Annual Report
2010 Y o u r S u p p l y C h a i n M a t t e r s.
TM
| Table of Contents
3 8 12 19
2010 TECSYS Inc. - Annual Report
63
2
Mission & Executive Messages
3
Vision & Mission
4
Message from the President
6
Message from the Chairman
TECSYS & Supply Chain Management
8
About TECSYS
9
Why customers choose TECSYS
10
TECSYS’ Evolution in Supply Chain Management
11
TECSYS’ Evolution in Healthcare
Customer Success
12
McKesson
14
North Mississippi Health Services
16
Aetrex Worldwide
MD&A & Financials
19
Management’s Discussion and Analysis
34
Management’s Report
35
Auditors’ Report
36
Financial Section
Other Information
63
General Information
64
Directors and Executive Management
65
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, 2010. 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. 2010. All names, trademarks, products, and services mentioned are registered or unregistered trademarks of their respective owners.
OUR VISION | TECSYS is in relentless pursuit of one goal ─ to be the
dominant Supply Chain Management (SCM) software technology and solutions provider for distribution-centric operations. Our specific focus is in healthcare and high-volume distribution. Today, hundreds of world-class companies and thousands of facilities with complex, high-volume distribution environments rely on TECSYS to achieve the highest level of customer service at the lowest possible operating costs.
industry solutions based on our advanced, proven technologies and featurerich suites of enterprise SCM and logistics applications. Backed up by the breadth and depth of our employees’ expertise, and focused by our “Customers for Life” philosophy, we continue to be the software vendor of choice because of our distribution and supply chain management know-how. By leveraging the full power of our solutions to improve the efficiency and profitability of their businesses, our clients continue to soar as leaders in their respective fields.
2010 TECSYS Inc. - Annual Report
OUR MISSION | We improve our customers’ supply chains with unparalleled
3
| Message from the President
TECSYS was able to stand apart from its competitors, continuing to win business, delivering solid financial results and becoming increasingly recognized in the industry as a market-leading provider of supply chain management solutions.
2010 TECSYS Inc. - Annual Report
Fiscal 2010 was a challenging year as the world continued to deal with uncertainty and economic growth remained elusive. While our overall revenue was down, largely due to a near collapse in hardware sales, TECSYS was able to stand apart from its competitors, continuing to win business, delivering solid financial results and becoming increasingly recognized in the industry as a market-leading provider of supply chain management solutions, particularly for healthcare.
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During the year, we remained focused on our operational and strategic plans. Our achievements were driven by our clear long-term strategy adapted in the short term for changes in economic and market conditions. We continued to focus on presenting our customers with industry-specific solutions, including both software and services. This sets us apart, and provides us with a true sustainable competitive advantage in a rapidly-changing environment. Our achievements would not have been possible without the great contributions of our people who are proud to be a part of the TECSYS organization and are committed to always putting our customers first. As a result of this combination of great product tailored to specific industries and great people who look after our customers, we continue to be the supply chain software partner of choice for high-volume distribution operations, particularly in healthcare. Our new Visual Logistics now leads the market, in terms of innovative thinking and positions us well for the future. I am delighted to see where TECSYS is today, exciting times are ahead and I am pleased to report on our major achievements in fiscal 2010.
Highlights of the Year During the year, the Company: ▪▪
Won the business of 23 new customers, and continued to increase its market share.
▪▪
Signed 42 new agreements with existing clients, reinforcing its position with its base accounts and improving its recurring revenue stream.
▪▪
Saw an increase of 9% in revenue from proprietary software compared to last year, of which approximately 40% of new license bookings were
generated from the healthcare market. (Major competitors license revenue declined by as much as 47% in calendar 2009.) ▪▪
Achieved fourteenth consecutive quarter with earnings from operations and continued to generate cash.
▪▪
Delivered an EPS of 18 cents per basic share compared to 12 cents in fiscal 2009, an increase of 50%.
▪▪
Completed the deployment of its software at 67 customer sites.
▪▪
Further penetrated the healthcare industry and deployed its software for the distribution of 125 million doses of H1N1 vaccines across the U.S. ─ a historical achievement.
▪▪
Introduced Visual Logistics™, an industry first for warehouse management and a new competitive weapon that has produced significant interest from our customers, prospects as well as industry experts.
▪▪
Moved its Montreal operations to a new facility; improving the work environment and reducing costs by about $600K annually.
Fiscal Discipline The past year has again proven our sound business model. Through a combination of new high-margin business from both existing and new clients, a solid backlog and prudent cost control, TECSYS did well financially. Although overall revenue was down, our focus on proprietary product sales improved gross margin from 43% in 2009 to 46% in 2010. We continued to manage the business against a clearly defined financial scorecard and this meant some cost reductions in a year when the Canadian Dollar climbed against the U.S. Dollar, reducing the value of our U.S. revenue and challenging us to find new ways to enhance productivity. Our continued profitability in 2010 and profitability outlook in future years enabled us to take advantage of prior years’ investment tax credits to the tune of $1.4 million and tax recovery of $452K.
Below are the results of fiscal 2010 KPIs compared to those in 2009. The 2010 KPIs were significantly impacted by the strengthening of the Canadian dollar; the U.S. to Canadian dollar exchange rate decreased from $1.14 in 2009 to $1.07 in 2010. (For further details, please see the MD&A section of this annual report.). KPI $000’s Except for EPS & ROE Revenue EBIDTA Earnings from Operations EPS/Basic
2010
2009
36,772 3,312
41,017 3,138
2,106
2,181
0.18
0.12
Backlog
18,276
20,360
ROE %
13.3%
10.2%
Cash from Operations Recurring Revenue
2,268
3,799
13,077
13,374
Today, we are debt free and our balance sheet is strong. In fiscal 2010, we generated $2.3 million cash from operations, ending the year with over $8.1 million in cash and short-term investments compared to $7.8 million last year.
Healthcare Focus For nearly fifteen years, we have been providing distribution and warehouse management solutions to Fortune 100 healthcare manufacturers and distributors, as well as a number of hospital supply networks in Canada and the United States. During this period, we have built significant know-how and software solutions that cater specifically to the healthcare supply chain. These tremendous assets have enabled us to strategically differentiate our offerings, outpacing competitors and positioning us in a market-leading position for this sector.
Opportunities in healthcare Our IDN* initiative began in 2003, when we collaborated with Mercy ROi, a 4000bed hospital group in the U.S., to deliver our first supply chain solution to this sector. Today, Mercy ROi is among the most innovative hospital networks in the United States with a powerful supply chain management infrastructure powered by TECSYS’ software, enabling them to reap millions of dollars in savings, improve service to patients and save lives. With healthcare administrators becoming increasingly cognizant of the need to reduce operating cost and efficiently manage critical supplies to healthcare professionals, self-distribution has become a growing trend. It is also becoming more widely embraced as early adopters report real tangible and intangible benefits. Recently, renewed emphasis on the healthcare infrastructure and information technology spending has further stimulated the market opportunity for our supply chain software. With a market for our technology of over 600 hospital networks, we are at the infancy stage of an adoption trend where TECSYS is already in a market-leading position.
Other Verticals In our high-volume distribution vertical market sectors; heavy equipment, gas and welding supplies, import-to-retail, industrial distribution, general high-volume distribution and third-party logistics (3PL), our sales initiatives continued to bear fruit; we continued to win business, differentiated by our industry-specific technology and expertise, edging the competition and gaining market share.
Product Innovation In fiscal 2010, our investment in R&D enabled us to deliver major product releases that have considerably strengthened our value proposition and competitive stance. During the course of the year, we released EliteSeries 8.x with advanced warehouse and transportation management capabilities. Furthermore, on December 3rd, 2009, we announced Visual Logistics; a new technological innovation that enables customers to significantly streamline the logistics process and potentially achieve the highest in order accuracy and fill rate known to date. Already deployed at customer sites, Visual Logistics delivers visual cues to workers and communicates the exact activities they can execute in the optimum time, particularly in environments where literacy and training of workers are a challenge.
Returns to Shareholders From the perspective of returns to shareholders, and as part of our Normal Course Issuer Bid (NCIB), in fiscal 2010, we purchased 300,859 of our outstanding common shares for cancellation at an average price of $1.90 per share for a total investment of $580,000. In addition, as per our dividend policy, and due to our continued positive performance as well as cash generation, the board declared a semi-annual dividend of $0.025 per share; an increase of 25% over fiscal 2009, that was paid on October 7, 2009 and March 31, 2010.
Moving Forward We continue to focus on our business strategy and business fundamentals. Our markets have started to return to their healthy pre-credit market crisis condition. Our business development activities are on the rise producing a very health sales pipeline, particularly in healthcare which has the lion’s share of our sales opportunities. I would like to thank our customers, employees and their families, our suppliers as well as partners for their collaboration in helping us achieve our fiscal and strategic objectives in 2010. I also would like to thank our shareholders and the financial community for supporting TECSYS in 2010, and look forward to their continued support in 2011. Sincerely,
Last summer, we were challenged by an undertaking that was described as “potentially the largest mass vaccination program in human history”. We were called upon by the world’s largest healthcare services company and an existing customer of TECSYS for a decade, to support the massive initiative of deploying the technology infrastructure for the distribution of the H1N1 vaccine across the U.S. Early in August 2009, a 40-day race for the go-live of TECSYS’ software was launched; TECSYS’ experts worked around the clock to enable four major distribution centers strategically located across the United States. On October 12, 2009 a historical achievement was made when the first shipments of thousands of H1N1 vaccines were delivered to support the health system across the U.S., and after eight-weeks, 125 million of the H1N1 vaccines were successfully distributed to their destinations using our software. *IDN: Integrated Delivery Networks for the Management of Hospital Supply Chains.
Peter Brereton President and CEO
2010 TECSYS Inc. - Annual Report
Historical achievement
5
| Message from the Chairman
My fellow shareholders, the results speak for themselves, and I am pleased with the accomplishments that TECSYS’ management has been able to achieve.
During the course of fiscal 2010, economic and market uncertainty presented TECSYS and its management with both opportunities and challenges. During this challenging time, TECSYS continued to demonstrate resilience and prudent management, taking advantage of business opportunities, leading with product innovation and continuing to deliver positive results with a high ROI to its shareholders, most notably the 50% increase in EPS to 18 cents per share, as well as a 25% increase in dividend to $0.025 per share paid semi-annually.
2010 TECSYS Inc. - Annual Report
For the board, this period has been marked by a thoughtful review of TECSYS’ on-going performance and achievements to ensure that the Company stays on its strategic course while sustaining strong operational achievements in its fiscal initiatives. In last year’s report, I discussed the key principles instilled in TECSYS’ management philosophy:
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1. 2. 3. 4.
Be innovative, continue to invest in R&D Preserve cash Hire great people that will not be satisfied with mediocrity Provide stellar service to customers
Considering the challenging times most businesses have faced in the past couple of years, TECSYS’ performance against these principles in 2010 was outstanding: 1.
As competitors battle for supremacy, investments in R&D and delivering practical innovations continued to be a strategic focus of TECSYS. In 2010, TECSYS released a number of product capabilities that extended its advantages over the value proposition of its competitors.
2.
Preserving cash has been religious at TECSYS. Strong and prudent management of our cash assets has enabled TECSYS to improve its current cash position to $8.1 million.
3.
TECSYS’ knowledge assets through the expertise of its people continue to be the number one reason clients choose the Company over competitors. In 2010, it was no different. The highlight of the year was marked by the outstanding achievement of TECSYS’ experts in the deployment of the supply chain infrastructure for the distribution of millions of the H1N1 vaccine across the U.S.
In addition to the above, TECSYS’ management performance is primarily measured by the Key Performance Indicators (KPIs) shown in Peter’s message on page 5 of this annual report. My fellow shareholders, the results speak for themselves, and I am pleased with the accomplishments that TECSYS’ management has been able to achieve. During the course of the year, your board continued its sharp focus on the oversight of TECSYS’ on-going initiatives while continuing to apply its sound and progressive governance practices to support management. Comprehensive discussions and analysis of the Company’s strategic profile and investments were reviewed, and your directors continued to carefully assess management’s execution of its strategy in a rapidly changing business environment. TECSYS’ management practices and framework for execution of its strategy have proven to be effective and robust and the board has been satisfied with the outcome. The board is proud to be actively engaged in TECSYS’ achievements and extends its sincere appreciation to all of TECSYS’ employees for their valued contributions in fiscal 2010.
As Executive Chairman of the Board, my goal is to ensure that we, as board members, continue to provide management with objective advice and ensure that they remain focused on execution while staying the course of their long‑term strategy, adapting it as needed to market and economic changes. TECSYS’ evident success in the healthcare industry and clear signals from this market of its readiness to adopt supply chain management solutions has provided TECSYS with adequate input to further its commitment to the healthcare market. The resounding success of the Company’s solutions over the years and the solid growth potential we see in healthcare are only a testimony of the confidence the board has in TECSYS adopting a focused strategy to further penetrate the healthcare system in Canada and the U.S.
I would like to take this opportunity to thank TECSYS’ management for their leadership and strong achievements during a challenging business environment in last fiscal year. Thanks are also due to our board of directors for their sound advice, and to our customers for their continued support of TECSYS’ value proposition. In closing, I would like to thank TECSYS’ shareholders and the financial community for continuing to see TECSYS as a great investment, and look forward to their support in fiscal 2011. Sincerely,
TECSYS’ Outstanding Common Shares 15.5 15
Dave Brereton Executive Chairman of the Board
14.5
Millions
14 13.5 13 12.5 12 11.5 11
2003
2004
2005
2006
2007
2008
2009
2010
During the course of the year, the Company contributed some $200,000 to various charitable organizations for such initiatives as Youth Unlimited. This is a non-profit organization which, among many things, operates a high school and numerous youth centers for teens that have a great need for a focused environment where they can learn academically at a different pace, learn to eat healthy, and learn sports, arts, and crafts…all with special support to their individual learning styles. We believe this is certainly a worthy cause that it is making a difference in the community.
2010 TECSYS Inc. - Annual Report
In 2010, TECSYS continued to invest in its own equity. The Board of Directors has concluded that the purchase of the Company’s common shares under a Normal Course Issuer Bid (NCIB) is a desirable use of TECSYS’ funds and, therefore, would be in the best interests of the Company and its shareholders. The purpose of the purchases of common shares is to increase the proportionate share interest in TECSYS of those shareholders who retain their shares. Since 2003, TECSYS has acquired over 2.9 million shares investing some 4.2 million in its own equity. As a result, the Company has reduced the number of shares outstanding by 19%, in effect increasing the value of each outstanding common share by at least the same percentage.
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| About TECSYS
Facts about TECSYS ▪▪ Founded in 1983. Headquartered in Montreal, Canada ▪▪ Market-leading provider of supply chain execution solutions to the healthcare and high-volume distribution industries ▪▪ Fourteen consecutive quarters: earnings from operations, and profitable ▪▪ Hundreds of customers, several thousand sites in North America, Europe, Latin America
2010 TECSYS Inc. - Annual Report
▪▪ Public company, listed on the TSX (TSX:TCS)
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TECSYS Today | TECSYS is a marketleading provider of warehouse management, transportation management and distribution management software and industry expert services to mid-size and Fortune 1000 corporations in healthcare, third-party logistics and general high-volume distribution industries. TECSYS has built its business through a singleminded focus on warehousing and distribution operations and by developing robust products and leading expertise over two decades. The Company employs a seasoned team of experts who have extensive experience in supply chain management and in deploying TECSYS’ technology in high-volume distribution environments, enabling customers to significantly streamline logistics operations, reduce cost and improve customer satisfaction.
Professional Experts, People-Oriented ▪▪ More than 75% of TECSYS’ staff has 10–25 years experience in supply chain management; warehousing, distribution & transportation management, and technology. ▪▪ Deep and unique expertise in TECSYS’ targeted vertical markets. TECSYS knows its customers’ businesses. ▪▪ Customer and people-oriented staff ─ very high on customers’ decision-making priorities.
Robust & Flexible - Applications & Technology ▪▪ TECSYS’ technology is robust, powered by state-of-the-art Java® technology and TECSYS’ proprietary iTopia® framework. ▪▪ Flexible, integrated and intuitive technology, easier to use and deploy ─ provides strong competitive advantage and high ROI to customers.
Why customers choose TECSYS
▪▪ TECSYS supply chain applications respond effectively to customers’ business needs ─ moving goods efficiently, reducing logistics costs, improving fill rate, tracking products and orders, and providing unprecedented visibility into customers’ supply chains.
Focus on Supply Chain Execution ▪▪ TECSYS is focused on supply chain execution with its people, solutions and technology – specific solutions to specific clients’ needs in each vertical segment. ▪▪ TECSYS’ focused approach on vertical market segments strengthens its value proposition from product to services; enabling deeper product functionality in each market sector, improved ROI and increased depth of expertise. All of which translate into improved supply chain performance and competitive advantage for its customers.
Agility & Responsiveness to Customers TECSYS’ infrastructure is nimble and flexible, enabling the Company to: ▪▪ Move quickly and efficiently; ▪▪ Respond quickly to its customers’ needs.
TECSYS’ technology is an enabling platform for solving its customers’ warehousing and distribution challenges. Its rich expertise and distribution management capabilities for certain verticals provide key advantages to its customers such as: ▪▪ Improved fill rate up to 99.98% ▪▪ Reduced operational costs ▪▪ Increased order accuracy to over 99% ▪▪ Improved labour productivity; handle more with less ▪▪ Improved responsiveness to customers ▪▪ Increased customer satisfaction
supply chains with unparalleled industry solutions based on its advanced, proven technologies and feature-rich suites of enterprise supply chain management applications. By leveraging the full power of its solutions to improve the efficiency and profitability of
2010 TECSYS Inc. - Annual Report
TECSYS - Providing Customers with Advantages that Matter
TECSYS improves customers’
their businesses, TECSYS’ clients continue to soar as leaders in their respective fields.
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| TECSYS’ Evolution in Supply Chain Management 2009: Launched Visual Logistics 2007: Acquired Streamline, Focus on Industrial Distribution 2005: Migration to Java 2005: Acquired ASI, Entered IBM iSeries/System i Market 2004: Acquired PointForce, Increased focus on Import-to-retail/Giftware 2001: Internet-based Architecture 2000: Acquired Disticom, Entered TMS Market | 10 years - Transportation Management Solutions 1995: Partenered with Cognos - Entered BI Market | 15 years - Business Intelligence Solutions 1995: Acquired Source (Provia), Entered WMS Market | 15 years - Warehouse Management Solutions 1993: Developed, Launched Own Product (DMS) | 17 years - Distribution Management Solutions 1983: SCM Solution Provider | 27 years - Supply Chain Management Solutions
TECSYS Founded
2010 TECSYS Inc. - Annual Report
1983
10
Best Managed Private Company
1995
IPO
1998
Internet Focus
2002-2003
Market Expansion
2004-2006
Market Focus, Leadership
2007-2010
High-Volume Distribution Vertical Market
TECSYS Position
Representative Customers
Heavy Equipment
Leading (20% market share)
Empire CAT, Cleveland Brothers, Milton CAT
Packaged Gas, Welding & Supplies
Emerging market - leader
Cee Kay, AOC, Metroplex, TWSCO
Import-to-retail
Canadian market - leader
Ten Thousand Villages, Kurt S. Adler, Lamrite
Industrial Distribution
Canadian market - leader
ADOX/OKI, S.B. Simpson
General High-Volume Distribution
Market-leading WMS-centric operations
Canon, E1, NewsGroup, SCP, Hagen, LoyaltyOne, Hector Larivée
“We interviewed several warehouse management vendors, looking for the right combination of features and a system that would easily interface to our Banner Enterprise software, and at a price point that we, as a non-profit organization, could afford. On the recommendation from Gartner, the world’s leading information technology research and advisory company, we also looked at TECSYS. We concluded that, quite frankly, TECSYS was the only vendor we interviewed that showed us a solution that would fit our needs for a price we could pay.” John Gauger, Project Manager Liberty University
| TECSYS’ Evolution in Healthcare 2009: The Leading SCM Software Supplier for H1N1 Vaccines 2003: 1st IDN - Sister of Mercy | 7 years - SCM Solutions for IDNs 1999: McKesson & Cardinal Health Select TECSYS | Focused on Healthcare Market 1995: Started in Healthcare (ShoppersDrugMart) | 15 years - Healthcare SCM Solutions
TECSYS Founded
1983
Best Managed Private Company
IPO
1998
1995
Internet Focus
2002-2003
Market Expansion
2004-2006
Market Focus, Leadership
2007-2010
Healthcare Market
TECSYS Position
Representative Customers
IDN*
Market-leading
Mercy ROi, NMHS, VHA, Orlando Health, WRHA, Piedmont HealthCare, Providence Health
Specialty-Drug Distribution
Market-leading
McKesson, Cardinal Health, Triple i, LifeScience Logistics
*IDN: Integrated Delivery Network for Hospitals Supply Chain
“The TECSYS system is a proven product for healthcare. It is a very good fit for our needs and works hand-in-hand with our materials management and clinical systems. It is easy-to-use and is helping us maximize the efficiency and cost savings in delivering quality service for patient care.”
2010 TECSYS Inc. - Annual Report
Mike Switzer, Vice President, Supply Chain North Mississippi Health Services (NMHS)
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| Customer Success – McKesson
“A distribution initiative of this magnitude requires reliable technology. TECSYS was 100% committed to this program, as a result, we were able to move quickly and achieve our goal of safely and accurately delivering the H1N1 flu vaccine to healthcare providers across the country.” Tom Hart Vice President, Vaccines McKesson Specialty Care Solutions
About McKesson McKesson Corporation, currently ranked 14th on the FORTUNE 500, is a healthcare services and information technology company dedicated to helping its customers deliver high-quality healthcare by reducing costs, streamlining processes, and improving the quality and safety of patient care. Over the course of its 177-year history, McKesson has grown by providing pharmaceutical and medical-surgical supply management across the spectrum of care; healthcare information technology for hospitals, physicians, homecare and payors; hospital and retail pharmacy automation; and services for manufacturers and payors designed to improve outcomes for patients. McKesson Specialty Care Solutions, a division of McKesson Corp., delivers the services manufacturers, payors and providers need to ensure pharmaceutical products, coordinated reimbursement, and clinical services are available to patients with complex diseases. Its technology platform and clinical tools, provide manufacturers and providers with value-added information that helps improve efficiency while enabling better, safer patient care. McKesson Specialty Care Solutions is the second largest distributor of specialty pharmaceuticals and biologics and the largest distributor of rheumatology drugs in the United States. In addition, it is the centralized distributor for the Centers for Disease Control & Prevention’s (CDC) public-sector purchased adult and pediatric vaccines, including the 2009 H1N1 vaccine and those distributed under the CDC’s Vaccines for Children program.
A pandemic H1N1 is declared
2010 TECSYS Inc. - Annual Report
The first novel H1N1 patient in the United States was confirmed by laboratory testing at CDC on April 15, 2009. Following that, it was quickly determined that the virus was spreading from person-to-person, and on April 22, CDC activated its Emergency Operations Center to better coordinate the public health response. Shortly thereafter, the United States Government declared a public health emergency and moved forward to actively and aggressively implement the nation’s pandemic response plan.
