-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ddg19hxK/uEjGblxK4xFZenE5YbpBTfQrkCqeBizH+iWRYTZKKLju6RZRKE4B93H 5Gn7cL3yAp4yyZI7pPFgSg== 0000950135-02-000770.txt : 20020414 0000950135-02-000770.hdr.sgml : 20020414 ACCESSION NUMBER: 0000950135-02-000770 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DELANO TECHNOLOGY CORP CENTRAL INDEX KEY: 0001100043 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 980206122 STATE OF INCORPORATION: A6 FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-94505 FILM NUMBER: 02543366 BUSINESS ADDRESS: STREET 1: 302 TOWN CENTRE BLVD. STREET 2: MARKHAM, ONTARIO, L3R OE8 CITY: ONTARIO CANADA STATE: A6 ZIP: 00000 BUSINESS PHONE: 905-947-2222 MAIL ADDRESS: STREET 1: 302 TOWN CENTRE BLVD STREET 2: MARKHAM CITY: ONTARIO STATE: A6 ZIP: 00000 10-Q 1 b41990dte10-q.txt DELANO TECHNOLOGY CORPORATION DELANO TECHNOLOGY CORPORATION - 10 Q - Quarterly Report ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------------- FORM 10-Q (x) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarter ended December 31, 2001; or ( ) 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) NONE of the Act: 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 . --- --- As of Thursday, January 31, 2002, Registrant had 43,202,029 outstanding shares of Common Stock. ================================================================================ 1 DELANO TECHNOLOGY CORPORATION - 10 Q - Quarterly Report ================================================================================ DELANO TECHNOLOGY CORPORATION FORM 10-Q QUARTER ENDED DECEMBER 31, 2001 TABLE OF CONTENTS
PAGE PART I: FINANCIAL INFORMATION Item 1 Financial Statements Condensed Consolidated Balance Sheets at December 31, 2001 and March 31, 2001.............................................................................. 3 Unaudited Condensed Consolidated Statements of Operations for the three months and nine months ended December 31, 2001 and 2000 ..................................................... 4 Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended December 31, 2001 and 2000............................................................. 5 Notes to the Unaudited Condensed Consolidated Financial Statements .......................... 6 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations ........................................................................... 11 Item 3 Quantitative and Qualitative Disclosures About Market Risk ...................................... 20 PART II: OTHER INFORMATION Item 1 Legal Proceedings................................................................................ 31 Item 2 Changes in Securities and Use of Proceeds........................................................ 31 Item 3 Defaults upon Senior Securities.................................................................. 31 Item 4 Submission of Matters to a Vote of Security Holders.............................................. 31 Item 5 Other Information................................................................................ 31 Item 6 Exhibits and Reports on Form 8-K ................................................................ 31 Signatures ................................................................................................. 32
================================================================================ 2 DELANO TECHNOLOGY CORPORATION - 10 Q - Quarterly Report ================================================================================ PART 1: FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS DELANO TECHNOLOGY CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
DECEMBER 31, MARCH 31, 2001 2001 ------------ ----------- (unaudited) ASSETS Current assets: Cash and cash equivalents....................................................... $ 11,205 $ 34,209 Short-term investments.......................................................... 1,427 1,155 Accounts receivable trade, net of allowance for doubtful accounts of $1,075 at December 31, 2001, and $1,859 at March 31, 2001............................... 4,132 8,099 Prepaid expenses and other...................................................... 842 3,674 ------------ ----------- Total current assets.......................................................... 17,606 47,137 Property and equipment............................................................. 2,867 11,300 Goodwill and identifiable intangibles, net ........................................ -- 5,217 Other assets ...................................................................... 263 985 ------------ ----------- Total assets....................................................................... $ 20,736 $ 64,639 ============ =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities........................................ $ 3,469 $ 8,960 Restructuring accrual........................................................... 2,080 2,411 Deferred revenue................................................................ 801 1,975 Current portion of obligations under capital leases............................. 89 182 ------------ ----------- Total current liabilities..................................................... 6,439 13,528 Long-term liabilities: Obligations under capital leases................................................ -- 49 Restructuring accrual........................................................... -- 1,121 ------------ ----------- Total liabilities.................................................................. 6,439 14,698 Shareholders' equity: Capital stock: Preference shares: Authorized: Unlimited Issued and outstanding: Nil at December 31, 2001 and March 31, 2001 Common shares: Authorized: Unlimited Issued and outstanding: 42,889,310 shares at December 31, 2001 and 37,240,858 shares at March 31, 2001......................................... 222,765 230,647 Warrant......................................................................... 370 496 Deferred stock-based compensation............................................... (1,930) (8,464) Accumulated other comprehensive losses.......................................... (340) (340) Deficit......................................................................... (206,568) (172,398) ------------- ------------ Total shareholders' equity.................................................... 14,297 49,941 ------------ ----------- Total liabilities and shareholders' equity......................................... $ 20,736 $ 64,639 ============ ===========
