DELOITTE Deloitte & Touche LLP
55 King Street West
Suite 700
Kitchener ON N2G 4W1
Canada
Tel: (519) 576-0880
Fax: (519) 576-0209
www.deloitte.ca
AUDITORS' REPORT
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 of January 31, 2004 and 2003 and the consolidated
statements of operations, shareholders' equity and cash flows for each of the
years in the three-year period ended January 31, 2004. 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. Those 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.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of January 31, 2004
and 2003 and the results of its operations and its cash flows for each of the
years in the three-year period ended January 31, 2004 in accordance with
accounting principles generally accepted in the United States of America.
On May 14, 2004, except as to Note 16, which is as of May 19, 2004, 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.
/s/ Deloitte & Touche LLP
- --------------------------------
Chartered Accountants
Kitchener, Ontario
May 14, 2004, except as to Note 16, which is as of May 19, 2004
COMMENTS BY AUDITOR ON CANADA-UNITED STATES OF AMERICA REPORTING DIFFERENCE
In the United States of America, reporting standards for auditors require the
addition of an explanatory paragraph (following the opinion paragraph) when
there are changes in accounting principles that have a material effect on the
comparability of the Company's financial statements, such as the change in
accounting for goodwill and intangible assets described in Notes 2 and 7 to the
consolidated financial statements. Our report to the shareholders, dated May 14,
2004, except as to Note 16, which is as of May 19, 2004, is expressed in
accordance with Canadian reporting standards which do not require a reference to
such changes in accounting principles in the auditors' report when the change is
properly accounted for and adequately disclosed in the financial statements.
/s/ Deloitte & Touche LLP
- --------------------------------
Chartered Accountants
Kitchener, Ontario
May 14, 2004, except as to Note 16, which is as of May 19, 2004
THE DESCARTES SYSTEMS GROUP INC.
CONSOLIDATED BALANCE SHEETS
(US DOLLARS IN THOUSANDS; US GAAP)
- -------------------------------------------------------------------------------------------------
---------- ----------
JANUARY 31, January 31,
2004 2003
---------- ----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents (Note 3) 13,187 21,195
Marketable securities (Note 3) 34,586 8,521
Accounts receivable
Trade (Note 4) 12,986 14,036
Other 3,501 2,819
Prepaid expenses and other 3,045 3,020
---------- ----------
67,305 49,591
MARKETABLE SECURITIES (Note 3) 17,279 144,386
CAPITAL ASSETS (Note 5) 13,452 12,151
LONG-TERM INVESTMENTS (Note 6) 3,300 3,300
GOODWILL (Note 7) 18,038 17,603
INTANGIBLE ASSETS (Note 7) 8,264 13,606
DEFERRED CHARGES AND OTHER ASSETS 1,021 1,638
---------- ----------
128,659 242,275
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable 4,743 3,964
Accrued liabilities 3,609 8,673
Deferred revenue 2,860 2,923
---------- ----------
11,212 15,560
CONVERTIBLE DEBENTURES (Note 10) 26,995 71,995
---------- ----------
38,207 87,555
---------- ----------
COMMITMENTS, CONTINGENCIES AND GUARANTEES (Note 11)
SHAREHOLDERS' EQUITY
Common shares - unlimited shares authorized; Shares issued and
outstanding 40,705,811 and 52,224,511 (Note 12) 364,907 468,618
Additional paid-in capital 81,667 5,201
Unearned deferred compensation (339) (690)
Accumulated other comprehensive loss (Note 12) (387) (1,506)
Accumulated deficit (355,396) (316,903)
---------- ----------
90,452 154,720
---------- ----------
128,659 242,275
========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
Approved by the Board:
[SIGNATURE ILLEGIBLE] [SIGNATURE ILLEGIBLE]
Director Director
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,
2004 2003 2002
---------- ---------- ----------
REVENUES 59,785 70,383 79,522
COST OF REVENUES 19,387 26,631 27,701
---------- ---------- ----------
GROSS PROFIT 40,398 43,752 51,821
---------- ---------- ----------
EXPENSES
Sales and marketing 31,843 29,943 29,543
Research and development 9,402 15,223 25,385
General and administrative 12,365 12,895 10,751
Amortization of goodwill -- -- 24,521
Amortization of intangible assets 5,339 10,100 8,039
Impairment of goodwill (Note 7) -- 86,689 --
Impairment of intangible assets (Note 7) -- 17,980 --
Write-down of long-term investments (Note 6) -- -- 9,783
Purchased in-process research and development -- -- 4,500
Restructuring costs (Note 9) 18,784 11,712 3,984
---------- ---------- ----------
77,733 184,542 116,506
---------- ---------- ----------
LOSS FROM OPERATIONS (37,335) (140,790) (64,685)
---------- ---------- ----------
OTHER INCOME (EXPENSE)
Interest expense (3,020) (4,619) (5,012)
Investment income 1,245 6,493 10,705
Gain (loss) on purchase of convertible debentures (Note 10) 904 (89) 352
---------- ---------- ----------
(871) 1,785 6,045
---------- ---------- ----------
LOSS BEFORE INCOME TAXES AND MINORITY INTEREST (38,206) (139,005) (58,640)
INCOME TAX EXPENSES (RECOVERY) - CURRENT (Note 14) 287 (362) 78
---------- ---------- ----------
LOSS BEFORE MINORITY INTEREST (38,493) (138,643) (58,718)
MINORITY INTEREST -- 448 --
---------- ---------- ----------
LOSS (38,493) (138,195) (58,718)
========== ========== ==========
LOSS PER SHARE
Basic and diluted (0.84) (2.65) (1.15)
========== ========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic and diluted (thousands) 45,951 52,234 50,858
========== ========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
THE DESCARTES SYSTEMS GROUP INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(US DOLLARS IN THOUSANDS; US GAAP)
- -------------------------------------------------------------------------------------------------------------
---------- ---------- ----------
JANUARY 31, January 31, January 31,
2004 2003 2002
---------- ---------- ----------
COMMON STOCK
Balance, beginning of year 468,618 468,445 415,676
Stock options exercised 163 223 2,530
Shares repurchased (Note 12) (103,874) -- --