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On August 10, 2009, McKesson Corp. announced that its current partnership with the Centers for Disease Control and Prevention (CDC) had been expanded to include preparations for H1N1 flu vaccine distribution. Under the authority of Unusual and Compelling Urgency (Federal Acquisition Regulation 6.302-2), the CDC expanded its existing contract with McKesson to include centralized distribution of the H1N1 flu vaccine which was under development at the time. The H1N1 vaccine distribution effort included the centralized distribution of the H1N1 flu vaccine to as many as 150,000 sites across the country, making it the largest public health initiative in the CDC’s history.
The challenge 1.
Needed the ability to distribute millions of dosages to thousands of sites including: point of dispensing facilities, retail outlets, pharmacies, hospitals, mass immunizers, public health facilities, physicians/long-term care physician offices, clinics, nursing homes and other small providers.
2.
Complex, multi-faceted supply chain requiring cold chain product handling to ensure product safety.
“We wanted to be part of this initiative and support our long-standing partner to help control this pandemic outbreak. It was a significant challenge not only from a massive distribution point of view but also from a timeline; eight weeks to go-live, 100% error free and accurate, no room for any slippage whatsoever. We were delighted to be part of this successful initiative!” Peter Brereton President & CEO TECSYS Inc.
3.
Involvement of five manufacturers required handling of multiple products, packaging, and labeling conventions.
tion operations, consolidates information, manages inventory, drives dramatic cost savings, and delivers superior customer service.
4.
New distribution centers and IT systems needed to be executed in a matter of months to protect patients from rapidly spreading pandemic influenza.
Deployment in record time
TECSYS’ partnership with McKesson goes back over a decade when McKesson selected TECSYS’ distribution and warehouse management software for healthcare in 1999 for its 3PL specialty drug distribution business (Oncology Therapeutic Network, now McKesson Specialty Care Solutions).
The solution To help the CDC ensure the safe and expedient delivery of the H1N1 flu vaccine to patients across the country, McKesson Specialty Care Solutions leveraged its existing TECSYS partnership to build an industry-leading technology system.
TECSYS in healthcare For some fifteen years, TECSYS has been providing distribution and warehouse management solutions to customers in the healthcare industry; these include Fortune 100 manufacturers and distributors, as well as a number of hospital supply networks (IDNs) and third-party logistics providers in Canada and the United States. The Company’s product suite for healthcare effectively streamlines business processes, speeds up the flow of business activity across distribu-
Fulfillment – 99.99% accuracy Thanks to McKesson’s industry-leading technology systems and operations processes, the Company was able to process and ship out H1N1 vaccine orders on the same day they were received in its systems from the CDC. This critical functionality ensured vaccine packages were received by healthcare professionals as quickly as possible. Using TECSYS’ distribution and warehouse management software applications, each order was electronically processed and each vaccine package was barcode scanned and verified for accuracy.
Major achievements/benefits ▪▪ ▪▪ ▪▪ ▪▪
Eight weeks to go-live for four distribution centers Picking, packing and shipments of up to 5000 containers per day Fulfillment of 125 million dosages was completed in two months from go-live 99.99% order accuracy
2010 TECSYS Inc. - Annual Report
“This was as much about public health as about a business transaction,” commented Peter Brereton, President & CEO, TECSYS Inc. “We wanted to be part of this initiative and support our long-standing partner to help control this pandemic outbreak. It was a significant challenge not only from a massive distribution point of view but also from a timeline; eight weeks to go-live, 100% error free and accurate, no room for any slippage whatsoever. We were delighted to be part of this successful initiative!”
To achieve the CDC’s goal of vaccinating patients across the country beginning in October 2009, TECSYS experts alongside McKesson professionals worked around the clock to enable four distribution centers strategically located across the United States.
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| Customer Success – North Mississippi Health Services “We are now buying in bulk from manufacturers compared to small quantities from distributors in the past. As a result, we have reduced our cost anywhere from 3% to over 25% on individual items and improved our fill rate to 99.98%.” Mike Switzer Vice President, Supply Chain NMHS
About NMHS North Mississippi Health Services (NMHS) is a diversified regional healthcare organization which serves 22 counties in north Mississippi and northwest Alabama. North Mississippi Medical Center is the flagship hospital (winner of the 2006 Malcolm Baldrige Quality Award) and operates the Logistics Center (warehouse). The organization covers a broad range of acute diagnostic and therapeutic services, and through North Mississippi Medical Center, NMHS offers a comprehensive portfolio of managed-care plans. Educational programs and early intervention are also important aspects of NMHS’ services, but the organization’s main focus is to improve the health of the people in its region by providing conveniently-accessible, cost-effective healthcare of the highest quality. NMHS’ service area covers two states; it includes six hospitals, one surgery center, 32-owned clinics, four nursing homes, a home health agency and 23 school health centers. In fiscal year 2008 (October 2007 through September 2008), NMHS admitted over 36,000 patients and over 123,000 cases in the ER. Coordinating care over such a wide area and in so many settings is one of the supply chain system’s key challenges.
The challenge Hospital Expenses Other Expenses 15%
Logistics 15% Labour 45%
▪▪
Some 40% of hospital supply-related costs are devoted to handling, moving and processing supplies, compared to less than 10% in other industries
▪▪
A cost reduction of 5 to 15% in supply chain costs could result in some 3% improvement in a hospital’s operating margin
Like most hospitals, NMHS was in pursuit of improved margins and increased efficiency. To meet its objectives, NMHS appointed Mr. Mike Switzer, an experienced executive in supply chain management for healthcare, as its Corporate Supply Chain Officer. Mr. Switzer’s mandate was simply to cut cost and improve supply chain operations to support NMHS’ reputation of quality service. The task, not so simple, but it has proven to be more than well worth the investment. Since going live with TECSYS’ EliteSeries, NMHS saved millions of dollars and increased its EBITDA (Earnings before interest, taxes, depreciation and amortization) by 10%, music to any business executive’s ears!
Strategy Switzer assembled multiple teams of people. Each team focused on different Supply Chain needs. There was a team that looked at the supply approval process that included Physicians, Purchasing, Surgery, Nursing, Accounting and the Business Office. Another team looked at the needs for a MMIS (Materials Management Information System). This team consisted of IT, Purchasing and Distribution. An offshoot of the MMIS team was formed when it became apparent that none of the MMIS systems had good warehouse functionality. The WMS team consisted of three people from IT, two people from Distribution and the Corporate Supply Chain Officer. A team that consisted of Surgery, Central Sterile and the Corporate Supply Chain Officer that looked at both Central Sterile Processing and Case Cart Assembly. After an in-depth evaluation, Switzer and his team concluded that they needed: ▪▪
A warehouse management system to anchor their supply chain strategy
▪▪
To start an aggressive contracting phase with manufacturers involving physicians in the buying process
▪▪
To build: ▪▪
A warehouse facility of 30,000 square feet instead of the initially planned 18,000 square feet, but stay within budget
▪▪
A new Central Sterile Processing (CSP) facility. The current one was too small and outdated
▪▪
A new Laundry facility, as the current one was designed twenty years ago and was reaching the end of its life. Laundry operation for over 6.6 million pounds per year of such items as linen, bed spreads and other reusable items
The team saw a great potential for eliminating redundant steps and improving stock by altering the distribution management process and going directly to manufacturers. A disintermediation process that immediately paid off!
2010 TECSYS Inc. - Annual Report
Supplies 25%
14
The U.S. hospital industry is characterized as having ever increasing costs and reduced cash flow. With the supply chain representing the second largest expense for hospitals after labor costs, it is a strategic target area for cost reduction. The hospital supply chain is often inflated with the wrong inventories and a high occurrence of stockouts, ranging from 85% to 95% fill rate. Furthermore, with the lack of a proper inventory management system, it is virtually impossible for hospital personnel to have real-time visibility of their available supplies or any shortages in the supply network across their campus. Undoubtedly, the hospital supply chain is a significant area for cost savings and operational improvements. According to recent studies of hospital supply chains: ▪▪
Managing materials and supplies consumes up to 30% of net patient revenues
▪▪
Purchasing professionals spend about 40% of their time on manual processes
With its self-distribution strategy, NMHS was enabled to control their own destiny by managing products in their supply chain, from cradle to grave. It also enabled them to reduce product, operating and excessive costs associated with the purchasing, warehousing and delivery of supplies.
The solution Prior to selecting TECSYS, NMHS had a small warehouse with a significant number of manual processes that were not in keeping with the organization’s high quality and professional staff. NMHS’ management was looking for logical ways to keep costs in line, such as reducing duplication and inefficiencies and encouraging standardized processes. In pursuit of its continued innovation, Switzer and his team searched, among major enterprise systems players, including major WMS (warehouse management systems) suppliers then looked at TECSYS at McKesson’s drug wholesale operation in Memphis, Tennessee and decided in favor of TECSYS’ EliteSeries WMS for healthcare. “We looked at the top three enterprise software suppliers and could not find a warehouse management system that could meet our needs,” commented Switzer. “TECSYS’ EliteSeries system is a proven product for healthcare. It is a very good fit for our needs and works hand in-hand with our materials
“We have been very happy with the operation of the TECSYS system. It was a drastic change from the old ways of doing business, but our staff bought into the concept and ran with it.” Mike Switzer Vice President, Supply Chain NMHS management and clinical systems. It is easy-to-use and it is helping us maximize the efficiency and cost savings in delivering quality service for patient care.” During the Spring of 2007, NMHS signed with TECSYS. In July 2007, NMHS attended a training class on the EliteSeries, and went live on the new system in early November 2007. The EliteSeries effectively streamlines business processes that cut across the functional areas of business and consolidates fragmented operations, often replacing multiple legacy systems. As a totally integrated suite, it consolidates information, manages inventory, drives dramatic cost savings, and helps deliver superior customer service. Initially, and to speed-up the go-live date in order to “stop the bleeding” and take advantage of the cost savings possible through TECSYS’ EliteSeries system, NMHS opted for a SaaS (software as a service) model of the EliteSeries; the underlying system is a fully-redundant, remotely hosted warehouse management application. In effect, NMHS had tier one warehouse management capabilities in sub-seconds, and without the need to attend to application technology— hardware or software. With TECSYS’ WMS capabilities, NMHS is now able to manage its critical needs of delivering such materials as IV fluids, clinical supplies and implants using the software’s key capabilities for healthcare such as tracking of expiry dates and lot numbers, proper stock rotation, paperless picking, receiving and more; in essence automation of their full warehouse operation. Generally, hospitals are over stocked with too many products, often not with the right products or supplies. With NMHS’ strategy to move to self distribution; buy directly from manufacturers and manage their own inventory, they needed to increase their inventory with the right products based on real consumption.
The center keeps a 15- to 30-day supply of most items in stock, plus lead time. A pair of wire-guided forklifts is available so the operator does not have to steer while driving the load down the aisle. The goods are transported in plastic reusable totes to cut down on cardboard and cellulose in the hospitals. Plastic reusable pallets are also used to transport the goods to the hospitals. The plastic pallets will save on wear and tear on the hospital floors and can be cleaned. To avoid mispicking, no two like-items are placed beside, above or below the other. Powered by TECSYS’ EliteSeries for healthcare, NMHS warehouse operations is able to track goods from the moment they are received until they are delivered. The system also tracks items’ expiration dates and lot numbers. Lot integrity and tracking are crucial healthcare supply chain functions; they help ensure that patients receive safe therapies, and that problems are contained and minimized.
Switzer believes the Logistics Center will pay for itself in just over two years through cost savings by buying directly from the manufacturer and taking advantage of buying in bulk of economic order quantities. “The ROI we prepared projected a five year payback, but the actual results will be just over two years.” commented Switzer. NMHS has already achieved significant measurable savings, including a high level of efficiency in its logistics operations, below are some of the key benefits.
Benefits Key Performance Indicator
Increase/Decrease
Substantial Increase in Space & Inventory without adding staff:
Fill rate increased
t300% t47% t310% u71% u78% u59% tup to 99.98%
Annual cost reductions
US$ 8 million
▪▪ Warehouse space ▪▪ Number of items received ▪▪ Inventory Value Total mis-picks # of overnight packages/day Back orders
NMHS eliminated several steps in the supply chain, and greatly improved management of inventory. The hospital gained large, unexpected operating benefits because the system eliminated the erratic hospital order pattern of the past. As a result, Hospital personnel were redeployed into patient care.
2010 TECSYS Inc. - Annual Report
According to Switzer, “We have added more than 800 line items to the inventory, bringing the total to more than 2,100 line items. This enabled us to have the right products at the right time to support our Doctors and Nurses and equip them with supplies to deliver, just-in-time, quality service to patients.”
Order pickers wear a wrist computer with an RF, laser ring reader. Through TECSYS’ EliteSeries system-directed putaway and picking, the software directs the worker through the warehouse in the most efficient route to each item’s location; the item is then double checked by scanning its barcode to confirm that the correct item is being picked. The wrist computers are wireless and send their signal back in real time to update the central database, so the device does not have to be docked for a download.
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| Customer Success – Aetrex WorldWide
“TECSYS’ WMS is a wonderful product. It has enabled us to grow at a very aggressive rate, and without it we would have not been able to achieve our strategic sales and customer service goals. We went from paper-based to RF technology in a VERY short period of time; this leap has enabled us to increase our productivity, our volume and be able to manage our distribution and sales commitments, with a minimal increase in staff.” Jeffrey Pike Vice President of Operations Aetrex WorldWide
Founded in 1946, Aetrex is a family-owned global leader of pedorthic footwear and foot orthotics. The Company has just completed its 12th consecutive year with double-digit growth, doubling in revenue in the last five years, and is now on the cusp of a major entrance into the consumer market on a worldwide basis. “Our goal is to become a major brand in footwear,” stated Jeffrey Pike, Vice President of Operations, Aetrex Worldwide Inc. Although footwear is a major Aetrex focus, the Company has also pioneered an industry-altering technological innovation, the iStep; the leading digital foot analysis system, available to consumers at more than 4,500 locations throughout the world. Aetrex also owns Foot.com, named by Yahoo!™ as the best healthcare site “below the knee”. Aetrex addresses two key markets; foot health and comfort shoes. The Company distributes its products through major retailers and specialty stores and clinics. It is also the exclusive supplier of diabetic shoes to the United States Veterans Association, and orthopedic insoles and shoes to the U.S. military.
The challenge Aetrex’s management made a strategic decision to outsource its manufacturing and position the Company as the expert in pedorthic footwear and foot orthotics, focusing on the design, quality as well as its supply chain and customer care.
2010 TECSYS Inc. - Annual Report
“Five years ago, we made a strategic decision to go offshore with all of our manufacturing. We realized that we needed a warehouse management system to support our objective of improving our distribution, customer service and distribution channels,” stated Jeff Pike.
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Having an efficient supply chain that supports its vision and further links its people to customers and suppliers is a vital part of Aetrex’s strategy. The Company needed to have a system in place to support its volumes and distribution mix; 20,000 different SKU’s, 2,000 orders and 20,000 units per day. The Company needed to become automated with a strong supply chain infrastructure to support its go-to-market strategy, and to provide real-time intelligence to better serve its clients, management and distributors.
The solution Aetrex management accepted proposals from a number of warehouse management vendors. Following an extensive evaluation process, Aetrex decided in favor of TECSYS. “We selected TECSYS for a number of reasons; we felt that TECSYS’ WMS is out of the box, fully-featured and robust suite of applications that we could use with the absolute minimum amount of modifications. In addition, customer service is very important to us, TECSYS demonstrated unparalleled customer care with their hand holding, responsiveness and presence,” commented Pike.
Deployment of TECSYS’ warehouse and distribution management applications at Aetrex was completed in about five months. ”We put the stake in the ground in terms of the go-live time table and TECSYS came through with their expertise, service and support. We may have had some bumps along the way, but we dealt with them as they came up. There is no such thing as a totally uneventful go-live, but at the end of the day, with TECSYS we are now miles ahead in our execution abilities and management of our supply chain,” Pike commented. Aetrex’s customer orders are received daily, primarily through EDI which triggers the picking process from inventory either one order at a time or through a batch order process. Non-distributor orders are usually shipped the same day, with rush orders given a priority; if an order is received by 2:00 P.M. it is shipped the same day. The Company places orders monthly with its suppliers which could take up to 4 months before they are received at Aetrex’s central distribution facility. Upon receiving, shipments are scanned into TECSYS’ WMS, followed by a stringent Quality Control process, utilizing a 10% QPR/ progressive matrix procedure; Aetrex’s final inspection of all incoming product before put away. With TECSYS’ WMS at Aetrex’s central distribution; receiving is alerted in advance of incoming products that should be immediately shipped or put away into a stocking location. Down the line, TECSYS’ electronic data interchange (EDI) enables the system to generate an Advance Ship Notice (ASN) to advise the customer on a timely basis. TECSYS’ EDI enables Aetrex to automatically pass orders through the entire system from receipt of an order, to shipping and billing. It also helps to maximize customer responsiveness, increase turnover, reduce cost and meet trading partner requirements. Software Scalability Supports Aetrex’s Growth The flexibility and scalability of TECSYS’ applications are enabling Aetrex to meet the size, need and complexity of its business at any location globally. If one distribution facility is nearing capacity, scaling it is as simple as adding another instance of the application. Scaling horizontally is providing Aetrex’s management with considerable cost savings and giving management better access to critical information for sensing the pulse of the business. Extending Aetrex’s Supply Chain Management Beyond the Warehouse TECSYS’ applications are extending the reach of the Company’s management beyond the four walls of their warehouse; empowering their people to efficiently link to customers and suppliers. TECSYS’ WMS is integrated with a complete suite of distribution management, transportation management and business intelligence solutions, enabling Aetrex’s management to seamlessly execute order-to-cash and purchase-to-pay processes.
Benefits Since deploying TECSYS’ warehouse and distribution management applications, Aetrex has gained a significant number of supply chain execution capabilities and benefits: ▪▪ ▪▪ ▪▪ ▪▪ ▪▪ ▪▪ ▪▪
Flawless High-Volume Order Fulfillment of 100,000+ line items and over 6,000 orders per week Reduced Order Turn-Around Time from 2-3 days to “in by 2:00, out same day” Reduced Labor and Steps for Picking/Shipping Real-time Control of Complex DCs such as handling stock, non-stocks and special orders and multiple units of measure Accurate and Timely Receipts such as Reduce availability for sale/picking from days to hours Global Internal and External Visibility such as Collaboration with suppliers/ customers via self-service Web Scale with Business Growth such as easily scaling from 2 users to 200+ users and 1,000 to 1,000,000 SKUs
Key Performance Indicator Increased volume without additional people Improved fill rate Increased inventory accuracy Reduced cost by
“We selected TECSYS for a number of reasons; we felt that TECSYS’ WMS is out of the box, fullyfeatured and robust suite of applications that we could use with the absolute minimum amount of modifications. In addition, customer service is very important to us, TECSYS demonstrated unparalleled customer care with their hand holding, responsiveness and presence.” Jeffrey Pike Vice President of Operations Aetrex WorldWide
Increase/Decrease
t80% t45% t70% u24% 2010 TECSYS Inc. - Annual Report
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2010 TECSYS Inc. - Annual Report
| Management’s Discussion and Analysis of Financial Condition and Results of Operations
18
Management’s Discussion and Analysis of Financial Condition and Results of Operations This Management Discussion and Analysis (MD&A) dated July 8, 2010 supplements and should be read in conjunction with the Consolidated Financial Statements and Notes thereto, which are included in this document. The Company’s fiscal year ends on April 30. Fiscal 2010 refers to the twelve-month period ended April 30, 2010. The Company’s consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles. Except where otherwise indicated, all financial information reflected in this annual report are expressed in Canadian dollars. The Company’s functional currency is the Canadian dollar as substantially all of the Company’s assets, operations and resources are located in Canada.
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 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 two decades. The deployment of TECSYS’ technology for high-volume distribution operations enables customers to streamline logistics operations, reduce cost and improve customer service. The supply chain management 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 generally 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. Despite the economic recession that has been characterized by tightened credit markets, delayed capital spending, and longer sales cycles, the Company has managed to sustain good business volumes and financial performance. The Company is cautiously optimistic of its growth potential based on the continued positive market reaction to its value proposition and the expected annual growth rate of the overall supply chain management software and services market. According to Gartner, the world’s leading information technology research and advisory company, despite economic uncertainties, worldwide revenue for supply chain applications was $7 billion at the end of 2008, increasing 16.6% over 2007. Although growth slowed in 2009, a compound annual growth of 10.6% is expected through 2012. Growth will be fueled by supply chain organizations focusing investments in areas of high business value, notably applications that help reduce costs, drive business growth, improve customer service and improve efficiency. Resumption and growth of SCM project spending is expected to be driven over the longer term by the replacement cycle of legacy systems as well as new areas of supply chain deployment such as those undertaken in healthcare and higher education. In the immediate term, the Company remains vigilant in ensuring that its business model is in line with realistic revenue and margin expectations.
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 is a growing trend in hospital groups. The Company’s solutions are also becoming more widely adopted as hospitals have embraced the concept due to the fact that they have met enough success and have delivered real tangible and intangible benefits.
Similarly, over the past several years the Company has made significant inroads for 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 supplier and service provider for heavy equipment parts distribution in North America with approximately 20% 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 providers that include: software partners such as IBM, Oracle, Microsoft, mobile computing partners such as Intermec and Psion Teklogix. In June 2008, the Company entered into a marketing agreement with National Medical Logistics, a supply chain and distribution consulting firm serving some of the largest healthcare systems in the United States. The combined offering and expertise promotes the penetration of this market with a totally integrated supply chain execution solution enabling cost reduction and improving supply chain efficiency. On December 3, 2009, TECSYS announced the launching of Visual Logistics, an innovation to its Warehouse Management Software (WMS), that TECSYS believes will enable 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 radio-frequency 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. At the core of the Company’s software applications is the iTopia application framework. Developed by TECSYS, the iTopia application framework brings leading edge web technologies and platform independence to the Company’s flagship product, EliteSeries. Furthermore, this framework provides the Company with robust integration services for all of its applications. The user interface provided by iTopia is metadata-based allowing users to easily customize screen and report content, include rich content such as dynamic links and images as well as being accessible through any device that supports browser technologies. The iTopia framework allows TECSYS to enhance its applications rapidly to provide secure, scalable, robust solutions to its chosen geographical and vertical markets. The Company generates revenue from licensing fees for proprietary software, third-party software licenses and hardware, and the provision of related information technology services. 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-and-material 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 19% of revenue for fiscal 2010 and 15% for fiscal 2009. In fiscal 2010, third-party products represented 18% of total revenue (23% in fiscal 2009) and include products developed by Oracle Corporation, IBM Corporation, Psion Teklogix Inc., ScanSource Inc., Intermec Systems Corporation, Optio Software Inc., and Best Software Canada Ltd.
2010 TECSYS Inc. - Annual Report
Since mid-fiscal 2007, the Company has streamlined its business operations with the objective of achieving improved margins and profitability. The strategy transformed the Company into an organization focused on specific vertical markets that has strengthened its expertise and product offerings. Currently, vertical markets targeted by TECSYS 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 highvolume distribution and third-party logistics.
