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INNOVATION AT
THE HEART OF SUPPLY CHAINS ANNUAL REPORT
2013
TABLE OF CONTENTS
4
Message from the President
8 10
Message from the Chairman Continued innovation
12
Introducing the OR inventory manager
16
TECSYS’ self-service requisition management system
18
TECSYS SMART™
4
45 46
20 20 44
Financial section
45
Management’s discussion and analysis Management’s report
Independent auditors’ report
84
84 85 86
General information Directors and executive management Corporate information
The statements in this annual report relating to matters that are not historical fact are forward looking statements that are based on management’s beliefs and assumptions. Such statements are not guarantees of future performance and are subject to a number of uncertainties, including but not limited to future economic conditions, the markets that TECSYS Inc. serves, the actions of competitors, major new technological trends, and other factors beyond the control of TECSYS Inc., which could cause actual results to differ materially from such statements. More information about the risks and uncertainties associated with TECSYS Inc.’s business can be found in the MD&A section of this annual report and the Annual Information Form for the fiscal year ended April 30th, 2013. These documents have been filed with the Canadian securities commissions and are available on our Website (www.tecsys.com) and on SEDAR (www.sedar.com). Copyright © TECSYS Inc. 2013. All names, trademarks, products, and services mentioned are registered or unregistered trademarks of their respective owners.
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TECSYS Annual Report 2013
“Every day, our people deliver the support our customers need to maximize their success. Our customers’ needs drive all that we do. With TECSYS’ warehouse management software our employees are empowered to uphold our mission, which is to make our customers more profitable by providing safe, innovative, cost-effective
solutions.
Given
TECSYS’
robust technology and the relatively simple process-driven approach to deploying its software applications, our management team leveraged TECSYS’ professional expertise and structured implementations to enable us to be up and running as quickly as possible with the
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least amount of interventions. The results are
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clear: improved efficiency in our parts centre and an improved level of order accuracy which translates into the highest level of customer satisfaction.”
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Timothy (Tim) R. Kramer President Kramer Ltd. STOCK BUY
www.tecsys.com
3
MESSAGE FROM THE PRESIDENT I am pleased to report that in fiscal 2013, we achieved 11% growth in overall revenue and delivered outstanding growth in license fees of 27% compared to last year, the second year in a row with double-digit growth in our software products. Lower margin thirdparty software and hardware sales continued to drop, down almost 20% from the prior year, while services contributed to the revenue growth with a 14% increase compared to last year and our backlog increased to over $27 million. As importantly, we remained strong in the competitive landscape and once again we were recognized by Gartner as “Visionaries” in the supply chain execution world. In fiscal 2013, we extended our leadership position in our key markets while maintaining prudent and disciplined cost control in our business operations. Across our vertical markets we serve, we gained market share, added 25 new customers, and also deepened client relationships signing a significant number of agreements with our existing clients. I am delighted with TECSYS’ position today in our two strategic markets; health systems and supply chain execution. I am excited about our future in the supply chain management industry. Our businesses are growing, and we made good progress in executing our long-term strategy. Our confidence comes from the strength of our people, technology and our longstanding partnerships with our key customers as they continued to reinvest in our products and services.
Our Mission – Innovation at the heart of our customers’ supply chains
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TECSYS Annual Report 2013
STRATEGIC INVESTMENT – TO SUSTAIN LONG-TERM VALUE CREATION
SMB
14%
We remained profitable at eight cents per share. Profitability was impacted by several factors: 1) We continued to invest heavily in new people in our services organization to service our customers and convert our rising backlog. 2) Our sales of lower margin thirdparty products continued to decline. 3) Due to our decision to buy out stock options as they are converted, we recognize the rising value of options as an expense resulting in a reduction of income of $242K. I believe that all of these trends and investment decisions will enhance our shareholder returns over the longer term. As we make decisions about capital deployment, our priority is to deliver good returns to our shareholders while finding the right balance between investing in operations and returns to our shareholders. KPI $000’s Except for EPS & ROE
WMS-centric
37%
2013
2012
Revenue
43,759
39,502
EBITDA
2,966
3,075
Profit from Operations
1,268
1,455
0.08
0.09
27,235
26,307
5.7
6.7
EPS Backlog ROE % Cash from Operations
(137)
Recurring Revenue
Healthcare
49%
15,350
1,641 14,782
OUR MISSION – INNOVATION AT THE HEART OF OUR CUSTOMERS’ SUPPLY CHAINS In 2013, we continued to innovate, introducing continuous improvements that deliver practical solutions. We believe that our products introduced in 2013, will help accelerate the rate-of-return on customers’ technology investments. They will also provide our customers with another competitive edge over their competitors by combining extreme visibility, supply chain management deployment knowhow with an optimum user experience. On May 15, 2013, Gartner published its latest Magic Quadrant for Warehouse Management Systems report1 in which TECSYS was positioned again in the Visionary quadrant. According to Gartner, “To be visionary, vendors must have a coherent, compelling and innovative strategy that seeks to deliver a robust and vibrant offering to the market.” We are pleased with our innovative stance in the supply chain management market. EXTENDING OUR LEADERSHIP – IN THE HEALTHCARE SUPPLY CHAIN
We won the business of twenty-five new customers. From an initial contract value perspective, 49% came from healthcare, 37% from complex distribution with warehouse-centric operations and 14% from the SMB sector.
Critical to our customers’ business is the intrinsic value we bring to the table to solve their supply chain challenges. Our people and technology remain a clear competitive advantage in today’s market place and moving forward. In health systems, we had a stellar year; adding four new major organizations to our client portfolio, increasing our market share and strengthening our leadership position. In this market we have an established leadership position and see great opportunities to gain further market share by delivering new and innovative supply chain management solutions to hospitals including solutions that will address the operating rooms. Cost associated with materials management can exceed 35% of a hospital’s operating budget, with 20-25% attributable to supply costs alone. More importantly, operating rooms in hospitals represent more than 40% of the hospital’s total expense and 60% of the profit. With this level of cost reduction opportunity, and the criticality of the operating room in healthcare, it was very evident that the operating room 1
Gartner “Magic Quadrant for Warehouse Management Systems” by C. Dwight Klappich, May 15, 2013. www.tecsys.com
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was a market we needed to expand into and deliver a new product in fiscal 2013. See page 12 for more information on TECSYS’ OR Manager, a new and exciting product targeting the operating room. STRONG COMPETITIVE POSITION IN A GROWING INDUSTRY
From a growth perspective, Gartner estimates that the 2012 market will have grown 7.7% and will exceed $9.0 billion in 2013. Gartner’s forecast outlook for supply chain applications is estimated to have a 9% five-year compounded annual growth rate (CAGR) through 2016; a significant and healthy market.
According to Gartner, customer business goals are becoming more focused on revenue and growth generation, rather than cost refinement, efficiency and productivity that were a preoccupation in previous years. The elevation of improving the customer experience, driving growth through supply chain innovation strongly suggests that organizations are looking for ways to make their previous cost cuts sustainable. This will demand that they make processes more effective and would require supply chain technologies and proven processes that can help them deliver on these objectives.
Today, against the backdrop of the supply chain management customer priorities, TECSYS has the competitive strengths, people, technology and strategy to continue to be in a strong position and grow. We have the number one market share in our core vertical markets – and we continue to extend this lead by winning more business with proven strength in innovation, technology and expertise at the heart of our customers’ supply chains.
Furthermore, there is a stronger sentiment for increased budgets and spending for supply chain technologies that is reminiscent of 2007, with buying sentiment looking more favorable for best-of-breed applications such as TECSYS’. Although cost optimization remains a primary supply chain objective, improving operational efficiency and the customer experience rose in importance, which, combined, indicates that cost slashing is bottoming out.
OUR PEOPLE - UNITED BY OUR VISION, INNOVATION, ENTREPRENEURIAL SPIRIT AND VALUES
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■■
TECSYS’ strength comes from our people who are united by our vision and customer for life philosophy, and by our shared core values instilled in our culture since our foundation. Our values of professionalism, integrity, customer-orientation, teamwork, responsibility, diversity, and cost-consciousness set the tone for our culture. We are proud that our culture is an important aspect of both retaining employees and attracting new ones. Our cultural diversity, entrepreneurial
Achieved eight cents earnings per share. Our strategic investment in our infrastructure and human capital was designed to achieve long-term value for our clients and shareholders, in the short term it was a necessary expense to build and strengthen our services infrastructure which we believe will have a long-term positive impact on value creation.
License Fees
The leading industry analysts firm, Gartner, in May, 2013, in their third consecutive report, reaffirmed our “visionary” stance in the warehouse management space. We are further ahead in the competitive market place and are a favorable player in this industry, particularly in our core vertical market spaces.
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Continued to innovate, announced new products at the industry’s most prominent material handling show in January of 2013. See page 10 for further details.
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Further strengthened our R&D and services infrastructures, added, trained, integrated a number of people; the average head count increased by 57 professionals in 2013 compared to 2012, the majority of whom are actively serving customers.
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OUR ACCOMPLISHMENTS IN 2013 WERE
On November 1st, 2012, we announced the completion of a financing agreement of up to $10 million with the National Bank of Canada to support the Company’s growth.
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TECSYS Annual Report 2013
+27%
2012
2013
Delivered an outstanding revenue growth in license fees of 27% compared to last year.
spirit and customer-focused approach are the foundation of our innovation and our continued ability to stay front and center in our customers’ mission critical operations. We are committed to offering a workplace where employees can achieve their full potential and feel proud to be part of TECSYS. Investing in our people, to ensuring their skills evolve with the needs of our business, are key to our future growth and competitive strength.
operating room are substantial, and we intend to make the most of these opportunities in 2014 and beyond. I am confident that TECSYS will continue to deliver value for our clients, shareholders, employees and communities. I believe we have a great combination of the right strategy, right technology, right values and right people. I would like to thank our employees for their continued commitment to putting our clients first, and to all of our clients for relying on us to help them achieve their supply chain management objectives. Thanks are also due to our board for their continued valuable advice throughout 2013 and to our shareholders and the financial community. We will continue to make every effort to deliver growth and build value to earn your continued support moving forward.
RETURNS TO SHAREHOLDERS In fiscal 2013, we returned over $1.2 million to you, our shareholders; $462,000 delivered through share repurchase under the NCIB (Normal Course Issuer Bid) and $800,000 through dividends. This year we announced another dividend increase of over 16% to $0.07 per share per year, and renewed our share buyback program for 2013 under the NCIB. The financial markets are reacting positively to TECSYS’ achievements and performance; in fiscal 2013 share value increased from $2.45 at the end of last fiscal year to $3.45 at the end of 2013, a 41% increase.
Sincerely,
MOVING FORWARD
Peter Brereton President and CEO
2013 has brought improved market share, reinforced positioning and competitive strength to TECSYS. Our current target market and extended market opportunities in the
SIGNIFICANT, BELOW ARE THE MAJOR HIGHLIGHTS:
Services Revenue
Recurring Revenue
+14%
2012
2013
We deployed our solutions at fifty-nine customer sites across our vertical markets, enabling our clients to significantly improve efficiency, reduce operating costs and heighten service levels.
Share Price
+4%
2012
2013
Our existing clients continued to invest in our products and services. Recurring revenue continued to be strong, increasing to $15.4 million by the end of the year from 14.8 million at the end of last year.
+41%
2012
2013
Improved returns to shareholders. Share value increased by 41% from April 30th, 2012 to April 30th 2013.
www.tecsys.com
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MESSAGE FROM THE CHAIRMAN My fellow shareholders, In fiscal 2013 our board witnessed TECSYS management’s notable progress in executing on its long-term strategy; reaping significant benefits of 1) increasing market share in the health systems, heavy equipment and other supply chain execution markets, 2) continuing to be recognized as a visionary company by Gartner, the leading industry analysts firm 3) delivering double-digit growth in license revenue, while remaining profitable, 4) investing in the business to sustain and improve long-term value, and 5) reaching a five-year high in its rate of returns to shareholders. The board is very pleased with these significant and notable achievements.
TECSYS’ strategy is shaped by its leadingedge technology and expertise that define the Company’s value proposition.
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TECSYS Annual Report 2013
TECSYS’ strategy is shaped by its leading-edge technology and expertise that define the Company’s value proposition, tracked by measured performance of KPI’s (Key Performance Indicators) and limited only by a clearly defined amount of risk that is acceptable to TECSYS in the pursuit of its business objectives. The board is highly engaged in setting TECSYS’ KPIs and risk tolerance, and we are regularly monitoring TECSYS’ performance and risk profile in representing all of our shareholders. As we examine opportunities, your board is committed to maintaining the right balance between risk and reward to drive long-term value to our clients and shareholders. The board supports management’s strategic investment in the business in 2013 to grow its infrastructure which we believe will have a positive impact on its value creation in the longer term.
+16.9% CAGR
Five-Year IRR* to April 30, 2013 2008
2013
*Internal Rate of Return
As chairman of the board, central to my role is to ensure that TECSYS has the right strategy, technology, risk management and talent to succeed and deliver long-term value. In fiscal 2013, the board spent a significant amount of time with management reviewing the Company’s strategic and operational plans aimed at being the undisputed leader in the markets we serve; healthcare and high-volume complex distribution. The results this year speak for themselves and the board is pleased with management’s accomplishments.
As always, and as a good citizen, TECSYS is committed in helping cultural, spiritual, medical, educational endeavors and the poor, with a special emphasis on youth. As one of the charities we support says, “We see the hope and potential in every young person”. We continued to invest in these in 2013 believing that these good causes enhance the well-being of society and individuals. The donations we give to these communities go a long way in helping our fellow citizens improve their quality of life.
The board is proud of the strong corporate values and integrity that TECSYS’ people possess. As I mingle with TECSYS employees, I feel the sense of pride and commitment TECSYS’ employees have. These are invaluable qualities that positively reflect on the Company to all of its stakeholders. At the board level, we are confident that TECSYS has the right people in place to build on its success. I would like to thank our management team and the over 300 employees whose talent and engagement with our customers deliver best-in-class solutions and enable them to succeed. TECSYS’ management has demonstrated that it has the right strategy, culture and people to win business, deliver growth and create value for both clients and shareholders.
I would like to take this opportunity to express my appreciation to the board members for the leadership and commitment they demonstrate in providing TECSYS with an independent, balanced and value-added perspective to help management create long-term value for shareholders. Thanks are also due to our management team and employees for superb execution, to our customers for their continued support of TECSYS’ value proposition, and to our shareholders and the financial community for continuing to see TECSYS as a great investment. I look forward to an even better fiscal 2014.
To drive growth and a strong return on equity, key contributors to our market valuation is the Internal Rate of Return (IRR). Over the last five years, returns to shareholders were outstanding; on April 30th, 2008, shares were trading at $1.78 and at April 30th, 2013, shares were trading at $3.45 with an annual dividend of $0.07 per share. During this five-year period, we have announced three increases to our dividend, amounting to a cumulative increase of 75%. As a result of strong execution and performance, TECSYS’ Internal Rate of Return (IRR) achieved during this period was an outstanding 16.9% CAGR.
Sincerely,
Dave Brereton Executive Chairman of the Board
www.tecsys.com
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Some 3 billion devices world-wide use Java™.
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CONTINUED INNOVATION— DELIVERING SUSTAINABLE VALUE AT THE HEART OF OUR CUSTOMERS’ SUPPLY CHAINS
In 2013, we continued to innovate, introducing continuous improvements that deliver practical, innovative solutions at the heart of our customers’ supply chains. The products we introduced in 2013 will help accelerate the rate-ofreturn on customers’ technology investments. They will also provide our customers with another competitive edge over their competitors by combining extreme visibility, supply chain management deployment knowhow with an optimum user experience. Innovation is at the heart of what we do, according to Gartner1: “The vendor is an innovator and does a commendable job of commercializing its innovations intrinsically across its products as well as specifically to its target vertical industries.” MODERNIZING OUR TECHNOLOGICAL INNOVATION After over two million lines of code, we are wrapping-up the migration of our enterprise application suite to the world’s most advanced and popular programming language – Java™. Java tops the list of computer programming languages. From powerful business programs to apps for Smartphones along with other wireless gadgets, Java applications are capable of doing almost everything. Some 3 billion devices worldwide use Java. Java’s assistance is all-pervasive. It really is being incorporated into significant OS’s (Operating Systems) and it has been included in the most popular internet browsers. Furthermore, the most prevalent advantage of Java is that it is completely portable. Write only one time but run anyplace. This permits developers to create the application program code only once after which it will be possible to operate it anyplace at any time.
According to Gartner, the world’s leading information technology research and advisory company, “To be a Visionary, vendors must have a coherent, compelling and innovative strategy that seeks to deliver a robust and vibrant offering to the market.” 1
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TECSYS Annual Report 2013
ACCELERATING THE RATE-OF-RETURN FOR CUSTOMERS’ TECHNOLOGY INVESTMENTS In January of 2013 at a premier industry show for material handling, supply chain and logistics solutions in North America, TECSYS announced innovative solutions in its product and services portfolio. These solutions are designed to further differentiate the Company’s supply chain execution offerings in the competitive landscape and empower its customers with the ability to streamline their business processes; significantly increase visibility and lower supply spend.
1
Gartner “Magic Quadrant for Warehouse Management Systems” by C. Dwight Klappich, May 15, 2013.
According to Gartner, TECSYS has a differentiated vision, architecture and solution; these allow users to exploit visual information to improve process execution. The vendor’s Visual Logistics solution goes well beyond just adding pictures to textual data — it allows users to control, through rules, where visual information will add value, what visual information will improve the process, and for whom and when visual information is needed to make processes work more effectively. The vendor has a unique and flexible approach to visibility, iTopia®, which allows users to pull data from multiple sources within TECSYS’ applications as well as from outside data sources. Users can then assemble this data to create real-time personalized views, filtering and organizing the data as needed.
Source: Gartner “Magic Quadrant for Warehouse Management Systems” by C. Dwight Klappich, May 15, 2013
TECSYS’ Innovative Solutions Include: 1. TECSYS’ REQUISITION MANAGEMENT SYSTEM (RMS)
2. TECSYS SMART™
TECSYS’ RMS is an intuitive, user-friendly self-service requisition management solution that enables hundreds of users across an enterprise to quickly and easily initiate, process and track purchase requisitions for stock and nonstock items with little or no intervention from purchasing agents. TECSYS’ RMS provides the ability to configure multiple types of requisition submissions; each uniquely defined based on supply source, approval structure, appropriation assignment as well as tracking and automation of email notifications with full edit capabilities for approvers and buyers.
An industry first, TECSYS SMART is a set of innovative tools and application knowhow, combining the power of TECSYS’ professional expertise, proven business and implementation processes as well as dynamic knowledge resources. TECSYS SMART enables a distribution organization to enjoy an accelerated rate-of-return on their technology investment and achieve the highest performance in managing their supply chain.
As a self-service facility, TECSYS’ RMS is very intuitive and users require no training. It speeds up the requisition and appropriation process, eliminating paper trails, streamlining the purchasing process, accelerating order times, improving fill rates, often reducing inventory levels due to overstocking and ultimately lowering the total supply chain spend.
TECSYS SMART tools are all about maximizing the success of the software deployment. By empowering logistics management and users with guided and proven business processes and knowhow, TECSYS SMART enables distribution organizations to reduce cost, complexity and time required to implement and use software applications. These tools provide a proven approach that takes as much as 60% out of the time and cost associated with the software implementation process and at the same time maximize the use of the full capabilities of the software application; ultimately translating into a significant ROI for businesses.
www.tecsys.com
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INTRODUCING THE OR INVENTORY MANAGER— INNOVATION AT THE HEART OF HEALTHCARE TECSYS’ OR (Operating Room) Inventory Manager is all about ultimate visibility, control and efficient execution. It optimizes the supply chain execution process, reduces costs and eliminates waste while maximizing profitability. As a result, it restores clinical staff’s confidence in the reliability of the perioperative supply chain process and helps achieve stakeholders’ satisfaction.
THE PERIOPERATIVE INVENTORY MANAGEMENT CHALLENGES Overall, today’s hospitals face daily challenges of unpredictable patient needs, virtually no visibility of inventories, significant waste, diverse patient care processes, loss of revenue and a complex, evolving payment structure. The perioperative supply chain management challenges; before, during and after surgeries, are enormous and very costly. The operating room as a whole accounts for millions of dollars in revenue and expenses; 40-50% of total hospital expenses, and generates 60 to 70% of the revenue – all of which can translate into substantial risk or opportunity that can be leveraged by health systems executives.
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TECSYS Annual Report 2013
In the OR (Operating Room), manually managing inventory is a very time-consuming, very costly, distracting and error-prone process. Often resulting in delays and/or cancelled procedures where surgeons and clinicians are trying to deliver quality service and save lives. In this challenging environment, hospital management have a significant need for the automation of their perioperative inventory management processes. They need total visibility and control of their “virtual inventory”— med surg supplies, implants, medical devices, and sterile packs used in various steps of the perioperative supply chain.
Expenses
It is a common practice for the perioperative staff to order supplies as needed, often last minute, order more than they need with the fear of running out of supplies and disappointing surgeons. It is a documented fact that in the OR and many parts of hospitals, inventory just grows and grows. The inventory expires, gets expensed and does not get charged, resulting in significant financial loses to the health system. In this environment, materials management lacks the right technology to manage and oversee all inventories. As a result, physicians and clinical staff have no confidence in the information available to them and therefore accumulate secret stockpiles of OR supplies to ensure that they would be available when needed.
50%
Revenue
Today more than ever, hospital executives are under considerable pressure to streamline their perioperative supply chain management processes in order to enable clinicians and doctors to deliver quality patient care. They need to shift the OR inventory from an expense to asset to efficiently manage their supply needs. TECSYS’ OR INVENTORY MANAGER Leveraging some thirty years of supply chain execution solutions and more than eighteen years in healthcare, TECSYS’ OR Inventory Manager was designed specifically for the perioperative environment. It is a breakthrough clinical stafffriendly supply chain execution solution that responds to the significant challenges of the perioperative supply chain process; before, during and post-surgery. TECSYS’ OR Inventory Manager collaborates with the health system’s enterprise and electronic health record systems1 to synchronize the procedural case information and surgeon preference card. It enables the on-time delivery of the required supplies, instruments and medical devices for a procedure while capturing the expenses associated with each case for billing and revenue recognition purposes.
1
EHR (Electronic Health Records) system, ERP (Enterprise Resource Planning) or the ADT (Admitting Discharge and Transfer) system.
70%
Total hospital Operating room
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TECSYS’ OR Inventory Manager enables full visibility, tracking and control of lots and serial numbers of its inventory anywhere in the health system. It allows the hospital to reduce inventory levels and at the same time decreases the incidences of human error and eliminates labor-intensive manual processes. It also enables the management of recalls and the ability to analyze and plan the acquisition of supplies to replenish stock and non-stock inventory items including expensive medical devices on consignment from their respective suppliers. In addition to providing total visibility to inventory across the entire hospital and/or health system, TECSYS’ OR Inventory Manager allows the hospital system to analyze the value of those inventories at all locations. Without TECSYS’ System, the inventory value would be expensed. TECSYS’ OR Inventory Manager automates all aspects of the perioperative supply chain; the receiving, putaway and picking of supplies and medical devices including the preparation of case carts and sterile packs. With TECSYS’ OR Inventory Manager, health systems will be able to save millions of dollars annually by becoming significantly more efficient in their perioperative supply chain process, by lowering inventory levels, eliminating expired products and reducing waste.
TECSYS’ OR Inventory Manager includes TECSYS’ patent pending Visual Logistics® technology to provide visual cues and alerts to the supply chain and clinical staff for improved instructions, visibility and exceptions. Furthermore, the supply chain process is completely automated. Products are captured via barcode and stored in the TECSYS system, enabling health system purchasing organizations to track usage, re-order to minimums and plan the demand accordingly. TECSYS’ OR Inventory Manager allows just-in-time delivery and tracking of the high-cost items provided on a consignment basis by suppliers. Management of the consigned products can be handled either by paper-based or system-directed processes; vendors can view status of orders, quantities on hand, check lots and expiry dates and more. It eliminates misplaced items with complete usage capture; it streamlines processes with automatic reconciliation and reduces consignment costs & unauthorized purchasing. TECSYS’ OR Inventory Manager improves efficiencies and decision-making throughout the entire preoperative continuum and improves satisfaction—OR staff devotes their time to medical procedures and patient care, leading to increase in job satisfaction and overall productivity.
TECSYS’ OR INVENTORY MANAGER – MAJOR CAPABILITIES ■■ Hospital-wide inventory replenishment
visibility,
tracking
and
■■ Case/cart management ■■ Serial and lot tracking (including product expiry) ■■ Consignment & non-stock inventory management ■■ Case cost analysis ■■ Procedure-based inventory allocation ■■ Integration to hospital ERP, EHR, ADT and/or other systems1 ■■ Visual Logistics® ■■ Analytics
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TECSYS Annual Report 2013
1
EHR (Electronic Health Records) system, ERP (Enterprise Resource Planning) or the ADT (Admitting Discharge and Transfer) system.
