ontario and Georgia. These restructuring plans resulted in the
prompt reduction of workforce by approximately 120 employees, or 20% of the
total workforce, across all geographic areas within which we operate. The
reductions were concentrated within the finance, customer care, research and
development, and network services functional areas. In conjunction with the
above-noted centralization plans and workforce reduction, we also identified
leased facilities that were in excess of our ongoing space requirements. The
termination cost of these leased facilities along with the redundant leasehold
improvements, furniture and fixtures, and computer equipment were reflected in
the restructuring provision. Furthermore, the restructuring provision reflected
the cost of consolidation of data center facilities. The following table shows
the changes in the restructuring provision for the June 2002 initiative:
--------------------------------------------------------------------------------------------
NETWORK
WORKFORCE OFFICE REDUNDANT DATA CENTER SYSTEMS
REDUCTION CLOSURE COSTS ASSETS CONSOLIDATIONS CONSOLIDATIONS TOTAL
--------------------------------------------------------------------------------------------
Provision as at June 19, 2002 2,381 3,399 839 550 -- 7,169
Revisions to accruals 2,958 1,857 (229) (379) 416 4,623
--------------------------------------------------------------------------------------------
Restructuring cost 5,339 5,256 610 171 416 11,792
Cash drawdowns (4,782) (4,667) -- (171) (416) (10,036)
Non-cash drawdowns (90) (182) (610) -- -- (882)
--------------------------------------------------------------------------------------------
Provision as at January 31, 2003 467 407 -- -- -- 874
Additions to accruals 3,297 3,501 155 864 2,915 10,732
Revisions to accruals -- -- -- -- (1,259) (1,259)
--------------------------------------------------------------------------------------------
Restructuring cost 3,297 3,501 155 864 1,656 9,473
Cash drawdowns (3,764) (3,748) -- (864) (1,656) (10,032)
Non-cash drawdowns -- -- (155) -- -- (155)
--------------------------------------------------------------------------------------------
Provision as at January 31, 2004 -- 160 -- -- -- 160
Revisions to accruals -- 402 -- -- -- 402
--------------------------------------------------------------------------------------------
Restructuring cost -- 402 -- -- -- 402
Cash drawdowns -- (562) -- -- -- (562)
Non-cash drawdowns -- -- -- -- -- --
--------------------------------------------------------------------------------------------
Provision as at January 31, 2005 -- -- -- -- -- --
============================================================================================
Our initial provision under this initiative was $7.2 million, comprised of $2.4
million in workforce reduction charges, $3.4 million of office closure costs,
$0.8 million of redundant asset write-offs and $0.6 million of data center
consolidation charges. Including subsequent additions and revisions to accruals,
as of January 31, 2005, we have incurred $21.7 million of restructuring charges
under this initiative comprised of $8.6 million in workforce reduction charges,
$9.2 million of office closure costs, $0.8 million of redundant assets
write-offs, $1.0 million of data center consolidation charges and $2.1 million
of network consolidation charges.
During 2005, we incurred minimal charges of $0.4 million relating to our June
2002 restructuring initiative. The provisions for this initiative were reduced
in 2005 by cash payments of $0.6 million.
As at January 31, 2005, we have completed our obligations under this
restructuring initiative. We do not anticipate any further significant charges
under this restructuring initiative as our plan has been fully implemented.
F-17
SUMMARY OF ALL RESTRUCTURING INITIATIVES
During 2005, we incurred initial charges relating to our May 2004 restructuring
initiative and additional revisions to each of our restructuring initiatives of
cumulatively $14.1 million, comprised of $4.8 million for workforce reduction,
$3.5 million for office closure costs and $5.8 million for redundant assets. Our
restructuring provisions were drawn-down in 2005 as a result of cash payments
related to these initiatives of $7.3 million and a non-cash write-off of
redundant assets in connection with the May 2004 initiative of $5.8 million,
relating primarily to software, hardware and office-related assets.
