CONDITION AND RESULTS OF OPERATIONS
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We 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. 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 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 suites enable our customers to purchase and use one module at a time or combine several modules as part of their end-to-end, real-time supply chain solution. This gives our customers an opportunity to add supply chain services and capabilities as their business needs grow and change. Helping us to develop and support our solutions is theLogistics Network Operating System™ (LNOS) | built on the Microsoft .NET framework. The LNOS is the foundation or architecture upon which our newer product suites operate enabling us to 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 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 and regional markets. 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. Previously Announced Developments (the "Recent Events") Management Changes -On May 6, 2004 we announced the termination of Manuel Pietra as Chief Executive Officer and President of Descartes effective immediately. Art Mesher, Executive Vice-President, Strategic Development and Brandon Nussey, Chief Financial Officer, have been temporarily appointed to replace him and together form the Office of the Chief Executive Officer reporting to the Board of Directors. Expense Reduction Initiatives -On May 17, 2004, we announced that we were taking action to significantly reduce expenses and implement a downsizing of our global staff. In addition, we announced we would be closing certain offices, and canceling certain leases, consulting and other |
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operating contracts. The focus of the downsizing was our regional operational structure and has resulted in a significantly smaller global direct sales force and management level of the organization. On September 2, 2004, we announced that we found and acted upon additional opportunities for cost savings, particularly in the area of staff reductions. The aggregate result of these initiatives was a downsizing of the global workforce by approximately 45 percent. In relation to these expense reduction initiatives, we recorded a charge of approximately $7.4 million in the second quarter of 2005. Additionally, as indicated in our May 17, 2004 press release, we reviewed our assets for redundancy. As a result, we recorded a non-cash charge of $5.8 million in the second quarter of 2005 related to the write-down of assets such as leaseholds, office furniture, and emp loyee and network computer hardware and software. The impact of the expense reduction initiatives on our financial condition and results of operation is discussed in more detail later in this MD&A. Class Action Litigation - On or about May 19, 2004, we were named as a defendant in a securities class action lawsuit captionedBrij 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. Subsequently, three additional complaints have been filed making substantially similar allegations, and it is possible that one or more additional or amended complaints may follow. We believe all such claims are without merit and intend to vigorously defend all matters. Adjustments to Fiscal 2004 Unaudited Financial Statements- On May 25, 2004, we announced the completion of the audit of our fiscal 2004 financial statements, which audited statements included certain adjustments from the unaudited fiscal 2004 financial results that had previously been released on March 10, 2004. |
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Second Quarter of | First Two Quarters of | ||||
2005 | 2004 | 2005 | 2004 | ||
Total revenues | 11.1 | 15.2 | 24.3 | 29.4 | |
Cost of revenues | 5.9 | 4.7 | 11.4 | 9.5 | |
Gross margin | 5.2 | 10.5 | 12.9 | 19.9 | |
Operating expenses | 13.2 | 11.6 | 30.0 | 24.4 | |
Net margin | (8.0) | (1.1) | (17.1) | (4.5) | |
Acquisition-related expenses | (1.0) | (1.3) | (20.1) | (2.7) | |
Restructuring costs and asset impairment | (13.2) | (12.5) | (13.7) | (16.1) | |
Loss from operations | (22.2) | (14.9) | (50.9) | (23.3) | |
Other income (expense) | (0.4) | 0.2 | (0.6) | (0.4) | |
Loss before income taxes | (22.6) | (14.7) | (51.5) | (23.7) | |
Income tax expense | (0.1) | - | (0.1) | - | |
Loss | (22.7) | (14.7) | (51.6) | (23.7) | |
LOSS PER SHARE - BASIC AND DILUTED | (0.56) | (0.29) | (1.27) | (0.46) | |
WEIGHTED AVERAGE SHARES OUTSTANDING BASIC AND DILUTED | 40,706 | 50,470 | 40,706 | 51,335 | |
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Second Quarter of | First Two Quarters of | ||||
2005 | 2004 | 2005 | 2004 | ||
Services revenues | 10.3 | 12.4 | 21.8 | 24.6 | |
Percentage of revenues | 93% | 82% | 90% | 84% | |
License revenues | 0.8 | 2.8 | 2.5 | 4.8 | |
Percentage of revenue | 7% | 18% | 10% | 16% | |
Total revenues | 11.1 | 15.2 | 24.3 | 29.4 |
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Second Quarter of | First Two Quarters of | ||||
2005 | 2004 | 2005 | 2004 | ||
Services | |||||
Services revenues | 10.3 | 12.4 | 21.8 | 24.6 | |
Cost of services revenues | 5.7 | 4.3 | 10.9 | 8.6 | |
Gross margin | 4.6 | 8.1 | 10.9 | 16.0 | |
Gross margin percentage | 45% | 65% | 50% | 65% | |
Licenses | |||||
License revenues | 0.8 | 2.8 | 2.5 | 4.8 | |
Cost of license revenues | 0.2 | 0.4 | 0.5 | 0.9 | |
Gross margin | 0.6 | 2.4 | 2.0 | 3.9 | |
Gross margin percentage | 75% | 86% | 80% | 81% |
Total | |||||
Revenues | 11.1 | 15.2 | 24.3 | 29.4 | |
Cost of revenues | 5.9 | 4.7 | 11.4 | 9.5 | |
Gross margin | 5.2 | 10.5 | 12.9 | 19.9 | |
Gross margin percentage | 47% | 69% | 53% | 68% |
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Second Quarter of | First Two Quarters of | ||||
2005 | 2004 | 2005 | 2004 | ||
Total revenues | 11.1 | 15.2 | 24.3 | 29.4 | |
Sales and marketing | 5.7 | 6.8 | 13.8 | 13.8 | |
Percentage of revenues | 51% | 45% | 57% | 47% | |
Research and development | 2.8 | 2.1 | 6.6 | 4.2 | |
Percentage of revenues | 25% | 14% | 27% | 14% | |
General and administrative | 4.7 | 2.7 | 9.6 | 6.4 | |
Percentage of revenues | 42% | 18% | 40% | 22% | |
Total operating expenses | 13.2 | 11.6 | 30.0 | 24.4 |
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approximately $1.5 million included in the first quarter of 2005 relating to the departure of various members of senior management. Additionally, general and administrative expenses increased due to thereserve for anticipated defense costs relating to the class action lawsuit and an increase in professional fees in the second quarter of 2005.