ABOUT TECSYS & HEALTHCARE For over eighteen years, TECSYS has been providing distribution and warehouse management solutions to the healthcare industry; these include Fortune 100 manufacturers and distributors, as well as a number of health systems and thirdparty logistics providers in Canada and the United States. The Company’s product suite for healthcare effectively streamlines business processes that cut across functional areas and consolidates fragmented operations, often replacing multiple legacy systems. As a totally integrated solution suite, TECSYS’ supply chain execution solutions for healthcare speed up the flow of business activity across the enterprise, consolidates information, manages inventory, drives dramatic cost savings, and helps deliver superior customer service and patient care. Since 2003 TECSYS’ supply chain execution solutions have been empowering Integrated Delivery Networks (IDNs) of hospitals and clinics with IDN-specific supply chain modeling, software solutions and industry expertise, enabling IDNs to reap millions of dollars in savings, improve service to patients and save lives. As a result, TECSYS has been recognized that, “It [TECSYS] has dominant market share, it is highly regarded and is involved in most of the conversations for CSCs (Consolidated Service Centers) forming today.”1
“At Intermountain, extraordinary clinical care is at the heart of our mission and our supply chain promise is to bring to the front line needed resources, efficiently and affordably to meet our commitment of ensuring that caregivers are focused on patients. With the self-distribution model enabled through TECSYS, we will be able to plan, receive, store and distribute thousands of products that we provide across our supply network from a single central location, vastly increasing efficiency, reducing cost and improving service. In addition to their robust healthcare software, we have selected TECSYS because they are at the forefront of supply chain management solutions for the IDN space and clearly understand the healthcare supply chain better than anyone in the software industry.“ Brent Johnson Vice President Supply Chain & Imaging Services Chief Purchasing Officer Intermountain Healthcare
1
Gartner: To CSC or Not to CSC...that is the Question for Healthcare Providers report by: Eric O’Daffer, Hussain Mooraj, Publication Date: 18 February 2011.
www.tecsys.com
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INTRODUCING TECSYS’ SELF-SERVICE REQUISITION MANAGEMENT SYSTEM (RMS) TECSYS’ Requisition Management System (RMS) is a web-based and flexible requisition management solution that allows businesses to automate and manage their purchase requisition processes for supplies and services, executing each through the approval, appropriation and procurement workflows to streamline the purchasing process, improve service to users and lower supply spend. TECSYS’ RMS provides the ability to configure multiple types of requisition submissions; each uniquely defined based on supply source, approval structure, appropriation assignment as well as tracking and automation of email notifications with full edit capabilities for approvers and buyers.
TECSYS’ RMS MAJOR CAPABILITIES INCLUDE: ■■ Requisition Management: enables businesses to manage purchase requisitions, processing each through the approval, appropriation and procurement process. ■■ Requisition Approvals: Through electronic approval processes, TECSYS’ RMS addresses the many variables associated with the approval processes no matter how complex they are. ■■ Procurement Management: TECSYS’ RMS Procurement capability provides the flexibility required to fully manage and process a requisition from request to delivery. Buyers have the flexibility to modify supply sources and/or items to take advantage of vendor promotions, discounts and volume pricing incentives. ■■ Appropriation Management: Answers to the many questions associated with a requisition process such as “when was it approved”, “for what period”, “what was it for”, “what budget should it be applied to” and more. TECSYS’ RMS ties budget to the requisition and allows multiple appropriation codes to be applied to a single entry. ■■ Email Notification: TECSYS’ RMS offers automated email notification, triggered when a request is submitted. Hassle free, providing collaborative hyperlinks directly to the requisition and requires no intervention from the requester. ■■ Accessible anytime, anywhere: TECSYS’ RMS can be accessed from any browser-based device, from anywhere at any time. The system is intelligent, extensible and as easy-to-use as a browser. It is adaptable to users’ environments, and is sensitive to each individual’s personal needs. As workers use the system more and more, TECSYS’ intelligent technology quickly tailors itself to each individual’s preferences and way of working, and presents that information exactly how they like to see it. Internet-based with SOA architecture, TECSYS’ open system software applications can be deployed on premise, be hosted applications or deployed as a SaaS (Software-as-a-Service) model. TECSYS’ RMS can collaborate and easily and securely be interfaced to other complementary software applications and host systems using Web services, file transfer or direct connections.
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TECSYS Annual Report 2013
TECSYS’ RMS is an intuitive, user-friendly selfservice requisition management solution that enables hundreds of users across an enterprise to quickly and easily initiate, process and track purchase requisitions for stock and non-stock items with little or no interventions from purchasing agents.
As a self-service facility, TECSYS’ RMS is very intuitive and users require no training. It speeds up the requisition and appropriation process, eliminating paper trails, streamlining the purchasing process, accelerating order times, improving fill rates, often reducing inventory levels due to overstocking and ultimately lowering the total supply chain spend costs. TECSYS’ Vice-President of Marketing & Business Development, Robert Colosino, commented: “Inherent in every supply chain organization is the significant number of purchase requisition transactions involved for stock, and more so, for non-stock items to support the organization’s business. Distributors, hospitals, educational organizations,
utilities and government bodies waste hundreds of hours in the creation, processing and execution of purchase requisitions through non-automated and user-unfriendly technology or paper-based processes. Recognizing this essential need in the market, we have put to work our decades of experience working with a variety of businesses to create TECSYS’ RMS. It is based on our visionary technology platform that is known for its collaborative visibility attributes, bringing high values that businesses appreciate most, both from a technological and business processes perspectives.”
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INTRODUCING TECSYS SMART ™ INNOVATION IN BUSINESS PROCESSES & KNOWHOW, ENABLING BEST-IN-CLASS SUPPLY CHAIN MANAGEMENT PERFORMANCE An industry first, TECSYS SMART is a set of innovative tools and application knowhow, combining the power of TECSYS’ professional expertise, proven business and implementation processes as well as dynamic knowledge resources. TECSYS SMART enables a distribution organization to enjoy an accelerated rate-of-return on their technology investment and achieve the highest performance in managing their supply chain. According to Gartner1, the world’s leading information technology research and advisory company, “TECSYS has developed a very well thought out and documented implementation methodology using its Supply Chain Modeling and Reference Tools (SMART), which are not only a methodology, but also best-practice blueprints for its major vertical industries, and also a knowledge base for learning.” TECSYS SMART tools are all about maximizing the success of the software deployment. By empowering logistics management and users with guided and proven business processes and knowhow, TECSYS SMART enables 1
Gartner “Magic Quadrant for Warehouse Management Systems” by C. Dwight Klappich, May 15, 2013.
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TECSYS Annual Report 2013
distribution organizations to reduce cost, complexity and time required to implement and use software applications. These tools provide a proven approach that takes as much as 60% out of the time and cost associated with the software implementation process and at the same time maximize the use of the full capabilities of the software application; ultimately translating into a significant ROI for businesses. “TECSYS SMART has provided us with a strong supply chain and application knowhow right from the get-go, even before we started building our 327,000 sq. ft. supply chain centre. Achieving supply chain excellence for maximum return is one of our core competencies. Managing a supply chain is not just about buying the right technologies. It is also about ensuring that users across your supply chain know how the business is supposed to flow and what the roadmaps are to efficiently use the software application system; fully leveraging every inch of the system’s capabilities. With TECSYS SMART, the complexity of the implementation process was vastly simplified; we have shed the light on our supply chain journey and removed the ambiguity
TECSYS SMART™ ALLOWS ORGANIZATIONS TO: ■■ Simplify the implementation process through proven industry-specific best practices and standards. ■■ Expedite the delivery of software applications, reducing the implementation effort to a minimum, both for internal resources as well as consultants; therefore reducing cost substantially. ■■ Deliver immediate value after go live, accelerating time to benefit. ■■ Run the TECSYS system smoothly and successfully. ■■ Reduce the probability of over-engineering processes. ■■ Better train end users, not only on functionalities, but also in the context of their role in fulfilling a business process. ■■ Easily identify any gaps in processes to improve and optimize operations through supply chain Key Performance Indicators (KPIs).
typically associated with most software implementations. It is maximizing our knowhow based on industry-specific proven supply chain management roadmaps combined with dynamic educational resources to fully leverage the TECSYS software across our supply chain”, commented Brent Johnson, Vice President, Supply Chain and CPO at Intermountain Healthcare. Intermountain Healthcare, a $5 billion non-profit health system, is an internationally recognized organization of 22 hospitals, a medical group with more than 185 physician clinics, and an affiliated health insurance company, SelectHealth. Intermountain’s 33,000 employees serve patients and plan members in Utah and southeastern Idaho, offering a full range of services, from urgent care to home care to the region’s most advanced trauma centers. Providing excellent care of the highest quality at an affordable cost is at the heart of their mission. TECSYS SMART includes a structured and phased implementation process that leverages the industry’s best
practices and roadmaps. When combined with industryspecific knowledge that TECSYS has accumulated over three decades of working within a wide variety of vertical industry sectors, TECSYS SMART enables customers to quickly become more efficient in their distribution operations.
TECSYS SMART™ CONSISTS OF: ▪▪ Industry Knowledge and Expertise spanning three decades ▪▪ Online Training and Documentation ▪▪ Industry Maps ▪▪ Industry Models ▪▪ Tools and Templates ▪▪ Pre-engineered Solutions
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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TECSYS Annual Report 2013
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management Discussion and Analysis (MD&A) dated July 9, 2013 should be read in conjunction with the Consolidated Financial Statements of TECSYS Inc. (the “Company”) and Notes thereto, which are included in this document. The Company’s fiscal year ended on April 30, 2013. Fiscal 2013 refers to the twelve-month period ended April 30, 2013. The accompanying consolidated financial statements of the Company have been prepared by and are the responsibility of the Company’s Management. The Company prepares its consolidated financial statements in accordance with International Financial Reporting Standards (“IFRS”). This document and the consolidated financial statements are expressed in Canadian dollars unless it is otherwise indicated. The Company’s functional currency is the Canadian dollar as it is the currency that represents the primary economic environment in which the Company operates. The consolidated financial statements were authorized for issue by the Board of Directors on July 9, 2013.
Overview TECSYS is a market-leading Supply Chain Management (SCM) provider of powerful warehouse, transportation and distribution management software solutions and industry expert services to mid-size and Fortune 1000 corporations in the healthcare, general high-volume distribution and third-party logistics industries. The Company has built its business by focusing on warehousing and distribution operations and by developing robust products and leading supply chain management expertise over more than three decades. The deployment of TECSYS’ supply chain management best practice business processes and technology for high-volume distribution organizations enables customers to streamline logistics operations, reduce cost and improve customer service. Generally, Supply Chain Management encompasses the processes of creating and fulfilling the market’s demand for goods and services; it enhances distributor and customer value by optimizing the flow of products, services and related information from suppliers to customers, with a goal of enabling customer satisfaction. Within SCM is Supply Chain Execution (SCE), on which TECSYS is focused. SCE is execution-oriented applications that enable the efficient procurement and supply of goods, services and information to meet customer-specific demand. SCE includes Warehouse Management Systems (WMS), Transportation Management Systems (TMS), and supply chain inventory visibility — to provide a single solution to manage the inbound and outbound logistics process of a distribution operation. The SCM software market has been evolving over the past several years as logistics-intensive companies have been increasingly seeking automation, operational efficiencies and real-time control of their supply chain activities. This demand is driven by the need for organizations to reduce cost, improve margins and profitability, and become more competitive. These trends represent a significant opportunity for the Company, which is well entrenched in vertical-market sectors targeted by its value-proposition. According to Gartner Inc., the world’s leading information technology research and advisory company, over the past few years, supply chain professionals have identified improving efficiency as well as productivity and cost reduction as their dominant business priorities. Gartner has seen these priorities diminish in 2012, indicating that business goals are based on revenue and growth generation, rather than cost refinement, efficiency and productivity. The elevation of improving the customer experience, driving growth through supply chain contributions and innovating strongly suggests that organizations are looking for ways to make their previous cost cuts sustainable. This will demand that they make processes more effective. Another observation is that these efforts will exploit productivity gains to delay or eliminate the need to rehire personnel who were cut during the downturn. The market for supply chain software is large, diverse in offerings and growing. Gartner estimates that the 2012 market will grow 7.7% and exceed $9.0 billion in 2013. Gartner’s forecast outlook for supply chain applications, is estimated to have grown during 2012, and to secure a 9% five-year compounded annual growth rate (CAGR) through 2016.
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There is a stronger sentiment for increased budgets and spending for supply chain technologies that is reminiscent of 2007, with buying sentiment looking more favorable for best-of-breed providers and SaaS offerings that provide more focused capabilities and typically less expensive, quicker deployments. Although cost optimization remains a primary supply chain objective, improving operational efficiency and the customer experience rose in importance, which, combined, indicates that cost slashing is bottoming out, despite continued economic uncertainty and constrained budgets. In fiscal 2007, TECSYS’ management revamped its business processes, reduced costs, and tailored its product offering to select and profitable niche vertical markets. The Company narrowed its focus onto vertical markets that are most aligned with its offerings, these include: hospital supply networks and speciality drug distribution in healthcare; high-volume distribution in such industries as parts for heavy equipment, industrial gas and welding supplies, giftware, industrial distribution, general high-volume distribution and thirdparty logistics. Today, TECSYS’ business development and sales efforts are exclusively focused on those markets where the Company has the highest winning opportunity and best financial returns. From a research and development and customer services perspective, this allows TECSYS to replicate its solutions in a “cookie cutter” approach, enabling the Company to reduce costs inherent in new development and adoption of technology. It also helps increase the depth of expertise in these market segments where the Company is recognized as an expert by its customers. TECSYS has been providing distribution and warehouse management solutions to the healthcare industry for a number of years. These include Fortune 100 manufacturers and distributors, as well as a number of Hospital Supply Networks or IDNs (Integrated Delivery Networks) and third party logistics providers (3PLs) in Canada and the United States. TECSYS believes that hospitals are becoming increasingly cognizant of costs and the need to manage critical supplies to healthcare professionals and has noted that self-distribution using a Consolidated Services Center (CSC) is a growing trend in hospital groups. It is also becoming more widely adopted as hospitals have embraced the concept due to the fact that it has met early success and has delivered real tangible and intangible benefits. IDNs are large integrated networks of hospitals, nursing homes, clinics, home health agencies and school health centers. The IDN market targeted by TECSYS consists of more than 600 groups of healthcare entities in North America and is core to the Company’s goto-market strategy. Recently, there is a renewed emphasis on the health infrastructure and information technology spending initiatives in the U.S. economic stimulus package. An increasing number of IDN management teams that are taking steps towards the adoption of CSC solutions offered by TECSYS are, in TECSYS’ view, indicative of the growth potential for this vertical. TECSYS believes that it currently has a market-leading position for supply chain management software and services in the IDN sector in North America. According to Gartner, “TECSYS — As a supply chain management company, with a significant warehouse management systems focus specializing in healthcare, it is not the only option in this category. But because it has dominant market share, it is highly regarded and is involved in most of the conversations for CSCs forming today.” In addition, over the past several years the Company has made significant inroads in the Caterpillar® dealer market, more broadly referred to by TECSYS as the heavy equipment parts distribution. The Company believes that it is currently the leading supply chain management software and services supplier for heavy equipment parts distribution with approximately 29% of the North American Caterpillar® dealer market. As part of the Company’s strategy to penetrate key verticals and expand its geographic coverage, TECSYS has a partnership strategy in place with several technology providers that include: software partners such as IBM, Oracle, and Microsoft, as well as mobile computing technology providers such as Intermec, Motorola and Psion. On December 3, 2009, TECSYS announced the launching of Visual Logistics®, an innovation to its warehouse management systems (WMS) software, that TECSYS believes enables its customers to significantly streamline putaway, picking and packing and achieve optimal order accuracy and fill rate thereby improving customer satisfaction. As an integral part of WMS, Visual Logistics represents a significant improvement in warehouse management permitting visual instructions to be delivered to workers directly on their radiofrequency devices or handheld computers. Visual Logistics allows the instant communication of the exact activities warehouse workers can perform in the optimum time, particularly in operations where literacy is an issue. Visual Logistics also permits customers to improve training and retention of logistics processes with its use of visuals. On September 13, 2010, TECSYS announced that it had been positioned by Gartner, Inc. in the “Visionaries” quadrant of the 2010 Magic Quadrant for Warehouse Management Systems report1. Gartner, the world’s leading information technology research and advisory company, evaluated over a dozen WMS vendors in their Magic Quadrant research.
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TECSYS Annual Report 2013
According to Gartner, “To be a visionary, vendors must have a coherent, compelling and innovative strategy that seeks to deliver a robust and vibrant product to the market. Visionaries are thought leaders in one or more WMS solution dimensions (for example, functionality, services, go-to-market or deployment strategies), and they tend to be on the leading edge of emerging concepts. However, these offerings have yet to demonstrate an ability to handle a broad range of complex user requirements without modifications. At a minimum, solutions in the Visionaries quadrant fall into one of two categories: first, they can be established WMS offerings that have yet to mature into leading positions in the market. Additionally, these vendors must anticipate user requirements across all functional areas of WMS, demonstrate a commitment to an adaptive technology strategy like Service-Oriented Architecture (SOA) and modeldriven architectures, and articulate a strategy for pursuing SCE convergence. Second, they can be specialist vendors with unique and potentially disruptive views of where the market is going. They can exhibit innovation in WMS products, services, and go-to-market or deployment strategies.” On February 27, 2012, Gartner published another Magic Quadrant for Warehouse Management Systems report2 in which TECSYS was positioned in the Visionary quadrant. Furthermore, on May 15, 2013, Gartner published its latest Magic Quadrant for Warehouse Management Systems report3 in which TECSYS was positioned again in the Visionary quadrant. In March 2011, TECSYS released a new version of its EliteSeries flagship product (version 8.2); an increasingly robust set of applications with improved integration capabilities to other host systems, as well as additional new features for increased customer intimacy, such as improved visibility of customer interactions by all distributor employees, enhanced inter-operability and reporting services. On August 8, 2011 TECSYS announced its Supply Management System (SMS). SMS is a breakthrough, clinical staff-friendly solution that is designed to address the just-in-time needs of the clinical supply chain at point-of-use. It provides clear visibility and accessibility of supplies anywhere in a hospital or an Integrated Delivery Network (IDN). It also automates replenishment based on real consumption and captures item usage for patient billing while providing the ability to reduce costs as well as cash tied up in inventory. In December 2011, TECSYS released EliteSeries version 8.3. The release includes full certification on the latest release of Cognos tools that allows for enhanced business intelligence and mobility. Other major enhancements include mobile voice picking technologies, financial, purchasing, forecasting and transportation capabilities that allow for more sophisticated and complex transactions to be executed for distribution operations. On February 6, 2012 TECSYS announced five new products focused on order accuracy, self-service and mobility for workers on-the-go. 1. Visual-On-Voice: Visual-On-Voice is a combination of voice technology with TECSYS’ Visual Logistics. Combining Visual Logistics with voice technology enables operators, while remaining completely hands-free, to become even more efficient than with voice alone. Graphical content provides operator aides for quick reference only or true multi-modal processes. The combination helps to eliminate common voice-only challenges in situations such as confusing units of measure descriptors or cluster picking into a multi-tote cart. 2. Supply Management System for non-healthcare industries (for more details see SMS above) 3. Customer Self-Service Kiosk: TECSYS’ Customer Self-Service Kiosk (CSK) is similar to the self check-in kiosk at airports. It enables customers to get in a supplier’s outlet, obtain the products they need and get back to their busy schedule, virtually with no delays. TECSYS’ CSK permits a distributor’s customers to place their orders online and pick them up on their own, without the need for third-party intervention. 4. Mobile Delivery Management: TECSYS’ Mobile Delivery Management (MDM) solution is an event tracking and delivery management mobile system for fleet and internal delivery management. It enables distribution organizations to create, pick up and deliver shipments directly from a handheld mobile device and offer their customers real-time, online traceability of shipments similar to the functionality offered by major international parcel shipping organizations. 5. Mobile Business Intelligence: TECSYS’ Business Intelligence (BI) solutions provide decision makers with the ability to gain clear and immediate insight into their organizational data assets in order to make informed decisions. TECSYS’ Business Intelligence solutions bring to the mobile worker the same level of information they are accustomed to with the advantage of added mobility on user-friendly devices such as tablets and smartphones.
1
Gartner “Magic Quadrant for Warehouse Management Systems” by C. Dwight Klappich, July 29, 2010.
2
Gartner “Magic Quadrant for Warehouse Management Systems” by C. Dwight Klappich, February 27, 2012.
3
Gartner “Magic Quadrant for Warehouse Management Systems” by C. Dwight Klappich, May 15, 2013.
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On October 19, 2012, TECSYS released EliteSeries version 8.4. The release includes added functionality for full serial tracking in the warehouse, redesign of the transportation management application for improved usability, addition of new software modules for point-of-use supply management and for employee requisition management, and extension of executive business intelligence to allow access via smartphones and tablets. On January 21, 2013, TECSYS announced innovative solutions in its product and services portfolio. These solutions are designed to further differentiate the Company’s supply chain execution offerings in the competitive landscape and empower its customers with the ability to streamline their business processes, significantly increase visibility and lower supply spend. These innovative solutions include: 1. TECSYS’ Requisition Management System (RMS) is designed to be an intuitive, user-friendly self-service requisition management solution that should enable hundreds of users across an enterprise to quickly and easily initiate, process and track purchase requisitions for stock and non-stock items with little or no intervention from purchasing agents. TECSYS’ RMS provides a distribution organization with the ability to configure multiple types of requisition submissions; each uniquely defined based on supply source, approval structure, appropriation assignment as well as tracking and automation of email notifications with full edit capabilities for approvers and buyers. As a self-service facility, TECSYS’ RMS is designed so that users require no training. It is designed to speed up the requisition and appropriation process, eliminate paper trails, streamline the purchasing process, accelerate order times, improve fill rates, reducing inventory levels due to overstocking with the ultimate goal of lowering the total supply chain spend. 2. TECSYS SMART™ is a set of innovative tools and application knowhow, combining the power of TECSYS’ professional expertise, proven business and implementation processes as well as dynamic knowledge resources. TECSYS SMART enables a distribution organization to enjoy an accelerated rate-of-return on its technology investment and is designed to help such an organization in managing its supply chain. The Company generates revenue from licensing fees for proprietary software, third-party software licenses and hardware, and the provision of related information technology services. At the end of fiscal 2013, recurring revenue amounts to $15.4 million which represents 35% of fiscal 2013 revenue. Services revenue includes both the fees associated with implementation assistance and ongoing services. These ongoing services include consulting, training, product adaptations, upgrade implementation assistance, maintenance, customer support, application hosting, and data base administration services. Such revenue is typically derived from contracts based on a fixed-price or time-andmaterial basis and is recognized as the services are performed. Products revenue has two components: the Company’s proprietary products and third-party products. Proprietary products’ revenue was 21% of revenue for fiscal 2013 and 18% for fiscal 2012. In fiscal 2013, third-party products represented 13% of total revenue (18% in fiscal 2012) and include products developed by Oracle Corporation, IBM Corporation / Cognos, Psion Inc., ScanSource Inc., Intermec Systems Corporation, Optio Software Inc., Top Vox Corporation, and Best Software Canada Ltd. Cost of revenue comprises the cost of products purchased for re-sale and the cost of services, made up mainly of salaries, incentives, benefits and travel expenses of all personnel providing services. Also included in the cost of services is a portion of overhead and e-business tax credits available under a Quebec government incentive program designed to support the development of the information technology industry. Cost of products purchased for re-sale includes all products not developed by the Company that are required to complete customer solutions. These are typically other software products such as database and business intelligence software and hardware such as radio frequency equipment and computer servers. Sales and marketing, as well as general and administration expenses include all human resources costs involved in these functions. They also include all other costs related to sales and marketing, such as travel, rent, advertising, trade shows, professional fees, office expenses, training, telecommunications, bad debts, and equipment rentals and maintenance.
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TECSYS Annual Report 2013
Research and development (R&D) includes salaries, benefits, incentives and expenses of all staff assigned to R&D. Fees paid to external consultants and sub-contractors are also included, along with a portion of overhead. At the end of fiscal 2013, the Company employed 314 active employees in comparison to 288 at the end of fiscal 2012. Trends in the past eighteen months are indicative of a resurgence of the supply chain management market, which has translated to higher bookings for the Company’s products and services and a backlog greater than $26 million at the start of fiscal 2013, representing an increase of 25% in comparison to a year earlier. The Company increased its headcount during fiscal 2012 and the first nine months of fiscal 2013 to meet the higher demand for its services and to capture pipeline opportunities. The backlog was approximately $27.2 million at April 30, 2013 in comparison to $26.3 million at April 30, 2012 and $21.0 million on April 30, 2011. The two most significant areas accounting for the headcount increase are in the services and R&D functions. The average number of employees was 318 in fiscal 2013 in comparison to 255 for fiscal 2012. The U.S. dollar strengthened slightly by approximately 0.8% against the Canadian dollar during fiscal 2013 in comparison to fiscal 2012. The U.S. dollar to Canadian dollar exchange rates for fiscal 2013 averaged CA$1.0034 in comparison to CA$0.9959 for fiscal 2012. Consequently, with approximately 58% of the Company’s revenue generated in U.S. dollars in fiscal 2013, the strengthened U.S. dollar affected the reported revenue favorably by an estimated $192,000 and profit from operations by an estimated $161,000. In 2012, the U.S. dollar weakened by approximately 1.6% against the Canadian dollar in comparison to fiscal 2011. With approximately 50% of the Company’s revenue generated in U.S. dollars in fiscal 2012, the weakened U.S. dollar affected the reported revenue adversely by an estimated $324,000 and profit from operations by an estimated $215,000 in fiscal 2012 in comparison to fiscal 2011.
Selected Annual Information In thousands of Canadian dollars, except per share data
Total Revenue Profit and Comprehensive Income Basic Earnings per Common Share Common Share Dividends Total Assets Total Long-Term Financial Liabilities: Loans Payable (including the current portion) Term Loan (including the current portion)
2013
2012
43,759 885 0.08 0.07
39,502 1,057 0.09 0.06
32,219
28,150
70 4,500
85 -
Results of Operations Year ended April 30, 2013 compared to year ended April 30, 2012 Revenue
Total revenue increased to $43.8 million, $4.3 million or 11% higher, compared to $39.5 million for fiscal 2012. Proprietary software products revenue increased to $9.3 million, $2.0 million or 27% higher in comparison to $7.3 million for fiscal 2012, while third-party products revenue decreased to $5.9 million, $1.4 million or 19% lower in comparison to $7.2 million recorded for fiscal 2012. Overall bookings, including base accounts, amounted to $24.4 million during fiscal 2013 in comparison to $23.2 million for the previous fiscal year, an increase of 5%. The Company signed twenty-five new accounts with a total contract value of $10.8 million during fiscal 2013 in comparison to twenty-five new accounts with a total contract value of $6.7 million during fiscal 2012. The increase in proprietary products revenue is largely attributable to a very significant sale of a proprietary license to an existing customer in the first quarter of fiscal 2013. The decrease in third-party products revenue is largely attributable to two unusually large orders received from existing customers in the third quarter of fiscal 2012 that did not reoccur in fiscal 2013.