Issuance of shares in conjunction with acquisitions -- (50) 50,239
---------- ---------- ----------
Balance, end of year 364,907 468,618 468,445
---------- ---------- ----------
ADDITIONAL PAID-IN CAPITAL
Balance, beginning of year 5,201 5,201 4,074
Shares repurchased (Note 12) 76,646 -- --
Unearned compensation related to issuance of stock options (180) -- 1,127
---------- ---------- ----------
Balance, end of year 81,667 5,201 5,201
---------- ---------- ----------
UNEARNED DEFERRED COMPENSATION
Balance, beginning of year (690) (1,157) (1,101)
Deferred compensation earned on stock options 351 467 1,071
Unearned compensation related to stock options -- -- (1,127)
---------- ---------- ----------
Balance, end of year (339) (690) (1,157)
---------- ---------- ----------
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance, beginning of year (1,506) (200) (190)
Foreign currency translation adjustment 1,253 (1,341) (10)
Net unrealized investment gains/(losses) (134) 35 --
---------- ---------- ----------
Balance, end of year (387) (1,506) (200)
---------- ---------- ----------
ACCUMULATED DEFICIT
Balance, beginning of year (316,903) (176,687) (117,969)
Loss (38,493) (138,195) (58,718)
Coterminous year-end adjustment -- (2,021) --
---------- ---------- ----------
Balance, end of year (355,396) (316,903) (176,687)
---------- ---------- ----------
---------- ---------- ----------
Total Shareholders' Equity 90,452 154,720 295,602
========== ========== ==========
COMPREHENSIVE LOSS
Loss (38,493) (138,195) (58,718)
Other comprehensive loss
Foreign currency translation adjustment 1,253 (1,341) (10)
Net unrealized investment gains/(losses) (134) 35 --
---------- ---------- ----------
Total other comprehensive income (loss) 1,119 (1,306) (10)
---------- ---------- ----------
Comprehensive loss (37,374) (139,501) (58,728)
========== ========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
THE DESCARTES SYSTEMS GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(US DOLLARS IN THOUSANDS; US GAAP)
- --------------------------------------------------------------------------------------------------------------------
---------- ---------- ----------
JANUARY 31, January 31, January 31,
2004 2003 2002
---------- ---------- ----------
OPERATING ACTIVITIES
Loss (38,493) (138,195) (58,718)
Adjustments to reconcile loss to cash provided by (used in) operating
activities:
Bad debt charge 4,331 2,907 3,500
Depreciation 2,782 2,514 3,161
Amortization of goodwill -- -- 24,521
Amortization of intangible assets 5,339 10,100 8,039
Impairment of goodwill -- 86,689 --
Impairment of intangible assets -- 17,980 --
Write-down of long-term investments -- -- 9,783
Purchased in-process research and development -- -- 4,500
Restructuring cost 1,545 1,069 1,802
Amortization of convertible debenture costs 451 726 701
Amortization of deferred compensation 171 467 1,071
Minority interest -- 448 --
Loss (gain) on purchase of convertible debentures (904) 89 (352)
Changes in operating assets and liabilities:
Accounts receivable
Trade (3,281) 381 1,605
Other (682) 4,180 555
Prepaid expenses and other (616) 851 (1,736)
Accounts payable 779 1,306 (2,349)
Accrued liabilities (3,991) (5,956) (4,406)
Deferred revenue (63) (2,375) (7,275)
---------- ---------- ----------
Cash used in operating activities (32,632) (16,819) (15,598)
---------- ---------- ----------
INVESTING ACTIVITIES
Short-term marketable securities (26,065) 73,964 86,502
Long-term marketable securities 127,107 (61,942) (82,444)
Additions to capital assets (5,744) (5,287) (5,356)
Long-term investments -- (50) (1,833)
Acquisition of subsidiaries, net of cash acquired (335) (2,175) (9,540)
---------- ---------- ----------
Cash provided by (used in) investing activities 94,963 4,510 (12,671)
---------- ---------- ----------
FINANCING ACTIVITIES
Purchase of convertible debentures, including purchase costs (43,274) (1,545) (1,098)
Purchase of common shares, including purchase costs (27,228) -- --
Issuance of common shares for cash 163 223 2,530
---------- ---------- ----------
Cash used in (provided by) financing activities (70,339) (1,322) 1,432
---------- ---------- ----------
DECREASE IN CASH AND CASH EQUIVALENTS (8,008) (13,631) (26,837)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR (NOTE 2) 21,195 34,826 62,938
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR 13,187 21,195 36,101
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest 2,821 3,977 4,318
Cash paid during the year for income taxes 159 7 335
========== ========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
- ---------------------------------------------------
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 supply chain solutions that help
companies reduce costs, save time, and enhance customer satisfaction. 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, 2004, is
referred to as the "current fiscal year", "fiscal 2004", "2004" or using similar
words. Our previous fiscal year, which ended on January 31, 2003, is referred to
as the "previous fiscal year", "fiscal 2003", "2003" 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.
Effective February 1, 2002, we made the year-end of certain of our subsidiaries,
which previously had a December year-end, coterminous with the January 31st
year-end of the parent. Accordingly, the results of such subsidiaries for the
month ended January 31, 2002, which amounted to a loss of $2.0 million (revenues
of $0.9 million net of expenses of $2.9 million), were recorded as an adjustment
to the opening accumulated deficit. The consolidated balance sheet as at January
31, 2003 reflects the balance sheets of such subsidiaries as at January 31,
2003. The consolidated results of operations and cash flows for the year ended
January 31, 2003 reflect the results of operations and the cash flows of such
subsidiaries for the year ended January 31, 2003, respectively. For the purposes
of the consolidated cash flow statement, the opening cash and cash equivalents
as at February 1, 2002 reflect the cash and cash equivalents of such
subsidiaries as at February 1, 2002.