During 2004, we incurred aggregate restructuring charges and revisions of $18.8
million, broken down into workforce reduction expenses of $8.1 million, office
closure costs of $6.4 million, redundant asset write-offs of $1.8 million, data
center consolidations of $0.9 million and network system consolidations of $1.6
million. Restructuring provisions were drawn-down in 2004 as a result of cash
payments related to these initiatives of $17.2 million and a non-cash write-off
of redundant assets in connection with the May 2003 and June 2002 initiative of
cumulatively $1.8 million, relating primarily to software, hardware and
office-related assets.
During 2003, we incurred aggregate restructuring charges and revisions of $11.7
million, broken down into workforce reduction expenses of $5.3 million, office
closure costs of $5.2 million, redundant asset write-offs of $0.6 million, data
center consolidations of $0.2 million and network system consolidations of $0.4
million. Restructuring provisions were drawn-down in 2003 as a result of cash
payments related to these initiatives of $11.6 million and a non-cash write-off
of redundant assets in connection with the June 2002 and August 2001 initiative
of cumulatively $0.9 million, relating primarily to software, hardware and
office-related assets.
NOTE 10 - CONVERTIBLE DEBENTURES
On June 30, 2000, we issued $75.0 million aggregate principal amount of 5.5%
convertible unsecured subordinated debentures maturing on June 30, 2005, the
issuance of which was quali?ed by a short form prospectus dated June 26, 2000.
Interest on the debentures has accrued from June 30, 2000 and is payable, and
has been paid, in equal semi-annual installments in arrears on June 30th and
December 30th of each year, the first payment having been made on December 30,
2000. Issuance costs of $3.5 million are being amortized to interest expense
over the term of the debenture, subject to earlier write-off in connection with
any repurchases of the debentures, with the balance of the issuance costs being
shown as deferred issuance costs on the balance sheet. Each debenture is
convertible, at the option of the holder, into common shares at any time prior
to June 30, 2005 at a price of $35 per common share. In addition the debentures
may be redeemed, in whole or in part, in cash or common shares, at our option,
provided that the average closing price of the common shares on the Nasdaq
National Market during the 20 consecutive trading days ending five trading days
preceding the date on which notice of redemption is given is not less than
$43.75. On maturity, we can elect to satisfy the debentures, in whole or in
part, with the number of common shares obtained by dividing the principal amount
of the debentures that we want to satisfy with common shares by 95% of the
average closing price of the common shares on the Nasdaq National Market for the
period of 20 consecutive trading days ending five trading days before maturity.
Any amount not satisfied by common shares on maturity is to be paid in cash.
In each of December 2001 and March 2002, pursuant to a normal course issuer bid,
we purchased for cancellation $1.5 million principal amount of the debentures,
or an aggregate of $3.0 million. In each case, the debentures were purchased for
approximately $1.1 million, resulting in a gain of $0.4 million, which was
recorded in the related fiscal quarter.
On August 1, 2002 we announced that we offered to purchase for cancellation up
to $51,428,571 aggregate principal amount of the debentures. We offered to pay a
cash price of $700 for each $1,000 principal amount of debentures, plus accrued
and unpaid interest. The offer was made by way of an issuer bid, which was open
for acceptance until September 6, 2002. On September 7, 2002, we announced that
pursuant to the offer, we would acquire a nominal principal amount of the
debentures (which acquisition was completed later in the quarter ended October
31, 2002). The acquisition of the debentures resulted in a loss of $0.5 million
net of costs associated with the offer and the write off of the related deferred
issuance costs.
On June 5, 2003, we announced that we were offering to purchase, indirectly
through a wholly-owned subsidiary, up to $45.0 million aggregate principal
amount of the debentures. Under the offer for the debentures, we offered to pay
a cash price of $950 for each $1,000 principal amount of debentures, plus unpaid
interest (subject to any applicable
F-18
withholding tax) accrued to but excluding the date of purchase. On July 17,
2003, we announced that, through our wholly-owned subsidiary, we had purchased
$45.0 million aggregate principal amount of the debentures for $42.8 million
resulting in a gain of $0.9 million net of costs associated with the offer and
the write- off of the related deferred issuance costs.