IDNs are integrated delivery 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 go-to-market strategy. Recently, renewed emphasis on health infrastructure and information technology spending initiatives in the U.S. economic stimulus package is, in TECSYS’ view, indicative of the growth potential for this vertical. TECSYS believes that, currently, it has a market-leading position for supply chain management software and services in the IDN sector in North America.
19
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 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. Research and development (R&D) includes salaries, benefits, incentives and expenses of all staff assigned to R&D. Fees paid to external consultants and subcontractors are also included, along with a portion of overhead. At the end of fiscal 2010, the Company employed 242 people in comparison to 245 at the end of fiscal 2009 representing a slight decrease. The average number of employees remained flat at 242 for both fiscal 2009 and 2010. The U.S. dollar weakened by approximately 6% against the Canadian dollar during fiscal 2010 in comparison to fiscal 2009. The U.S. dollar to Canadian dollar exchange rates for fiscal 2010 averaged CA$1.0722 in comparison to CA$1.1449 for fiscal 2009. Consequently, with a significant portion of the Company’s revenue base generated in U.S. dollars, the weakened U.S. dollar affected the reported revenue adversely by an estimated $1.3 million while cost of revenue and operating expenses were affected favourably by an estimated $400,000. Earnings from operations have been affected adversely by an estimated $900,000 in fiscal 2010 due to the weakened U.S. dollar. In 2009, the U.S. dollar strengthened by approximately 12% against the Canadian dollar in comparison to fiscal 2008, and earnings from operations were affected favourably by an estimated $1.4 million.
Products revenue decreased to $13.3 million, 15% or $2.4 million lower, compared to $15.7 million for the previous fiscal year. The change in products revenue of $2.4 million comprises a decrease of $3.0 million or 32% for third-party products while proprietary products increased $573,000 or 9%. This decrease in third-party products is attributable to a continuing lack of investment in hardware in this current economic climate. Proprietary license bookings during fiscal 2010 have outpaced those of the previous fiscal year. The increase for proprietary software licenses is mainly attributable to higher sales to new accounts. In fiscal 2010, the Company signed 23 new customers at an average initial total contract value of $375,000 in comparison to 21 new customers with an average initial total contract value of $293,000 for the previous fiscal year. This was partly offset by lower software licenses from existing accounts. The current economic, financial, and credit environment in North America is clearly having an impact in delaying and / or reducing capital investment decisions and prolonging the sales cycle for both existing and prospective customers. Services revenue decreased to $22.4 million, 7% or $1.7 million lower, from $24.1 million in the previous fiscal year. The decrease in services revenue is attributable primarily to lower activity for product adaptation and implementation services, offset by improved performance for software support and software hosting activities. The reduction in product adaptation services is primarily due to the lack of significant projects requiring changes and the Company’s continuing strategic focus on vertical markets where significant product adaptation is not required. As a percentage of total revenue, products accounted for 36% and services for 61% in fiscal 2010, in comparison to 38% and 59%, respectively, for fiscal 2009. The very large decrease in third-party products explains the decrease of the products percentage component in fiscal 2010 offset partially by the increase in proprietary products. Proprietary products accounted for 52% and third-party products for 48% of the total products revenue in fiscal 2010, in comparison to 40% and 60%, respectively, for fiscal 2009. Given the high cost associated with third-party products, the reduction in third-party products revenue of $3.0 million had an impact of $582,000 on gross margin. Source of Revenue FY 2010
Selected Annual Information
Reimbursable Expenses 3%
2010 TECSYS Inc. - Annual Report
In thousands of Canadian dollars, except per share data
20
Total Revenue Net Earnings Basic Net Earnings per Share Common Share Dividends Total Assets Total Long-Term Financial Liabilities: Long-Term Debt (including the current portion of long-term debt)
2010
2009
2008
36,772 2,182 0.18 0.05
41,017 1,587 0.12 0.04
39,495 1,263 0.09 0.02
32,295
31,466
30,102
249
233
407
Products 36%
Services 61%
FY 2009 Reimbursable Expenses 3%
Results of Operations
Year ended April 30, 2010 compared to year ended April 30, 2009 Revenue Total revenue decreased to $36.8 million in fiscal 2010, $4.2 million or 10% lower, compared to $41.0 million in fiscal 2009. The economic recession and the weakening U.S. dollar were two significant factors behind this reduction in revenue. Since more than 50% of the Company’s revenues are generated in the United States, the weakening U.S. dollar accounted for an estimated $1.3 million in lower revenues.
Products 38%
Services 59%
Geographical Breakdown of Revenue
fiscal year. Proprietary products generate a considerably higher margin than thirdparty products explaining the margin percentage increase.
FY 2010
Services gross margin decreased by $949,000 or 11% to $8.0 million representing 36% of services revenue in fiscal 2010 compared to $9.0 million representing 37% of services revenue in fiscal 2009. The decrease in the services gross margin is largely attributable to the diminished activity particularly for product adaptation and implementation services and aggravated further by the unfavourable revenue impact of the weakened U.S. dollar in fiscal 2010. The transfer of services resources to the R&D activity to assist in the Java migration effort, and other initiatives to contain expenses in the areas of consulting and travelling have mitigated the impact on the services gross margin.
Other 1%
Canada 47%
U.S. 52%
Total operating expenses decreased 6% or $883,000 to $14.7 million in fiscal 2010 compared to $15.5 million in fiscal 2009. The discussion below will address the most significant variances and transactions differentiating fiscal 2010 in comparison to fiscal 2009.
FY 2009
Sales and marketing
Other 1%
Canada 46%
Operating Expenses
Sales and marketing expenses were lower by $459,000 or 7% amounting to $5.9 million in fiscal 2010 in comparison to $6.4 million for fiscal 2009. The decrease is primarily attributable to lower commission expenses of $249,000 and lower European selling expenses of $287,000. U.S. 53%
General and administration General and administration expenses remained virtually flat at $3.6 million, $29,000 lower in fiscal 2010 in comparison to the previous year. In fiscal 2010, the Company recorded higher bad debt expenses, charitable donations, and U.S. franchise taxes amounting to approximately $300,000 that were offset by lower management incentives, travelling expenses, and legal fees. Research and development (R&D)
Cost of Revenue Cost of revenue in fiscal 2010 decreased to $20.0 million, 14% or $3.3 million lower, in comparison to $23.3 million for the previous fiscal year. Products cost decreased by $2.4 million or 34% to $4.6 million in fiscal 2010 in comparison to $7.0 million for fiscal 2009. This decrease is predominantly attributable to the reduction of third-party products revenue of 32% as noted earlier.
Gross Margin Total gross margin decreased to $16.8 million in fiscal 2010, 5% or $958,000 lower, in comparison to $17.7 million in the previous fiscal year. The gross margin percentage increased to 46% in fiscal 2010 in comparison to 43% for fiscal 2009 mainly due to the increase in proprietary license revenue. Products margin in fiscal 2010 remained virtually flat at $8.7 million, $9,000 lower, compared to fiscal 2009 and represented 66% and 56% of products revenue, respectively. The increase in proprietary products revenue of $573,000 over fiscal 2009 virtually offsets the lower margins realized on the diminished third-party products revenue. The proportion of proprietary license revenues within the products revenue mix changed favourably in fiscal 2010 to 52% in comparison to 40% for the previous
In fiscal 2010, gross R&D expenses were 17% of revenue compared to 14% in fiscal 2009. R&D and e-business tax credits increased by $1.3 million or 165% to $2.0 million in fiscal 2010 in comparison to $760,000 for fiscal 2009. In fiscal 2010, the Company recorded $1.4 million of Federal non-refundable tax credits which may be used to reduce income taxes payable in the current and future years. The Company establishes a valuation allowance against non-refundable tax credits unless, based on available information, their realization is probable. On April 30, 2010, the Company had non-refundable research and development tax credits totalling approximately $7.5 million for Canadian income tax purposes which may be used to reduce taxes payable in future years. For the year ended April 30, 2010, the Company intends to claim available non-refundable research and development tax credits to reduce Canadian Federal income taxes. These tax credits have been applied to offset Canadian Federal income taxes otherwise payable of $143,000. Management believes that it is probable that the Company will also claim available non-refundable research and development tax credits in future years to reduce Canadian Federal income taxes otherwise payable of at least $1.3 million. These tax credits have been recognized as current assets of $355,000 and non-current assets of $930,000 in the Consolidated Balance Sheet and as operating earnings for the year. No corresponding Federal non-refundable tax credits were recorded in fiscal 2009.
2010 TECSYS Inc. - Annual Report
Services costs decreased by $751,000 or 5% to $14.4 million in fiscal 2010 compared to $15.2 million in fiscal 2009. The decrease in the cost of services is attributable primarily to the transfer of resources for approximately $450,000 from the service activity to R&D to assist in the Java migration efforts, as well as higher tax credits, and lower consulting and travelling expenses. The cost of services includes tax credits of $755,000 for fiscal 2010 compared to $690,000 for the same period in the previous fiscal year. The tax credits relate to the e-business tax credits offered in the Province of Quebec.
Gross R&D expenses increased by 14% or $785,000 to $6.3 million in fiscal 2010 compared to $5.5 million in fiscal 2009. The increase of gross R&D expenses can be attributed primarily to higher employee-related costs, consulting, and overhead as a result of the Company focusing its efforts on the migration to the Java platform. Several resources normally involved in providing product adaptation services were redirected to support the advancement of this project accounting for approximately $450,000 of the increase.
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The Company also recorded e-business tax credits and Provincial refundable research and development tax credits which increased $157,000 or 21% to $917,000 for fiscal 2010 in comparison to $760,000 for fiscal 2009. The higher tax credits in fiscal 2010 are generally attributable to the increased R&D activity in the year and to some favourable adjustments for under-accrued tax credits related to prior years. Lastly, in fiscal 2010, the Company recorded a provision for commission expense of $333,000 as a reduction to R&D and e-business tax credits. This provision arises from a lawsuit for lobbying consulting services regarding tax credits received under a Quebec government-based program. Please see note 16 to the consolidated financial statements for further details. During fiscal 2010, the Company deferred $876,000 of new product development costs in comparison to $810,000 for fiscal 2009, representing an increase of $66,000 or 8%. The deferred development costs in fiscal 2010 related to the Java migration did intensify as the Company had disclosed at the end of fiscal 2009. The Company believes that migration of the existing product onto a Java platform will continue to have future economic benefits. The increase in capitalized development in fiscal 2010 is primarily explained by the addition of new resources and the transfer of resources from other activities to speed-up the technology migration. The Company foresees the broadening of the Java migration project to include other technology platforms and estimates that the project duration is likely to go on for approximately fifteen months to the summer of 2011. The development activity in fiscal 2011 is estimated to result with deferred development costs of approximately $1.0 million. The amortization of deferred development costs increased $180,000 or 80% as the amortization expenses for fiscal 2009 and 2010 amounted to $224,000 and $404,000, respectively. The amortization of the deferred development costs commenced in the first quarter of fiscal 2008 with the release of version 7.6 of the Company’s flagship product, EliteSeries, increased in fiscal 2009 and again in fiscal 2010 as the Company released version 7.7 in November 2008, version 8.0 in April 2009, and version 8.01 in February 2010. Other operating expenses Amortization of property and equipment increased slightly by 1% or $5,000 to $550,000 in fiscal 2010 compared to $545,000 for the previous fiscal year. In the second quarter of fiscal 2010, the Company signed a new ten and one-half years lease agreement for the relocation of its Montreal head-office facility. The Company moved to this facility in the spring of 2010. The disposal of redundant property and equipment that was not fully amortized resulted in a write-down of property and equipment of $153,000. The amortization of intangible assets decreased by 32% or $224,000 to $480,000 in fiscal 2010 compared to $704,000 for fiscal 2009. The decrease in the amortization expense is primarily attributable to the intangible assets of the PointForce Inc. that were fully amortized by December 2008, accounting for $179,000 savings in fiscal 2010.
2010 TECSYS Inc. - Annual Report
Earnings from Operations
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Earnings from operations decreased by $75,000 or 3% to $2.1 million representing 6% of revenue in fiscal 2010 compared to $2.2 million representing 5% of revenue for the previous fiscal year.
Interest Income and Expense In fiscal 2010, the Company recorded interest income of $37,000 compared to $53,000 for the comparable period last year. The reason for the lower interest income in fiscal 2010 stems from the fact that interest rates were considerably higher prior to the financial market meltdown which commenced approximately mid fiscal 2009. Interest expense increased by $37,000 or 54% to $106,000 for fiscal 2010 in comparison to $69,000 for fiscal 2009. The interest expense increase is mainly attributable to the accrued $82,000 interest expense associated with lobbying services lawsuit brought against the Company and discussed in further detail on note 16 to the consolidated financial statements, offset by lower interest expense on the floating rate credit facilities due primarily to lower interest rates in fiscal 2010.
Foreign Exchange Losses The Company recorded exchange losses of $211,000 in fiscal 2010 in comparison to $280,000 for the previous fiscal year. The exchange loss is primarily a result of carrying a net asset position, primarily cash and cash equivalents and accounts receivable denominated in U.S. dollars. The exchange losses arose from the timing difference between the generation of revenue and the corresponding accounts receivable and the execution of the forward exchange contracts to sell newly created U.S. monetary assets and the estimation risk in the ongoing process to monitoring the net U.S. monetary asset position. On April 30, 2010, the Company held outstanding foreign exchange contracts with various maturities to October 29, 2010 to sell US$3.9 million into Canadian dollars at rates averaging CA$1.0319 to yield CA$4.0 million. The Company recorded unrealized exchange gains of $78,000 related to the change in fair value of these contracts for the year ended April 30, 2010. Subsequent to the year ended April 30, 2010, the Company undertook another foreign exchange contract to sell US$500,000 at a rate of CA$1.0393 for maturity on October 29, 2010 and sold US$500,000 at a spot rate of CA$1.0540 on June 4, 2010 and US$400,000 at a spot rate of CA$1.0170 on June 21, 2010. On April 30, 2009, the Company held outstanding foreign exchange contracts with various maturities to January 29, 2010 to sell US$4.2 million into Canadian dollars at a weighted average rate of CA$1.198 to yield CA$5.0 million. The Company recorded unrealized exchange gains of $17,000 related to the change in fair value of these contracts for the year ended April 30, 2009.
Changes in Fair Value of Asset-Backed Commercial Paper At April 30, 2010, the Company held MAV2 long-term floating rate notes and ineligible assets (IA) Tracking long-term floating-rate notes with a face value of $5.0 million including U.S. denominated notes arising from the conversion of various third-party asset-backed commercial paper (ABCP) that originally matured in August and September 2007. Please refer to note 5 of the consolidated financial statements in this annual report for a detailed discussion of the restructuring process, the valuation techniques, assumptions, fair value estimates, and the risks associated with these instruments. Since the liquidity disruption in the third-party ABCP market in August 2007, the Company has recorded losses of $1.3 million, of which $238,000 was posted in fiscal 2009. In addition, all principal and interest repayments received of approximately $293,000 have been used to write-down the carrying value further, as the Company has not reported any interest income since the market disruption. For fiscal 2010, after taking into consideration the changes in the credit market characterized by the narrowing of credit spreads and the increasing of the average interest rates, the down-grading of the MAV2 Class A-2 notes to “BBBlow”, the additional accrued interest on the ABCP, the depreciation of the face value of the U.S. denominated ABCP, and the review of the valuation assumptions, the Company concluded that its current carrying value of $3.5 million is a good approximation of the fair value of the ABCP and hence reported no further write-downs or write-ups during fiscal 2010. Estimates of the fair value of the ABCP and the related put option are not supported by observable market prices or rates other than in thinly traded markets, therefore are subject to uncertainty, including, but not limited to, the estimated amounts to be recovered, the yield of the substitute financial instruments and the timing of future cash flows, and the market for these types of instruments. The resolution of these uncertainties could be such that the ultimate fair value of these instruments may vary significantly from the Company’s current estimates. Changes in the near term could require significant changes in the recognized amounts of these assets. As the Company records the new notes at current fair value each period, such adjustments will directly impact earnings.
Income Taxes For fiscal year 2010, the Company had a net income taxes recovery of $435,000 consisting of a current income taxes expense of $204,000 offset by a future income taxes recovery of $639,000. In fiscal 2010, the Company reduced its valuation allowance and therefore recorded future tax assets on its balance sheet because management believes that it is probable that some future tax assets will be realized in future years to reduce income taxes otherwise payable. These future tax assets have been recognized as current and non-current assets. In fiscal 2009, the Company did not record any current income taxes and provided a full valuation allowance against future tax assets.
Net Earnings The Company recorded net earnings of $2.2 million (basic net earnings of $0.18 per share) compared to $1.6 million (basic net earnings of $0.12 per share) in fiscal 2010 and 2009, respectively.
Results of Operations for the Fourth Quarter
Quarter ended April 30, 2010 compared to quarter ended April 30, 2009 Revenue Fourth quarter total revenue decreased 15% or $1.6 million to $8.8 million in fiscal 2010 in comparison to $10.4 million for the corresponding quarter of the previous fiscal year. The U.S. dollar exchange rate averaged CA$1.0283 in the fourth quarter of fiscal 2010 in comparison to CA$1.2445 for the corresponding quarter of fiscal 2009. As the Company generated approximately one-half of its revenues in U.S. dollars in the fourth quarter, revenue has been adversely affected for an estimated $914,000. In the fourth quarter of fiscal 2010, products revenue decreased to $3.5 million, 5% or $180,000 lower, in comparison to $3.6 million for the fourth quarter of fiscal 2009. Proprietary products increased by $94,000 or 5% to $2.0 million compared to $1.9 million for the corresponding quarter of fiscal 2009. The favourable increase in proprietary software license revenues is attributable to the signing of nine new accounts in the fourth quarter of fiscal 2010 in comparison to five for the comparable quarter of fiscal 2009. The related software licenses for 2010 fourth quarter bookings outpaced the fiscal 2009 target by approximately $226,000. Third-party products decreased $274,000 or 16% to $1.4 million in the fourth quarter of fiscal 2010 in comparison to $1.7 million in the same period for the previous fiscal year. The reduction in third-party products is due to lower demand for radio frequency equipment and servers. The current economic climate is clearly having an impact in delaying capital investments.
As a percentage of total revenue, products revenue and services revenue were 39% and 59%, respectively, in the fourth quarter of fiscal 2010 in comparison to 35% and 62%, respectively, for fiscal 2009. Cost of Revenue In the fourth quarter of fiscal 2010, cost of revenue decreased by $478,000 or 9% to $4.9 million in comparison to $5.3 million for the same quarter of the previous year. The decrease in costs is primarily attributable to lower services cost and lower reimbursable expenses. In the fourth quarter of fiscal 2010, services costs decreased $310,000 or 8% to $3.6 million in comparison to $3.9 million for fiscal 2009. The decrease in services costs is primarily attributable to lower salaries and incentives of approximately $148,000,
In the fourth quarter of fiscal 2010 products cost decreased 5% or $51,000 to $1.1 million in comparison to the same quarter of the previous fiscal year as a result of decrease of the third-party products revenue mentioned earlier.
Gross Margin Total gross margin for the fourth quarter of fiscal 2010 amounted to $4.0 million, 22% or $1.1 million lower, in comparison to $5.1 million for the same quarter of the previous fiscal year. The gross margin percentage decreased to 45% for the fourth quarter of fiscal 2010 in comparison to 49% for the same period in fiscal 2009. Services gross margin decreased by $966,000 or 38% to $1.6 million representing 30% of services revenue in the fourth quarter of fiscal 2010 compared to $2.5 million representing 39% of services revenue in fiscal 2009. The decrease in the services gross margin is attributable to the impact of the weakened U.S. dollar, the diminished activity for product adaptation and implementation services on revenue offset by lower employee costs. Products margin in the fourth quarter of fiscal 2010 decreased to $2.4 million, 5% or $129,000 lower, compared to $2.5 million for the same period of fiscal 2009 and represented 70% of products revenue in each of these quarters. The decrease in products margin is attributable to lower third-party products revenue, offset by higher proprietary products revenue.
Operating Expenses Total operating expenses for the fourth quarter of fiscal 2010 decreased $1.1 million or 27% to $3.1 million in comparison to $4.3 million for the same quarter a year earlier. The discussion below will address the other most significant variances differentiating the fourth quarter of fiscal 2010 in comparison to the fourth quarter of fiscal 2009. Sales and marketing Sales and marketing expenses, in the fourth quarter of fiscal 2010, decreased $62,000 or 4% to $1.6 million in comparison to $1.7 million for the fourth quarter of the previous year. The reduction in expenses is primarily due to lower commissions and lower European sales operating costs. General and administration General and administration expenses, in the fourth quarter of fiscal 2010, were lower by $288,000 or 26% amounting to $834,000 in comparison to $1.1 million for the fourth quarter of the previous year. This was mainly attributable to a legal settlement in fiscal 2009 amounting to $189,000. The Company also recorded lower management incentives and travelling expenses, offset by higher U.S. franchise taxes. Research and development (R&D) Gross R&D expenses, in the fourth quarter of fiscal 2010, increased by 13% or $195,000 to $1.7 million in comparison to $1.5 million for the fourth quarter of the previous year. The increase of gross R&D expenses can be attributed primarily to higher employee-related costs, consulting, and overhead as a result of the Company focusing its efforts on the migration to the Java platform. Several resources normally involved in providing product adaptation services were redirected to support the advancement of this project accounting for approximately $147,000 of the increase. R&D tax credits increased by $1.1 million or 310% to $1.4 million in the fourth quarter of fiscal 2010 in comparison to $342,000 for the corresponding quarter of 2009. In the fourth quarter of fiscal 2010, the Company recorded $1.4 million of Federal non-refundable tax credits which may be used to reduce income taxes payable in the current and future years.
2010 TECSYS Inc. - Annual Report
In the fourth quarter of fiscal 2010, services revenue decreased to $5.2 million, 20% or $1.3 million lower, in comparison to $6.5 million for the corresponding quarter of the previous fiscal year. The decrease is attributable to diminished activity for product adaptation and implementation services, each accounting for approximately one-half of the revenue shortfall. The diminished revenue for product adaptations is indicative of relatively weak bookings for these services in fiscal 2010 relative to fiscal 2009. The diminished revenue for product implementation services is attributable to fewer significant “go-live� implementations during the fourth quarter of the current year compared to last year.
lower consulting, and the transfer of services resources to R&D to support the Java migration accounting for another $147,000. Services cost in the fourth quarter is net of e-business tax credits of $209,000 and $213,000 in fiscal 2010 and 2009, respectively. Reimbursable expenses related to the provision of services activities decreased $117,000 or 39% to $183,000 in comparison to $300,000 for the fourth quarter of the previous fiscal year.
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The Company also recorded e-business tax credits and Provincial refundable research and development tax credits for $308,000 and $342,000 for the fourth quarter of fiscal 2010 and 2009, respectively. Lastly, in the fourth quarter of fiscal 2010, the Company recorded a provision for commission expense of $333,000 as a reduction to R&D and e-business tax credits. This provision arises from a lawsuit for lobbying consulting services regarding tax credits received under a Quebec government program. Please see note 16 to the consolidated financial statements for further details. During the fourth quarter of fiscal 2010, the Company deferred $255,000 of new product development costs in comparison to $167,000 for the same period of the prior year.
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, 2010 compared to the year ended April 30, 2009.