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,
2004. The fair value of convertible debentures, based on quoted market prices as
at January 31, 2004 on the Toronto Stock Exchange was $25.6 million.
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.
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. Our large customer base 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 foreign
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 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 Unites 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 DEBT SECURITIES
Marketable securities represent cash invested in investment-grade corporate
bonds and commercial paper and in investment-grade dividend received deduction
("DRD") eligible securities issued by US corporations. Cash and cash equivalents
include short-term deposits and marketable debt securities with original
maturities of three months or less. Short-term marketable securities comprise
debt securities with original maturities between three and 12 months from the
balance sheet date. Long-term marketable securities comprise debt securities
with original maturities in excess of 12 months from the balance sheet date and
DRD eligible securities.
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 ($99), $35 and nil in 2004, 2003 and
2002, 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.
GOODWILL AND INTANGIBLE ASSETS
We account for goodwill in accordance with the SFAS No. 142, "Goodwill and other
intangible assets", which was adopted effective February 1, 2002. SFAS No. 142,
among other things, requires that goodwill is no longer amortized, but instead
is tested for impairment at least annually. During the year, we changed the date
of our annual goodwill impairment test to October 31 of each year. This was done
so that the impairment test did not coincide with the period when we are focused
on preparing our annual audited financial statements, in order that the analysis
and calculations could be given appropriate time and effort to properly
conclude. We believe that the change in the test date is preferable for
administrative purposes and did not delay, accelerate or avoid any impairment
charge.
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 developed for internal use is included
in capital assets on our balance sheet as at January 31, 2004 and 2003.
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 lesser of life of
asset or term of lease, generally 5
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.
REVENUE RECOGNITION
We recognize revenues in accordance with AICPA Statement of Position 97-2 ("SOP
97-2"), "Software revenue recognition" and the US Securities and Exchange
Commission's Staff Accounting Bulletin 101, "Revenue recognition in financial
statements" ("SAB 101").
Our revenues are generated principally from (i) ongoing network usage fees in
the form of transactional and monthly subscription fees, (ii) software licenses
that grant customers the right to use our software products, (iii) professional
services revenues from a variety of services related to the implementation,
training in use and support of our software, including project management,
consulting and other services, and (iv) maintenance and other revenues, which
include revenues associated with annual software maintenance and support
services.
Network-related revenues generally consist of fees arising from the customers
processing transactions through our proprietary networks and are recognized as
the transactions occur.
In accordance with SOP 97-2, as amended, revenues derived from multiple element
software sale arrangements are recognized in earnings based on the relative fair
values of the individual elements. Software license revenues are recognized upon
execution of a contract and delivery of software, provided that the license fee
is fixed or determinable and no significant production, modification or
customization of the software is required and collection is considered probable
by management. If these revenue recognition criteria above are not satisfied,
amounts received from customers are classified as deferred revenue on the
balance sheet until such time as the revenue recognition criteria are met.
Service revenues are primarily derived from fees for consulting, implementation
and training services related to our supply chain solutions and are recognized
as the services are performed.
Maintenance revenues are normally billed in advance and recorded as deferred
revenues. Deferred revenue resulting from maintenance contracts is recognized as
revenue rateably over the term of the maintenance period.
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 time when products are marketed are expensed as they are insignificant.
STOCK-BASED COMPENSATION
At January 31, 2004, 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 the Company had
applied the fair value recognition provisions of SFAS No. 123, "Accounting for
stock-based compensation."
------------------------------------------
YEAR ENDED JANUARY 31, January 31, January 31,
2004 2003 2002
------------------------------------------
Loss - As reported (38,493) (138,195) (58,718)
Add: Stock-based compensation - As reported 171 467 1,071
Less: Total stock-based compensation expense determined under the fair value
based method for all awards (5,458) (8,546) (9,022)
------------------------------------------
Loss - Pro forma (43,780) (146,274) (66,669)
==========================================
Loss per share - Basic and diluted
------------------------------------------
As reported (0.84) (2.65) (1.15)
==========================================
Pro forma (0.95) (2.80) (1.31)
==========================================
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,
2004 2003 2002
------------------------------------------
Black-Scholes weighted average assumptions:
Expected dividend yield 0.0% 0.0% 0.0%
Expected volatility 83.0% 91.0% 108.0%
Risk-free rate 3.9% 4.2% 4.6%
Expected option life in years 4.0 3.6 4.4
==========================================
Weighted average fair value per option $1.64 $3.43 $7.32
==========================================
PRODUCT WARRANTY
We have not experienced significant warranty claims to date and, as a result,
have not recorded a provision for product warranty claims at January 31, 2004 or
2003.
INCOME TAXES
We account for income taxes in accordance 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
ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH
LIABILITIES AND EQUITY
In May 2003, the FASB issued SFAS No. 150, ``Accounting for certain financial
instruments with characteristics of both liabilities and equity.'' SFAS No. 150
modifies the accounting for certain financial instruments that, under previous
guidance, could be accounted for as equity. SFAS No. 150 requires that such
instruments be classified as liabilities in statements of financial position.
SFAS No. 150 affects the accounting for three types of freestanding financial
instruments, namely, (1) mandatorily redeemable shares, which the issuing
company is obligated to buy back in exchange for cash or other assets; (2)
instruments (such as put options and forward purchase contracts), other than
outstanding shares, that do or may require the issuer to buy back some of its
shares in exchange for cash or other assets; and (3) obligations that can be
settled with shares, the monetary value of which is fixed, tied solely or
predominantly to a variable such as a market index, or varies inversely with the
value of the issuer's shares. SFAS No. 150 does not apply to features embedded
in financial
instruments that are not derivatives in their entirety. In addition to its
requirements for the classification and measurement of financial instruments
within its scope, SFAS No. 150 also requires disclosures about alternative ways
of settling those instruments and the capital structure of entities, all of
whose shares are mandatorily redeemable. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. It is to be implemented by reporting the cumulative effect of a change in
an accounting principle for financial instruments created before the issuance
date of the Statement and still existing at the beginning of the interim period
of adoption. Restatement is not permitted.
