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DELANO TECHNOLOGY CORPORATION - 10-Q Quarterly Report
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------
FORM 10-Q
(x) Quarterly Report Under Section 13 Or 15 (D) Of The Securities Exchange
Act Of 1934.
For the quarter ended June 30, 2000;
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to _____________.
COMMISSION FILE NO. 333-94505
DELANO TECHNOLOGY CORPORATION
(Exact name of Registrant as specified in its charter)
ONTARIO, CANADA 98-0206122
(Province or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
------------------------------------
302 TOWN CENTRE BOULEVARD L3R 0E8
MARKHAM, ONTARIO, CANADA (Zip code)
(Address of Registrant's principal executive offices)
Registrant's telephone number, including area code 905-947-2222
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) COMMON STOCK NO PAR VALUE
of the Act: (Title of Class)
------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
On August 1, 2000 approximately 30,143,141 shares of the Registrant's Common
Stock were outstanding.
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DELANO TECHNOLOGY CORPORATION - 10-Q Quarterly Report
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DELANO TECHNOLOGY CORPORATION
FORM 10-Q
QUARTER ENDED JUNE 30, 2000
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION
Page
Item 1 Financial Statements
Condensed Consolidated Balance Sheets at June 30, 2000
and March 31, 2000............................................3
Unaudited Condensed Consolidated Statements of Operations
for the three months ended June 30, 2000 and 1999 ............4
Unaudited Condensed Consolidated Statements of Cash Flows
for the three months ended June 30, 2000 and 1999 ............5
Notes to the Unaudited Condensed Consolidated Financial
Statements ...................................................6
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................8
Item 3 Quantitative and Qualitative Disclosures About Market Risk ......23
PART II: OTHER INFORMATION
Item 1 Legal Proceedings ..............................................n/a
Item 2 Changes in Securities and Use of Proceeds.......................n/a
Item 6 Exhibits and Reports on Form 8-K ................................23
Signatures ................................................................24
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DELANO TECHNOLOGY CORPORATION - 10-Q Quarterly Report
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PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
DELANO TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
2000 2000
---------------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 80,911 $ 82,370
Short-term investments.......................................................... 19,676 29,154
Accounts receivable trade, net of allowance for doubtful accounts of $600
at June 30, 2000, and $200 at March 31, 2000.................................... 5,851 3,910
Prepaid expenses and other...................................................... 2,297 2,100
------------ ------------
Total current assets.......................................................... 108,735 117,534
Property and equipment............................................................. 4,694 2,373
------------ ------------
Total assets....................................................................... $ 113,429 $ 119,907
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable and accrued liabilities........................................ $ 6,509 $ 5,954
Deferred revenue................................................................ 971 961
Current portion of obligations under capital leases............................. 180 209
------------ ------------
Total current liabilities..................................................... 7,660 7,124
Long-term liabilities:
Obligations under capital leases................................................ 208 222
------------ ------------
Total liabilities.................................................................. 7,868 7,346
Shareholders' equity:
Capital Stock................................................................... 135,390 133,132
Deferred stock-based compensation............................................... (9,479) (8,851)
Accumulated other comprehensive losses.......................................... (340) (340)
Deficit......................................................................... (20,010) (11,380)
------------ ------------
Total shareholders' equity.................................................... 105,561 112,561
------------ ------------
Total liabilities and shareholders' equity ........................................ $ 113,429 $ 119,907
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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DELANO TECHNOLOGY CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
<S> <C> <C>
Revenues:
License........................................................................ $ 5,361 $ 752
Service........................................................................ 657 59
---------- ----------
Total revenues............................................................... 6,018 811
---------- ----------
Cost of revenues:
License........................................................................ 59 --
Service (excluding stock-based compensation of $65 and $35, respectively) ..... 801 149
---------- ----------
Total cost of revenues....................................................... 860 149
---------- ----------
Gross profit...................................................................... 5,158 662
---------- ----------
Operating expenses:
Sales and marketing (excluding stock-based compensation of $1,427 and $46,
respectively).................................................................. 10,388 818
Research and development (excluding stock-based compensation of $53 and $6,
respectively).................................................................. 2,320 389
General and administrative (excluding stock-based compensation of $79 and $20,
respectively).................................................................. 998 157
Amortization of deferred stock-based compensation.............................. 1,624 107
---------- ----------
Total operating expenses..................................................... 15,330 1,471
---------- ----------
Operating loss ................................................................... (10,172) (809)
Interest income, net ............................................................. 1,542 11
---------- ----------
Loss before income taxes.......................................................... (8,630) (798)
Income taxes...................................................................... -- --
---------- ----------
Net loss ......................................................................... (8,630) (798)
Less: accretion of dividends on redeemable convertible special shares.... -- (70)
---------- -----------
Loss applicable to common shares ................................................. $ (8,630) $ (868)
=========== ===========
Basic and diluted loss per common share........................................... $ (0.29) $ (0.47)
=========== ===========
Shares used in computing basic and diluted loss per
common share (in thousands)....................................................... 29,959 1,850
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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DELANO TECHNOLOGY CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
<S> <C> <C>
Cash provided by (used in):
Operating activities:
Loss for the period............................................................ $ (8,630) $ (798)
Depreciation and amortization which does not involve cash..................... 351 13
Amortization of deferred stock-based compensation.............................. 1,624 107
Changes in non-cash operating working capital:
Accounts receivable trade.................................................... (1,941) (329)
Prepaid expenses and other................................................... (197) (131)
Accounts payable and accrued liabilities..................................... 555 190
Deferred revenue............................................................. 10 (33)
----------- ------------
Net cash used in operating activities.......................................... (8,228) (981)
Financing activities:
Issuance of common shares...................................................... 6 --
Issuance of special warrants................................................... -- 14,436
Repayment of obligations under capital leases.................................. (43) (15)
------------ ------------
Net cash provided by (used in) financing activities............................ (37) 14,421
Investing activities:
Additions to property and equipment............................................ (2,672) (163)
Sale of short-term investments................................................. 9,478 --
----------- -----------
Cash provided by (used in) investing activities................................ 6,806 (163)
Effect of currency translation of cash balances................................... -- 298
----------- -----------
Increase (decrease) in cash and cash equivalents.................................. (1,459) 13,575
Cash and cash equivalents, beginning of period.................................... 82,370 1,989
----------- -----------
Cash and cash equivalents, end of period.......................................... $ 80,911 $ 15,564
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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DELANO TECHNOLOGY CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements have been
prepared by Delano Technology Corporation ("Delano" or the "Company") and
reflect all adjustments (all of which are normal and recurring in nature) that,
in the opinion of management, are necessary for a fair presentation of the
interim financial information. The results of operations for the interim periods
presented are not necessarily indicative of the results to be expected for any
subsequent quarter or for the entire year ending March 31, 2001. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted under the Securities and Exchange Commission's rules and
regulations. These unaudited condensed consolidated financial statements and
notes included herein should be read in conjunction with Delano's audited
consolidated financial statements and notes included in Delano's Annual Report
on Form 10-K for the year ended March 31, 2000.
NOTE 2. STOCKHOLDERS' EQUITY
The Company's share capital and loss per common share information has been
restated to reflect a 3-for-2 split of the Company's common shares, which was
approved by the Company's shareholders on January 11, 2000.
Stock Option Plan
The Company's stock option plan (the "Plan") was established for the
benefit of the employees, officers, directors and certain consultants of the
Company. The maximum number of common shares which may be set aside for issuance
under the Plan is 7,500,000 shares, provided that the Board of Directors of the
Company has the right, from time to time, to increase such number subject to the
approval of the shareholders of the Company when required by law or regulatory
authority. Generally, options issued subsequent to March 4, 1999 under the Plan
vest over a four-year period. Options issued prior to March 5, 1999 vest
annually over a three-year period.