Net Earnings In the fourth quarter of fiscal 2010, the Company recorded net earnings of $1.3 million (basic net earnings of $0.10 per share) in comparison to $572,000 (basic net earnings of $0.04 per share) for the fourth quarter of fiscal 2009.
Quarterly Selected Financial Data
The amortization expense of deferred development costs for the fourth quarter of fiscal 2010 increased by $54,000 to $132,000 in comparison to $78,000 for the fourth quarter of the previous year.
(Quarterly data are unaudited) In thousands of Canadian dollars, except per share data
Other operating expenses
Fiscal Year 2010
In the second quarter of fiscal 2010, the Company signed a new ten and one-half years lease agreement for the relocation of its Montreal head-office facility. The Company moved to this facility in the spring of 2010. The disposal of redundant property and equipment that was not fully amortized resulted in a write-down of property and equipment of $153,000 in the fourth quarter of fiscal 2010.
Total Revenue Net Earnings
The amortization of intangible assets decreased by $62,000 to $105,000 in the fourth quarter of fiscal 2010 compared to $167,000 for the corresponding quarter last year as a result of the fully amortized intangible assets of two of the Company’s acquisitions that were fully amortized by February and March 2010.
Basic Net Earnings per Common Share (In dollars) Diluted Net Earnings per Common Share (In dollars)
Q1
Q2
Q3
Q4
Total
9,198 108
9,927 746
8,800 62
8,847 1,266
36,772 2,182
0.01
0.06
0.01
0.10
0.18
0.01
0.06
0.00
0.10
0.17
Q1
Q2
Q3
Q4
Total
10,237 274
10,711 644
9,649 97
10,420 572
41,017 1,587
0.02
0.05
0.01
0.04
0.12
0.02
0.05
0.01
0.04
0.12
Earnings from Operations Earnings from operations for the fourth quarter of fiscal 2010 increased to $851,000, 4% or $36,000 higher, in comparison to $815,000 for the fourth quarter of the previous year. The lower gross margin was offset by lower operating expenses, predominantly R&D tax credits.
Interest Income and Expense
2010 TECSYS Inc. - Annual Report
Interest expense increased by $80,000 to $88,000 in the fourth quarter of fiscal 2010 in comparison to $8,000 for the fourth quarter of the previous year. The increase is attributable to the accrued $82,000 interest expense associated with lobbying services lawsuit brought against the Company and discussed in further detail on note 16 to the consolidated financial statements.
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Fiscal Year 2009 Total Revenue Net Earnings Basic Net Earnings per Common Share (In dollars) Diluted Net Earnings per Common Share (In dollars)
Foreign Exchange Losses
Liquidity and Capital Resources
The Company recorded exchange gains of $10,000 in the fourth quarter of fiscal 2010 in comparison to a $117,000 exchange loss for the previous fiscal year. The rapid deterioration of the U.S. dollar value in the fourth quarter of fiscal 2009, particularly April 2009, did not allow the Company to contract foreign exchange contracts fast enough to sell U.S. dollars forward to protect newly created U.S. monetary assets during the period. In April 2009, the U.S. dollar depreciated from CA$1.2602 to CA$1.1940.
As of April 30, 2010, current assets totalled $19.0 million compared to $20.1 million at the end of fiscal 2009. Cash and cash equivalents, and short-term and other investments, increased to $8.1 million compared to $7.8 million as of April 30, 2009. The increase in the cash position is primarily a result of cash generated from operating activities, the reduction in the restricted cash position, offset by the normal course issuer bid buy-back of the Company’s shares, the payment of dividends, and acquisition of capital assets.
Changes in Fair Value of Asset-Backed Commercial Paper
The Company renewed its banking agreement with the National Bank of Canada (the “Bank”) in November 2009 under the same terms, conditions, and obligations as per the previous renewal in January 2009. Please see note 9 to the consolidated financial statements for a detailed description of the banking facilities and the amendments.
For fiscal 2010, after taking into consideration the changes in the credit market characterized by the narrowing of credit spreads and the increasing of the average interest rates, the down-grading of the MAV2 Class A-2 notes to “BBBlow”, the additional accrued interest on the ABCP, the depreciation of the face value of the U.S. denominated ABCP, and the review of the valuation assumptions, the Company concluded that its current carrying value of $3.5 million is a good approximation of the fair value of the ABCP and hence reported no further write-downs or write-ups in comparison to an additional write-down of $115,000 in the fourth quarter of fiscal 2009.
Pursuant to the restructuring of the ABCP in January 2009 into restructured long-term notes, on May 14, 2009, the Company executed a new revolving credit facility, with an effective agreement date of March 13, 2009, providing access to approximately $4.0 million of liquidity to refinance the September 2007 revolving credit facility. The first part of this credit facility provides lines of credit for $3.5 million and US$233,000 ($236,000) and is secured by a first ranking hypothec on the MAV2 restructured long-term notes. This facility has an initial maturity date of three years
and may be extended annually until the seventh anniversary of the agreement. On the maturity date or any other subsequent date arising as a result of an extension, the recourses of the Bank in respect of approximately $2.1 million, representing 45% of the face value of the MAV2 restructured notes, is limited to the notes. The remaining balance of this credit facility is unsecured. Any principal repayments received from the restructured notes will reduce the credit facility. The second part of this credit facility provides lines of credit for $160,000 and US$75,000 ($76,000) and is secured by a first ranking hypothec on the IA Tracking restructured long-term notes. This facility has an initial maturity date of two years and may be extended annually until the seventh anniversary of the agreement. On the maturity date or any other subsequent date arising as a result of an extension, the recourses of the Bank in respect of this credit facility, representing 75% of the face value of the IA Tracking restructured notes, is limited to the notes. The Bank will have no recourse against the Company in respect of the principal amount of this facility after the exhaustion of the Bank’s recourses against the IA Tracking notes and any proceeds thereof. Any principal repayments received from the restructured notes will reduce the credit facility. Floating rate loans in Canadian dollars bear interest at the Canadian prime rate less 1%. Similarly, floating-rate loans in U.S. dollars bear interest at the U.S. base rate less 1%. A small portion of the principal of the restructured notes has been repaid to the Company, thus reducing the total amount of the renewed credit facility. As such, on April 30, 2010, the Company had drawn slightly less than $4.0 million on this credit facility. Accounts receivable, including work in progress, totalled $7.4 million at the end of fiscal 2010, compared to $9.6 million at the end of fiscal 2009. The Company’s DSO (Days Sales Outstanding) is 75 days at the end of fiscal 2010 in comparison to 83 days at the end of fiscal 2009. The improvement in the DSO is due to a combination of improved collection and to the decrease of deferred revenue. Current liabilities decreased $204,000 or 1% to $15.3 million at April 30, 2010 compared to $15.5 million at the end of fiscal 2009. The decrease in current liabilities is due primarily to the decrease of deferred revenue. Working capital decreased to $3.7 million at the end of fiscal 2010 in comparison to $4.5 million at the previous year-end primarily as a result of the significant investment in capital assets and other long-term assets, the buy-back of the Company’s own shares, and the distribution of dividends. The Company believes that funds on hand at the end of fiscal 2010, together with cash flow from operations, and access to the credit 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. Cash from operations
Financing activities Financing activities used funds of $1.2 million for fiscal 2010 in comparison to $1.3 million for fiscal 2009. During fiscal 2010, the Company purchased 300,859 (2009 – 490,300) of its outstanding common shares for cancellation at an average price of $1.90 per share (2009 – $1.34). The total cost related to purchasing these shares, including other related costs, was $580,000 (2009 – $667,000). The excess of the purchase price over the net book value of these shares for $546,000 (2009 - $613,000) has been
In fiscal 2009, the Company incurred expenditures of $174,000 related to the Streamline acquisition, for which the balance of the purchase price was subject to adjustments of offset rights regarding uncollectible accounts receivable, excess liabilities, or uncollectible tax credits. The expenditures were claimed against the outstanding debt owing to former Streamline shareholders and were reflected as the repayment of long-term debt. In fiscal 2010, the Company realized a recovery of $36,000 of assets related to the Streamline acquisition, and is reflected as an increase of debt to the former Streamline shareholders. In addition, during 2010, $20,000 of the outstanding Streamline debt was repaid. Lastly, in fiscal 2010, the Company repaid $49,000 on its bank credit facility (2009 $3,000). Investing activities In fiscal 2010, investing activities used funds of $1.3 million in comparison to $650,000 for fiscal 2009. The decrease in short-term and other investments and restricted cash equivalents and other investments generated funds of $14,000 in fiscal 2010 (2009 – used funds of $392,000). The acquisition of property and equipment and intangible assets, net of proceeds of disposal, amounted to $1.5 million (2009 - $467,000). The Company recovered funds of $11,000 (2009 - $42,000) for loans that were previously extended to TLA. The Company received $125,000 (2009 - $167,000) of interest and principal repayments on the restructured ABCP during fiscal 2010. Lastly, during 2010, the Company received excess investment tax credits of $25,000 related to the Streamline acquisition which were used to write down the carrying value of the goodwill.
Contractual Obligations In the second quarter of fiscal 2010, the Company signed a new lease agreement for its head office in Montreal. The Company has relocated to this facility in the spring of 2010. The lease term of ten and one-half years is effective May 1, 2010 and runs through October 31, 2020. The Company has incurred capital expenditures for leasehold improvements, new furniture, and other equipment related to the move to the new facility of approximately $1.5 million, of which $401,000 remains unpaid at April 30, 2010. As at April 30, 2010, the principal commitments consist of operating leases and long-term debt represented by a subordinated loan and a promissory note payable related to the Streamline acquisition as described in Notes 10 and 17 to the consolidated financial statements. The following table summarizes significant contractual obligations as at April 30, 2010. In thousands of Canadian dollars
Years Ending April 30, 2011 April 30, 2012 April 30, 2013 April 30, 2014 April 30, 2015 Thereafter
Long-term Debt
Operating Leases
Total
249 -
1,265 1,053 724 733 737 4,124
1,514 1,053 724 733 737 4,124
249
8,636
8,885
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 Enterprise Supply Chain (ESC) business unit, 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
2010 TECSYS Inc. - Annual Report
In fiscal 2010, operating activities generated funds of $2.3 million compared to $3.8 million for fiscal 2009. In fiscal 2010, net non-cash working capital generated cash of $1.1 million primarily due to the decrease of accounts receivable for $2.0 million. In fiscal 2009, net non-cash working capital generated cash of $1.3 million primarily due to the increase of deferred revenue for $1.4 million. Cash flow from operating activities, excluding working capital items, generated cash of $1.2 million in fiscal 2010 compared to $2.5 million for fiscal 2009. This was due mainly to lower income generated in 2010 excluding the consideration of federal non-refundable tax credits and future tax assets compared to 2009.
charged to contributed surplus. Additionally, during fiscal 2009, 12,500 options were exercised to purchase shares generating $20,000. During fiscal 2010, the Company declared and paid dividends using funds for $618,000 (2009 - $508,000).
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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 $254,000 in fiscal 2010 (2009 - $262,000).
Dividend Policy In February 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 and applicable law. In determining whether to declare, and the amount of a dividend, the Board of Directors, among other criteria, takes into account the Company’s earnings, capital requirements, financial conditions and other such factors as the Board of Directors, in its sole discretion, deems relevant.
The Company was not involved in any off-balance sheet arrangements as at April 30, 2010, with the exception of an irrevocable letter of guarantee issued in the amount of $200,000 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 as per the terms of the lease.
Current and Anticipated Impacts of Current Economic Conditions
Related Party Transactions
Given the current backlog, comprised primarily of services, the Company’s management believes that the current services revenue level ranging from approximately $5.0 to $5.5 million per quarter can be sustained in the very short term if no significant new agreements are completed.
On December 2005 and October 2007, the Company acquired an equity interest in TECSYS Latin America (TLA). During fiscal 2010, the Company recorded revenues of $228,000 (2009 – $230,000) for licenses and services. The Company provided five loans of US$50,000 each at various dates during fiscal 2007 through 2010 to TLA. The loans bear interest at 5% and are repayable over four years commencing six months following each loan. During fiscal 2010, the Company recorded $5,000 (2009 - $7,000) of interest income related to these loans and has outstanding loans receivable of $112,000 (US$110,000) (2009 – $137,000 (US$115,000)). During the second quarter of fiscal 2010, in the ordinary course of business, the Company sold US$250,000 at a spot rate of CA$1.072 to yield CA$268,000 to an officer and major shareholder. The spot rate was the same spot rate offered at arm’s length by the Company’s banker.
Contingencies
2010 TECSYS Inc. - Annual Report
Off-Balance Sheet Agreements
During fiscal 2010, the Company declared a dividend of $0.025 on two separate occasions that were paid on October 7, 2009 and March 31, 2010 to shareholders of record at the close of business on September 23, 2009 and March 12, 2010 respectively for a total amount declared and paid of $618,000. During fiscal 2009, the Company declared a dividend of $0.02 on two separate occasions that were paid on October 7, 2008 and March 31, 2009 to shareholders of record at the close of business on September 23, 2008 and March 12, 2009 respectively for a total amount declared and paid of $508,000.
The Company has a subordinated loan for $107,000 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. Interest, on an annual basis, amounts to $14,000. The same amount was outstanding at April 30, 2010 and 2009.
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plus interest, estimated at approximately $82,000. On October 15, 2009, the Company filed an appeal with the Quebec Court of Appeal citing that the judgment concluded incorrectly on its misinterpretation of the facts, the contract, and the transitional provisions of the Lobbying Act. As a result of new developments, the Company’s management has decided to fully provide for this contingent liability in the financial statements in the fourth quarter of 2010.
Through the course of operations, the Company may be exposed to a number of lawsuits, claims and contingencies. Accruals are made in instances where it is probable that liabilities will be incurred and where such liabilities can be reasonably estimated. Although it is possible that liabilities may be incurred in instances for which no accrual 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. In June 2005, a former lobbying consulting group instituted a lawsuit against the Company claiming commissions on tax credits received and receivable by the Company pursuant to a lobbying services contract executed between the two parties. The Company has not paid such commissions since 2002 as a result of the enactment of the Lobbying Act which rendered such lobbying activities that were taking place as of June 13, 2002 illegal. The lobbying consulting group contends that the lobbying services were rendered prior to the enactment of the law and that the law cannot have the retroactive effect of rendering illegal acts that were performed prior to its enactment. The Company contests the allegations and contends that the payment of commissions ensuing from the lobbying contract are not permitted since the enactment of the Lobbying Act, which had the effect of ceasing all consulting services, a prerequisite for continuing commissions. Arguments were heard at trial before a judge of the Superior Court of Quebec from June 2 to 5, 2009. On September 22, 2009, judgment was rendered against the Company to pay commissions for $333,000
The current overall economic condition and constrained credit markets continue to have an adverse impact on the demand for the Company’s products and services. As industry is exercising caution and generally delaying capital spending, the immediate impact is manifesting itself in lower bookings and lower revenues. The magnitude of the impact will depend on the strength of the economic recovery.
Strategically, the Company continues to focus its efforts on the most likely opportunities within our existing vertical markets and customer base, particularly in some of the vertical markets that are less likely to be affected such as Healthcare. The Company also currently offers subscription-based licensing, hosting services, modular sales and implementations, and enhanced payment terms to promote revenue growth. The exchange volatility 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 50% 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. Current cost containment initiatives include a very limited number of new hires for the foreseeable future. The R&D Java migration project will be supported by the internal transfer of services resources and by limited new recruitment. Additionally, other cost savings areas that are under consideration are facilities, traveling, consulting and communications. Regarding the relocated facility for the Montreal head office, although the Company has incurred significant capital expenditures for leasehold improvements and other property and equipment approaching $1.5 million in fiscal 2010, the Company is expecting to realize savings of approximately $600,000 annually in comparison to its rental expense for fiscal 2010. Although, the Company believes that funds on hand, together with anticipated cash flows from operations, and access to the revolving 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 bids, adjusting its dividend policy, and extending or amending its credit facilities.
Financial Instruments and Financial Risk Management The Company has classified cash and cash equivalents, short-term and other investments, restricted cash equivalents and other investments, and asset-backed commercial paper as held-for-trading financial instruments and as such are recorded on the consolidated balance sheet at fair 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 has been recorded as an accrued other receivable at April 30, 2010 and 2009.
The Company has determined that the carrying values of its short-term financial assets and liabilities, including cash and cash equivalents, short-term and other investments, accounts receivable, other accounts receivable, bank advances, accounts payable and accrued liabilities, and current portion of long-term debt, approximate their fair value because of the relatively short period to maturity of the instruments. The fair value of the asset-backed commercial paper (ABCP) has been estimated at $3.5 million. The MAV2 restructured notes are estimated at $3.3 million representing approximately 70% of the face value of the notes while the IA Tracking restructured notes are estimated at $214,000 representing 75% of the face value discounted for one year at the Company’s borrowing rate based on the credit facility executed with the Company’s banker. The credit facility agreement includes a put option exercisable by the Company at the second anniversary, March 13, 2011, and limits the Company’s losses to 25% of the IA Tracking notes. Please see note 5 to the consolidated financial statements for a detailed discussion on the valuation techniques, assumptions, and risks associated with these financial instruments. An increase in the estimated discount rate of one percent would reduce the estimated fair value of the ABCP by approximately $200,000. Continuing uncertainties regarding the ABCP could give rise to further change in the value of the Company’s investment in ABCP. The fair value of the long-term receivables was determined by discounting 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 long-term receivables as at April 30, 2010 and 2009. Financial instruments which potentially subject the Company to credit risk consist principally of cash and cash equivalents, short-term and other investments, assetbacked commercial paper, and accounts receivable. The Company’s cash and cash equivalents and short-term and other investments consisting of guaranteed investment certificates are maintained at major financial institutions. At April 30, 2010, there is one customer comprising more than 10% of the total of 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. dollardenominated 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, and not for generating trading profits. As such, any change in cash flows associated with derivative instruments is designed to be offset by changes in cash flows related to the net monetary position in the foreign currency.
Outstanding Share Data At July 8, 2010, the Company has 12,195,321 common shares outstanding. During the period from May 1, 2010 to July 8, 2010, the Company granted 50,000 options to its employees at a weighted average exercise price of $1.90, while 1,375 options were cancelled or expired unexercised. At July 8, 2010, the options outstanding under the stock option plan were 938,234.
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 The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect 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. Significant areas requiring the use of management estimates include estimating the fair value of assetbacked commercial paper, determining separate units of accounting in connection with revenue recognition relating to multiple element arrangements, determining the percentage-of-completion of projects for purposes of revenue recognition, establishing the fair value of assets and liabilities, intangible assets, and goodwill related to business combinations, determining estimates and assumptions related to impairment tests for all long-lived assets and goodwill, estimating stock-based compensation, assessing the recoverability of research and development tax credits and other tax credits, and establishing provisions related to doubtful accounts and future income taxes. Consequently, actual results could differ from those estimates. As the Company’s software implementation period may typically span from six to twelve months, a significant area requiring judgement and estimation is revenue recognition relating to multiple element arrangements, where the resulting revenue recognition per element and the related timing must be assessed in relation to contract terms, criteria set out in Statement of Position (SOP) 97-2, which was primarily codified into subtopic 985-605, “Software – Revenue Recognition”, in the Accounting Standards Codification (ASC), future services, and other criteria as discussed later. The estimates and assumptions are based on past experience and other factors that the Company considers reasonable. As this involves varying degrees of judgement and uncertainty, actual results could differ from those estimates. Based on a structured methodology, portions of the purchase price paid in business acquisitions have been assigned to intangible assets acquired, consisting of customer relationships, acquired technology, in-process research and development, reseller agreements and vendor non-solicitation engagements. Determination of the fair values assigned to each of these acquired intangible assets has required management estimates of revenue growth, gross margins, the retention of customer base, technology obsolescence, operating expenses, capital requirements and expected future cash flows. Fair values attributed to the intangible assets acquired in each business acquisition were determined based on the specific circumstances of each acquisition together with management’s outlook based on past performance, the business plan, as well as in initial operating and capital budgets. The acquired intangible assets are being amortized on a straight-line basis over five years based on the current estimates of technological obsolescence and a projected annual attrition of the existing customer base. The carrying values of the intangible assets acquired in business acquisitions are reviewed annually for impairment as described below. The Company assesses the carrying value of its long-lived assets, which include property and equipment, technology, customer relationships, and other purchased definite-life intangible assets, for future recoverability when events or changed circumstances indicate that the carrying value may not be recoverable. An impairment loss is recognized if the carrying value of a long-lived asset exceeds the sum of the estimated undiscounted future cash flows expected from its use. The amount of impairment loss, if any, is determined as the excess of the carrying value of the assets over their fair value. The long-lived assets impairment test entails the use of a number of management estimates including but not limited to revenue growth, gross margins, operating expenses, capital requirements, and future cash flows. The estimates involve varying degrees of judgement and uncertainty. Actual results will differ from those estimates.
2010 TECSYS Inc. - Annual Report
See note 19 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 risk.
Critical Accounting Policies
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Goodwill represents the excess of the purchase price of businesses acquired over the fair value of the underlying net identifiable assets acquired or liabilities assumed. Goodwill is evaluated for impairment annually, or when events or changed circumstances indicate an impairment may have occurred. In connection with the goodwill impairment test, if the carrying value of the Company’s reporting unit to which goodwill relates exceeds its estimated fair value, an impairment loss is recognized in the amount of the excess of the carrying value over the fair value. The goodwill impairment test entails the use of a number of management estimates including but not limited to revenue growth, gross margins, retention of customer base, technology obsolescence, operating expenses, capital requirements and future cash flows. The estimates involve varying degrees of judgement and uncertainty. Actual results will differ from those estimates. 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. Considerable judgement is required to assess the realizable value of the receivables including the probability of collection and the current creditworthiness of each customer. As this involves varying degrees of judgement and uncertainty, actual results could differ from those estimates. The Company accrues refundable investment tax credit benefits related to qualifying activities, including research and development projects. Considerable judgement is required to assess the various criteria of whether activities qualify. As these activities are audited periodically by the taxation authorities, the actual results attributable to a fiscal period may differ from the accounting estimates posted.
2010 TECSYS Inc. - Annual Report
Stock-based compensation costs are accounted for using the fair value based method of accounting for stock options and warrants granted to employees and directors. Under the fair value based method, compensation cost is measured at fair value at the date of grant and is expensed over the award’s vesting period with a corresponding credit to contributed surplus. Upon the exercise of the options, any consideration received from plan participants is credited to capital stock and the stock-based compensation cost originally credited to contributed surplus is reclassified to capital stock. Any stock-based compensation costs related to awards to individuals other than employees and directors are accounted for at fair value. Cancellations are accounted for as they occur, with any previously recognized compensation cost related to unvested options being reversed in the period of cancellation. The Company uses the Black-Scholes options pricing model to calculate stock option values, which requires certain assumptions, including the future stock price volatility and expected time to exercise. Changes to any of these assumptions, or the use of a different option pricing model, could produce different fair values for stock-based compensation, which could have a material impact on the Company’s earnings.