We have adopted the guidance of SFAS No. 150 effective August 1, 2003. The
adoption of SFAS No. 150 did not, and is not anticipated to, have a material
impact on our business, results of operations or financial position.
GAINS AND LOSSES FROM EXTINGUISHMENT OF DEBT
In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements 4, 44,
and 64, amendment of FASB statement 13, and technical corrections." SFAS No. 145
updates, clarifies and simplifies existing accounting pronouncements, including
rescinding SFAS 4, which required all gains and losses from extinguishment of
debt to be aggregated and, if material, classified as an extraordinary item, net
of related income tax effect. SFAS 145 is effective for fiscal years beginning
after May 15, 2002, with early adoption of the provisions related to the
rescission of SFAS No. 4 encouraged.
Effective February 1, 2003 we treated the gains or losses on the purchase of
convertible debentures for cancellation in accordance with SFAS No. 145. The
classification of gains or losses realized on any future redemption of
convertible debentures will also be assessed under the requirements of SFAS No.
145. Prior years gains or losses on the purchase of convertible debentures for
cancellation have been reclassified from extraordinary items to conform with
SFAS No. 145.
OFF-BALANCE SHEET ARRANGEMENTS
On January 17, 2003, the FASB issued Interpretation 46 ("FIN 46"),
"Consolidation of variable interest entities", which clarifies the application
of Accounting Research Bulletin 51, "Consolidated Financial Statements", to
those entities (defined as Variable Interest Entities (VIEs), and more commonly
referred to as special purpose entities (SPE), in which either the equity at
risk is not sufficient to permit that entity to finance its activities without
additional subordinated financial support from other parties, or equity
investors lack either voting control, an obligation to absorb expected losses,
or the right to receive expected residual returns. FIN 46 requires consolidation
of VIEs by the Primary Beneficiary. The Primary Beneficiary is defined as the
party who has exposure to the majority of the expected losses and/or expected
residual returns of the VIEs. This interpretation applies immediately to all
VIEs created after January 31, 2003, and no later than the end of the first
interim or annual reporting period ending after March 15, 2004, for VIEs created
prior to February 1, 2003. The adoption of FIN 46 did not have a material impact
on our business, results of operations or financial position.
NOTE 3 - CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
The following is a summary of cash, cash equivalents and marketable securities
as at January 31, 2004 and 2003.
--------------------------------------------------------
COST UNREALIZED UNREALIZED MARKED TO
JANUARY 31, 2004 BASIS GAINS LOSSES MARKET
--------------------------------------------------------
CASH
Cash 12,190 - - 12,190
Money market funds 997 - - 997
--------------------------------------------------------
Total cash and cash equivalents 13,187 - - 13,187
--------------------------------------------------------
MARKETABLE SECURITIES
Corporate bonds 34,636 - (50) 34,586
--------------------------------------------------------
Total short-term marketable securities 34,636 - (50) 34,586
--------------------------------------------------------
Corporate bonds 6,828 - (50) 6,778
DRD eligible investments 10,500 1 - 10,501
--------------------------------------------------------
Total long-term marketable securities 17,328 1 (50) 17,279
--------------------------------------------------------
--------------------------------------------------------
Total cash, cash equivalents and marketable securities 65,151 1 (100) 65,052
--------------------------------------------------------
--------------------------------------------------------
COST UNREALIZED UNREALIZED MARKED TO
JANUARY 31, 2003 BASIS GAINS LOSSES MARKET
--------------------------------------------------------
CASH
Cash 15,268 - - 15,268
Money market funds 5,927 - - 5,927
--------------------------------------------------------
Total cash and cash equivalents 21,195 - - 21,195
--------------------------------------------------------
MARKETABLE SECURITIES
Corporate bonds 8,312 209 - 8,521
--------------------------------------------------------
Total short-term marketable securities 8,312 209 - 8,521
--------------------------------------------------------
Corporate bonds 9,560 15 (189) 9,386
DRD eligible investments 135,000 - - 135,000
--------------------------------------------------------
Total long-term marketable securities 144,560 15 (189) 144,386
--------------------------------------------------------
Total cash, cash equivalents and marketable securities 174,067 224 (189) 174,102
========================================================
We do not have any investments which we have held greater than 12 months as at
January 31, 2004 with unrealized losses.
OPERATING LINES OF CREDIT
We have operating lines of credit of $9.1 million (Canadian $12.0 million) in
Canada. Borrowings under this facility bear interest at prime rate based on the
borrowed currency (4.25% on Canadian dollar borrowings and 4.0% on US dollar
borrowings at January 31, 2004), are due on demand and are secured by our bond
portfolio and a general assignment of inventory and accounts receivable. At
January 31, 2004, we had issued letters of credit with balances outstanding of
$2.6 million, which reduced the available operating line of credit by a
corresponding amount. NOTE 4 - TRADE RECEIVABLES
----------------------------
YEAR ENDED JANUARY 31, January 31,
2004 2003
----------------------------
Trade receivables 17,359 16,836
Less: Allowance for doubtful accounts (4,373) (2,800)
----------------------------
12,986 14,036
============================
NOTE 5 - CAPITAL ASSETS
----------------------------
YEAR ENDED JANUARY 31, January 31,
2004 2003
----------------------------
Cost
Computer equipment and software 26,235 19,916
Furniture and fixtures 3,430 4,142
Leasehold improvements 3,260 2,021
----------------------------
32,925 26,079
Accumulated amortization
Computer equipment and software 15,286 11,360
Furniture and fixtures 2,298 1,486
Leasehold improvements 1,889 1,082
----------------------------
19,473 13,928
----------------------------
13,452 12,151
============================
The net carrying amount of assets under development or obtained for internal use
that are not being depreciated was $4.4 million and $1.4 million as at January
31, 2004 and January 31, 2003, respectively.