Details of stock option transactions are as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES AVAILABLE NUMBER EXERCISE PRICE
FOR GRANT OF SHARES PER SHARE
---------------- ----------- --------------
<S> <C> <C> <C>
Balances, May 7, 1998
Shares authorized............................. 3,000,000 -- --
Options granted............................... (1,779,000) 1,779,000 $ 0.13
-------------- -----------
Balances, March 31, 1999.......................... 1,221,000 1,779,000 $ 0.13
Additional shares authorized................ 2,500,000 -- --
Options granted............................. (2,692,725) 2,692,725 $ 3.85
Options exercised........................... -- (255,250) $ 0.11
Options cancelled........................... 202,875 (202,875) $ 1.08
---------- ------------
Balances, March 31, 2000.......................... 1,231,150 4,013,600 $ 2.51
Additional shares authorized................ 2,000,000 -- --
Options granted............................. (1,080,500) 1,080,500 $ 10.64
Options exercised........................... -- (45,125) $ 0.13
Options cancelled........................... 139,500 (139,500) $ 3.22
------------- -----------
Balances, June 30, 2000 .......................... 2,290,150 4,909,475 $ 4.29
============= ===========
Options exercisable at June 30, 2000.............. 507,180 $ 0.18
===========
</TABLE>
The stock options expire at various dates between May 2003 and June 2005.
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The Company recorded deferred stock-based compensation amounting to $2.3
million for the quarter ended June 30, 2000, and $1.2 million for the quarter
ended June 30, 1999. Amortization of deferred stock-based compensation amounted
to $1.6 million for the quarter ended June 30, 2000 and $107,000 for the quarter
ended June 30, 1999.
The amortization of deferred stock-based compensation relates to the
following cost of service revenues and operating expense categories (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
<S> <C> <C>
Cost of service revenues...................................... $ 65 $ 35
Sales and marketing........................................... 1,427 46
Research and development ..................................... 53 6
General and administrative.................................... 79 20
------- -------
$ 1,624 $ 107
======= =======
</TABLE>
Warrant
During January 1999, the Company issued a warrant for no consideration to
an executive of the Company to purchase 394,737 common shares at a price of
$0.44 per share. The warrant expires when the executive ceases to be employed by
the Company or January 5, 2002 whichever is earlier.
Escrow Shares
At June 30, 2000, 1,237,500 common shares of the Company are held in
escrow pursuant to escrow arrangements entered into with certain
employee/shareholders. Under the terms of the arrangements 365,625 common shares
will be released from escrow on the last day of each successive calendar quarter
subsequent to March 31, 2000.
Employee Stock Purchase Plan
The Company has established an employee stock purchase plan under which
employees may authorize payroll deductions of up to 15% of their compensation
(as defined in the plan) to purchase common shares at a price equal to 85% of
the lower of the fair market values as of the beginning or the end of the
offering period. As at June 30, 2000 no common shares had been issued and there
were 1,000,000 common shares available for issuance under this plan.
NOTE 3. COMPREHENSIVE LOSS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for
reporting and presentation of comprehensive income. This standard defines
comprehensive income as the changes in equity of an enterprise except those
resulting from shareholder transactions. Comprehensive loss for the three months
ended June 30, 1999 and June 30, 2000 was not materially different from net loss
for the periods.
NOTE 4. SEGMENT INFORMATION
Delano's chief operating decision maker reviews financial information
presented on a consolidated basis, accompanied by disaggregated information
about revenues by geographic region for purposes of making operating decisions
and assessing financial performance. Accordingly, Delano considers itself to be
in a single industry segment, specifically the license, implementation and
support of its software applications. Delano's long-lived assets are primarily
in Canada. Geographic information on revenue for the three months ended June 30,
2000 and June 30, 1999 are as follows (in thousands):
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<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30, 2000
------------------------
2000 1999
---------- ---------
<S> <C> <C>
United States .................................................... $3,472 $ 635
Canada ........................................................... 1,224 176
Europe ........................................................... 1,322 --
------ -------
$6,018 $ 811
====== =======
</TABLE>
During the three months ended June 30, 2000, one customer represented 15%
of total revenues. No other customer represented more than 10% of total
revenues. During the three months ended June 30, 1999, one customer accounted
for more than 10% of total revenues.
NOTE 5. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging
Activities". SFAS No. 133 establishes accounting and reporting standards
requiring that every derivative instrument be recorded in the balance sheet as
either an asset or liability measured at its fair value. SFAS No. 133, as
recently amended, is effective for the fiscal year ending March 31, 2002.
Management believes the adoption of SFAS No. 133 will not have a material effect
on the Company's financial position or results of operations.
The Securities and Exchange Commission issued Staff Accounting Bulletin
No. 101, "Revenue Recognition in Financial Statements" (SAB 101), on December 3,
1999. SAB 101 provides additional guidance on the application of existing
generally accepted accounting principles to revenue recognition in financial
statements. Management does not expect the guidance of SAB 101 to have a
material effect on its financial statements.
The Financial Accounting Standards Board issued Interpretation No. 44,
Accounting for certain Transactions Involving Stock Compensation (FIN No. 44),
in March 2000. This interpretation clarifies the application of Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, with
respect to certain issues in accounting for employee stock compensation and is
generally effective as of July 1, 2000. Management does not expect FIN 44 to
have a material effect on its financial statements.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Except for historical information contained or incorporated by reference
in this section, the following discussion contains forward-looking statements
that involve risks and uncertainties. Delano's actual results could differ
significantly from those discussed herein. Factors that could cause or
contribute to these differences include, but are not limited to, those discussed
herein with this Quarterly Report on Form 10-Q, the Company's Annual Report on
Form 10-K, and the company's registration statement on form F-1 filed with the
Securities and Exchange Commission. Any forward-looking statements speak only as
of the date such statements are made.
OVERVIEW
From the date of our incorporation on May 7, 1998 until April 1999 we were
a development stage company and had no revenues. Our operating activities during
this period consisted primarily of conducting research and developing our
initial products. In May 1999, we released and sold the first commercially
available version of the Delano e-Business Interaction Suite.
To date, we have derived substantially all of our revenues from the sale
of software product licenses and from the provision of professional services,
including implementation, training and maintenance services. Our products have
been sold primarily through our direct sales force.
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Our products are offered on a licensed basis. We license our products
based on:
o a fee for each client, which depends on the specific and
individual needs of the client;
o an additional fee, which covers installation, configuration,
training and professional services; and
o a variable component, which depends on, among other things, the
number of servers and the number of optional applications and add-ons,
servers and component packs purchased.
We recognize our software license revenues in accordance with the American
Institute of Certified Public Accountants, or ("AICPA"), Statement of Position
("SOP") 97-2, "Software Revenue Recognition," and related amendments and
interpretations contained in the AICPA's SOP 98-9. We generally recognize
revenues allocated to software licenses upon delivery of the software products,
when all of the following conditions have been met:
o persuasive evidence of an arrangement exists;
o the license fee is fixed or determinable; and
o the license fee is collectible.
Because substantially all of our software license agreements include
related maintenance services, these agreements are multiple-element
arrangements. We allocate the fees in multiple-element arrangements based on the
respective value for each element, with maintenance being allocated as at least
18% of license revenue in all sales. Delivery of the software generally is
deemed to occur upon shipment of the software unless customers are provided the
opportunity to return the products. Revenues are recognized only when all refund
obligations have expired. In situations where we provide online offerings,
delivery of the software occurs upon initiation of the online offerings.
Revenues from maintenance and support services and online offerings are
recognized ratably over the related contractual period.
Our cost of revenues includes the cost of product documentation, the cost
of compact disks used to deliver our products, personnel-related expenses,
travel costs, equipment costs and overhead costs.