NOTE 11 - COMMITMENTS, CONTINGENCIES AND GUARANTEES
COMMITMENTS
We are committed under non-cancelable operating leases for business premises and
computer equipment with terms expiring at various dates through 2012. The future
minimum amounts payable at January 31, 2005 under the lease agreements are $3.0
million, $1.5 million, $0.9 million, $0.7 million, $0.2 million, $0.1 million
and $0.1 million for 2006, 2007, 2008, 2009, 2010, 2011, and 2012, respectively.
CONTINGENCIES
On January 23, 2004, we announced that a complaint alleging patent infringement
had been filed against us in the United States District Court for the Southern
District of New York by ArrivalStar, Inc. The complaint alleges that certain of
our products infringe certain patents of ArrivalStar, Inc. We believe the
complaint is without merit and we are defending against it vigorously. The
action is currently in the initial phase of discovery.
On or about May 19, 2004, we were named as a defendant in a securities class
action lawsuit captioned BRIJ WALIA V. THE DESCARTES SYSTEMS GROUP INC., ET AL.,
which was filed in the United States District Court for the Southern District of
New York purportedly on behalf of purchasers of our common stock between June 4,
2003 and May 6, 2004. The complaint also names as defendants two of our former
officers. The complaint alleges, among other things, that the defendants made
misstatements to the investing public between June 4, 2003 and May 6, 2004
regarding our financial condition. Three additional complaints were filed and,
subsequently, all four complaints were consolidated into a single complaint. On
November 2, 2004, we announced that we had reached an agreement-in-principle to
settle the consolidated securities class action litigation. Under the terms of
the settlement-in-principle, a settlement fund will be established in the total
amount of $1.5 million, of which our insurance providers will pay approximately
$1.1 million and the balance paid by us. In January 2005, the parties to the
litigation executed a Memorandum of Understanding that memorialized the
settlement-in-principle. The settlement-in-principle remains subject to the
signing of a definitive settlement agreement and final approval by the court. In
the second quarter of 2005, we accrued $0.5 million for anticipated defense
costs related to the class action litigation. With the settlement-in-principle
in the third quarter of 2005, this accrual was sufficient to encompass both our
defense costs and our contribution to the settlement-in-principle. Our
contribution to the settlement-in-principle was paid in the third quarter of
2005.
We are also subject to a variety of other claims and suits that arise from time
to time in the ordinary course of our business and are typical in our industry.
The consequences of these matters are not presently determinable but, in the
opinion of management, the ultimate liability is not expected to have a material
effect on our annual results of operations, financial position or capital
resources.
Business combination agreements
-------------------------------
In connection with agreements to acquire additional entities, we have guaranteed
minimum levels of additional purchase price based on revenues derived from the
acquired entity. The maximum earn-out remaining to be paid under all outstanding
agreements is $0.2 million.
Product Warranties
------------------
In the normal course of operations, we provide our customers with product
warranties relating to the performance of our software and network services. To
date, we have not encountered material costs as a result of such obligations and
have not accrued any liabilities related to such on our financial statements.
F-19
GUARANTEES
In the normal course of business we enter into a variety of agreements that may
contain features that meet the definition of a guarantee under FIN 45,
"Guarantor's accounting and disclosure requirements for guarantees, including
indirect guarantees of indebtedness of others". The following lists our
significant guarantees:
Intellectual property indemnification obligations
-------------------------------------------------
We provide indemnifications of varying scope to our customers against claims of
intellectual property infringement made by third parties arising from the use of
our products. We evaluate estimated losses for such indemnifications under SFAS
5, "Accounting for Contingencies", as interpreted by FIN 45. We consider such
factors as the degree of probability of an unfavorable outcome and the ability
to make a reasonable estimate of the amount of loss. To date, we have not
encountered material costs as a result of such obligations and have not accrued
any liabilities related to such indemnifications on our financial statements.
