-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MezMwkwnj0C8Pnx+dTP6ppb9TdTanermuL/pnCM7xIV5eBuOIt35dQhWzsnQOZbt ZwxUH8Kv+tYyCdgo8UlnXg== 0001072613-04-001200.txt : 20040618 0001072613-04-001200.hdr.sgml : 20040618 20040618172223 ACCESSION NUMBER: 0001072613-04-001200 CONFORMED SUBMISSION TYPE: 40-F PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20040131 FILED AS OF DATE: 20040618 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DESCARTES SYSTEMS GROUP INC CENTRAL INDEX KEY: 0001050140 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 000000000 STATE OF INCORPORATION: A6 FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 40-F SEC ACT: 1934 Act SEC FILE NUMBER: 333-09768 FILM NUMBER: 04871257 BUSINESS ADDRESS: STREET 1: 120 RANDALL ST CITY: WATERLOO ONTARIO CAN STATE: A6 BUSINESS PHONE: 5197468110 MAIL ADDRESS: STREET 1: 120 RANDALL DRIVE STREET 2: WATERLOO, ONTARIO, CANADA N2V 1C6 40-F 1 form40-f_12757.txt FORM 40-F FOR THE PERIOD ENDED 1/31/04 ================================================================================ U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 40-F [ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12 OF THE SECURITIES EXCHANGE ACT OF 1934 OR [X] ANNUAL REPORT PURSUANT TO SECTION 13(A) OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended January 31, 2004 Commission File Number: 333-09768 THE DESCARTES SYSTEMS GROUP INC. -------------------------------- (Exact name of Registrant as specified in its charter) N/A --- (Translation of Registrant's name into English (if applicable)) Ontario, Canada --------------- (Province or other jurisdiction of incorporation or organization) N/A --- (Primary Standard Industrial Classification Code Number (if applicable)) N/A --- (I.R.S. Employer Identification Number (if applicable)) 120 Randall Drive, Waterloo, Ontario, Canada N2V 1C6 Tel: (519) 746-8110 ------------------- (Address and telephone number of Registrant's principal executive offices) THROUGH JUNE 30, 2004 POST JUNE 30, 2004 Descartes Systems (USA) LLC Descartes Systems (USA) LLC 1745 Phoenix Blvd. Powers Ferry Business Park Suite 470 Suite 510, Building 500 Atlanta, GA 30349 2300 Powers Ferry RD NW Tel: (770) 996-8109 Atlanta, GA 30339 -------------------- Tel: (678) 247-0400 ------------------- (Name, address (including zip code) and telephone number (including area code) of agent for service in the United States) Securities registered or to be registered pursuant to Section 12(b) of the Act. Title of each class: N/A Name of each exchange on which registered: N/A --- --- Securities registered or to be registered pursuant to Section 12(g) of the Act. Common Shares, no par value per share (Title of Class) Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. N/A (Title of Class) For annual reports, indicate by check mark the information filed with this Form: [X] Annual information form [X] Audited annual financial statements 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 as of January 31, 2004 ================================================================================ Indicate by check mark whether the Registrant by filing the information contained in the Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934 (the "Exchange Act"). If "Yes" is marked, indicate the filing number assigned to the Registrant in connection with such Rule. Yes [ ] No [X] Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 [ ] Exhibit Index on Page 8 Page 2 of 8 DOCUMENTS FILED PURSUANT TO GENERAL INSTRUCTIONS In accordance with General Instruction B(3) of Form 40-F, the Registrant hereby files Exhibit 1, Exhibit 2, and Exhibit 3, as set forth in the Exhibit Index attached hereto. In accordance with General Instruction D(9) of Form 40-F, the Registrant hereby files Exhibit 4, as set forth in the Exhibit Index attached hereto. In accordance with General Instruction B(6) of Form 40-F, the Registrant hereby files Exhibits 5 and 6, as set forth in the Exhibit Index attached hereto. In accordance with the requirements of Section 906 of the Sarbanes-Oxley Act of 2002, the Registrant hereby furnishes Exhibit 99.1, as set forth in the Exhibit Index attached hereto. CONTROLS AND PROCEDURES DISCLOSURE CONTROLS AND PROCEDURES. The Registrant's management, with the participation of the two members of the Registrant's Office of the CEO and the Registrant's Chief Financial Officer, evaluated the effectiveness of the Registrant's disclosure controls and procedures as of January 31, 2004 (the "Evaluation Date"), pursuant to Rule 13a-15(b) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based upon that evaluation, the two members of the Registrant's Office of the CEO and the Registrant's Chief Financial Officer concluded that, as of the Evaluation Date, the Registrant's disclosure controls and procedures were effective in ensuring that material information required to be disclosed by the Registrant in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, including ensuring that such material information is accumulated and communicated to the Registrant's management, including the two members of the Registrant's Office of the CEO and the Registrant's Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. INTERNAL CONTROL OVER FINANCIAL REPORTING During the period covered by this report, there have been no changes in the Registrant's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Registrant's internal control over financial reporting. NOTICES PURSUANT TO RULE 104 OF REGULATION BTR None. AUDIT COMMITTEE FINANCIAL EXPERT The Registrant's Audit Committee of the Board of Directors currently consists of four members. The Registrant's Board of Directors has determined that J. Ian Giffen is an "audit committee financial expert" (as defined in paragraph 8(b) of General Instruction B to Form 40-F). Mr. Giffen is independent within the meaning of Nasdaq's director independence standards. Exhibit Index on Page 8 Page 3 of 8 CODE OF ETHICS The Registrant has adopted a Code of Business Conduct and Ethics (the "Code of Ethics") that applies to the Registrant'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 Registrant's corporate website at www.descartes.com. PRINCIPAL ACCOUNTANT FEES AND SERVICES The aggregate fees billed in respect of each of the last two fiscal years for professional services rendered by Deloitte & Touche LLP ("D&T"), the Registrant's principal accountant, are as follows (in thousands of U.S. dollars): Fiscal Year Ended Fiscal Year Ended January 31, 2004 January 31, 2003 --------------------- ----------------- ----------------- Audit Fees $532 $379 Audit-Related Fees $66 $115 Tax Fees $411 $391 All Other Fees $0 $0 AUDIT FEES-- 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 Registrant's audit committee is responsible for overseeing the work of the independent auditors and has adopted a policy requiring its pre-approval of all audit and permissible non-audit services provided by the independent auditors. Exhibit Index on Page 8 Page 4 of 8 OFF-BALANCE SHEET ARRANGEMENTS The Registrant does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Registrant's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS The following table presents, as of January 31, 2004, the Registrant's known contractual obligations, aggregated by type of contractual obligation as set forth below (in millions of U.S. dollars): PAYMENTS DUE BY PERIOD ------------------------------------------------- LESS THAN MORE THAN CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS Long-Term Debt Obligations $29.3 $1.5 $27.8 -- -- Operating Lease Obligations $10.1 $4.5 $5.0 $0.6 -- ----- --------- --------- --------- --------- TOTAL $39.4 $6.0 $32.8 $0.6 -- IDENTIFICATION OF THE AUDIT COMMITTEE The Registrant has a separately designated standing audit committee established in accordance with section 3(a)(58)(A) of the Exchange Act. The members of the audit committee are: Mr. John Albright (Chair), Mr. James Balsillie, Dr. Stephen Watt and Mr. J. Ian Giffen. Exhibit Index on Page 8 Page 5 of 8 UNDERTAKING AND CONSENT TO SERVICE PROCESS UNDERTAKING. Registrant undertakes to make available, in person or by telephone, representatives to respond to inquiries made by the Commission staff, and to furnish promptly, when requested to do so by the Commission staff, information relating to: the securities in relation to which the obligation to file an annual report on Form 40-F arises; or transactions in said securities. CONSENT TO SERVICE OF PROCESS. The Registrant is concurrently filing with the Commission a Form F-X. Any change to the name or address of the Registrant's agent for service of process shall be communicated promptly to the Commission by amendment to Form F-X referencing the file number of the Registrant. Exhibit Index on Page 8 Page 6 of 8 SIGNATURES Pursuant to the requirements of the Exchange Act, the Registrant certifies that it meets all of the requirements for filing on Form 40-F and has duly caused this annual report to be signed on its behalf by the undersigned, thereto duly authorized. THE DESCARTES SYSTEMS GROUP INC. By: /s/ Brandon Nussey ---------------------------- Name: Brandon Nussey Title: Chief Financial Officer and member of the Office of the CEO Date: June 18, 2004 Exhibit Index on Page 8 Page 7 of 8 EXHIBIT INDEX Exhibit Number Description - ------ ----------- 1. Annual Information Form for the fiscal year ended January 31, 2004. 2. Management's Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year ended January 31, 2004. 3. Audited Consolidated Financial Statements for the fiscal year ended January 31, 2004. 4. Consent of Deloitte & Touche LLP. 5. Certification of Chief Financial Officer and each member of the Office of the CEO pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934. 6. Certification of each member of the Office of the CEO pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934. 99.1 Certifications of the Chief Financial Officer and each member of the Office of the CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Exhibit Index on Page 8 Page 8 of 8 EX-1 2 exh-1_12757.txt ANNUAL INFORMATION FORM FOR YEAR ENDED 1/31/04 EXHIBIT 1 --------- - -------------------------------------------------------------------------------- [DESCARTES RENEWAL ANNUAL INFORMATION FORM COMPANY LOGO] JUNE 18, 2004 - -------------------------------------------------------------------------------- THE DESCARTES SYSTEMS GROUP INC. - -------------------------------------------------------------------------------- TABLE OF CONTENTS - -------------------------------------------------------------------------------- ITEM 2 - CORPORATE STRUCTURE.............................................2 2.1 The Company....................................................2 2.2 Intercorporate Relationships...................................2 ITEM 3 - GENERAL DEVELOPMENT OF THE BUSINESS.............................2 3.1 Profile........................................................2 3.2 History and General Development................................3 3.3 Trends.........................................................4 ITEM 4 - NARRATIVE DESCRIPTION OF THE BUSINESS...........................4 4.1 Company Overview...............................................4 4.2 Principal Products and Services................................5 (a) Value-added Networks.....................................5 (b) Supply Chain Solution Suites.............................6 (c) Consulting Services......................................9 (d) Customer Service and Support and Maintenance.............9 4.3 Revenue Sources................................................9 4.4 Customer Base.................................................10 4.5 Sales and Marketing...........................................10 (a) Sales Force.............................................10 (b) Strategic Marketing Alliances...........................10 4.6 Research and Development......................................11 4.7 Competition...................................................11 4.8 Intellectual Property and Other Proprietary Rights............12 4.9 Contracts.....................................................13 4.10 Employees....................................................13 4.11 Risks Associated with Foreign Sales and Exchange Rate Fluctuations..........................................14 4.12 Risks Associated with Cyclical or Seasonal Aspects of Business........................................14 4.13 Reorganizations..............................................14 ITEM 5 - MANAGEMENT'S DISCUSSION AND ANALYSIS AND RISK FACTORS..........15 ITEM 6 - MARKET FOR SECURITIES AND RELATED SECURITYHOLDER MATTERS.......15 ITEM 7 - DIRECTORS AND EXECUTIVE OFFICERS...............................17 7.1 Summary Information...........................................17 7.2 Committees of the Board of Directors..........................19 ITEM 8 - EXTERNAL AUDITOR...............................................21 ITEM 9 - LEGAL PROCEEDINGS..............................................21 ITEM 10 - ADDITIONAL INFORMATION........................................22 APPENDIX A - AUDIT COMMITTEE CHARTER....................................23 APPENDIX B - COMPENSATION COMMITTEE CHARTER.............................25 APPENDIX C - CORPORATE GOVERNANCE COMMITTEE CHARTER.....................27 1 INFORMATION CONTAINED HEREIN IS PROVIDED AS AT JANUARY 31, 2004 AND IS IN U.S. DOLLARS, UNLESS OTHERWISE INDICATED. Certain statements made in this Renewal Annual Information Form and information incorporated herein by reference, including statements relating to the Company's (as defined below) expectations with respect to market opportunity and industry trends, the Company's ability to enhance and maintain existing and new future product lines, and the Company's ability to enhance its market positioning through the deployment of emerging technologies, constitute forward-looking statements. When used in this Renewal Annual Information Form and in documents incorporated herein by reference, the words "believes", "plans", "expects", "anticipates", "intends", "continues", "may", "will", "could", "should" and similar expressions, or the negative of such terms, 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 herein and the factors discussed under the heading "Certain Factors That May Affect Future Results" appearing in the Company's Annual Report for the fiscal year ended January 31, 2004. If any such risk factors actually occur, they could materially adversely affect the Company's business, financial condition or results of operations. In that case, the trading price of the Company's common shares or other securities 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. The Company does 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 the Company's expectations or any change in events, conditions or circumstances on which any statement is based. The Renewal Annual Information Form refers to the Company's fiscal periods. The Company's fiscal year commences on Feburary 1st of each year and ends on January 31st of the following year. The current fiscal year, which will end on January 31, 2005, is referred to as the "current fiscal year", "fiscal 2005", "2005" or using similar words. The previous fiscal year, which ended on January 31, 2004, is referred to as the "previous fiscal year", "fiscal 2004" or using similar words. 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 "first quarter of 2008" refers to the quarter ending April 30, 2007. - -------------------------------------------------------------------------------- ITEM 2 CORPORATE STRUCTURE - -------------------------------------------------------------------------------- 2.1 THE COMPANY The Descartes Systems Group Inc. ("Descartes" or the "Company") was amalgamated under the BUSINESS CORPORATIONS ACT (Ontario) on January 26, 1999. Its principal executive office is located at 120 Randall Drive, Waterloo, Ontario N2V 1C6 and its phone number is (519) 746-8110. 2.2 INTERCORPORATE RELATIONSHIPS The following is a list of the Company's material subsidiaries with each subsidiary's jurisdiction of incorporation or organization and the percentage of all voting securities or membership interests directly or indirectly owned or held by the Company: Descartes U.S. Holdings, Inc. Delaware 100% Descartes Systems (USA) LLC Delaware 100% Descartes Systems AB Sweden 100% - -------------------------------------------------------------------------------- ITEM 3 GENERAL DEVELOPMENT OF THE BUSINESS - -------------------------------------------------------------------------------- 3.1 PROFILE The Company develops, markets, operates, implements and supports software and services for supply chain management. The Company has significant experience in providing integrated software applications and network services to manage the end-to-end supply chain. The Company's history of serving industries with short order-to- 2 fulfillment cycles has allowed it 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. The Company's 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, the Company provides a variety of related services, including support and maintenance services, consulting, implementation and training. The Company's primary target industries are retail, consumer product goods, manufacturing and transportation. Companies in over 60 countries use the Company's solutions. 