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Services revenue increased to $27.5 million, higher by $3.4 million or 14%, during fiscal 2013 compared to $24.1 million for the previous fiscal year. The increase is attributable primarily to higher revenue for implementation consulting and product adaptation services related to intensified project implementation, however revenue from other service operations including support and hosting was also higher. As a percentage of total revenue, proprietary software products accounted for 21%, third-party products for 13%, and services for 63% in fiscal 2013 compared to 19%, 18% and 61% for fiscal 2012, respectively.
Cost of Revenue
Total cost of revenue increased to $25.5 million, higher by $3.4 million or 16%, in fiscal 2013 in comparison to $22.1 million for fiscal 2012. The increase is primarily attributable to higher services costs and offset by lower third-party products costs. The cost of products decreased to $4.3 million, lower by $681,000 or 14%, in fiscal 2013 in comparison to $4.9 million in fiscal 2012. The cost decrease is related to the decrease of third-party revenue of 19% as noted earlier. The cost of services increased to $20.1 million, higher by $3.8 million or 24% in fiscal 2013 in comparison to $16.2 million for fiscal 2012 mainly due to higher employee-related expenses of $4.1 million, and generally higher operating costs of $372,000 including facilities cost, depreciation of property and equipment, office and travel expenses offset partially by higher tax credits of $668,000. The average services headcount of 179 in fiscal 2013 increased by approximately 31% compared to an average headcount of 137 in fiscal 2012. The Company invested significantly in integrating new resources within its services staff to address a rising backlog and positive business signs for supply chain management software and related services. The cost of services includes tax credits of $1.6 million for fiscal 2013 compared to $951,000 for the previous fiscal year, largely due to the increased headcount. The tax credits relate to the Quebec e-business tax credits introduced by the Quebec government in March 2008.
Gross Profit
The gross profit increased to $18.3 million, higher by $832,000, in fiscal 2013 in comparison to $17.5 million for the previous year as $1.3 million of higher products gross profit was offset by lower services gross profit of $458,000. Total gross profit percentage in fiscal 2013 decreased to 42% in comparison to 44% for fiscal 2012 mainly due to lower margin on services and third-party products and offset partially by higher gross profit realization on proprietary products. The overall products gross profit increased by $1.3 million to $10.9 million in 2013 representing a margin of 72% of products revenue in comparison to $9.6 million representing 66% of products revenue for the previous year. The increase in gross profit percentage is mainly due to higher revenue from proprietary products of $2.0 million and offset partially by lower margins and gross profit percentage on third-party products. Services gross profit during fiscal 2013 decreased to $7.4 million, lower by $458,000 in comparison to $7.8 million for fiscal 2012. Services gross profit was 27% of services revenue in fiscal 2013 in comparison to 33% for fiscal 2012. The increase in services revenue was offset by even higher services expenses attributable to the Company’s significant recruitment of new services personnel from the third quarter of fiscal 2012 to the third quarter of fiscal 2013. The Company anticipates continuous improvement on a quarterly basis in the services gross profit percentage as the integration of the new employees and the optimization of operations are achieved.
Operating Expenses
Total operating expenses in fiscal 2013 increased to $17.0 million, higher by $1.0 million or 6%, compared to $16.0 million for fiscal 2012. The most notable differences and trends between fiscal 2013 in comparison to fiscal 2012 are as follows. •
Sales and marketing expenses amounted to $7.8 million in fiscal 2013, $792,000 higher than the previous year. Expenses were higher primarily due to employee related costs of $607,000 and higher travel expense of $180,000. The increase to the employee costs is attributable to the addition of three headcount.
•
General and administrative expenses decreased to $3.9 million, $134,000 lower than fiscal 2012 and attributable primarily to lower legal and professional fees of $155,000, a recovery of $82,000 of insurance premiums, lower bad debt expense of $62,000 and offset by higher employee related costs of $177,000.
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TECSYS Annual Report 2013
•
R&D expenses, net of tax credits, increased to $5.3 million, $382,000 higher than the previous year. Gross R&D expenses increased to $7.4 million from $6.2 million, an increase of $1.2 million comprising primarily of higher employee costs. The increase in gross R&D expenses is attributable to the investment in the migration of the Company’s flagship product, EliteSeries, onto a Java platform. The average headcount during fiscal 2013 was thirteen higher than a year earlier. The Company also recorded $1.3 million of R&D and e-business tax credits during fiscal 2013 compared to $1.2 million for fiscal 2012. The increase in tax credits of $123,000 is predominantly made up of higher e-business tax credits related to the higher number of R&D resources. In addition, the Company capitalized deferred development costs of $1.7 million in fiscal 2013 compared to $855,000 for fiscal 2012 while amortizing deferred development costs of $883,000 in fiscal 2013 in comparison to $789,000 for the same period a year earlier.
Profit from Operations
The Company recorded profit from operations of $1.3 million representing 3% of revenue in fiscal 2013 in comparison to $1.5 million for 2012 and representing 4% of revenue.
Net finance costs
In fiscal 2013, the Company recorded net finance costs of $308,000 in comparison to $120,000 for fiscal 2012. Finance costs in fiscal 2013 includes $242,000 of cost related to the revaluation of the fair value of the share options liability in comparison to $67,000 for the same period a year earlier. Additionally, finance costs include net foreign exchange losses of $12,000 in fiscal 2013 in comparison $74,000 for fiscal 2012 and net interest expense of $54,000 versus net interest income of $21,000, respectively. The increase of net interest expense over last year is largely due to the new term loan executed by the Company at the end of the second quarter of fiscal 2013. In the fourth quarter of fiscal 2012, the Company sold its full 30% equity interest in TECSYS Latin America (“TLA”) for total consideration of US$275,000 (CA$272,000) and recorded a gain of $67,000. Prior to this divesture, the Company recognized its 30% share of the net loss on its investment in TLA of $15,000 during the first nine months of fiscal 2012. The Company divested its equity interest in TLA because of its non-strategic importance. The limited size of the local market that it serves and the need for TLA to deal in a broader range of products than TECSYS supplies were considerations for the divestiture.
Income Taxes
In fiscal 2013, the Company recorded an income tax expense of $75,000 comprising a current income tax expense of $254,000 offset by deferred income taxes recovery of $179,000. In fiscal 2012, the Company recorded an income tax expense of $330,000 comprising a current income tax expense of $556,000 offset by deferred income taxes recovery of $226,000. In fiscal 2013, similar to fiscal 2012, the Company adjusted its deferred tax assets covering the future four year period from fiscal 2014 through 2017 based on management’s belief that it is probable that these deferred tax assets will be realized in future years to reduce income taxes otherwise payable. The Company does not anticipate any significant cash disbursements related to income taxes given its availability of Canadian Federal nonrefundable tax credits and deferred tax assets.
Profit
The Company recorded profit of $885,000 or $0.08 per common share in fiscal 2013 compared to $1.1 million or $0.09 per common share for fiscal 2012.
Results of Operations for the Fourth Quarter Quarter ended April 30, 2013 compared to quarter ended April 30, 2012 Revenue
Total revenue for the fourth quarter ended April 30, 2013 increased to $11.1 million, $312,000 or 3% higher, compared to $10.8 million for the same period of fiscal 2012. The U.S. dollar averaged CA$1.0177 in the fourth quarter of fiscal 2013 in comparison to CA$0.9943 in the fourth quarter of fiscal 2012. Approximately 59% of the Company’s revenues were generated in the United States during the fourth quarter of fiscal 2013, hence the stronger U.S. dollar impacted revenues favorably by an estimated $150,000.
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Proprietary software products revenue decreased to $2.0 million, $1.0 million or 34% lower in the fourth quarter of fiscal 2013 in comparison to $3.0 million for the same period in fiscal 2012, while third-party products revenue decreased to $1.4 million, $81,000 or 5% lower in comparison to $1.5 million recorded for the fourth quarter of fiscal 2012. The Company signed ten new accounts with a total contract value of $3.7 million in the fourth quarter of fiscal 2013 in comparison with nine new accounts with a total contract value of $2.9 million in the same period last year. Overall bookings, including base accounts, increased to $8.5 million in the fourth quarter of fiscal 2013 in comparison to $8.1 million for the same period in fiscal 2012. The decrease in proprietary software products revenue is largely attributable to the following. In the fourth quarter of fiscal 2012, the Company signed a very significant upgrade order with an existing customer, and in the fourth quarter of fiscal 2013, the Company deferred approximately $300,000 of new account license revenues that will be recognized ratably over the support period as these new customers are required contractually to purchase annual support on an ongoing basis to maintain the use of their licenses. Services revenue increased to $7.4 million, higher by $1.3 million or 22%, in fourth quarter of fiscal 2013 compared to $6.1 million for the same period in the previous fiscal year. The increase is predominantly attributable to higher implementation consulting services related to intensified activity, however, other service operations including product adaptation, support and hosting were also higher. As a percentage of total revenue, proprietary software products accounted for 18%, third-party products for 13%, and services for 66% in the fourth quarter of fiscal 2013 compared to 28%,14%, and 56% for the same quarter of fiscal 2012, respectively.
Cost of Revenue
Total cost of revenue increased to $6.6 million, higher by $716,000 or 12%, in the fourth quarter of fiscal 2013 in comparison to $5.9 million for the same three-month period in fiscal 2012. The increase is attributable to higher services costs. The cost of services increased to $5.2 million, higher by $667,000 or 15% in the fourth quarter of fiscal 2013 in comparison to $4.6 million for the same period last year mainly due to higher employee-related expenses of $976,000 and offset partially by lower consulting expenses of $84,000 and higher tax credits of $159,000. The average services headcount in the fourth quarter of fiscal 2013 increased by approximately twenty-seven compared to the same period of fiscal 2012. The cost of services includes tax credits of $392,000 for the fourth quarter of fiscal 2013 compared to $232,000 for the same period in the previous fiscal year, largely due to the increased headcount. The tax credits relate to the e-business tax credit introduced by the Quebec government in March 2008.
Gross Profit
The gross profit decreased to $4.5 million, lower by $404,000, for the fourth quarter of fiscal 2013 in comparison to $4.9 million for the same period last year as $1.1 million lower products gross profit was offset by higher services gross profit of $652,000. Total gross profit percentage in the fourth quarter of fiscal 2013 was 41% compared to 45% in the same period of fiscal 2012 as the lower products gross profit margin percentage was offset partially by a higher services gross profit margin percentage. The overall products gross profit decreased by $1.1 million to $2.4 million in the fourth quarter of fiscal 2013 representing a margin of 69% of products revenue in comparison to $3.4 million representing 76% of products revenue for the same period of the previous year. The decrease in absolute dollars is due to lower proprietary products gross profit of $1.0 million and lower third-party products gross profit of $43,000. The decrease in proprietary revenues, as discussed earlier, is largely the root cause for the corresponding impact on the gross profit. Services gross profit during the fourth quarter of fiscal 2013 increased to $2.1 million, higher by $652,000 in comparison to $1.5 million for the same period in fiscal 2012. Higher services revenue of $1.3 million was offset partially by higher services expenses of $667,000 as noted earlier. Services gross profit increased to 29% in the fourth quarter of fiscal 2013 from 25% for the fourth quarter of fiscal 2012.
Operating Expenses
Total operating expenses for the fourth quarter of fiscal 2013 increased to $4.2 million, higher by $75,000 or 2%, in comparison to $4.2 million for the same three-month period last year.
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TECSYS Annual Report 2013
The most notable differences between the fourth quarter of fiscal 2013 in comparison with the same period in fiscal 2012 are as follows. •
Sales and marketing expenses remained flat amounting to $2.1 million, $23,000 lower than the comparable quarter last year. Higher employee related costs of $50,000 and higher travel expense of $20,000 were offset by lower marketing program costs of $88,000.
•
General and administrative expenses decreased to $909,000, $63,000 lower than the comparable quarter last year primarily as a result of lower travel, bad debt, and office expenses.
•
R&D expenses, net of tax credits, increased to $1.3 million, $185,000 higher than the comparable quarter last year. Gross R&D expenses increased to $1.9 million from $1.7 million, a net increase of $169,000 primarily attributable to higher employee costs of $246,000 which were offset by lower travel and consulting expenses of $66,000. Dedicated research and development staff averaged 71 headcount in the fourth quarter of fiscal 2013 in comparison to 61 headcount for the same period a year earlier. The Company also recorded lower tax credits of $248,000 comprising primarily lower non-refundable federal tax credits of $255,000 as the Company recorded $225,000 of non-refundable tax credits in the first three quarters of fiscal 2013 and $75,000 in the fourth quarter of fiscal 2013 in comparison to $330,000 recorded exclusively in the fourth quarter of fiscal 2012. In addition, the Company capitalized deferred development costs of $561,000 in the fourth quarter of fiscal 2013 compared to $310,000 for the same period in fiscal 2012 while amortizing deferred development costs of $237,000 in fiscal 2013 in comparison to $218,000 for the same period a year earlier.
Profit from Operations
The Company recorded profit from operations of $256,000 representing 2% of revenue in the fourth quarter of fiscal 2013 in comparison to $735,000 representing 7% of revenue for the comparable quarter of the previous year.
Net finance costs
In the fourth quarter of fiscal 2013, the Company recorded net finance costs of $5,000 in comparison to net finance income of $1,000 for the comparable quarter last year. Finance cost in the fourth quarter of fiscal 2013 includes $31,000 of cost recovery in comparison to $17,000 for the same period last year related to the revaluation of the fair value of the share options liability. Additionally, finance costs include net foreign exchange losses of $5,000 in the fourth quarter of fiscal 2013 in comparison to an exchange loss of $29,000 for the same period last year and net interest expense of $31,000 versus a net interest income of $13,000, respectively. The increase of net interest expense over last year is largely due to the new term loan executed by the Company at the end of the second quarter of fiscal 2013. In the fourth quarter of fiscal 2012, the Company sold its full equity interest in TLA for total consideration of US$275,000 (CA$272,000) and recorded a gain of $67,000.
Income Taxes
Please refer to the discussion of income taxes in the preceding section focusing on the results of operations for the year ended April 30, 2013 compared to the year ended April 30, 2012. The income taxes for fiscal 2012 were accounted for in the fourth quarter of fiscal 2012.
Profit
The Company recorded profit of $181,000 or $0.02 per share in the fourth quarter of fiscal 2013 compared to $473,000 or $0.04 per share for the same period last year.
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Quarterly Selected Financial Data
(Quarterly data are unaudited) In thousands of Canadian dollars, except per share data
Fiscal Year 2013 Total Revenue Profit (Loss) and Comprehensive Income (Loss) Basic and Diluted Earnings (Loss) per Common Share Fiscal Year 2012 Total Revenue Profit and Comprehensive Income Basic and Diluted Earnings per Common Share
Q1
Q2
11,510 1,125
10,748 122
0.10
Q3
Q4
Total
10,384 (543)
11,117 181
43,759 885
0.01
(0.05)
0.02
0.08
Q1
Q2
Q3
Q4
Total
9,003 146
9,099 133
10,595 305
10,805 473
39,502 1,057
0.01
0.01
0.03
0.04
0.09
Liquidity and Capital Resources On April 30, 2013, current assets totaled $21.1 million compared to $18.2 million at the end of fiscal 2012. Cash and cash equivalents increased to $5.3 million compared to $5.2 million as at April 30, 2012. The Company maintained its cash position primarily due to securing a new term loan and the generation of cash from operating activities excluding non-cash working capital items as these fund were used to finance the increase in working capital items, the investment in property and equipment and the Company flagship product, EliteSeries, the distribution of dividends and the repurchase of common shares and share options for cancellation. During October 2012, the Company completed the renegotiation and renewal of its banking agreement with a Canadian chartered bank including new credit facilities for an operating line of credit up to $5,000,000 and a term loan of $5,000,000. This banking agreement replaces the previous banking agreement. Please see note 13 to the consolidated financial statements for a detailed description of the banking facilities. The term loan of $5.0 million was received at the end of the second quarter and the Company has since repaid $500,000 as scheduled, while the operating line of credit has not been used thus far. The banking agreement requires the Company to maintain a working capital ratio equal or greater than 1.1 : 1.0, a shareholder’s equity equal or greater than $5,000,000, a ratio of interest-bearing debt to EBITDA of less than or equal to 3.0 : 1.0, and a debt service coverage ratio greater than or equal to 1.2 : 1.0. At April 30, 2013 and April 30, 2012, the Company was in compliance with the required financial covenants in effect at the time. On July 9, 2013, an amendment to the banking agreement requires that the debt service coverage ratio to be greater than or equal to 0.6 : 1.0 on July 31, 2013, greater than or equal to 1.1 : 1.0 on October 31, 2013, and reverts back to greater than or equal to 1.2 : 1.0 on January 31, 2014. Accounts receivable and work in progress totaled $9.3 million on April 30, 2013 compared to $8.9 million as at April 30, 2012. The Company’s DSO (days sales outstanding) stood at 75 days at the end of fiscal 2013 compared to 74 days at the end of fiscal 2012. Current liabilities on April 30, 2013 increased to $13.2 million compared to $12.4 million at the end of fiscal 2012 mainly due to the current liability of $1.0 million related to the new term loan and the increase of the deferred revenue which was largely offset by the decrease in accounts payable and accrued liabilities. Working capital increased to $7.9 million at the end of April 30, 2013 in comparison to $5.8 million at the end of fiscal year 2012. The Company believes that funds on hand at April 30, 2013 combined with cash flow from operations and its accessibility to new banking facilities will be sufficient to meet its needs for working capital, R&D, capital expenditures and debt repayment for at least the next twelve months.
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TECSYS Annual Report 2013
Cash from operations
Operating activities used funds of $137,000 in fiscal 2013 and generated $1.6 million in fiscal 2012. Operating activities excluding changes in non-cash working capital items related to operations generated $3.0 million in fiscal 2013 and $2.9 million in fiscal 2012. Non-cash working capital items used funds of $3.2 million in fiscal 2013 primarily due to increases of tax credits receivable for $2.6 million, as well as increases in work in progress, and decreases in accounts payable and accrued liabilities. The increase in the tax credit receivable is largely attributable to the delay of the reimbursement of the Company’s e-business and scientific research and experimental development tax credits relating to fiscal 2012 from Revenue Quebec as the Company was undergoing an audit of its claim. In June 2013, shortly after the fiscal 2013 year-end, the Company received $1.9 million relating to its tax credit application. The balance of the increase in the tax credit receivable is attributable to a larger tax credit for fiscal 2013 in comparison to fiscal 2012 because of the increase in new employees involved in eligible activities. Working capital items used funds of $1.3 million in fiscal 2012 primarily due to increases in accounts receivable, work in progress, and inventory and offset by increases in accounts payable and accrued liabilities and deferred revenue. During the fourth quarter of fiscal 2013, operating activities used $662,000 in comparison to generating $995,000 for the same period a year earlier. Operating activities excluding changes in non-cash working capital items related to operations generated $609,000 in the fourth quarter of fiscal 2013 in comparison to $810,000 for the same three-month period in fiscal 2012 primarily as a result of the lower profitability. Non-cash working capital items used $1.3 million in the fourth quarter of fiscal 2013 largely due to the increase in accounts receivable, work in progress and tax credits receivable and offset partially by the increase in accounts payable and deferred revenue. During the same period in fiscal 2012, non-cash working capital items generated $185,000 largely as a result of a reduction in tax credit receivable and other accounts receivable and offset by the decrease in accounts payable.
Financing activities
Financing activities generated funds of $2.9 million for fiscal 2013 and used $5.0 million for fiscal 2012. During the second quarter of fiscal 2013, the Company completed the renegotiation and renewal of its banking agreement with a Canadian chartered bank including new credit facilities for an operating line of credit up to $5.0 million and a term loan of $5.0 million. The components of the banking facilities are discussed in note 13 to the consolidated financial statements. The Company received the term loan of $5.0 million at the end of the second quarter of fiscal 2013 whereas the Company has not made use of the operating line of credit. The principal of the term loan is scheduled to be repaid in equal and consecutive monthly installments over a period of five years. During the second half of fiscal 2013, the Company paid back $500,000 of the term loan as scheduled. Additionally, the Company repaid $15,000 of an outstanding loan in comparison to $22,000 repaid for the same period a year earlier. During fiscal 2012, the Company repaid $3.7 million of bank advances and terminated the credit facility that was partially secured by the asset-backed commercial paper, which was also sold for cash during the period. During fiscal 2013, the Company declared and distributed two dividends of $0.035 per share on each occasion or $800,000 in aggregate in comparison to two dividends of $0.03 per share on each occasion or $698,000 in aggregate during the previous year. During 2013, the Company purchased 187,300 of its outstanding common shares for cancellation at an average price of $2.41 per share under a Normal Course Issuer Bid (“NCIB”). The total cost related to the purchasing of these shares including other related costs, was $462,000. During fiscal 2012, the Company purchased 192,800 of its outstanding common shares for cancellation at an average price of $2.23 per share. The total cost related to the purchasing of these shares, including related costs, was $437,000. Additionally, during fiscal 2013, 198,220 share options were exercised at an average exercise price of $1.57 and cash settled for a total disbursement of $328,000 in comparison to 370,140 share options exercised by employees at an average exercise price of $1.42 and cash-settled for a total disbursement of $347,000 for the same period a year earlier. During fiscal 2013, 33,450 share options were exercised at an average exercise price of $1.78 to purchase common shares generating cash for $59,000, whereas during fiscal 2012, 117,400 share options were exercised at an average exercise price of $1.66 to purchase common shares generating cash for $195,000. The weighted average trading price of the Company’s shares during the period of five trading days preceding the date of exercise for all of the exercised share options during fiscal 2013 and 2012 was $3.13 and $2.30, respectively. The Company paid interest of $100,000 and $16,000 for fiscal 2013 and fiscal 2012, respectively. The increase of interest expense disbursement over last year is attributable to the new term loan executed by the Company since the end of the second quarter of fiscal 2013. During the fourth quarter of fiscal 2013, financing activities used funds of $782,000 in comparison to $396,000 for the same period a year earlier. During the three month period in fiscal 2013, the Company reimbursed $250,000 of the new term loan and repaid $4,000 of an outstanding loan in comparison to $3,000 for fiscal 2012. Additionally, the Company declared and paid dividends of $400,000 and $349,000, respectively for the fourth quarter of fiscal 2013 and fiscal 2012. During the fourth quarter of fiscal 2012, the Company purchased 15,900 of its outstanding common shares for cancellation at an average price of $2.41 per share. The total cost related to the purchasing of these shares, including related costs, was $39,000. Additionally, during the fourth quarter of fiscal 2013, 52,282 share
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options were exercised at an average exercise price of $1.50 and cash settled for a total disbursement of $85,000 in comparison to 8,000 share options exercised by employees at an average exercise price of $1.53 and cash-settled for a total disbursement of $8,000 for the same period a year earlier. During the fourth quarter of fiscal 2013, 2,000 share options were exercised at an average exercise price of $1.50 to purchase common shares generating cash for $3,000, whereas during the same period of fiscal 2012, 3,000 share options were exercised at an average exercise price of $1.50 to purchase common shares generating cash for $5,000. The Company paid interest of $45,000 and $2,000 during the fourth quarter of fiscal 2013 and fiscal 2012, respectively.
Investing activities
During fiscal 2013, investing activities used funds of $2.6 million in comparison to generating funds of $2.2 million for fiscal 2012. During fiscal 2013, the Company generated cash with the reduction of short-term and other investments of $40,000 in comparison to $890,000 for fiscal 2012. In addition, during fiscal 2012, the Company sold the asset-backed commercial paper to a third-party generating proceeds of $3.6 million. The Company used funds of $1.0 million and $1.6 million for the acquisition of property and equipment and other intangible assets for fiscal 2013 and fiscal 2012, respectively. Additionally, the Company invested in its software products with the capitalization of $1.7 million and $855,000 reflected as deferred development costs in fiscal 2013 and fiscal 2012, respectively. The Company collected monies on previously advanced loans to TLA of $13,000 and $23,000 during fiscal 2013 and 2012, respectively. Additionally, during the fourth quarter of fiscal 2012, following the divesture of its equity interest in TLA, the Company received $136,000 representing 50% of the consideration and during fiscal 2013 the Company collected another $34,000 from the balance of sale. Lastly, the Company received interest of $46,000 and $37,000 during fiscal 2013 and fiscal 2012, respectively. During the fourth quarter of fiscal 2013, investing activities used funds of $422,000 in comparison to generating funds of $158,000 for the same period in fiscal 2012. During the fourth quarter of fiscal 2013, the Company generated cash with the reduction of short-term and other investments of $342,000 in comparison to $565,000 for fiscal 2012. The Company used funds of $218,000 and $251,000 for the acquisition of property and equipment and other intangible assets for the fourth quarter of fiscal 2013 and fiscal 2012 respectively. Additionally, the Company invested in its software products with the capitalization of $561,000 and $310,000 reflected as deferred development costs in the fourth quarter of fiscal 2013 and fiscal 2012, respectively. The Company collected monies on previously advanced loans to TLA of $1,000 and $3,000 during the fourth quarter of fiscal 2013 and 2012, respectively and during the fourth quarter of fiscal 2012, following the divesture of its equity interest in TLA, the Company received $136,000 representing 50% of the consideration. Lastly, the Company received interest of $14,000 and $15,000 during the fourth quarter of fiscal 2013 and fiscal 2012, respectively.
Commitments and Contractual Obligations In the second quarter of fiscal 2010, the Company signed a new lease agreement for its head office in Montreal, Quebec. The Company relocated to this facility in April 2010. The lease term of ten and one-half years is effective from May 1, 2010 and runs through October 31, 2020. During fiscal 2012, the Company signed an amendment to its lease agreement for additional space. The lease for additional space runs for eight years and five months commencing on June 1, 2012 terminating on the same date as the original lease, October 31, 2020. Additionally, during fiscal 2012, the Company signed a new lease agreement for its office in Markham, Ontario. The Company relocated its Markham office to this new facility in November 2011. The lease term of ten years and eight months is effective December 1, 2011 and runs through July 31, 2022. As at April 30, 2013, the principal commitments consist of operating leases (note 24 of the consolidated financial statements), loans payable (notes 13 and 15 of the consolidated financial statements) representing a subordinated loan from a related party, and the term loan initiated at the end of the second quarter of fiscal 2013. The following table summarizes significant contractual obligations as at April 30, 2013.