Other indemnification agreements
--------------------------------
In the normal course of operations, we enter into various agreements that
provide general indemnifications. These indemnifications typically occur in
connection with purchases and sales of assets, securities offerings or
buy-backs, service contracts, administration of employee benefit plans,
retention of officers and directors, membership agreements and leasing
transactions. These indemnifications require us, in certain circumstances, to
compensate the counterparties for various costs resulting from breaches of
representations or obligations under such arrangements, or as a result of third
party claims that may be suffered by the counterparty as a consequence of the
transaction. We believe that the likelihood that we could incur significant
liability under these obligations is remote. Historically, we have not made any
significant payments under such indemnifications. No amount has been included in
our consolidated balance sheet as at January 31, 2005 related to these
indemnifications.
F-20
NOTE 12 - SHARE CAPITAL
COMMON SHARES OUTSTANDING
--------------------------------------------
YEAR ENDED JANUARY 31, January 31, January 31,
(THOUSANDS OF SHARES) 2005 2004 2003
--------------------------------------------
Balance, beginning of year 40,706 52,225 52,229
Stock options exercised -- 59 12
Cancelled shares on acquisitions -- -- (16)
Repurchased shares -- (11,578) --
--------------------------------------------
Balance, end of year 40,706 40,706 52,225
============================================
We are authorized to issue an unlimited number of our common shares, without par
value, for unlimited consideration. Our common shares are not redeemable or
convertible.
On July 17, 2003, we purchased 11,578,000 of our own common shares for Canadian
$3.20 per share by way of a Dutch auction tender. All common shares tendered at
or below Canadian $3.20 (subject to pro-rating and disregarding fractions) were
purchased at Canadian $3.20 and immediately cancelled. Common shares tendered at
prices higher than Canadian $3.20 were returned to holders. The total purchase
price was $27.2 million, net of costs associated with the offer. The transaction
was accounted for as a reduction in common shares of $103.9 million and an
increase in additional paid-in capital of $76.7 million.
On November 30, 2004, we announced that our Board of Directors had adopted a
shareholder rights plan (the "Rights Plan") to ensure the fair treatment of
shareholders in connection with any take-over offer, and to provide the Board of
Directors and shareholders with additional time to fully consider any
unsolicited take-over bid. We are not adopting the Rights Plan in response to
any specific proposal to acquire control of the Company. The Rights Plan has
been conditionally approved by the Toronto Stock Exchange and is subject to
approval by our shareholders at our next annual meeting of shareholders. If
approved by shareholders, the Rights Plan will take effect as of November 29,
2004, and will have an initial term of three years. The Rights Plan is similar
to plans adopted by other Canadian companies and approved by their shareholders.
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table shows the components of accumulated other comprehensive
loss:
----------------------------
YEAR ENDED JANUARY 31, January 31,
(THOUSANDS OF DOLLARS) 2005 2004
----------------------------
Accumulated mark-to-market loss on debt securities (63) (99)
Currency translation adjustments 156 (288)
----------------------------
Accumulated other comprehensive income (loss) 93 (387)
============================
NOTE 13 - STOCK-BASED COMPENSATION PLANS
We maintain stock option plans for directors, officers, employees and other
service providers. Options to purchase our common shares are granted at an
exercise price equal to the fair market value of our common shares at the day
prior to the grant, other than those options granted in conjunction with
acquisitions as described in Note 8. As a result, no compensation expense is
recorded when options are granted. When stock options are exercised, we include
the amount of the proceeds in share capital.
Employee stock options generally vest over a three- to five-year period starting
from their grant date and expire 7 years from the date of their grant.
Directors' and officers' stock options generally have accelerated vesting over
three- to five-year periods.
As of January 31, 2005, we had 4,303,597 stock options granted and outstanding
under our shareholder-approved stock option plan and 2,168,214 remained
available for grant. In addition, there were 167,011 stock options
F-21
outstanding in connection with option plans assumed or adopted pursuant to
various previously completed acquisitions.