See accompanying notes to condensed consolidated financial statements. ================================================================================ 3 DELANO TECHNOLOGY CORPORATION - 10 Q - Quarterly Report ================================================================================ DELANO TECHNOLOGY CORPORATION UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, ----------------------- -------------------------- 2001 2000 2001 2000 -------- --------- --------- --------- Revenues: License.................................................... $ 2,541 $ 8,040 $ 5,800 $ 20,410 Service.................................................... 1,619 1,230 5,356 2,912 ----- --------- --------- --------- Total revenues........................................... 4,160 9,270 11,156 23,322 ----- --------- --------- --------- Cost of revenues: License.................................................... 181 89 567 270 Service (excluding stock-based compensation of $31, $77, $43 and $207 respectively) .............................. 970 1,440 3,838 3,410 -------- --------- --------- --------- Total cost of revenues................................... 1,151 1,529 4,405 3,680 -------- --------- --------- --------- Gross profit.................................................. 3,009 7,741 6,751 19,642 -------- --------- --------- --------- Operating expenses: Sales and marketing (excluding stock-based compensation of $139, $687, $(1,773) and $2,777, respectively)....... 2,097 13,641 11,651 35,145 Research and development (excluding stock-based compensation of $77, $155, $(56) and $257, respectively)............................................ 1,007 6,128 7,254 12,304 General and administrative (excluding stock-based compensation of $152, $84, $41 and $242, respectively)... 670 1,397 2,572 3,537 Amortization (recovery) of deferred stock-based compensation............................................. 399 1,003 (1,745) 3,483 In-process research and development........................ -- 69 -- 429 Amortization of goodwill and identifiable intangibles...... -- 5,107 287 5,107 Impairment of goodwill..................................... -- -- 4,930 -- Asset impairment........................................... 603 -- 7,629 -- Restructuring charges (recovery)........................... (2,094) -- 8,795 -- -------- --------- --------- --------- Total operating expenses................................. 2,682 27,345 41,373 60,005 -------- --------- --------- --------- Operating profit (loss) ...................................... 327 (19,604) (34,622) (40,363) Interest and other income, net ............................ 35 926 598 3,852 Equity in loss of associated company....................... -- -- (146) -- -------- --------- --------- --------- Income (loss) before income taxes............................. 362 (18,678) (34,170) (36,511) Income taxes.................................................. -- -- -- -- ------- --------- --------- --------- Net income (loss) ............................................ $ 362 $ (18,678) $ (34,170) $ (36,511) ======== ========= ========= ========= Basic earnings (loss) per common share........................ $ 0.01 $ (0.52) $ (0.90) $ (1.14) ======== ========== ========= ========= Shares used in computing basic earnings (loss) per common share (in thousands)............................... 38,959 35,825 37,945 32,055 ======== ========= ========= ========= Fully diluted earnings per common share...................... $ 0.01 n/a n/a n/a ======== ========= ========= ========= Shares used in computing fully diluted earnings per common share (in thousands)............................... 44,001 n/a n/a n/a ======== ========= ========= =========
See accompanying notes to condensed consolidated financial statements. ================================================================================ 4 DELANO TECHNOLOGY CORPORATION - 10 Q - Quarterly Report ================================================================================ DELANO TECHNOLOGY CORPORATION UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
NINE MONTHS ENDED DECEMBER 31, ------------------------ 2001 2000 --------- --------- Cash provided by (used in): Operating activities: Loss for the period ........................................ $(34,170) $(36,511) Depreciation and amortization which does not involve cash .. 2,329 1,917 Amortization (recovery) of deferred stock-based compensation (1,745) 3,483 Impairment of goodwill ..................................... 4,930 -- Equity in loss of associated company ....................... 146 -- Non-cash charges ........................................... 5,302 5,536 Changes in non-cash operating working capital: Accounts receivable trade ................................ 3,967 (5,517) Prepaid expenses and other ............................... 2,807 (2,451) Accounts payable and accrued liabilities ................. (5,425) 4,109 Restructuring accrual .................................... 72 -- Deferred revenue ......................................... (1,174) 237 -------- -------- Net cash used in operating activities ...................... (22,961) (29,197) Financing activities: Issuance of common shares and warrants ..................... 272 1,295 Payment on notes payable ................................... -- (1,995) Repayment of obligations under capital leases .............. (144) (131) -------- -------- Net cash provided by (used in) financing activities ........ 128 (831) Investing activities: Sale (purchase) of short-term investments .................. (272) 28,012 Additions to property and equipment ........................ (239) (11,252) Purchase of long-term investments .......................... (698) Cash used in acquisition ................................... -- (17,956) Proceeds on sale of property and equipment ................. 351 -- -------- -------- Net cash used in investing activities ...................... (160) (1,894) Effect of currency translation of cash balances ............... (11) 210 -------- -------- Decrease in cash and cash equivalents ......................... (23,004) (31,712) Cash and cash equivalents, beginning of period ................ 34,209 82,370 -------- -------- Cash and cash equivalents, end of period ...................... $ 11,205 $ 50,658 ======== ========
See accompanying notes to condensed consolidated financial statements. ================================================================================ 5 DELANO TECHNOLOGY CORPORATION - 10 Q - Quarterly Report ================================================================================ 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 in accordance with generally accepted accounting principles in the United States 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, 2002. 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, 2001. NOTE 2. SHAREHOLDERS' EQUITY 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 9,335,382 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:
WEIGHTED OPTIONS AVAILABLE AVERAGE FOR NUMBER EXERCISE PRICE GRANT OF OPTIONS PER SHARE ----------------- ---------- -------------- Balances, March 31, 2000....................................... 1,231,150 4,013,600 $ 2.51 Additional options authorized............................ 3,835,382 Options granted.......................................... (6,466,956) 6,466,956 $ 7.24 Options exercised........................................ (694,592) $ 0.59 Options cancelled........................................ 1,677,928 (1,677,928) $ 7.28 ---------- ---------- Balances, March 31, 2001....................................... 277,504 8,108,036 $ 4.90 Additional options authorized............................ Options granted.......................................... (4,255,000) 4,255,000 $ 0.22 Options exercised........................................ (650,672) $ 0.16 Options cancelled........................................ 4,362,098 (4,362,098) $ 5.95 ---------- ---------- Balances, December 31, 2001 (unaudited)........................ 384,602 7,350,266 $ 2.01 ========== ========== Options exercisable at December 31, 2001 (unaudited).......... 1,724,101 $ 2.88 ==========
The stock options expire at various dates between May 2003 and September 2010. The Company recorded deferred stock-based compensation amounting to $111,000 for the three months ended December 31, 2001 compared to $1.2 million for the three months ended December 31, 2000. Amortization of deferred stock-based compensation amounted to $399,000 for the three months ended December 31, 2001 compared to $1.0 million for the three months ended December 31, 2000. The amortization (recovery) of deferred stock-based compensation relates to the following cost of service revenues and operating expense categories (in thousands): ================================================================================ 6 DELANO TECHNOLOGY CORPORATION - 10 Q - Quarterly Report ================================================================================ THREE MONTHS ENDED NINE MONTHS ENDED Unaudited DECEMBER 31, DECEMBER 31, ------------------------ ---------------------- 2001 2000 2001 2000 ----------- --------- ---------- --------- Cost of service revenues...... $ 31 $ 77 $ 43 $ 207 Sales and marketing........... 139 687 (1,773) 2,777 Research and development ..... 77 155 (56) 257 General and administrative.... 152 84 41 242 --------- --------- -------- --------- $ 399 $ 1,003 $ (1,745) $ 3,483 ========= ========= ========= ========= NOTE 3. COMPREHENSIVE INCOME (LOSS The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," which established standards for reporting and presentation of comprehensive income. This standard defines comprehensive income (loss) as the changes in equity of an enterprise except those resulting from shareholder transactions. Comprehensive loss for the three months and nine months ended December 31, 2001 and December 31, 2000, was not materially different from net income (loss) for the periods. NOTE 4. SEGMENT INFORMATION The Company reviewed its operations and determined that it operates in a single reportable operating segment, being the development and marketing of interaction-based e-business communications applications. All long-lived assets relating to the Company's operations are located in Canada in fiscal 2001. Revenue per geographic location, which is attributable to geographic location based on the location of the external customer, is as follows (in thousands): THREE MONTHS ENDED NINE MONTHS ENDED Unaudited DECEMBER 31, DECEMBER 31, -------------------- ------------------- 2001 2000 2001 2000 --------- -------- -------- -------- Revenue by geographic locations: United States ................... $ 2,199 $ 7,556 $ 7,480 $ 16,126 Canada........................... 549 827 2,109 3,998 Europe........................... 1,354 247 1,509 2,558 Asia Pacific..................... 58 640 58 640 -------- -------- -------- -------- $ 4,160 $ 9,270 $ 11,156 $ 23,322 ======== ======== ======== ======== For the three months ended December 31, 2001, two customers accounted for 26% and 18% of total revenues, respectively. For the three months ended December 31, 2000, one customer accounted for 10% of total revenues. For the nine months ended December 31, 2001, one customer accounted for 23% of total revenues. For the nine months ended December 31, 2000, no customer accounted for 10% of total revenues. As at December 31, 2001, the Company had a receivable from one significant customer amounting to 23% of total accounts receivable trade. As at December 31, 2000, the Company did not have a receivable from a customer amounting to 10% of total accounts receivable trade. NOTE 5. JOINT VENTURES AND INVESTMENT IN AFFILIATE In June 2000, the Company formed Delano Minerva Holdings Inc. ("Minerva"), and had a controlling position with a 50% ownership and a majority of the seats of the Minerva Board of Directors. During fiscal 2001, the Company's proportionate share of Minerva's losses exceeded its investment. Minerva's results of operations were included within the Company's fiscal 2001 revenue, cost and expense categories. During the three months ended September 30, 2001, the Company agreed to pay $100,000 for the remaining ownership interest in Minerva and subsequently closed down the operation. In December 2000, the Company invested in a joint venture, Delano Asia-Pacific, as a minority interest party by acquiring 19.9% of the common shares. The joint venture partner was eGlobal Technology Services Holding Limited ("eGlobal") of Singapore. The investment in this joint venture has been made in the form of a $398,000 capital cash contribution, and a long-term, non-interest bearing loan receivable of $602,000. This investment is accounted for using the equity method of accounting. In the three months and in the six months ended September 30, 2001 the Company recognized $80,000 and $146,000 respectively of losses and during fiscal 2001, the Company recognized $278,000 of losses, which represent the Company's proportionate share of the joint ventures losses, net of the intercompany elimination. ================================================================================ 7 DELANO TECHNOLOGY CORPORATION - 10 Q - Quarterly Report ================================================================================ During the three months ended December 31, 2001, the Company terminated its distribution agreement with Delano Asia-Pacific pursuant to the terms of that agreement. NOTE 6. SPECIAL CHARGES Special charges for the three months ended December 31, 2001 include a $603,000 asset impairment charge and a $2.1 million restructuring recovery. ASSET IMPAIRMENT: During the three months ended September 30, 2001, the Company restructured its operations to reduce operating expenses. During the restructuring, it was determined that $5.8 million of capital assets and $1.2 million of other assets, including the long-term, non-interest bearing loan receivable from eGlobal of $602,000, had no future value to the Company. During the three months ended December 31, 2001, the Company recorded an additional charge of $603,000 related to the