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TECSYS Annual Report 2013
The minimum future rental payments expiring up to July 31, 2022, including operating expenses required under non-cancellable longterm operating leases which relate mainly to premises are as follows: In thousands of Canadian dollars
Years Ending April 30, 2014 April 30, 2015 April 30, 2016 April 30, 2017 April 30, 2018 Thereafter
Loans Payable
Term Loan
Operating Leases
Total
70 70
1,000 1,000 1,000 1,000 500 4,500
1,422 1,424 1,394 1,426 1,470 4,714 11,850
2,492 2,424 2,394 2,426 1,970 4,714 16,420
Under the terms of a licensing agreement with a third party, the Company is committed to pay royalties calculated at a rate of 1.25% of eligible revenue of the EliteSeries product line, excluding reimbursable expenses and hardware sales. Revenue derived from the operations of other business units or acquired companies are exempt from these royalties. The agreement was effective February 1, 2004, had an initial term which expired on April 30, 2007, and was subject to termination by either party at any time by providing six months notice. Upon expiration of the initial term, the agreement automatically renews for consecutive one-year terms. The Company has incurred royalty fees related to this agreement of $174,000 in fiscal 2013 (2012 – $183,000).
Dividend Policy On February 26, 2008, the Company announced the approval of a dividend policy whereby a cash dividend per common share is intended to be distributed to its shareholders following the release of its financial results of the first and third quarter of each year. The declaration and payment of dividends shall be at the discretion of the Board of Directors, which will consider earnings, capital requirements, financial conditions and other such factors as the Board of Directors, in its sole discretion, deems relevant. During fiscal 2013, the Company declared a dividend of $0.035 per share on two separate occasions that were paid on October 5, 2012 and March 29, 2013 to shareholders of record at the close of business on September 21, 2012 and March 15, 2013, respectively. During fiscal 2012, the Company declared a dividend of $0.03 per share on two separate occasions to shareholders of record at the close of business on September 22, 2011 and March 16, 2012. The dividends were paid on October 6, 2011 and March 30, 2012, respectively.
Related Party Transactions The Company has a subordinated loan of $70,000 from a person related to certain shareholders, bearing interest at 12.67%. The loan is payable on the earlier of demand or on the death of the lender. The Company repaid $15,000 and $22,000 for fiscal 2013 and fiscal 2012, respectively. The amount outstanding as at April 30, 2012 was $85,000. The interest expense for the subordinated loan amounted to $10,000 and $13,000 for fiscal 2013 and fiscal 2012, respectively. Under the provisions of the share purchase plan for key management, the Company provided interest-free loans to key management of $169,000 and $166,000 to facilitate their purchase of Company shares during fiscal 2013 and fiscal 2012, respectively. These loans were fully repaid before the end of each fiscal year. No loans were outstanding as at April 30, 2013 and April 30, 2012.
Contingencies Through the course of operations, the Company may be exposed to a number of lawsuits, claims and contingencies. Provisions are recognized as liabilities in instances when there are present obligations and it is probable that an outflow of resources embodying
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economic benefits will be required to settle the obligations and where such liabilities can be reliably estimated. Although it is possible that liabilities may be incurred in instances where no provision has been made, the Company has no reason to believe that the ultimate resolution of such matters will have a material impact on its financial position.
Off-Balance Sheet Agreements The Company was not involved in any off-balance sheet arrangements as at April 30, 2013, with the exception of an irrevocable letter of guarantee issued in the amount of $120,000 related to lease commitments. This letter of guarantee in favour of one of the Company’s landlords must be renewed annually through the first five years of the lease term which commenced in April 2010.
Current and Anticipated Impacts of Current Economic Conditions The current overall economic uncertainty and volatility may have an adverse impact on the demand for the Company’s products and services as industry may adjust quickly to exercise caution on capital spending. The Company is seeing some positive signs, over the last eighteen months, of prospects and customers ramping up investment in supply chain management software. During the last six quarters ending April 30, 2013, the Company has booked significant increases in business volume with total contract values averaging $6.7 million in each quarter, whereas for the previous fourteen quarters since the beginning of fiscal 2009, bookings have averaged approximately $4.8 million per quarter. The Company’s pipeline reflecting potential new deals remains strong. The magnitude of the growth trend will depend on the strength and sustainability of the economic recovery and the demand for supply chain management software. Given the current backlog of $27.2 million, comprised primarily of services, the Company’s management believes that the current services revenue level ranging between $6.8 million and $7.3 million per quarter can be sustained in the short term if no significant new agreements are completed. If the positive business signs continue to manifest themselves and newer employees refine their expertise and integration, as the Company is anticipating, services revenue should continue to rise. The Company is also taking positive action to optimize and right size its services organization as is generally needed after a significant and rapid growth spurt. The Company anticipates that its services gross profit margin which has been under pressure in fiscal 2013 as it continues to integrate new resources, to improve in fiscal 2014. Strategically, the Company continues to focus its efforts on the most likely opportunities within its existing vertical markets and customer base. The Company also currently offers subscription-based licensing, hosting services, modular sales and implementations, and enhanced payment terms to promote revenue growth. The exchange rate of the U.S. dollar in comparison to the Canadian dollar continues to be an important factor affecting revenues and profitability as the Company continues to derive approximately 60% of its business from U.S. customers while the majority of its cost base is in Canadian dollars. The Company will continue to adjust its business model to ensure that costs are aligned to its revenue expectations and the economic reality. The Company has increased its headcount significantly during fiscal 2012 and 2013 to meet the higher demand for its services and to capture pipeline opportunities. The Company will focus its attention on rendering this investment profitable while addressing the services backlog contributing to revenue generation. Other cost areas under continuous scrutiny are traveling, consulting and communications. During October 2012, the Company completed the renegotiation and renewal of its banking agreement with a Canadian chartered bank including new credit facilities for an operating line of credit up to $5.0 million and a term loan of $5.0 million that is repayable over the next five years. This banking agreement replaces the previous banking agreement. Please see note 13 to the consolidated financial statements for a more comprehensive disclosure regarding the banking agreement and credit facilities. In October 2012, the Company received funds of $5.0 million in the form of a floating-rate term loan while the operating line of credit has not been used thus far. The objective of the term loan was to restore the Company’s working capital, which was used, in large part, to finance the capital expenditures related to the Company’s new expanded offices in Montreal, Quebec and Markham, Ontario since April 2010 as well as the significant investment in the migration of the Company’s flagship product, EliteSeries onto a Java platform. Additionally, due to the anticipated expansion of its working capital due to business growth and its investment in the integration and training of new resources, the Company sought to ensure flexibility so growth trends could be nurtured and sustained.
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TECSYS Annual Report 2013
The Company believes that funds on hand, including funds from the new term loan, together with anticipated cash flows from operations, and its accessibility to the new operating line of credit will be sufficient to meet all its needs for a least the next twelve months. The Company can further manage its capital structure by adjusting its purchases of shares for cancellation pursuant to the normal course issuer bid and adjusting its dividend policy.
Financial Instruments and Financial Risk Management The Company has classified cash and cash equivalents, restricted cash equivalents and other investments, accounts receivable, other accounts receivable and non-current receivables as loans and receivables. Bank advances, accounts payable and accrued liabilities, loans payable, and the term loan are classified as other financial liabilities. The Company has determined that the carrying values of its short-term financial assets and liabilities, including cash and cash equivalents, accounts receivable, other accounts receivable, accounts payable and accrued liabilities, and loans payable approximate their fair value because of the relatively short period to maturity of the instruments. The fair value of the restricted cash equivalents and other investments, non-current receivables, and the term loan was determined to be not significantly different with their carrying value. Derivative instruments are also recorded as either assets or liabilities measured at their fair value. As such, the net fair value of outstanding foreign exchange contracts of $9,000 loss was recorded as accounts payable and accrued liabilities at April 30, 2013 ($112,000 gain was recorded as an accrued other accounts receivable at April 30, 2012). Financial instruments which potentially subject the Company to credit risk consist principally of cash and cash equivalents, accounts receivable, other accounts receivable and derivatives, restricted cash equivalents and other investments and non-current receivables. The Company’s cash and cash equivalents, and restricted cash equivalents and other investments consisting of guaranteed investment certificates are maintained at major financial institutions. At April 30, 2013, there is no customer comprising more than 10% of total trade accounts receivable and work in progress. Generally, there is no particular concentration of credit risk related to the accounts receivable due to the North American distribution of customers and procedures for the management of commercial risks. The Company performs ongoing credit reviews of all its customers and establishes an allowance for doubtful accounts receivable when accounts are determined to be uncollectible. Customers do not provide collateral in exchange for credit. The Company is exposed to currency risk as a certain portion of the Company’s revenues and expenses are incurred in U.S. dollars resulting in U.S. dollar-denominated accounts receivable and accounts payable and accrued liabilities. In addition, certain of the Company’s cash and cash equivalents are denominated in U.S. dollars. These balances are therefore subject to gains or losses due to fluctuations in that currency. The Company may enter into foreign exchange contracts in order to offset the impact of the fluctuation of the U.S. dollar regarding the revaluation of its U.S. net monetary assets. The Company uses derivative financial instruments only for risk management purposes, not for generating trading profits. As such, any change in cash flows associated with derivative instruments is expected to be offset by changes in cash flows related to the net monetary position in the foreign currency. See note 26 to the consolidated financial statements for additional discussion of the Company’s risk management policies, including currency risk, credit risk, liquidity risk, interest rate risk and market price risk.
Outstanding Share Data At July 9, 2013, the Company has 11,449,421 common shares outstanding as there have been no transactions since the end of the 2013 year end. Similarly, on July 9, 2013, outstanding share options to purchase common shares numbered 88,900 as 500 options were forfeited since the end of the 2013 year end.
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Critical Accounting Policies The Company’s critical accounting policies are those that it believes are the most important in determining its financial condition and results. A summary of the Company’s significant accounting policies, including the critical accounting policies discussed below, is set out in the notes to the consolidated financial statements.
Use of estimates, assumptions and judgments The preparation of the consolidated financial statements requires management to make estimates, assumptions, and judgments that affect the application of accounting policies and the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Reported amounts and note disclosures reflect the overall economic conditions that are most likely to occur and the anticipated measures that management intends to take. Actual results could differ from those estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. Information about areas requiring the use of judgment, management assumptions and estimates, and key sources of estimation uncertainty that the Company believes could have the most significant impact on reported amounts is noted below: (i) Revenue recognition: A portion of the Company’s revenue is recognized on a percentage-of-completion basis. In this regard, estimates are required in determining the level of advancement and in determining the costs to complete the deliverables. In addition, revenue recognition is also subject to critical judgment, particularly in multiple-element arrangements where judgment is required in allocating revenue to each component, including licenses, professional services and maintenance services, based on the relative fair value of each component. As certain of these components have a term of more than one year, the identification of each deliverable and the allocation of the consideration received to the components impacts the timing of revenue recognition. (ii) Government assistance: Management uses judgment in estimating amounts receivable for various tax credits and in assessing the eligibility of research and development expenses. (iii) Income taxes: In assessing the realizability of deferred tax assets, management considers whether it is probable that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and available tax planning strategies in making this assessment. Deferred tax assets and liabilities contain estimates about the nature and timing of future permanent and temporary differences as well as the future tax rates that will apply to those differences. Changes in tax laws and rates as well as changes to the expected timing of reversals may have a significant impact on the amounts recorded for deferred tax assets and liabilities. Management closely monitors current and potential changes to tax law and bases its estimates on the best available information at each reporting date. (iv) Impairment of assets: Impairment assessments may require the Company to determine the recoverable amount of a cash generating unit (“CGU”), defined as the smallest identifiable group of assets that generates cash inflows independent of other assets. This determination requires significant estimates in a variety of areas including: the determination of fair value, selling costs, timing and size of cash flows, and discount and interest rates. The Company documents and supports all assumptions made in the above estimates and updates such assumptions to reflect the best information available to the Company if and when an impairment assessment requires the recoverable amount of a CGU to be determined.
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TECSYS Annual Report 2013
(v) Fair value of derivative instruments: The fair value of a derivative instrument is estimated using inputs, including forward prices, foreign exchange rates, interest rates and volatilities. These inputs are subject to change on a regular basis based on the interplay of various market forces. Consequently, the fair value of the Company’s derivative instruments are subject to assumptions and estimation uncertainties and can vary significantly in each reporting period.
Revenue Recognition The Company derives its revenues under non-cancellable license agreements from the sale of proprietary software licenses, third-party software, support, and hardware and provides software-related services including training, installation, consulting and maintenance, which include product support services and periodic updates. Software licenses sold by the Company are generally perpetual in nature and the arrangements generally comprise various services. Revenues generated by the Company include the following: (i) License fees and hardware products: Revenues from perpetual licenses sold separately are recognized when a non-cancellable agreement has been signed, the product has been delivered, there are no uncertainties surrounding product acceptance, the fees are fixed or determinable and the amount of revenue and costs can be measured reliably, and collection is considered probable such that economic benefits associated with the transaction will flow to the Company. Delivery generally occurs at the point where title and risk of loss have passed to the customer and the Company no longer retains continuing managerial involvement or effective control over the products sold. However, some arrangements require evidence of customer acceptance of the hardware and software products that have been sold. In such cases, delivery of the hardware, software and services is not considered to have occurred until evidence of acceptance is received from the customer or the Company has completed its contractual obligations. Certain of the Company’s license agreements require the customer to renew its annual support agreement in order to maintain its right to continue to use the software. In such cases, the perpetual license is effectively transformed into a renewable annual license. Where an upfront fee is not considered to represent a significant and incremental premium over subsequent year renewal fees, the license fee is recognized ratably over the initial contractual support period, which is generally one year. An upfront license fee representing a significant and incremental premium over subsequent year renewal fees is deferred and recognized as revenue over the period in which support is expected to be provided, which is generally considered to be the estimated useful life of the software license. For long-term contracts where services are considered to be essential to the functionality of the software, fees from licenses and services are aggregated and recognized as revenue as the related services are performed using the percentageof-completion method. The percentage of completion is generally determined based on the number of hours incurred to date in relation to the total expected hours of services. The cumulative impact of any revision in estimates of the percentage completed is reflected in the period in which the changes become known. Losses on contracts in progress are recognized when known. Work in progress is established for revenue based on the percentage completed in excess of progress billings as of the reporting date. Any excess of progress billings over revenue based on the percentage completed is deferred and included in deferred revenue. Generally, the terms of long-term contracts provide for progress billings based on completion of certain phases of work. Where acceptance criteria are tied to specific milestones, and the delivery performance of any undelivered product or service is uncertain and not substantially within the Company’s control, then the percentage of completion up to those milestones is recognized upon acceptance. (ii) Support agreements: Support agreements for proprietary software licences generally call for the Company to provide technical support and unspecified software updates to customers. Proprietary licenses support revenues for technical support and unspecified software update rights are recognized ratably over the term of the support agreement.
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Third-party support revenues related to third-party software and the related cost are generally recognized upon the delivery of the third-party products as the support fee is included with the initial licensing fee, the support included with the initial license is for one year or less, and the estimated cost of providing support during the arrangement is insignificant. In addition, unspecified upgrades for third-party support agreements historically have been and are expected to continue to be minimal and infrequent. (iii) Consulting and training services: The Company provides consulting and training services to its customers. Revenues from such services are recognized as the services are performed. (iv) Reimbursable expenses: The Company records revenue and the associated cost of revenue on a gross basis in its statements of comprehensive income for reimbursable expenses such as airfare, hotel lodging, meals, automobile rental and other charges related to providing services to its customers. (v) Multiple-element arrangements: Some of the Company’s sales involve multiple-element arrangements that include product (software and/or hardware), maintenance and various professional services. The Company evaluates each deliverable in an arrangement to determine whether such deliverable would represent a separate component. Most of the Company’s products and services qualify as separate components and revenue is recognized when the applicable revenue recognition criteria, as described above, are met. In multiple-element arrangements, the Company separately accounts for each product or service according to the methods described when the following conditions are met: • • •
the delivered product or service has value to the customer on a stand-alone basis; there is objective and reliable evidence of fair value of any undelivered product or service; if the sale includes a general right of return relating to a delivered product or service, the delivery performance of any undelivered product or service is probable and substantially in the Company’s control.
If there is objective and reliable evidence of fair value for all products and services in a sale, the total price of the arrangements is allocated to each product and service based on relative fair value. Otherwise, the Company first allocates a portion of the total price to any undelivered products and services based on their fair value and the remainder to the products and services that have been delivered.
Change in Accounting Policies New accounting standards adopted in 2013 On October 7, 2010, the IASB issued amendments to IFRS 7, Financial Instruments: Disclosures, which increase the disclosure requirements for transactions involving the transfers of financial assets to help users of financial statements evaluate the risk exposures related to such transfers and the effect of those risks on an entity’s financial position. These amendments are effective and have been adopted in the first quarter of 2013 commencing May 1, 2012. The Company has determined that the amendments to IFRS 7 did not have a material impact on the Company’s consolidated financial statements.
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TECSYS Annual Report 2013
New Accounting Standards and Interpretations Issued But Not Yet Adopted A number of new standards, interpretations and amendments to existing standards were issued by the IASB or International Financial Reporting Interpretations Committee (“IFRIC”) that are mandatory but not yet effective for the year ended April 30, 2013, and have not been applied in preparing these consolidated financial statements. None are expected to have an impact on the consolidated financial statements of the Company except for: International Financial Reporting Standards
Effective for annual periods starting on or after
IFRS 9, Financial Instruments IFRS 10, Consolidated Financial Statements IFRS 12, Disclosure of Interests in Other Entities IFRS 13, Fair Value Measurement Early adoption is permitted for IFRS 10, 12, and 13
January 1, 2015 January 1, 2013 January 1, 2013 January 1, 2013
IFRS 9, Financial Instruments (“IFRS 9”), will ultimately replace IAS 39, Financial Instruments: Recognition and Measurement (“IAS 39”). The replacement of IAS 39 is a three-phase project with the objective of improving and simplifying the reporting for financial instruments. The issuance of IFRS 9 in November 2009 was the first phase of the project, which provides guidance on the classification and measurement of financial assets and financial liabilities. The Company intends to adopt IFRS 9 in its consolidated financial statements for the annual period beginning May 1, 2015. IFRS 10, Consolidated Financial Statements (“IFRS 10”), establishes principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities. IFRS 10 replaces the consolidation requirements in SIC-12, Consolidation - Special Purpose Entities and IAS 27, Consolidated and Separate Financial Statements. The Company intends to adopt IFRS 10 in its consolidated financial statements for the annual period beginning May 1, 2013. IFRS 12, Disclosure of Interests in Other Entities (“IFRS 12”), is a new and comprehensive standard on disclosure requirements for all forms of interests in other entities, including subsidiaries, joint arrangements, associates and unconsolidated structured entities. The Company intends to adopt IFRS 12 in its consolidated financial statements for the annual period beginning May 1, 2013. IFRS 13, Fair Value Measurement (“IFRS 13”), provides new guidance on fair value measurement and disclosure requirements. The Company intends to adopt IFRS 13 in its consolidated financial statements for the annual period beginning May 1, 2013. The Company is in the process of determining the extent of the impact of these standards on the Company’s consolidated financial statements.
Risks and Uncertainties History of Earnings and Losses; Uncertainty of Future Operating Results The Company realized net earnings over the last six fiscal years from 2008 through 2013, but incurred losses in fiscal 2007 as well as in other prior fiscal years. The Company has continued to adjust its operating model in view of achieving profitability. However, there can be no assurance that the Company will achieve or sustain profitability in the future. The Company’s dependence on a market characterized by rapid technological change make the prediction of future results of operations difficult or impossible. There can be no assurance that the Company can generate substantial revenue growth on a quarterly or annual basis, or that any revenue growth that is achieved can be sustained. Revenue growth that the Company has achieved or may achieve may not be indicative of future operating results. In addition, the Company may increase its operating expenses in order to fund higher levels of research and development, increase its sales and marketing efforts, develop new distribution channels, broaden its customer support capabilities and expand its administrative resources in anticipation of future growth. To the extent that increases in such expenses precede or are not subsequently followed by increased revenue, the Company’s business, results of operations, and financial condition would be materially adversely affected. www.tecsys.com
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Fluctuations in Quarterly Results The Company’s quarterly operating results have in the past and will in the future, fluctuate significantly, depending on factors such as the demand for the Company’s products, the size and timing of orders, the number, timing and significance of new product announcements by the Company and its competitors, the ability of the Company to develop, introduce, and market new and enhanced versions of its products on a timely basis, the level of product and price competition, changes in operating expenses, changes in average selling prices and product mix, sales personnel changes, the mix of direct and indirect sales, product returns and general economic factors, among others. In particular, the Company’s quarterly results are affected by the timing of new releases of its products and upgrades. The Company’s operating expenses are based on anticipated revenue levels in the short term and are relatively fixed and incurred throughout the quarter. As a result, if the revenue is not realized in the expected quarter, the Company’s operating results could be materially adversely affected. Quarterly results in the future may be influenced by these or other factors, including possible delays in the shipment of new products and purchasing delays of current products as customers anticipate new product releases. Accordingly, there may be significant variations in the Company’s quarterly operating results.
Lengthy Sales and Implementation Cycle The sale and implementation of the Company’s products generally involves a significant commitment of resources by prospective customers. As a result, the Company’s sales process is often subject to delays associated with lengthy approval processes attendant to significant capital expenditures. For these and other reasons, the sales cycle associated with the licensing of the Company’s products varies substantially from customer to customer and typically lasts between six and twelve months. During this time, the Company may devote significant resources to a prospective customer, including costs associated with multiple site visits, product demonstrations and feasibility studies, and experience a number of significant delays over which it has no control. In addition, following license sales, the implementation period may involve six to twelve months for consulting services, customer training and integration with the customer’s other existing systems.
Product Development and Technological Change The software industry is characterized by rapid technological change and frequent new product introductions. Accordingly, the Company believes that its future success depends upon its ability to enhance current products or develop and introduce new products that enhance performance and functionality at competitive prices. The Company’s inability, for technological or other reasons, to develop and introduce products in a timely manner in response to changing market conditions or customer requirements could have a material adverse effect on its business, results of operations and financial condition. The ability of the Company to compete successfully will depend in large measure on its ability to maintain a technically competent research and development staff and adapt to technological changes and advances in the industry, including providing for the continued compatibility of its software products with evolving computer hardware and software platforms and operating environments. There can be no assurance that the Company will be successful in these efforts.
Competition The Company competes in many cases against companies with more established and larger sales and marketing organizations, larger technical staff, and significantly greater financial resources. As the market for the Company’s products continues to develop, additional competitors may enter the market and competition may intensify. Additionally, there can be no assurance that competitors will not develop products superior to the Company’s products or achieve greater market acceptance due to pricing, sales channels or other factors.
Management of Growth The Company’s ability to support the growth of its business will be substantially dependent upon having in place highly trained internal and third-party resources to conduct pre-sales activity, product implementation, training and other customer support services.
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TECSYS Annual Report 2013
Risks Related to Acquisitions The Company may continue to expand its operations or product line through the acquisition of additional businesses, products or technologies. Acquisitions may involve a number of special risks, including diversion of management’s attention, failure to retain key acquired personnel, unanticipated events or circumstances and legal liabilities, some or all of which could have a material adverse effect on the Company’s business, results of operations and financial condition.
Risk of Software Defects Software products as complex as those offered by the Company frequently contain errors or defects, especially when first introduced or when new versions or enhancements are released. Despite product testing, the Company has in the past released products with defects, discovered software errors in certain of its new versions after introduction and experienced delays or lost revenue during the period required to correct these errors. The Company regularly introduces new releases and periodically introduces new versions of its software. There can be no assurance that, despite testing by the Company and its customers, defects and errors will not be found in existing products or in new products, releases, versions or enhancements after commencement of commercial shipments.
Risk of Third-Party Claims for Infringement The Company is not aware that any of its products infringe the proprietary rights of third-parties. There can be no assurance, however, that third-parties will not claim such infringement by the Company or its licensees with respect to current or future products. The Company expects that software developers will increasingly be subject to such claims as the number of products and competitors in the Company’s industry segment grows and as functionality of products in different industry segments overlaps.
Reliance on Third-Party Software The Company relies on certain software that it sub-licenses from third-parties. There can be no assurance that these third-party software companies will continue to permit the Company to sub-license on commercially reasonable terms.
Currency Risk A significant part of the Company’s revenues are realized in U.S. dollars. Fluctuation in the exchange rate between the Canadian dollar, the U.S. dollar, and other currencies may have a material adverse effect on the margins the Company may realize from its products and services and may directly impact results from operations. From time to time, the Company may take steps to manage such risk by engaging in exchange rate hedging activities; however, there can be no assurance that the Company will be successful in such hedging activities.
Disclosure Controls and Procedures Disclosure controls and procedures are designed to provide reasonable assurance that material information is gathered and reported to senior management on a timely basis so that appropriate decisions can be made regarding public disclosure. The Company’s Chief Executive Officer (CEO) and its Chief Financial Officer (CFO) are responsible for establishing and maintaining disclosure controls and procedures regarding the communication of information. They are assisted in this responsibility by the Company’s Executive Committee, which is composed of members of senior management. Based on the evaluation of the Company’s disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures were effective as of April 30, 2013.
Internal Control over Financial Reporting The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of the Company’s financial reporting and its compliance with IFRS in its consolidated financial statements.
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An evaluation was carried out under the supervision and with the participation of the Company’s Chief Executive Officer and the Chief Financial Officer to evaluate the design and operating effectiveness of the Company’s internal controls over financial reporting as at April 30, 2013. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the internal control over financial reporting, as defined by National Instrument 52-109 was appropriately designed and operating effectively. The evaluations were conducted in accordance with the framework criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), a recognized control model, and the requirements of National Instrument 52-109, Certification of Disclosures in Issuers’ Annual and Interim Filings.