------------------------------- ------------------------------- -------------------------------
2005 2004 2003
------------------------------- ------------------------------- -------------------------------
WEIGHTED NUMBER OF Weighted Number of Weighted Number of
AVERAGE STOCK OPTIONS Average Stock Options Average Stock Options
EXERCISE PRICE OUTSTANDING Exercise Price Outstanding Exercise Price Outstanding
------------------------------- ------------------------------- -------------------------------
Balance at February 1 8.64 3,964,239 9.91 4,223,609 11.67 4,213,335
Granted 1.09 3,063,596 3.49 988,000 4.19 780,750
Forfeited/Cancelled 6.29 (2,557,227) 9.10 (1,188,070) 13.86 (758,544)
Exercised -- -- 4.13 (59,300) 5.09 (11,932)
------------------------------- ------------------------------- -------------------------------
Balance at January 31 4.81 4,470,608 8.64 3,964,239 9.91 4,223,609
------------------------------- ------------------------------- -------------------------------
Exercisable at January 31 9.92 1,551,920 10.50 2,475,094 10.77 2,766,363
Available options 2,168,214 2,702,195 2,672,615
remaining for grant
Outstanding options as a
% of outstanding shares 11.0% 9.7% 8.1%
Options outstanding and options exercisable as at January 31, 2005 by range of
exercise price are as follows:
-------------------------------------------------- -------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- -------------------------------
RANGE OF EXERCISE PRICES Weighted average
Weighted Number of remaining Weighted
Average Stock Options contractual life Average Number of
Exercise Price Outstanding (years) Exercise Price Stock Options
-------------------------------------------------- -------------------------------
0.62 - 1.09 1.09 2,051,310 7.00 1.09 63,010
1.78 - 7.95 4.73 1,986,683 3.82 6.05 1,116,968
8.14 - 29.05 15.34 285,665 4.21 15.24 239,642
30.66 - 45.83 37.50 146,950 2.29 37.16 132,300
-------------------------------------------------- -------------------------------
4.81 4,470,608 5.15 9.92 1,551,920
================================================== ===============================
DEFERRED SHARE UNIT PLAN
Our Board of Directors adopted a deferred share unit plan effective as of June
28, 2004 pursuant to which non-employee directors are eligible to receive grants
of deferred share units (DSUs), each of which has a value equal to the average
closing price of our common shares for the five trading days preceding the date
of the grant. The plan allows each director to choose to receive, in the form of
DSUs, all, none or a percentage of the eligible director's fees which would
otherwise be payable in cash. If a director has invested less than the minimum
amount of equity in the company as prescribed from time to time by the Board of
Directors (which, as at October 31, 2004, was set at $37,500), then the director
must take at least 50% of the base annual fee for serving as a director in the
form of DSUs. Each DSU fully vests upon award, but is distributed only when the
director ceases to be a member of the Board of Directors. Vested units are
settled in cash based on common share price when conversion takes place. As at
January 31, 2005, the total DSUs held by participating directors was 7,146.
NOTE 14 - INCOME TAXES
The components of the net deferred tax asset are as follows:
------------------------------------------
YEAR ENDED JANUARY 31, January 31, January 31,
2005 2004 2003
------------------------------------------
Accruals not currently deductible 1,231 1,340 1,154
Accumulated net operating losses:
F-22
Canada 19,920 13,461 9,996
United States 31,222 30,068 28,453
Europe, Middle East and Africa (EMEA) 12,659 10,495 7,126
Asia Pacific 3,144 2,475 2,057
Difference between tax and accounting basis of capital assets 6,227 5,857 4,292
Research and development tax credits and expenses 5,564 5,262 4,220
Expenses of public offerings 370 370 1,030
------------------------------------------
Net deferred tax asset 80,337 69,328 58,328
Valuation allowance (80,337) (69,328) (58,328)
------------------------------------------
Deferred tax asset, net of valuation allowance -- -- --
==========================================
The measurement of a deferred tax asset is adjusted by a valuation allowance, if
necessary, to recognize tax benefits only to the extent that, based on available
evidence, it is more likely than not that they will be realized. Based on the
weight of positive and negative evidence regarding recoverability of our
deferred taxes, we have recorded a valuation allowance for the full amount of
our net deferred tax assets of $80.3 million during 2005.