Our operating expenses are classified into four categories: sales and
marketing, research and development, general and administrative, and
amortization of deferred stock-based compensation.
o Sales and marketing expenses consist primarily of compensation and
related costs for sales and marketing personnel and promotional
expenditures, including public relations, advertising, trade shows and
marketing materials.
o Research and development expenses consist primarily of compensation
and related costs for research and development employees and
contractors and in connection with the enhancement of existing
products and quality assurance activities.
o General and administrative expenses consist primarily of compensation
and related costs for administrative personnel, legal, accounting and
other general corporate expenses.
o Amortization of deferred stock-based compensation includes the
amortization, over the vesting period of a stock option, of the
difference between the exercise price of options granted to employees
and the deemed fair market value of the options for financial
reporting purposes. In addition, deferred stock-based compensation
includes compensation expense arising on the issuance of options and a
warrant to employees and a consultant, calculated as the difference
between the exercise price of the options and warrant and the fair
market value at the date of issuance. Also included in amortization of
deferred stock-based compensation is compensation expense relating to
an option to acquire shares of the Company issued in connection with a
professional services agreement between the Company and a related
corporation. The compensation expense is calculated as the difference
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between the exercise price of the option and the fair market value at
the time the option was issued or earned.
We allocate common costs based on relative headcount or other relevant
measures. These allocated costs include rent and other facility-related costs
for the corporate head office, communication expenses and depreciation expenses
for furniture and equipment.
In connection with the granting of stock options and the issuance of a
warrant to our employees, we recorded deferred stock-based compensation totaling
$12.9 million through June 30, 2000. This amount represents the total difference
between the exercise prices of stock options and the warrant and the deemed fair
value of the underlying common stock for accounting purposes on the date these
stock options were granted and the warrant issued. This amount is included as a
component of stockholders' equity and is being amortized by charges to
operations over the vesting period of the options, consistent with the method
described in Financial Accounting Standards Board, or ("FASB"), Interpretation
No. 28. As of June 30, 2000, we had a total of $9.5 million of deferred
stock-based compensation that had not been amortized. The amortization of the
remaining deferred stock-based compensation will result in additional charges to
operations through December 2003 of approximately $900,000 per quarter. The
amortization of deferred stock-based compensation is classified as a separate
component of operation expenses in our consolidated statement of operations.
In our development of new products and enhancements of existing products,
the technological feasibility of the software is not established until
substantially all product development is complete. Historically, our software
development costs eligible for capitalization have been insignificant and all
costs related to internal product development have been expensed as incurred.
We believe that period-to-period comparisons of our historical operating
results are not necessarily meaningful and should not be relied upon as being a
good indication of our future performance. Our prospects must be considered in
light of the risks, expenses and difficulties frequently experienced by
companies in early stages of development, particularly companies in new and
rapidly evolving markets like ours. Although we have experienced significant
revenue growth recently, this trend may not be sustainable. Furthermore, we may
not achieve or maintain profitability in the future.
The following table sets forth the results of operations for the three
months ended June 30, 2000 and 1999 expressed as a percentaged total revenues.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------
JUNE 30, 2000 JUNE 30,1999
------------- ------------
(PERCENTAGE)
<S> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
License 89.1% 92.7%
Service 10.9 7.3
---------- -----------
Total revenues 100.0% 100.0%
---------- -----------
Cost of revenues
License 1.0 0.0
Service 13.3 18.4
---------- -----------
Total cost of revenues 14.3 18.4
---------- -----------
Gross profit 85.7 81.6
---------- -----------
Operating expenses:
Sales and marketing 172.6 100.9
Research and development 38.5 48.0
General and administrative 16.6 19.3
Amortization of deferred stock-based compensation 27.0 13.2
---------- -----------
Total operating expenses 254.7 181.4
---------- -----------
Loss from operations (169.0) (99.8)
Interest income, net 25.6 1.4
---------- -----------
Loss before income taxes (143.4) (98.4)
Income taxes 0.0 0.0
---------- -----------
Loss for the period (143.4) (98.4)
=========== ============
</TABLE>
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RESULTS OF OPERATIONS
Three months ended June 30, 2000 Compared to the three months ended June 30,
1999.
Revenues. Total revenues for the three months ended June 30, 2000 were
$6.0 million, compared to $811,000 for the three months ended June 30, 1999.
License revenues accounted for $5.4 million, or 89.1% of total revenues for the
three months ended June 30, 2000, compared with $752,000 or 92.7% for the three
months ended June 30, 1999. Services revenues, including maintenance and
services fees, accounted for the remaining $657,000 or 10.9% of total revenues
for the three months ended June 30, 2000, compared with $59,000 or 7.3% for the
three months ended June 30, 1999. Approximately 57.7% of our total revenues were
generated in the United States, 20.3% were generated in Canada and 22.0% were
generated elsewhere in the three months ended June 30, 2000.
Cost of revenues. Cost of product revenues was $59,000 for the three
months ended June 30, 2000 or 1.0% of total revenues, compared with nil for the
three months ended June 30, 1999. Cost of services revenues was $801,000 for the
three months ended June 30, 2000, or 13.3% of total revenues, compared with
$149,000, or 18.4% of total revenues for the three months ended June 30, 1999.
We anticipate that cost of service revenues will increase in absolute dollars as
we continue to hire additional services personnel, but decrease proportionately
as a percentage of service revenues. We anticipate that the cost of product
revenues will increase proportionately with increases in product revenues.
Sales and marketing. Sales and marketing expenses increased to $10.4
million for the three months ended June 30, 2000, or 172.6% of total revenues,
compared with $818,000 or 100.9% of total revenues for the three months ended
June 30, 1999. This increase was attributable primarily to the addition of 164
sales and marketing personnel and higher marketing costs due to expanded
promotional activities. We anticipate that sales and marketing expenses will
increase in absolute dollars as we continue to hire additional sales and
marketing personnel and expand discretionary marketing programs, but decrease as
a percentage of revenue.
Research and development. Research and development expenses increased to
$2.3 million for the three months ended June 30, 2000, or 38.5% of total
revenues, compared with $389,000, or 48.0% of total revenues for the three
months ended June 30, 1999. This increase was attributable primarily to the
addition of 110 product development and related services personnel and to
increased consulting and recruiting costs. We anticipate that research and
development expenses will increase in absolute dollars, but will decrease as a
percentage of total revenues from period to period as we continue to hire
additional research and development personnel.
As a Canadian Controlled Private Corporation or ("CCPC"), we qualified for
certain investment tax credits under the Income Tax Act (Canada) on eligible
research and development expenditures. Prior to our initial public offering,
refundable investment tax credits, which result in cash payments to us, have
been recorded at a rate of 35% of eligible current and capital research and
development expenditures. Prior to our initial public offering, we were entitled
to an investment tax credit at these rates for the first Cdn$2.0 million
(approximately $1.4 million) of eligible research and development expenditures
and a further investment tax credit at the rate of 20% of eligible research and
development expenditures in excess of Cdn$2.0 million. Investment tax credits on
current expenditures earned at the 35% rate are fully refundable to CCPCs.
Investment tax credits earned by a CCPC on capital expenditures at the 35% rate
are refundable at a rate of 40% of the amount of the credit. We will earn
investment tax credits at a rate of 20% of eligible current and capital research
and development expenditures made after our initial public offering. While a
portion of investment tax credits earned as a CCPC are refundable, investment
tax credits earned after our initial public offering may only be used to offset
income taxes otherwise payable.