actions taken during the three months ended September 30, 2001. RESTRUCTURING CHARGE: The Company determined its restructuring charges in accordance with Emerging Issues Task Force Issue No. 94-3 ("EITF 94-3") and Staff Accounting Bulletin No. 100 ("SAB 100"). EITF 94-3 and SAB 100 require that the Company commit to an exit plan before it accrues employee termination costs and exit costs. On January 4, 2001, the Company's senior management prepared and approved a detailed exit plan that included the termination of 102 employees, closure of certain facilities and the elimination of the ASP sales model. On April 23, 2001, the Company's senior management prepared and approved a second detailed exit plan that included the additional termination of 140 employees and closure of additional facilities. On July 3, 2001, the Company's senior management prepared and approved a third detailed exit plan that included the additional termination of 183 employees, closure of additional facilities, reduction of capital assets no longer in use and other various exit costs. During the three months ended December 31, 2001, the Company, under new management, took actions to reduce the amount of restructuring liability by negotiating settlements with existing landlords of certain restructured leased premises, by renegotiating future cost commitments on the ASP model, and a decision to retain the ASP model in future operations and various other measures. As a result of these efforts, the Company recorded a $2.1 million restructuring recovery during the three months ended December 31, 2001. During the three months ended March 31, 2001, the Company incurred a restructuring charge of $6.1 million (after adjustment) as part of a plan to improve its operating results by reducing employees, by closing duplicative Company facilities in the United States and Canada, and by implementing other measures. This charge was part of a plan to streamline the Company's efforts to focus on achieving profitability. Subsequent to March 31, 2001, an additional $848,000 was accrued relating to a change in estimate for one of the facilities in the three months ended June 30, 2001 and an additional $683,000 was accrued relating to a change in estimate of future cost commitments for our ASP model during the three months ended September 30, 2001. During the three months ended December 31, 2001, a recovery of $1.7 million was accrued made up of $400,000 recovered in connection with a loan to a shareholder of an acquired company, $857,000 from the settlement or near settlement of certain lease obligations and a recovery of $435,000 related to the renegotiations of future cost commitments on the ASP model. After the adjustments above, the restructuring charge was comprised of $2.8 million for reductions in employee numbers, $2.1 million for facilities related costs including penalties associated with the reduction of lease commitments and future lease payments and $1.2 million related to eliminating the Company's ASP sales model which has now been reinstated as part of future operations. As of December 31, 2001, $5.0 million had been paid out on the restructuring charge. Most of the remaining $1.1 million that has not yet been paid is related to lease commitments. In connection with the restructuring actions for the three months ended March 31, 2001, the Company terminated the employment of 102 employees, consisting of sales and marketing employees, applications development employees, technical and other support employees, and administrative employees in all locations. In addition, the Company did not replace approximately 34 employees who resigned voluntarily during the three months ended March 31, 2001. At March 31, 2001, the Company had terminated all employees associated with these restructuring actions. At March 31, 2001, the Company had exited a portion of its facilities in Markham, Canada and most of its offices in the United States. The Company has entered into sublease arrangements for some of its office space. During the three months ended June 30, 2001, the Company incurred an additional restructuring charge of $3.3 ================================================================================ 8 DELANO TECHNOLOGY CORPORATION - 10 Q - Quarterly Report ================================================================================ million (after adjustment) as part of a plan to improve its operating results by reducing employees, by closing duplicative Company facilities in the United States, and by implementing other measures. This charge was part of a plan to streamline the Company's efforts to focus on achieving profitability. During the three months ended December 31, 2001, a recovery of $158,000 was accrued. After the adjustment above, the restructuring charge was comprised of $2.5 million for reductions in employee numbers, $571,000 for facilities-related costs including penalties associated with the reduction of lease commitments and future lease payments and $186,000 related to the termination of the Minerva joint venture in Denmark. As of December 31, 2001, all amounts had been paid out on the restructuring charge. In connection with the restructuring actions for the three months ended June 30, 2001, the Company terminated the employment of 140 employees, consisting of applications development employees, sales and marketing employees, technical and other support employees, and administrative employees in all locations. In addition, the Company did not replace approximately 39 employees who resigned voluntarily during the three months ended June 30, 2001. At June 30, 2001, the Company had terminated all employees associated with these restructuring actions. At June 30, 2001, the Company had exited its office facilities in the United States identified in the restructuring plan. During the three months ended September 30, 2001, the Company incurred an additional restructuring charge of $5.7 million (after adjustment) as part of a plan to improve its operating results by reducing employees, by closing duplicative Company facilities in the United States, Canada and Europe and by implementing other measures. This charge was part of a plan to streamline the Company's efforts to focus on achieving profitability. During the three months ended December 31, 2001, a recovery of $244,000 was accrued relating mostly to settlement or near settlement of certain lease obligations. After the adjustment above, the restructuring charge was comprised of $3.7 million for reductions in employee numbers and $2.0 million for facilities-related costs including penalties associated with the reduction of lease commitments and future lease payments. As of December 31, 2001, $4.7 million had been paid out on the restructuring charge. Most of the remaining $1.0 million relates to employee termination costs and lease commitments. In connection with the restructuring actions