Forward-Looking Information This annual report and management’s discussion and analysis contain “forward-looking information” within the meaning of applicable securities legislation. Although the forward-looking information is based on what the Company believes are reasonable assumptions, current expectations, and estimates, investors are cautioned from placing undue reliance on this information since actual results may vary from the forward-looking information. Forward-looking information may be identified by the use of forward-looking terminology such as “believe”, “intend”, “may”, “will”, “expect”, “estimate”, “anticipate”, “continue” or similar terms, variations of those terms or the negative of those terms, and the use of the conditional tense as well as similar expressions. Such forward-looking information that is not historical fact, including statements based on management’s belief and assumptions cannot be considered as guarantees of future performance. They are subject to a number of risks and uncertainties, including but not limited to future economic conditions, the markets that the Company serves, the actions of competitors, major new technological trends, and other factors, many of which are beyond the Company’s control, that could cause actual results to differ materially from those that are disclosed in or implied by such forward-looking information. The Company undertakes no obligation to update publicly any forward-looking information whether as a result of new information, future events or otherwise other than as required by applicable legislation. Important risk factors that may affect these expectations include, but are not limited to, the factors described under the section “Risks and Uncertainties”.
Additional Information about TECSYS Additional information about the Company, including copies of the continuous disclosure materials such as annual information form and the management proxy circular are available through the SEDAR website at http://www.sedar.com.
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TECSYS Annual Report 2013
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MANAGEMENT’S REPORT The consolidated financial statements of the Company included herewith as well as all the information presented in this Annual Report are the responsibility of management and have been approved by the Board of Directors. The consolidated financial statements have been prepared by management in accordance with International Financial Reporting Standards (“IFRS”). The consolidated financial statements include amounts based on the use of best estimates and judgements. Management has established these amounts in a reasonable manner in order to ensure that the consolidated financial statements are fairly presented in all material respects. Management has also prepared the financial information presented elsewhere in the annual report and has ensured that it agrees with the consolidated financial statements. The Company maintains control systems for internal accounting and administration. The objective of these systems is to provide a reasonable assurance that the financial information is pertinent, reliable and accurate and that the Company’s assets are properly accounted for and safeguarded. The Board of Directors is entrusted with ensuring that management assumes its responsibilities with regard to the presentation of financial information and is ultimately responsible for the examination and approval of the financial statements. However, it is mainly through its Audit Committee, whose members are external directors, that the Board discharges this responsibility. This committee meets periodically with management and the external auditors to discuss the internal controls exercised over the process of presentation of the financial information, auditing issues and questions on the presentation of financial information, in order to assure itself that each party properly fulfills its function and also to examine the consolidated financial statements and the external auditors’ report. The consolidated financial statements have been audited on behalf of the shareholders by the external auditors, KPMG LLP for the fiscal years ended April 30, 2013 and 2012. The auditors have free and full access to internal records, to management and to the Audit Committee.
Peter Brereton President and CEO July 9, 2013
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TECSYS Annual Report 2013
Berty Ho-Wo-Cheong Vice President, Finance and Administration and Chief Financial Officer
INDEPENDENT AUDITORS’ REPORT To the Shareholders of TECSYS Inc. We have audited the accompanying consolidated financial statements of TECSYS Inc., which comprise the consolidated statements of financial position as at April 30, 2013 and April 30, 2012, the consolidated statements of comprehensive income, cash flows and changes in equity for the years then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management’s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of TECSYS Inc. as at April 30, 2013 and April 30, 2012, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards.
July 9, 2013 Montréal, Canada
*CPA auditor, CA, public accountancy permit No. A111162
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TECSYS Inc. Consolidated Statements of Financial Position (in thousands of Canadian dollars)
Note
April 30, 2013
April 30, 2012
Assets Current assets Cash and cash equivalents Accounts receivable Work in progress Other accounts receivable and derivatives Tax credits Inventory Prepaid expenses Total current assets Non-current assets Restricted cash equivalents and other investments Non-current receivables Tax credits Property and equipment Deferred development costs Other intangible assets Goodwill Deferred tax assets Total non-current assets
6
$
10 8 9
6 10 8 11 12 12 12 17
Total assets
5,348 7,959 1,291 132 4,675 545 1,153 21,103
$
5,217 8,207 645 190 2,070 696 1,177 18,202
120 39 1,219 2,928 3,317 544 2,239 710 11,116 $
32,219
160 99 1,076 2,911 2,514 362 2,239 587 9,948 $
28,150
Liabilities Current liabilities Accounts payable and accrued liabilities Loans payable Term loan Deferred revenue Total current liabilities Term loan Other non-current liabilities Total non-current liabilities Total liabilities
14 15 13
4,997 70 1,000 7,161 13,228
5,685 85 6,665 12,435
13 14
3,500 225 3,725 16,953
159 159 12,594
16 16
1,748 9,588 3,930 15,266
1,688 10,023 3,845 15,556
Equity Share capital Contributed surplus Retained earnings Total equity attributable to the owners of the Company Total liabilities and equity
$
32,219
$
28,150
See accompanying notes to the consolidated financial statements. Approved by the Board of Directors
_______________________________ Director
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TECSYS Annual Report 2013
_______________________________ Director
TECSYS Inc. Consolidated Statements of Comprehensive Income (in thousands of Canadian dollars, except per share data)
Years ended April 30, Revenue: Software products Third-party hardware and software products Services Reimbursable expenses Total revenue Cost of revenue: Products Services Reimbursable expenses Total cost of revenue
Note
2013 $
18
9,307 5,853 27,458 1,141 43,759
2012 $
7,307 7,244 24,078 873 39,502
4,263 20,072 1,141 25,476
4,944 16,234 873 22,051
Gross profit
18,283
17,451
Operating expenses: Sales and marketing General and administration Research and development, net of tax credits Other Total operating expenses
7,796 3,881 5,338 17,015
7,004 4,015 4,956 21 15,996
1,268
1,455
19
Profit from operations Finance income Finance costs Net finance costs
21 21
46 (354) (308)
37 (157) (120)
Share of net loss of equity-accounted associate Gain on sale of the investment in equity-accounted associate Profit before income taxes
10 10
960
(15) 67 1,387
Income taxes
17
75
330
Profit attributable to the owners of the Company and comprehensive income for the year Basic and diluted earnings per common share
16
$
885
$
1,057
$
0.08
$
0.09
See accompanying notes to the consolidated financial statements.
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TECSYS Inc. Consolidated Statements of Cash Flows (in thousands of Canadian dollars)
Years ended April 30, Cash flows (used in) from operating activities: Profit for the year Adjustments for: Depreciation of property and equipment Depreciation of deferred development costs Depreciation of other intangible assets Share-based compensation Net finance costs Realized foreign exchange gains and others Share of net loss of equity-accounted associate Gain on sale of the investment in equity-accounted associate Federal non-refundable research and development tax credits Income taxes Operating activities excluding changes in non-cash working capital items related to operations
Note
2013 $
11 12 12 21 10 10 8
Net cash (used in) from operating activities
Cash flows (used in) from investing activities: Short-term and other investments and restricted cash equivalents and other investments Interest received Proceeds from asset-backed commercial paper Acquisitions of property and equipment Proceeds on disposal of property and equipment Acquisitions of other intangible assets Deferred development costs Non-current receivables including the current portion of the loan from TECSYS Latin America Inc. Proceeds from disposition of the investment in equity-accounted associate Net cash (used in) from investing activities Net increase (decrease) in cash and cash equivalents during the year Cash and cash equivalents - beginning of year Cash and cash equivalents - end of year Supplementary cash flow information (note 22) See accompanying notes to the consolidated financial statements.
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TECSYS Annual Report 2013
$
907 883 162 308 109 (300) 75
Accounts receivable Work in progress Other accounts receivable Tax credits Inventory Prepaid expenses Accounts payable and accrued liabilities Deferred revenue Changes in non-cash working capital items related to operations
Cash flows from (used in) financing activities: Repayment of bank advances Repayment of loans Term loan Repayment of term loan Issuance of common shares Purchase of common shares for cancellation Purchase of share options for cancellation Payment of dividends Interest paid Net cash from (used in) financing activities
885
2012
7 15 13 13 16 16 16 16 21
21 7 11 12 12 10 10
$
1,057 789 789 119 40 120 32 15 (67) (330) 330
3,029
2,894
248 (646) (41) (2,647) 151 24 (751) 496 (3,166)
(1,347) (600) 65 (270) (516) (327) 1,421 321 (1,253)
(137)
1,641
(15) 5,000 (500) 59 (462) (328) (800) (100) 2,854
(3,720) (22) 195 (437) (347) (698) (16) (5,045)
40 46 (685) (348) (1,686)
890 37 3,584 (1,413) 4 (189) (855)
13 34 (2,586)
23 136 2,217
131 5,217 5,348
(1,187) 6,404 5,217
$
TECSYS Inc. Consolidated Statements of Changes in Equity (in thousands of Canadian dollars, except number of shares)
Note Balance, April 30, 2011
11,678,671
Profit and comprehensive income for the year Total comprehensive income for the year Repurchase of common shares Repurchase of share options Share options exercised Fair value associated with share options exercised Fair value of share options transferred to liabilities Share-based compensation Dividends to equity owners Total transactions with owners of the Company
16 16 16
16 16
Balance, April 30, 2012
Balance, April 30, 2013
16 16 16
$
1,467
Contributed surplus $
10,993
Retained earnings $
3,486
Total $
15,946
-
-
-
1,057
1,057
-
-
-
1,057
1,057
(192,800) 117,400
(25) 195
(412) (279) -
(437) (279) 195
-
51
51
-
-
(319) 40 -
(698)
(319) 40 (698)
(75,400)
221
(970)
(698)
(1,447)
$
1,688
-
-
-
11,603,271
Profit and comprehensive income for the year Total comprehensive income for the year Repurchase of common shares Share options exercised Fair value associated with share options exercised Dividends to equity owners Total transactions with owners of the Company
Share capital Number Amount
$
10,023
$
3,845
$
15,556
-
-
-
885
885
-
-
-
885
885
(187,300) 33,450
(27) 59
-
28 -
(153,850) 11,449,421
(435) -
60 $
1,748
(435) $
9,588
$
-
(462) 59
(800)
28 (800)
(800)
(1,175)
3,930
$
15,266
See accompanying notes to the consolidated financial statements.
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TECSYS Inc.
Notes to the Consolidated Financial Statements For the years ended April 30, 2013 and 2012 (in Canadian dollars, tabular amounts in thousands, except as otherwise noted)
1. Description of business: TECSYS Inc. (the “Company”) develops, markets and sells enterprise-wide supply chain management software for distribution, warehousing, and transportation logistics. The Company also provides related consulting, education and support services. The Company is headquartered at 1, Place Alexis Nihon, Montréal, Canada, and derives substantially all of its revenue from customers located in the United States and Canada. The Company’s customers consist primarily of high-volume distributors of discrete goods operating in such industries as health care, gas and welding distribution, office products, hardware, spare parts for heavy equipment, third-party logistics, industrial products, giftware and home decor, and consumer goods. 2. Basis of preparation: The Company prepares its consolidated financial statements in accordance with International Financial Reporting Standards (“IFRS”). (a) Statement of compliance: These consolidated financial statements and the notes thereto have been prepared in accordance with IFRS. The consolidated financial statements were authorized for issuance by the Board of Directors on July 9, 2013. (b) Basis of measurement: The consolidated financial statements have been prepared on a going concern basis using historical cost except for derivative instruments and the share options liability which are measured at fair value. (c) Functional and presentation currency: The consolidated financial statements are presented in Canadian dollars, the functional currency of the Company and its entities. All financial information has been rounded to the nearest thousand, except where otherwise indicated. (d) Use of estimates, assumptions and judgments: The preparation of the consolidated financial statements requires management to make estimates, assumptions, and judgments that affect the application of accounting policies and the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Reported amounts and note disclosures reflect the overall economic conditions that are most likely to occur and the anticipated measures that management intends to take. Actual results could differ from those estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. Information about areas requiring the use of judgment, management assumptions and estimates, and key sources of estimation uncertainty that the Company believes could have the most significant impact on reported amounts is noted below: (i) Revenue recognition: A portion of the Company’s revenue is recognized on a percentage-of-completion basis. In this regard, estimates are required in determining the level of advancement and in determining the costs to complete the deliverables. In addition, revenue recognition is also subject to critical judgment, particularly in multiple-element arrangements where judgment is required in allocating revenue to each component, including licenses, professional services and maintenance services, based on the relative fair value of each component. As certain of these components have a term of more than one year, the identification of each deliverable and the allocation of the consideration received to the components impacts the timing of revenue recognition. (ii) Government assistance: Management uses judgment in estimating amounts receivable for various tax credits and in assessing the eligibility of research and development expenses.
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TECSYS Annual Report 2013
TECSYS Inc.
Notes to the Consolidated Financial Statements For the years ended April 30, 2013 and 2012 (in Canadian dollars, tabular amounts in thousands, except as otherwise noted)
(iii) Income taxes: In assessing the realizability of deferred tax assets, management considers whether it is probable that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and available tax planning strategies in making this assessment. Deferred tax assets and liabilities contain estimates about the nature and timing of future permanent and temporary differences as well as the future tax rates that will apply to those differences. Changes in tax laws and rates as well as changes to the expected timing of reversals may have a significant impact on the amounts recorded for deferred tax assets and liabilities. Management closely monitors current and potential changes to tax law and bases its estimates on the best available information at each reporting date. (iv) Impairment of assets: Impairment assessments may require the Company to determine the recoverable amount of a cash-generating unit (“CGU�), defined as the smallest identifiable group of assets that generates cash inflows independent of other assets. This determination requires significant estimates in a variety of areas including: the determination of fair value, selling costs, timing and size of cash flows, and discount and interest rates. The Company documents and supports all assumptions made in the above estimates and updates such assumptions to reflect the best information available to the Company if and when an impairment assessment requires the recoverable amount of a CGU to be determined. (v) Fair value of derivative instruments: The fair value of a derivative instrument is estimated using inputs, including forward prices, foreign exchange rates, interest rates and volatilities. These inputs are subject to change on a regular basis based on the interplay of various market forces. Consequently, the fair value of each of the Company’s derivative instruments is subject to assumptions and estimation uncertainties and can vary significantly in each reporting period. 3. Significant accounting policies: These consolidated financial statements have been prepared with the accounting policies set out below and have been applied consistently to all periods presented, unless otherwise indicated. (a) Basis of consolidation: These consolidated financial statements include the accounts of the Company and its subsidiaries. (i) Business combinations: Acquisitions on or after May 1, 2010 For acquisitions on or after May 1, 2010, the Company measures goodwill as the fair value of the consideration transferred including the recognized amount of any non-controlling interest in the acquiree, less the net recognized amount (generally fair value) of the identifiable assets acquired and liabilities assumed, all measured as of the acquisition date. Transaction costs, other than those associated with the issue of debt or equity securities, that the Company incurs in connection with a business combination are expensed as incurred. Acquisitions prior to May 1, 2010 In respect of acquisitions prior to May 1, 2010, goodwill represents the amount recognized under previous Canadian generally accepted accounting principles before the adoption of IFRS. (ii) Subsidiaries: Subsidiaries are entities controlled by the Company. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. (iii) Investment in equity-accounted associate: Associates are those entities in which the Company has significant influence, but not control, over the financial and operating policies. Significant influence is presumed to exist when the Company holds between 20% and 50% of the
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TECSYS Inc.
Notes to the Consolidated Financial Statements For the years ended April 30, 2013 and 2012 (in Canadian dollars, tabular amounts in thousands, except as otherwise noted)
voting power of another entity. Investments in associates are accounted for using the equity method and are recognized initially at cost. The investment in TECSYS Latin America Inc. (“TLA”) was accounted for using the equity method until its disposal. During the fourth quarter of fiscal 2012, the Company sold its 30% equity interest in TLA to the majority shareholder of that company (note 10). The Company’s investment included goodwill identified on acquisition, net of any accumulated impairment losses. The consolidated financial statements included the Company’s share of the income and expenses and equity movements of the equity-accounted associate, after adjustments to align the accounting policies with those of the Company, from the date that significant influence commenced until the date that it ceased. When the Company’s share of losses exceeds its interest in an equity-accounted associate, the carrying amount of that interest is reduced to nil, and the recognition of further losses is discontinued to the extent that the Company has no obligation to make payments on behalf of the investee. The Company had no obligation to fund TLA. (iv) Transactions eliminated on consolidation: Inter-company balances and transactions, and any unrealized income and expenses arising from inter-group transactions, are eliminated in preparing the consolidated financial statements. Unrealized gains arising from transactions with the equity-accounted associate are eliminated against the investment to the extent of the Company’s interest in the associate. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment.
(b) Foreign currency translation: The functional currency of the Company’s foreign subsidiaries is the Canadian dollar, the Company’s functional currency. As such, transactions in foreign currencies are translated as follows: •
Revenues and expenses are translated at the exchange rate in effect as at the date of the transaction;
•
Monetary assets and liabilities are translated into the functional currency at the exchange rate at the reporting date;
•
Non-monetary items measured at historical cost are translated using the historical exchange rate at the date of the transaction. Depreciation is translated at the same rate as the asset to which it applies;
•
Non-monetary assets and liabilities measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined;
•
Foreign currency gains or losses on monetary items is the difference between amortized cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortized cost of foreign currency translated at the exchange rate at the end of the period.
•
Currency translation gains and losses are reflected in finance income or finance costs in profit or loss for the period.
(c) Inventory: Inventory is stated at the lower of cost and net realizable value. Cost is determined on an average cost basis. Inventory costs include the purchase price and other costs directly related to the acquisition of materials, and other costs incurred in bringing the inventories to their present location and condition. Net realizable value is the estimated selling price in the ordinary course of business less selling expenses. (d) Financial instruments: (i) Financial assets and liabilities are initially recognized at fair value and classified at inception as either fair value through profit or loss, available-for-sale, held-to-maturity, loans and receivables or other financial liabilities when the Company becomes a party to the contract. The Company has made the following classifications: •
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Cash and cash equivalents, restricted cash equivalents and other investments, accounts receivable, other accounts receivable and non-current receivables are classified as loans and receivables;
TECSYS Annual Report 2013
TECSYS Inc.
Notes to the Consolidated Financial Statements For the years ended April 30, 2013 and 2012 (in Canadian dollars, tabular amounts in thousands, except as otherwise noted)
•
Accounts payable and accrued liabilities, loans payable, and the term loan are classified as other financial liabilities;
•
The Company does not have financial instruments designated as available-for-sale or held-to-maturity.
The Company must classify the fair value measurements of financial instruments according to a three-level hierarchy, based on the type of inputs used in making these measurements. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. Transaction costs are expensed as incurred for financial assets classified as fair value through profit or loss. For other non-derivative financial assets and liabilities, transaction costs are added to the initial fair value on initial recognition and are presented against the underlying financial instruments. In subsequent periods, non-derivative financial assets and financial liabilities designated as fair value through profit or loss are measured at fair value with changes in those fair values included in profit or loss for the period. Loans and receivables are measured at amortized cost using the effective interest method of amortization less any impairment losses. Other financial liabilities are measured at amortized cost using the effective interest method. (ii) Cash and cash equivalents: Cash and cash equivalents consist primarily of unrestricted cash and short-term investments having an initial maturity of three months or less. (iii) Short-term and other investments: Short-term and other investments consist of investments having an initial maturity of greater than three months but less than one year. (iv) Derivative financial instruments: Derivative financial instruments, including the forward foreign exchange contracts, are recorded as either assets or liabilities measured initially at their fair value. Attributable transaction costs are recognized in profit or loss as incurred. The net fair value of outstanding forward foreign exchange contracts are included as part of the accounts designated “other accounts receivable and derivatives” or “accounts payable and accrued liabilities” as appropriate. Any subsequent change in the fair value of outstanding forward foreign exchange contracts are accounted for in finance income or finance cost in profit or loss for the period in which it arises. The foreign currency gains and losses on these contracts are recognized in the period in which they are generated and offset the exchange losses or gains recognized on the revaluation of the foreign currency net monetary assets. Cash flows from forward foreign exchange contract settlements are classified as cash flows from operating activities along with the corresponding cash flows from the monetary assets being economically hedged. The Company has not designated any hedging relationships. Accordingly, the Company does not use hedge accounting. (v) Impairment of financial assets: A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there is objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably. Objective evidence that financial assets are impaired can include default or delinquency by a debtor, restructuring of an amount due to the Company on terms that the Company would not consider otherwise, indications that a debtor or issuer will enter bankruptcy, or the disappearance of an active market for a security. An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the asset’s original effective interest rate. Losses are recognized in profit or loss and reflected in an allowance account against the asset. Interest on the impaired asset continues to be recognized through the unwinding of the discount. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss.
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TECSYS Inc.
Notes to the Consolidated Financial Statements For the years ended April 30, 2013 and 2012 (in Canadian dollars, tabular amounts in thousands, except as otherwise noted)
(e) Property and equipment: Property and equipment are carried at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. Purchased software that is integral to the functionality of the related equipment is capitalized as part of that equipment. Gains and losses on disposal of an item of property and equipment are determined by comparing the proceeds from disposal with the carrying amount of property and equipment, and are recognized net within profit or loss. Subsequent costs The cost of replacing a part of an item of property and equipment is recognized in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Company, and its cost can be measured reliably. The carrying amount of the replaced part is derecognized. Costs of the day-to-day servicing of property and equipment are recognized in profit or loss as incurred. Depreciation Depreciation is calculated over the depreciable amount, which is the cost of an asset, or other amount substituted for cost, less its residual value. The Company provides for depreciation of property and equipment commencing once the related assets have been put into service. Depreciation is recognized in profit or loss on a straight-line basis since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. The Company uses the following methods and periods to calculate depreciation: Method
Period
Computer and exhibition equipment
Straight-line
2 to 5 years
Furniture and fixtures
Straight-line
10 years
Leasehold improvements
Straight-line Lower of term of lease or economic life
Depreciation methods, useful lives and residual values are reviewed at each financial period-end and adjusted if appropriate. (f) Intangible assets: (i) Goodwill: Goodwill is measured at cost less accumulated impairment loss. In respect of equity-accounted investments, the carrying amount of goodwill is included in the carrying amount of the investment, and an impairment loss on such an investment is not allocated to any asset, including goodwill, that forms part of the carrying amount of the equity-accounted investment. In respect of acquisitions prior to May 1, 2010, goodwill is included on the basis of its deemed cost, which represents the amount recorded under previous Canadian generally accepted accounting principles before the adoption of IFRS. (ii) Research and development costs: Costs related to research are expensed as incurred. Development costs of new software products for sale, net of government assistance, are capitalized as deferred development costs if they can be measured reliably, the product is technically and commercially feasible, future economic benefits are probable and the Company intends to and has sufficient resources to complete development and to use or sell the product. Otherwise, development costs are expensed as incurred. Expenditures capitalized include the cost of materials, direct labour, overhead costs that are directly attributable to preparing the asset for its intended use, and borrowing costs on qualifying assets for which the commencement date for capitalization is on or after May 1, 2010, if any. Deferred development costs are depreciated, commencing when the product is available for general release and sale, over the estimated product life using the straight-line method over five years.
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TECSYS Annual Report 2013
TECSYS Inc.
Notes to the Consolidated Financial Statements For the years ended April 30, 2013 and 2012 (in Canadian dollars, tabular amounts in thousands, except as otherwise noted)
Subsequent to initial measurement, deferred development costs are stated at cost less accumulated depreciation and accumulated impairment losses. (iii) Other intangible assets: Other intangible assets consist of technology, customer relationships and software acquired for internal use and are carried at cost less accumulated depreciation and accumulated impairment losses. All intangible assets have finite useful lives and are therefore subject to depreciation. Depreciation is calculated over the cost of the asset, or other amount substituted for cost, less its residual value. The Company provides for depreciation of the technology, customer relationships and software acquired for internal use on a straight-line method over their estimated useful lives of five years. Depreciation methods, useful lives and residual values are reviewed at each financial period-end and adjusted if appropriate. (g) Impairment of non-financial assets: The Company reviews the carrying value of its non-financial assets, which include property and equipment, technology, customer relationships, software acquired for internal use, and deferred development costs at each reporting date to determine whether events or changed circumstances indicate that the carrying value may not be recoverable. For goodwill, the recoverability is estimated annually, on April 30 or more often when there are indicators of impairment. For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the “cash-generating unit, or CGU”). For the purposes of goodwill impairment testing, goodwill acquired in a business combination is allocated to the CGU, or the group of CGUs, that is expected to benefit from the synergies of the combination. This allocation is subject to an operating segment ceiling test and reflects the lowest level at which that goodwill is monitored for internal reporting purposes. The Company’s corporate assets do not generate separate cash inflows. If there is an indication that a corporate asset may be impaired, then the recoverable amount is determined for the CGU to which the corporate asset belongs. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. An impairment loss is recognized if the carrying value of a non-financial asset exceeds the recoverable amount. Impairment losses are recognized in profit or loss. Impairment losses recognized in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the unit, and then to reduce the carrying amounts of the other assets in the CGU on a pro rata basis. An impairment loss in respect of goodwill is not reversed. In respect of other non-financial assets, impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation, if no impairment loss had been recognized. Goodwill that forms part of the carrying amount of an investment in an associate is not recognized separately, and therefore is not tested for impairment separately. Instead, the entire amount of the investment in an associate is tested for impairment as a single asset when there is objective evidence that the investment in an associate may be impaired. (h) Government assistance: Government assistance consists of scientific research and experimental development tax credits (“SRED”) and refundable e-business tax credits. SRED and other tax credits are accounted for as a reduction of the related expenditures and recorded when there is reasonable assurance that the Company has complied with the terms and conditions of the approved government program. The refundable portion of tax credits is recorded in the period in which the related expenditures are incurred. The nonrefundable portion of tax credits is recorded in the period in which the related expenditures are incurred or in a subsequent period to the extent that their future realization is determined to be probable, provided the Company has reasonable assurance the credits will be received and the Company will comply with the conditions associated with the award.
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TECSYS Inc.