Second Quarter of | First Two Quarters of | ||||
2005 | 2004 | 2005 | 2004 | ||
Impairment of goodwill | - | - | 18.0 | - | |
Amortization of intangible assets | 1.0 | 1.3 | 2.1 | 2.7 | |
Total acquisition-related expenses | 1.0 | 1.3 | 20.1 | 2.7 |
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Second Quarter of 2005 | Provision as at April 30, 2004 | Additional Charges | Revisions | Cash Payments | Non-Cash Payments | Provision as at July 31, 2004 |
June 2002 | ||||||
Office closure costs | 115 | - | 523 | (244) | - | 394 |
May 2003 | ||||||
Workforce reduction | - | - | 177 | (177) | - | - |
Office closure costs | 434 | - | 724 | (300) | - | 858 |
May 2004 | ||||||
Workforce reduction | - | 4,217 | - | (2,943) | - | 1,274 |
Office closure costs | - | 1,743 | - | (604) | - | 1,139 |
Redundant assets | - | 5,770 | - | - | (5,770) | - |
549 | 11,730 | 1,424 | (4,268) | (5,770) | 3,665 |
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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, | Total | |||
2004 | 2004 | ||||
2005 | |||||
Revenue | 13,256 | 11,065 | 24,321 | ||
Gross margin | 7,791 | 5,892 | 12,964 | ||
Operating expenses | 16,781 | 13,263 | 30,044 | ||
Loss | (28,943) | (22,699) | (51,642) | ||
Basic and diluted loss per share | (0.71) | (0.56) | (1.27) | ||
Shares used in loss per share calculation | 40,706 | 40,706 | 40,706 |
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 margin | 9,407 | 10,529 | 11,239 | 9,223 | 40,398 |
Operating expenses | 12,848 | 11,576 | 12,204 | 16,982 | 53,610 |
Loss | (9,018) | (14,706) | (4,194) | (10,575) | (38,493) |
Basic and diluted loss per share | (0.17) | (0.29) | (0.10) | (0.26) | (0.84) |
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 margin | 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 |
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 $46.4 million in cash, short-term deposits, short- and long-term investments in corporate bonds and dividend received deduction ("DRD") eligible securities and $9.0 million in unutilized lines of credit, we believe we have sufficient liquidity to meet our current operating requirements based on our current internal forecasts. While we do not
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Second Quarter of | First Two Quarters of | ||||
2005 | 2004 | 2005 | 2004 | ||
Cash used in operating activities (before restructuring) | (5.8) | (8.5) | (12.8) | (13.5) | |
Cash used in restructuring initiatives | (4.3) | (6.5) | (4.9) | (10.6) | |
Additions to capital assets | (0.1) | (1.0) | (1.0) | (2.6) | |
Acquisition of subsidiaries | - | (0.1) | - | (0.1) | |
Purchase of convertible debentures | - | (43.3) | - | (43.3) | |
Purchase of common shares | - | (27.2) | - | (27.2) | |
Net change in cash and cash equivalents and marketable securities | (10.2) | (86.6) | (18.7) | (97.3) | |
Cash and cash equivalents and marketable securities, beginning of period | 56.6 | 163.4 | 65.1 | 174.1 | |
Cash and cash equivalents and marketable securities, end of period | 46.4 | 76.8 | 46.4 | 76.8 |
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Standard & Poors (S&P) Rating | Percentage of Total | Amount | |
Interest-bearing cash deposits | - | 26% | 11,840 |
Marketable securities | AA | 2% | 1.030 |
AAA | 72% | 33,552 | |
100% | 46,422 |
Less than 1 year | 1-3 years | 3-5 years | More than 5 years | Total | |
Convertible Debentures (plus interests payments) | 28.5 | - | - | - | 28.5 |
Operating Lease Obligations | 3.8 | 4.9 | 0.6 | - | 9.3 |
Total | 32.3 | 4.9 | 0.6 | - | 37.8 |
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Long-Lived Assets
INFORMATION
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We may face delisting by Nasdaq.