for the three months ended September 30, 2001, the Company terminated the employment of 183 employees, consisting primarily of applications development employees, sales and marketing employees, technical and other support employees, and administrative employees in all locations. In addition, the Company did not replace approximately 9 employees who resigned voluntarily during the three months ended September 30, 2001. At September 30, 2001, the Company had terminated all employees associated with these restructuring actions. At September 30, 2001, the Company had exited its office facilities in the United States, Canada and Europe identified in the restructuring plan. Restructuring charge accruals, both current and long-term, are shown separately on the condensed consolidated balance sheet at December 31, 2001. The long-term restructuring charge accrual at March 31, 2001 relates specifically to future lease payment commitments that extend beyond one year. Detail of the restructuring charges as of and for the three months ended December 31, 2001 are summarized below:
BALANCE AT ADJUSTMENTS BALANCE AT FOURTH QUARTER 2001 RESTRUCTURING ACTIONS: SEPTEMBER 30, 2001 (REVERSALS) UTILIZED DECEMBER 31, 2001 ------------------------------------------ ------------------ ----------- -------- ----------------- Employee related $ -- $ (400) $ (400) $ -- Facilities related 1,884 (857) 120 907 ASP sales model related 791 (435) 156 200 ------- -------- ------- ------- $ 2,675 $ (1,692) $ (124) $ 1,107 ======= ======== ======= =======
BALANCE AT ADJUSTMENTS BALANCE AT BALANCE SHEET COMPONENTS SEPTEMBER 30, 2001 (REVERSALS) UTILIZED DECEMBER 31, 2001 ------------------------ ------------------ ----------- -------- ----------------- Accounts payable $ -- $ -- $ -- $ -- Accrued liabilities 2,675 (1,692) (124) 1,107 ------- -------- ------ ------- $ 2,675 $ (1,692) $ (124) 1,107 ======= ======== ====== Less: current portion 1,107 ------- Long-term portion $ -- =======
================================================================================ 9 DELANO TECHNOLOGY CORPORATION - 10 Q - Quarterly Report ================================================================================
BALANCE AT ADJUSTMENTS BALANCE AT FIRST QUARTER 2002 RESTRUCTURING ACTIONS: SEPTEMBER 30, 2001 (REVERSALS) UTILIZED DECEMBER 31, 2001 ---------------------------------------- ------------------ ----------- -------- ----------------- Employee related $ 156 $ (102) $ 54 $ -- Facilities related 69 (2) 67 -- Joint venture 75 (54) 21 -- -------- ------- -------- -------- $ 300 $ (158) $ 142 $ -- ======== ======== ======== ========
BALANCE AT ADJUSTMENTS BALANCE AT BALANCE SHEET COMPONENTS SEPTEMBER 30, 2001 (REVERSALS) UTILIZED DECEMBER 31, 2001 ------------------------ ------------------ ----------- -------- ----------------- Accounts payable $ -- $ -- $ -- $ -- Accrued liabilities 300 (158) 142 -- -------- -------- -------- -------- $ 300 $ (158) $ 142 -- ======== ======== ======== Less: current portion -- -------- Long-term portion $ -- ========
BALANCE AT ADJUSTMENTS BALANCE AT SECOND QUARTER 2002 RESTRUCTURING ACTIONS: SEPTEMBER 30, 2001 (REVERSALS) UTILIZED DECEMBER 31, 2001 ------------------------------------------ ------------------ ----------- -------- ----------------- Employee related $ 628 $ 18 $ 503 $ 143 Facilities related 1,726 (262) 634 830 -------- -------- -------- ------- $ 2,354 $ (244) $ 1,137 $ 973 ======== ======== ======== =======
BALANCE AT ADJUSTMENTS BALANCE AT BALANCE SHEET COMPONENTS SEPTEMBER 30, 2001 (REVERSALS) UTILIZED DECEMBER 31, 2001 ------------------------ ------------------ ----------- -------- ----------------- Accounts payable $ -- $ -- $ -- $ -- Accrued liabilities 2,354 (244) 1,137 973 -------- -------- -------- ------- $ 2,354 $ (244) $ 1,137 973 ======== ======== ======== Less: current portion 973 ------- Long-term portion $ -- =======
NOTE 7. RELATED PARTY TRANSACTIONS As at September 30, 2001, accrued consulting fees payable to a director of the Company amounted to $165,000. These consulting fees were paid during the three months ended December 31, 2001. The Company named Vikas Kapoor as the Chief Executive Officer of the Company and certain subsidiaries of the Company effective October 5, 2001. Mr. Kapoor has served as a member of the Company's Board of Directors since July 2001. Mr. Kapoor's compensation package includes a grant of 4,230,000 Common Shares, which vest over 30 months (705,000 common shares vested upon grant and the balance vest at the rate of 117,500 common shares per month) subject to accelerated vesting in certain circumstances as set out in the Restricted Share Agreement. NOTE 8. RECENT ACCOUNTING PRONOUNCEMENTS In October 2001, FASB issued Statement No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets", which retains the fundamental provisions of SFAS 121. Statement 144 also broadens the definition of discontinued operations to include all distinguishable components of an entity that will be eliminated from ongoing operations. SFAS 121 is effective for the Company's year commencing January 1, 2002 to be applied prospectively. The Company expects the adoption of this standard will not have a material impact on its financial position, results of operations or cash flows. NOTE 9. LEGAL ITEMS During the period from August 2 to October 1, 2001, three purported securities class action lawsuits were filed against the Company in the U.S. District Court for the Southern District of New York, Shapiro, et al. v. Delano Technology Corporation, et al., Ellis Investments Ltd, et al. v. Delano Technology Corporation, et al., and Wendy and Joe Scavuzzo, et al. v. Delano Technology Corporation, et al. The complaints also name one or more of the Company's underwriters in the ================================================================================ 10 DELANO TECHNOLOGY CORPORATION - 10 Q - Quarterly Report ================================================================================ Company's initial public offering and certain officers and directors of the Company. The complaints allege violations of the federal securities laws regarding statements in the Company's initial public offering registration statement concerning the underwriters' activities in connection with the underwriting of the Company's Common Shares to the public. The actions seek rescission of the plaintiff's alleged purchases of Company Common Shares and other damages and costs associated with the litigation. Various plaintiffs have filed similar actions asserting virtually identical allegations against more than 100 other companies. The Company believes it has meritorious defenses to these lawsuits and will vigorously defend itself. ================================================================================ 11 DELANO TECHNOLOGY CORPORATION - 10 Q - Quarterly Report ================================================================================ ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the Financial Condition and Results of Operations contains forward-looking statements within the meaning of Section 21e of the Securities Exchange Act of 1934. Our actual results and timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth under "Risk Factors," elsewhere in this report and in our other public filings. The following discussion should be read in conjunction with our unaudited consolidated financial statements and the related notes appearing elsewhere in this Quarterly Report on Form 10-Q. 