General and administrative. General and administrative expenses increased
to $1.0 million, or 16.6% of total revenues for the three months ended June 30,
2000, compared to $157,000, or 19.3% of total revenues for the three months
ended June 30, 1999 due primarily to the addition of 35 administrative
personnel, increased consulting costs and to higher facilities-related expenses
necessary to support our growth. We expect that general and administrative
expenses will increase in absolute dollars as we add personnel and incur related
costs to facilitate the growth of our business.
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Amortization of deferred stock-based compensation. We incurred a charge of
$1.6 million for the three months ended June 30, 2000, compared to $107,000 for
the three months ended June 30, 1999 related to the issuance of stock options
with exercise prices less than the deemed fair market value for financial
reporting purposes on the date of grant.
Interest income, net. Interest income, net for the three months ended June
30, 2000 was $1.5 million, compared to $11,000 for the three months ended June
30, 1999. Interest income, net reflected the interest earned on the cash and
cash equivalents balance arising from our special warrant offering in June 1999
and our initial public offering in February 2000.
Provision for income taxes. A deferred tax asset of $4.6 million existed
as of June 30, 2000. A valuation allowance is recorded against a deferred tax
asset if it is more likely than not that the asset will not be realized. A
valuation allowance taken against substantially all of the deferred tax asset
reflects the lack of profitability in the past, the significant risk that
taxable income would not be generated in the future and the nontransferable
nature of the deferred tax asset under certain conditions.
LIQUIDITY AND CAPITAL RESOURCES
Since the date of incorporation, we have raised an aggregate of $3.4
million through private placements of special shares. We have raised $14.4
million, net of the agents' commission and offering expenses, through a private
placement of special warrants in June 1999. We have also raised $103.4 million,
net of agents' commissions and offering expenses through our initial public
offering in February 2000.
Our operating activities used cash of $8.2 million during the three months
ended June 30, 2000 and cash of $981,000 for the three months ended June 30,
1999. Our negative operating cash flow resulted principally from the net losses
that we incurred during these periods as we invested in the development of our
products, expanded our sales force and expanded our infrastructure to support
our growth.
Our financing activities used $37,000 in cash during the three months
ended June 30, 2000 and generated $14.4 million in the three months ended June
30, 1999. In the three months ended June 30, 1999 the issuance of special
warrants generated net proceeds of $14.4 million.
Our investing activities used $2.6 million in cash during the three months
ended June 30, 2000 and cash of $163,000 for the three months ended June 30,
1999 for the purchase of computer equipment, software, furniture and equipment
to support our growing number of employees. For the three months ended June 30,
2000, the sale of short-term investments generated $9.5 million generating a net
amount for investing activities of $6.8 million.
In March 1999, we obtained a lease line of credit from a Canadian
chartered bank to purchase equipment and furniture. Approximately $388,000 was
outstanding on the lease line of credit as of June 30, 2000 and approximately
$169,000 was outstanding as of June 30, 1999. The ceiling on the lease line of
credit is Cdn$1,000,000 (approximately $693,000). The lease line of credit is
not collateralized with cash for the amount of the line that is used for leasing
equipment.
Our capital requirements depend on a number of factors. We expect to
devote substantial resources to continue our research and development efforts,
expand our sales, support, marketing and product development organizations,
establish additional facilities worldwide and build the infrastructure necessary
to support our growth. Our expenditures have increased substantially since the
date of incorporation, and we anticipate that capital expenditures will continue
to increase in absolute dollars in the foreseeable future.
At June 30, 2000, we had cash and cash equivalents aggregating $80.9
million. At June 30, 2000, we also had a short-term investment of $19.7 million.
We believe that our current cash and cash equivalents are sufficient to fund our
operations for at least the next 12 months. If cash generated from operations is
insufficient to meet our long-term liquidity needs, we may need to raise
additional funds or seek other financing arrangements. Additional funding may
not be available on favorable terms or at all. In addition, although there are
no present understandings, commitments or agreements with respect to any
acquisition of other businesses, products or technologies, we may, from time to
time, evaluate potential acquisitions of other businesses, products and
technologies. In order to consummate potential
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acquisitions, we may issue additional securities or need additional equity or
debt financing and any such financing may be dilutive to existing investors.
RISK FACTORS
Our future operating results may vary substantially from period to period.
The price of our common stock will fluctuate in the future, and an investment in
our common stock is subject to a variety of risks, including but not limited to
the specific risks identified below. Inevitably, some investors in our
securities will experience gains while others will experience losses depending
on the prices at which they purchase and sell securities. Prospective and
existing investors are strongly urged to carefully consider the various
cautionary statements and risks set forth in this report. This report contains
forward-looking statements that are not historical facts but rather are based on
current expectations, estimates and projections about our business and industry,
our beliefs and assumptions. Words such as "anticipates", "expects", "intends",
"plans", "believes", "seeks", estimates" and variations of these words and
similar expressions are intended to identify forward-looking statements. These
statements are not guarantees of future performance and are subject to risks,
uncertainties and other factors, some of which are beyond our control, are
difficult to predict and could cause actual results to differ materially from
those expressed or forecasted in the forward-looking statements. These risks and
uncertainties include those described in this "risks associated with Delano's
business and future operating results" and elsewhere in this report.
Forward-looking statements that were true at the time made may ultimately prove
to be incorrect or false. Readers are cautioned not to place undue reliance on
forward-looking statement, which reflect our management's view only as of the
date of this report.
RISKS RELATED TO OUR BUSINESS
OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO EVALUATE OUR BUSINESS AND
FORECAST OUR FUTURE OPERATING RESULTS.
We were incorporated on May 7, 1998, and we first recorded revenues in the
quarter ended June 30, 1999. We are still in the early stages of our development
and have a limited operating history, making it difficult to evaluate our
business and prospects. As a result of our limited operating history, it is
difficult or impossible for us to predict future operating results. For example,
we cannot forecast operating expenses based on our historical results because
our historical results are limited and we, to some extent, forecast expenses
based on future revenue projections. Moreover, due to our limited operating
history, any evaluation of our business and prospects must be made in light of
the risks and uncertainties often encountered by early-stage companies in
internet-related markets. Many of these risks are discussed in the sub-headings
below, and include our ability to execute our product development activities,
implement our sales and marketing initiatives, both domestically and
internationally, and attract more clients. We may not successfully address any
of these risks.
FACTORS RELATING TO OUR BUSINESS MAKE OUR FUTURE OPERATING RESULTS UNCERTAIN,
AND MAY CAUSE THEM TO FLUCTUATE FROM PERIOD TO PERIOD.
Our quarterly revenues and operating results are difficult to predict and
may fluctuate significantly from quarter to quarter, particularly because our
products and services are relatively new and our prospects are uncertain. If our
quarterly revenues or operating results fall below the expectations of
investors, the price of our common shares could decline substantially. Factors
that might cause quarterly fluctuations in our operating results include the
risk factors described in the sub-headings below as well as the following:
o the timing of new releases of our products;
o changes in our pricing policies or those of our competitors, including
the extent to which we may need to offer discounts to match
competitors' pricing;
o the mix of sales channels through which our products and services are
sold;
o the mix of our domestic and international sales;
o costs related to the customization of our products;
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o our ability to expand our operations, and the amount and timing of
expenditures related to this expansion; and
o any costs or expenses related to our anticipated move to new corporate
offices;
o our operating results may also be affected by the following factors
over which we have little or no control:
>> the evolving and varying demand for interaction-based software
products and services for e-businesses, particularly our products
and services;
>> the discretionary nature of our clients' purchasing and budgetary
cycles;
>> the timing of execution of large contracts that materially affect
our operating results; and
>> global economic conditions, as well as those specific to large
enterprises with high e-mail volume.
OUR OPERATING EXPENSES ARE RELATIVELY FIXED, WHICH WOULD CAUSE OUR OPERATING
RESULTS TO VARY FROM PERIOD TO PERIOD.