NOTE 6 - LONG-TERM INVESTMENTS
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 as of January 31, 2004 was $5.1 million.
In September 2000, the Company invested $2.5 million in Maptuit Corporation by
way of $0.5 million in cash and the issuance of 39,526 common shares valued at
$2.0 million. Maptuit is a provider of wireline and wireless Internet-based
location services for maps, directions and points of interest.
In November 2000, in connection with the acquisition of TraffiCop, the Company
made a commitment to invest $3.0 million in two companies that were spun off
from TraffiCop. As at January 31, 2004, the entire committed amount has been
invested in these companies.
In December 2000, the Company acquired a minority position in Sameday.com, Inc.
for cash consideration of $2.5 million. Sameday.com provided Internet-based
supply chain management technology.
During the quarter ended April 30, 2001, management conducted a review of the
carrying value of the long-term investments and as a result recorded a provision
of $9.8 million against the carrying values of certain of these long-term
investments, as the impairments were considered to be other than temporary. The
impairment resulted from the general market conditions for the technology
industry and delays in achieving pre-established product development and revenue
growth targets by certain of these investees.
NOTE 7 - GOODWILL AND INTANGIBLE ASSETS
-------------------------------
YEAR ENDED JANUARY 31, January 31,
2004 2003
-------------------------------
GOODWILL
Cost 142,520 142,085
Accumulated amortization and impairment 124,482 124,482
-------------------------------
18,038 17,603
===============================
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 20,552 18,117
Non-compete covenants 893 549
Existing technology 13,363 12,243
Trade names 9,808 8,365
-------------------------------
44,616 39,274
-------------------------------
8,264 13,606
===============================
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 nil, $86.7 million and nil due to impairment for 2004,
2003 and 2002.
We ceased amortizing goodwill beginning on February 1, 2002. Prior to that date
we amortized goodwill arising from any acquisition made before July 1, 2001 over
its useful life. Goodwill amortization of $24.5 million was included in net
income for the year ended January 31, 2002. Had goodwill not been amortized in
the year ended January 31, 2002, both basic and diluted loss per share for that
year would have decreased by $0.48.
----------------------------------------
YEAR ENDED JANUARY 31, January 31, January 31,
2004 2003 2002
----------------------------------------
Loss - As reported (38,493) (138,195) (58,718)
Goodwill amortization adjustment - - 24,521
----------------------------------------
Adjusted loss (38,493) (138,195) (34,197)
========================================
Loss per share - Basic and diluted
----------------------------------------
As reported (0.84) (2.65) (1.15)
========================================
Adjusted loss (0.84) (2.65) (0.67)
========================================
ANNUAL GOODWILL IMPAIRMENT TEST
As indicated above, on February 1, 2002, we ceased amortizing goodwill. In
addition, we initially designated February 1 as the date for our annual
impairment test. The annual impairment test on February 1, 2003, using a
valuation approach based on market capitalization and discounted cash flow
models, indicated a goodwill impairment of $86.7 million that was recorded in
the results of operations for the year ended January 31, 2003.
During the quarter ended October 31, 2003, we changed the date of our annual
goodwill impairment test to October 31st of each year. This was done so that the
impairment test did not coincide with the period when we are focused on
preparing our annual audited financial statements. We believe that the change in
the test date is preferable for administrative purposes and is not intended to
delay, accelerate or avoid any impairment charge.
We completed our annual goodwill impairment test as of October 31, 2003 by
comparing our enterprise fair value to our book value. This comparison indicated
an aggregate enterprise fair value for the Company in excess of its book value.
Accordingly, we determined that no impairment existed.
Future goodwill impairment tests will be performed on October 31st of each year.
In addition, there will be 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. All impairment adjustments will be recognized as operating
expenses 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 life, which historically has 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 cash flows. We determined that there were impairment
write-downs of nil in 2004, $18.0 in 2003 and nil in 2002.
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.
Future amortization expense for intangible assets that we own as at January 31,
2004 are estimated to be $4.1 million for 2005, $2.7 million for 2006, $1.0
million for 2007, $0.2 million for 2008, $0.2 million for 2009 and $0.1 million
for 2010.
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.
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 from
Nocom AB, an information technology company headquartered in Sweden, Nocom's 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. We issued 78,250 options to purchase common shares of
Descartes to employees of Tradevision pursuant to our Stock Option Plan. At
January 31, 2004, 29,520 of these options were outstanding of which 14,490 were
exercisable.
In conjunction with the acquisitions of the shares of Tradevision, we developed
a restructuring plan to eliminate redundant staff positions, offices and network
infrastructures. The final plan resulted in severance costs of approximately
$2.1 million, infrastructure consolidation costs of $1.1 million and office
closure and other activity costs of $0.5 million.
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. The allocations set out in the table below are based on an appraisal of
the acquired intangibles performed by an independent consultant we engaged
during 2003.
---------------
(MILLIONS) Tradevision
---------------
Customer agreements and relationships 0.5
Existing technology 1.8
Trade names 1.0
Goodwill 4.1
Other net assets (liabilities) 0.2
---------------
Purchase Price 7.6
===============
In addition to the amounts above, an additional $1.2 million in acquisition
costs have been incurred since October 2002. Accordingly, the total cash
purchase price for Tradevision thus far is $8.8 million ($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 has been accounted for using the purchase method.
The following table presents unaudited pro forma revenue, loss and loss per
share as if we acquired Tradevision effective February 1, 2001.