3.2 HISTORY AND GENERAL DEVELOPMENT The Company's 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. The Company offers solutions to retailers, manufacturers, distributors and transportation companies that go beyond traditional applications that only address one particular point of a logistics problem. The Company provides 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. The Company's 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, the Company introduced the LOGISTICS NETWORK OPERATING SYSTEM(TM) (LNOS) built on Microsoft ..NET standards. The LNOS is the foundation or architecture upon which the Company's newer product suites operate, enabling the Company to offer end-to-end solutions to our existing and potential clients. As a result of the LNOS component-based architecture, the Company can offer many of its applications to customers either hosted by the Company or hosted by the customer behind its own firewall. The Company's flexible pricing model offers customers the opportunity to either purchase solutions on a subscription basis or license solutions for their own installation. Significant product and business developments over the last three fiscal years have been as follows: FISCAL 2004 o Launched the LOGISTICS NETWORK OPERATING SYSTEM(TM), a flexible architectural framework that is designed to enable increased development flexibility and eaSE of product integration and to provide a common look and feel across the Company's products o Named a Microsoft Certified Partner and a Microsoft Business Solutions ISV (independent software vendor) partner o Committed to the Microsoft development platform, commonly known as .NET o Introduced instant messaging capabilities for ROADSHOW TRANSPORT(TM)using the Microsoft Office Live Communications Server 2003 o Launched the DESCARTES AUTOMATED MANIFEST SERVICE(TM), to address the market need for ocean manifest messaging under the new U.S. Customs Service ContainER Security Initiative (CSI) o Participated in live RFID (radio frequency identification technology) field tests as part of the Supply Chain Network(C)Project being conducted by the Supply Chain Development Association 3 o Developed relationship with Nextel Communications, Inc., ("Nextel"), a leading digital wireless provider, to offer customers two DESCARTES MOBILELINk(TM) applications, using Nextel's Java(TM) technology-enabled phones and the Nextel Nationwide Network o Launched global user group to share product release information and obtain customer feedback on future product direction o Purchased for cancellation $45.0 million aggregate principal amount of the Company's convertible debentures through a wholly owned subsidiary for $43.3 million, including costs associated with the offer o Purchased for cancellation 11,578,000 of the Company's common shares for an aggregate cost of $27.2 million including costs associated with the offer FISCAL 2003 o Acquired the remaining 30% of the outstanding shares of Tradevision AB ("Tradevision"). Developed a restructuring plan to integrate the operations of Tradevision with the Company's operations by eliminating redundant staff positions, offices and network infrastructures o Aligned the organization by geographical regions - the Americas (North and South America), EMEA (Europe, Middle East and Africa) and Asia Pacific - in an effort to drive strong relationships with customers and prospects o Introduced wireless routing and scheduling applications MOBILELINK: COMMERCE(TM)and MOBILELINK: TRACKER(TM)and routing and scheduling software FISCAL 2002 o Expanded suite of applications and electronic messaging services with the acquisitions of Centricity, Inc., TranSettlements, Inc. and 70% of the outstanding shares of Tradevision AB o Launched the Company's wireless routing, scheduling and dispatch solutions in Europe o Introduced enhancements to the Company's ocean contract management and rate builder solutions 3.3 TRENDS Rapid technological change and frequent new product introductions and enhancements characterize the software and network services industries. Organizations are increasingly requiring greater levels of functionality and more sophisticated product offerings. Accordingly, the Company expects that its future success will be dependent upon its ability to enhance current products or develop and introduce new products offering enhanced performance and functionality at competitive prices. In particular, customers are looking for, end-to-end solutions that combine business document exchange and mobile and wireless applications (MRM) with end-to-end supply chain execution (SCE) applications, such as transportation management, routing and scheduling and inventory visibility. Additionally, the continued growth in global trade creates a need to comply with new and stricter security regulations which sometimes mandate electronic logistics messaging. There is also growing acceptance of subscription pricing models that create more affordable options for small and medium-size enterprises. - -------------------------------------------------------------------------------- ITEM 4 NARRATIVE DESCRIPTION OF THE BUSINESS - -------------------------------------------------------------------------------- 4.1 COMPANY OVERVIEW The Company develops, markets, implements and supports solutions for supply chain management. The Company has significant experience in providing software applications and network services to manage end-to-end supply chains. The Company's technology-based solutions, which consist of services and software, provide connectivity and business document exchange, route planning and wireless dispatch, inventory and asset visibility, transportation management, and warehouse optimization. The Company's pricing model provides companies with the flexibility to purchase solutions on either a license or subscription basis. The Company's primary target industries are retail, consumer product goods, manufacturing and transportation. The Company operates in one business segment providing supply chain management technology to 4 manufacturers, distributors, retailers, and transportation and logistics service providers. The Company's technologies enable customers across industries and modes to better manage the movement of goods and related information. 4.2 PRINCIPAL PRODUCTS AND SERVICES (a) Value-Added Networks - -------------------------------- The Company has solutions for different logistics communities that address logistics connectivity and connect trading partners through value-added networks. For transportation service providers, the Company operates value-added networks for air 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 the Company's other applications. AIR MESSAGING The Company's DSG-TRADEVISION(TM) network offers services for air carriers and freight forwarders in Europe. The transportation services vertical that the CompaNY acquired from BCE Emergis Inc. in 2000 offers service for air carriers and freight forwarders in North America. The Company's air messaging services help simplify cargo management. The Company specializes 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 The Company's 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. ROAD AND LAND MESSAGING The Company offers road and land messaging services via the DSG-TRANSETTLEMENTS(TM) network. This network provides 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. 5 TURNAROUND DOCUMENTS(TM) For shippers and carriers without EDI capabilities, the Company offers an application called TURNAROUND DOCUMENTS(TM) which enables users to process purchase orderS, sales orders, bills of lading and shipment statuses in standard format required for specific EDI transaction sets via the Company's value-added networks. (b) Supply Chain Solution Suites - ---------------------------------------- The Company's solution suites include Supply Chain Execution Management, Transportation Management, Ocean Contract Management and Routing and Scheduling. SUPPLY CHAIN EXECUTION MANAGEMENT This solution suite includes applications such as 20/20 VISIBILITY(TM), SUMMARY BALANCES(TM), DC OPTIMIZER(TM), APPOINTMENT SCHEDULER(TM) and SUPPLY CHAIN SNAPSHOTS(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. 20/20 VISIBILITY(TM) 20/20 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. 20/20 VISIBILITY(TM) covers shipments as they move 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. SUMMARY BALANCES(TM) SUMMARY BALANCES(TM) is a reporting feature for identifying discrepancies between planned and actual activities throughout the supply chain. Users can repoRT on suppliers, product lines and trade lanes, and parameters may include lead times, maximum and minimum values, and daily, weekly, monthly or yearly activity. 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. APPOINTMENT SCHEDULER(TM) APPOINTMENT SCHEDULER(TM) helps resolve dock congestion by automating scheduling based on configuration and resource availability. Through collaboratiON between shippers, consignees and carriers, warehouse efficiency and hours of service can be improved. SUPPLY CHAIN SNAPSHOTS(TM) SUPPLY CHAIN 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. 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 performance management. Milestones and other information in the itineraries are available to other products and applications for functions such as event monitoring. 6 TRANSPORTATION MANAGEMENT The Company's 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. OCEAN 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) and Automated Manifest Service. 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 The Company's Automated Manifest Service helps users easily manage shipment information electronically, and enables compliance with the requirement to electronically submit shipment information to the US Customs Department's Automated Manifest System for ocean cargo. ROUTING AND SCHEDULING The Company's 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 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) and MOBILELINK(TM) applications. 7 ROADSHOW(TM) AND FLEETWISE(TM) As part of the Company's Routing & Scheduling solution, the FLEETWISE(TM) and ROADSHOW(TM) applications optimize routes. Users can plan routes and schedulES To most effectively deploy a constant number of trucks in a fleet. FLEETWISE 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. ROADSHOW applications optimize static and fixed routes and are available to be used as stand-alone applications or as centralized, multi-user enterprise applications. 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 FLEETWISE 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) AND FLEETWISE MONITOR(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. Through integrated and automatic wireless updates, FLEETWISE MONITOR(TM) provides rapid notification of critical events that affect distributioN. As part of the Company's 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. MOBILELINK(TM) The Company's 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: COMMERCE(TM), MOBILELINK: FREIGHT(TM); MOBILELINK: STATUS(TM) and MOBILELINK: TRACKER(TM). 8 MOBILELINK: COMMERCE(TM) MOBILELINK: COMMERCE(TM) offers financial settlement support for the mobile sales force. It provides order and delivery information at the line item level aND feeds delivery/payment information into customer service and billing systems. 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. MOBILELINK: TRACKER(TM) MOBILELINK: TRACKER(TM) passively monitors trucks and shipments without driver intervention. It triggers shipment status updates and system alerts whEN designated routes are not followed. This application uses the satellite Global Positioning System (GPS) and the terrestrial packet data network to transmit data. (c) Consulting Services - ------------------------------- The Company's 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 the Company's solutions. The Company offers a variety of site-specific technical and consulting services to assist in all phases of the implementation process. The Company also provides assistance in integrating its products with the customer's existing software. In addition, the Company offers training services that provide customers with a formalized program to ensure that applications are implemented and utilized in an efficient and cost-effective manner. (d) Customer Service and Support and Maintenance - -------------------------------------------------------- The Company is committed to deploying customer support practices consistent with those of large software and network companies. The Company provides worldwide support to its customers through its central support center. Customer support is available 24-hours-a-day, 7-days-per-week via telephone, fax or e-mail. 4.3 REVENUE SOURCES The Company's revenues are generated in the following two categories of principal products and services: (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 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 the Company's revenue sources for the fiscal years ended January 31, 2004 and 2003. 9 - ------------------------------------------------------------------------------- REVENUES Fiscal year ended January 31 --------------------------------------------------------------- 2004 2003 --------------------------------------------------------------- Amount Amount (US dollars Percentage of (US dollars Percentage of in millions) Total Revenues in millions) Total Revenues --------------------------------------------------------------- License 10.9 18% 17.4 25% - ------------------------------------------------------------------------------- Services 48.9 82% 53.0 75% - ------------------------------------------------------------------------------- Total revenues 59.8 100% 70.4 100% - ------------------------------------------------------------------------------- 4.4 CUSTOMER BASE The Company's customers are globally diverse, located in the Americas, Asia Pacific and Europe, Middle East and Africa (EMEA) 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 exchanges. In the fiscal year ended January 31, 2004, 68% of the Company's revenues were derived from the Americas, 24% were derived from EMEA and the remaining 8% of revenues were derived from Asia Pacific. 4.5 SALES AND MARKETING (a) Sales Force - ----------------------- The Company's sales force is expected to sell across the Company's solutions, targeting specific industry verticals. At present, the Company sells most of its products and services through a direct sales team that is aligned by geographic market and classification of the Company's product. Channel partners such as distributors and value-added resellers play a central role in the Company's strategy to address global customers. As of January 31, 2004, the Company employed a total of 137 individuals in sales and marketing, of which 51 were quota carrying sales professionals. On May 17, 2004 the Company announced that it was taking actions to significantly reduce its expenses, including a reduction of its workforce. A significant percentage of the Company's direct sales force has been impacted by the workforce reductions. See "Reorganizations" below. The Company is headquartered in Waterloo, Ontario. Its 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. In addition to its direct international sales force, the Company sells its software and network products internationally through a network of over 15 distributors. (b) Strategic Marketing Alliances - ----------------------------------------- The Company also forms strategic alliances with various companies in different geographic markets, in different industries and for different products with the goal of expanding the Company's market base. Typically, an alliance participant will market the Company's products in certain geographic and vertical markets and refer customers to the Company, in exchange for a fee in respect of new customers generated by the alliance participant. The Company has established several working relationships with telecommunication companies, management consulting firms, and complementary hardware and software firms. An example of one such strategic relationship is the Company's relationship with Nextel, a leading digital wireless provider, which offers customers two DESCARTES MOBILELINK(TM) applications, MOBILELINK: STATUS(TM) and MOBILELINK: FREIGHT(TM), for real-time fleet management and dispatch capabilities using Nextel's JAVA(TM) technology-enabled phones and the Nextel Nationwide Network. 10 4.6 RESEARCH AND DEVELOPMENT The Company believes that its future success depends in large part on its ability to maintain and enhance its current product lines, and to enhance its market positioning through the deployment of emerging technologies. Accordingly, the Company continuously invests in product development to ensure that sufficient resources are focused on developing new products or enhancements to its existing products considering the Company's expense reduction initiatives. The Company believes that such expenditures are critical to its success. In the year ended January 31, 2004, the Company incurred research and development expenses of approximately $9.4 million. The Company has made a substantial investment in research and development over the last several years. The Company's growth and future financial performance will depend in part on its 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 the Company typically conducts research and development initiatives internally, its modular solutions and component-based architecture have allowed it to use an outsourced developer on an as needed basis. In the fiscal year ended January 31, 2004, the Company used a third-party provider to assist with the offshore development of certain of the Company's supply chain products. The Company has provided notice to this provider of its termination of the outsourcing arrangement and currently anticipates that the relationship will be concluded in October 2004. The Company is transitioning the development formerly provided by this outsourcing provider to its internal staff. Given the recent cost-reduction initiatives announced by the Company, including a global reduction in the Company's workforce, these development activities may be difficult to transition to internal personnel. In the event of such difficulty, development on certain products may be delayed or deferred until sufficient resources are available. This could result in customer dissatisfaction that could materially adversely affect the operating results of the Company. The Company's research and development program requires a high degree of detail in business analysis, technical design, and quality assurance. The Company believes it is well positioned to address these needs internally. To build applications, the Company has 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 the Company's pre-sales and post-sales people. The Company plans quarterly releases of many of its applications, introducing new features and functionality. Recently issued and generally available updated releases include 20/20 VISIBILITY(TM), TURNAROUND DOCUMENTS(TM) and SUMMARY BALANCES(TM), FLEETWISE(TM), ROADSHOW ENTERPRISE(TM) and ROADSHOW TRANSPORT(TM). Recently completed development projects include the general availability of SUPPLY CHAIN SNAPSHOTS(TM) and MULTIMODAL ROUTE GUIDE(TM), as well as the LOGISTICS NETWORK OPERATING SYSTEM(TM) foundation. Currently, the Company's development efforts are focused primarily on issuing new releases of many of its existing applications, such as SUMMARY BALANCES(TM), TURNAROUND DOCUMENTS(TM) and SUPPLY CHAIN SNAPSHOTS(TM), with planned general availability in approximately four to five months. 