Most of our expenses, such as employee compensation and rent, are
relatively fixed in the short term. Moreover, our expense levels are based, in
part, on our expectations regarding future revenue levels. As a result, if total
revenues for a particular quarter are below our expectations, we cannot
proportionately reduce operating expenses for that quarter. Therefore, this
revenue shortfall would have a disproportionate effect on our operating results
for that quarter.
WE HAVE A HISTORY OF LOSSES, WE MAY INCUR LOSSES IN THE FUTURE AND OUR LOSSES
MAY INCREASE BECAUSE OF OUR PLAN TO INCREASE OPERATING EXPENSES.
Since we began operations in May 1998, we have incurred substantial
operating losses in every quarter. As a result of accumulated operating losses,
as of June 30, 2000, we had an accumulated deficit of $20.0 million. For the
three months ended June 30, 2000, we had a net loss of $8.6 million, or 143.4%
of total revenues for that period. Our growth in recent periods has been from a
limited base of clients, and we may not be able to sustain our growth rate. We
expect to continue to increase our operating expenses. As a result, we expect to
continue to experience losses and negative cash flow, even if sale of our
products and services continues to grow, and we may not generate sufficient
revenues to achieve profitability in the future.
In addition, as a result of our rapid growth, we expect that our losses
may increase even more because of additional costs and expenses related to an
increase in:
o the number of our employees;
o research and development activities; and
o sales and marketing activities.
WE ARE DEPENDENT UPON A LIMITED NUMBER OF CLIENTS, AND A LOSS OF ANY OF THESE
CLIENTS OR A REDUCTION, DELAY OR CANCELLATION IN ORDERS FROM THESE CLIENTS COULD
HARM OUR BUSINESS.
To date, a significant portion of the total revenues has been derived from
sales to a small number of clients. In the three months ended June 30, 2000, one
customer accounted for 15% of our total revenues and no other customer accounted
for more than 10% of revenues. We expect that we will continue to be dependent
upon a limited number of clients for a significant portion of our revenue in
future periods. There can be no assurance that our existing clients or any
future clients will continue to use our products. A reduction, delay or
cancellation in orders from our clients, including reductions or delays due to
market, economic or competitive conditions, could have a materially adverse
effect on our business, operating results and financial condition.
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DIFFICULTIES IN IMPLEMENTING OUR PRODUCTS COULD HARM OUR BUSINESS.
Our success depends upon the ability of our staff and our clients to
implement our products. This implementation typically involves working with
sophisticated software, computing and communications systems. If we experience
implementation difficulties or do not meet project milestones in a timely
manner, we could be obligated to devote more customer support, engineering and
other resources to a particular project than anticipated. Some clients may also
require us to develop customized features or capabilities. If new or existing
clients require more time to deploy our products than is originally anticipated,
or require significant amounts of our professional services support or
customized features, our revenue recognition could be further delayed and our
costs could increase, causing increased variability in our operating results.
OUR PRODUCTS AND SERVICES MAY NOT BE ACCEPTED BY THE MARKETPLACE.
Of our total revenues of $6.0 million for the three months ended June 30,
2000, $5.4 million was derived from licenses of our products and $657,000 was
from related services. We are not certain that our target clients will widely
adopt and deploy our products and services. Our future financial performance
will depend on the successful development, introduction and client acceptance of
new and enhanced versions of our products. In the future, we may not be
successful in marketing our products and services or any new or enhanced
products.
WE EXPECT TO DEPEND ON SALES OF OUR DELANO E-BUSINESS INTERACTION SUITE AND
VELOCITY SUITE APPLICATIONS FOR A SUBSTANTIAL MAJORITY OF OUR REVENUES FOR THE
FORESEEABLE FUTURE.
In the three months ended June 30, 2000, we derived most of our revenues
from licenses of our Delano e-Business Interaction Suite and Customer Velocity.
Although we have added new product offerings and expect to add new product
offerings, we expect to continue to derive a substantial majority of our
revenues from sales of the Delano e-Business Interaction Suite for the
foreseeable future. Implementation of our strategy depends on the Delano
e-Business Interaction Suite being able to solve the communication needs of
businesses engaging in commercial transactions over the internet or having an
internet presence. If current or future clients are not satisfied with the
Delano e-Business Interaction Suite, our business and operating results could be
seriously harmed.
WE MUST CONTINUE TO DEVELOP ENHANCEMENTS TO OUR PRODUCTS AND NEW APPLICATIONS
AND FEATURES THAT RESPOND TO THE EVOLVING NEEDS OF OUR CLIENTS, RAPID
TECHNOLOGICAL CHANGE AND ADVANCES INTRODUCED BY OUR COMPETITORS.
Future versions of hardware and software platforms embodying new
technologies and the emergence of new industry standards could render our
products obsolete. The market for e-business communications software is
characterized by:
o rapid technological change;
o frequent new product introductions;
o changes in customer requirements; and
o evolving industry standards.
Our products are designed to work on, or inter-operate with, a variety of
operating systems used by our clients. However, our software may not operate
correctly on evolving versions of operating systems, or the hardware upon which,
or with which, they are intended to run or interoperate, programming languages,
databases and other systems that our clients use. For example, because the
server component of the current versions of our products run only on the Windows
NT operating system from Microsoft, we must develop products and services that
are compatible with UNIX and other operating systems to meet the demands of our
clients. If we cannot successfully develop these products in response to client
demands or improve our existing products to keep pace with technological
changes, our business could suffer.
We must continually improve the performance, features and reliability of
our products, particularly in response to competitive offerings. Our success
depends, in part, on our ability to enhance our existing software and to develop
new
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services, functionality and technologies that address the increasingly
sophisticated and varied needs of our prospective clients. If we do not properly
identify the feature preferences of prospective clients, or if we fail to
deliver features that meet the requirements of these clients on a timely basis,
our ability to market our products successfully and to increase our revenues
will be impaired.
DELAYS IN INTRODUCING NEW AND ENHANCED PRODUCTS COULD HARM OUR BUSINESS.
The development of proprietary technologies and necessary service
enhancements entail significant technical and business risks and requires
substantial expenditures and lead time. If we experience product delays in the
future we may face:
o customer dissatisfaction;
o cancellation of orders and license agreements;
o negative publicity;
o loss of revenues;
o slower market acceptance; and
o legal action by clients against us.
In the future, our efforts to remedy product delays may not be successful
and we may lose clients as a result. Delays in bringing to market new products
or product enhancements could be exploited by our competitors. If we were to
lose market share as a result of lapses in our product development, our business
would suffer.
INTENSE COMPETITION COULD REDUCE OUR MARKET SHARE AND HARM OUR FINANCIAL
PERFORMANCE.
The market for our products and services is intensely competitive,
evolving and subject to rapid technological change. We expect the intensity of
competition to increase in the future. Increased competition may result in price
reductions, reduced gross margins and loss of market share. The market for
e-business communications software is new and intensely competitive. There are
no substantial barriers to entry in this emerging market segment, and we expect
established or new entities to enter this market segment in the near future.
We currently face competition for our products principally from systems
designed by in-house and third-party development efforts. In addition, some of
our competitors who currently offer licensed software products are now beginning
to offer online offerings, which involve providing software on a rental basis
hosted on the hardware of an application service provider, or ASP. In this
quarter, we have begun to offer on-line offerings as well. However, we may lose
potential clients to competitors operating with longer histories.
Our competitors include companies providing software that is focused on a
few operational or functional areas, such as eGain Communications and Kana
Communications. We also compete with companies that provide customer management
and communications solutions, such as Siebel Systems and Vantive. Furthermore,
established enterprise software companies, including Hewlett-Packard, IBM and
Microsoft, may leverage their existing relationships and capabilities to offer
e-business communications software that competes with our products. We believe
competition will increase as our current competitors increase the sophistication
of their offerings and as new participants enter the market. We may also face
competition from web application servers, messaging server platform solutions,
e-mail application vendors and e-mail service bureaus.