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. Our products are offered on a licensed basis. We license our products based on: - a fee for each client, which depends on the specific and individual needs of the client; - an additional fee, which covers installation, configuration, training and professional services; and - 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. 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. - 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; - Research and development expenses consist primarily of compensation and related costs for research and development employees and contractors in connection with the enhancement of existing products and quality assurance activities; - General and administrative expenses consist primarily of compensation and related costs for administrative personnel, legal, accounting and other general corporate expenses; and - Amortization (recovery) 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 between the exercise price of the option and the fair market value at the time the option was issued or earned. Also included in amortization of deferred stock-based compensation is compensation expense relating to the unvested options assumed in the acquisitions of Continuity and DA. In connection with the restructuring actions, the Company has recorded a recovery of deferred stock-based compensation relating to terminated employees. We allocate common costs based on relative headcount or other relevant measures. These allocated costs include rent ================================================================================ 12 DELANO TECHNOLOGY CORPORATION - 10 Q - Quarterly Report ================================================================================ and other facility-related costs for the corporate head office, communication expenses and depreciation expenses for property and equipment. In connection with the granting of stock options and the issuance of a warrant to our employees and a consultant, we recorded deferred stock-based compensation totaling $13.7 million through March 31, 2001. 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 shareholders' equity and is being amortized by charges to operations over the vesting period of the options, consistent with the method described in FASB, Interpretation No. 28. We recorded $399,000 of stock-based compensation amortization expense during the three months ended December 31, 2001 compared to $1.0 million of stock-based compensation amortization expense during the three months ended December 31, 2000. We recorded a recovery of $1.7 million of stock-based compensation amortization expense during the nine months ended December 31, 2001 compared to $3.5 million of stock-based compensation amortization expense during the nine months ended December 31, 2000. As of December 31, 2001, we had a total of $1.9 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 $200,000 per quarter. The amortization of deferred stock-based compensation is classified as a separate component of operation expenses in our consolidated statement of operations. The Company named Vikas Kapoor as the Chief Executive Officer of the Company and certain subsidiaries of the Company effective October 5, 2001. Mr. Kapoor has served as a member of the Company's Board of Directors since July 2001. Mr. Kapoor's compensation package includes a grant of 4,230,000 Common Shares, which vest over 30 months (705,000 common shares vested upon grant and the balance vest at the rate of 117,500 common shares per month) subject to accelerated vesting in certain circumstances as set out in the Restricted Share Agreement. 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. Special charges for the three months ended December 31, 2001 include a $603,000 asset impairment charge and a $2.1 million restructuring recovery. ASSET IMPAIRMENT: During the three months ended September 30, 2001, the Company restructured its operations to reduce operating expenses. During the restructuring, it was determined that $5.8 million of capital assets and $1.2 million of other assets, including the long-term, non-interest bearing loan receivable from eGlobal of $602,000, had no future value to the Company. During the three months ended December 31, 2001, the Company recorded an additional charge of $603,000 related to the actions taken during the three months ended September 30, 2001. RESTRUCTURING CHARGE: The Company determined its restructuring charges in accordance with Emerging Issues Task Force Issue No. 94-3 ("EITF 94-3") and Staff Accounting Bulletin No. 100 ("SAB 100"). EITF 94-3 and SAB 100 require that the Company commit to an exit plan before it accrues employee termination costs and exit costs. On January 4, 2001, the Company's senior management prepared and approved a detailed exit plan that included the termination of 102 employees, closure of certain facilities and the elimination of the ASP sales model. On April 23, 2001, the Company's senior management prepared and approved a second detailed exit plan that included the additional termination of 140 employees and closure of additional facilities. On July 3, 2001, the Company's senior management prepared and approved a third detailed exit plan that included the additional termination of 183 employees, closure of additional facilities, reduction of capital assets no longer in use and other various exit costs. During the three months ended December 31, 2001, the Company, under new management, took actions to reduce the amount of restructuring liability by negotiating settlements with existing landlords of certain restructured leased premises, by renegotiating future cost commitments on the ASP model, and a decision to retain the ASP model in future operations and various other measures. As a result of these efforts, the Company recorded a $2.1 million restructuring recovery during the three months ended December 31, 2001. During the three months ended March 31, 2001, the Company incurred a restructuring charge of $6.1 million (after adjustment) as part of a plan to improve its operating results by reducing employees, by closing duplicative Company ================================================================================ 13 DELANO TECHNOLOGY CORPORATION - 10 Q - Quarterly Report ================================================================================ facilities in the United States and Canada, and by implementing other measures. This charge was part of a plan to streamline the Company's efforts to focus on achieving profitability. Subsequent to March 31, 2001, an additional $848,000 was accrued relating to a change in estimate for one of the facilities in the three months ended June 30, 2001 and an additional $683,000 was accrued relating to a change in estimate of future cost commitments for our ASP model during the three months ended September 30, 2001. During the three months ended December 31, 2001, a recovery of $1.7 million was accrued made up of $400,000 recovered in connection with a loan to a shareholder of an acquired company, $857,000 from the settlement or near settlement of certain lease obligations and a recovery of $435,000 related to the renegotiations of future cost commitments on the ASP model. After the adjustments above, the restructuring charge was comprised of $2.8 million for reductions in employee numbers, $2.1 million for facilities related costs including penalties associated with the reduction of lease commitments and future lease payments and $1.2 million related to eliminating the Company's ASP sales model which has now been reinstated as part of future operations. As of December 31, 2001, $5.0 million had been paid out on the restructuring charge. Most of the remaining $1.1 million that has not yet been paid is related to lease commitments. In connection with the restructuring actions for the three months ended March 31, 2001, the Company terminated the employment of 102 employees, consisting of sales and marketing employees, applications development employees, technical and other support employees, and administrative employees in all locations. In addition, the Company did not replace approximately 34 employees who resigned voluntarily during the three months ended March 31, 2001. At March 31, 2001, the Company had terminated all employees associated with these restructuring actions. At March 31, 2001, the Company had exited a portion of its facilities in Markham, Canada and most of its offices in the United States. The Company has entered into sublease arrangements for some of its office space. During the three months ended June 30, 2001, the Company incurred an additional restructuring charge of $3.3 million (after adjustment) as part of a plan to improve its operating results by reducing employees, by closing duplicative Company facilities in the United States, and by implementing other measures. This charge was part of a plan to streamline the Company's efforts to focus on achieving profitability. During the three months ended December 31, 2001, a recovery of $158,000 was accrued. After the adjustment above, the restructuring charge was comprised of $2.5 million for reductions in employee numbers, $571,000 for facilities-related costs including penalties associated with the reduction of lease commitments and future lease payments and $186,000 related to the termination of the Minerva joint venture in Denmark. As of December 31, 2001, all amounts had been paid out on the restructuring charge. In connection with the restructuring actions for the three months ended June 30, 2001, the Company terminated the employment of 140 employees, consisting of applications development employees, sales and marketing employees, technical and other support employees, and administrative employees in all locations. In addition, the Company did not replace approximately 39 employees who resigned voluntarily during the three months ended June 30, 2001. At June 30, 2001, the Company had terminated all employees associated with these restructuring actions. At June 30, 2001, the Company had exited its office facilities in the United States identified in the restructuring plan. During the three months ended September 30, 2001, the Company incurred an additional restructuring charge of $5.7 million (after adjustment) as part of a plan to improve its operating results by reducing employees, by closing duplicative Company facilities in the United States, Canada and Europe and by implementing other measures. This charge was part of a plan to streamline the Company's efforts to focus on achieving profitability. During the three months ended December 31, 2001, a recovery of $244,000 was accrued relating mostly to settlement or near settlement of certain lease obligations. After the adjustment above, the restructuring charge was comprised of $3.7 million for reductions in employee numbers and $2.0 million for facilities-related costs including penalties associated with the reduction of lease commitments and future lease payments. As of December 31, 2001, $4.7 million had been paid out on the restructuring charge. Most of the remaining $1.0 million relates to employee termination costs and lease commitments. In connection with the restructuring actions for the three months ended September 30, 2001, the Company terminated the employment of 183 employees, consisting primarily of applications development employees, sales and marketing employees, technical and other support employees, and administrative employees in all locations. In addition, the Company did not replace approximately 9 employees who resigned voluntarily during the three months ended September 30, 2001. At September 30, 2001, the Company had terminated all employees associated with these restructuring actions. At September 30, 2001, the Company had exited its office facilities in the United States, Canada and Europe identified in the restructuring plan. 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 ================================================================================ 14 DELANO TECHNOLOGY CORPORATION - 10 Q - Quarterly Report ================================================================================ 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. RESULTS OF OPERATIONS Three months and nine months ended December 31, 2001 compared to three months and nine months ended December 31, 2000. Revenues. Total revenues for the three months ended December 31, 2001 were $4.2 million compared to $9.3 million for the three months ended December 31, 2000. In the three months ended December 31, 2001, license revenues accounted for $2.5 million or 61.1% of total revenues. In the three months ended December 31, 2000, license revenues accounted for $8.0 million, or 86.7% of total revenues. Total revenues for the nine months ended December 31, 2001 were $11.2 million compared to $23.3 million for the nine months ended December 31, 2000. In the nine months ended December 31, 2001, license revenues accounted for $5.8 million or 52.0% of total revenues. In the nine months ended December 31, 2000, license revenues accounted for $20.4 million, or 87.5% of total revenues. Service revenues, including maintenance