---------------------------
YEAR ENDED January 31, January 31,
2003 2002
---------------------------
Revenue 70,383 83,436
Loss (138,643) (61,185)
---------------------------
Loss per share (2.65) (1.20)
===========================
2002 ACQUISITIONS - CENTRICITY, TRANSETTLEMENTS AND NEOMODAL
During 2002, in addition to the purchase of the 70% interest in Tradevision
described above, we completed the acquisitions set out in the table below, which
have been accounted for using the purchase method:
----------------------------------------
Centricity TranSettlements NeoModal
----------------------------------------
In-process research and development 4,500 - -
Assembled workforce - 694 1,397
Customer agreements and relationships - 10,800 -
Non-compete covenants - - 560
Existing technology 7,753 - 3,630
Trade names 1,545 1,946 -
Goodwill 10,743 11,426 -
Other net assets (liabilities) 290 1,217 -
----------------------------------------
24,831 26,083 5,587
----------------------------------------
In July 2001, we issued 1,311,205 common shares to the former shareholders of
Centricity, Inc. ("Centricity") in a private placement and issued 208,107
options to purchase our common shares to the employees of Centricity (such
shares and options collectively valued at approximately $24 million), and
cancelled a note receivable of $350,000 in exchange for receiving 100% of the
outstanding share capital of Centricity. Centricity was a privately held
Atlanta, Georgia company specializing in ground transportation and optimization
solutions. At January 31, 2004, 101,605 of these employee stock options were
outstanding of which 71,772 were exercisable.
In June 2001, we announced that we had expanded our messaging services available
over our proprietary networks with the completion of the acquisition of
TranSettlements, Inc. of Atlanta, Georgia. TranSettlements was a leading
provider of logistics network messaging services for the North American ground
transportation industry. The acquisition was completed by the issuance of
1,534,964 common shares to the former shareholders of TranSettlements and the
issuance of 176,859 options to purchase our common shares to the employees of
TranSettlements (such shares and options collectively valued at approximately
$25.0 million) in exchange for all of the outstanding share capital of
TranSettlements. At January 31, 2004, 29,048 of these employee stock options
were outstanding of which 11,633 were exercisable.
In May 2001, pursuant to an asset purchase agreement, we acquired certain
technology assets of NeoModal.com, L.L.C., a Delaware limited liability
corporation, which developed, marketed and supported a suite of Internet-based
logistics products for the global transportation industry. The acquisition of
certain technology assets, which also included the transfer to us of certain
employees of NeoModal, was completed by the issuance of 50,030 common shares to
NeoModal (valued at approximately $1 million), payment of cash of approximately
$3.2 million, cancellation of a note receivable of $900,000 from NeoModal and
the issuance of 99,750 options to purchase our common shares to these new
employees. At January 31, 2004, 4,500 of these employee stock options were
outstanding of which 1,800 were exercisable.
The allocations shown in the above table for Centricity and TranSettlements are
based on an appraisal of the acquired intangibles performed by an independent
consultant engaged by us during 2002. The acquired in-process research and
development costs of Centricity reflected values assigned to technology which
had not reached a feasible stage as of the acquisition date and, other than its
intended use, had no alternative future use. Accordingly, we recorded a charge
of $4.5 million in the second quarter ended July 31, 2001. The value allocated
to in-process research and development reflected the present value of the
projected revenues likely to be generated upon completion of the projects and
the beginnings of commercial sale, the related operating expenses and the cost
to complete the project. A discount factor of 20% was applied, which reflected
the time value of invested capital as well as the related technological and
market risks. The purchase price allocation shown above for the specific
technology assets of NeoModal that were acquired is based on an internal
assessment of the acquired intangibles.
The following table presents unaudited pro forma revenue, loss and loss per
share as if we acquired Centricity, TranSettlements and NeoModal effective
February 1, 2001.
----------------
YEAR ENDED January 31,
2002
----------------
Revenue 87,140
Loss (61,280)
----------------
Loss per share (1.21)
================
NOTE 9 - RESTRUCTURING COSTS
MAY 2003 ANNOUNCEMENT
Based on a review of cost levels, we announced on May 6, 2003 a further
downsizing of our global operations by approximately 130 employees. In addition
to workforce reduction across all operations, the plans included further
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 Total
reduction closure assets
costs
-------------------------------------------
Provision as at May 6, 2003 5,169 2,837 1,661 9,667
Revisions to accruals (380) - - (380)
-------------------------------------------
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
===========================================
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 from
2002 to 2004:
---------------------------------------------------------------------------------
Workforce Office Redundant Data center Network Total
reduction closure assets consolidations systems
costs consolidations
---------------------------------------------------------------------------------
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
=================================================================================
AUGUST 2001 ANNOUNCEMENT
On August 2, 2001, due to the deterioration of global economic conditions, we
announced our intention to implement a restructuring plan to lower the overall
operating cost structure. The restructuring plan included a worldwide workforce
reduction and the consolidation of excess office facilities. The workforce
reduction program involved the reduction of 70 positions, or approximately 10%
of our workforce, across all business functions and geographic locations. The
following table shows the changes in the restructuring provision for the August
2001 initiative, which is substantially complete.
---------------------------------------
Workforce Office closure Total
reduction costs
---------------------------------------
Provision as at August 2, 2001 2,058 1,926 3,984
Cash drawdowns (1,729) (394) (2,123)
Non-cash drawdowns - (59) (59)
---------------------------------------
Provision as at January 31, 2002 329 1,473 1,802
Additions to accruals 43 - 43
Revisions to accruals - (123) (123)
---------------------------------------
Restructuring cost 43 (123) (80)
Cash drawdowns (292) (1,295) (1,587)
---------------------------------------
Provision as at January 31, 2003 80 55 135
Additions to accruals - 80 80
Revisions to accruals (29) (27) (56)
---------------------------------------
Restructuring cost (29) 53 24
Cash drawdowns (51) (104) (155)
---------------------------------------
Provision as at January 31, 2004 - 4 4
=======================================
SUMMARY OF ALL RESTRUCTURING INITIATIVES
During 2004, we incurred workforce reduction charges of $8.5 million related to
severance and benefit costs from the June 2002 and May 2003 restructuring
initiatives. These charges were offset by cash payments of $8.5 million and by a
$0.4 million reduction in the provision that was no longer required due to
retention of some employees initially considered part of the restructuring
initiative. We expect that the remaining provision for workforce reduction
charges will be substantially drawn down by the end of the second quarter in
2005.