4.7 COMPETITION Although the Company has experienced limited competition to date from companies with broad application suites with comparable capabilities, the market for the Company's applications is nevertheless highly competitive and subject to rapid technological change and the Company expects 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, the Company does experience competition 11 from established vendors. On a geographic basis, the Company experiences competition from multinational companies as well as local competitors. The Company faces some disadvantage in entering new markets where competitors may have existing solutions with user interfaces that are advanced in local language presentation. To maintain and improve its competitive position on a global basis, the Company must continue to develop and introduce new applications, application features and services in a timely and cost effective manner. The Company competes or may compete, directly or indirectly, with the following: (i) application software vendors positioned as supply chain execution and other best-of-breed vendors; (ii) internal development efforts by corporate information technology departments; (iii) middleware vendors that provide integration software; (iv) application software vendors, including enterprise resource planning software vendors and business-to-business e-commerce vendors which may expand their current offerings into Internet fulfillment, some of whom may from time to time jointly market the Company's products as a complement to their own systems; and (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 Internet fulfillment solutions. The Company also expects to face additional competition as other established and emerging companies enter the market for Internet-based logistics 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 the Company's prospective customers. The principal competitive factors affecting the market for the Company's solutions include vendor and product reputation; expertise and experience in implementing products in the customer's industry sector; 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, the Company must continue to respond promptly and effectively to technological change and competitors' innovations. 4.8 INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS The Company's success depends significantly on its proprietary technology. The Company relies 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 its proprietary rights in its products and technology. The source codes and routing algorithms for the Company's applications and technology are protected both as trade secrets and as unregistered copyrighted works. The Company currently has one US patent for technology used in its dynamic vehicle routing application and has another US patent, based on a patent that has been issued to the Company in the Netherlands, for certain technological processes contained in its network architecture. The Company has 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. The Company also utilizes certain other software technologies, such as geographic data, translation applications and business intelligence applications that it licenses from third parties, generally on a non-exclusive basis, including software that is integrated with internally developed software and used in the Company's 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. The Company's 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 the Company's network services. The Company's 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 the Company's network services. 12 4.9 CONTRACTS (a) Customer Contracts - ------------------------------ The Company licenses its software products to its customers primarily by way of written license agreements. The license agreements specify the applicable terms and restrictions of use of the software, the terms and conditions of any enrolment by the customer in the Company's software maintenance program, and the applicable fees to be paid by the customer to the Company. The Company provides its supply chain services to its customers primarily by way of written subscription agreement. The subscription agreement sets out the applicable terms and restrictions of use of the service, the length of time the customer can use the service, and the applicable fees to by paid by the customer to the Company. Typically, these subscription agreements renew at a customer's option and 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 the following: o recent announcements that we have made regarding our financial condition and the termination of our CEO; o budgetary constraints related to economic uncertainty; o dissatisfaction with product or service quality; o difficulty in prioritizing a surplus of information technology projects; or o 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. (b) 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., BCE Emergis Inc. and Q9 Networks Inc. These hosting contracts, on which the Company is substantially dependent as it relates to the delivery of the Company's network services, typically contemplate services to be provided for a term at a defined service level, with applicable rights of termination and renewal. The Company typically pays monthly fees under these contracts. If any of these contracts were terminated without the consent of the Company, the Company 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 the operating results of the Company and the service that the Company provides to its customers. In the fiscal year ended January 31, 2004, the Company used a third-party provider to assist with the offshore development of certain of the Company's supply chain products. Further details of these development arrangements are provided in section 4.6 "Research and Development" above. 4.10 EMPLOYEES As at January 31, 2004, the Company employed 404 full-time staff. Of the 404 employees, 78 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 13 were located in North America, 51 were located in Europe, 34 were located in Asia/Pacific and 3 were located in Central America. On May 17, 2004, the Company announced that it was taking actions to significantly reduce its expenses, which actions include a downsizing of the Company's global staff by approximately 130 employees, or approximately 35% of the Company's then total workforce. In addition, the Company announced that it would be closing certain offices, and canceling certain leases, consulting and other operating contracts. As of the date of this Renewal Annual Information Form, the Company employs approximately 275 full-time staff. 4.11 RISKS ASSOCIATED WITH FOREIGN SALES AND EXCHANGE RATE FLUCTUATIONS In the fiscal year ending January 31, 2004, sales outside of the Americas accounted for approximately 32% of the Company's total revenues. The Company's international revenues are subject to risks associated with foreign sales, including longer collection times from foreign customers (particularly in the Asia Pacific region), difficulty in repatriating cash from foreign jurisdictions, unexpected changes in legal and regulatory requirements, export restrictions, changes in tariffs, exchange rates and other trade barriers, political and economic instability, difficulties in accounts receivable collection, difficulties in management of distributors or representatives, difficulties in staffing and managing foreign operations, difficulties in protecting the Company's intellectual property, seasonality of sales, language issues and potentially adverse tax consequences. There can be no assurance that any of these factors will not have a material adverse effect on the Company's business, results of operations and financial condition. In particular, although substantially all of the Company's sales to date outside of Canada have been denominated in US dollars, adverse fluctuations in the value of the US dollar in relation to foreign currencies may affect the Company's sales to foreign customers. Further currency control restrictions in foreign jurisdictions may adversely affect the Company's ability to collect funds in US currency, if at all, or on a timely basis. Substantially all of the Company's revenues are realized in US dollars, with much smaller proportions realized in other currencies dollars, while a significant portion of the Company's expenses are incurred in Canadian dollars and other local currencies. Fluctuations in exchange rates between the US dollar, the Canadian dollar and other currencies may have a material adverse effect on the Company's business, results of operations and financial condition. 4.12 RISKS ASSOCIATED WITH CYCLICAL OR SEASONAL ASPECTS OF BUSINESS The Company's 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 the Company's 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 the Company's 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 the Company's revenues and have a material adverse affect on the Company's business, results of operations and/or financial condition. 4.13 REORGANIZATIONS On August 2, 2001, due to the deterioration of global economic conditions, the Company announced its intention to implement a restructuring plan to lower its 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 the Company's workforce, across all business functions and geographic locations. The restructuring also resulted in the consolidation of excess office facilities and equipment. 14 On June 19, 2002, the Company announced that it had commenced further restructuring plans in order to align its cost structure with its network-based revenue model and to streamline its 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 the Company's network infrastructure and data center facilities in Ontario and Georgia. These restructuring plans impacted the workforce by approximately 120 employees, or 20% of the total workforce, across all geographic areas within which the Company operated. 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, the Company also identified leased facilities, which were in excess of the Company's ongoing space requirements. During the latter half of the fiscal year ended January 31, 2003, the Company continued with its restructuring plans with further staff terminations (including certain management layers) and certain office closures. This also included certain initiatives that the Company undertook in facilitating the integration of its global operations with Tradevision further to the acquisition of the remaining 30% of the outstanding shares of Tradevision, including the consolidation of network infrastructure. Based on a review of cost levels, on May 6, 2003, the Company announced it would implement a further downsizing of its 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. On May 17, 2004, the Company announced that it was taking actions to significantly reduce its expenses, which actions included a downsizing of its global staff by approximately 130 employees, or approximately 35% of its workforce. In addition, the Company announced that it would be closing certain offices, and canceling certain office leases, consulting and other operating contracts. - -------------------------------------------------------------------------------- ITEM 5 MANAGEMENT'S DISCUSSION AND ANALYSIS AND RISK FACTORS - -------------------------------------------------------------------------------- Reference is made to the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in the Company's 2004 Annual Report for the year ended January 31, 2004 in respect of U.S. GAAP, and to the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the material entitled "Canadian GAAP Financial Results for 2004 Fiscal Year" made available to all shareholders of the Company and filed with various regulatory authorities in respect of Canadian GAAP, both of which are incorporated herein by reference, specifically including the section entitled "Certain Factors That May Affect Future Results." This information is available on the SEDAR website at www.sedar.com. - -------------------------------------------------------------------------------- ITEM 6 MARKET FOR SECURITIES AND RELATED SECURITYHOLDER MATTERS - -------------------------------------------------------------------------------- The Company is authorized to issue an unlimited number of common shares, without par value, for unlimited consideration. The common shares are not redeemable or convertible. Each common share carries the right to receive notice of and one vote at a meeting of shareholders; the right to participate in any distribution of the assets of the Company on liquidation, dissolution or winding up; and the right to receive dividends if, as and when declared by the Board of Directors. As of June 18, 2004 there were 40,705,811 common shares outstanding. The common shares are listed on the Toronto Stock Exchange (TSX) under the symbol "DSG" and quoted on the Nasdaq National Market (Nasdaq) under the symbol "DSGX". 15 On June 30, 2000, the Company issued $75.0 million aggregate principal amount of 5.50% convertible unsecured subordinated debentures maturing on June 30, 2005 (the "Debentures"), 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. 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 the Company's 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. The Company 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. As of June 18, 2004, there were $71,995,000 aggregate principal amount of Debentures outstanding, $45,000,000 of which were held by 3078393 Nova Scotia Company, a wholly owned subsidiary of the Company ("Descartes Sub"). The debentures are listed on the TSX under the symbol "DSG.DB.U". On December 8, 2003, the Company announced that the TSX had approved the purchase by Descartes Sub of up to an aggregate of $3,599,750 principal amount of the Debentures pursuant to a normal course issuer bid. The purchases can occur from time to time over 12 months from the date of the normal course issuer bid through the facilities of the TSX, if and when considered advisable by the Company.
- -------------------------------------------------------------------------------------------------------------------------- COMMON SHARES - TSX COMMON SHARES - NASDAQ DEBENTURES - TSX - --------------- -------------------------------- ----------------------------- ------------------------------------- MONTH PRICE RANGE (CDN.$) VOLUME PRICE RANGE (US$) VOLUME PRICE RANGE PER US $1,000 VOLUME (US $) - --------------- ------------------- ----------- ----------------- ---------- ------------------------- ---------- FEBRUARY 2003 $4.02 - 4.93 2,427,800 $2.60 - 3.26 99,005 $851.00 - 870.00 4,200 - --------------- ------------------- ----------- ----------------- ---------- ------------------------- ---------- MARCH 2003 $3.20 - 4.75 3,089,600 $2.15 - 3.18 322,115 $855.00 - 879.60 4,610 - --------------- ------------------- ----------- ----------------- ---------- ------------------------- ---------- APRIL 2003 $3.23 - 4.02 4,442,300 $2.22 - 2.76 353,224 $865.00 - 870.00 4,320 - --------------- ------------------- ----------- ----------------- ---------- ------------------------- ---------- MAY 2003 $2.88 - 3.75 11,258,300 $2.03 - 2.65 599,025 $840.00 - 930.00 299,687 - --------------- ------------------- ----------- ----------------- ---------- ------------------------- ---------- JUNE 2003 $3.00 - 3.37 6,043,800 $2.18 - 2.49 472,449 $915.10 - 930.00 8,560 - --------------- ------------------- ----------- ----------------- ---------- ------------------------- ---------- JULY 2003 $2.83 - 3.39 5,579,400 $2.00 - 2.55 477,461 $892.50 - 930.00 1,167 - --------------- ------------------- ----------- ----------------- ---------- ------------------------- ---------- AUGUST 2003 $2.98 - 3.65 4,846,800 $2.05 - 2.61 347,396 $902.50 - 920.00 140 - --------------- ------------------- ----------- ----------------- ---------- ------------------------- ---------- SEPTEMBER 2003 $3.22 - 3.75 6,419,500 $2.40 - 2.89 2,110,127 $925.00 - 930.00 2,700 - --------------- ------------------- ----------- ----------------- ---------- ------------------------- ---------- OCTOBER 2003 $3.43 - 4.20 11,137,500 $2.55 - 3.21 1,994,812 $925.00 - 935.00 3,464 - --------------- ------------------- ----------- ----------------- ---------- ------------------------- ---------- NOVEMBER 2003 $3.62 - 4.50 8,785,200 $2.72 - 3.40 1,866,155 $930.00 - 960.00 9,150 - --------------- ------------------- ----------- ----------------- ---------- ------------------------- ---------- DECEMBER 2003 $3.31 - 4.28 6,541,800 $2.45 - 3.37 2,108,763 $940.00 - 955.00 2,640 - --------------- ------------------- ----------- ----------------- ---------- ------------------------- ---------- JANUARY 2004 $3.65 - 4.65 7,301,800 $2.83 - 3.65 3,485,359 $950.00 - 960.00 1,070 - --------------------------------------------------------------------------------------------------------------------------
The Company has not paid any dividends on its common shares to date. The Company will consider paying dividends on its common shares in the future when operational circumstances permit, having regard to, among other things, Company's earnings, cashflow and financial requirements as well as relevant legal and business considerations. 16 The register of transfers of the Company's securities is located in the offices of the Company's stock transfer agent: Computershare Trust Company of Canada, 100 University Avenue, Toronto, Ontario, Canada, M5J 2Y1. - -------------------------------------------------------------------------------- ITEM 7 DIRECTORS AND EXECUTIVE OFFICERS - -------------------------------------------------------------------------------- 7.1 SUMMARY INFORMATION The following table sets forth the name, location of residence and office held by each of the executive officers and directors of the Company as at January 31, 2004 with footnoted updates where appropriate. Each director is elected at the annual meeting of shareholders or appointed pursuant to the provisions of the Company's 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. The Company does not have an Executive Committee. NAME AND LOCATION OF RESIDENCE OFFICE HELD - ------------------------------ ----------- DR. STEPHEN WATT(1)(2)(3) Director, Chairman of the Board London, Ontario, Canada JOHN ALBRIGHT(1)(2) Director Toronto, Ontario, Canada JAMES BALSILLIE(1)(2)(3) Director Waterloo, Ontario, Canada J. IAN GIFFEN(1) Director Unionville, Ontario, Canada CHRIS HEWAT(3) Director Toronto, Ontario, Canada MANUEL PIETRA(4) Former Director, Chief Executive Officer Coral Gables, Florida, U.S.A. and President COLLEY CLARKE(5) Former Executive Vice-President, Finance Waterloo, Ontario, Canada and Chief Financial Officer BRUCE GORDON Senior Vice-President, Research, Atlanta, Georgia, U.S.A. Development & Support ART MESHER(6) Executive Vice-President, Strategic Waterloo, Ontario, Canada Development J. SCOTT PAGAN Corporate Secretary Cambridge, Ontario, Canada EURIPEDES PSILOYENIS(6) Former Senior Vice-President, IT Services Miami, Florida, U.S.A. (1) Member of the Audit Committee. (2) Member of the Compensation Committee. (3) Member of the Corporate Governance Committee. (4) Mr. Pietra's employment with the Company terminated in May 2004. (5) Mr. Clarke left the Company in March 2004 to pursue other opportunities. 17 (6) Mr. Mesher and Mr. Nussey were appointed to the Office of the Chief Executive Officer reporting to the Board of Directors pending a search for a new Chief Executive Officer following the termination of Mr. Pietra's employment on May 6, 2004. (7) Mr. Psiloyenis' employment with the Company terminated in May 2004. The principal occupations of each of the directors and executive officers of the Company during the five years preceding January 31, 2004 are as follows: DR. STEPHEN WATT, has been an outside member of the Company's 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 the Company's 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. JAMES BALSILLIE has been an outside member of the Company's 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 the Company's board of directors since December 2003. 