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Income taxes are accounted for under the asset and liability method. Future tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credits carry forwards. Future tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on future tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Management provides valuation allowances against the future tax asset for amounts which are not considered “more likely than not” to be realized. The ultimate realization of future tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. In the event the Company was to determine that it would be able to realize its tax asset, an adjustment to the tax asset would increase income in the period in which such determination is made. Revenue recognition The Company licenses software under non-cancellable license agreements and provides 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. The Company recognizes revenue as described below, which is in accordance with the guidance set out in Statement of Position (SOP) 97-2, “Software Revenue Recognition”, which was primarily codified into subtopic 985-605, “Software – Revenue Recognition”, in the ASC. Revenues generated by the Company include the following: License fees
Revenue from perpetual licenses sold separately is recognized when a noncancellable license agreement has been signed, the software product has been delivered, there are no uncertainties surrounding product acceptance, the fees are fixed or determinable, and collection is considered probable. Fees from multiple element arrangements are allocated to the various elements based on vendor-specific objective evidence of fair value provided that services, if any, are not essential to the functionality of the software. Revenue from perpetual licenses sold under multiple element arrangements are recognized upon shipment of the software product, provided that all of the above criteria have been met and subject to the following. 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. An up-front 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. Where an up-front 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. 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 percent completed is reflected in the period in which the changes become known. Losses on such contracts in progress are recognized when known. Work in progress is established for revenue based on the percent completed in excess of progress billings as of the balance sheet date. Any excess of progress billings over revenue based on the percent completed is deferred and included in deferred revenue. Generally, the terms of long-term contracts provide for progress billing based on completion of certain phases of work. Where acceptance criteria are tied to specific milestones, the percentage of completion up to that milestone is recognized upon acceptance. Support agreements
Support agreements 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 and the related costs are generally recognized upon the delivery of the third-party products as the Company’s direct customer support for these products is generally limited to interface issues between the Company’s proprietary products and the third-party products. Customer support for technical issues related to the third-party products is referred to the third-party supplier for resolution. Consulting and training services
The Company provides consulting and training services to its customers. Revenue from such services is recognized as the services are performed.
Changes in Accounting Policies 2010 Accounting Changes Effective with the commencement of its 2010 fiscal year beginning May 1, 2009, the Company adopted the new CICA accounting standards presented hereunder.
Goodwill and intangible assets In February 2008, the CICA issued Section 3064, Goodwill and Intangible Assets, which replaces Section 3062, Goodwill and Other Intangible Assets and Section 3450, Research and Development Costs. The standards provide guidance on the recognition, measurement, presentation and disclosure of intangible assets and goodwill in accordance with the definition of an asset and the criteria for asset recognition, other than the initial recognition of goodwill or intangible assets acquired in a business combination. The new standards clarify the application of the concept of matching revenues and expenses, whether these assets are separately acquired or internally developed. These new standards are applicable for fiscal years beginning on or after October 1, 2008, and require retroactive application to prior period financial statements. Accordingly, the Company adopted this standard on May 1, 2009. The adoption of this standard did not have an impact on the financial statements. Financial instruments – disclosures In June 2009, the Canadian Accounting Standards Board (AcSB) issued amendments to CICA Handbook Section 3862, Financial Instruments – Disclosures, in order to align with International Financial Reporting Standard IFRS 7, Financial Instruments: Disclosures. This Section has been amended to include additional disclosure requirements about fair value measurements of financial instruments and to enhance liquidity risk disclosure. The amendments establish a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. 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. These amendments apply to annual financial statements relating to fiscal years ending after September 30, 2009 and are applicable to the Company as at April 30, 2010. The amended Section relates to disclosure only and did not impact the financial results of the Company.
Future Changes to Accounting Standards Business combinations, Consolidated financial statements and Non-controlling interests The CICA issued three new accounting standards in January 2009: Section 1582, Business Combinations, Section 1601, Consolidated Financial Statements, and Section 1602, Non-controlling Interests. These new standards will be effective for fiscal years beginning on or after January 1, 2011, however earlier adoption is permitted. The Company will adopt these standards early, effective May 1, 2010 as they converge with IFRS and hence will minimize the need for restatement should any acquisitions arise in fiscal 2011.
Consolidated Financial Statements, Section 1601 and Non-controlling Interests, Section 1602 replace Section 1600, Consolidated Financial Statements with the exception of non-controlling interest which is addressed in a separate section. These two sections are the equivalent to the corresponding provisions of International Financial Reporting Standards IAS 27, Consolidated and Separate Financial Statement. Section 1602 applies to the accounting for non-controlling interests and transactions with non-controlling interest holders in consolidated financial statements. The new sections require that, for each business combination, the acquirer measure any non-controlling interest in the acquiree either at fair value or at the non-
International Financial Reporting Standards In February 2008, Canada’s Accounting Standards Board (AcSB) confirmed that Canadian GAAP, as used by publicly accountable enterprises, would be fully converged into IFRS, as issued by the International Accounting Standards Board (IASB). The changeover date is for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. As a result, the Company will be required to report under IFRS for its 2012 fiscal year commencing May 1, 2011 for interim and annual financial statements. While IFRS uses a conceptual framework similar to Canadian GAAP, there are significant differences in accounting policy which must be addressed. The Company will convert to these new standards according to the timetable set within these rules. The Company is in the process of determining the impact of adopting the standards on its consolidated financial statements. Conversion Plan
The Company has implemented a plan to convert its financial reporting to IFRS using key resources in the areas of accounting, taxation, and management information systems. The plan addresses the impact of IFRS on accounting policies, implementation decisions, employee training requirements, financial and operating systems requirements, and the updating of internal controls over financial reporting. A brief summary of our three-step plan follows: The planning and diagnostic phase includes the development of the IFRS conversion plan, including scoping decisions. This phase was completed. The detailed evaluation phase included the thorough analysis of differences in Canadian GAAP and IFRS, the selection of IFRS policies, the assessment of IFRS 1 exemptions and choices, the selection of the IFRS 1 choices for the first-time adoption of IFRS standards, and the assessment of implications on the Company’s IT systems. The Company has made significant progress in this phase during fiscal 2010. The development and implementation phase will focus on the development of the IFRS financial statement format, the quantification of the effect of changes on the Company’s financial statements, employee training, the development of system requirements and solutions, and changes to internal controls over financial reporting that result from the accounting policy conversion, as well as dry run testing. The Company has made progress in this phase during the fourth quarter of fiscal 2010 and is expecting significant progress in the first half of fiscal 2011. The IFRS conversion plan will provide the Company with the opportunity to generate comparative financial reporting under IFRS standards for the 2011 fiscal year to be used the following fiscal year when the Company will report under IFRS. The Company recognizes that IFRS standards will be in transition right up to the changeover date and will ensure that it adapts its policies as is necessary to be in full compliance. Since all potential changes to IFRS, that will be effective as at April 30, 2012, are not yet known, any conclusions drawn at this point in time must be considered preliminary. Status of the Conversion
An update regarding the progress of the conversion plan is summarized below. The Company has completed the planning and diagnostic phase, which included the elaboration of the conversion plan and completion of a high-level review of the major differences between Canadian GAAP and IFRS. The Company is now engaged in the detailed evaluation phase which includes a detailed analysis of the impact of the IFRS differences identified in the initial assessment phase and the evaluation of IFRS 1 transition exemptions. The design of solutions to resolve these IFRS differences are progressing according to plan.
2010 TECSYS Inc. - Annual Report
Section 1582 replaces the former Section 1581, Business Combinations, and establishes standards for the accounting for a business combination. It provides the Canadian equivalent to International Financial Reporting Standards IFRS 3, Business Combinations. The new standard requires the acquiring entity in a business combination to recognize most of the assets acquired and liabilities assumed in the transaction at fair value including contingent assets and liabilities; and recognize and measure the goodwill acquired in the business combination or a gain from a bargain purchase, while acquisition-related costs are to be expensed. The section applies prospectively to business combinations for which the acquisition date is on or subsequent to the Company’s early adoption date. This new section will have an impact on the consolidated financial statements for future acquisitions that will be made subsequent to the date of adoption.
controlling interest’s proportionate share of the acquiree’s identifiable net assets. The new sections also require non-controlling interest to be presented as a separate component of shareholders’ equity. Under Section 1602, non-controlling interest in income is not deducted in arriving at consolidated net income or other comprehensive income. Rather, net income and each component of other comprehensive income are allocated to the controlling and non-controlling interests based on relative ownership interests. These sections will be adopted concurrently with Section 1582 effective May 1, 2010, the Company’s early adoption date, and will have an impact on the consolidated financial statements subsequent to the date of adoption.
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Potential Impact of the Conversion
The comparison of IFRS with Canadian GAAP, has helped identify a number of areas of differences. IFRS 1, First-time Adoption of International Financial Reporting Standards, provides entities adopting IFRS for the first time with a number of optional exemptions and mandatory exceptions, in certain areas, to the general requirement for full retrospective application of IFRS. The Company is analyzing the various accounting policy choices available and will implement those determined to be most appropriate in the circumstances. Currently, the Company expects to apply the following elective exemptions: ▪▪ it will not retrospectively restate the accounting of past business combinations; ▪▪ it will not retrospectively apply IFRS 2 for share-based payments granted on or before November 7, 2002, and for equity instruments granted after November 7, 2002 that have vested before the transition date to IFRS. The remaining elective exemptions appear to have limited or no applicability to the Company. Therefore, most adjustments required on transition to IFRS will be made retrospectively against opening retained earnings as of the date of the first comparative balance sheet presented based on standards applicable at that time. Transitional adjustments relating to those standards where comparative figures are not required to be restated will only be made as of the first day of the year of adoption. Based on the detailed evaluation phase, the main areas where changes to accounting policies are expected or which may impact the Company are set forth below: ▪▪ ▪▪ ▪▪ ▪▪ ▪▪
Functional currency Share-based payment Impairment of assets Provisions Income taxes
Set out below are selected key areas of accounting differences where changes in accounting policies in conversion to IFRS may impact the Company’s consolidated financial statements. The list and comments should not be construed as a comprehensive list of changes that will result from transition to IFRS, but rather highlights those areas of accounting differences management currently believes to be most significant. Notwithstanding, analysis of changes is still in progress and certain decisions remain to be made where choices relating to accounting policies are available. At this stage, the Company is not able to reliably quantify the full impact of these and other differences on the Company’s consolidated financial statements. The Company expects to complete the quantification of these selected key areas by the end of the third quarter of fiscal 2011.
2010 TECSYS Inc. - Annual Report
Functional Currency and Foreign Currency Translation under IFRS Standards
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The Company has analyzed and documented its assessment on functional currency and foreign currency translation under IFRS focusing on resolving two objectives: 1) determining the functional currency of the Company and its foreign operations, namely TECSYS U.S. Inc., and TECSYS Europe Limited, and 2) concluding on the methodology for the translation of the foreign currency denominated financial statements for each of these entities. Under IFRS, in the determination of functional currency, an entity is required to place its greatest weighting on the currency that influences the pricing of the transactions that it undertakes rather than focusing on the currency in which the transactions are denominated in. Virtually all of the Company’s most significant human, financial, and capital assets as well as sources of equity capital, lines of credit, intangible technology assets and trademarks, and customer contractual agreements are an integral part of the Canadian company. The U.S. and European operations are best viewed as an extension of the Canadian parent and have very few resources relative to it. They do not have the infrastructure from an R&D, administrative, marketing, and servicing perspective to operate autonomously. In management’s view, the functional currency of the Canadian entity and its two subsidiaries is the Canadian dollar as it is the currency that most influences its pricing for goods and services. In addition, it is the
competitive forces of the Canadian marketplace that determines the sales prices of its goods and services. Predominantly, the costs for labour, material and overhead that address the needs and support the Company’s customers worldwide are incurred in Canadian dollars, and hence the pricing of goods and services to the customer is more greatly influenced from operations and the competitive forces in Canada. In conclusion, the process and methodology for the translation of the foreign currency financial statements of the Company’s foreign subsidiaries into Canadian dollars, the presentation currency of the group for its consolidated financial statements, remains largely unaltered from the Canadian GAAP temporal method. The implications regarding the Company’s economic hedging policy is that it should effectively remain the same. The Company generally enters into foreign exchange contracts in order to offset the impact of the fluctuation of the U.S. dollar regarding the revaluation of its net monetary assets on a consolidated basis. As such, any change in cash flows associated with the derivative instruments is designed to be offset by changes in cash flows related to the net monetary position in that foreign currency. Business Combinations
The Company has resolved that it will adopt CICA standard Section 1582, Business Combinations early on May 1, 2010 as this Canadian standard converges with IFRS 3, Business Combinations. As such, this early adoption will ease the conversion to IFRS and minimize the need for restatement should any acquisitions arise in fiscal 2011. Property and Equipment
Tentatively, the Company has also determined that its application of IFRS’ IAS 16, Property, Plant and Equipment will rely on the historical cost model. The Company does not anticipate any revaluation for its property and equipment at the date of transition, and hence there should be no impact on transition. The Company’s preliminary decision is based on the Company’s current condition and remains subject to change. Impairment of Assets
The Company has given careful consideration to IAS 36, Impairment of Assets and concluded that unlike Canadian GAAP, it will not be in a position to apply the impairment test to one reporting unit, but rather will be subject to apply the impairment tests to various Cash Generating Units (CGU’s) that are largely responsible for independent cash inflows. The Company concluded that multiple impairment tests are more likely to result in impairment losses for CGU’s that are profit-challenged with respect to their net assets. Share-based Payment
The application of IFRS 2, Share-based Payment does not permit the attribution of costs on a straight-line basis for stock options with graded vesting provisions, which is currently the methodology practiced by the Company under Canadian GAAP. Similarly, the IFRS standards require that forfeiture estimates are established at the time of the initial fair value assessment of share-based payments rather than to account for the forfeitures as they occur. Both of these differences in accounting methodology will impact the financial statements of the Company as it transitions to IFRS. The Company is in the process of updating its outstanding stock options database on a hosted software web application for the purposes of quantifying the impact on the unvested options at the date of transition, May 1, 2010. The assumptions for volatility, the expected life of each tranche of the unvested options, the dividend rate, and the forfeiture rate will be based on management’s assessment of these variables at the transition date, whereas the risk-free interest rate and the exercise price will be the historical parameters at the time of granting. The Company anticipates that the quantification of the impact and further disclosure will be made available by the end of the second quarter in fiscal 2011. Impact on information systems and technology
The areas where information systems and processes will be impacted the most are firstly, the need to create the ability for information systems and processes to concurrently track IFRS adjustments for fiscal 2011, the comparative year, and
secondly the need for the creation of several reports to assist in preparing the increased note disclosures and different presentation required by IFRS. These report requirements may also require modifications to existing general ledger account structures. At this time, the transition is expected to have minimal impact on other information systems used by the organization. Impact on reporting and internal controls
The Company anticipates that transaction-level controls will not be affected significantly by the transition to IFRS in any material respect. The transition to IFRS for the Company primarily affects the presentation and disclosure of its financial statements as well as presentation of transitional adjustments. This may lead to significant presentation and process changes to report more detailed information in the notes to the financial statements, but it is not currently expected to lead to many measurement or fundamental differences in the accounting treatments used by the Company. Financial reporting controls will change due to the transition to IFRS, but the impact is expected to be minimal. The majority of change surrounds new processes, or modified processes, due to the fact that IFRS requires more judgment with respect to various accounting treatments. Processes and controls will be put in place to ensure the Company is making the appropriate judgments and following the IFRS accounting policies selected. Impact on financial reporting expertise
Training and education to this point has been limited to those directly involved with the transition to IFRS. IFRS training for relevant financial staff will take place on an ongoing basis over the next several quarters, while targeted programs for operational staff will need to be developed once the transition to IFRS is underway. This training will focus mainly around the process changes required and an overview of the reasons behind the changes from a standards perspective. Impact on business activities
The Company does not anticipate that the transition to IFRS will have a significant impact on its covenants, contracts, and other business activities. The Company’s incentive compensation is largely based upon attaining and exceeding budget targets. These targets are determined on an annual basis and in accordance with Canadian GAAP for fiscal 2011, for which Canadian GAAP standards and reporting will still apply. There may need to be some re-evaluation commencing in fiscal 2012, when the impacts of changes brought about by the transition to IFRS are fully known. General
Based upon the work completed to date, and since all potential changes to IFRS that will be effective as at April 30, 2012 are not yet known, the Company cannot reasonably determine the full impact that adopting IFRS may have on its financial position and future results. As a result of the transition, changes in accounting policies could have a material impact on the consolidated financial statements.
Risks and Uncertainties
The Company realized net earnings of $2.2 million, $1.6 million, and $1.3 million in fiscal 2010, fiscal 2009, and fiscal 2008, respectively, 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
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.
2010 TECSYS Inc. - Annual Report
History of Losses; Uncertainty of Future Operating Results
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.
31
Management of Growth
Internal Control over Financial Reporting
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.
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 GAAP in its consolidated financial statements.
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.
2010 TECSYS Inc. - Annual Report
Currency Risk
32
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, 2010.
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, 2010. 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 “forwardlooking 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 forwardlooking 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.
2010 TECSYS Inc. - Annual Report
33
| 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 Canadian generally accepted accounting principles. 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 auditor, KPMG LLP for fiscal years 2010 and 2009. The auditors have free and full access to internal records and to the Audit Committee.
2010 TECSYS Inc. - Annual Report
Peter Brereton President and CEO July 8, 2010
34
Berty Ho-Wo-Cheong Vice President, Finance and Administration and Chief Financial Officer
| Auditors’ Report
To the Shareholders of TECSYS Inc. We have audited the consolidated balance sheets of TECSYS Inc. as at April 30, 2010 and 2009 and the consolidated statements of earnings and comprehensive earnings, cash flows and shareholders’ equity for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. 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 plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at April 30, 2010 and 2009 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles.
Chartered Accountants Montreal, Canada June 25, 2010
2010 TECSYS Inc. - Annual Report
*CA Auditor permit no 14553
35
TECSYS Inc. Consolidated Balance Sheets (in thousands of Canadian dollars) April 30, 2010
April 30, 2009
Assets Current assets Cash and cash equivalents Short-term and other investments (note 4) Accounts receivable Work in progress Other accounts receivable Tax credits receivable (note 12) Inventory Prepaid expenses Future tax assets (note 12)
$
7,256 850 7,346 66 425 1,914 171 879 142
$
7,510 325 9,307 303 198 1,536 219 668
-
19,049
20,066
200 3,514 48 930 211 2,472 623 1,991 453 2,804
739 3,535 77 290 1,481 930 1,519 2,829
$ 32,295
$ 31,466
$
$
Restricted cash equivalents and other investments (notes 4 and 15) Asset-backed commercial paper (note 5) Long-term receivables (notes 8 and 18) Investment tax credits (note 12) Long-term investment (note 8) Property and equipment (note 6) Intangible assets (note 7) Deferred development costs (note 7) Future tax assets (note 12) Goodwill (note 7)
Liabilities Current liabilities Bank advances (note 9) Accounts payable and accrued liabilities Current portion of long-term debt (note 10) Deferred revenue
3,951 5,305 249 5,827
4,000 5,154 133 6,249
15,332
15,536
-
100
15,332
15,636
1,386 11,931
1,420 12,328
3,646
2,082
16,963
15,830
$ 32,295
$ 31,466
Long-term debt (note 10)
Contingencies and commitments (notes 16 and 17)
2010 TECSYS Inc. - Annual Report
Shareholders’ equity Capital stock (note 11) Contributed surplus (note 11) Retained earnings
Approved by the Board of Directors
The accompanying notes are an integral part of these consolidated financial statements.
36
_______________________________ Director
_______________________________ Director
TECSYS Inc. Consolidated Statements of Earnings and Comprehensive Earnings (in thousands of Canadian dollars, except share and per share data) Years ended April 30,
2010
Revenue Products (note 13) Services Reimbursable expenses
$
13,333 22,437 1,002
2009
$
15,749 24,137 1,131
36,772
41,017
4,585 14,418 1,002
6,992 15,169 1,131
20,005
23,292
Gross margin
16,767
17,725
Operating expenses Sales and marketing General and administration Gross research and development Research and development tax credits (note 12) Deferred development costs Stock-based compensation Amortization of property and equipment Loss on disposal of property and equipment Amortization of intangible assets Amortization of deferred development costs
5,902 3,578 6,333 (2,012) (876) 149 550 153 480 404
6,361 3,607 5,548 (760) (810) 125 545 704 224
14,661
15,544
2,106
2,181
37 (106) (211) (79) -
53 (69) (280) (60) (238)
1,747
1,587
(435)
-
Cost of revenue Products Services (note 14) Reimbursable expenses
Earnings from operations Interest income Interest expense Foreign exchange losses Share of net loss and amortization of intangible assets of a company subject to significant influence (note 8) Changes in fair value of asset-backed commercial paper (note 5) Earnings before income taxes Income taxes recovery (note 12) $
2,182
Weighted average number of common shares outstanding – basic – diluted
12,362,504 12,550,420
12,782,738 12,785,157
Basic net earnings per common share Diluted net earnings per common share
$ $
$ $
0.18 0.17
$
1,587
0.12 0.12
The accompanying notes are an integral part of these consolidated financial statements.
2010 TECSYS Inc. - Annual Report
Net earnings and comprehensive earnings for the year
37
TECSYS Inc. Consolidated Statements of Cash Flows (in thousands of Canadian dollars) Years ended April 30
2010
2009
Cash flows from Operating activities Net earnings for the year Adjustments for Amortization of property and equipment Amortization of intangible assets Amortization of deferred development costs Unrealized foreign exchange gains Stock-based compensation Loss on disposal of property and equipment Changes in fair value of asset-backed commercial paper Deferred development costs Federal non-refundable research and development tax credits Share of net loss and amortization of intangible assets of a company subject to significant influence Income taxes
$
Changes in non-cash working capital items related to operations Decrease (increase) in accounts receivable Decrease in work in progress (Increase) decrease in other accounts receivable Increase in tax credits receivable Decrease (increase) in inventory (Increase) decrease in prepaid expenses Decrease in long-term receivables Decrease in accounts payable and accrued liabilities (Decrease) increase in deferred revenue
2010 TECSYS Inc. - Annual Report
Financing activities Repayment of bank advances Purchase price adjustments on acquisition applied against long-term debt Repayment of long-term debt Issuance of common shares Purchase of common shares for cancellation Payment of dividends
38
Investing activities Decrease (increase) in short-term and other investments and restricted cash equivalents and other investments Interest and principal received on asset-backed commercial paper Acquisitions of property and equipment Proceeds on disposal of property and equipment Acquisitions of intangible assets Proceeds on disposal of intangible assets Decrease in long-term receivables including the current portion from a related party Decrease in goodwill related to the Streamline acquisition
(Decrease) increase in cash and cash equivalents during the year Cash and cash equivalents – beginning of year Cash and cash equivalents – end of year
$
2,182
$
1,587
550 480 404 (43) 149 153 (876) (1,428) 79 (452)
545 704 224 (183) 125 238 (810) 60 -
1,961 237 (271) (23) 48 (211) (249) (422)
(74) 140 137 (257) (3) 179 58 (290) 1,419
2,268
3,799
(49) 36 (20) (580) (618)
(3) (174) 20 (667) (508)
(1,231)
(1,332)
14 125 (1,313) 20 (173) 11 25
(392) 167 (321) 8 (161) 7 42 -
(1,291)
(650)
(254) 7,510
1,817 5,693
7,256
$
7,510
Supplementary cash flow information (note 15)
The accompanying notes are an integral part of these consolidated financial statements.