The provision for income taxes varies from the expected provision at the
statutory rates for the reasons detailed in the table below:
------------------------------------------
YEAR ENDED JANUARY 31, January 31, January 31,
2005 2004 2003
------------------------------------------
Combined basic Canadian statutory rates 36.1% 36.6% 38.5%
Recovery of income taxes based on the above rates (19,894) (13,983) (53,483)
Increase (decrease) in income taxes resulting from:
Permanent differences including amortization of intangibles 9,186 2,546 45,741
Effect of differences between Canadian and foreign tax rates (231) 377 1,050
Application of loss carryforwards (817) (379) (30)
Valuation allowance 11,756 11,439 6,722
Other 325 287 (362)
------------------------------------------
Income tax expense (recovery) 325 287 (362)
==========================================
F-23
We have combined income tax loss carryforwards of approximately $185.9 million,
which expire as follows:
-----------------------------------------------------------------
EXPIRY YEAR CANADA UNITED STATES EMEA ASIA PACIFIC TOTAL
-----------------------------------------------------------------
2006 -- -- 306 -- 306
2007 4,079 1,877 694 -- 6,650
2008 -- 3,222 177 -- 3,399
2009 2,299 3,921 352 509 7,081
2010 15,571 4,298 265 328 20,462
2011 5,324 7,263 -- 553 13,140
2012 27,908 6,048 -- 10 33,966
2018 -- 3,167 -- -- 3,167
2019 -- 18,074 -- -- 18,074
2020 -- 20,777 -- -- 20,777
2021 -- 3,502 -- -- 3,502
2022 -- 1,568 -- -- 1,568
2023 -- 2,681 -- -- 2,681
2024 -- 578 -- -- 578
2025 -- 2,068 -- -- 2,068
Indefinite -- -- 38,475 10,013 48,488
-----------------------------------------------------------------
55,181 79,044 40,269 11,413 185,907
=================================================================
NOTE 15 - SEGMENTED INFORMATION
We operate in one business segment providing on-demand supply chain solutions.
The following tables provide our segmented revenue information by geographic
areas of operation and solution type:
------------------------------------------
YEAR ENDED JANUARY 31, January 31, January 31,
2005 2004 2003
------------------------------------------
Revenues
Americas 32,857 40,637 48,220
Europe, Middle East and Africa 11,085 14,318 17,058
Asia Pacific 2,453 4,830 5,105
------------------------------------------
46,395 59,785 70,383
==========================================
------------------------------------------
YEAR ENDED JANUARY 31, January 31, January 31,
2005 2004 2003
------------------------------------------
Revenues
Services 41,820 48,887 53,014
License 4,575 10,898 17,369
------------------------------------------
46,395 59,785 70,383
==========================================
Services revenues are comprised of the following: (i) ongoing transactional
and/or subscription fees for use of our services and products by our customers;
(ii) professional services revenues from consulting, implementation and training
services related to our services and products; and (iii) maintenance and other
related revenues, which include revenues associated with maintenance and support
of our services and products. License revenues derive from licenses granted to
our customers to use our software products.
The following table provides our segmented information by geographic areas of
operation for our long-lived assets. Long-lived assets represent capital assets,
goodwill and intangible assets that are attributed to individual geographic
segments.
F-24
----------------------------
YEAR ENDED JANUARY 31, January 31,
2005 2004
----------------------------
Total long-lived assets
Americas 9,039 34,734
Europe, Middle East and Africa 1,922 4,609
Asia Pacific 127 411
----------------------------
11,088 39,754
============================
NOTE 16 - SUMMARY OF MATERIAL DIFFERENCES BETWEEN CANADIAN GAAP AND US GAAP
We prepare our consolidated financial statements in accordance with US GAAP that
conforms in all material respects with Canadian GAAP except as set forth below.