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 the Company's 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 the Company during the fiscal year ended January 31, 2004 and is expected to provide legal services to the Company in the fiscal year ending January 31, 2005. MANUEL PIETRA'S employment with the Company terminated in May 2004. Mr. Pietra was previously appointed Chief Executive Officer and President of the Company in May 2003. Prior to that, in February 2002, Mr. Pietra was previously appointed Co-Chief Executive Officer and President of the Company. Mr. Pietra was appointed to the Board of Directors in September 2003. Prior to February 2002, Mr. Pietra was a consultant to the Company providing strategic advisory services. Prior to joining the Company, Mr. Pietra held positions as Founder and Managing Partner of Numbers@Work, a venture fund and consulting firm for the technology and, prior to that, a senior executive position with Baan International B.V.'s Baan Americas division. COLLEY CLARKE left the Company in March 2004 to pursue other opportunities. Mr. Clarke first joined the Company in January 2000 as Executive Vice President, Finance and Chief Financial Officer. Prior to joining the Company, Mr. Clarke held several senior executive and financial positions including Senior Vice President Strategic Planning and Chief Financial Officer for BCE Media Inc. from June 1998 to October 1999. 18 BRUCE GORDON joined the Company in January 1999 and was originally based in the Company's Australian offices. Mr. Gordon held various senior roles in the sales and professional services organizations of the Company. In May 2003, Mr. Gordon was appointed Senior Vice President, Research, Development & Support. ART MESHER joined the Company in May 1998 as Executive Vice President, Corporate Strategy and Business Development. Prior to joining the Company, Mr. Mesher was research director for Gartner Group's Integrated Logistics Strategies Service from May 1995 until he joined the Company. J. SCOTT PAGAN was appointed Corporate Secretary in May 2003. Mr. Pagan first joined the Company's legal department in May 2000. Prior to joining the Company, Mr. Pagan was in private legal practice in Cambridge, Ontario. EURIPEDES PSILOYENIS' employment with the Company terminated in May 2004. Mr. Psiloyenis first joined the Company as a consultant to the Company's finance department and was appointed Senior Vice President, IT Services in May 2003. Prior to working with Descartes, Mr. Psiloyenis held senior management positions with KPMG, International Paint, Burmah Castrol, iDirect and Softvision Group. To the knowledge of the Company, as at June 18, 2004, the directors and executive officers of the Company as a group beneficially owned, directly or indirectly, approximately 126,220 common shares of the Company, representing approximately 0.31% of the common shares then outstanding. 7.2 COMMITTEES OF THE BOARD OF DIRECTORS The Board of Directors currently has three committees: the Audit Committee, Compensation Committee and Corporate Governance Committee. The committees, their mandates and membership are discussed below: AUDIT COMMITTEE The Audit Committee's primary responsibilities consist of: o engaging the independent accountants to the Company to audit the Company's financial statements; o discussing the scope and results of the audit with the independent accountants; o reviewing with the Company's executive officers and the independent accountants the Company's interim and year-end operating results and approving the provision of all audit services and permitted non-audit services to be performed by the independent accountants; o reviewing the professional fees payable to the independent accountants; o establishing procedures designed to facilitate (a) the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters and (b) the receipt of confidential, anonymous submissions by employees of concerns regarding questionable accounting or auditing matters; and o reviewing the adequacy of the internal accounting controls and audit procedures of the Company. On June 12, 2000, the Board of Directors adopted a written Audit Committee Charter setting out the scope of the Audit Committee's responsibilities and membership requirements. The Audit Committee Charter was adopted to comply with Nasdaq rules established in December 1999 respecting the composition and functioning of audit committees. A copy of the Audit Committee Charter is attached as "Appendix A". The Audit Committee is currently composed of four unrelated, financially literate and independent directors: Mr. John Albright (Chair), Mr. James Balsillie; Mr. Ian Giffen; and Dr. Stephen Watt. Each of the members of the Audit Committee is an unrelated director and independent under the Nasdaq standards for independence of audit committee members. 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 Paragraph (8)(b) of General Instruction B to 19 Form 40-F promulgated by the Securities and Exchange Commission and is financially sophisticated for the purposes of Nasdaq Rule 4350(d)(2). The following sets out the education and experience of the members of the Audit Committee: JOHN L. ALBRIGHT, B.B.A., C.F.A. - 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 several boards. 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 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. DR. STEPHEN M. WATT, B.Sc., M. Math, Ph.D. - Dr. Watt is a professor of Computer Science in the Department of Computer Science at the University of Western Ontario and served as Chair of the Department from 1997-2002. Dr. Watt also serves as a director of Waterloo Maple Inc., as director of the Ontario Research Centre for Computer Algebra and is a member, and former director, of The Fields Institute for Research in Mathematical Sciences. COMPENSATION COMMITTEE The Compensation Committee is primarily responsible for: o reviewing, assessing and recommending to the Board of Directors any changes to the compensation of the Chief Executive Officer; o reviewing and approving the Chief Executive Officer's recommendations respecting the compensation of the other senior executives of the Company; and o reviewing, assessing and recommending to the Board of Directors any changes to the compensation of the individual members of the Board of Directors. The Board of Directors has adopted a written Compensation Committee Charter setting out the scope of the Compensation Committee's responsibilities and membership requirements. A copy of the Compensation Committee Charter is attached as "Appendix B". The Compensation Committee is currently composed of three directors: Mr. James Balsillie (Chair), Mr. John Albright and Dr. Stephen Watt. Each of the members of the Compensation Committee is an unrelated director and is considered by the Board of Directors to be independent of management. 20 CORPORATE GOVERNANCE COMMITTEE The Corporate Governance Committee was established following the conclusion of the fiscal year ended January 31, 2003, with its primary responsibility being to assist the Board of Directors in fulfilling its responsibilities by overseeing the Company's corporate governance policies and making policy recommendations aimed at enhancing the Board of Directors' effectiveness. The Board of Directors has adopted a written Corporate Governance Committee Charter setting out the scope of the Corporate Governance Committee's responsibilities and membership requirements. A copy of the Corporate Governance Committee Charter is attached as "Appendix C". The Corporate Governance Committee is currently composed of three directors: Dr. Stephen Watt (Chair), Mr. James Balsillie, and Mr. Chris Hewat. Each of Dr. Watt and Mr. Balsillie are unrelated directors and are considered by the Board of Directors to be independent of management. - -------------------------------------------------------------------------------- ITEM 8 EXTERNAL AUDITOR - -------------------------------------------------------------------------------- The Company's external auditor is Deloitte & Touche LLP, who is nominated for re-appointment at the Company's annual general meeting of shareholders to be held on June 28, 2004. Deloitte & Touche LLP has been the external auditor of the Company since the fiscal year ended January 31, 1997. The following table sets forth the approximate fees incurred by the Company in using the services of Deloitte & Touche LLP in respect of the applicable fiscal years noted (all amounts in United States dollars): - ----------------- ---------- ------------------ -------- ---------- ---------- FISCAL YEAR ENDED AUDIT FEES AUDIT-RELATED FEES TAX FEES OTHER FEES TOTAL - ----------------- ---------- ------------------ -------- ---------- ---------- JANUARY 31, 2004 $532,000 $66,000 $411,000 $0 $1,009,000 - ----------------- ---------- ------------------ -------- ---------- ---------- JANUARY 31, 2003 $379,000 $115,000 $391,000 $0 $885,000 - ----------------- ---------- ------------------ -------- ---------- ---------- - -------------------------------------------------------------------------------- ITEM 9 LEGAL PROCEEDINGS - -------------------------------------------------------------------------------- On January 23, 2004, the Company announced that a complaint alleging patent infringement had been filed against the Company in the United States District Court of the Southern District of New York by ArrivalStar, Inc.("ArrivalStar"). The complaint alleges that certain of Descartes' products infringe certain patents of ArrivalStar. No specific amount is claimed in the complaint. The announcement also indicated the Company's belief that the complaint was without merit and that we intend to defend against it vigorously. The Company has brought a motion to dismiss the complaint. On or about May 19, 2004, the Company was 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 the Company's common stock between June 4, 2003 and May 6, 2004. On or about June 16, 2004, the Company was named as a defendants in a securities class action lawsuit captioned DOUG VAN FRAASSEN V. DESCARTES SYSTEMS GROUP, INC. ET AL., which was filed in the United States District Court for the Southern District of New York on behalf of purchasers of the Company's common stock between June 4, 2003 and May 6, 2004. Each complaint also names as defendants two of the Company's former officers. The complaints allege, among other things, that the defendants made misstatements to the investing public between June 4, 2003 and May 6, 2004 regarding the Company's financial condition. No specific amount has been claimed in the complaints. It is possible that one or more additional complaints making substantially similar allegations may follow. The Company intends to vigorously defend all such matters. 21 - -------------------------------------------------------------------------------- ITEM 10 ADDITIONAL INFORMATION - -------------------------------------------------------------------------------- Additional information about the Company is available at the Company's website at www.descartes.com, on SEDAR at www.sedar.com and on EDGAR at www.sec.gov. Additional information, including directors' and officers' remuneration and indebtedness, principal holders of the Company's securities and securities authorized for issuance under equity compensation plans, where applicable, is contained in the Company's management information circular dated May 26, 2004 for the Company's annual meeting of shareholders to be held on June 28, 2004. Additional financial information is provided in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements, the notes thereto and the report of the Company's auditors thereon contained in the Annual Report to the Shareholders of the Company for the year ended January 31, 2004 in respect of US GAAP, and the material entitled "Canadian GAAP Financial Information Fiscal 2004" made available to all shareholders of the Company and filed with various regulatory authorities in respect of Canadian GAAP. Copies of such documents, together with copies of any interim financial statements of the Company subsequent to the financial statements for the year ended January 31, 2004, copies of this Annual Information Form and copies of any documents or the pertinent pages of any documents incorporated by reference in this Annual Information Form, are available upon request from the Company's Corporate Secretary, provided that the Company may require payment of a reasonable charge if the request is made by a person who is not a security holder of the Company. At any time when securities of the Company are in the course of a distribution pursuant to a short form prospectus or a preliminary short form prospectus has been filed in respect of a distribution of its securities, a copy of the foregoing documents, together with a copy of any other documents that are incorporated by reference into the short form prospectus or the preliminary short form prospectus may be obtained without charge upon request from the Company's Corporate Secretary. 22 APPENDIX A ---------- THE DESCARTES SYSTEMS GROUP INC. AUDIT COMMITTEE CHARTER Adopted by the Board of Directors on June 12, 2000 A. PURPOSE AND SCOPE The primary function of the Audit Committee (the "Committee") is to assist the Board of Directors in fulfilling its responsibilities by reviewing: (i) the financial reports provided by the Corporation to the Securities and Exchange Commission ("SEC"), the Corporation's stockholders or to the general public, and (ii) the Corporation's internal financial and accounting controls. B. COMPOSITION The Committee shall be comprised of a minimum of three directors as appointed by the Board of Directors, who shall meet the independence and audit committee composition requirements under any rules or regulations of The Nasdaq National Market, as in effect from time to time, and each such director shall be free from any relationship that, in the opinion of the Board of Directors, would interfere with the exercise of his or her independent judgement as a member of the Committee. All members of the Committee shall either (i) be able to read and understand fundamental financial statements, including a balance sheet, cash flow statement and income statement, or (ii) be able to do so within a reasonable period of time after appointment to the Committee. At least one member of the Committee shall have employment experience in finance or accounting, requisite professional certification in accounting, or other comparable experience or background which results in the individual's financial sophistication, including being or having been a chief executive officer, chief financial officer or other senior officer with financial oversight responsibilities. The Board of Directors may appoint one member who does not meet the independence requirements set forth above and who is not a current employee of the Corporation or an immediate family member of such employee if the Board of Directors, under exceptional and limited circumstances, determines that membership on the Committee by the individual is required in the best interests of the Corporation and its stockholders. The Board of Directors shall disclose in the next proxy statement after such determination the nature of the relationship and the reasons for the determination. The members of the Committee shall be elected by the Board of Directors at the meeting of the Board of Directors following each annual meeting of stockholders and shall serve until their successors shall be duly elected and qualified or until their earlier resignation or removal. Unless a Chair is elected by the full Board of Directors, the members of the Committee may designate a Chair by majority vote of the full Committee membership. C. RESPONSIBILITIES AND DUTIES To fulfil its responsibilities and duties the Committee shall: Document Review - --------------- 1. Review and assess the adequacy of this Charter periodically as conditions dictate, but at least annually (and update this Charter if and when appropriate). 23 Independent Accounting Firm - --------------------------- 2. Recommend to the Board of Directors, the selection of the independent accounting firm, and approve the fees and other compensation to be paid to the independent accounting firm. The Committee and the Board of Directors shall have the ultimate authority and responsibility to select, evaluate and, when warranted, replace such independent accounting firm (or to recommend such replacement for stockholder approval in any proxy statement). 3. On an annual basis, receive from the independent accounting firm a formal written statement identifying all relationships between the independent accounting firm and the Corporation consistent with Independence Standards Board ("ISB") Standard 1. The Committee shall actively engage in a dialogue with the independent accounting firm as to any disclosed relationships or services that may impact its independence. The Committee shall take, or recommend that the Board of Directors take, appropriate action to oversee the independence of the independent accounting firm. 4. On an annual basis, discuss with representatives of the independent accounting firm the matters required to be discussed by Statement on Auditing Standards ("SAS") 61, as it may be modified or supplemented. 5. Meet with the independent accounting firm prior to the audit to review the planning and staffing of the audit. 6. Evaluate the performance of the independent accounting firm and recommend to the Board of Directors any proposed discharge of the independent accounting firm when circumstances warrant. The independent accounting firm shall be ultimately accountable to the Board of Directors and the Committee. Financial Reporting Processes - ----------------------------- 7. In consultation with the independent accounting firm and management, review annually the adequacy of the Corporation's internal financial and accounting controls. Compliance - ---------- 8. To the extent deemed necessary by the Committee, it shall have the authority to engage outside counsel and/or independent accounting consultants to review any matter under its responsibility. While the Audit Committee has the responsibilities and powers set forth in this Charter, it is not the duty of the Audit Committee to plan or conduct audits or to determine that the Corporation's financial statements are complete and accurate and are in accordance with generally accepted accounting principles. 