During 2004, we accrued office closure costs of $6.4 million, which primarily
relate to rent and occupancy costs of lease facilities that were part of the
June 2002 and May 2003 restructuring initiatives. These costs were offset by
cash payments of $6.2 million. We expect that the remaining provision for office
closure costs will be substantially drawn down by the end of the fourth quarter
in 2009. Furthermore, the provision shown above for office closure costs does
not include certain costs, which will be recorded as restructuring charges as
and when incurred. As of January 31, 2004, we estimate that there might be
between $1.2 million and $1.5 million in additional costs associated with the
May 2003 restructuring initiative that may be incurred in future quarters and
that have not been accrued for as of January 31, 2004, bringing the total
expected cost of this initiative to between $10.5 million and $10.7 million. The
actual amount of the additional restructuring costs will primarily depend on our
ability to exit or sublease various leases and terminate certain third-party
operating contracts.
During 2004, we incurred charges related to the consolidation of our data center
and network infrastructure as part of the June 2002 and May 2003 restructuring
initiatives of $3.8 million. These charges were offset by a $1.3 million
reduction in the provision that was no longer required due to the repricing of
our network contracts. In addition, these charges were offset by cash payments
of $2.5 million. We expect that the remaining provision for the consolidation of
the data center and network infrastructure will be substantially drawn down by
the end of 2005 due to the long-term nature of cancelled networking agreements.
During 2004, we identified and wrote-off $1.8 million of tangible fixed assets.
During 2003, we incurred aggregate restructuring charges of $12.5 million,
broken down into workforce reduction expenses of $5.4 million, office closure
costs of $5.3 million, redundant asset write-offs of $0.8 million, data center
consolidations of $0.6 million and network system consolidations of $0.4
million. These charges were offset by a reduction in our accrual provision of
$0.7 million that related to the lower than expected charges.
During 2002, we incurred aggregate restructuring charges of $4.0 million, broken
down into workforce reduction expenses of $2.1 million and consolidation of
excess facilities and equipment charges of $1.9 million.
In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with
Exit or Disposal Activities." This Statement addresses financial accounting and
reporting for costs associated with exit or disposal activities and supercedes
Emerging Issues Task Force ("EITF") Issue 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(Including Certain Costs Incurred in a Restructuring)." 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 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.
Our restructuring reserves and costs for our August 2001 and June 2002
restructuring plans were determined under the provisions of EITF Issue 94-3. The
restructuring reserves and costs for the May 2003 announcement were determined
under the provisions of SFAS 146, which were valued using an estimated fair
value method.
NOTE 10 - CONVERTIBLE DEBENTURES
On June 30, 2000, we issued $75.0 million aggregate principal amount of 5.50%
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 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 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. The debentures may now be redeemed 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 125%
of the conversion price. We may elect to satisfy the obligation to pay all or
any part of the aggregate principal amount of the debentures on redemption by
delivery of that number of common shares obtained by dividing the principal
amount of the debentures 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 the redemption date.
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 its 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 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 million aggregate principal amount
of its 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.
On December 8, 2003, we announced that the Toronto Stock Exchange (the "TSX")
had approved the purchase by 3078393 Nova Scotia Company, our wholly-owned
subsidiary, of up to an aggregate of US$3,599,750 principal amount of our
remaining outstanding debentures pursuant to a normal course issuer bid. The
purchases can occur from time to time over the next 12 months through the
facilities of the TSX, if and when considered advisable by us.
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 date through 2009. The future
minimum amounts payable at January 31, 2004 under the lease agreements are $4.5
million, $2.6 million, $1.6 million, $0.9 million and $0.6 million for 2005,
2006, 2007, 2008, and 2009 and thereafter, 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. The announcement also
indicated our belief that the complaint was without merit and that we intend to
defend against it vigorously.
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 $0.5 million. As at January 31, 2004, $0.1 million has been
recorded on our financial statements.
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.
GUARANTEES
In the normal course of business we enter into a variety of agreements that may
contain features, which 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 relate 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, 2004 related to these
indemnifications.
NOTE 12 - SHARE CAPITAL
COMMON SHARES OUTSTANDING
---------------------------------------
YEAR ENDED JANUARY 31, January 31, January 31,
(000S OF SHARES) 2004 2003 2002
---------------------------------------
Balance, beginning of year 52,225 52,229 48,803
Stock options exercised 59 12 533
Issued shares on acquisitions - - 2,893
Cancelled shares on acquisitions - (16) -
Repurchased shares (11,578) - -
---------------------------------------
Balance, end of year 40,706 52,225 52,229
=======================================
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 June 5, 2003, we announced that we were offering to purchase for cancellation
up to 11,578,000 of our outstanding common shares for a cash price of not more
than Canadian $3.85 and not less than Canadian $3.00 per common share (subject
to any applicable withholding tax). This offer was made by way of a Dutch
auction tender, which provided holders with the opportunity to specify the price
at which they were prepared to sell their common shares. The actual purchase
price of Canadian $3.20 (announced on July 17, 2003) was determined through an
auction mechanism and was the lowest price within the range stated above at
which we purchase up to 11,578,000 of its common shares from shares tendered
under the offer. 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.
ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table shows the components of accumulated other comprehensive
loss:
----------------------------
YEAR ENDED JANUARY 31, January 31,
2004 2003
----------------------------
Accumulated mark to market gain (loss) on debt
securities (99) 35
Currency translation adjustments (288) (1,541)
----------------------------
Accumulated other comprehensive loss (387) (1,506)
============================
NOTE 13 - STOCK-BASED COMPENSATION PLANS
We maintain stock option plans for directors, officers, employees and 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.
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.
As of January 31, 2004, we had 3,769,616 stock options granted and outstanding
under our shareholder-approved stock option plan. In addition, there were
194,623 stock options outstanding in connection with option plans assumed or
adopted pursuant to various previously completed acquisitions.
As of January 31, 2004, the maximum allowable grants under our shareholder
approved stock option plan are 8,849,410 common shares (which includes 2,182,976
of options issued and exercised).