· | Fluctuations in the demand for our services and products; |
· | Our ability to reduce or limit increases in our operating expenses; |
· | The successful implementation and market acceptance of our pricing and revenue model; |
· | Price and functionality competition in our industry; |
· | Changes in the productivity of, and costs associated with, our distribution channels and international operations; |
· | Changes in legislation and accounting standards, including standards relating to revenue recognition, and stock-based compensation; |
· | Variances in the size, timing and collection of orders and, in particular, license transactions; |
· | Our ability to satisfy all contractual obligations in customer contracts and deliver services and products to the satisfaction of our customers; |
· | Legal costs incurred in bringing or defending litigation; and |
· | Other risk factors discussed in this report. |
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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.
· | Longer collection time from foreign clients, particularly in the Asia Pacific region; |
· | Difficulty in repatriating cash from certain foreign jurisdictions; |
· | Language barriers, conflicting international business practices and other difficulties related to the management and administration of a global business; |
· | Difficulties and costs of staffing and managing geographically disparate direct and indirect operations; |
· | Currency fluctuations and exchange rates; |
· | Multiple and possibly overlapping tax structures and the burdens of complying with a wide variety of foreign laws; |
· | Trade restrictions; |
· | Changes in tariff rates; |
· | The need to consider characteristics unique to technology systems used internationally; |
· | Economic or political instability in some international markets; and |
· | Other risk factors set out in this report. |
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· | Recent announcements that we have made regarding our financial condition, restructuring initiatives and termination of our CEO; |
· | Budgetary constraints related to economic uncertainty; |
· | Dissatisfaction with product or service quality; |
· | Difficulty in prioritizing a surplus of information technology projects; or |
· | Changes in business strategy or priorities or for other reasons. |
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· | Revenue or results of operations in any quarter failing to meet the expectations, published or otherwise, of the investment community; |
· | Announcements of technological innovations or acquisitions by us or by our competitors; |
· | Introduction of new products or significant customer wins or losses by us or by our competitors; |
· | Developments with respect to our intellectual property rights or those of our competitors; |
· | Changes in recommendations or financial estimates by industry or investment analysts; |
· | Rumors or dissemination of false and/or misleading information; |
· | Changes in management; |
· | Conditions and trends in the supply chain technology industry; |
· | Corporate security breaches; |
· | Adoption of industry standards and the inclusion of our technology in, or compatibility of our technology with, such standards; |
· | Our inclusion or removal from stock exchange composite indexes or sub indexes; |
· | Adoption of new accounting standards affecting the supply chain technology industry; |
· | Fluctuations in the stock prices of other companies in the technology and emerging growth sectors; |
· | General market conditions; and |
· | Other risk factors set out in this report. |
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· | Increase our vulnerability to general adverse economic and industry conditions; |
· | Limit our ability to obtain additional financing; |
· | 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; |
· | If the outstanding principal amount of our convertible debentures is satisfied by us on redemption or maturity through the issuance by us of common shares, the aggregate number of outstanding shares will be increased significantly and may result in a material decline in the market price for our common stock; |
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· | Limit our flexibility in planning for, or reacting to, changes in our business and the industry; and |
· | Place us at a competitive disadvantage relative to our competitors. |
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· | Longer operating history; |
· | Greater financial, technical, marketing, sales, distribution and other resources; |
· | Profitable operations; |
· | Superior product functionality in specific areas; |
· | Greater name recognition; |
· | A broader range of products to offer; |
· | Better performance; |
· | A larger installed base of customers; |
· | Established relationships with customers that we are targeting; or |
· | Greater worldwide presence. |
· | System or network failure; |
· | Interruption in the supply of power; |
· | Virus proliferation; |
· | Earthquake, fire, flood or other natural disaster; or |
· | An act of war or terrorism. |
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· | Meet or exceed technological advances in the marketplace; |
· | Meet changing market and customer requirements, including rapid realization of benefits and the need to rapidly manage and analyze increasingly large volumes of data; |
· | Comply with changing industry standards; |
· | Integrate with system platforms, operating environments and user interfaces commercially accepted from time to time; |
· | Achieve market acceptance; |
· | Integrate third-party technology effectively; and |
· | Respond to competitive offerings. |
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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.
· | Difficulties in integrating technologies, products, personnel and operations; |
· | Disruption of our ongoing business and diversion of management's attention from other business concerns; |
· | Risks of entering markets in which we have no or limited prior experience; |
· | Issuances of equity securities that may dilute your ownership interest in our common stock; |
· | Cash payments to, or the assumption of debt or other liabilities of, the companies we acquire; |
· | Large write-offs related to goodwill, intangible assets and acquired research and development; |
· | Difficulties in realizing the expected benefits of the transaction; |
· | Difficulties in retaining key employees; |
· | Difficulties in maintaining controls, procedures and policies during the transition and integration; |
· | Adverse effects to relationships with partner companies or third-party providers of technology or products; and |
· | 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. |
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