Notes to the Consolidated Financial Statements For the years ended April 30, 2013 and 2012 (in Canadian dollars, tabular amounts in thousands, except as otherwise noted)
SRED and other tax credits claimed for the current and prior years are subject to government review which could result in adjustments to profit or loss. (i) Provisions: A provision is recognized if, as a result of a past event, the Company has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognized as a finance cost. (j) Leases: All of the Company’s leases are operating leases. The leased assets are not recognized in the Company’s consolidated statements of financial position since the Company does not assume substantially all risks and rewards of ownership of the leased assets. Payments made under operating leases are recognized in profit or loss on a straight-line basis over the term of the leases. Lease incentives are recognized as an integral part of the total lease expense, over the term of the leases. The deferred portion of the lease expense is included in accounts payable and accrued liabilities and other non-current liabilities. (k) Income taxes: Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognized in profit or loss except to the extent that it relates to a business combination, or items recognized directly in equity or in other comprehensive income. Current tax is the expected tax payable or receivable on the taxable income or loss for the period, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously. A deferred tax asset is recognized for unused tax losses and deductible temporary differences to the extent that it is probable that future taxable profits will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting period and are reduced to the extent that it is no longer probable that the related tax benefit will be realized. (l) Revenue recognition: The Company derives its revenues under non-cancellable license agreements from the sale of proprietary software licenses, third-party software, support, and hardware and provides software-related services including training, installation, consulting and maintenance, which include product support services and periodic updates. Software licenses sold by the Company are generally perpetual in nature and the arrangements generally comprise various services. Revenues generated by the Company include the following: (i) License fees and hardware products: Revenues from perpetual licenses sold separately are recognized when a non-cancellable agreement has been signed, the product has been delivered, there are no uncertainties surrounding product acceptance, the fees are fixed or determinable and the amount of revenue and costs can be measured reliably, and collection is considered probable such that economic benefits associated with the transaction will flow to the Company. Delivery generally occurs at the point where title and risk of loss have passed to the customer and the Company no longer retains continuing managerial involvement or effective control over the products sold. However, some arrangements require evidence of customer acceptance of the hardware and software products that have been sold. In such cases, delivery of the hardware, software and services is not considered to have occurred until evidence of acceptance is received from the customer or the Company has completed its contractual obligations.
56
TECSYS Annual Report 2013
TECSYS Inc.
Notes to the Consolidated Financial Statements For the years ended April 30, 2013 and 2012 (in Canadian dollars, tabular amounts in thousands, except as otherwise noted)
Certain of the Company’s license agreements require the customer to renew its annual support agreement in order to maintain its right to continue to use the software. In such cases, the perpetual license is effectively transformed into a renewable annual license. Where an upfront fee is not considered to represent a significant and incremental premium over subsequent year renewal fees, the license fee is recognized ratably over the initial contractual support period, which is generally one year. An upfront license fee representing a significant and incremental premium over subsequent year renewal fees is deferred and recognized as revenue over the period in which support is expected to be provided, which is generally considered to be the estimated useful life of the software license. For long-term contracts where services are considered to be essential to the functionality of the software, fees from licenses and services are aggregated and recognized as revenue as the related services are performed using the percentage-of-completion method. The percentage of completion is generally determined based on the number of hours incurred to date in relation to the total expected hours of services. The cumulative impact of any revision in estimates of the percentage completed is reflected in the period in which the changes become known. Losses on contracts in progress are recognized when known. Work in progress is established for revenue based on the percentage completed in excess of progress billings as of the reporting date. Any excess of progress billings over revenue based on the percentage completed is deferred and included in deferred revenue. Generally, the terms of long-term contracts provide for progress billings based on completion of certain phases of work. Where acceptance criteria are tied to specific milestones, and the delivery performance of any undelivered product or service is uncertain and not substantially within the Company’s control, then the percentage of completion up to those milestones is recognized upon acceptance. (ii) Support agreements: Support agreements for proprietary software licences generally call for the Company to provide technical support and unspecified software updates to customers. Proprietary licenses support revenues for technical support and unspecified software update rights are recognized ratably over the term of the support agreement. Third-party support revenues related to third-party software and the related cost are generally recognized upon the delivery of the third-party products as the support fee is included with the initial licensing fee, the support included with the initial license is for one year or less, and the estimated cost of providing support during the arrangement is insignificant. In addition, unspecified upgrades for third-party support agreements historically have been and are expected to continue to be minimal and infrequent. (iii) Consulting and training services: The Company provides consulting and training services to its customers. Revenues from such services are recognized as the services are performed. (iv) Reimbursable expenses: The Company records revenue and the associated cost of revenue on a gross basis in its statements of comprehensive income for reimbursable expenses such as airfare, hotel lodging, meals, automobile rental and other charges related to providing services to its customers. (v) Multiple-element arrangements: Some of the Company’s sales involve multiple-element arrangements that include product (software and/or hardware), maintenance and various professional services. The Company evaluates each deliverable in an arrangement to determine whether such deliverable would represent a separate component. Most of the Company’s products and services qualify as separate components and revenue is recognized when the applicable revenue recognition criteria, as described above, are met. In multiple-element arrangements, the Company separately accounts for each product or service according to the methods described when the following conditions are met:
• the delivered product or service has value to the customer on a stand-alone basis; • there is objective and reliable evidence of fair value of any undelivered product or service; • if the sale includes a general right of return relating to a delivered product or service, the delivery performance of any undelivered product or service is probable and substantially in the Company’s control.
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TECSYS Inc.
Notes to the Consolidated Financial Statements For the years ended April 30, 2013 and 2012 (in Canadian dollars, tabular amounts in thousands, except as otherwise noted)
If there is objective and reliable evidence of fair value for all products and services in a sale, the total price of the arrangements is allocated to each product and service based on relative fair value. Otherwise, the Company first allocates a portion of the total price to any undelivered products and services based on their fair value and the remainder to the products and services that have been delivered. (m) Employee benefits: The Company maintains employee benefit programs which provide retirement savings, medical, dental and group insurance benefits for current employees. The Company’s expense is limited to the employer’s match of employees’ contributions to a retirement savings plan, and to the employer’s share of monthly premiums for insurance covering other benefits. The Company has no legal or constructive obligation to pay further amounts. An employee’s entitlement to all benefits ceases upon termination of employment with the Company. (i) Short-term employee benefits: Short-term employee benefits include wages, salaries, compensated absences, medical, dental and insurance benefits, profit-sharing and bonuses. Short-term employee benefits are measured on an undiscounted basis and are recognized in profit or loss as the related service is provided or capitalized if the related service is rendered in connection with creation of property and equipment or intangible assets. A liability is recognized for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Company has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee, and the obligation can be estimated reliably. (ii) Defined contribution plans: Post-employment benefits include defined contribution plans under which the Company pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution plans are recognized as an employee benefit expense when earned by the employee. The Company’s defined contribution plans comprise the Quebec and Canada Pension Plans, the U.S. 401(k) plan, and registered retirement savings plans. (iii) Termination benefits: Termination benefits are recognized as an expense when the Company is committed demonstrably, without realistic possibility of withdrawal, to a formal detailed plan or through a contractual agreement, to either terminate employment before the normal retirement date, or to provide termination benefits as a result of an offer made to encourage voluntary redundancy. Termination benefits for voluntary redundancies are recognized as an expense if the Company has made an offer of voluntary redundancy, it is probable that the offer will be accepted, and the number of acceptances can be estimated reliably. If benefits are payable more than 12 months after the reporting period, then they are discounted to their present value. (n) Finance income and finance costs: Finance income comprises interest income on funds invested and gains in the fair value of financial assets held at fair value through profit or loss. Interest income is recognized as it accrues in profit or loss, using the effective interest method. Finance costs comprise interest expense on financial liabilities measured at amortized cost, losses in fair value of financial assets and liabilities recognized at fair value through profit or loss, unwinding of the discount related to provisions, and any losses on sale of financial assets. Borrowing costs that are not directly attributable to the acquisition or production of a qualifying asset are recognized in profit or loss using the effective interest method. Foreign currency gains and losses are reported on a net basis as finance income or finance costs. The net change in the fair value of foreign exchange contracts and the employee share options liability are reported as finance income or finance costs, as appropriate. (o) Share-based payment transactions: Effective May 1, 2011, the Company has discontinued the practice of granting share options.
58
TECSYS Annual Report 2013
TECSYS Inc.
Notes to the Consolidated Financial Statements For the years ended April 30, 2013 and 2012 (in Canadian dollars, tabular amounts in thousands, except as otherwise noted)
Share-based payment transactions were accounted for using the fair value based method to account for share options granted to employees. Under the fair value based method, compensation cost was measured at fair value at the date of grant and was expensed over the award’s vesting period with a corresponding credit to contributed surplus. The share options were accounted for using graded vesting, whereby the fair value of each tranche was recognized over its respective vesting period. Forfeitures were estimated upfront. The amount recognized as an expense was adjusted to reflect the number of awards for which the related service vesting conditions were expected to be met, such that the amount ultimately recognized as an expense was based on the number of awards that met the related service conditions at the vesting date. Upon the exercise of the options, any consideration received from plan participants was credited to share capital and the share-based compensation originally credited to contributed surplus was reclassified to share capital. On September 8, 2011, the Company passed a resolution to vest all outstanding unvested share options and to allow share option holders the privilege to cash settle their share options at their option, no longer subject to the Company’s approval. The outstanding options continue to be governed by the share option plan. The Company’s decision to grant the share option holders the privilege to cash settle their share options, at their option, effectively transformed the share options into compound financial instruments. As such, on September 8, 2011, the Company reclassified $319,000 from contributed surplus to accounts payable and accrued liabilities, representing the fair value of 540,941 share options outstanding at that time. The fair value of the outstanding share options was determined based on the Company closing share price on September 8, 2011 which was $2.20. Share options exercised for purchasing shares rather than cash settlement will result in the reclassification of the fair value of the share options, at the time of exercise, to share capital. The Company revalues the share options liability at each reporting date and any change in the liability is reflected as finance income or finance costs in the consolidated statements of comprehensive income, as appropriate. (p) Earnings per share: Basic earnings per share is calculated using the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated based on the weighted average number of common shares outstanding during the period plus the effects of dilutive potential common shares outstanding during the period. This method requires that the dilutive effect of outstanding options be calculated as if all dilutive options had been exercised at the later of the beginning of the reporting period or date of issuance, and that the funds obtained thereby be used to purchase common shares of the Company at the average trading price of the common shares during the period. (q) Share capital: Common shares are classified as equity. Incremental costs directly attributable to the issuance of common shares are recognized as a deduction from equity, net of any tax effects. (r) Segment reporting: An operating segment is a component of the Company that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Company’s other components. The operating segment’s operating results are reviewed regularly by the Company’s Chief Operating Decision Maker (“CODM”) to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. Segment results that are reported to the CODM include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly of corporate assets (primarily the Company’s headquarters), head office expenses, and income tax assets and liabilities. Segment capital expenditure is the total cost incurred during the period to acquire property and equipment and intangible assets other than goodwill.
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TECSYS Inc.
Notes to the Consolidated Financial Statements For the years ended April 30, 2013 and 2012 (in Canadian dollars, tabular amounts in thousands, except as otherwise noted)
4. New accounting standards adopted in 2013: On October 7, 2010, the IASB issued amendments to IFRS 7, Financial Instruments: Disclosures, which increase the disclosure requirements for transactions involving the transfers of financial assets to help users of financial statements evaluate the risk exposures related to such transfers and the effect of those risks on an entity’s financial position. These amendments are effective and have been adopted in the first quarter of 2013 commencing May 1, 2012. The Company has determined that the amendments to IFRS 7 did not have a material impact on the Company’s consolidated financial statements. 5. New accounting standards and interpretations issued but not yet adopted: A number of new standards, interpretations and amendments to existing standards were issued by the IASB or International Financial Reporting Interpretations Committee (“IFRIC”) that are mandatory but not yet effective for the year ended April 30, 2013, and have not been applied in preparing these consolidated financial statements. None are expected to have an impact on the consolidated financial statements of the Company except for: International Financial Reporting Standards
Effective for annual periods starting on or after
IFRS 9, Financial Instruments
January 1, 2015
IFRS 10, Consolidated Financial Statements
January 1, 2013
IFRS 12, Disclosure of Interests in Other Entities
January 1, 2013
IFRS 13, Fair Value Measurement
January 1, 2013
Early adoption is permitted for IFRS 10, 12, and 13 IFRS 9, Financial Instruments (“IFRS 9”), will ultimately replace IAS 39, Financial Instruments: Recognition and Measurement (“IAS 39”). The replacement of IAS 39 is a three-phase project with the objective of improving and simplifying the reporting for financial instruments. The issuance of IFRS 9 in November 2009 was the first phase of the project, which provides guidance on the classification and measurement of financial assets and financial liabilities. The Company intends to adopt IFRS 9 in its consolidated financial statements for the annual period beginning May 1, 2015. IFRS 10, Consolidated Financial Statements (“IFRS 10”), establishes principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities. IFRS 10 replaces the consolidation requirements in SIC12, Consolidation - Special Purpose Entities and IAS 27, Consolidated and Separate Financial Statements. The Company intends to adopt IFRS 10 in its consolidated financial statements for the annual period beginning May 1, 2013. IFRS 12, Disclosure of Interests in Other Entities (“IFRS 12”), is a new and comprehensive standard on disclosure requirements for all forms of interests in other entities, including subsidiaries, joint arrangements, associates and unconsolidated structured entities. The Company intends to adopt IFRS 12 in its consolidated financial statements for the annual period beginning May 1, 2013. IFRS 13, Fair Value Measurement (“IFRS 13”), provides new guidance on fair value measurement and disclosure requirements. The Company intends to adopt IFRS 13 in its consolidated financial statements for the annual period beginning May 1, 2013. The Company is in the process of determining the extent of the impact of these standards on the Company’s consolidated financial statements.
60
TECSYS Annual Report 2013
TECSYS Inc.
Notes to the Consolidated Financial Statements For the years ended April 30, 2013 and 2012 (in Canadian dollars, tabular amounts in thousands, except as otherwise noted)
6. Cash and cash equivalents: Cash and cash equivalents, including restricted cash equivalents and other investments, comprise the following: April 30, 2013 Bank balances Short-term investments with initial maturities of three months or less Cash and cash equivalents, including restricted cash equivalents and other investments
$
April 30, 2012 $
$
1,772 3,696 5,468
$
1,948 3,429 5,377
Presented as: Current Cash and cash equivalents
$
5,348
$
5,217
Non-current Restricted cash equivalents and other investments
$
120
$
160
On April 30, 2013, short-term investments with maturities of three months or less bear interest at rates from 0.75% to 1.23% (April 30, 2012 – 0.75% to 1.28%) and mature on various dates to July 29, 2013. On April 30, 2013, the Company is obligated to provide a short-term investment of $120,000 (April 30, 2012 – $160,000), earning interest income at 0.75%, as security for an outstanding letter of guarantee in favour of one of the Company’s landlords. The letter of guarantee must be renewed through the first five years of the lease term which commenced in April 2010. As such, since the expiration of the letter of guarantee is beyond one year, these investments were classified as non-current restricted cash equivalents and other investments. 7. Asset-backed commercial paper: In fiscal 2012, during the month of May 2011, the Company sold the asset-backed commercial paper comprising MAV2 restructured long-term notes to a third-party for cash proceeds of $3,584,000 realizing the carrying value reported on April 30, 2011. During the same month, the Company repaid its revolving credit facility in full for approximately $3,720,000 as this line of credit was partially secured by the MAV2 restructured notes. The credit facility was terminated and cancelled. 8. Government assistance: The Company is eligible to receive scientific research and experimental development (“SRED”) tax credits granted by the Canadian federal government (“Federal”) and the governments of the provinces of Quebec and Ontario (“Provincial”). Federal SRED tax credits, which are non-refundable, are earned on qualified Canadian SRED expenditures and can only be used to offset Federal income taxes otherwise payable. Provincial SRED tax credits, which are refundable, are earned on qualified SRED salaries in the provinces of Quebec and Ontario. A refundable tax credit for the development of e-business information technologies was introduced in Quebec in 2008. This tax credit is granted to eligible corporations on salaries paid to eligible employees carrying out eligible activities. The credits are earned at an annual rate of 30% of salaries paid to eligible employees engaged in eligible activities, to a maximum annual tax credit of $20,000 per eligible employee. The Company must obtain an eligibility certificate each year confirming that it has satisfied the criteria relating to the proportion of the activities in the information technology sector and for the services supplied. The Company expects to maintain its eligibility for this tax credit in fiscal 2013, as it did for fiscal 2012.
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61
TECSYS Inc.
Notes to the Consolidated Financial Statements For the years ended April 30, 2013 and 2012 (in Canadian dollars, tabular amounts in thousands, except as otherwise noted)
SRED Canadian Federal nonrefundable tax credits
SRED Canadian Provincial refundable tax credits
E-business tax credits
Total
Balance, April 30, 2011 Tax credits received Tax credits recognized in profit (loss)
$
1,360 (314) 330
$
118 (129) 122
$
1,382 (1,398) 1,675
$
2,860 (1,841) 2,127
Balance, April 30, 2012 Tax credits received Tax credits recognized in profit (loss)
$
1,376 (198) 300
$
111 153
$
1,659 2,493
$
3,146 (198) 2,946
Balance, April 30, 2013
$
1,478
$
264
$
4,152
$
5,894
Presented as: Current Tax credits
$
259
$
264
$
4,152
$
4,675
Non-current Tax credits
$
1,219
$
-
$
-
$
1,219
The amounts recorded as receivable are subject to a government tax audit and the final amounts received may differ from those recorded. There are no unfulfilled conditions or contingencies associated with the government assistance received. On April 30, 2013, the Company has non-refundable research and development tax credits totalling approximately $7,016,000 (April 30, 2012 – $7,125,000) for Canadian income tax purposes which may be used to reduce taxes payable in future years. These Federal non-refundable tax credits may be claimed no later than fiscal years ending April 30: Federal nonrefundable tax credits $ 727 1,172 1,635 1,139 999 160 204 173 143 165 154 86 94 73 92 $ 7,016
2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033
62
TECSYS Annual Report 2013
TECSYS Inc.
Notes to the Consolidated Financial Statements For the years ended April 30, 2013 and 2012 (in Canadian dollars, tabular amounts in thousands, except as otherwise noted)
Management believes that it is probable that the Company will claim available non-refundable research and development tax credits in future years to reduce Canadian Federal income taxes otherwise payable of at least $1,478,000. These tax credits have been recognized as current assets of $259,000 and non-current assets of $1,219,000 in the consolidated statement of financial position. Tax credits recognized in profit and loss for the years are outlined below: Years ended April 30, Federal non-refundable research and development tax credits: Future years Provincial refundable research and development tax credits E-business tax credits for research and development employees Other and adjustments to prior year’s credits Total research and development tax credits E-business tax credits for other employees Tax credits recognized in the year
2013 $
$
2012
300 153 800 35 1,288
$
1,658 2,946
$
330 122 684 29 1,165 991 2,156
9. Inventory: Finished goods Third-party software licenses for resale
April 30, 2013 $ $
April 30, 2012
106 439 545
$ $
114 582 696
In fiscal 2013, changes in finished goods and third-party software licenses for resale recognized as cost of revenue amounted to $3,171,000 (2012 – $3,696,000). During fiscal 2013, the Company wrote-down the carrying amount of finished goods and third-party software licenses for resale inventory for obsolescence charging the cost of revenue for products for $132,000 (2012 – $64,000). 10. Investment in equity-accounted associate: The Company had a 30% equity interest in TECSYS Latin America Inc. (“TLA”) at May 1, 2011. During the fourth quarter of fiscal 2012, the Company sold its full equity interest for a total consideration of US$275,000 (CA$272,000), of which US$137,500 (CA$136,000) was received at the time of the execution of the share purchase agreement, and the balance of US$137,500 (CA$136,000), bearing interest at a rate of 3.5% per annum, is receivable over eleven equal quarterly installments commencing July 31, 2012 and ending on January 31, 2015. At April 30, 2013, US$39,000 (CA$39,000) (April 30, 2012 – US$89,000 (CA$88,000)) of the balance of sale is included in non-current receivables and US$62,000 (CA$63,000) (April 30, 2012 – US$48,500 (CA$48,000)) was included in other accounts receivable. The changes in the Canadian dollar carrying amount of the investment in TLA are as follows: Balance - April 30, 2011 Share of net loss of equity-accounted associate Disposition of equity interest
$
Balance - April 30, 2012
220 (15) (205) -
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63
TECSYS Inc.
Notes to the Consolidated Financial Statements For the years ended April 30, 2013 and 2012 (in Canadian dollars, tabular amounts in thousands, except as otherwise noted)
The Company recorded a gain of $67,000, net of selling expenses, on the disposition of its 30% equity interest in TLA in fiscal 2012. Under the terms of the original purchase agreement when the Company acquired its equity interest in TLA, the Company committed to advance funds to TLA as loans for an aggregate of US$250,000. Loans under this commitment earn interest at 5% per annum and are repayable over four years commencing six months following each loan. The Company provided five loans of US$50,000 each at various dates from 2007 to 2010. The outstanding loan receivable was US$13,000 (CA$14,000) as at April 30, 2013 (April 30, 2012 – US$27,000 (CA$27,000)), of which nil (April 30, 2012 – $11,000) was included in non-current receivables and $14,000 (April 30, 2012 – $16,000) was included in other accounts receivable. 11. Property and equipment: Property and equipment comprise the following: Computer and exhibition equipment
Cost Balance at April 30, 2011 Additions Disposals Write-off of fully depreciated assets no longer in use
$
Additions
Accumulated depreciation Balance at April 30, 2011 Depreciation for the year Disposals Write-off of fully depreciated assets no longer in use
$
(40)
Balance at April 30, 2012
Balance at April 30, 2013
5,568 699 -
Furniture and fixtures
Leasehold improvements
1,163 301 (468)
$
1,000 457 (160)
Total
$
7,731 1,457 (628)
-
-
6,227
996
1,297
8,520
375
232
317
924
$
6,602
$
$
4,465 619 -
$
(40)
1,228
770 64 (443)
$
$
1,614
228 106 (160)
-
-
(40)
$
9,444
$
5,463 789 (603) (40)
Balance at April 30, 2012
5,044
391
174
5,609
Depreciation for the year
653
95
159
907
Balance at April 30, 2013
$
5,697
$
486
$
333
$
6,516
Carrying amounts At April 30, 2012 At April 30, 2013
$ $
1,183 905
$ $
605 742
$ $
1,123 1,281
$ $
2,911 2,928
At April 30, 2013, all present and future moveable assets, including property and equipment, are subject to a first-ranking general hypothec of $2,375,000 (April 30, 2012 – $1,675,000) and a second-ranking general hypothec of $10,000,000 to secure banking facilities (note 13).
64
TECSYS Annual Report 2013
TECSYS Inc.
Notes to the Consolidated Financial Statements For the years ended April 30, 2013 and 2012 (in Canadian dollars, tabular amounts in thousands, except as otherwise noted)
12. Goodwill, deferred development costs, and other intangible assets: The changes in the carrying amount of goodwill, deferred development costs, and other intangible assets are as follows: Goodwill
Cost Balance at April 30, 2011 Additions
Deferred development costs
Other Intangible assets Technology Customer Other intangible Total of other relationships assets intangible assets
Software acquired for internal use
$
2,804 -
$
3,791 855
$
2,816 193
$
1,613 -
$
1,732 -
$
167 -
$
6,328 193
Balance at April 30, 2012 Additions
$
2,804 -
$
4,646 1,686
$
3,009 344
$
1,613 -
$
1,732 -
$
167 -
$
6,521 344
Balance at April 30, 2013
$
2,804
$
6,332
$
3,353
$
1,613
$
1,732
$
167
$
6,865
Accumulated depreciation Balance at April 30, 2011 $ Depreciation for the year
565
$
1,343
$
2,528
$
1,613
$
1,732
$
167
$
6,040
Balance at April 30, 2012
565
$
Depreciation for the year
-
789
$
-
2,132
119
$
883
2,647
-
$
162
1,613
-
$
-
1,732
-
$
-
167
119
$
-
6,159
162
Balance at April 30, 2013
$
565
$
3,015
$
2,809
$
1,613
$
1,732
$
167
$
6,321
Carrying amounts At April 30, 2012 At April 30, 2013
$ $
2,239 2,239
$ $
2,514 3,317
$ $
362 544
$ $
-
$ $
-
$ $
-
$ $
362 544
Depreciation for deferred development costs is recognized in research and development, net of tax credits within the consolidated statements of comprehensive income. The remaining amortization period for deferred development costs at the end of the fiscal periods presented is a maximum of five years. Depreciation for technology, customer relationships, and other intangible assets was recognized in cost of revenue for products. Technology, customer relationships, and other intangible assets were fully depreciated as at April 30, 2011. Depreciation for software acquired for internal use is recognized within the various functions utilizing the assets. The remaining amortization period for software acquired for internal use is a maximum of five years as at April 30, 2013.
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65
TECSYS Inc.