--------------------------- -------------------------- --------------------------
2004 2003 2002
--------------------------- -------------------------- --------------------------
WEIGHTED NUMBER OF Weighted Number of Weighted Number of
AVERAGE STOCK Average Stock Options Average Stock Options
EXERCISE OPTIONS Exercise Exercise
PRICE OUTSTANDING Price Price
--------------------------- -------------------------- --------------------------
Balance at February 1 9.91 4,223,609 11.67 4,213,335 11.95 3,396,455
Granted 3.49 988,000 4.19 780,750 9.18 1,562,523
Forfeited/Cancelled 9.10 (1,188,070) 13.86 (758,544) 14.80 (225,346)
Exercised 4.13 (59,300) 5.09 (11,932) 4.68 (520,297)
--------------------------- -------------------------- --------------------------
Balance at January 31 8.64 3,964,239 9.91 4,223,609 11.67 4,213,335
--------------------------- -------------------------- --------------------------
Exercisable at January 31 10.50 2,475,094 10.77 2,766,363 11.36 2,124,339
Available options remaining for grant
2,702,195 2,672,615 2,898,598
Outstanding options as a % of
outstanding shares 9.7% 8.1% 8.1%
Options outstanding and options exercisable as at January 31, 2004 by range of
exercise price are as follows:
----------------------------------------- ----------------------------
Options Outstanding Options Exercisable
----------------------------------------- ----------------------------
Weighted Number of Weighted Weighted Number of
Average Stock average Average Stock
Exercise Options remaining Exercise Price Options
Price Outstanding contractual
RANGE OF EXERCISE PRICES life (years)
========================================= ============================
2.34 - 4.81 3.08 1,466,911 5.81 3.53 354,798
5.19 - 10.67 6.73 1,740,472 2.54 6.77 1,511,985
12.33 - 19.96 13.79 345,656 5.10 13.68 269,891
27.06 - 42.69 32.21 411,200 3.30 31.97 338,420
----------------------------------------- ----------------------------
8.64 3,964,239 4.05 10.50 2,475,094
========================================= ============================
NOTE 14 - INCOME TAXES
The components of the net deferred tax asset are as follows:
-----------------------------------------
YEAR ENDED JANUARY 31, January 31, January 31,
2004 2003 2002
-----------------------------------------
Accruals not currently deductible 1,340 1,154 2,742
Accumulated net operating losses:
Canada 13,461 9,996 2,049
United States 30,068 28,453 32,593
Europe, Middle East and Africa (EMEA) 10,495 7,126 3,472
Asia-Pacific 2,475 2,057 1,386
Difference between tax and accounting basis of capital assets 5,857 4,292 4,411
Research and development tax credits and expenses 5,262 4,220 3,894
Expenses of public offerings 370 1,030 1,738
-----------------------------------------
Net deferred tax asset 69,328 58,328 52,285
Valuation allowance (69,328) (58,328) (52,285)
-----------------------------------------
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 $69.3 million during 2004.
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,
2004 2003 2002
-----------------------------------------
Combined basic Canadian statutory rates 36.6% 38.5% 41.4%
Recovery of income taxes based on the above rates (13,983) (53,483) (24,422)
Increase (decrease) in income taxes resulting from:
Permanent differences including amortization of intangibles 2,546 45,741 19,950
Effect of differences between Canadian and foreign tax rates 377 1,050 603
Application of loss carryforwards (379) (30) (797)
Valuation allowance 11,439 6,722 4,228
Other 287 (362) 516
-----------------------------------------
Income tax expense (recovery) 287 (362) 78
=========================================
We have combined income tax loss carryforwards of approximately $159.4 million,
which expire as follows:
--------------------------------------------------------------------
EXPIRY YEAR Canada United States EMEA Asia Pacific Total
--------------------------------------------------------------------
2005 - - 317 - 317
2006 - - 295 - 295
2007 4,667 1,877 694 - 7,238
2008 681 3,222 177 - 4,080
2009 1,567 3,921 352 1,054 6,894
2010 6,933 4,298 - - 11,231
2011 23,440 7,263 - - 30,703
2012 - 6,048 - - 6,048
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 - 2,128 - - 2,128
Indefinite - - 32,745 7996 40,741
--------------------------------------------------------------------
37,288 78,526 34,580 9,050 159,444
====================================================================
NOTE 15 - SEGMENTED INFORMATION
We operate in one business segment providing supply chain solutions. The
following tables provides our segmented revenue information by geographic areas
of operation and solution type:
----------------------------------------
YEAR ENDED JANUARY 31, January 31, January 31,
2004 2003 2002
----------------------------------------
Revenues
Americas 40,637 48,220 55,328
Europe, Middle East and Africa 14,318 17,058 17,716
Asia Pacific 4,830 5,105 6,478
----------------------------------------
59,785 70,383 79,522
========================================
----------------------------------------
YEAR ENDED JANUARY 31, January 31, January 31,
2004 2003 2002
----------------------------------------
Revenues
Services 48,887 53,014 32,180
Licenses 10,898 17,369 47,342
----------------------------------------
59,785 70,383 79,522
========================================
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.
---------------------------
YEAR ENDED JANUARY 31, January 31,
2004 2003
---------------------------
Total long-lived assets
Americas 34,734 37,557
Europe, Middle East and Africa 4,609 5,440
Asia Pacific 411 363
---------------------------
39,754 43,360
===========================
NOTE 16 - SUBSEQUENT EVENTS
RESTRUCTURING
On May 17, 2004, we announced that we were taking actions to significantly
reduce our expenses, which actions include a downsizing of our global staff by
approximately 130 employees, or approximately 35% of our total staff. In
addition, we will be closing certain offices, and canceling certain leases,
consulting and other operating contracts. We announced that we expect to record
restructuring charges of approximately $5.5 million to $6.5 million and
anticipate that the majority of these charges will be recorded in the second
quarter in 2005.
CLASS ACTION LAWSUIT
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. It is possible that one or more additional
complaints making substantially similar allegations may follow. We intend to
vigorously defend all such matters.
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