24 APPENDIX B ---------- THE DESCARTES SYSTEMS GROUP INC. COMPENSATION COMMITTEE CHARTER A. PURPOSE AND SCOPE The primary function of the Compensation Committee (the "Committee") of the Board of Directors (the "Board") is to exercise the responsibilities and duties set forth below, including but not limited to, determining and making recommendations with respect to all forms of compensation to be granted to the Chief Executive Officer of the Corporation, and reviewing the Chief Executive Officer's recommendations respecting compensation of the other senior executives of the Corporation. B. COMPOSITION The Committee shall be comprised of a minimum of three directors as appointed by the Board, a majority of whom shall be independent and unrelated as determined in accordance with TSX Guidelines and other wise meet any applicable independence and committee composition requirements under any applicable rules or regulations of The Nasdaq National Market or securities laws in effect from time to time. The members of the Committee shall be elected by the Board at the meeting of the Board following each annual meeting of stockholders and shall serve until their successors shall be duly elected and qualified or until their earlier resignation or removal. Unless a Chair is elected by the full Board, the members of the Committee may designate a Chair by majority vote of the full Committee membership. C. RESPONSIBILITIES AND DUTIES To fulfil its responsibilities and duties the Committee shall: o Administer and interpret the Corporation's stock option plan and its policies respecting the grant of options thereunder, and review and recommend for approval of the Board the grant of options thereunder and the terms thereof o Review and recommend to the Board of Directors for approval the annual salary, bonus, stock options and other benefits direct and indirect, of the Chief Executive Officer o Review and approve the Chief Executive Officer's recommendations for the annual salary, bonus, stock options, and the other benefits, direct and indirect, of the other senior executives of the Corporation o Prepare an annual report for inclusion in the Corporation's management information circular to shareholders respecting the process undertaken by the Committee in its review and preparing a recommendation in respect of Chief Executive Officer compensation o Review on a periodic basis the terms of and experience with the Corporation's executive compensation programs for the purpose of determining if they are properly co-ordinated and achieving the purpose for which they were designed and administered o Recommend to the Board the appropriate level of director compensation 25 o Review and assess the adequacy of this Charter periodically as conditions dictate to ensure compliance with any rules of regulations promulgated by any regulatory body and recommend to the Board for its approval any modifications to this Charter as considered o Oversee the Corporation's compliance with any rules promulgated by any regulatory body prohibiting loans to officers and directors of the Corporation. 26 APPENDIX C ---------- THE DESCARTES SYSTEMS GROUP INC. CORPORATE GOVERNANCE COMMITTEE CHARTER A. PURPOSE AND SCOPE The primary responsibility of the Corporate Governance Committee (the "Committee") is to assist the Board of Directors (the "Board") in fulfilling its responsibilities by overseeing the Corporation's corporate governance policies and make policy recommendations aimed at enhancing Board effectiveness. B. COMPOSITION The Committee shall be comprised of a minimum of three directors as appointed by the Board, a majority of whom shall be independent and unrelated as determined in accordance with TSX Guidelines and other wise meet any applicable independence and committee composition requirements under any applicable rules or regulations of The Nasdaq National Market or securities laws in effect from time to time. The members of the Committee shall be elected by the Board at the meeting of the Board following each annual meeting of stockholders and shall serve until their successors shall be duly elected and qualified or until their earlier resignation or removal. Unless a Chair is elected by the full Board, the members of the Committee may designate a Chair by majority vote of the full Committee membership. C. RESPONSIBILITIES AND DUTIES To fulfil its responsibilities and duties the Committee shall: 1. Oversight of Corporate Governance Practices o Conduct a periodic review of the Corporation's corporate governance policies and make policy recommendations aimed at enhancing Board and committee effectiveness o Ensure appropriate structure, size, composition, mandate and membership of Board committees o Propose agenda items and content for submissions to the Board related to corporate governance issues and provides periodic updates on recent developments in corporate governance o Conduct a periodic review of the relationship between management and the Board o Review and approve the Corporation's response to the TSX Guidelines and comparable U.S. guidelines and requirements 2. Management of Board and Committee Activities o Review annually the mandates of the Board and each committee and recommends amendments as it believes are necessary or desirable o Make recommendations regarding Board meeting dates and agendas, committee meetings, the frequency and content of meetings, and the need for special meetings o Determine annually which Board and committee members are considered to be unrelated, recommending its determination to the Board and providing the related analysis o Ensure effective communication between management and the Board, particularly with respect to the provision of information to directors in a timely manner o Recommend procedures to permit Board to function independently of management, including procedures to permit Board to meet on a regular basis without a member of management present 27 3. Evaluation of Board Effectiveness o Review the amount and form of director's compensation to ensure that it is competitive and aligns the interests of directors and shareholders o Conduct at least annually an evaluation of the effectiveness of the Board and its committees o Conduct an annual evaluation of the effectiveness of individual directors 4. Recruitment and Education of Directors o Identify, evaluate and recommend suitable candidates for nominees as directors o Establish criteria for election, re-election and retirement as a director o Responsible for orientation of new directors and ongoing education of directors 5. Succession Planning o Responsible for succession planning for the CEO. 28 THE DESCARTES SYSTEMS GROUP INC. Corporate Headquarters 120 Randall Drive Waterloo, Ontario N2V 1C6 Canada Phone: (519) 746-8110 (800) 419-8495 Fax: (519) 747-0082 info@descartes.com www.descartes.com - ----------------- [DESCARTES COMPANY LOGO] EX-2 3 exh-2_12757.txt MANAGEMENT'S DISCUSSION AND ANALYSIS EXHIBIT 2 --------- - ----------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ----------------------------------------- Our Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") contains references to Descartes using the words "we", "us", "our" and similar words and the reader is referred to using the words "you", "your" and similar words. The MD&A also refers to our fiscal years. 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. This MD&A is prepared as of May 25, 2004. You should read the MD&A in conjunction with our audited consolidated financial statements for 2004. 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 and MD&A 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. We have prepared the MD&A in reference to the new MD&A disclosure requirements established under National Instrument 51-102 "Continuous Disclosure Obligations" ("NI 51-102") of the Canadian Securities Administrators. While the provisions of NI 51-102 concerning annual MD&A apply only for financial periods beginning on or after January 1, 2004, we believe that utilizing NI 51-102 as a guideline for enhanced disclosure will provide greater insight into, and understanding of, our financial condition and results of operation. Additional information about us, including copies of our continuous disclosure materials such as our annual information form, is available on our website at http://www.descartes.com, 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 statements relating to our expectations concerning future revenues and earnings, 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 "believes", "plans", "expects", "anticipates", "intends", "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 under the heading "Certain Factors That May Affect Future Results" appearing in the MD&A. 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. 1 - ----------------------------------------- OVERVIEW - ----------------------------------------- 4We are a global provider of 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 business document exchange, route planning and wireless dispatch, inventory and asset visibility, transportation management, and warehouse optimization. We sell our solutions the way our customers want to buy them. Our pricing model provides companies with flexibility in purchasing our solutions on either a license or subscription basis. Our primary target industries are retail, consumer product goods, manufacturing and transportation. THE MARKET Supply chain management has been changing over the past several years, as companies are increasingly seeking real-time control of their supply chain activities. Companies are looking for integrated, end-to-end solutions that combine business document exchange and mobile and wireless applications (MRM) with end-to-end supply chain execution (SCE) applications, such as transportation management, routing and scheduling and inventory visibility. As the market has been changing, we have been evolving to meet its needs. We are helping our customers take advantage of the Real-Time Supply Chain market by offering end-to-end solutions that leverage our strengths and capabilities in SCE, MRM and business document exchange. SOLUTIONS 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. The DESCARTES FOR RETAIL(TM) solution, for example, addresses the specific needs or challenges of the retail industry such as the coordination of inbound and outbound manufacturing shipments. Helping us to develop and support our solutions is 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 integrate our applications and offer end-to-end enterprise solutions. SALES AND DISTRIBUTION Our sales efforts are directed toward specific industries primarily in retail, consumer product goods, manufacturing, and transportation services. Our sales staff is regionally based and seeks to build long-term relationships with customers and end-users of our products. The sales force is trained to sell across our solutions, targeting specific industry verticals. We promote our products primarily through direct sales techniques aimed at existing and potential users of our products. Channel partners include distributors and value-added resellers. Partnerships play a central role in our strategy to address both existing and future customers. MARKETING Marketing materials are delivered through targeted programs designed to reach our core customer groups. These programs include trade show and user group conferences and exchanges, partner-focused marketing programs and direct corporate marketing efforts. RECENT DEVELOPMENTS UPDATE ON FIRST-QUARTER EXPECTATIONS AND MANAGEMENT CHANGES - We announced on May 6, 2004 that our revenues and loss per share for the first quarter of 2005 would be materially below the expectations set forth in our March 10, 2004 press release and that we were undertaking a review of our financial statements for 2004. 2 We also announced on that date the termination of Manuel Pietra as Chief Executive Officer and President of the Company effective immediately. Art Mesher, Executive Vice-President, Strategic Development and Brandon Nussey, Chief Financial Officer, together have formed the Office of the Chief Executive Officer reporting to the Board of Directors pending a search for a new Chief Executive Officer. 2004 RESULTS - On May 10, 2004, we announced the results of our review of our 2004 unaudited consolidated financial statements and also announced preliminary results for the first quarter of 2005. We determined to undertake a review of our 2004 financial statements primarily due to significant difficulties in collecting certain receivables, particularly within the Asia Pacific geographic region. We previously released unaudited 2004 financial results in our March 10, 2004 press release. Based on the review of our 2004 financial statements following our initial release of unaudited financial statements on March 10, 2004, we announced on May 10, 2004, that we had determined to make adjustments to our 2004 financial statements, including the following: o Increase our allowance for doubtful accounts receivable by $5.0 million (to a total of $8.0 million) based on a specific review of our accounts receivable. This increase in allowance relates primarily to accounts receivable based in the Asia Pacific region and a significant account receivable based on a contract entered into with a single customer based in Europe in the second quarter of 2004. We intend to vigorously pursue the collection of these accounts. o Reduce revenue and related cost of goods sold relating to a significant contract with a customer in China that we previously contemplated recognizing in the fourth quarter of 2004. Due to the combination of the ongoing delay in obtaining approval of various Chinese authorities to enable us to collect payments from customers in China, and the fact that the customer has not yet deployed the licensed software, we determined that the revenue and cost of goods sold from this contract should not be recognized in the fourth quarter of 2004. We intend to continue to pursue the approval of the Chinese authorities and the collection of amounts owing from this customer. o Increase expenses by $1.3 million consisting of a one-time non-cash write-down of $1.2 million relating to certain assets that have been determined to be impaired or otherwise should be written-off, and $0.1 million relating to an Ontario employer health tax reassessment issued subsequent to 2004 year-end. o Reduction of bad debt expense by $0.4 million relating to an arbitration award in our favor issued subsequent to 2004 year-end. As a result of these adjustments and provisions, we announced on May 10, 2004 that, in relation to the unaudited financial results for 2004 that were previously released on March 10, 2004, total revenues were expected to decrease by $1.1 million to $60.6 million, the loss per share was expected to increase by $0.16 to $0.84, total assets were expected to decrease by $6.5 million to $128.6 million and total liabilities were expected to decrease by $0.2 million to $38.2 million. We also announced on May 10, 2004 that given our results for the first quarter of 2005, we are pursuing further cost reduction initiatives to bring expenses in line with revenues. EXPENSE REDUCTION - On May 17, 2004, we announced that we are taking action to significantly reduce expenses and that we are implementing a downsizing of our global staff by approximately 130 employees, or approximately 35 percent of our total staff. In addition, we will be closing certain offices, and canceling certain leases, consulting and other operating contracts. We expect to record a restructuring charge, relating to staff reductions, office closures, lease terminations and cancellation of operating contracts, of between $5.5 and $6.5 million, and anticipate that the majority of the charge will be recorded in our second quarter of 2005 ending July 31, 2004. The timing for recording of the balance of the charge will depend on when leases and other contractual arrangements affected by the restructuring initiatives can be exited. Beginning with our third quarter of 3 2005, we expect to realize quarterly savings in expenses as a result of these initiatives of approximately $7.0 million. We expect our aggregate cash, cash equivalents and marketable securities to be approximately $56.0 million as at April 30, 2004. As of April 30, 2004, the outstanding principal amount of our convertible debentures due June 30, 2005 was $27.0 million. We expect that these restructuring actions will entail an aggregate cash expenditure of between $5.5 and $6.5 million, with $3.5 to $4.0 million of that cash being used in the second quarter of 2005. We also announced that we will be determining whether certain capital assets are redundant as a result of the expense reduction initiatives and that we will be conducting an interim impairment test of our intangible assets and goodwill. Any charge resulting from either the review of capital assets or the interim impairment tests of intangible assets and goodwill will be in addition to the estimated restructuring charge relating to staff reductions, office closures, lease terminations and cancellation of operating contracts and will be recorded as a non-cash charge. COMPLETION OF 2004 AUDIT - On May 25, 2004, we announced the completion of the audit of the consolidated financial statements for 2004. The audited 2004 financial statements reflect a reclassification of $0.8 million of the $5.0 million increase in allowance for doubtful accounts announced on May 10, 2004 to a reduction in revenue for the fourth quarter of 2004. With this adjustment, the audited revenues for 2004 were $59.8 million and the unaudited revenues for the fourth quarter of 2004 were $14.4 million. No adjustments were required upon completion of the audit to any audited results for fiscal years ended prior to January 31, 2004 or to any unaudited quarterly results for the first three quarters of 2004. We are in the course of finalizing our unaudited financial results for the first quarter of 2005, which will be issued by way of press release accompanied by a conference call hosted by management. 4 - ----------------------------------------- CONSOLIDATED OPERATIONS - ----------------------------------------- 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, January 31, January 31, 2004 2003 2002 ------------------------------------------------ Total revenues 59.8 70.4 79.5 Cost of revenues (19.4) (26.6) (27.7) ------------------------------------------------ Gross margin 40.4 43.8 51.8 Operating expenses (53.6) (58.1) (65.6) ------------------------------------------------ Net margin (13.2) (14.3) (13.8) Acquisition-related expenses (5.3) (114.8) (46.9) Restructuring costs (18.8) (11.7) (4.0) ------------------------------------------------ Loss from operations (37.3) (140.8) (64.7) Investment income (expense) net of interest expense (1.8) 1.9 5.7 Gain/(loss) on purchase of convertible debentures 0.9 (0.1) 0.4 ------------------------------------------------ Loss before income taxes and minority interest (38.2) (139.0) (58.6) Income taxes (0.3) 0.4 (0.1) ------------------------------------------------ Loss before minority interest (38.5) (138.6) (58.7) Minority interest -- 0.4 -- ------------------------------------------------ Loss (38.5) (138.2) (58.7) ================================================ LOSS PER SHARE - BASIC AND DILUTED (0.84) (2.65) (1.15) ================================================ WEIGHTED AVERAGE SHARES OUTSTANDING 45,951 52,234 50,858 ================================================ Other Pertinent Information: - ---------------------------- Total assets 128.7 242.3 388.5 ================================================ Convertible debentures 27.0 72.0 73.5 ================================================