TECSYS Inc. Consolidated Statements of Shareholders’ Equity (in thousands of Canadian dollars)
Contributed surplus
Capital stock
Balance, April 30, 2008 Repurchase of common shares (note 11) Stock options exercised
Number
Amount
13,003,684
$ 1,444
$ 12,826
(490,300)
(54)
(613)
Retained earnings
$
Total
1,003
$ 15,273
-
(667)
12,500
20
-
-
20
Fair value associated with options exercised
-
10
(10)
-
-
Stock-based compensation
-
-
125
-
125
Net earnings for the year
-
-
-
1,587
1,587
Dividends
-
-
-
(508)
(508)
12,525,884
$ 1,420
$ 12,328
2,082
$ 15,830
(300,859)
(34)
(546)
-
(580)
Balance, April 30, 2009 Repurchase of common shares (note 11) Stock options exercised
$
281
-
-
-
-
Stock-based compensation
-
-
149
-
149
Net earnings for the year
-
-
-
2,182
2,182
Dividends Balance, April 30, 2010
-
-
-
12,225,306
$ 1,386
$ 11,931
$
(618)
(618)
3,646
$ 16,963
The accompanying notes are an integral part of these consolidated financial statements.
2010 TECSYS Inc. - Annual Report
39
TECSYS Inc. Notes to Consolidated Financial Statements Years Ended April 30, 2010 and 2009 (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 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 healthcare, gas and welding supplies distribution, office products, hardware, spare parts for heavy equipment, third-party logistics, industrial products, giftware and home decor, and consumer goods.
2
Changes in accounting policies a) 2010 accounting changes Effective with the commencement of its 2010 fiscal year beginning May 1, 2009, the Company adopted the new CICA accounting standards presented hereunder. Goodwill and intangible assets In February 2008, the CICA issued Section 3064, Goodwill and Intangible Assets, which replaces Section 3062, Goodwill and Other Intangible Assets and Section 3450, Research and Development Costs. The standards provide guidance on the recognition, measurement, presentation and disclosure of intangible assets and goodwill in accordance with the definition of an asset and the criteria for asset recognition, other than the initial recognition of goodwill or intangible assets acquired in a business combination. The new standards clarify the application of the concept of matching revenues and expenses, whether these assets are separately acquired or internally developed. These new standards are applicable for fiscal years beginning on or after October 1, 2008, and require retroactive application to prior period financial statements. Accordingly, the Company adopted this standard on May 1, 2009. The adoption of this standard did not have an impact on the financial statements. Financial instruments – disclosures In June 2009, the Canadian Accounting Standards Board (AcSB) issued amendments to CICA Handbook Section 3862, Financial Instruments – Disclosures, in order to align with International Financial Reporting Standard IFRS 7, Financial Instruments: Disclosures. This Section has been amended to include additional disclosure requirements about fair value measurements of financial instruments and to enhance liquidity risk disclosure. The amendments establish a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. 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. These amendments apply to annual financial statements relating to fiscal years ending after September 30, 2009 and are applicable to the Company as at April 30, 2010. The amended Section relates to disclosure only and did not impact the financial results of the Company. b) Future accounting changes Business combinations, Consolidated financial statements and Non-controlling interests
2010 TECSYS Inc. - Annual Report
The CICA issued three new accounting standards in January 2009: Section 1582, Business Combinations, Section 1601, Consolidated Financial Statements, and Section 1602, Non-controlling Interests. These new standards will be effective for fiscal years beginning on or after January 1, 2011, however earlier adoption is permitted. The Company will adopt these standards early, effective May 1, 2010 as they converge with IFRS and hence will minimize the need for restatement should any acquisitions arise in fiscal 2011.
40
Section 1582 replaces the former Section 1581, Business Combinations, and establishes standards for the accounting for a business combination. It provides the Canadian equivalent to International Financial Reporting Standards IFRS 3, Business Combinations. The new standard requires the acquiring entity in a business combination to recognize most of the assets acquired and liabilities assumed in the transaction at fair value including contingent assets and liabilities; and recognize and measure the goodwill acquired in the business combination or a gain from a bargain purchase, while acquisition-related costs are to be expensed. The section applies prospectively to business combinations for which the acquisition date is on or subsequent to the Company’s early adoption date. This new section will have an impact on the consolidated financial statements for future acquisitions that will be made subsequent to the date of adoption. Consolidated Financial Statements, Section 1601 and Non-controlling Interests, Section 1602 replace Section 1600, Consolidated Financial Statements with the exception of non-controlling interest which is addressed in a separate section. These two sections are the equivalent to the corresponding provisions of International Financial Reporting Standards IAS 27, Consolidated and Separate Financial Statement. Section 1602 applies to the accounting for non-controlling interests and transactions with non-controlling interest holders in consolidated financial statements. The new sections require that, for each business combination, the acquirer measure any non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s identifiable net assets. The new sections also require non-controlling interest to be presented as a separate component of shareholders’ equity. Under Section 1602, non-controlling interest in income is not deducted in arriving at consolidated net income or other comprehensive income. Rather, net income and each component of other comprehensive income are allocated to the controlling and non-controlling interests based on relative ownership interests. These sections will be adopted concurrently with Section 1582 effective May 1, 2010, the Company’s early adoption date, and will have an impact on the consolidated financial statements subsequent to the date of adoption.
TECSYS Inc. Notes to Consolidated Financial Statements Years Ended April 30, 2010 and 2009 (in Canadian dollars, tabular amounts in thousands, except as otherwise noted) International Financial Reporting Standards In February 2008, the AcSB confirmed that Canadian GAAP, as used by publicly accountable enterprises, would be fully converged into IFRS, as issued by the International Accounting Standards Board (IASB). The changeover date is for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. As a result, the Company will be required to report under IFRS for its 2012 fiscal year commencing May 1, 2011 for interim and annual financial statements. While IFRS uses a conceptual framework similar to Canadian GAAP, there are significant differences in accounting policy which must be addressed. The Company will convert to these new standards according to the timetable set within these rules. The Company is in the process of determining the impact of adopting the standards on its consolidated financial statements.
3
Significant accounting policies These financial statements have been prepared in accordance with Canadian generally accepted accounting principles (“GAAP”). Consolidation These consolidated financial statements include the accounts of the Company and its wholly and majority-owned subsidiaries. All intercompany accounts and transactions have been eliminated. Acquisitions are accounted for by the purchase method and, accordingly, the results of operations of subsidiaries are included from the dates of acquisition. The Company’s investment in which it has significant influence is accounted for using the equity method. Use of estimates The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect 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. Significant areas requiring the use of management estimates include estimating the fair value of assetbacked commercial paper, determining separate units of accounting in connection with revenue recognition relating to multiple element arrangements, determining the percentage-of-completion of projects for purposes of revenue recognition, establishing the fair value of assets and liabilities, intangible assets, and goodwill related to business combinations, determining estimates and assumptions related to impairment tests for all long-lived assets and goodwill, estimating stock-based compensation, assessing the recoverability of research and development and other tax credits and establishing provisions related to doubtful accounts and future income taxes. Consequently, actual results could differ from those estimates. Foreign currency translation Functional and reporting currency The functional currency of the Company is the Canadian dollar as substantially all of the Company’s assets, operations and resources are located in Canada. Foreign operations The Company’s foreign operations are classified as integrated and are translated into the functional currency using the temporal method. Under this method, monetary assets and liabilities are translated at the exchange rate in effect at the balance sheet date, whereas non-monetary assets and liabilities are translated at historical exchange rates. Revenues and expenses are translated at the average exchange rate for the reporting period, except for amortization, which is translated at the same rate as the asset to which it applies. Gains and losses resulting from translation are reflected in the statement of earnings for the year. Foreign currency transactions Transactions denominated in foreign currencies are translated into the functional currency using the temporal method.
From time to time, the Company enters into forward exchange contracts to manage its exposure to fluctuations in foreign exchange rates. The Company is exposed to currency risk fluctuations as a certain portion of the Company’s sales and expenses are incurred in foreign currencies, primarily U.S. dollars, which generally give rise to the Company carrying a net monetary asset position in those foreign currencies. These derivative financial instruments are effective in meeting the risk reduction objectives of the Company by generating offsetting exchange gains and losses related to the revaluation of the underlying foreign currency net monetary asset position being carried. The Company does not hold or issue derivative financial instruments for trading purposes. 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 exchange contract settlements are classified as cash flows from operating activities along with the corresponding cash flows from the monetary assets being economically hedged. Revenue recognition The Company licenses software under non-cancellable license agreements and provides 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. The Company recognizes revenue as described below, which is consistent with the guidance set out in Statement of Position (SOP) 97-2, “Software Revenue Recognition”, which was primarily codified into subtopic 985-605, “Software – Revenue Recognition”, in the Accounting Standards Codification (ASC). Revenues generated by the Company include the following:
2010 TECSYS Inc. - Annual Report
Forward exchange contracts
41
TECSYS Inc. Notes to Consolidated Financial Statements Years Ended April 30, 2010 and 2009 (in Canadian dollars, tabular amounts in thousands, except as otherwise noted) License fees Revenues from perpetual licenses sold separately are recognized when a non-cancellable license agreement has been signed, the software product has been delivered, there are no uncertainties surrounding product acceptance, the fees are fixed or determinable, and collection is considered probable. Fees from multiple element arrangements are allocated to the various elements based on vendor-specific objective evidence of fair value provided that services, if any, are not essential to the functionality of the software. Revenues from perpetual licenses sold under multiple element arrangements are recognized upon shipment of the software product, provided that all of the above criteria have been met and subject to the following. 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. 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. 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. 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 such 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 balance sheet 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, the percentage of completion up to that milestone is recognized upon acceptance. Support agreements Support agreements 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 and the related cost are generally recognized upon the delivery of the third-party products as the Company’s direct customer support for these products is generally limited to interface issues between the Company’s proprietary products and the third-party products. Customer support for technical issues related to the third-party products is referred to the third-party supplier for resolution. 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. Reimbursable expenses The Company records revenue and the associated cost of revenue on a gross basis in its statement of earnings for reimbursable expenses such as airfare, hotel lodging, meals, automobile rental and other charges related to providing services to its customers. 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, and are recorded at fair market value. 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 and are valued at fair market value.
2010 TECSYS Inc. - Annual Report
Inventory
42
Inventory is stated at the lower of cost and net realizable value. Cost is determined on an average cost basis. Financial instruments Financial assets and liabilities, including derivatives, are recognized on the consolidated balance sheet when the Company becomes a party to the contractual provisions of the financial instrument or derivative contract. All financial instruments are classified into one of the following five categories: held-for-trading, held-to-maturity investments, loans and receivables, available-for-sale financial assets, or other financial liabilities. On initial recognition, all financial instruments, including derivatives, are recorded on the consolidated balance sheet at fair value except for certain related party transactions. Transaction costs are expensed as incurred for financial instruments classified as held-for-trading. For other financial instruments, transaction costs are added to the initial fair value on initial recognition and are classified against the underlying financial instruments. The held-for-trading classification is applied when the Company is “trading” in an instrument or alternatively the standard permits that any financial instrument be irrevocably designated as held-for-trading. The held-to-maturity classification is applied only if the asset has specified characteristics and the entity has the ability and the intent to hold the asset until maturity. Measurement in subsequent periods is dependent upon the classification of the financial instrument.
TECSYS Inc. Notes to Consolidated Financial Statements Years Ended April 30, 2010 and 2009 (in Canadian dollars, tabular amounts in thousands, except as otherwise noted) In subsequent periods, the financial assets and financial liabilities classified as held-for-trading are measured at fair value with changes in those fair values included in net earnings for the period. Financial assets classified as held-to-maturity, loans and receivables, or other financial liabilities are measured at amortized cost using the effective interest method of amortization. The effective interest related to the financial instrument is included in net earnings for the period in which it arises. If a financial asset is classified as available-for-sale, the gain or loss is recognized in other comprehensive income until the financial asset is derecognized and all the cumulative gain or loss is then recognized in net income. The Company has classified its cash and cash equivalents, short-term and other investments, restricted cash equivalents and other investments, and asset-backed commercial paper as held-for-trading. Accounts receivable and other accounts receivable are classified as loans and receivables. Bank advances, accounts payable and accrued liabilities, and long-term debt are classified as other financial liabilities. The Company did not have any held-to-maturity or available-for-sale instruments during the years ended April 30, 2009 and April 30, 2010. Under the Company’s risk management policy derivative financial instruments are used for risk management purposes and not for generating trading profits. Derivative financial instruments are recorded as either assets or liabilities measured at their fair value unless exempted from derivative treatment as a normal purchase or sale. The Company enters into forward foreign exchange contracts to sell amounts of currency in the future at predetermined exchange rates. The net fair value of outstanding forward foreign exchange contracts are included in the consolidated balance sheet as part of the accounts designated “other accounts receivable” or “accounts payable and accrued liabilities” as appropriate. Any change in the fair value of outstanding forward foreign exchange contracts are accounted for as a foreign exchange gain (loss) in net earnings for the period in which it arises. The Company has not designated any hedging relationships. Accordingly, the Company does not use any hedge accounting rules. Property and equipment and amortization Property and equipment are carried at cost less accumulated amortization. The Company provides for amortization of property and equipment commencing once the related assets have been put into service using the following methods and rates or period: Method Computer equipment Furniture and fixtures Exhibition equipment Leasehold improvements
Declining balance Declining balance Declining balance Straight-line
Rate/period
30% 20% 30% Over term of lease
Long-term investment The investment in TECSYS Latin America Inc. is accounted for on an equity basis. Accordingly, the investment is presented at the acquisition cost, plus the proportional ownership share of the net earnings (loss) since acquisition including the amortization of intangible assets. The amortization period of all the intangible assets is five years. Intangible assets Intangible assets are carried at cost less accumulated amortization. The Company provides for amortization of software acquired for internal use over its estimated useful life using the declining balance method at a rate of 30% per year. Technology, customer relationships, and other intangible assets are amortized on a straight-line basis over their estimated useful lives of five years. Goodwill
Impairment of long-lived assets The Company assesses the carrying value of its long-lived assets, which include property and equipment, technology, customer relationships, and other purchased definite-life intangible assets, for future recoverability when events or changed circumstances indicate that the carrying value may not be recoverable. An impairment loss is recognized if the carrying value of a long-lived asset exceeds the sum of the estimated undiscounted future cash flows expected from its use. The amount of impairment loss, if any, is determined as the excess of the carrying value of the assets over their fair value. Research and development costs All costs related to development activities which do not meet generally accepted criteria for deferral and all costs related to research are expensed as incurred. Development costs, which do meet generally accepted criteria for deferral, are capitalized and amortized against earnings over the estimated period of benefit of approximately five years.
2010 TECSYS Inc. - Annual Report
Goodwill represents the excess of the purchase price of businesses acquired over the fair value of the underlying net identifiable assets acquired or liabilities assumed. Goodwill is evaluated for impairment annually or when events or changed circumstances indicate an impairment may have occurred. In connection with the goodwill impairment test, if the carrying value of the Company’s reporting unit to which goodwill relates exceeds its estimated fair value, an impairment loss is recognized in the amount of the excess of the carrying value over the fair value. The Company has selected April 30 as the date of its annual impairment test for goodwill.
43
TECSYS Inc. Notes to Consolidated Financial Statements Years Ended April 30, 2010 and 2009 (in Canadian dollars, tabular amounts in thousands, except as otherwise noted) Development costs of new software products for sale are charged to expense as incurred until generally accepted criteria for deferral are met as prescribed by CICA Handbook Section 3064, Goodwill and Intangible Assets. Once the deferral criteria have been met, additional qualifying software product development costs, net of government assistance, which have an anticipated future economic benefit, are deferred and amortized against earnings over the estimated product life. Amortization commences when the product is available for general release and sale. Deferred development costs are stated at cost less accumulated amortization. If it is determined that the unamortized deferred costs are not recoverable from future revenues less related costs, an impairment loss is recognized at that time in the amount of the excess of the carrying value over the net recoverable amount. Tax credits The Company is entitled to 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 in information technologies was introduced in the Quebec March 13, 2008 budget speech and subsequently adjusted as announced in the March 2009 budget. The Company expects to maintain its eligibility for this tax credit in fiscal 2010, as it did for fiscal 2009. This tax credit is granted to eligible corporations regarding salaries paid to eligible employees for carrying out eligible activities. Such 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, each year, an eligibility certificate from Investissement Québec confirming that it has satisfied the criterion relating to the proportion of the activities in the information technology sector and in respect of the services supplied. SRED and other tax credits are accounted for as a reduction of the related expenditures. The refundable portion of tax credits is recorded in the year in which the related expenditures are incurred. The non-refundable portion of tax credits is recorded in the year in which the related expenditures are incurred, provided the Company has reasonable assurance the credits will be realized, or in a subsequent year to the extent that their future realization is determined to be probable. Stock-based compensation and other stock-based payments Stock-based compensation costs are accounted for using the fair value based method of accounting for stock options and warrants granted to employees and directors. Under the fair value based method, compensation cost is measured at fair value at the date of grant and is expensed over the award’s vesting period with a corresponding credit to contributed surplus. Upon the exercise of the options, any consideration received from plan participants is credited to capital stock and the stockbased compensation cost originally credited to contributed surplus is reclassified to capital stock. Any stock-based compensation costs related to awards to individuals other than employees and directors are accounted for at fair value. Cancellations are accounted for as they occur, with any previously recognized compensation cost related to unvested options being reversed in the period of cancellation. Income taxes The Company provides for income taxes using the asset and liability method of tax allocation. Under this method, future income tax assets and liabilities are determined based on deductible or taxable temporary differences between financial statement values and tax values of assets and liabilities using substantively enacted income tax rates expected to be in effect for the year in which the differences are expected to reverse. The Company establishes a valuation allowance against future income tax assets if, based on available information, it is more likely than not that some or all of the future income tax assets will not be realized. Employee future benefits
2010 TECSYS Inc. - Annual Report
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. An employee’s entitlement to any benefits ceases upon termination of employment with the Company. The Company has no liability for any future benefits. The table represents amounts expensed in the statement of earnings for the years indicated.
44
Years ended April 30, Contribution to retirement savings Premiums for other benefits
2010 $
44 565
$ 609
2009 $
52 518
$ 570
TECSYS Inc. Notes to Consolidated Financial Statements Years Ended April 30, 2010 and 2009 (in Canadian dollars, tabular amounts in thousands, except as otherwise noted) Earnings per share Basic net earnings per common share are calculated using the weighted average number of common shares outstanding during the year. Diluted net earnings per common share are 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 and warrants be calculated using the treasury stock method, 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 were used to purchase common shares of the Company at the average trading price of the common shares during the period. The diluted weighted average number of common shares has been calculated as follows: 2010
2009
Weighted average number of common shares – basic Addition to reflect the impact of: Employee and director stock options and warrants
12,362,504
12,782,738
187,916
2,419
Weighted average number of common shares – diluted
12,550,420
12,785,157
Options to purchase 4,500 common shares for the year ended April 30, 2010 (April 30, 2009 - 423,469) could have an effect on the calculation of diluted earnings per share in the future but have been excluded from the above calculation since these options and warrants had exercise prices greater than the average price of the common shares during the year.
4
Short-term and other investments Short-term and other investments comprise the following: April 30, 2010
April 30, 2009
Guaranteed investment certificates denominated in Canadian dollars bearing interest at 0.55% maturing through March 30, 2011 (2009 - 0.22% to 1.70%)
$
850
$ 1,064
Presented as: Short-term investments Restricted cash equivalents and other investments
$
850 -
$
$
850
$ 1,064
325 739
On April 30, 2009, the Company was obligated to provide short-term investments totalling $739,000 as security for an outstanding letter of guarantee in favour of the Company’s former head-office landlord. On April 30, 2010, an investment of $200,000, serving as security for an outstanding letter of guarantee in favour of the Company’s current head-office landlord, had an initial maturity of less than three months, and therefore was reclassified from cash equivalents (see note 15). The letter of guarantee outstanding at April 30, 2010 must be renewed annually through the first five years of the lease term, whereas the letter of guarantee at April 30, 2009 was renewed annually to the end of the lease term. As such, since the expiration of the lease term in both cases was beyond one year, these investments were classified as restricted cash equivalents and other investments.
Asset-backed commercial paper At April 30, 2010, the Company held MAV2 long-term floating rate notes and ineligible assets (IA) Tracking long-term floating-rate notes arising from the conversion of various third-party asset-backed commercial paper (ABCP) that originally matured in August and September 2007. The ABCP had an original cost of $5,109,000, including $400,000 denominated in U.S. dollars and had been classified as held-for-trading on initial recognition. These ABCP, previously rated by the Dominion Bond Rating Service (DBRS) as R1-high, were securities that met the criteria of the Company’s investment policy. An R-1 high rating is the highest credit rating issued by the DBRS. The Canadian market for ABCP suffered a liquidity disruption in mid-August 2007 following which a group of financial institutions and other parties agreed, pursuant to the Montreal Proposal, to a standstill period with respect to ABCP sold by 22 conduit issuers. Participants of the Montreal Proposal also agreed, in principle, to the conversion of the ABCP into longer-term financial instruments with maturities corresponding to the underlying assets (floating rate notes). A Pan-Canadian Investors Committee (“the Committee”) was subsequently established to oversee the orderly restructuring of these instruments during this standstill period. On March 17, 2008, the Committee announced that it had filed an application in the Ontario Superior Court of Justice under the Companies’ Creditors Arrangement Act asking the Court to call a meeting of the ABCP noteholders.