Many of our competitors have longer operating histories, significantly
greater financial, technical, marketing and other resources, significantly
greater name recognition and a larger installed base of customers than we do. In
addition, many of our competitors have well-established relationships with our
current and potential clients and have extensive knowledge of our industry. We
may lose potential clients to competitors for various reasons, including the
ability or willingness of our
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competitors to offer lower prices and other incentives that we cannot match.
Accordingly, it is possible that new competitors or alliances among competitors
may emerge and rapidly acquire significant market share. We also expect that
competition may increase as a result of industry consolidations. We may not be
able to compete successfully against current and future competitors, and
competitive pressures may seriously harm our business.
THE DELANO E-BUSINESS INTERACTION SUITE ENABLES THIRD PARTIES TO DEVELOP
APPLICATIONS THAT COMPETE WITH OUR APPLICATIONS.
Third parties have the ability to develop their own applications on top of
the Delano e-Business Interaction Suite. The applications of these third parties
could compete with products developed by us or services, which we offer now or
will offer in the future. If our target clients do not widely adopt and purchase
our products, or if third parties compete with applications developed by us, our
business would suffer.
FAILURE TO ATTRACT AND RETAIN ADDITIONAL QUALIFIED PERSONNEL COULD ADVERSELY
AFFECT OUR EXPANSION PLANS.
We intend to continue to increase the number of our sales and marketing,
engineering, professional services and product management personnel
significantly over the next 12 months. Competition for these individuals is
intense in our industry, particularly in the Toronto area where we are
headquartered, and there are a limited number of experienced people available
with the necessary technical skills. Our ability to increase revenues in the
future depends considerably upon our success in recruiting, training and
retaining additional direct sales personnel and the success of the direct sales
force. Our business will be harmed if we fail to hire or retain qualified sales
personnel, or if newly hired salespeople fail to develop the necessary sales
skills or develop these skills more slowly than we anticipate. We also are
substantially dependent upon our ability to develop new products and enhance
existing products, and we may not be able to hire and retain highly qualified
research and development personnel. Similarly, our failure to attract and retain
the highly trained personnel that are integral to our professional services
group, which is responsible for the implementation and customization of, and
technical support for, our products and services, may limit the rate at which we
can develop and install new products or product enhancements, which would harm
our business.
THE LOSS OF ANY OF OUR EXECUTIVE OFFICERS COULD ADVERSELY AFFECT OUR BUSINESS.
Our future success depends to a significant degree on the skills,
experience and efforts of our executive officers. In particular, we depend upon
the continued services of John Foresi, our President and Chief Executive
Officer, and Bahman Koohestani, our Executive Vice-President, Products and Chief
Technology Officer and a founder of Delano.
We have not entered into employment agreements with our executive officers
which would require them to work solely for us on a long-term basis. If any of
our executive officers left or was seriously injured and unable to work and we
were unable to find a qualified replacement, our business could be harmed.
FAILURE TO INTEGRATE OUR EXECUTIVE TEAM MAY INTERFERE WITH OPERATIONS.
Our executive team has largely been hired in the past year. To integrate
into our company, these individuals must spend a significant amount of time
developing interpersonal relationships and learning our business model and
management system, in addition to performing their regular duties. Accordingly,
the integration of new personnel has resulted, and may continue to result, in
some disruption of our ongoing operations.
WE HAVE EXPERIENCED RAPID GROWTH, WHICH HAS PLACED A STRAIN ON OUR RESOURCES,
AND ANY FAILURE TO MANAGE OUR GROWTH EFFECTIVELY MAY CAUSE OUR BUSINESS TO
SUFFER.
Our ability to offer our products and services successfully in a rapidly
evolving market requires an effective planning and management process. We have
limited experience in managing rapid growth. We are experiencing a period of
growth that is placing a significant strain on our managerial, financial and
personnel resources. On June 30, 2000, we had a total of 417 full-time employees
compared to 76 on June 30, 1999. We expect to continue to hire new employees at
a rapid pace. Our business will suffer if this growth continues and we fail to
manage this growth. Any additional growth will further strain our management,
financial, personnel and other resources. To manage any future growth
effectively, we must
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improve our financial and accounting systems, controls, reporting systems and
procedures, integrate new personnel and manage expanded operations. Any failure
to do so could negatively affect the quality of our products, our ability to
respond to our clients and retain key personnel, and our business in general.
OUR FUTURE REVENUE GROWTH COULD BE IMPAIRED IF WE ARE UNABLE TO DEVELOP
ADDITIONAL DISTRIBUTION CHANNELS FOR OUR PRODUCTS.
We believe that our success in penetrating our target markets depends in
part on our ability to enter into agreements with established third-party
distribution companies, consulting organizations and software vendors relating
to the distribution of our products. We have recently entered into non-exclusive
distribution agreements with various parties, including Clarify,
Hewlett-Packard, Macromedia, Deloitte Consulting and PricewaterhouseCoopers.
Since these agreements are non-exclusive and normally terminable without penalty
on short notice, some third parties may choose to discontinue working with us or
may decide to work with our competitors. We derive revenues from these
agreements through the sale of licenses. For the three months ended June 30,
2000, we derived 15% of our total revenues from a single sale through one of
these agreements. We may not be able to derive significant revenues in the
future from these agreements.
WE MAY SEEK TO GROW BY MAKING ACQUISITIONS, BUT WE HAVE NEVER ACQUIRED ANOTHER
BUSINESS AND WE MAY NOT BE ABLE TO SUCCESSFULLY COMPLETE ANY ACQUISITIONS WE
UNDERTAKE OR INTEGRATE ANY ACQUIRED BUSINESS WITH OUR OWN.
We intend to consider investments in complementary companies, products or
technologies. If we undertake an acquisition or investment, we may not realize
the anticipated benefits. If we buy a company, we may not be able to
successfully assimilate the acquired personnel, operations, technology and
products into our business. In particular, we will need to assimilate and retain
key technical, professional services, sales and marketing personnel. In
addition, acquired products or technology will have to be integrated into our
products and technology, and it is uncertain whether we may accomplish this.
These difficulties could disrupt our ongoing business, distract our management
and employees or increase our expenses. In connection with a merger, or
acquisition for shares, the issuance of these securities may be dilutive to our
existing shareholders or affect profitability. Furthermore, we may have to issue
equity or incur debt to pay for future acquisitions or investments, the issuance
of which could be dilutive to us or our existing shareholders or affect our
profitability. In addition, our profitability may suffer because of
acquisition-related costs or amortization costs for acquired goodwill and other
acquired intangible assets.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL TO GROW OUR BUSINESS, WHICH WE MAY NOT
BE ABLE TO DO.
Our future liquidity and capital requirements are difficult to predict
because they depend on numerous factors, including the success of our existing
and new service offerings as well as competing technological and market
developments. As a result, we may not be able to generate sufficient cash from
our operations to meet additional working capital requirements, support
additional capital expenditures or take advantage of acquisition opportunities.
Accordingly, we may need to raise additional capital in the future. Our ability
to obtain additional financing will be subject to a number of factors, including
market conditions and our operating performance. These factors may make the
timing, amount, terms and conditions of additional financing unattractive for
us. If we raise additional funds by selling equity securities, the relative
equity ownership of our existing investors could be diluted or the new investors
could obtain terms more favorable than previous investors. If we raise
additional funds through debt financing, we could incur significant borrowing
costs. If we are unable to raise additional funds when needed, our ability to
operate and grow our business could be impeded.