Our TOTAL REVENUES were $59.8 million, $70.4 million and $79.5 million in 2004, 2003 and 2002. TOTAL REVENUES consist of SERVICES REVENUES and LICENSE REVENUES. 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. 5 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, January 31, January 31, 2004 2003 2002 ------------------------------------------------ Services revenues 48.9 53.0 47.3 PERCENTAGE OF REVENUES 82% 75% 59% License revenues 10.9 17.4 32.2 PERCENTAGE OF REVENUES 18% 25% 41% ------------------------------------------------ Total revenues 59.8 70.4 79.5 ================================================
Our SERVICES REVENUES were $48.9 million, $53.0 million and $47.3 million in 2004, 2003 and 2002. The decline in our services revenues was contributed to by 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 maintenance contracts, as well as from the impact of customer sign-ups for our connectivity and network applications over the past year. Our LICENSE REVENUES were $10.9 million, $17.4 million and $32.2 million in 2004, 2003 and 2002. The decline in license revenues over these fiscal periods is primarily a 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 82%, 75% and 59% in 2004, 2003 and 2002. This increase in services revenues as a percentage of total revenues was in part a result of the decline in our amortized license revenues described above, as well as the specific impact of the softness in economic conditions on license revenues and increased customer preference for acquiring our solutions under our service model. We operate in one business segment providing supply chain solutions. The following table provides additional analysis of our SEGMENTED REVENUE BY GEOGRAPHIC AREAS OF OPERATION (in millions of dollars):
------------------------------------------------ YEAR ENDED JANUARY 31, January 31, January 31, 2004 2003 2002 ------------------------------------------------ Americas 40.7 48.2 55.3 PERCENTAGE OF REVENUES 68% 69% 70% Europe, Middle-East and Africa (EMEA) 14.3 17.1 17.7 PERCENTAGE OF REVENUES 24% 24% 22% Asia Pacific 4.8 5.1 6.5 PERCENTAGE OF REVENUES 8% 7% 8% ------------------------------------------------ Total revenues 59.8 70.4 79.5 ================================================
REVENUES FROM THE AMERICAS REGION were $40.7 million, $48.2 million and $55.3 million in 2004, 2003 and 2002. The decrease is primarily attributable to a loss of ocean customers in this region and lower license revenues, as described above. 6 REVENUES FROM THE EMEA REGION were $14.3 million, $17.1 million and $17.7 million in 2004, 2003 and 2002. The decrease in revenues from 2002 to 2004 is primarily due to the global economic downturn in 2002, as well as the loss of some recurring contracts over that period. REVENUES FROM THE ASIA PACIFIC REGION were $4.8 million, $5.1 million and $6.5 million in 2004, 2003 and 2002. Aggregate revenues for the Asia Pacific region for 2004 were down nominally in comparison to 2003, though we announced and implemented several new customers in the region over 2004. On May 10, 2004, we announced we had completed a review of our 2004 financial statements and, primarily due to collection challenges within the Asia Pacific Region, had determined to not recognize revenue (and related cost of goods sold) from a significant transaction in China that we had previously contemplated recognizing in the fourth quarter of 2004. In addition, based on a specific review of accounts receivable, we announced on May 10, 2004 that we were increasing our allowance for doubtful accounts for certain accounts in the region. COSTS OF REVENUES were $19.4 million, $26.6 million and $27.7 million in 2004, 2003 and 2002. The following table provides an additional analysis of cost of revenues (in millions of dollars) and the related gross margins for the years indicated:
------------------------------------------------ YEAR ENDED JANUARY 31, January 31, January 31, 2004 2003 2002 ------------------------------------------------ Services - -------- Services revenues 48.9 53.0 47.3 Cost of revenues 17.9 25.7 26.5 ------------------------------------------------ Gross margin 31.0 27.3 20.8 ================================================ GROSS MARGIN PERCENTAGE 63% 52% 44% Licenses - -------- Revenues 10.9 17.4 32.2 Cost of revenues 1.5 0.9 1.2 ------------------------------------------------ Gross margin 9.4 16.5 31.0 ================================================ GROSS MARGIN PERCENTAGE 86% 95% 96% Total - ----- Revenues 59.8 70.4 79.5 Cost of revenues 19.4 26.6 27.7 ------------------------------------------------ Gross margin 40.4 43.8 51.8 ================================================ GROSS MARGIN PERCENTAGE 68% 62% 65%
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 RATES FOR SERVICE REVENUES were 63%, 52% and 44% in 2004, 2003 and 2002. The increase in the gross margin rate 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. The higher cost in 2004 was primarily due to higher map royalty costs and referral fees in the fourth quarter, particularly related to certain contracts in the Asia Pacific region. 7 GROSS MARGIN RATE FOR LICENSE REVENUES was 86%, 95% and 96% in 2004, 2003 and 2002. The lower gross margin rate, as described above, was primarily due to higher royalty and other costs of goods sold paid to third parties in the fourth quarter of 2004. OPERATING EXPENSES (consisting of sales and marketing, research and development and general and administrative expenses) were $53.6 million, $58.1 million and $65.6 million for 2004, 2003 and 2002. The decline is primarily the result of reduced operating expenses from our restructuring initiatives. The following table provides an additional analysis of operating expenses (in millions of dollars) for the years indicated:
------------------------------------------------ YEAR ENDED JANUARY 31, January 31, January 31, 2004 2003 2002 ------------------------------------------------ Total revenues 59.8 70.4 79.5 ------------------------------------------------ Sales and marketing 31.8 30.0 29.5 PERCENTAGE OF REVENUES 53% 42% 37% Research and development 9.4 15.2 25.4 PERCENTAGE OF REVENUES 16% 22% 32% General and administrative expenses 12.4 12.9 10.7 PERCENTAGE OF REVENUES 21% 18% 13% ------------------------------------------------ Total expenses 53.6 58.1 65.6 ================================================
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 53%, 42% and 37% in 2004, 2003 and 2002. The increase in 2004 was a result of our investment in international sales and marketing activities in Asia Pacific and Latin America as well as a $4.3 million 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. We intend to continue to vigorously pursue the collection of these accounts. 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 expense all costs related to research and development. The decline in research and development costs for 2004, compared to 2003 and 2002 was attributable to the 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 $12.4 million, $12.9 million and $10.7 million in 2004, 2003 and 2002. The decrease in general and administrative expenses is attributable to our reduced workforce resulting from restructuring initiatives. Additionally, in 2003 general and administrative expenses reflected the results of an arbitration concluded in the fiscal year. ACQUISITION-RELATED EXPENSES includes amortization and impairments of goodwill and intangible assets acquired on business combinations, write-off of purchased in-process research and development costs and write-downs of 8 long-term investments that we have completed to date. Acquisition-related expenses were $5.3 million, $114.8 million, and $46.9 million for 2004, 2003 and 2002. The following table provides an additional analysis of acquisition related expenses for the years indicated (in millions of dollars):
------------------------------------------------ YEAR ENDED JANUARY 31, January 31, January 31, 2004 2003 2002 ------------------------------------------------ Amortization of goodwill -- -- 24.5 Impairment of goodwill -- 86.7 -- Amortization of intangible assets 5.3 10.1 8.1 Impairment of intangible assets -- 18.0 -- Write-down of long-term investments -- -- 9.8 Purchased in-process research and development -- -- 4.5 ------------------------------------------------ Total expenses 5.3 114.8 46.9 ================================================
AMORTIZATION OF GOODWILL was nil in 2004 and 2003, and $24.5 million in 2002. 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 on February 1, 2003 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 $86.7 million that was recorded in the results of operations for 2003. We initially designated February 1st of each year as the date for our annual impairment test. During the three-month period 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. 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 and our carrying or book value. This comparison indicated an aggregate enterprise fair value in excess of our book value. Accordingly, we determined that no impairment existed. We will continue to perform a 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. AMORTIZATION OF INTANGIBLE ASSETS includes customer agreements and relationships, non-compete covenants, existing technologies and trade names associated with the acquisitions completed by the Company 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 acquisition activities as well as our asset impairment tests. Amortization of intangible assets was $5.3 million, $10.1 million and $8.1 million in 2004, 2003 and 2002. The decline 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." As at January 31, 2004, the unamortized portion of intangible assets amounted to $8.3 million compared with $13.6 at January 31, 2003. The WRITE-DOWN OF LONG-TERM INVESTMENTS resulted from a review of the carrying value of our long-term investments acquired in 2002. As a result, we recorded a provision of $9.8 million in 2002 against the carrying 9 values of certain long-term investments for impairments considered to be other than temporary. The impairment resulted from the general market conditions for the technology industry and delays in achieving expected cash flow targets by certain of these investees. We conducted a similar review in 2004 and 2003 and determined that no further write-down was required. PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT ("IPR&D") assets are expensed at the time of acquisition. In 2002, we engaged the services of an independent consultant to perform an appraisal of the acquired intangible assets of Centricity, Inc ("Centricity"). The acquired IPR&D 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 2002. The value allocated to IPR&D 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. RESTRUCTURING COSTS were $18.8 million, $11.7 million and $4.0 million in 2004, 2003 and 2002. At January 31, 2004, we had a remaining restructuring provision of $0.7 million. The remaining restructuring provision is primarily the result of the restructuring plans described in Note 9 in the accompanying Notes to the Consolidated Financial Statements. We initiated these restructuring plans in order to align our cost structure with our network-based revenue model and to streamline our corporate operations. The remaining restructuring reserve under each initiative is summarized below as well as the changes in the restructuring provision from 2003 to 2004 (in thousands of dollars):
------------------------------------------------------------------------------------------- Provision Additional Revisions Cumulative Cumulative Remaining as at Charges During Non-cash Cash Provision as January 31, During 2004 Drawdowns Drawdowns at January 31, 2003 2004 2004 ------------------------------------------------------------------------------------------- AUGUST 2001 135 80 (56) -- (155) 4 - ----------- JUNE 2002 - --------- Workforce reduction 467 3,297 -- -- (3,764) -- Office closure costs 407 3,501 -- -- (3,748) 160 Redundant assets -- 155 -- (155) -- -- Data center consolidations -- 864 -- -- (864) -- Network system consolidations -- 2,915 (1,259) -- (1,656) -- MAY 2003 - -------- Workforce reduction -- 5,169 (380) -- (4,692) 97 Office closure costs -- 2,837 -- -- (2,360) 477 Redundant assets -- 1,661 -- (1,661) -- -- ------------------------------------------------------------------------------------------- 1,009 20,479 (1,695) (1,816) (17,239) 738 ===========================================================================================
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 10 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 of $3.8 million related to the consolidation of our data center and network infrastructure as part of the June 2002 and May 2003 restructuring initiatives. 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. 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. INVESTMENT INCOME (EXPENSE) NET OF INTEREST EXPENSE was an expense of $1.8 million in 2004, compared to income of $1.9 million and $5.7 million in 2003 and 2002, respectively. The decrease in each year is attributable to a decrease in investment income caused by lower yields from marketable securities as well as lower investment balances as a result of cash usage in operations and the share and debenture repurchases. This decline was partially offset by lower interest expense charges, as there was a lower outstanding principal amount of 11 convertible debentures after our repurchases of certain of these debentures (Note 10 to the Consolidated Financial Statements). GAIN/(LOSS) ON PURCHASE OF CONVERTIBLE DEBENTURES was $0.9 million, ($0.1) million and $0.4 million for 2004, 2003 and 2002. These gains and losses resulted from our purchase of $45 million principal amount of our convertible debentures during 2004, as well as the purchase of approximately $1.5 million principal amount of our convertible debentures in each of 2003 and 2002 (Note 10 to the Consolidated Financial Statements). INCOME TAXES were $0.3 million, recoveries of $0.4 million and $0.1 million for 2004, 2003 and 2002. The income tax recoveries in 2003 were 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. Overall, we incurred a LOSS of $38.5 million in 2004, compared to greater losses in 2003 and 2002 of $138.2 million and $58.7 million, respectively. The decrease in the loss between 2004 and 2003 is attributable to improvements in gross margins, lower operating expenses due to restructuring initiatives, lower amortization of intangible assets resulting from a change of accounting and the absence in 2004 of impairment provisions as were booked in 2003. These positive factors were offset by higher restructuring costs and lower net investment incomes due to lower cash balances. 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. - ----------------------------------------- QUARTERLY OPERATING RESULTS - ----------------------------------------- The following table provides an analysis of our unaudited operating results (in thousands of dollars, except per share and weighted average per share amounts) for each of the quarters ended on the date indicated:
--------------------------------------------------------------------------- APRIL 30, JULY 31, OCTOBER 31, JANUARY 31, TOTAL 2003 2003 2003 2004 --------------------------------------------------------------------------- 2004 - ---- Revenue 14,187 15,219 16,026 14,353 59,785 Gross Profit 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) Shares used in loss per share calculation 52,230 50,470 40,654 40,655 45,951 --------------------------------------------------------------------------- April 30, July 31, October 31, January 31, Total 2002 2002 2002 2003 --------------------------------------------------------------------------- 2003 - ---- Revenue 16,824 18,028 17,501 18,030 70,383 Gross Profit 8,945 10,091 11,734 12,982 43,752 Operating Expenses 14,340 19,311 12,725 11,685 58,061 Loss (6,082) (18,487) (5,152) (108,474) (138,195) Basic and diluted loss per share (0.12) (0.35) (0.10) (2.08) (2.65) Shares used in loss per share calculation 52,237 52,241 52,233 52,224 52,234
12 - ----------------------------------------- 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. With $65.1 million in cash, short-term deposits, short- and long-term investments in corporate bonds and dividend received deduction ("DRD") eligible securities, a $8.3 million surplus of non-cash working capital and $9.1 million in unutilized lines of credit, in each case as at January 31, 2004, we believe we have sufficient liquidity to meet our operating requirements. While we do not currently contemplate undertaking a financing transaction, the proceeds from any such transaction, should such a transaction occur, could be utilized to fund strategic transactions, for reducing debt, share buybacks, 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. We have subsidiaries in various jurisdictions around the world to enable us to conduct business in such jurisdictions. Some jurisdictions, such as China and Brazil, have currency control restrictions which require sometimes complex administrative processes and procedures be followed in order to transfer currency out of the jurisdiction. In addition, some jurisdictions have minimum capitalization requirements for conducting business in the jurisdictions, creating a further restriction on removing funds from the jurisdiction. We believe that we currently have sufficient funds outside these highly regulated jurisdictions to enable us to meet our financial obligations as they come due. 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, 2004 2003 2002 ------------------------------------------------ Cash used in operating activities (32.6) (16.8) (15.6) Additions to capital assets (5.8) (5.3) (5.4) Acquisitions (0.3) (2.2) (9.5) Purchase of convertible debentures (43.3) (1.5) (1.1) Purchase of common shares (27.2) -- -- Issuance of common shares 0.2 0.2 2.5 Purchase of long-term investments -- (0.1) (1.8) ------------------------------------------------ Net change in cash and cash equivalents and marketable securities (109.0) (25.7) (30.9) Cash and cash equivalents and marketable securities, beginning of year 174.1 199.8 231.9 ------------------------------------------------ Cash and cash equivalents and marketable securities, end of year 65.1 174.1 201.0 ================================================