CONDENSED CONSOLIDATED BALANCE SHEETS
----------------------------
JANUARY 31, January 31,
2005 2004
----------------------------
Total assets in accordance with US GAAP 72,572 128,659
Mark-to-market of short- and long-term marketable securities (a) 63 99
----------------------------
Total assets in accordance with Canadian GAAP 72,635 128,758
============================
Total liabilities in accordance with US GAAP 36,834 38,207
Convertible debentures (b) (562) (1,646)
----------------------------
Total liabilities in accordance with Canadian GAAP 36,272 36,561
============================
Total shareholders' equity in accordance with US GAAP 35,738 90,452
Mark-to-market of short- and long-term marketable securities (a) 63 99
Convertible debentures (b) 562 1,646
----------------------------
Total shareholders' equity in accordance with Canadian GAAP 36,363 92,197
============================
F-25
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
----------------------------
JANUARY 31, January 31,
2005 2004
----------------------------
Loss in accordance with US GAAP (55,331) (38,493)
Amortization of convertible debentures (b) (1,084) (1,812)
Loss on purchase of convertible debentures (b) -- (3,720)
Foreign exchange translation gain (loss) (c) (384) 1,253
----------------------------
Loss in accordance with Canadian GAAP (per Canadian GAAP (56,799) (42,772)
in effect on January 31, 2004)
Stock-based compensation expense (d) (890) (727)
----------------------------
Loss in accordance with Canadian GAAP (per Canadian GAAP
in effect January 31, 2005) (57,689) (43,499)
============================
(A) MARK-TO-MARKET OF SHORT- AND LONG-TERM MARKETABLE SECURITIES
Under US GAAP, marketable debt securities that are available for sale are
recorded at their fair market value with the corresponding gain (loss) recorded
in comprehensive income. Under Canadian GAAP, marketable debt securities are
recorded at amortized cost.
(B) CONVERTIBLE DEBENTURES
Under US GAAP, convertible debentures are recorded at their face value. Under
Canadian GAAP, the debt and equity components of the convertible debentures are
recorded and presented separately. The debt component of the convertible
debentures is measured and recorded based on the present value of future
principal and interest payments at the date of issue. The equity component is
recorded based on the difference between the face value and the value of the
debt component at the date of issue. The equity component is amortized to
interest expense on a straight-line basis over the term to maturity of the
convertible debentures. Since the carrying value of the debentures differs
between US GAAP and Canadian GAAP, the resulting gain (loss) on a repurchase of
debentures will also differ.
(C) FOREIGN EXCHANGE TRANSLATION GAIN (LOSS)
Under US GAAP, foreign exchange translation gain (loss) is recorded in
comprehensive income and included in shareholders' equity where the functional
currency of the parent company's foreign operations is the local currency. Under
Canadian GAAP, foreign exchange translation gain (loss) is recorded in earnings
where it is determined that the foreign operations are integrated with the
parent company. In conjunction with our cost reduction initiatives announced in
May 2004, management determined that its foreign subsidiaries should be treated
under the current rate method for Canadian GAAP beginning with the second
quarter of 2005 and for subsequent quarters. As a result, foreign exchange
translation gain (loss) is recorded as a separate component of shareholders'
equity.
(D) STOCK-BASED COMPENSATION EXPENSE
Under US GAAP, under APB 25, no compensation expense is recorded for the
granting of employee stock options if the stock options are granted with an
exercise price greater or equal to the fair market value at the date of the
grant. Under Canadian GAAP, we have adopted the amended recommendations in CICA
Handbook Section 3870 ("Section 3870"), "Stock-based Compensation and Other
Stock-based Payments" which require fair value accounting for employee awards
granted on or after February 1, 2002. Based on the transitional provisions of
Section 3870, we have restated the results of operations for the fiscal period
ended January 31, 2004 to include the expense for employee awards that was
previously included in the Canadian GAAP pro forma note disclosures for this
period.
F-26