TECHNICAL PROBLEMS WITH INTERNAL OR OUTSOURCED COMPUTER AND COMMUNICATIONS
SYSTEMS COULD RESULT IN REDUCED REVENUES AND HARM TO OUR REPUTATION.
The success of our online support services depends on the efficient and
uninterrupted operation of our own and outsourced computer and communications
hardware and software systems. These systems and operations are vulnerable to
damage or interruption from human error, natural disasters, telecommunications
failures, break-ins, sabotage, computer viruses and similar adverse events. Our
operations depend on our ability to protect our systems against damage or
interruption. We cannot guarantee that our internet access will be
uninterrupted, error-free or secure. We have no formal disaster recovery plan in
the event of damage or interruption, and our insurance policies may not
adequately compensate us
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for losses that we may incur. Any system failure that causes an interruption in
our service or a decrease in responsiveness could harm our relationships with
our clients and result in reduced revenues.
FAILURE TO SELL ONLINE SERVICES MAY IMPAIR OUR FUTURE REVENUE GROWTH.
We currently focus primarily on software sales rather than online offerings.
Our competitors may move to a heavier emphasis on online offerings, and our
failure to focus on it at an early stage may make it difficult to compete if
online offerings become a dominant means of generating revenues within the
industry. In addition, although our sales force sells both our software products
and online offerings, the skills necessary to market and sell online offerings
are different than those relating to our software products. As a result, our
sales and marketing groups may not be able to maintain or increase the level of
sales of our online offerings.
A DECLINE IN OUR LICENSE REVENUES COULD CAUSE A DECLINE IN OUR SERVICE REVENUES.
Our products are designed to enable customers to rapidly develop and
deploy e-business communication applications. Where desirable, our professional
services group can assist our clients internal IT personnel to implement our
products. Because the revenues associated with these services are largely
correlated with the licensing of our products, a decline in license revenues
could also cause a decline in our service revenues.
CONFLICTS BETWEEN OUR PRODUCTS AND OTHER VENDORS' PRODUCTS COULD HARM OUR
BUSINESS AND REPUTATION.
Our clients generally use our products together with products from other
companies. As a result, when problems occur in the network, it may be difficult
to identify the source of the problem. Even when these problems are not caused
by our products, they may cause us to incur significant warranty and repair
costs, divert the attention of our engineering personnel from our product
development efforts and cause significant customer relations problems.
OUR SUCCESS DEPENDS ON OUR ABILITY TO PROTECT OUR PROPRIETARY RIGHTS.
We rely on contractual restrictions, such as confidentiality agreements
and licenses, to establish and protect our proprietary rights. None of our
trademarks is registered, nor do we have any trademark applications pending. We
currently have no patent applications pending relating to our software. Despite
any precautions that we take to protect our intellectual property:
o laws and contractual restrictions may be insufficient to prevent
misappropriation of our technology or deter others from developing
similar technologies;
o current laws that prohibit software copying provide only limited
protection from software "pirates", and effective trademark, copyright
and trade secret protection may be unavailable or limited in foreign
countries;
o other companies may claim common law trademark rights based upon state,
provincial or foreign laws that precede any registrations we may
receive for our trademarks; and
o policing unauthorized use of our products and trademarks is difficult,
expensive and time-consuming, and we may be unable to determine the
extent of this unauthorized use.
It is possible that our intellectual property rights could be successfully
challenged by one or more third parties, which could result in our inability to
exploit, or our loss of the right to prevent others from exploiting, certain
intellectual property. We are aware that certain of our competitors have filed
patent applications.
Also, the laws of other countries in which we market our products may
offer little or no effective protection of our technology. Reverse engineering,
unauthorized copying or other misappropriation of our technology could enable
third parties to benefit from our technology without paying us for it, which
would significantly harm our business.
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WE RELY ON SOFTWARE LICENSED TO US BY THIRD PARTIES FOR FEATURES WE INCLUDE IN
OUR PRODUCTS.
We use and in the future will use certain software technologies and other
information that we license or otherwise acquire from third parties, usually on
a non-exclusive basis, including software that is integrated with our internally
developed software and used in our products to perform what may be important
functions. If we are not able to continue to use the third-party software and
technologies, or if they fail to adequately update and support their products,
we could suffer delays or reductions in shipments of our products until
alternative software and technologies could be identified, which could adversely
affect our business and financial condition.
CLAIMS BY OTHER COMPANIES THAT OUR PRODUCTS INFRINGE THEIR PROPRIETARY RIGHTS
COULD ADVERSELY AFFECT OUR ABILITY TO SELL OUR PRODUCTS AND INCREASE OUR COSTS.
Substantial litigation over intellectual property rights exists in our
industry. We expect that software in our industry may be increasingly subject to
third-party infringement claims as the number of competitors grows and the
functionality of products in different industry segments overlap. Third parties
may currently have, or may eventually be issued patents that our products or
technology infringe.
Any of these third parties might make a claim of infringement against us.
Many of our software license agreements require us to indemnify our clients and
suppliers from any claim or finding of intellectual property infringement. Any
litigation, brought by us or others, could result in the expenditure of
significant financial resources and the diversion of management's time and
efforts. In addition, litigation in which we are accused of infringement might
cause negative publicity, have an impact on prospective clients, cause product
shipment delays, require us to develop non-infringing technology or require us
to enter into royalty or license agreements, which might not be available on
acceptable terms, or at all. If a successful claim of infringement were made
against us and we could not develop non-infringing technology or license the
infringed or similar technology on a timely and cost-effective basis, our
business could be significantly harmed.
OUR INSURANCE MAY NOT BE SUFFICIENT TO COVER ALL POTENTIAL PRODUCT LIABILITY AND
WARRANTY CLAIMS.
Our products are integrated into our clients' networks. The sale and
support of our products results in the risk of product liability or warranty
claims based on damage to these networks. In addition, the failure of our
products to perform to client expectations could give rise to warranty claims.
Although we carry general liability insurance, our insurance would likely not
cover potential claims of this type or may not be adequate to protect us from
all liability that may be imposed.
OUR PRODUCTS COULD CONTAIN UNDETECTED DEFECTS OR ERRORS.
We face the possibility of higher costs as a result of the complexity of
our products and the potential for undetected errors. Due to the
mission-critical nature of our products and services, undetected errors are of
particular concern. We have only a limited number of clients that test new
features and the functionality of our software before we make these features and
functionalities generally available. If our software contains undetected errors
or we fail to meet our clients' expectations in a timely manner, we could
experience:
o loss of, or delay in revenues expected from the new product and an
immediate and significant loss of market share;
o loss of existing clients that upgrade to the new product and of new
clients;
o failure to achieve market acceptance;
o diversion of development resources;
o injury to our reputation;
o increased service and warranty costs;
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o legal actions by clients against us; and
o increased insurance costs.
A product liability claim could harm our business by increasing our costs,
damaging our reputation and distracting our management.
OUR INTERNATIONAL EXPANSION EFFORTS MAY NOT BE SUCCESSFUL.
Our operations outside the United States and Canada are located in the
United Kingdom and, to date, have been limited. We plan to expand our existing
international operations and establish additional facilities in other parts of
the world, including continental Europe and Asia. However, we have not yet
determined which cities or countries will be the locations for our international
expansion. The expansion of our existing international operations and entry into
additional international markets are key parts of our growth strategy and will
require significant management attention and financial resources. In addition,
to expand our international sales operations, we will need to, among other
things:
o expand our international sales channel management and support
organizations;
o develop relationships with international service providers and
additional distributors and systems integrators; and
o customize our products for local markets.
Our investments in facilities in other countries may not produce desired
levels of revenues. Even if we are able to expand our international operations
successfully, we may not be able to maintain or increase international market
demand for our products.