NET CASH USED IN OPERATING ACTIVITIES was $32.6 million, $16.8 million and $15.6 million for 2004, 2003 and 2002. The increase in cash used in operating activities from 2003 to 2004 was comprised of an increase in our trade receivables of $5.0 million in 2004 as well as higher use of cash for restructuring activities. ADDITIONS TO CAPITAL ASSETS of $5.8 million in 2004 represents investments that we have made in computing equipment and software to support our global operations and the centralization of our support functions. ACQUISITIONS represents the purchase price and costs related to acquired companies. In 2003 and 2002 we had undertaken a focused acquisition strategy designed to complement and enhance our product offering and our distribution capabilities. Pursuant to this strategy, we completed a series of acquisitions including the acquisition 13 of the remaining 30% interest in Tradevision AB ("Tradevision") in 2003, as well as the acquisitions of Centricity, TranSettlements, Inc. ("TranSettlements"), certain technology assets of NeoModal.com, L.L.C. ("NeoModal") and a 70% interest in Tradevision (described below) in 2002. In December 2001, in a $2.5 million cash transaction, we acquired from Nocom AB, an information technology company headquartered in Sweden, its 70% ownership interest in Tradevision, a Sweden-based provider of global connectivity and value-added software solutions for transportation logistics. In October 2002, in a $0.7 million cash transaction, we acquired the remaining 30% interest of Tradevision from SAS Cargo Group A/S ("SAS"), a transport solution provider headquartered in Denmark. The share purchase agreement with SAS also provides for an additional purchase price earn-out amount of a maximum of $0.7 million over a four-year period. Under this plan, we paid $0.1 million in 2004. We also issued 78,250 options to purchase our common shares to employees of Tradevision, of which 14,490 were exercisable as of January 31, 2004. In conjunction with the acquisitions of the shares of Tradevision, we developed a restructuring plan to integrate the operations of Tradevision with our operations by eliminating redundant staff positions, offices and network infrastructures. The final plan resulted in severance costs of approximately $2.1 million, infrastructure consolidation costs of $1.2 million and office closure and other activity costs of $0.5 million. Further details of our restructuring initiatives are described more fully in Note 9 to the Consolidated Financial Statements. 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 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, $2.2 million and $6.3 million paid in 2004, 2003 and 2002), which included the cash consideration, the integration costs and other acquisition related expenses. The transaction has been accounted for using the purchase method. In May 2001, pursuant to an asset purchase agreement, we acquired certain technology assets of NeoModal, 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 of certain employees of NeoModal to us, 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. As at January 31, 2004, 4,500 of these stock options were outstanding of which 1,800 were exercisable. In addition to the acquisitions described above, we completed two non-cash acquisitions in 2002: Centricity and TranSettlements (Note 8 to Consolidated Financial Statements). 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. On December 8, 2003, we announced the intention of 3078393 Nova Scotia Company, our wholly owned subsidiary, to purchase up to an aggregate of $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 12 months following the announcement through the facilities of the TSX, if and when considered advisable by us. As of May 20, 2004, we have not purchased any debentures under this normal course issuer bid. 14 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 May 25, 2004, there were 40,705,811 shares issued and outstanding. LONG-TERM INVESTMENTS of $0.1 million in 2003 represent additions to our investment in Ocado, an online food retailer based in the United Kingdom. Long-term investments of $1.8 million in 2002 represent cash invested in two companies that were spun off from TraffiCop, Inc. ISSUANCE OF COMMON SHARES represents the proceeds from the issuance of common shares from exercised stock options. Employees exercised 59,300 stock options in 2004 for $0.2 million. As of January 31, 2004, our current assets exceed our current liabilities by $62.4 million. This working capital surplus results primarily from $13.2 million of cash reserves, $34.6 million in short-term marketable securities and $19.0 million in current trade receivables. The liquidity of these assets provides financial flexibility to achieve our business objectives. 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 comprise debt securities maturing within 12 months from the balance sheet date. Long-term marketable securities are comprised of DRD eligible securities as well as 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. Generally, the longer the term to maturity (which is limited to three years) and the higher the level of investment in a single corporation or a group of related corporations (which is limited to $25 million), the higher the required minimum credit rating. As at January 31, 2004, 20% of the total cash and investment portfolio was in interest-bearing cash deposits, 16% was in DRD eligible securities, 54% was in corporate bonds having terms to maturity of less than one year and 10% was in corporate bonds having terms to maturity of between one and two years. The table below provides an analysis of our consolidated holdings of cash and investments in thousands of dollars with their credit ratings as at January 31, 2004: STANDARD & POORS PERCENTAGE AMOUNT (S&P) RATING OF TOTAL ------------------------------------------- Interest-bearing cash deposits -- 20% 13,187 Marketable securities A 7% 4,492 A+ 3% 2,066 AA- 2% 1,025 AA 19% 12,314 AAA 49% 31,968 -------------------------- 100% 65,052 ========================== 15 CONTRACTUAL OBLIGATIONS, COMMITMENTS, CONTINGENCIES AND GUARANTEES 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:
----------------------------------------------------- LESS THAN 1-3 3-5 MORE THAN TOTAL 1 YEAR YEARS YEARS 5 YEARS ----------------------------------------------------- Convertible Debentures (plus interests payments) 1.5 27.8 -- -- 29.3 Operating Lease Obligations 4.5 5.0 0.6 -- 10.1 ----------------------------------------------------- TOTAL 6.0 32.8 0.6 -- 39.4 =====================================================
COMMITMENTS On June 30, 2000, we issued $75.0 million aggregate principal amount of 5.50% convertible unsecured subordinated debentures maturing on June 30, 2005. 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. In December 2001, March 2002, and August 2002, we cumulatively purchased for cancellation $3.0 million principal amount of the debentures. In addition, in July 2003 we purchased, and currently hold through a wholly owned subsidiary, $45.0 million principal amount of the debentures. At January 31, 2004, we had $72.0 million of these debentures outstanding, $45.0 million of which are held in a wholly owned subsidiary. 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 the option of the Company, 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. We have not identified any reasonably possible circumstance that would trigger a default by us under the trust agreement for the debentures that would result in any early payment of the debentures. Interest obligations due in the current year are expected to be satisfied with a combination of cash reserves, the liquidation of short-term investments, and operating cash flows. We are committed under non-cancelable operating leases for business premises and computer equipment with terms expiring at various dates through 2009. The future minimum amounts payable under the lease agreements in thousands 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. These aggregate outstanding balances are not material in amount. 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 16 certain of our products infringe certain patents of ArrivalStar, Inc. We believe the claim is without merit and are vigorously defending the claim. 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. 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 liability is not expected to have a material effect on our annual results of operations, financial position or capital resources. 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 at January 31, 2004, our guarantees that were issued or modified after December 31, 2002 were not material. 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. We have not been involved in any transactions requiring consolidation as prescribed by FIN 46. - ------------------------------------------- APPLICATION OF CRITICAL ACCOUNTING POLICIES - ------------------------------------------- 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, revenue 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, changes in financial condition or results of operation. Our significant accounting policies are discussed in Note 2 of the Notes to the Consolidated Financial Statements; critical estimates inherent in these 17 accounting policies include revenue recognition, impairment of intangible assets and goodwill, and accounting for income taxes. 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 customisation 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 ratably 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. GOODWILL AND INTANGIBLE 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 Descartes) 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. 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 18 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. 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. Our management has discussed the development and selection of these critical accounting policies with the Audit Committee and the Board of Directors. In addition, the Audit Committee has reviewed the disclosures in this Management's Discussion and Analysis. - ---------------------------------------------- CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS - ---------------------------------------------- ANY INVESTMENT IN OUR 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 REPORT. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES FACING OUR 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 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. OUR RECENT ANNOUNCEMENTS MAY HAVE A NEGATIVE IMPACT ON OUR BUSINESS. We recently announced that we were reviewing our financial results for 2004 and that our audited results would differ materially from the unaudited results 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 recently announced a significant downsizing of our staff, office closures, the cancellation of certain leases and contracts and the termination of our CEO. These announcements have resulted in a significant drop in our stock price and may have a negative impact on our ability to generate business with customers and to retain key employees. WE INTEND TO HIRE A NEW CEO. On May 6, 2004, we announced the termination of our CEO and the forming of an office of the CEO. Although we anticipate hiring a new CEO, it will take time to find a proper replacement. Our performance is highly dependent on the performance of senior management. Any inability to timely hire a new CEO could have a material adverse effect on our business, results of operations, financial condition and the price of our securities. WE MAY FACE DELISTING BY NASDAQ. If our stock price continues to decline, it may result in a failure to comply with the Nasdaq listing criteria and could result in a delisting of our stock on Nasdaq. A delisting will result in the inability of our shareholders to trade our securities on Nasdaq. 19 WE 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. It is possible that one or more additional complaints making substantially similar allegations may follow. There can be no assurance that any such claims would not have a material adverse effect on our results of operations or financial position. WE HAVE A HISTORY OF LOSSES AND EXPECT TO INCUR LOSSES IN THE FUTURE, WHICH MAY NEGATIVELY IMPACT THE PRICE OF OUR SECURITIES. We have incurred losses in the current fiscal quarter and fiscal year as well as in prior fiscal quarters and fiscal years. As at January 31, 2004, our accumulated deficit was $355.4 million. We believe that the success of our business depends on our ability to reduce our operating expenses to a level at or below our revenues. There can be no assurance that we can generate expense reductions or revenue growth, or that any expense reductions or revenue growth that are achieved can be sustained. If our revenues fail to grow or our operating expenses increase without a corresponding increase in our revenues, or we fail to adjust operating expense levels appropriately, we may not be able to achieve or sustain profitability, which would increase the possibility that the value of your investment will decline. OUR 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. 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 Fluctuations in the demand for our services and products; o Our ability to reduce or limit increases in our operating expenses; o The successful implementation and market acceptance of our pricing and revenue model; 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, including standards relating to revenue recognition, and stock-based compensation; o Variances in the size, timing and collection of orders and, in particular, license transactions; o Our ability to satisfy all contractual obligations in customer contracts and deliver services and products to the satisfaction of our customers; o Legal costs incurred in bringing or defending litigation; and o Other risk factors discussed in this 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. 20 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 operations in both Europe and the Asia Pacific region. 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; 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 rates; o Multiple and possibly overlapping tax structures and the burdens of complying with a wide variety of foreign laws; o Trade restrictions; o Changes in tariff rates; 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 report. 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 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. 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 types of claims and incur damage to the reputation of our company and 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 ACHIEVE AND SUSTAIN PROFITABILITY. We have implemented separate restructuring plans in each of August 2001, June 2002, May 2003 and May 2004. In 2004 we incurred a restructuring charge of $18.8 million. We expect that we will incur further restructuring charges in 2005 and future fiscal years relating to these restructuring plans. These restructuring charges could impair our ability to achieve and sustain profitability in the future and have a negative impact on the price of our 21 securities. We expect that we will continue our efforts to streamline operations, improve efficiency and align our cost structure with our revenues in order to meet our business and profitability objectives. The objective of the restructuring plans is to reduce our cost structure and generate greater operating efficiencies through reductions in our workforce, and through consolidation of personnel facilities and termination of operating contracts. Workforce reductions could temporarily negatively impact our remaining employees, including those directly responsible for sales. Further, the failure to retain and effectively manage remaining employees could increase our costs, hurt development and sales efforts, and impact the quality of our customer service. As a result, these changes may affect our ability to close new transactions and maintain existing relationships with customers and prospects and therefore negatively affect future revenues. This could harm our business, results of operations and financial condition. WE MAY BE UNABLE TO ATTRACT AND RETAIN KEY PERSONNEL, WHICH 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 key person 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. 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 service 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 any of the following reasons: o Recent announcements that we have made regarding our financial condition and termination of our CEO, 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 Potential concerns resulting from the securities class action lawsuit filed against us, or o 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 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 22 indemnification 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 may result in our being forced to bear the burden of an increased portion of risks for 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. 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 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 Changes in recommendations or financial estimates by industry or investment analysts; o Rumors or dissemination of false and/or misleading information; o Changes in management; o Conditions and trends in the supply chain technology industry; o Corporate security breaches; o Adoption of industry standards and the inclusion of our technology in, or compatibility of our technology with, such standards; o Our inclusion or removal from stock exchange composite indexes or sub indexes; o Adoption of new accounting standards affecting the supply chain technology industry; 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 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 one 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. IF OUR COMMON SHARE PRICE DECREASES TO LEVELS SUCH THAT THE FAIR VALUE OF OUR NET ASSETS IS LESS THAN THE CARRYING VALUE OF OUR NET ASSETS, WE MAY BE REQUIRED TO RECORD ADDITIONAL SIGNIFICANT NON-CASH CHARGES ASSOCIATED WITH GOODWILL IMPAIRMENT. We account for goodwill in accordance with the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets", which we adopted effective February 1, 2002. SFAS No. 142, among other things, requires that goodwill no longer be amortized, but instead be tested for impairment at least annually. Goodwill is tested for impairment to ensure that its fair value is greater than or equal to its carrying value. Any excess of carrying value over fair value is charged to income in the period in which impairment is determined. In testing goodwill impairment, we use a valuation approach based on market capitalization and discounted cash flow models. Our current date for the annual goodwill impairment test is 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. Should the fair value of our net assets, determined by our market capitalization, be less than the carrying value of our net assets at future impairment test dates, we may have to recognize additional goodwill impairment losses in our future results of operations. This could impair our 23 ability to achieve or maintain profitability in the future. FAIR VALUE ASSESSMENTS OF OUR INTANGIBLE ASSETS REQUIRED BY GAAP MAY REQUIRE US TO RECORD SIGNIFICANT NON-CASH CHARGES ASSOCIATED WITH INTANGIBLE ASSET IMPAIRMENT. Significant 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 are 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 impair our ability to achieve or maintain profitability in the future. 