2010 TECSYS Inc. - Annual Report
5
45
TECSYS Inc. Notes to Consolidated Financial Statements Years Ended April 30, 2010 and 2009 (in Canadian dollars, tabular amounts in thousands, except as otherwise noted) On March 20, 2008, the Committee made available an Information Statement describing the proposed restructuring plan (“the Plan”). The Plan was approved by noteholders in a vote held at a noteholders meeting on April 25, 2008. A number of opposing noteholders opposed the Plan and after an unsuccessful legal process, on September 19, 2008, the Committee announced that it was commencing the final steps to implement the Plan. On December 24, 2008, the Committee announced that it had reached an agreement with all key stakeholders, including the governments of Canada, Quebec, Ontario and Alberta regarding the restructuring as further complexities had arisen due to the credit market crises and financial market meltdown in the fall of 2008. Pursuant to the terms of an agreement reached among the governments, the dealer bank asset providers, the Canadian Schedule 1 banks and the Investors Committee, the governments, together with certain participants in the restructuring provided, in aggregate, approximately $4.45 billion of additional margin facilities to support the proposed restructuring Plan. The total margin facilities and equivalents now total $17.82 billion, and $3.45 billion of the “back-stop” facility ranks senior to all other margin facilities. In the event of margin calls, it would be the last in and the first out. In connection with the establishment of the senior “back-stop” facility, the key parties to the restructuring plan also agreed to certain further enhancements to the transaction including, among others, an extension of the previously announced moratorium on additional collateral calls from 14 to 18 months from the date of implementation and the elimination of the circumstances in which the moratorium could have been terminated earlier. On January 21, 2009, the restructuring Plan affecting the $32 billion of third-party ABCP was fully implemented. The converted ABCP and the resulting newly issued floating rate notes in which the Company has invested has not traded in an active market with significant volumes since mid-August 2007. Although, market quotations are available for the MAV2 notes, the Company does not consider the market for the MAV2 notes to be fully active yet. During the year ended April 30, 2010, the Company received $34,000 in partial redemption of the principal relating to its notes and approximately $91,000 of interest. The interest was accrued at the end of the Company’s last fiscal year, April 30, 2009. All payments received and all accrued interest was used to write-down the carrying value of the ABCP and was not reported as interest income. As a result of the restructuring, the subsequent redemption of the portion of the notes, the depreciation of the U.S. dollar since April 30, 2009, and a write-off of one of the IA Tracking notes (MAV2 IA Class 2 Notes – CUSIP CA57632XAB97) to zero as reported by CDS (Clearing and Depositary Services Inc.) on September 21, 2009, at April 30, 2010, the Company held replacement long-term floating rate notes with settlement values as follows:
MAV2 notes Class A-1 Class A-2 Class B Class C
IA Tracking notes
April 30, 2010
April 30, 2009
$
$
$
2,862 1,475 268 142 4,747
$
261
$
$
5,008
2,891 1,503 273 144 $ 4,811 332
$ 5,143
2010 TECSYS Inc. - Annual Report
MAV2 notes represent a combination of leveraged collateralized debt obligations, synthetic assets, and traditional securitized assets with expected maturities of approximately eight years. The expected repayment date for these notes is January 22, 2017. On January 21, 2009, DBRS assigned an “A” rating to the MAV2 senior notes (Class A-1 and A-2) while the subordinated notes (Class B and Class C) were unrated. Class A-1, A-2, and B notes bear interest at the rate equal to the BA rate less 50 basis points. Class C notes bear interest at a rate equal to 20% per annum. In April 2009, the MAV2 Class A-2 notes were placed under review with negative implications by DBRS. On August 11, 2009, DBRS downgraded the rating of the Class A-2 notes to “BBBlow” and maintained the rating under review with negative implications. In February 2010, DBRS confirmed the rating of the Class A-2 notes to “BBBlow”, however removed the under review with negative implications.
46
The IA Tracking notes are represented by assets that have an exposure to U.S. mortgages and sub-prime mortgages with expected maturities of approximately between five and nine years. No indication has been provided regarding the rating these notes may receive, if any. The valuation process used by the Company is a combination of broker provided market quotations and a discounted cash flow model as described further below. At April 30, 2010, market quotations on MAV2 floating rate notes yielded a value of $3,172,000 or 96% of the Company’s carrying value of $3,300,000. Several months earlier, market quotations were as much as 47% off of the Company’s carrying value, largely due to high illiquidity discounts required by the emerging market in trading these notes. The discounted cash flow valuation technique used by the Company to estimate the fair value of its investment in ABCP incorporates weighted discounted cash flows considering the best available public information regarding market conditions and other factors that a market participant would consider for such investments. The Company used the following assumptions in its valuation of the MAV2 notes based on the limited available financial information:
Weighted average interest rate Weighted average discount rate Expected maturity
April 30, 2010
April 30, 2009
3.03% 8.54% 6.75 years
1.80% 7.60% 7.75 years
TECSYS Inc. Notes to Consolidated Financial Statements Years Ended April 30, 2010 and 2009 (in Canadian dollars, tabular amounts in thousands, except as otherwise noted) The discount rates for each of the MAV2 classes vary as a function of the credit rating of each class of the replacement long-term notes. Discount rates have been estimated using long-term fixed rates plus expected spreads for similarly rated instruments with similar maturities and structure and estimated credit risk factors. The Company’s discounted cash flow model for MAV2 floating rate notes yields a valuation that is higher than the carrying value of $3,300,000 by approximately $250,000. An increase in the estimated discount rate of 1 percent would reduce the estimated fair value of the Company’s discounted cash flow valuation by approximately $200,000. For the valuation of the IA Tracking notes, the Company has used a minimum value of 75% of the face value discounted for one year at the Company’s borrowing rate based on the credit facilities executed with the Company’s banker. The credit facilities agreement includes a put option feature exercisable by the Company at the second anniversary, March 13, 2011, which limits the Company’s losses to 25% of the IA Tracking notes, subject to certain conditions, including importantly the condition that the fair value of the notes falls below 75% of their face value. The Company’s carrying value of the IA Tracking notes is estimated at approximately $214,000. After taking into consideration the changes in the credit market characterized by the narrowing of credit spreads and the increasing of the average interest rates, the down-grading of the MAV2 Class A-2 notes to “BBBlow”, the additional accrued interest on the ABCP, the depreciation of the face value of the U.S. denominated ABCP, and the review of the valuation assumptions, the Company concluded that its carrying value is a good approximation of the fair value of the ABCP and hence reported no further write-downs or write-ups during fiscal 2010. The following table details the change in balances of the asset-backed commercial paper in the consolidated balance sheets and the composition of the changes in fair value of asset-backed commercial paper in the consolidated statements of earnings and comprehensive earnings. Historical cost of ABCP Balance - August 2007
$
5,109
Provision for impairment of ABCP $
-
Carrying value of ABCP $
5,109
Changes in fair value of ABCP $
-
Exchange loss on U.S. dollar ABCP
-
(23)
(23)
23
Write-down of ABCP
-
(1,041)
(1,041)
1,041
$ (1,064)
$
$
$
Balance - April 30, 2008; impact on results for 2008
$
5,109
Interest received on ABCP
$
(167)
Estimated accrued interest Write-down of ABCP
-
4,045
$
1,064
(167)
$
-
(105)
-
(105)
-
-
(238)
(238)
238
$ (1,302)
$
3,535
$
238
$
$
(91)
$
-
Balance - April 30, 2009; impact on results for 2009
$
4,837
Interest received on ABCP
$
(91)
-
Reverse accrued interest
105
-
105
-
Principal received on ABCP
(34)
-
(34)
-
(1)
-
(1)
-
4,816
$ (1,302)
Other Balance - April 30, 2010; impact on results for 2010
$
$
3,514
$
-
The balance of ABCP as at April 30, 2010 is detailed as follows: Provision for impairment of ABCP *
Carrying value of ABCP
MAV2 Eligible Class A-1
$
Class A-2 Class B Class C $ MAV2 Ineligible $
2,862
$
(703)
$
2,159
1,475
(455)
1,020
268
(162)
106
142
(127)
4,747
$ (1,447)
261
(47)
5,008
$ (1,494)
* Includes the difference between the historical cost and the notional value of the ABCP.
15 $
3,300
2010 TECSYS Inc. - Annual Report
Notional value of ABCP
214 $
3,514
47
TECSYS Inc. Notes to Consolidated Financial Statements Years Ended April 30, 2010 and 2009 (in Canadian dollars, tabular amounts in thousands, except as otherwise noted) Estimates of the fair value of the ABCP and the related put option are not supported by observable market prices or rates other than in thinly traded markets, and are therefore subject to uncertainty, including, but not limited to, the estimated amounts to be recovered, the yield of the substitute financial instruments and the timing of future cash flows, and the market for these types of instruments. The resolution of these uncertainties could be such that the ultimate fair value of these instruments may vary significantly from the Company’s current estimates. Changes in the near term could require significant changes in the recognized amounts of these assets. As the Company records the new notes at current fair value each period, such adjustments will directly impact earnings.
6
Property and equipment Property and equipment comprise the following: April 30, 2010 Cost Computer equipment Furniture and fixtures Exhibition equipment Leasehold improvements
Accumulated amortization
Net
$
5,239 1,292 134 933
$
4,120 785 77 144
$
1,119 507 57 789
$
7,598
$
5,126
$ 2,472 April 30, 2009
Cost Computer equipment Furniture and fixtures Exhibition equipment Leasehold improvements
7
$
Accumulated amortization
7,955 2,794 462 1,708
$
7,069 2,367 426 1,576
$ 12,919
$
11,438
Net $
886 427 36 132
$ 1,481
Goodwill and other intangible assets a)
Purchased intangible assets comprise the following: April 30, 2010
2010 TECSYS Inc. - Annual Report
Cost
48
Technology Customer relationships Other intangible assets Software acquired for internal use
Accumulated amortization
Net
$
1,613 1,732 167 2,773
$
1,451 1,592 165 2,454
$
162 140 2 319
$
6,285
$
5,662
$
623
April 30, 2009 Cost Technology Customer relationships Other intangible assets Software acquired for internal use
Accumulated amortization
Net
$
1,613 1,732 167 2,600
$
1,305 1,384 137 2,356
$
308 348 30 244
$
6,112
$
5,182
$
930
During 2010, the Company acquired software for internal use of $173,000 (2009 – $161,000).
TECSYS Inc. Notes to Consolidated Financial Statements Years Ended April 30, 2010 and 2009 (in Canadian dollars, tabular amounts in thousands, except as otherwise noted) b)
c)
The changes in the carrying amount of goodwill for the years ended April 30, 2010 and 2009 are as follows: Years ended April 30,
2010
2009
Balance – Beginning of year Streamline acquisition
$ 2,829 (25)
$ 2,829 -
Balance – End of year
$ 2,804
$ 2,829
The changes in the carrying amount of deferred development costs for the years ended April 30, 2010 and 2009 are as follows: Years ended April 30,
8
2010
2009
Balance – Beginning of year Capitalized deferred development costs Amortization of deferred development costs
$ 1,519 876 (404)
$
933 810 (224)
Balance – End of year
$ 1,991
$ 1,519
Long-term investment The changes in the Canadian dollar carrying amount of the long-term investment in TECSYS Latin America Inc. (TLA) for the years ended April 30, 2010 and 2009 are as follows: Years ended April 30,
2010
2009
Balance – Beginning of year Share of net loss and amortization of intangible assets
$ 290 (79)
$ 350 (60)
Balance – End of year
$ 211
$ 290
In the original share purchase agreement, the Company had also committed to advance funds to TLA as loans for an aggregate maximum of US$250,000. Loans under this commitment bear interest at 5% per annum and are repayable over four years commencing six months following each loan. During 2007 and 2008, the Company had provided four loans of US$50,000 each at various dates and an additional US$50,000 during 2010 totalling US$250,000. The outstanding loan receivable is US$110,000 (CA$112,000) as at April 30, 2010 (April 30, 2009 - US$115,000 (CA$137,000)), of which $48,000 is included in long-term receivables and $64,000 is included in other accounts receivable.
9
Banking facilities The Company renewed its banking agreement with a Canadian chartered bank (the “Bank”) in November 2009 under the same terms, conditions and obligations as the previous renewal dated January 2009. The next scheduled renewal of this agreement is on or before September 30, 2010. Under the terms of the agreement, the Bank provides a currency risk protection facility for a principal amount not exceeding $1,500,000 ($1,500,000 April 30, 2009) which may be used to conclude forward exchange transactions regarding the sale or purchase of foreign currencies. The maximum amount of foreign currency that may be sold or purchased by this facility is dependent on the level of risk of the chosen currency as per the schedule in effect at the Bank. For example, a level of risk of 10% for a chosen currency would equate to a maximum amount of currency that may be sold or purchased under the facility of $15,000,000. On April 30, 2010, the Company held outstanding foreign exchange contracts with various maturities to October 29, 2010 to sell US$3,850,000 into Canadian dollars at rates averaging CA$1.0319 to yield CA$3,973,000. The Company recorded unrealized exchange gains of $78,000 related to the change in fair value of these contracts for the year ended April 30, 2010. On April 30, 2009, the Company held outstanding foreign exchange contracts with various maturities to January 29, 2010 to sell US$4,200,000 into Canadian dollars at rates averaging CA$1.198 to yield CA$5,032,000. The Company recorded unrealized exchange gains of $17,000 related to the change in fair value of these contracts for the year ended April 30, 2009.
2010 TECSYS Inc. - Annual Report
a)
49
TECSYS Inc. Notes to Consolidated Financial Statements Years Ended April 30, 2010 and 2009 (in Canadian dollars, tabular amounts in thousands, except as otherwise noted) This facility also permits the issuance of letters of guarantee of up to a maximum amount of $1,500,000. On April 30, 2010, $200,000 (April 30, 2009 - $739,000) 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 terms of the lease. This facility is secured by a first-ranking general hypothec of $1,675,000 ($1,675,000 – April 30, 2009) on all present and future moveable assets. The banking agreement requires the Company to maintain a working capital ratio equal or greater than 1 : 1, and a minimum shareholders’ equity of US$3,500,000 (CA$3,541,000). At April 30, 2010 and 2009, the Company was in compliance with the financial covenants under the banking agreement. b)
On September 28, 2007, the Company entered into a revolving credit facility with the Bank providing access to $4,000,000 of liquidity, or the equivalent thereof in U.S. dollars, by way of floating rate advances, to be used to finance the Company’s working capital needs. This credit facility was secured by a first-ranking hypothec of $4,800,000 on the third-party ABCP held with the Bank and expired in May 2009. This facility was renewed as described below. Prior to renewal, floating rate advances in Canadian dollars incurred interest at the Canadian prime rate less 1.50% per annum, with interest at the same rate on any amount in arrears. If the Company was in default towards the Bank, any floating rate advances in Canadian dollars incurred interest at the Canadian prime rate plus 1.00% per annum until total repayment thereof. Similarly, floating rate advances in U.S. dollars incurred interest at the U.S. base rate less 1.50% per annum. If the Company was in default towards the Bank, any floating rate advances in U.S. dollars incurred interest at the U.S. base rate plus 1.00% per annum until total repayment thereof. This credit facility was reviewed and renewed periodically with the Bank and was payable on demand. On April 30, 2009, the Company had drawn $4,000,000 on this credit facility. Pursuant to the restructuring of the ABCP in January 2009 into restructured long-term notes (note 5), on May 14, 2009, the Company executed a new revolving credit facility, with an effective agreement date of March 13, 2009, providing access to approximately $4,000,000 of liquidity to refinance the September 2007 revolving credit facility. The first part of this credit facility provides lines of credit for $3,508,000 and US$233,000 ($236,000) and is secured by a first ranking hypothec on the MAV2 restructured long-term notes. This facility has an initial maturity date of three years and may be extended annually until the seventh anniversary of the agreement. On the maturity date or any other subsequent date arising as a result of an extension, the recourses of the Bank in respect of approximately $2,140,000, representing 45% of the face value of the MAV2 restructured notes, is limited to the notes. The remaining balance of this credit facility is unsecured. Any principal repayments received from the restructured notes will reduce the credit facility. The second part of this credit facility provides lines of credit for $160,000 and US$75,000 ($76,000) and is secured by a first ranking hypothec on the IA Tracking restructured long-term notes. This facility has an initial maturity date of two years and may be extended annually until the seventh anniversary of the agreement. On the maturity date or any other subsequent date arising as a result of an extension, the recourses of the Bank in respect of this credit facility, representing 75% of the face value of the IA Tracking restructured notes, is limited to the notes. The Bank will have no recourse against the Company in respect of the principal amount of this facility after the exhaustion of the Bank’s recourses against the IA Tracking notes and any proceeds thereof. Any principal repayments received from the restructured notes will reduce the credit facility.
2010 TECSYS Inc. - Annual Report
Floating rate loans in Canadian dollars bear interest at the Canadian prime rate less 1.00%. If the Company is in default towards the Bank, any floating rate advances in Canadian dollars bear interest at the Canadian prime rate plus 1.00% until total repayment thereof. Similarly, floating-rate loans in U.S. dollars bear interest at the U.S. base rate less 1.00%. If the Company is in default towards the Bank, any floating rate advances in U.S. dollars bear interest at the U.S. base rate plus 1.00% until total repayment thereof.
50
A small portion of the principal of the restructured notes has been repaid to the Company, thus reducing the total amount of the renewed credit facility. As such, on April 30, 2010, the Company had drawn $3,951,000 on this credit facility, which represents the maximum amount available under the revolving credit facility on that date.
TECSYS Inc. Notes to Consolidated Financial Statements Years Ended April 30, 2010 and 2009 (in Canadian dollars, tabular amounts in thousands, except as otherwise noted)
10 Long-term debt Long-term debt, all of which is denominated in Canadian dollars, includes the following:
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, 2010
April 30, 2009
$ 107
$ 107
142
126
249 249
233 133
-
$ 100
Promissory note payable related to the Streamline acquisition bearing interest at 6%, maturing in November 2010
Less: Current portion $
11 Capital stock a)
Authorized – unlimited as to number and without par value Class “A” preferred shares, issuable in series, having such attributes as the Board of Directors may determine Common shares
b)
On July 17, 2009, 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 1,917 common shares on any trading day. 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 620,463 or 5% of the 12,409,274 issued and outstanding common shares on July 7, 2009. 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 21, 2009 to July 20, 2010. The common shares are purchased for cancellation. During the year, the Company purchased 300,859 (2009 – 490,300) of its outstanding common shares for cancellation at an average price of $1.90 per share (2009 – $1.34). The total cost related to purchasing these shares, including other related costs, was $580,000 (2009 – $667,000). The excess of the purchase price over the net book value of these shares for $546,000 (2009 - $613,000) has been charged to contributed surplus. On February 12, 2008, at a special meeting of shareholders, it was resolved that it was in the best interest of the Company to reduce the stated capital from $56,133,000 (US$38,188,000) as reflected on the consolidated balance sheet as at April 30, 2007 to $4,192,000 (US$3,194,000), pursuant to section 38 of the Canada Business Corporations Act, in order to eliminate the Company’s accumulated deficit.
d)
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 2010, the Company declared a dividend of $0.025 on two separate occasions that were paid on October 7, 2009 and March 31, 2010 to shareholders of record at the close of business on September 23, 2009 and March 12, 2010 respectively. During fiscal 2009, the Company declared a dividend of $0.02 on two separate occasions that were paid on October 7, 2008 and March 31, 2009 to shareholders of record at the close of business on September 23, 2008 and March 12, 2009 respectively.
e)
Under the stock 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 shall be the “market price” of the common shares in Canadian dollars at the time of granting, the market price being 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 vest 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.
2010 TECSYS Inc. - Annual Report
c)
51
TECSYS Inc. Notes to Consolidated Financial Statements Years Ended April 30, 2010 and 2009 (in Canadian dollars, tabular amounts in thousands, except as otherwise noted) The following table summarizes information about stock options outstanding as at April 30, 2010: Options outstanding Exercise price $
Number outstanding
1.22 - 1.32 1.36 - 1.46 1.50 - 1.59 1.62 - 1.70 1.76 - 1.86 2.01 - 2.06
5,250 384,703 316,656 16,000 162,500 4,500 889,609
Weighted average remaining contractual life (years)
Options exercisable
Weighted average exercise price $
Number exercisable
Weighted average exercise price $
3.32 1.54 2.59 1.76 4.02 4.71
1.27 1.40 1.52 1.66 1.79 2.04
2,047 319,422 174,867 11,500 11,250 -
1.25 1.40 1.52 1.65 1.76 -
2.39
1.52
519,086
1.45
As at April 30, 2009, there were 808,610 options outstanding and 387,015 options exercisable at weighted average exercise prices of $1.49 and $1.51, respectively. The following table summarizes the stock option activity under this plan:
Number of options Balance – April 30, 2008
Weighted average exercise price $
1,085,611
1.57
Granted Exercised Cancelled Vested and expired unexercised
47,000 (12,500) (13,502) (297,999)
1.57 (1.61) (1.51) (1.77)
Balance – April 30, 2009
808,610
1.49
Granted Exercised Cancelled Vested and expired unexercised
144,500 (1,296) (5,850) (56,355)
1.81 (1.43) (1.50) (1.91)
Balance – April 30, 2010
889,609
1.52
2010 TECSYS Inc. - Annual Report
In fiscal 2010, 1,015 out of the 1,296 options exercised were under a cash election option requiring the Company to disburse three hundred and seventy-five dollars.
52
f)
In 2005, pursuant to an acquisition, each of the five former owners were issued 5,000 warrants to purchase in aggregate 25,000 common shares of the Company, the exercise price of which was the weighted average price of common shares on the TSX for the five trading days preceding February 28, 2005 (the “Grant Date”). The exercise price per warrant was $1.64. At April 30, 2008, 10,000 of these warrants were forfeited. During fiscal 2009, the remaining 15,000 expired unexercised although they were 100% vested. At April 30, 2010 and 2009, there were no warrants outstanding.
g)
Stock-based compensation costs are accounted for using the fair value based method of accounting for stock options granted to employees and directors. The fair value of options granted was estimated using the Black-Scholes option pricing model with the following weighted average assumptions: Years ended April 30,
2010
2009
Volatility Risk-free interest rate Dividend yield Expected lives (in years)
45.3% 2.3% 2.7% 4
40.8% 3.2% 2.7% 4
TECSYS Inc. Notes to Consolidated Financial Statements Years Ended April 30, 2010 and 2009 (in Canadian dollars, tabular amounts in thousands, except as otherwise noted) Following is a summary of the weighted average exercise price and weighted average grant date fair value of options granted during the years ended April 30, 2010 and 2009:
2010 options 2009 options
Number of options
Weighted average exercise price $
Weighted average grant date fair value $
144,500 47,000
1.81 1.57
0.56 0.55
2010
2009
12 Income taxes a)
Income tax expense for the years ending April 30, 2010 and 2009 comprised the following components: Years ended April 30,
b)
Current income taxes Future income taxes
$
204 (639)
$
-
Income taxes recovery
$
(435)
$
-
The provision for income taxes varies from the expected provision at the statutory rate for the following reasons: Years ended April 30,
2010 %
2009 %
Combined basic federal and provincial statutory income tax rate Unrecognized benefit of non-capital losses and undeducted research and development expenses Benefit of previously unrecognized non-capital losses and undeducted research and development expenses Benefit of previously unrecognized net operating losses of subsidiaries Unrecognized benefit of net operating losses of subsidiary Unrecognized benefit of other current year temporary differences, permanent differences and others Change in valuation allowance
30.77 11.50 (2.86) (1.61) 1.33 (3.26) (60.77)
32.15 10.91 (83.09) (4.85) 7.94 36.94 -
Provision for income taxes as per financial statements
(24.90)
-
2010 TECSYS Inc. - Annual Report
53
TECSYS Inc. Notes to Consolidated Financial Statements Years Ended April 30, 2010 and 2009 (in Canadian dollars, tabular amounts in thousands, except as otherwise noted) c)
The future income tax balances are summarized as follows: April 30, 2010
April 30, 2009
$ 4,830 5 242 1,655 123 2,813 245 370
$ 5,277 5 285 1,984 125 2,896 290 256
10,283 (8,989)
11,118 (10,376)
1,294
742
(75) (541) (83)
(80) (456) (206)
Future income tax assets Research and development expenses Share issue costs Non-capital losses Net operating losses of U.S. subsidiaries Net operating losses of UK subsidiary Property and equipment Federal - Ontario harmonization credits Other
Valuation allowance Recognized future income tax assets Future income tax liabilities E-business tax credits Deferred development costs Intangible assets on business acquisitions Net future income tax assets
$
595
$
-
The Company establishes a valuation allowance against future income tax assets if, based on available information, it is more likely than not that some or all of the future income tax assets will not be realized. As of April 30, 2010, the Company expects to realize at least $595,000 of net future tax assets. These future tax assets are presented as current assets of $142,000 and non-current assets of $453,000 in the Consolidated Balance Sheet and as a reduction of future income taxes expense in the Consolidated Statement of Earnings and Comprehensive Earnings, thereby increasing the net earnings for the current year. d)
On April 30, 2010, the Company had accumulated research and development expenses of approximately $17,779,000 for Federal and Ontario provincial income tax purposes and $17,551,000 for Quebec provincial income tax purposes which may be carried forward indefinitely and used to reduce taxable income in future years.
e)
On April 30, 2010, the Company had non-capital losses carried forward of $4,028,000 for Quebec provincial income tax purposes which may be used to reduce taxable income in future years. These losses may be claimed no later than fiscal years ending April 30: Quebec Provincial
2010 TECSYS Inc. - Annual Report
2010 2014 2015 2026 2027
54
f)
$
1,001 351 651 1,953 72
$
4,028
On April 30, 2010, the Company’s U.S. subsidiaries had net operating losses carried forward for Federal income tax purposes totalling approximately $4,869,000 (US$4,813,000) which may be used to reduce Federal taxable income in future years. These losses may be claimed no later than fiscal years ending April 30: US$ 2020 2021 2023 2024
CA$
$
706 3,923 174 10
$
714 3,969 176 10
$
4,813
$
4,869
TECSYS Inc. Notes to Consolidated Financial Statements Years Ended April 30, 2010 and 2009 (in Canadian dollars, tabular amounts in thousands, except as otherwise noted) g)
On April 30, 2010, the Company’s U.K. subsidiary had net operating losses carried forward for income tax purposes totalling approximately $586,000 which may be applied to reduce taxable income in future years.
h)
On April 30, 2010, as a result of the harmonization of Canadian Federal and Ontario provincial tax balances, the Company has future tax assets of approximately $245,000 which may be applied to reduce Ontario provincial income taxes payable over the next three years. Management believes that it is probable that the Company will claim these deductions in full and reduce Ontario Provincial income taxes otherwise payable in future years.
i)
The Company has refundable tax credits which are receivable by cash payments, and non-refundable tax credits which may only be applied to reduce current income taxes otherwise payable. April 30, 2010
April 30, 2009
Canadian Provincial refundable tax credits Canadian Federal non-refundable tax credits Less: Valuation allowance on non-refundable tax credits
$
1,559 7,502 (6,217)
$
1,536 7,462 (7,462)
Net tax credits receivable
$
2,844
$
1,536
Current Non-current
$
1,914 930
$
1,536 -
$
2,844
$
1,536
The Company establishes a valuation allowance against non-refundable tax credits unless, based on available information, their realization is probable. On April 30, 2010, the Company had non-refundable research and development tax credits totalling approximately $7,502,000 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 non-refundable tax credits 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
$
495 879 1,172 1,635 1,139 999 160 204 173 143 165 154 184
$ 7,502
Management believes that it is probable that the Company will also claim available non-refundable research and development tax credits in future years to reduce Canadian Federal income taxes otherwise payable of at least $1,285,000. These tax credits have been recognized as current assets of $355,000 and non-current assets of $930,000 in the Consolidated Balance Sheet and as operating earnings for the year.