Notes to the Consolidated Financial Statements For the years ended April 30, 2013 and 2012 (in Canadian dollars, tabular amounts in thousands, except as otherwise noted)
The following table reflects the depreciation recognized for deferred development costs and software acquired for internal use within the various functions for the years ended April 30, 2013 and 2012. Years ended April 30,
Cost of revenue: Services Sales and marketing General and administration Research and development
2013 Deferred Software development acquired for costs internal use $
$
883 883
$
$
2012 Deferred Software development acquired for costs internal use
99 14 17 32 162
$
$
789 789
$
$
70 12 13 24 119
Impairment testing for cash-generating units containing goodwill For the purposes of impairment testing, goodwill is allocated to the cash-generating units (“CGUs”), as presented below, which represent the lowest level within the Company at which the goodwill was monitored for internal management purposes. The Enterprise CGU comprises the original parent company, the operations of the Application Solutions Inc. and Symplistech Inc., acquisitions dating back to March 1, 2005 and April 1, 2005, respectively. The SMB CGU comprises the operations of PointForce Inc. and Streamline Information Systems, acquisitions dating back to January 1, 2004 and November 30, 2007, respectively. The resulting goodwill is as follows: CGU
April 30, 2013
Enterprise SMB
$ $
535 1,704 2,239
April 30, 2012 $ $
535 1,704 2,239
The Company performs its goodwill impairment assessment on an annual basis or more frequently if there are any indications that impairment may have arisen. The recoverable amounts of the Company’s CGUs were based on their value in use without the assistance of independent valuators. The carrying amounts of the units were determined to be lower than their recoverable amounts and no impairment losses were recognized on April 30, 2013 and 2012. Value in use was determined by discounting the future cash flows generated from the continuing use of the units and was determined on the same basis as at April 30, 2013 and 2012. The carrying values of the CGUs, including the allocation of corporate property and equipment, were tested in a one-level impairment assessment as at April 30, 2013 and 2012. The calculation of the value in use was based on the following key assumptions: Cash flows were projected based on past experience, actual operating results, and the annual business plan approved by the Board of Directors prepared for the forthcoming year at the end of both fiscal 2013 and 2012. Cash flows for an additional four-year period and a terminal value were extrapolated using a constant growth rate of 5% (April 30, 2012 - 5%), which does not exceed the long-term average growth rate for the industry. A pre-tax discount rate of 12% (April 30, 2012 – 12%) was applied in determining the recoverable amount of the unit. The discount rate was estimated based on the Company’s past experience, and the consideration of the risk free rate plus the risk associated with further possible variations in the amount or timing of the cash flows, the price for uncertainty inherent in the combination of assets comprising the CGUs, and other factors, such as illiquidity, that would normally be considered in valuing the cash flows from the assets and are specific to each CGU. The values assigned to the key assumptions represent management’s assessment of future trends in the software industry and are based on both external and internal sources. The Company examined the sensitivity to changes in the key assumptions by varying the discount rates between 10% to 14% and applying a percentage factor to diminish the anticipated free cash flow from each of the CGUs to as low as 55% for the April 30, 2013 (April 30, 2012 – 57%) impairment assessment. For the Enterprise CGU, the combined application of a 55% factor to the
66
TECSYS Annual Report 2013
TECSYS Inc.
Notes to the Consolidated Financial Statements For the years ended April 30, 2013 and 2012 (in Canadian dollars, tabular amounts in thousands, except as otherwise noted)
anticipated free cash flow and a 13% discount rate begins to subject the CGU to impairment estimated at $180,000 and rises to $1,100,000 at a 14% discount rate, otherwise reasonable possible fluctuations in these key assumptions would not result in impairment. As The Company believes that its assumption of a 5 % growth rate and a 12% discount rate are sufficiently conservative, the impact of the combined application of the 55% factor to the anticipated free cash flow and the use of 13% and 14% discount rates is strictly for information purposes. Moreover, over the years since the acquisitions of PointForce Inc. in 2004 and Streamline Information Systems in 2007, the Company has integrated many functions into corporate resources that serve both CGU’s including research and development, general and administrative, and sales and marketing. In the recent past covering the last year or so customers originally from the SMB CGU are increasingly being provided support, implementation and customization services from the Enterprise CGU, as its flagship product, EliteSeries or certain modules therein, is often the optimal solution in responding to customer needs and as such the line differentiating the once independent cash flows of each of these CGU’s is becoming difficult to distinguish. As such, if the integration and interdependency trend continues as is expected, the Company foresees that future impairment tests may only be practicable at a single consolidated level. 13. Banking facilities: During October 2012, the Company completed the renegotiation and renewal of its banking agreement with a Canadian chartered bank (the “Bank”) including new credit facilities for an operating line of credit up to $5,000,000 and a term loan of $5,000,000. This banking agreement replaces the previous banking agreement. The components of the banking facilities are as follows. Facility A The banking facility permits the issuance of letters of guarantee of up to a maximum amount of $1,500,000, as was the case in the previous agreement. On April 30, 2013, $120,000 (April 30, 2012 – $160,000) of this facility was used to obtain a letter of guarantee in favour of one of the Company’s landlords and must be renewed annually through the first five years as per the term of the lease which commenced in April 2010. Facility B The facility also provides a global net risk line for treasury derivative products up to an aggregate maximum of $1,250,000 (April 30, 2012 – $1,500,000). The net risk line may be used to conclude foreign exchange transactions regarding the sale or purchase of foreign currencies for a term not exceeding one year and for a maximum amount of $1,000,000 and for derivative transactions regarding interest rate swaps for a maximum amount of $250,000. The amount of risk of each transaction shall be determined by the Bank in accordance with the applicable level of risk per the schedule in effect at the Bank. For example, a level of risk of 10% for a chosen currency transaction would equate to a maximum amount of currency that may be sold or purchased under the facility of $10,000,000. Facility C The banking agreement also includes a credit facility up to $100,000 to be used by way of cash advances on credit cards issued by the Bank. Security for facility B and C is a first-ranking movable hypothec of $2,375,000 on all of the Company’s corporeal and incorporeal, present and future movable property (April 30, 2012 – $1,675,000) and an insurance rider designating the Bank as beneficiary of the proceeds of insurance covering the property given as security up to the full replacement value thereof. Facility D Under the terms of the new banking agreement, the Company has access to an operating line of credit up to an amount not exceeding $5,000,000, in Canadian dollars or the equivalent thereof in U.S. dollars, to be used to finance the day-to-day operations of the Company. Floating-rate advances shall bear interest at the Canadian prime rate of the Bank per annum and advances in U.S. dollars shall bear interest at the U.S. base rate at the Bank per annum. Floating rate advances are repayable on demand but subject to a reasonable prior written notice by the Bank and the Company may repay, at any time, all or part of its floating rate advances without penalty. The aggregate amount of advances under this facility is limited by the application of various rates ranging from 50% to 90% on the Company’s accounts receivable and tax credits receivable. The Company has not made use of this credit facility as at April 30, 2013.
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67
TECSYS Inc.
Notes to the Consolidated Financial Statements For the years ended April 30, 2013 and 2012 (in Canadian dollars, tabular amounts in thousands, except as otherwise noted)
Facility E In October 2012, the Company received a term loan of $5,000,000 in the form of a floating-rate term loan, which is granted for a term of five years. The objective of the term loan was to restore the Company’s working capital, which was used, in large part, to finance the capital expenditures related to the Company’s new expanded offices in Montreal, Quebec and Markham, Ontario since April 2010 as well as the significant investment in the migration of the Company’s flagship product, EliteSeries onto a Java platform. This term loan shall bear interest at the Bank’s Canadian prime rate plus an additional margin varying between 0.75% to 2.00%. The additional margin interest rate shall be established and adjusted by the Bank, on the last day of each fiscal quarter on the basis of the ratio of interest bearing debt to EBITDA (earnings before interest, taxes, depreciation, and amortization) in effect on the last day of such quarter and applicable for the next quarter. The current interest rate in effect is 3.75% per annum. The principal of this loan shall be repaid in equal and consecutive monthly installments over a period of five years. At April 30, 2013, the Company repaid $500,000 of the term loan. Additionally, as long as the term loan remains on a floating-rate basis the Company may repay all or part of its floating-rate term loan at any time, without penalty, provided that the repayment is made from cash flow from operations or from proceeds of an issue of capital stock. The Company has options to convert its floating-rate term loan to a fixed-rate term loan or to discounted banker’s acceptances subject to certain terms and conditions. Security for facility D and E is a movable hypothec of $10,000,000 on all of the Company’s corporeal and incorporeal, present and future movable property and an insurance rider designating the Bank as beneficiary of the proceeds of insurance covering the property given as security up to the full replacement value thereof. The only senior ranking hypothec permitted is the first-ranking hypothec granted to the Bank. The banking agreement requires the Company to maintain a working capital ratio equal or greater than 1.1 : 1.0, a shareholder’s equity equal or greater than $5,000,000, a ratio of interest-bearing debt to EBITDA of less than or equal to 3.0 : 1.0, and a debt service coverage ratio greater than or equal to 1.2 : 1.0. At April 30, 2013 and April 30, 2012, the Company was in compliance with the required financial covenants in effect at that time. On July 9, 2013, an amendment to the banking agreement requires that the debt service coverage ratio to be greater than or equal to 0.6 : 1.0 on July 31, 2013, greater than or equal to 1.1 : 1.0 on October 31, 2013, and reverts back to greater than or equal to 1.2 : 1.0 on January 31, 2014. 14. Accounts payable and accrued liabilities: Trade payables Accrued liabilities and other payables Salaries and benefits due to related parties Employee salaries and benefits payable Fair value liability for share options (note 16)
April 30, 2013 $ 1,167 1,440 406 2,056 153
April 30, 2012 $ 1,532 1,563 524 1,958 267
$
5,222
$
5,844
Presented as: Current Accounts payable and accrued liabilities
$
4,997
$
5,685
Non-current Other non-current liabilities
$
225
$
159
68
TECSYS Annual Report 2013
TECSYS Inc.
Notes to the Consolidated Financial Statements For the years ended April 30, 2013 and 2012 (in Canadian dollars, tabular amounts in thousands, except as otherwise noted)
15. Loans payable: Loans payable, all of which are current liabilities and denominated in Canadian dollars, include the following: April 30, 2013 Subordinated loan from a person related to certain shareholders, bearing interest at 12.67%, repayable on the earlier of demand or the death of the lender
April 30, 2012
$
70
$
85
$
70
$
85
16. Share capital: (a) Share capital: Authorized - unlimited as to number and without par value Common shares The holders of common shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at shareholders’ meetings of the Company. All outstanding shares issued are fully paid. Class A preferred shares Class A preferred shares are issuable in series, having such attributes as the Board of Directors may determine. Holders of Class A preferred shares do not carry the right to vote. No preferred shares are outstanding as at April 30, 2013 and April 30, 2012. On July 19, 2012, the Company renewed its Notice of Intention to Make a Normal Course Issuer Bid (the “Notice”) with the Toronto Stock Exchange (“TSX”). The Notice stated the Company’s intention to purchase on the open market at prevailing market prices, through the facilities of the TSX, the greater of 25% of the average daily trading volume of the common shares on the TSX for the six complete months prior to the date of acceptance by the TSX of the Notice (the “ADTV”) or 1,000 common shares on any trading day. The ADTV over the last six complete months was 1,643 shares. Once a week, the Company may make a block purchase from a person who is not an insider exceeding the daily repurchase limit of (i) common shares having a price of at least $200,000 (ii) at least 5,000 common shares for at least $50,000 or (iii) at least 20 board lots of the common shares which total at least 150% of the ADTV. The maximum number of common shares, which may be purchased under the bid, is 575,858 or 5% of the 11,517,171 issued and outstanding common shares on July 3, 2012. The Company may purchase common shares under the bid, if it considers it advisable, at any time, and from time to time during the period of July 23, 2012 to July 22, 2013. The common shares are purchased for cancellation. During the year ended April 30, 2013, the Company purchased 187,300 (April 30, 2012 – 192,800) of its outstanding common shares for cancellation at an average price of $2.41 per share (April 30, 2012 – $2.23). The total outlay related to purchasing these shares, including other related costs, was $462,000 (April 30, 2012 - $437,000). The excess of the purchase price over the net book value of these shares of $435,000 (April 30, 2012 - $412,000) has been charged to contributed surplus. (b) On July 7, 2011, the Board of Directors authorized the establishment of an executive share purchase plan (the “purchase plan”) to provide for mandatory purchases of common shares by certain key executives of the Company (the “participants”) in order to better align the participant’s financial interests with those of the holders of common shares, create ownership focus and build long-term commitment to the Company. Starting on May 1, 2012, each participant is required to make annual purchases of common shares through the facilities of the TSX secondary market (“annual purchases”) having an aggregate purchase price equal to 10% of his or her annual base salary during the immediately preceding fiscal year (the “base salary”). Annual purchases must be made within 90 days of May 1, of every fiscal year.
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69
TECSYS Inc.
Notes to the Consolidated Financial Statements For the years ended April 30, 2013 and 2012 (in Canadian dollars, tabular amounts in thousands, except as otherwise noted)
Each participant has the obligation to make annual purchases until he or she owns common shares having an aggregate market value equal to 50% of his or her base salary (the “threshold”). If a participant reached his or her threshold and ceased making annual purchases but on any determination date for any subsequent fiscal year of the Company, i) the market value of the common shares owned by a participant falls below his or her threshold, whether as a result of a disposition of common shares or a decrease in the market value of the common shares he or she owns, such participant will be required to make additional purchases of common shares in accordance with the plan until his or her threshold is reached, or ii) the market value of the common shares owned by a participant exceeds his or her threshold, whether as a result of an acquisition of common shares or an increase in the market value of the common shares he or she owns, such participant will be entitled to dispose of common shares having an aggregate market value equal to the amount in excess of his or her threshold. During each fiscal year a participant is required to make an annual purchase, each participant has the right to borrow from the Company, and the Company has the obligation to loan to each participant, an amount not to exceed the annual purchase for such fiscal year for such participant (a “loan”). The loans will bear no interest and will be disbursed in one lump sum following receipt by the Company of a proof of purchase of the common shares. Each loan must be reimbursed to the Company on or before the fiscal year-end in which the loan was made in equal amounts during its term through periodic deductions at source for each of the pay periods remaining in the fiscal year. If the employment of a participant with the Company terminates for any reason whatsoever, all amounts due under any outstanding loan shall become immediately due and payable. If a participant fails to make his or her annual purchase in full in any fiscal year after fiscal 2012, the Company may withhold half of any bonus or other incentive payment earned by the participant in that fiscal year until the participant completes the required annual purchase. The Board of Directors may at any time amend, suspend or terminate the purchase plan upon notice to the participants. (c) On February 26, 2008, the Company announced the approval of a dividend policy whereby a cash dividend per common share is intended to be distributed to its shareholders following the release of its financial results of the first and third quarter of each year. The declaration and payment of dividends shall be at the discretion of the Board of Directors, which will consider earnings, capital requirements, financial conditions and other such factors as the Board of Directors, in its sole discretion, deems relevant. During fiscal 2013, the Company declared a dividend of $0.035 on two separate occasions that were paid on October 5, 2012 and March 29, 2013 to shareholders of record at the close of business on September 21, 2012 and March 15, 2013, respectively, for an aggregate of $800,000. During fiscal 2012, the Company declared a dividend of $0.03 on two separate occasions that were paid on October 6, 2011 and March 30, 2012 to shareholders of record at the close of business on September 22, 2011 and March 16, 2012, respectively, for an aggregate of $698,000. (d) Share-based payments: Under the share option plan, the maximum number of common shares, which may be issued, is 10% of the issued and outstanding common shares at any time. The exercise price was the “market price” of the common shares in Canadian dollars at the time of granting. The market price was determined by the weighted average trading price per share traded on the TSX during the period of five trading days preceding the date of grant. The options are non-assignable and expire five years after the date of granting. Options granted under this plan generally vested over a period of four years, with 25% becoming exercisable on the first anniversary of the date of grant and an additional 6.25% becoming exercisable at the end of each three-month period thereafter. The share option holders had the option to cash settle the share options, subject to the Company’s approval, although historically that option had rarely been exercised. On July 7, 2011, the Board of Directors closed the share option plan. No share options have been issued under the share option plan since March 3, 2011 and no additional options will be issued under the plan. On September 8, 2011, the Company passed a resolution to vest all outstanding unvested options and to allow share option holders the privilege to cash settle their share options at their option, no longer subject to the Company’s approval. The outstanding options will continue to be governed by the share option plan.
70
TECSYS Annual Report 2013
TECSYS Inc.
Notes to the Consolidated Financial Statements For the years ended April 30, 2013 and 2012 (in Canadian dollars, tabular amounts in thousands, except as otherwise noted)
The following table summarizes the share options activity under this plan: Number of options Balance, April 30, 2011 Exercised Cancelled Forfeited Balance, April 30, 2012 Exercised Forfeited
819,016
Weighted average exercise price $
1.54
(487,540) (876) (3,030)
1.48 1.73 1.43
327,570
1.64
(231,670) (6,500)
1.60 1.53
Balance, April 30, 2013
89,400
$
1.74
Exercisable, April 30, 2013
89,400
$
1.74
During the year ended April 30, 2013, 198,220 share options (April 30, 2012 – 370,140) were exercised at a weighted average exercise price of $1.57 (April 30, 2012 – $1.42) and cash settled for a total cash disbursement of $328,000 (April 30, 2012 – $347,000, of which $279,000 was charged to contributed surplus prior to the Company’s decision to allow share options holders the privilege to cash settle their share options at their option. The balance of $68,000 was charged to the share options liability account that resulted from the Company’s decision to allow share options holders the privilege to cash settle their share options at their option as discussed further below). Additionally, during the year ended April 30, 2013, 33,450 share options (April 30, 2012 – 117,400) were exercised at a weighted average exercise price of $1.78 (April 30, 2012 – $1.66) to purchase common shares generating cash and increasing share capital by $59,000 (April 30, 2012 – $195,000). The weighted average share price during the period of five trading days preceding the date of exercise for all the share options exercised in the year ended April 30, 2013 was $3.13 (April 30, 2012 – $2.30). Pursuant to the Company’s decision on September 8, 2011 to vest all outstanding unvested options, during the second quarter ended October 31, 2011 the Company expensed an amount of $32,000 representing the remaining related share-based payments for all options that would have otherwise been attributed to periods ending in fiscal 2015. The total share-based compensation for the year ended April 30, 2012 was $40,000 (April 30, 2013 – nil). The Company’s decision to grant the share option holders the privilege to cash settle their share options, at their option, effectively transformed the share options into compound financial instruments. As such, on September 8, 2011, the Company reclassified $319,000 from contributed surplus to accounts payable and accrued liabilities, representing the fair value of the 540,941 outstanding share options at that time. The fair value of the outstanding share options was determined based on the Company’s closing share price on September 8, 2011 which was $2.20. The Company revalues the share options liability at each reporting date and any change in the liability is reflected as finance income or finance costs in the consolidated statements of comprehensive income, as appropriate. On April 30, 2013, the Company reassessed the fair value of the 89,400 (April 30, 2012 – 327,570) outstanding share options at $153,000 (April 30, 2012 – $267,000). The fair value was determined based on the Company’s closing share price on April 30, 2013, which was $3.45 (April 30, 2012 – $2.45). For the year ended April 30, 2013, the Company has recorded an expense of $242,000 (April 30, 2012 – $67,000) as finance costs (note 21) representing the increase in the fair value of the share options since April 30, 2012 (April 30, 2012 – since the transfer of the fair value on September 8, 2011 to accounts payable and accrued liabilities).
www.tecsys.com
71
TECSYS Inc.
Notes to the Consolidated Financial Statements For the years ended April 30, 2013 and 2012 (in Canadian dollars, tabular amounts in thousands, except as otherwise noted)
The following table summarizes information about share options outstanding as at April 30, 2013: Options outstanding Weighted average remaining contractual life Weighted average (years) exercise price
Exercise price
Number outstanding
$ 1.22 - 1.32 1.59 - 1.59 1.70 - 1.80 1.89 - 1.90 2.01 - 2.06
2,000 27,000 52,500 1,000 6,900
0.77 0.19 1.67 2.71 1.93
$
1.29 1.59 1.80 1.90 2.02
89,400
1.24
$
1.74
As at April 30, 2012, there were 327,570 options outstanding and exercisable at weighted average exercise prices of $1.64 (e) Earnings per share: Basic earnings per share: The calculation of basic earnings per share at April 30, 2013 and 2012 is based on the profit attributable to common shareholders and the weighted average number of common shares outstanding calculated as follows: Years ended April 30, Profit attributable to common shareholders
$
2013 885
$
2012 1,057
Issued common shares at the beginning of the year Effect of share options exercised Effect of shares buyback through the normal course issuer bid
11,603,271 20,867 (149,224)
11,678,671 64,511 (73,657)
Weighted average number of common shares outstanding (basic)
11,474,914
11,669,525
Diluted earnings per share: The calculation of diluted earnings per share at April 30, 2013 and 2012 is based on the profit attributable to common shareholders and the weighted average number of common shares outstanding after adjustment for the effects of all dilutive common shares, calculated as follows: Years ended April 30, Profit attributable to common shareholders
$
2013 885
$
2012 1,057
Weighted average number of common shares outstanding (basic) Effect of share options on issue
11,474,914 103,872
11,669,525 137,948
Weighted average number of common shares outstanding (diluted)
11,578,786
11,807,473
The average market value of the Company’s shares for purposes of calculating the dilutive effect of share options was based on quoted market prices for the period during which the options were outstanding. For the years ended April 30, 2013 and 2012, all options that could have an effect on the calculation of diluted earnings per share in the future were included in the above calculations since these options had exercise prices less than the average price of the common shares during each year.
72
TECSYS Annual Report 2013
TECSYS Inc.
Notes to the Consolidated Financial Statements For the years ended April 30, 2013 and 2012 (in Canadian dollars, tabular amounts in thousands, except as otherwise noted)
17. Income taxes: (a) Income taxes for the years ending April 30, 2013 and 2012 recognized in the consolidated statements of comprehensive income comprised the following components: Years ended Current income taxes Current year Adjustments for prior years Recognition of previously unrecognized tax losses
April 30, 2013 $
April 30, 2012
257 (3) 254
$
142 (40) (281) (179) 75
$
$
583 (11) (16) 556
$
Deferred income taxes Origination and reversal of temporary differences Reduction / increase in tax rate Change in unrecognized deductible temporary difference Income taxes
$
$ $
(367) (54) 195 (226) 330
$ $
(b) The provision for income taxes varies from the expected provision at the statutory rate for the following reasons: Years ended Combined basic federal and provincial statutory income tax rate Unrecognized benefit of non-capital losses and undeducted research and development expenses Impact of previously unrecognized non-capital losses and undeducted research and development expenses Impact of previously unrecognized net operating losses of U.S. subsidiary Unrecognized benefit of net operating losses of UK subsidiary Unrecognized benefit of other current year temporary differences, permanent differences and others
April 30, 2013 % 26.74
April 30, 2012 % 27.30
2.47
(0.67)
9.06 (3.42) -
(8.12) (1.72) 0.71
(27.04)
6.29
7.81
23.79
Provision for income taxes as per financial statements (c) Unrecognized net deferred tax assets
At April 30, 2013 and 2012 the unrecognized net deferred tax assets consist of the following: April 30, 2013
April 30, 2012
Deferred tax assets Research and development expenses Net operating losses of US subsidiaries (i) Property and equipment Net operating losses of UK subsidiary (ii) Capital losses (iii) Other
$
3,474 109 3,207 125 234 -
$
3,796 176 3,097 125 234 40
Deferred tax liabilities Deferred development costs Net deferred tax assets unrecognized
$
7,149
$
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(38) 7,430
73
TECSYS Inc.
Notes to the Consolidated Financial Statements For the years ended April 30, 2013 and 2012 (in Canadian dollars, tabular amounts in thousands, except as otherwise noted)
i) On April 30, 2013, the Company’s U.S. subsidiary had net operating losses carried forward for Federal income tax purposes totalling approximately $675,000 (US $670,000) (April 30, 2012 – $780,000 (US $774,000)) which may be used to reduce Federal taxable income in future years. These losses may be claimed no later than the fiscal year ending April 30, 2021. ii) On April 30, 2013, the Company’s U.K. subsidiary had net operating losses carried forward for income tax purposes totalling approximately $594,000 (£ 379,000) (April 30, 2012 – $596,000) which may be applied to reduce taxable income in future years, however this is unlikely. iii) On April 30, 2013, the Company has accumulated capital losses of approximately $1,749,000 (April 30, 2012 – $1,749,000) which may be applied to reduce future capital gains. Deferred tax assets have not been recognized in respect of these items because it is not probable that future taxable profit will be available against which the Company can utilize the benefits. (d) Recognized deferred tax assets and liabilities At April 30, 2013 and 2012 the recognized net deferred tax assets consist of the following: April 30, 2013
April 30, 2012
Deferred tax assets Research and development expenses Non-capital losses Share issue costs Net operating losses of US subsidiaries Property and equipment Allowance for doubtful receivables Share options liability Ontario tax credits
$
Donations Other
1,146 77 5 60 272 40 41 48
$
840 5 84 123 45 71 45
161 32
123 -
(298) (874) -
(108) (634) (7)
Deferred tax liabilities E-business tax credit Deferred development costs Other Net deferred tax assets recognized
$
710
$
587
i) On April 30, 2013, the Company had Ontario provincial tax credits of approximately $48,000 (April 30, 2012 – $45,000) which may be applied to reduce Ontario provincial income taxes payable in future years. Management believes that it is probable that the Company will claim these credits to reduce Ontario Provincial income taxes otherwise payable in fiscal 2014. ii) On April 30, 2013, the Company had Canadian Federal non-refundable SRED tax credits totalling approximately $7,016,000 (note 8) (April 30, 2012 – $7,125,000) which may be used only to reduce future current Federal income taxes otherwise payable. For the year ended April 30, 2013, the Company intends to claim available Federal non-refundable tax credits to reduce Canadian Federal income taxes otherwise payable of $198,000.
74
TECSYS Annual Report 2013
TECSYS Inc.
Notes to the Consolidated Financial Statements For the years ended April 30, 2013 and 2012 (in Canadian dollars, tabular amounts in thousands, except as otherwise noted)
iii) On April 30, 2013, the Company has accumulated research and development expenses of approximately $16,858,000 (April 30, 2012 – $17,167,000) for Federal and Ontario provincial income tax purposes and $17,880,000 (April 30, 2012 – $17,849,000) for Quebec provincial income tax purposes which may be carried forward indefinitely and used to reduce taxable income in future years. iv) On April 30, 2013, the Company has non-capital losses carried forward of $1,079,000 (April 30, 2012 – Nil) for Quebec provincial income tax purposes which may be used to reduce provincial taxable income in future years. The losses may be claimed no later than the fiscal year ending April 30, 2023. 18. Revenue: Services revenue is broken down as follows: Years ended April 30, Professional services Maintenance Others
2013 $
$
16,095 10,322 1,041 27,458
2012 $
$
13,455 9,751 872 24,078
Revenues from contract accounting are allocated to software products and professional services revenue based on their relative fair value and the amount recognized is determined using the percentage completion method. During the year ended April 30, 2013, $8,386,000 (April 30, 2012 – $6,079,000) of contract revenue was recognized. At April 30, 2013, contract accounting revenue comprising aggregate costs and recognized profits on open contracts amounted to $9,618,000 (April 30, 2012 – $5,684,000). Progress billings and advances received from customers for open contracts amounted to $276,000 (April 30, 2012 – $516,000). Advances for which the related work has not started, and billings in excess of costs incurred and recognized profits, are presented as deferred revenue. There were no retentions relating to contracts in progress at April 30, 2013 and 2012. 19. Cost of revenue: The following table provides detail of the cost of services presented in cost of revenue: Years ended April 30, Gross expenses E-business tax credits
2013 $ $
21,691 (1,619) 20,072
2012 $ $
17,185 (951) 16,234
20. Personnel expenses: Years ended April 30, Salaries Other short-term benefits Payments to defined contribution plans Share-based compensation Termination benefits
2013 $
$
28,276 2,457 1,302 282 32,317
2012 $
$
www.tecsys.com
23,110 1,974 800 40 59 25,983
75
TECSYS Inc.