OUR BUSINESS MAY SUFFER IF WE FAIL TO ADAPT APPROPRIATELY TO THE CHALLENGES
ASSOCIATED WITH OPERATING INTERNATIONALLY.
Expanding our operations outside the United States and Canada subjects us
to numerous inherent potential risks associated with international operations.
These risks include greater difficulty in accounts receivable collection, the
burden of complying with multiple and conflicting regulatory requirements,
foreign exchange controls, longer payment cycles, import and export restrictions
and tariffs, potentially adverse tax consequences, and political and economic
instability, any of which could impair our sales and results of operations. In
addition, our ability to expand our business in certain countries will require
modification of our products, particularly domestic language support.
Our international operations will increase our exposure to international
laws and regulations. If we cannot comply with foreign laws and regulations,
which are often complex and subject to variation and unexpected changes, we
could incur unexpected costs and potential litigation. For example, the
governments of foreign countries might attempt to regulate our products and
services or levy sales or other taxes relating to our activities. In addition,
foreign countries may impose tariffs, duties, price controls or other
restrictions on foreign currencies or trade barriers, any of which could make it
more difficult to conduct our business. The European Union, in which we have a
sales office, recently enacted its own privacy regulations that may result in
limits on the collection and use of certain user information, which, if applied
to the sale of our products and services, could negatively impact our results of
operations.
FLUCTUATIONS IN EXCHANGE RATES MAY AFFECT OUR OPERATING RESULTS.
A substantial portion of our revenues are now, and are expected to
continue to be, realized in currencies other than Canadian dollars. Our
operating expenses are primarily paid in Canadian dollars. Fluctuations in the
exchange rate between the Canadian dollar and these other currencies may have a
material effect on our results of operations. In particular, we may be adversely
affected by a significant strengthening of the Canadian dollar against the U.S.
dollar. We do not currently engage in currency hedging activities. We have not
yet, but may in the future, experience significant foreign exchange rate losses,
especially to the extent that we do not engage in hedging.
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IF WE ARE OR BECOME A PASSIVE FOREIGN INVESTMENT COMPANY WE MAY NOT BE ABLE TO
SATISFY RECORD-KEEPING REQUIREMENTS, WHICH COULD HAVE ADVERSE U.S. TAX
CONSEQUENCES TO YOU.
The rules governing passive foreign investment companies can have
significant effects on U.S. investors. We could be classified as a passive
foreign investment company if, for any taxable year, either:
o 75% or more of our gross income is passive income, which includes
interest, dividends and some types of rents and royalties; or
o the average percentage, by fair market value, or, in some cases, by
adjusted tax basis, of our assets that produce or are held for the
production of passive income is 50% or more.
Distributions which constitute "excess distributions," as defined in
Section 1291 of the Internal Revenue Code, from a passive foreign investment
company and dispositions of shares of a passive foreign investment company are
subject to the highest rate of tax on ordinary income in effect and to an
interest charge based on the value of the tax deferred during the period during
which the shares are owned. However, these rules generally will not apply if the
U.S. investor elects to treat the passive foreign investment company as a
qualified electing fund under Section 1295 of the Internal Revenue Code.
If we are or become a passive foreign investment company we may not be
able to satisfy record-keeping requirements that would permit you to make a
qualified electing fund election.
RISKS RELATED TO OUR INDUSTRY
OUR FUTURE REVENUES AND PROFITS DEPEND ON THE CONTINUED GROWTH IN USE AND
EFFICIENT OPERATION OF THE INTERNET AND E-MAIL.
We sell our products and services primarily to organizations that receive
large volumes of e-mail and communications over the web. Consequently, our
future revenues and profits, if any, substantially depend upon the continued
acceptance and use of the web and e-mail, which are evolving as communications
media. Rapid growth in the use of e-mail is a recent phenomenon and may not
continue. As a result, a broad base of enterprises that use e-mail as a primary
means of communication may not develop or be maintained. Moreover, companies
that have already invested significant resources in other methods of
communications with customers, such as call centers, may be reluctant to adopt a
new strategy that may limit or compete with their existing investments. If
businesses do not continue to accept the web and e-mail as communications media,
our business would suffer.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES RELATING TO THE INTERNET COULD
DISCOURAGE COMMUNICATION BY E-MAIL OR OTHER INTERNET-BASED COMMUNICATIONS
FACILITATED BY OUR PRODUCTS.
Due to the increasing popularity and use of the internet, it is possible
that Canadian and U.S. federal, Canadian provincial, U.S. state, and other
foreign regulators could adopt laws and regulations that impose additional
burdens on those companies that conduct business online. These laws and
regulations could discourage communication by e-mail or other internet-based
communications facilitated by our products, which could reduce demand for our
products and services.
The growth and development of the market for online services may prompt
calls for more stringent consumer protection laws or laws that may inhibit the
use of internet-based communications or the information contained in these
communications. The adoption of any additional laws or regulations may slow the
growth of the internet. A decline in the growth of the internet, particularly as
it relates to online communication, could decrease demand for our products and
services and increase our cost of doing business, or otherwise harm our
business.
BECAUSE WE ARE A CANADIAN COMPANY, IT MAY BE DIFFICULT FOR YOU TO ENFORCE
AGAINST US LIABILITIES BASED SOLELY UPON THE FEDERAL SECURITIES LAWS OF THE
UNITED STATES.
We have been incorporated under the laws of the Province of Ontario, and
our executive offices are located in Ontario. Many of our directors, controlling
persons and officers, and representatives of the experts named in this Quarterly
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Report on Form 10-Q, are residents of Canada and a substantial portion of their
assets and a majority of our assets are located outside the United States.
Consequently, it may be difficult for you to enforce against us or any of our
directors, controlling persons, officers or experts who are not resident in the
United States, liabilities based solely upon the federal securities laws of the
United States.
OUR BOARD OF DIRECTORS MAY ISSUE, WITHOUT SHAREHOLDER APPROVAL, PREFERENCE
SHARES THAT HAVE RIGHTS AND PREFERENCES SUPERIOR TO THOSE OF COMMON SHARES AND
THAT MAY DELAY OR PREVENT A CHANGE OF CONTROL.
Our articles of incorporation allow the issuance of an unlimited number of
preference shares in one or more series. After the offering, there will be no
preference shares outstanding. However, our board of directors may set the
rights and preferences of any class of preference shares in its sole discretion
without the approval of the holders of common shares. The rights and preferences
of these preference shares may be superior to those of the common shares.
Accordingly, the issuance of preference shares may adversely affect the rights
of holders of common shares. The issuance of preference shares also could have
the effect of delaying or preventing a change of control of our company.
WE DO NOT INTEND TO PAY ANY DIVIDENDS ON OUR COMMON SHARES.
We have not paid any cash dividends on our shares and we currently do not
have any plans to pay dividends on our shares. In addition, our lease line of
credit specifically prohibits the payment of dividends on our shares.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We develop products in Canada and sell these products in North America and
Europe. Generally, our sales are made in US dollars. As a result, our financial
results could be affected by factors such as changes in foreign currency
exchange rates or weak economic conditions in foreign markets. We do not
currently use derivative instruments to hedge our foreign exchange risk.
Our exposure to market rate risk for changes in interest rates relates
primarily to our investment portfolio. Our investments consist primarily of
commercial paper, which have an average fixed yield rate of 6%. These all mature
within three months. Delano does not consider its cash equivalents to be subject
to interest rate risk due to their short maturities.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
Not Applicable.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized.
August 2, 2000 Delano Technology Corporation
/s/ JOHN FORESI President and Chief
Executive Officer, Director
------------------------------------------
John Foresi (Principal Executive Officer)
/s/ THOMAS HEARNE Chief Financial Officer
(Principal Financial Officer
------------------------------------------
Thomas Hearne And Principal Accounting Officer)
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