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 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 the sale of our debt and equity securities. As of January 31, 2004, we had cash, cash equivalents and marketable securities of approximately $65.1 million, surplus of non-cash working capital of $8.3 million and unutilized lines of credit of $9.1 million. In addition, on May 17, 2004, we announced that we would be undertaking restructuring initiatives which will entail an aggregate cash expenditure of between $5.5 and $6.5 million, with $3.5 to $4.0 million of that cash being used in the second quarter of 2005. While we believe that our resources will be sufficient to meet our contemplated operational and restructuring needs, 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. OUR INDEBTEDNESS MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL CONDITION. In June 2000, we completed a convertible debt offering of $75.0 million in 5.5% convertible unsecured subordinated debentures that are due June 2005. As of January 31, 2004, we had repurchased $48.0 million of these debentures, $3.0 million of which were canceled and $45 million of which are held by a wholly-owned subsidiary, leaving $27.0 million in outstanding debentures that are not held by us or our subsidiaries or affiliates. 24 In December 2003, the Toronto Stock Exchange approved the purchase by one of our subsidiaries of up to an aggregate of $3.6 million of additional outstanding debentures, which purchases could happen from time to time before December 8, 2004. Our indebtedness could have important consequences for investors. For example, it could: o Increase our vulnerability to general adverse economic and industry conditions; o Limit our ability to obtain additional financing; o Require the dedication of a portion of our cash flows from operations to the payment of principal of, and interest on, our indebtedness, thereby reducing the availability of capital to fund our operations, working capital, capital expenditures, acquisitions and other general corporate purposes; o Limit our flexibility in planning for, or reacting to, changes in our business and the industry; and o Place us at a competitive disadvantage relative to our competitors. Although we have no present plans to do so, we may incur substantial additional debt in the future. If a significant amount of new debt is added to our current levels, the related risks described above could intensify. 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 military action in Iraq and the global war on terrorism 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 OPERATION 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 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. 25 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 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, 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. OUR CUSTOMERS MAY EXPERIENCE DELAYS OR DIFFICULTIES IN THE INSTALLATION AND USE OF OUR SERVICES AND PRODUCTS, WHICH COULD LEAD TO CLAIMS FOR DAMAGES BY OUR CUSTOMERS, LOSS OF REVENUE OR DELAYS IN THE MARKET ACCEPTANCE OF OUR SERVICES AND PRODUCTS. When one of our products is implemented, the environment into which it is installed is complex and typically contains a wide variety of systems and third-party software with which our software must be integrated. As a result, some customers may have difficulty or be unable to implement our products successfully within anticipated timeframes or otherwise achieve their expected benefits. Further, even when our products are fully implemented and free of errors or defects, our services and products may not be delivered to the satisfaction of our customers. These problems may result in claims for damages suffered by our customers, a loss of, or delays in, the market acceptance of our services and products, damage to our reputation, lost revenue and collection difficulties during the period required to correct these errors, complete implementations or address customer dissatisfaction. 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, 26 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 operation and financial condition. ERRORS OR DEFECTS IN OUR PRODUCTS, WHICH MAY HARM OUR REPUTATION AND CAUSE US TO LOSE CUSTOMERS OR INCUR ADVERSE LEGAL JUDGMENTS, MAY BE DIFFICULT TO DETECT PRIOR TO IMPLEMENTATION. Some of our products are complex. This complexity can make it difficult to detect errors or failure in our products prior to implementation. Although we conduct testing and quality assurance through a release management process, we may not discover errors in our products until our customers install and use a given product or until the volume of use of that product increases. We may not be able to correct any detected errors or failures in a timely manner, if at all. Alleviating such errors could require significant expenditure of capital and other resources. These problems may result in claims for damages suffered by customers, a loss of, or delays in, the market acceptance of our services and products, damage to our reputation, lost revenue and collection difficulties during the period required to correct these errors or defects. 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 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. Cutbacks in our workforce or any deterioration in the relationship with our third-party outsourced development provider could lengthen the time necessary to develop our products. 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; 27 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; o Integrate with system platforms, operating environments and user interfaces commercially accepted from time to time; o Achieve market acceptance; o Integrate third-party technology effectively; and o 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 operating performance and financial condition. OUR LENGTHY AND VARIABLE SALES CYCLE MAKES IT DIFFICULT FOR US TO PREDICT WHEN, OR IF, SALES WILL OCCUR AND, THEREFORE, WE MAY EXPERIENCE AN UNPLANNED SHORTFALL IN REVENUES. Our services and products have a lengthy and unpredictable sales cycle that contributes to the uncertainty of our operating results. Customers typically view the purchase of our services and products as a significant and strategic decision. As a result, customers and prospects generally evaluate our services and products and determine their impact on existing infrastructure over a lengthy period of time. Our sales cycle typically averages between three and nine months, depending on the solution a particular customer is purchasing, a particular customer's implementation requirements and whether the customer is new or is extending an existing implementation. Services and products that include a license to our software products usually require a significant up-front license payment, which may be subject to delays if the customer has lengthy internal budgeting, approval, and evaluation processes. Additionally, in the current economic environment, many companies have reduced their budgets for information technology spending. If companies continue reducing their spending on information technology assets, we may be subject to additional delays and corresponding reductions in sales of our services and products. Moreover, we may incur significant selling and marketing expenses during a customer's evaluation period, including the costs of developing a full proposal and completing a rapid proof-of-concept or custom demonstration. Larger customers may purchase our services and products as a part of multiple simultaneous purchasing decisions, which may result in additional unplanned administrative processing and other delays. Also, our customers may delay their purchasing decisions in anticipation of new or enhanced services or products that we, or our competitors, may introduce. Further, any prolonged decline in the demand for technology services and products could reduce the market for our services and products, making sales more difficult. If revenues forecasted from a specific customer for a particular quarter are not realized or are delayed to another quarter, we may experience an unplanned shortfall in revenues, which could adversely affect our operating results. 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 OPERATION AND FINANCIAL CONDITION. We are currently investing, and intend to continue to invest, significant resources to develop and enhance 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, 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 operating performance and financial condition. 28 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 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. A complaint alleging patent infringement has been filed against us by ArrivalStar, Inc. in the United States District Court for the Southern District of New York. This claim or any intellectual property claim, 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 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. 29 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 fluctuations in the Canadian-US dollar exchange rate could have a material adverse effect on our business, results of operation and financial condition. WE MAY NOT REALIZE THE EXPECTED BENEFITS FROM ANY OF OUR ACQUISITIONS, AND IF WE CANNOT ADDRESS THE CHALLENGES PRESENTED BY ANY SUCH ACQUISITIONS, OUR OPERATING RESULTS MAY BE HARMED. In the past, we have acquired businesses to expand our operations or market presence, and we may continue our expansion by acquiring or investing in companies, assets or technologies that complement our business and offer opportunities for growth. These transactions involve many risks and challenges that we might not successfully overcome, including: o Difficulties in integrating technologies, products, personnel and operations; o Disruption of our ongoing business and diversion of management's attention from other business concerns; o Risks of entering markets in which we have no or limited prior experience; o Issuances of equity securities that may dilute your ownership interest in our common stock; o Cash payments to, or the assumption of debt or other liabilities of, the companies we acquire; o Large write-offs related to goodwill, intangible assets and acquired research and development; o Difficulties in realizing the expected benefits of the transaction; o Difficulties in retaining key employees; o Difficulties in maintaining controls, procedures and policies during the transition and integration; o Adverse effects to relationships with partner companies or third-party providers of technology or products; and o Failure of our due diligence process to identify significant issues with product quality, product architecture, legal and financial contingencies, and product development, among other things. WE MAY BE TREATED AS A "PASSIVE FOREIGN INVESTMENT COMPANY" FOR US INCOME TAX PURPOSES RESULTING IN ADVERSE TAX CONSEQUENCES FOR US INVESTORS IN OUR COMMON SHARES. If, for any taxable year, our passive income or our assets that produce passive income exceed levels provided by law, we may be characterized as a passive foreign investment company, or PFIC, for US federal income tax purposes. This characterization could result in adverse US tax consequences to the holders of our equity securities who are citizens or residents of the US for federal income tax purposes, and other holders of equity securities who may be subject to US federal income tax law. If you are such a person, you should consult with your own US tax advisors with respect to the US tax consequences of investing in our securities. We have not assumed, and do not assume, any obligation to make timely disclosure with respect to our PFIC status. 30 NEW LAWS OR REGULATIONS AFFECTING COMMERCE ON THE INTERNET, IMPORTING/EXPORTING OR TRANSPORTATION COULD REDUCE THE USE OF OUR SERVICES AND PRODUCTS BY CUSTOMERS, RESULT IN TAX ASSESSMENTS AGAINST US OR REQUIRE US TO CHANGE THE METHODS BY WHICH WE DO BUSINESS. THIS COULD MATERIALLY ADVERSELY AFFECT OUR RESULTS OF OPERATION AND GROWTH. US, Canadian and other foreign governmental authorities have adopted and are considering legislation affecting the use of the Internet, including laws relating to the use of the Internet for commerce and distribution. In addition, certain of our services and products, including some ocean carrier products and our automated manifest products, were designed to assist customers to comply with various regulatory requirements relating to transportation/shipment and importing/exporting of goods. The adoption, interpretation, amendment or repeal of these laws and regulations, as well as laws governing such things as taxation of commerce, consumer protection, libel, property rights and personal privacy, could adversely affect customers' general use of the Internet as a communications and commercial medium or customers' use of our supply chain services and products. If this occurs, this would reduce our revenues and have a material adverse effect on our growth, thereby adversely impacting our operating performance and financial condition. Further, laws and regulations relating to taxation of services and products that are delivered over the Internet or other networks continue to develop and tax regulations or rulings that are adverse to our pricing or delivery model could result in significant assessments against us or require us to change the methods by which we conduct our business. IF REQUIREMENTS RELATING TO ACCOUNTING TREATMENT FOR EMPLOYEE STOCK OPTIONS ARE CHANGED, WE MAY BE FORCED TO CHANGE OUR BUSINESS PRACTICES AND OUR BUSINESS MAY BE MATERIALLY ADVERSELY AFFECTED. If proposals currently under consideration by accounting standards organizations and governmental authorities are adopted, we may be required to treat the value of the stock options granted to employees as a compensation expense under US GAAP. As a result, we may re-evaluate our stock option compensation practices including the number of stock options granted to employees. In the absence of alternative cash or other compensation 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. 31 EX-3 4 exh-3_12757.txt AUDITED COSOLIDATED FINANCIAL STATEMENTS 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. - ----------------------------------------------------------------------- EX-4 5 exh-4_12757.txt CONSENT OF DELOITTE & TOUCHE EXHIBIT 4 --------- [Deloitte & Touche Letterhead] INDEPENDENT AUDITOR'S CONSENT We consent to the use in this Annual Report of The Descartes Systems Group Inc. on Form 40-F for the year ended January 31, 2004 of our report dated May 14, 2004, except as to Note 16 which is as of May 19, 2004.. We also consent to the incorporation by reference in Registration Statements (Nos. 333-10666, 333-11636, 333-13058, 333-13746, 333-13768 and 333-89694) of The Descartes Systems Group Inc. on Form S-8 of our report dated May 14, 2004, except as to Note 16 which is as of May 19, 2004 appearing in the Annual Report on Form 40-F of The Descartes Systems Group Inc. for the year ended January 31, 2004. /s/ Deloitte & Touche LLP Chartered Accountants June 18, 2004 EX-5 6 exh-5_12757.txt 302 CERTIFICATION OF CHIEF FINANCIAL OFFICER EXHIBIT 5 --------- CERTIFICATIONS I, Brandon Nussey, Chief Financial Officer and member of the Office of the CEO, certify that: 1. I have reviewed this report on Form 40-F of The Descartes Systems Group Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) [Paragraph omitted in accordance with SEC transition instructions contained in SEC Release No. 34-47986]; (c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluations; and (d) disclosed in this report any changes in the registrant's internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (and persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: June 18, 2004 /s/ Brandon Nussey ------------------------------ Brandon Nussey Chief Financial Officer and member of the Office of the CEO EX-6 7 exh-6_12757.txt 302 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER EXHIBIT 6 --------- CERTIFICATIONS I, Arthur Mesher, Executive Vice President, Corporate Strategy and member of the Office of the CEO, certify that: 1. I have reviewed this report on Form 40-F of The Descartes Systems Group Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) [Paragraph omitted in accordance with SEC transition instructions contained in SEC Release No. 34-47986]; (c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluations; and (d) disclosed in this report any changes in the registrant's internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (and persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: June 18, 2004 /s/ Arthur Mesher --------------------------- Arthur Mesher Executive Vice President, Corporate Strategy and member of the Office of the CEO EX-99.1 8 exh99-1_12757.txt 906 CERTIFICATION OF C.E.O. AND C.F.O. EXHIBIT 99.1 ------------ CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the annual report of The Descartes Systems Group Inc., a Canadian company and foreign private issuer (the "Company"), on Form 40-F for the fiscal year ended January 31, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, Brandon Nussey, Chief Financial Officer and member of the Office of the CEO of the Company, and Arthur Mesher, Executive Vice President, Corporate Strategy and member of the Office of the CEO of the Company, do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to our knowledge, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. By: /s/ Brandon Nussey ------------------------------------- Brandon Nussey Chief Financial Officer and member of the Office of the CEO By: /s/ Arthur Mesher ------------------------------------- Arthur Mesher Executive Vice President, Corporate Strategy and member of the Office of the CEO June 18, 2004 This certification is being submitted solely for the purpose of complying with Section 1350 of Chapter 63 of Title 18 of the United States Code. This certification is not to be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liability of that section, nor will the certification be deemed incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the registrant specifically incorporates it by reference. -----END PRIVACY-ENHANCED MESSAGE-----