Notes to the Consolidated Financial Statements For the years ended April 30, 2013 and 2012 (in Canadian dollars, tabular amounts in thousands, except as otherwise noted)
21. Finance income and finance costs: Years ended April 30, Interest expense on financial liabilities measured at amortized cost Foreign exchange gain (loss) Net decrease in fair value of foreign exchange contracts Increase in fair value of share options liability (note 16) Finance costs
2013 $
Interest income on loans and receivables Interest income on bank deposits Finance income Net finance costs recognized in profit or loss
(100) 43 (55) (242) (354)
2012 $
5 Â 41 46 $
(308)
(16) (27) (47) (67) (157) 8 29 37
$
(120)
22. Supplementary cash flow information: Years ended April 30,
2012
2012
Non-cash and cash equivalents investing activities included in accounts payable and accrued liabilities as at April 30 are as follows: Acquisitions of property and equipment Acquisitions of other intangible assets
$
283 -
$
44 4
$
283
$
48
23. Contingencies and guarantees: (a) Contingencies Through the course of operations, the Company may be exposed to a number of lawsuits, claims and contingencies. Provisions are recognized as liabilities in instances when there are present obligations and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligations and where such liabilities can be reliably estimated. Although it is possible that liabilities may be incurred in instances where no provision has been made, the Company has no reason to believe that the ultimate resolution of such matters will have a material impact on its financial position. (b) Guarantees The Company established a letter of guarantee in connection with the lease for its Montreal head office. On April 30, 2013, the Company is obligated to provide short-term investments totalling $120,000 (April 30, 2012 – $160,000) as security for the outstanding letter of guarantee in favour of one of the Company’s landlords. The letter of guarantee outstanding must be renewed annually through the first five years of the lease term which commenced in April 2010. As such, since the expiration of the lease term is beyond one year, these investments were classified as non-current restricted cash equivalents and other investments.
76
TECSYS Annual Report 2013
TECSYS Inc.
Notes to the Consolidated Financial Statements For the years ended April 30, 2013 and 2012 (in Canadian dollars, tabular amounts in thousands, except as otherwise noted)
24. Commitments: (a) Operating lease commitments: During fiscal 2010, the Company signed a new lease agreement for its head office in Montreal, Quebec. The Company relocated to this facility in April 2010. The lease term of ten and one-half years is effective from May 1, 2010 and runs through October 31, 2020. The Company has an option to extend the term of the lease for two consecutive periods of five years each from the expiration of the term. During fiscal 2012, the Company signed an amendment to its lease agreement for additional space. The lease for additional space runs for eight years and five months commencing on June 1, 2012 terminating on the same date as the original lease, October 31, 2020. Additionally, during fiscal 2012, the Company signed a new lease agreement for its office in Markham, Ontario. The Company relocated its Markham office to this new facility in November 2011. The lease term of ten years and eight months is effective December 1, 2011 and runs through July 31, 2022. The Company has an option to extend the term of the lease for two consecutive periods of five years each from the expiration of the term. The lease term includes eight months of free rent during the first thirty months. This lease inducement is deferred and recognized over the entire original lease term. During the year ended April 30, 2013, an expense of $1,594,000 was recognized as an expense in respect of operating leases (2012 – $1,284,000) and is included within the following expense classifications within the consolidated statements of comprehensive income. Years ended Services Sales and marketing General and administration Research and development
April 30, 2013 $
$
April 30, 2012
980 147 125 342 1,594
$
$
767 112 121 284 1,284
The minimum future rental payments expiring up to July 31, 2022, including operating expenses required under noncancellable long-term operating leases which relate mainly to premises are as follows: Less than 1 year Between 1 and 5 years More than 5 years
April 30, 2013 $
$
April 30, 2012
1,422 5,714 4,714 11,850
$
$
1,416 5,730 6,368 13,514
(b) Other commitments: Under the terms of a licensing agreement with a third party, the Company is committed to pay royalties calculated at a rate of 1.25% of revenue of the EliteSeries product line, excluding reimbursable expenses and hardware sales. Revenue derived from the operations of other business units or acquired companies are exempt from these royalties. The agreement was effective February 1, 2004, had an initial term which expired on April 30, 2007, and was subject to termination by either party at any time by providing six months notice. Upon expiration of the initial term, the agreement automatically renews for consecutive one-year terms. The Company has incurred royalty fees related to this agreement as follows: 2013 2012
$ $
174 (US$ 173) 183 (US$ 183)
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77
TECSYS Inc.
Notes to the Consolidated Financial Statements For the years ended April 30, 2013 and 2012 (in Canadian dollars, tabular amounts in thousands, except as otherwise noted)
25. Related party transactions: (a) Transactions with key management personnel: Key management includes the Board of Directors (executive and non-executive) and members of the Executive Committee. Key management of the Company participated in the share option plan until it was closed. Key management and their spouses control 49.7% of the issued common shares of the Company. Additionally, key management holds 75,000 outstanding share options, and with the conversion of the fully vested share options, they control 50.1% and as such are the ultimate controlling party. The compensation paid or payable to key management for employee services is as follows: Years ended April 30, Salaries Other short-term benefits Payments to defined contribution plans Share-based compensation
2013 $
$
2,943 230 79 3,252
2012 $
$
2,780 203 40 28 3,051
Under the provisions of the share purchase plan for key management, the Company provided interest-free loans to key management of $169,000 (fiscal 2012 – $166,000) to facilitate their purchase of the Company’s common shares during fiscal 2013. No loans were outstanding as at April 30, 2013 and 2012. (b) Transactions with other related parties: The loans payable comprises an unsecured subordinated loan from a person related to certain shareholders. The loan bears interest at 12.67% per annum and is payable on demand or upon the death of the lender. The Company repaid $15,000 during the year ended April 30, 2013 (April 30, 2012 – $22,000). Years ended April 30, Interest expense on loan from a person related to certain shareholders
2013 $
10
April 30, 2013 Subordinated loan payable These transactions occurred in the normal course of operations.
78
TECSYS Annual Report 2013
$
70
2012 $
13
April 30, 2012 $
85
TECSYS Inc.
Notes to the Consolidated Financial Statements For the years ended April 30, 2013 and 2012 (in Canadian dollars, tabular amounts in thousands, except as otherwise noted)
26. Financial instruments and risk management: Classification of financial instruments There have been no changes in classification of financial instruments since April 30, 2012. The table below summarizes the Company’s financial instruments and their classifications. April 30, 2013 Financial assets Cash and cash equivalents Restricted cash equivalents and other investments Accounts receivable Other accounts receivable Foreign exchange derivatives included in other accounts receivable and derivatives Non-current receivables Financial liabilities Accounts payable and accrued liabilities Fair value liability of share options included in accounts payable and accrued liabilities Foreign exchange derivatives included in accounts payable and accrued liabilities Loans payable Term loan Other non-current liabilities
Fair value through profit or loss
$
-
Loans and receivables
$
Total
- $ -
5,348 120 7,959 132
- $
39 13,598
$
4,835 $
4,835
$
$
$
39 13,598 $
$
-
$
- $
153
-
9 162
- $
$
Other financial liabilities
5,348 $ 120 7,959 132
-
$
April 30, 2012
70 4,500 225 9,630 $
$
5,217 160 8,207 78 112 99 13,873 5,418
153
267
9 70 4,500 225 9,792
85 159 5,929
$
The Company has not classified any financial instruments as held-to-maturity or available-for-sale. The net fair value of outstanding foreign exchange contracts has been recorded as accounts payable and accrued liabilities at April 30, 2013 and as other accounts receivable and derivatives for April 30, 2012. Fair value disclosures The Company has determined that the carrying values of its short-term financial assets and liabilities, including cash and cash equivalents, accounts receivable, other accounts receivable, accounts payable and accrued liabilities, and loans payable approximate their fair value because of the relatively short period to maturity of the instruments. The fair value of restricted cash equivalents and other investments, non-current receivables, and the term loan was determined by discounting the future cash flows using interest rates which the Company could obtain for loans with similar terms, conditions, and maturity dates. There is no significant difference between the fair value and the carrying value of the financial instruments as at April 30, 2013 and 2012.
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79
TECSYS Inc.
Notes to the Consolidated Financial Statements For the years ended April 30, 2013 and 2012 (in Canadian dollars, tabular amounts in thousands, except as otherwise noted)
The following table details the fair value hierarchy of financial instruments by level as at April 30, 2013: Quoted prices in active markets (Level 1)
Financial liabilities Derivative financial instruments - foreign exchange contracts FV of share options liability
Other observable inputs (Level 2)
Unobservable inputs (Level 3)
Total
$
-
$
9 153
$
-
$
9 153
$
-
$
162
$
-
$
162
Risk management The Company is exposed to the following risks as a result of holding financial instruments: currency risk, credit risk, liquidity risk, interest rate risk, and market price risk. Currency risk The Company is exposed to currency risk as a certain portion of the Company’s revenues and expenses are incurred in U.S. dollars resulting in U.S. dollar-denominated accounts receivable and accounts payable and accrued liabilities. In addition, certain of the Company’s cash and cash equivalents are denominated in U.S. dollars. These balances are therefore subject to gains or losses due to fluctuations in that currency. The Company may enter into foreign exchange contracts in order to offset the impact of the fluctuation of the U.S. dollar regarding the revaluation of its U.S. net monetary assets. The Company uses derivative financial instruments only for risk management purposes, not for generating trading profits. As such, any change in cash flows associated with derivative instruments is expected to be offset by changes in cash flows related to the net monetary position in the foreign currency. On April 30, 2013, the Company held outstanding foreign exchange contracts with various maturities to October 31, 2013 to sell US$5,550,000 into Canadian dollars at rates averaging CA$1.0055 to yield CA$5,580,000. The Company recorded unrealized exchange losses of $9,000 related to the change in fair value of these contracts for the year ended April 30, 2013. Subsequent to the year ended April 30, 2013, the Company undertook additional foreign exchange contracts to sell US$2,675,000 at rates averaging CA$1.0375 for maturity up to January 2014. On April 30, 2012, the Company held outstanding foreign exchange contracts with various maturities to October 31, 2012 to sell US$5,950,000 into Canadian dollars at rates averaging CA$1.0071 to yield CA$5,993,000. The Company recorded unrealized exchange gains of $112,000 related to the change in fair value of these contracts for the year ended April 30, 2012. The following table provides an indication of the Company’s significant foreign exchange currency exposures as at April 30, 2013 and 2012.
Cash and cash equivalents Accounts receivable Other accounts receivable Non-current receivables Accounts payable and accrued liabilities Derivative financial instruments – notional amount
80
TECSYS Annual Report 2013
April 30, 2013 US$ 762 5,580 167 39 (1,018) (5,550) (20)
£ 27 -
April 30, 2012 US$ 942 5,527 99 100 (916)
£ 1 39 -
27
(5,950) (198)
40
TECSYS Inc.
Notes to the Consolidated Financial Statements For the years ended April 30, 2013 and 2012 (in Canadian dollars, tabular amounts in thousands, except as otherwise noted)
The following exchange rates applied during the years ended April 30, 2013 and 2012.
CA$ per US$ CA$ per £
April 30, 2013 Reporting Average rate date rate 1.0034 1.0072 1.5792 1.5652
April 30, 2012 Reporting Average rate date rate 0.9959 0.9884 1.5861 1.6038
Based on the Company’s foreign currency exposures noted above, varying the above foreign currency reporting date exchange rates to reflect a 5% appreciation of the U.S. dollar (2013 – CA$1.0576; 2012 – CA$1.0378) and £ (2013 – CA$1.6435; 2012 – CA$1.6840) would have had the following impact on the profit, assuming all other variables remained constant.
(Decrease) increase in profit
2013 US$ (1)
£ 2
2012 US$ (10)
£ 3
A 5% depreciation of these currencies would have an equal but opposite effect on the profit, assuming all other variables remained constant. Credit risk Credit risk is the risk associated with incurring a financial loss when the other party fails to discharge an obligation. Financial instruments which potentially subject the Company to credit risk consist principally of cash and cash equivalents, accounts receivable, other accounts receivable and derivatives, restricted cash equivalents and other investments and noncurrent receivables. The Company’s cash and cash equivalents, and restricted cash equivalents and other investments consisting of guaranteed investment certificates are maintained at major financial institutions. At April 30, 2013, there is no customer comprising more than 10% of total trade accounts receivable and work in progress. Generally there is no particular concentration of credit risk related to the accounts receivable due to the North American distribution of customers and procedures for the management of commercial risks. The Company performs ongoing credit reviews of all its customers and establishes an allowance for doubtful accounts receivable when accounts are determined to be uncollectible. Customers do not provide collateral in exchange for credit. During fiscal 2013, the Company renewed an arrangement with a federal crown corporation and another insurer (“the insurers”) wherein the insurers assume the risk of credit loss in the case of bankruptcy for up to 90% of accounts receivable for certain qualifying foreign and domestic customers. The insurance is subject to a deductible of US$50,000 for each deductible period, in respect of trade accounts receivable generated during that period, and subject to a maximum of US$1,300,000 (April 30, 2012 – US$800,000) for export losses and US$975,000 (April 30, 2012 – US$800,000) for domestic losses, in any policy period. The insurance policy period runs from February 1 to January 31 of each year. On April 30, 2013, accounts receivable included foreign accounts totalling US$1,838,000 and £27,000 and domestic accounts for $686,000 (US$681,000) that were pre-approved for coverage, subject to the above-noted maximums, under this arrangement. On April 30, 2012, accounts receivable included foreign accounts totalling US$2,251,000 and £39,000 and domestic accounts for $963,000 (US$974,000) that were pre-approved for coverage, subject to the above-noted maximums, under this arrangement. The Company maintains an allowance for doubtful accounts at an amount estimated to be sufficient to provide adequate protection against losses resulting from collecting less than full payment on its receivables. Individual overdue accounts are reviewed and allowance adjustments are recorded when determined necessary to state receivables at the realizable value. If the financial condition of customers deteriorates resulting in their diminished ability or willingness to make payment, additional provisions for doubtful accounts are recorded. The Company’s maximum credit risk exposure corresponds to the carrying amounts of the trade accounts receivable.
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TECSYS Inc.
Notes to the Consolidated Financial Statements For the years ended April 30, 2013 and 2012 (in Canadian dollars, tabular amounts in thousands, except as otherwise noted)
Not past due Past due 1-180 days Past due over 180 days Allowance for doubtful accounts
April 30, 2013 $ 4,390 3,329 818 8,537 (578) $ 7,959
April 30, 2012 $ 3,993 3,889 855 8,737 (530) $ 8,207
Allowance for doubtful accounts Balance at beginning Impairment losses recognized Additional provisions Balance at the end
April 30, 2013 $ 530 (510) 558 $ 578
April 30, 2012 $ 542 (178) 166 $ 530
Liquidity risk Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company manages liquidity risk through the management of its capital structure and financial leverage, as outlined in the capital disclosures discussion in note 27 below. It also manages liquidity risk by continuously monitoring actual and projected cash flows. The Board of Directors reviews and approves the Company’s operating and capital budgets, as well as any material transactions out of the ordinary course of business. The following are contractual maturities of financial liabilities as of April 30, 2013 and 2012. April 30, 2013
Accounts payable and accrued liabilities Loans payable Term loan Other non-current liabilities
Carrying Less than amount one year $ 4,997 $ 4,997 70 70 4,500 1,000 225 $ 9,792 $ 6,067
April 30, 2012 Carrying Less than amount one year $ 5,685 $ 5,685 85 85 159 $ 5,929 $ 5,770
Interest rate risk Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company’s exposure to interest rate risk is summarized as follows: Cash and cash equivalents Restricted cash equivalents and other investments Accounts receivable Other accounts receivable Non-current receivables Accounts payable and accrued liabilities Loans payable Term loan Other non-current liabilities
As described in note 6 As described in note 6 Non-interest bearing As described in note 10 As described in note 10 Non-interest bearing As described in note 15 As described in note 13 Non-interest bearing
A 1% change in interest rates would not have a significant impact on profit assuming all other variables remained constant.
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TECSYS Annual Report 2013
TECSYS Inc.
Notes to the Consolidated Financial Statements For the years ended April 30, 2013 and 2012 (in Canadian dollars, tabular amounts in thousands, except as otherwise noted)
Market price risk Market price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market price risk comprises three types of risk: currency risk; interest rate risk; and other price risk, comprising those changes caused by factors specific to the financial instrument or its issuer, or factors affecting all similar instruments traded in the market. The Company’s exposure to financial instruments with market risk characteristics is insignificant. 27. Capital disclosures: The Company defines capital as equity, loans payable, term loans, and bank advances, net of cash. The Company objectives in its management of capital is to safeguard its ability to continue funding its operations as a going concern, ensuring sufficient liquidity to finance research and development activities, sales and services activities, general and administrative expenses, working capital, capital expenditures, potential future acquisitions, future growth, and to provide returns to shareholders through its dividend policy. The capital management objectives remain the same as for the previous fiscal year. Its capital management policies include promoting shareholder value through the concentration of its shareholdings by means of purchasing its own shares for cancellation through normal course issuer bids when the Company considers it advisable to do so. In recent history, the Company has followed an approach that relies almost exclusively on its existing liquidity and cash flow from operations to fund its activities. When possible, the Company tries to optimize its liquidity needs by non-dilutive sources, including tax credits, and interest income. In recent years, the Company’s policy was to maintain a minimum level of debt. Trends in the past eighteen months are indicative of a resurgence of the supply chain management market, which has translated to higher bookings for the Company’s products and services and a backlog greater than $26 million at the start of fiscal 2013, representing an increase of 25% in comparison to a year earlier. The Company increased its headcount during fiscal 2012 and the first nine months of fiscal 2013 to meet the higher demand for its services and to capture pipeline opportunities. Due to the anticipated expansion of its working capital due to business growth, its investment in the integration and training of new resources, and the expansion of its Montreal head office, the Company completed the negotiation of new credit facilities during the second quarter of the current fiscal year to ensure that the growth trends could be nurtured and sustained. The Company manages its capital structure by adjusting purchased shares for cancellation pursuant to the normal course issuer bids, adjusting the amount of dividends to shareholders, paying off existing debt and extending or amending its banking and credit facilities. The Company’s banking and credit facilities require adherence to financial covenants. The Company is in compliance with these covenants as at April 30, 2013 and April 30, 2012. Other than its banking agreement covenants, the Company is not subject to externally imposed capital requirements. 28. Operating segments: Management has organized the Company under one reportable segment: the development and marketing of enterprise-wide distribution software and related services. Substantially all of the Company’s property and equipment, goodwill and other intangible assets are located in Canada. The Company’s subsidiary in the U.S. comprises sales and service operations offering implementation services only. Following is a summary of revenue by geographic location in which the Company’s customers are located: Years ended April 30, Canada United States Other
2013 $
$
17,415 25,582 762 43,759
2012 $
$
19,107 19,868 527 39,502
29. Comparative figures: Certain comparative figures have been reclassified to conform with the basis of presentation used in the current year. www.tecsys.com
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GENERAL INFORMATION COMMON SHARE INFORMATION PRINCIPAL MARKET The Company’s common shares were first listed on the Toronto Stock Exchange (TSX) on July 27, 1998. The stock symbol of the Company’s common shares is TCS. The following table sets forth the high and low prices, as well as the trading volume for the common shares for the fiscal periods shown below. Fiscal Year 2013: May 1st, 2012 to April 30th, 2013 First Quarter Second Quarter Third Quarter Fourth Quarter
High
Low
$ 2.62 $ 3.54 $ 3.67 $ 3.60
$ 2.00 $ 2.10 $ 3.12 $ 3.00
Volume (Total) 194,789 1,209,991 595,138 575,208
DIVIDEND POLICY Dividend policy is determined by the Board of Directors, taking into account the Company’s financial condition and other factors deemed relevant. On February 26, 2008, TECSYS’ Board of Directors announced that it has approved a dividend policy whereby it intends to declare a cash dividend of $0.02 per common share to its shareholders to be distributed following the release of its financial results of the first and third quarter of each financial year. On September 10, 2009, TECSYS announced that the Company’s Board of Directors has decided to increase the semi-annual dividend to $0.025/share, a 25% increase in the dividends paid to shareholders. Furthermore on March 3, 2011, TECSYS announced that the Company’s Board of Directors has decided to increase the semi-annual dividend to $0.03/share, this represents another 20% increase in the dividends paid to shareholders. On September 6, 2012, the Company’s Board of Directors has decided to increase the semi-annual to $0.035/share; this represents an increase of 16.7% from the previous semi-annual dividend. INVESTOR INQUIRIES In addition to its Annual Report, the Company files an Annual Information Form (AIF), as well as a Management Proxy Circular with the Canadian Securities Commissions and are available on TECSYS’ web site (www.tecsys.com) and on SEDAR (www.sedar.com). For further information or to obtain additional copies of any of the above-mentioned documents, please contact: INVESTOR RELATIONS TECSYS Inc. 1 Place Alexis Nihon Suite 800 Montreal, Quebec Canada H3Z 3B8 Tel: (800) 922-8649 (514) 866-0001 Fax: (514) 866-1805 investor@tecsys.com www.tecsys.com
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DIRECTORS AND EXECUTIVE MANAGEMENT BOARD OF DIRECTORS
EXECUTIVE MANAGEMENT
Frank J. Bergandi Business Consultant
David Brereton Executive Chairman of the Board
David Brereton Executive Chairman of the Board TECSYS Inc.
Peter Brereton President and CEO
Peter Brereton President and CEO TECSYS Inc. AndrĂŠ Duquenne (1) (2) President T2ic Inc. Vernon Lobo (2) Managing Director Mosaic Venture Partners Inc. Steve Sasser (1) (2) Chief Executive Officer Merlin Technologies Corporation David Wayland (1) Corporate Director MRRM Inc.
Berty Ho-Wo-Cheong Vice President, Finance and Administration, Chief Financial Officer and Secretary Greg MacNeill Senior Vice President, World Wide Sales Robert Colosino Vice President, Business Development and Marketing Larry Lumsden Vice President, Products Bruno Dubreuil Vice President, Customer Delivery Dimitrios Argitis Vice President, Customer Care Services Luigi Friio Senior Director, Custom Enhancements Patricia Barry Vice President, Human Resources Catalin Badea Chief Technology Officer Mike Kalika Vice President and General Manager Warehouse Solutions Group
(1) (2)
Member of the Audit Committee Member of the Compensation Committee
Tom Wilson Vice President and General Manager SMB Group www.tecsys.com
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CORPORATE INFORMATION NORTH AMERICA
EUROPE
INVESTOR INQUIRIES
Corporate Headquarters TECSYS Inc. 1 Place Alexis Nihon Suite 800 Montreal, Quebec Canada H3Z 3B8 Tel: (800) 922-8649 (514) 866-0001 Fax: (514) 866-1805
European Headquarters TECSYS Europe Limited 125 Old Broad Street London EC2N 1AR United Kingdom Tel: (44) 844 870 0053
TECSYS Inc. Investor Relations 1 Place Alexis Nihon Suite 800 Montreal, Quebec Canada H3Z 3B8 Tel: (800) 922-8649 (514) 866-0001 Fax: (514) 866-1805 investor@tecsys.com www.tecsys.com
TECSYS U.S., Inc. 1001 Avenue of the Americas 4th Floor New York City, New York USA 10018 Toll Free: (800) 922-8649 TECSYS Inc. 15 Allstate Parkway Suite 501 Markham, Ontario L3R 5B4 Tel: (905) 752-4550 Fax: (905) 752-6400 CENTRAL & SOUTH AMERICA TECSYS Latin America Ltda Av Cra 15 # 122-75 Torre A Piso 5 Edificio Jorge Baron Bogotá D.C, Colombia Tel: (57-1) 740 6903 Ext. 131 Fax: (57-1) 640 7416 Distributor for: Puerto Rico, Central & South America, and the Caribbean
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TECSYS Annual Report 2013
Curomed BV Hulsterstraat 14 4116 EZ Buren, The Netherlands Tel: (31) 344 700 202
SUBSIDIARIES
Distributor for: The Benelux
TECSYS U.S., Inc. TECSYS CDI, Inc. TECSYS Europe Limited
MIDDLE EAST
AUDITORS
Helix Health Level 14, Boulevard Plaza Tower One Emaar Boulevard, Downtown Dubai P.O. Box 334155, Dubai, United Arab Emirates Tel: (971) 4 455 8753 Fax: (971) 4 455 8556
KPMG LLP Montreal, Quebec, Canada
Distributor for: The Kingdom of Saudi Arabia The United Arab Emirates The State of Qatar The Sultanate of Oman The Kingdom of Bahrain The State of Kuwait The Lebanese Republic The Arab Republic of Egypt
LEGAL COUNSEL
BANKERS National Bank of Canada Montreal, Quebec, Canada
McCarthy Tétrault LLP Montreal, Quebec, Canada TRANSFER AGENT AND REGISTRAR Computershare Investor Services Inc. 100 University Ave. 9th Floor, North Tower Toronto, Ontario M5J 2Y1 Canada Tel: (514) 982-7555 or (800) 564-6253 Fax: (514) 982-7635 service@computershare.com
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TECSYS Inc. 1 Place Alexis Nihon Suite 800 Montreal, Quebec Canada H3Z 3B8 Tel: (800) 922-8649 (514) 866-0001 Fax: (514) 866-1805 www.tecsys.com
Š2013, TECSYS Inc. All names, trademarks, products, and services mentioned are registered or unregistered trademarks of their respective owners. Printed in Canada