2010 TECSYS Inc. - Annual Report
For the year ended April 30, 2010, the Company intends to claim available non-refundable research and development tax credits to reduce Canadian Federal income taxes. These tax credits have been applied to offset Canadian Federal income taxes otherwise payable of $143,000.
55
TECSYS Inc. Notes to Consolidated Financial Statements Years Ended April 30, 2010 and 2009 (in Canadian dollars, tabular amounts in thousands, except as otherwise noted) Tax credits recognized in operating earnings consisted of the following: April 30, 2010 Federal non-refundable research and development tax credits: Current year Future years Provincial refundable research and development tax credits E-business tax credits for research and development employees Other Less: commission expense incurred (note 16a) )
$
143 1,285 80 790 47 (333)
Total research and development tax credits E-business tax credits for employees other than research and development Tax credits recognized in the year
$
April 30, 2009
$
63 697 -
2,012
760
755
690
2,767
$
1,450
13 Product revenue Product revenue is broken down as follows: Years ended April 30, Software products Third-party hardware and software products
2010 $
6,894 6,439
2009 $
6,321 9,428
$ 13,333
$ 15,749
2010
2009
$ 15,173 (755)
$ 15,859 (690)
$ 14,418
$ 15,169
2010
2009
14 Cost of services Cost of services is detailed as follows: Years ended April 30, Gross expenses E-business tax credits
2010 TECSYS Inc. - Annual Report
15 Supplementary cash flow information
56
Years ended April 30, Cash paid for interest Cash paid for income taxes
$ $
24 17
$ $
69 -
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 (note 17a) )
$
401
$
-
$
152 7,304
$
895 6,615
$
7,456
$
7,510
$
7,256 200
$
7,510 -
$
7,456
$
7,510
Cash and cash equivalents comprise: Cash Short-term investments with initial maturities of less than 90 days
Presented as: Cash and cash equivalents Restricted cash equivalents and other investments
TECSYS Inc. Notes to Consolidated Financial Statements Years Ended April 30, 2010 and 2009 (in Canadian dollars, tabular amounts in thousands, except as otherwise noted) On April 30, 2010, short-term investments with initial maturities of less than 90 days bear interest at rates ranging from 0.05% to 0.42% (2009 – 0.05% to 0.15%) and mature on various dates to July 22, 2010. On April 30, 2010, the Company is obligated to provide short-term investments totalling $200,000 (2009 – $739,000) as security for an outstanding letter of guarantee in favour of one of the Company’s landlords. The investment at the end of fiscal 2009 was reclassified from short-term and other investments (see note 4). The letter of guarantee outstanding at April 30, 2010 must be renewed annually through the first five years of the lease term, whereas the letter of guarantee at April 30, 2009 was renewed annually to the end of the lease term. As such, since the expiration of the lease term in both cases was beyond one year, these investments were classified as restricted cash equivalents and other investments.
16 Contingencies a)
In June 2005, a former lobbying consulting group instituted a lawsuit against the Company claiming commissions on tax credits received and receivable by the Company pursuant to a lobbying services contract executed between the two parties. The Company has not paid such commissions since 2002 as a result of the enactment of the Lobbying Act which rendered such lobbying activities that were taking place as of June 13, 2002 illegal. The lobbying consulting group contends that the lobbying services were rendered prior to the enactment of the law and that the law cannot have the retroactive effect of rendering illegal acts that were performed prior to its enactment. The Company contests the allegations and contends that the payment of commissions ensuing from the lobbying contract are not permitted since the enactment of the Lobbying Act, which had the effect of ceasing all consulting services, a prerequisite for continuing commissions. Arguments were heard at trial before a judge of the Superior Court of Quebec from June 2 to 5, 2009. On September 22, 2009, judgment was rendered against the Company to pay commissions for $333,000 plus interest estimated at approximately $82,000. On October 15, 2009, the Company filed an appeal with the Quebec Court of Appeal citing that the judgment concluded incorrectly on its misinterpretation of the facts, the contract, and the transitional provisions of the Lobbying Act. As a result of new developments, the Company’s management has decided to fully provide for this contingent liability in the financial statements in the fourth quarter of 2010.
b)
Through the course of operations, the Company may be exposed to a number of other lawsuits, claims and contingencies. Accruals are made in instances where it is probable that liabilities will be incurred and where such liabilities can be reasonably estimated. Although it is possible that liabilities may be incurred in instances for which no accrual 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.
c)
The Company has guaranteed a mortgage loan on behalf of the TECSYS Foundation for Youth (the “Foundation”) in the amount of $247,500 for the purchase of land and a building to be used by the Foundation as a school. The mortgage loan was granted on December 23, 2002, bears interest at Canadian prime rate plus 0.5% and is payable monthly. The principal is payable in 180 equal and consecutive monthly instalments of $1,375, which instalments are being paid by the Foundation. The outstanding principal balance of the mortgage amounted to $126,500 at April 30, 2010. The mortgage is secured by the land and building. During 2010, the Company donated $80,000 (2009 – $80,000) to the Foundation. At April 30, 2010, the Company has recorded no liability with respect to this guarantee, as the Company does not expect to make any payment for the aforementioned item and the standby liability is nominal.
17 Commitments In the second quarter of fiscal 2010, the Company signed a new lease agreement for its head office in Montreal. The Company has relocated to this facility in the spring of 2010. The lease term of ten and one-half years is effective May 1, 2010 and runs through October 31, 2020. The Company has incurred capital expenditures for leasehold improvements, new furniture, and other equipment in the amount of $1,450,000, of which $401,000 remains unpaid at April 30, 2010.
b)
On April 30, 2010, the minimum future rental payments, including operating expenses required under long-term operating leases which relate mainly to premises, are as follows. 2011 2012 2013 2014 2015 Thereafter
c)
$ 1,265 1,053 724 733 737 4,124 $ 8,636
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 Enterprise Supply Chain (ESC) business unit, 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.
2010 TECSYS Inc. - Annual Report
a)
57
TECSYS Inc. Notes to Consolidated Financial Statements Years Ended April 30, 2010 and 2009 (in Canadian dollars, tabular amounts in thousands, except as otherwise noted) The Company has incurred royalty fees related to this agreement as follows: 2010 2009
$ 254 (US$ 237) $ 262 (US$ 230)
18 Related party transactions The following table summarizes transactions and balances between the Company and certain related parties: Years ended April 30,
2010
2009
TECSYS Latin America Inc. (TLA) Revenues Loan interest income Accounts receivable, net of deferred revenue of $3 (2009 - $67) Loan receivable – short-term Loan receivable – long-term Accrued interest receivable
$ 228 5 151 64 48 2
$ 230 7 67 60 77 1
14 107
14 107
Other related parties Interest on advances from a person related to certain shareholders Subordinated loan payable
The Company provided four loans of US$50,000 each at various dates during 2007 and 2008 amounting to US$200,000 and an additional loan of US$50,000 during 2010 to TLA. The loans bear interest at 5% and are repayable over four years commencing six months following the advance of each loan. The outstanding loan receivable is US$110,000 (CA$112,000) as at April 30, 2010 (April 30, 2009 – US$115,000 (CA$137,000)), of which $48,000 is included in long-term receivables and $64,000 is included in other accounts receivable. The Company has a subordinated loan for $107,000 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. During the second quarter of fiscal 2010, in the ordinary course of business, the Company sold US$250,000 at a spot rate of CA$1.072 to yield CA$268,000 to an officer and major shareholder. The spot rate was the same spot rate offered at arm’s length by the Company’s banker. All other balances and transactions with related parties are disclosed separately in these financial statements. These transactions occurred in the normal course of operations and were measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.
19 Financial instruments and risk management Classification of financial instruments
2010 TECSYS Inc. - Annual Report
There have been no changes in classification of financial instruments since April 30, 2009. The table below summarizes the Company’s financial instruments and their classifications for the years ended April 30, 2010 and 2009.
58
TECSYS Inc. Notes to Consolidated Financial Statements Years Ended April 30, 2010 and 2009 (in Canadian dollars, tabular amounts in thousands, except as otherwise noted) April 30, 2010
Financial Assets Cash and cash equivalents Short-term and other investments Restricted cash equivalents and other investments Asset-backed commercial paper Accounts receivable Other accounts receivable Foreign exchange derivatives included in other accounts receivable (note 9) Long-term receivables Financial Liabilities Bank advances Accounts payable and accrued liabilities Current portion of long-term debt Long-term debt
Held-fortrading, at fair value $ 7,256 850 200 3,514 -
Loans and receivables, at amortized cost
78 $ 11,898 $ -
$
48 7,741
$
-
$
7,346 347
Other financial liabilities, at amortized cost $
-
$
$
-
$
$
3,951 5,305 249 9,505
$
Total 7,256 850 200 3,514 7,346 347
April 30, 2009 $ 7,510 325 739 3,535 9,307 181
78 48 19,639 3,951 5,305 249 9,505
17 77 $ 21,691 4,000 5,154 133 100 $ 9,387
The net fair value of outstanding foreign exchange contracts has been recorded as an accrued other receivable at April 30, 2010 and 2009. Fair value disclosures The Company has determined that the carrying values of its short-term financial assets and liabilities, including cash and cash equivalents, short-term and other investments, accounts receivable, other accounts receivable, bank advances, accounts payable and accrued liabilities, and current portion of long-term debt approximate their fair value because of the relatively short period to maturity of the instruments. The fair value of the long-term receivables was determined by discounting 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 long-term receivables as at April 30, 2010 and 2009. The following table details the fair value hierarchy of financial instruments by level as at April 30, 2010:
Financial Assets Cash and cash equivalents Short-term and other investments Restricted cash equivalents and other investments Derivative financial instruments - foreign exchange contracts Asset-backed commercial paper
Quoted prices in active markets (Level 1) $ -
Other observable inputs (Level 2) $
$
78 $
8,384
-
Total $
3,514 $
3,514
7,256 850 200 78 3,514
$
11,898
Risk management The Company is exposed to the following risks as a result of holding financial instruments: currency or foreign exchange risk, credit risk, liquidity risk, interest rate risk, and market 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 designed to be offset by changes in cash flows related to the net monetary position in the foreign currency.
2010 TECSYS Inc. - Annual Report
$
7,256 850 200
Unobservable inputs (Level 3)
59
TECSYS Inc. Notes to Consolidated Financial Statements Years Ended April 30, 2010 and 2009 (in Canadian dollars, tabular amounts in thousands, except as otherwise noted) As noted in note 9, on April 30, 2010, the Company held outstanding foreign exchange contracts with various maturities to October 29, 2010 to sell US$3,850,000 into Canadian dollars at rates averaging CA$1.0319 to yield CA$3,973,000. The Company recorded unrealized exchange gains of $78,000 related to the change in fair value of these contracts for the year ended April 30, 2010. Subsequent to the year ended April 30, 2010, the Company undertook another foreign exchange contract to sell US$500,000 at a rate of CA$1.0393 for maturity on October 29, 2010 and sold US$500,000 at a spot rate of CA$1.0540 on June 4, 2010 and US$400,000 at a spot rate of CA$1.0170 on June 21, 2010. On April 30, 2009, the Company held outstanding foreign exchange contracts with various maturities to January 29, 2010 to sell US$4,200,000 into Canadian dollars at rates averaging CA$1.198 to yield CA$5,032,000. The Company recorded unrealized exchange gains of $17,000 related to the change in fair value of these contracts for the year ended April 30, 2009. The following table provides an indication of the Company’s significant foreign exchange currency exposures as at April 30. Cash and cash equivalents Accounts receivable Other accounts receivable Long-term receivables Bank advances Accounts payable and accrued liabilities Derivative financial instruments – notional amount
US$ 1,300 3,550 81 48 (288) (872) (3,850) (31)
2010
GBP 10 34 (8) 36
US$ 2,007 4,619 56 65 (1,205) (4,200) 1,342
2009
GBP 8 5 (25) (12)
The following exchange rates applied during the years ended April 30.
CA$ per US$ CA$ per GBP
Average rate
2010 Reporting date rate
Average rate
1.0722 1.7181
1.0116 1.5484
1.1449 1.8931
2009 Reporting date rate
1.1940 1.7668
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 (2010 - CA$1.0622; 2009 – CA$1.2537) and GBP (2010 - CA$1.6258; 2009 – CA$1.8551) would have had the following impact on the net earnings, assuming all other variables remained constant. (Decrease) increase in net earnings
US$
2010
(2)
GBP
US$
3
80
2009
GBP (1)
A 5% depreciation of these currencies would have an equal but opposite effect on net earnings, 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.
2010 TECSYS Inc. - Annual Report
Financial instruments which potentially subject the Company to credit risk consist principally of cash and cash equivalents, short-term and other investments, assetbacked commercial paper, and accounts receivable. The Company’s cash and cash equivalents and short-term and other investments consisting of guaranteed investment certificates are maintained at major financial institutions.
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The asset-backed commercial paper consisted of commercial paper that were rated R1-high at the time the investments were executed, the highest credit rating issued by the Dominion Bond Rating Service (DBRS), and were consistent with the criteria of the Company’s investment policy. As a result of the liquidity disruption in the asset-backed commercial paper market in the summer of 2007, these investments did not settle on maturity and were reclassified as long-term assets. Please refer to note 5 to the consolidated financial statements for a discussion on the restructuring of the ABCP into long-term notes and the risks associated with these instruments. At April 30, 2010, there is one 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 has entered into an arrangement with a federal crown corporation wherein the latter has assumed the risk of credit loss in the case of bankruptcy for up to 90% of accounts receivable from certain foreign and domestic customers, to a maximum of US$1,500,000 and $1,770,000 (US$1,750,000) respectively, in any given year. On April 30, 2010, accounts receivable include foreign accounts totalling US$771,000 and GBP34,000 and domestic accounts for $1,225,000 (US$1,211,000) that were pre-approved for coverage, subject to the above-noted maximums, under this arrangement (2009 – US$1,422,000 and $1,134,000 (US$950,000)).
TECSYS Inc. Notes to Consolidated Financial Statements Years Ended April 30, 2010 and 2009 (in Canadian dollars, tabular amounts in thousands, except as otherwise noted) 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 conditions of customers deteriorate resulting in their diminished ability or willingness to make payment, additional provisions for doubtful accounts are recorded. At April 30, 2010, $2,934,000 of trade accounts receivable were not past due, $3,617,000 were past due 0-180 days, and $1,798,000 were past due 180 days. The total allowance for doubtful accounts was $1,003,000 at April 30, 2010. The Company’s maximum credit risk exposure corresponds to the carrying amounts of the accounts receivable. 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 20 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, 2010.
Bank advances Accounts payable and accrued liabilities Long-term liabilities including current portion
Carrying amount $ 3,951 5,305 249 $ 9,505
Less than 1 year $ $
3,951 5,305 249 9,505
As discussed in greater detail in note 9 b), on May 14, 2009, the Company executed a new revolving credit facility reflected above as bank advances. The lines of credit under the new credit facility have maturities ranging from two to three years from the effective date of the agreement, March 13, 2009. These credit facilities can be extended annually until the seventh anniversary of the agreement, subject to the bank’s approval. 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 Short-term and other investments Restricted cash equivalents and other investments Accounts receivable Long-term receivables Asset-backed commercial paper Bank advances Accounts payable and accrued liabilities Long-term debt
As described in note 15 As described in note 4 As described in notes 4 and 15 Non-interest bearing As described in notes 8 and 18 As described in note 5 As described in note 9 Non-interest bearing As described in note 10
A 1% increase in interest rates would decrease net earnings by approximately $20,000 annually arising mainly as a result of higher interest expense on bank advances, assuming all other variables remained constant. A 1% decrease in interest rates would have an equal but opposite effect, assuming all other variables remained constant. Interest income in the consolidated statement of earnings represents interest income for financial assets classified as held-for-trading. Interest expense represents interest expense for financial liabilities classified at amortized cost. Market risk 2010 TECSYS Inc. - Annual Report
Market 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 risk comprises three types of risk: foreign exchange 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. Please refer to note 5 regarding the asset-backed commercial paper and the associated market risks.
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TECSYS Inc. Notes to Consolidated Financial Statements Years Ended April 30, 2010 and 2009 (in Canadian dollars, tabular amounts in thousands, except as otherwise noted)
20 Capital disclosures The Company defines capital as shareholders’ equity, long-term debt 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 investment tax credits and interest income. The Company’s policy is to maintain a minimum level of debt. The Company’s revolving credit facility providing access to approximately $4,000,000 of liquidity to be used to finance the Company’s working capital needs is a precautionary security measure to ensure sufficient liquidity in light of the ABCP market disruption since the summer of 2007. The credit facility is secured by a first-ranking hypothec on the third-party ABCP held with the Bank. The Company manages its capital structure by adjusting purchased shares for cancellation pursuant to issuer bids, adjusting the amounts of dividend to shareholders, paying off existing debt, and extending or amending its banking credit facilities. As explained in note 9, the Company’s banking and credit facilities require adherence to financial covenants.
21 Segment information 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 long-lived assets and goodwill are located in Canada. 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
22 Comparative figures
2010 TECSYS Inc. - Annual Report
Certain comparative figures have been reclassified to conform with the basis of presentation used in the current year.
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2010
2009
$ 17,281 19,178 313
$ 18,845 21,790 382
$ 36,772
$ 41,017
| 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 2010, May 1st, 2009 to April 30th, 2010
High
Low
Volume
First Quarter
$ 1.90
$ 1.60
324,917
Second Quarter
$ 2.34
$ 1.80
321,258
Third Quarter
$ 2.20
$ 1.90
157,962
Fourth Quarter
$ 2.10
$ 1.83
244,048
(Total)
Eligibility for the SME Growth Plan On February 13th, 2007 TECSYS Inc. received a favorable ruling from the Ministère du Revenu du Québec confirming that its common shares are eligible as valid shares for the SME Growth Stock Plan. The common shares of TECSYS Inc. have been included on the list of the Autorité des Marchés Financiers (AMF) of corporations eligible for the SME Growth Stock Plan. As a result of being on the AMF list, an individual that has withdrawn shares qualifying under the SME Growth Stock Plan from such plan, can acquire common shares of TECSYS Inc. on the secondary market to include them in the SME Growth Stock Plan to replace such withdrawn shares.
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. This represents a 25% increase in the dividends paid to shareholders.
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 2010 TECSYS Inc. - Annual Report
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) Co-Founder and CEO Merlin Technologies Corporation David Wayland (1) Corporate Secretary MRRM Inc.
(1) (2)
Member of the Audit Committee Member of the Compensation Committee
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, Research & Development Patricia Barry Vice President, Human Resources Catalin Badea Chief Technology Officer RenĂŠ Poirier Senior Vice President and General Manager ESC Group Mike Kalika Vice President and General Manager TLM Group
2010 TECSYS Inc. - Annual Report
Tom Wilson Vice President and General Manager SMB & IDM Groups
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| Corporate Information North America
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
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. 1040 Avenue of the Americas 24th Floor New York City, New York USA 10018 Toll Free: 1-800-922-8649 TECSYS Inc. 80 Tiverton Court Suite 400 Markham, Ontario L3R 0G4 Tel: (905) 752-4550 Fax: (905) 752-6400 Europe European Headquarters TECSYS Europe Limited 5, Old Bailey, 2nd Floor London EC4M 7BA United Kingdom Tel.: (44) 870 284 6144 Central & South America TECSYS Latin America (TLA) Avenida Francisco Solano L贸pez Centro Empresarial Sabana Grande Piso 17, Oficina 17-4 Sabana Grande-Caracas 1060, Venezuela Tel: 58-212-740-6903 Fax: 58-212-740-1687
TECSYS U.S., Inc. TECSYS CDI, Inc. TECSYS Europe Limited Auditors KPMG LLP Montreal, Quebec, Canada Bankers National Bank of Canada Montreal, Quebec, Canada Legal Counsel McCarthy T茅trault LLP Montreal, Quebec, Canada Transfer Agent and Registrar Computershare Investor Services Inc. Montreal, Quebec, Canada
2010 TECSYS Inc. - Annual Report
Distributor for: Puerto Rico, Central & South America, and the Caribbean
Subsidiaries
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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
Š2010, TECSYS Inc. All names, trademarks, products, and services mentioned are registered or unregistered trademarks of their respective owners. Printed in Canada