and services fees, accounted for $1.6 million, or 38.9% of revenues for the three months ended December 31, 2001, compared to $1.2 million or 13.3% of total revenues for the three months ended December 31, 2000. Service revenues, including maintenance and services fees, accounted for $5.4 million, or 48.0% of revenues for the nine months ended December 31, 2001, compared to $2.9 million or 12.5% of total revenues for the nine months ended December 31, 2000. Approximately 52.9% of our total revenues were generated in the United States, 13.2% were generated in Canada and 33.9% were generated elsewhere in the three months ended December 31, 2001, compared to 81.5%, 8.9% and 9.6% respectively, for the three months ended December 31, 2000. Approximately 67.0% of our total revenues were generated in the United States, 18.9% were generated in Canada and 14.1% were generated elsewhere in the nine months ended December 31, 2001, compared to 69.1%, 17.1% and 13.8% respectively, for the nine months ended December 31, 2000. Cost of revenues. Cost of license revenues was $181,000 or 4.3% of total revenues for the three months ended December 31, 2001 compared to $89,000 for the three months ended December 31, 2000 or 1.0% of total revenues. Cost of service revenues was $970,000, or 23.3% of total revenues for the three months ended December 31, 2001 compared to $1.4 million for the three months ended December 31, 2000, or 15.5% of total revenues. Cost of license revenues was $567,000 or 5.1% of total revenues for the nine months ended December 31, 2001 compared to $270,000 for the nine months ended December 31, 2000 or 1.2% of total revenues. Cost of service revenues was $3.8 million, or 34.4% of total revenues for the nine months ended December 31, 2001, compared to $3.4 million for the nine months ended December 31, 2001, or 14.6% of total revenues. We anticipate that cost of service revenues will remain relatively constant in absolute dollars. We anticipate that the cost of license revenues will be a smaller proportion of license revenues. Sales and marketing. Sales and marketing expenses decreased to $2.1 million or 50.4% of revenues for the three months ended December 31, 2001 from $13.6 million or 147.1% of revenues for the three months ended December 31, 2000. Sales and marketing expenses decreased to $11.7 million or 104.4% of revenues for the nine months ended December 31, 2001 from $35.1 million or 150.7% of revenues for the nine months ended December 31, 2000. This decrease was attributable primarily to the reduction of sales and marketing personnel and lower marketing costs due to reduced promotional activities. We anticipate that sales and marketing expenses will remain relatively constant in the next few quarters. Research and development. Research and development expenses decreased to $1.0 million or 24.2% of revenues for the three months ended December 31, 2001 from $6.1 million or 66.1% of revenues for the three months ended December 31, 2000. Research and development expenses decreased to $7.3 million or 65.0% of revenues for the nine months ended December 31, 2001 from $12.3 million or 52.7% of revenues for the nine months ended December 31, 2000. This decrease was attributable primarily to the reduction of product development and related services personnel and to decreased consulting and recruiting costs. We anticipate that research and development expenses will remain constant in absolute dollars, and will reduce as a percentage of total revenues from period to period as we have reduced research and development personnel. ================================================================================ 15 DELANO TECHNOLOGY CORPORATION - 10 Q - Quarterly Report ================================================================================ General and administrative. General and administrative expenses decreased to $670,000 or 16.1% of revenues for the three months ended December 31, 2001 from $1.4 million or 15.0% of revenues for the three months ended December 31, 2000. General and administrative expenses decreased to $2.6 million or 23.0% of revenues for the nine months ended December 31, 2001 from $3.5 million or 15.2% of revenues for the nine months ended December 31, 2000. The decrease is due primarily to the reduction of administrative personnel, decreased consulting costs and to lower facilities-related expenses necessary to support our growth. We expect that general and administrative expenses will remain constant in absolute dollars as we have reduced personnel and related costs. Amortization of goodwill and identifiable intangibles. On September 26, 2000, the Company completed its acquisition of Continuity. As a result of the acquisition, $19.4 million was allocated to goodwill, and identifiable intangibles. This amount was being amortized on a straight-line basis over a period of three years for identifiable intangibles, and five years for goodwill from October 1, 2000. On October 16, 2000, the Company completed its acquisition of DA. As a result of the acquisition, $94.2 million was allocated to goodwill and identifiable intangibles. This amount was being amortized from October 16, 2000 on a straight-line basis over a period of three years for identifiable intangibles and five years for goodwill. Specific events and changes in circumstances indicated that these long lived assets were not recoverable, as determined based on the undiscounted cash flows of the acquired business. In accordance with the Company's policy, the carrying value has been reduced to net realizable value. For the three months ended March 31, 2001, goodwill and identifiable intangibles were reduced by approximately $97.0 million. For the three months ended June 30, 2001, goodwill was reduced by a further $4.9 million. For the three months ended December 31, 2001, there is no amortization of goodwill and identifiable intangibles. Amortization of deferred stock-based compensation. We incurred a charge of $399,000 or 9.6% of revenues in the three months ended December 31, 2001 compared to a charge of $1.0 million or 10.8% of revenues for the three months ended December 31, 2000. We incurred a recovery of $1.7 million or 15.6% of revenues in the nine months ended December 31, 2001 compared to a charge of $3.5 million or 14.9% of revenues for the nine months ended December 31, 2000. The charge is 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 and the recovery is related to the unvested options of terminated employees from the restructuring actions. Interest and other income, net. Interest and other income, net for the three months ended December 31, 2001 was $35,000, compared to the three months ended December 31, 2000 at $926,000. Interest and other income, net for the nine months ended December 31, 2001 was $598,000, compared to the nine months ended December 31, 2000 at $3.9 million. Interest and other income reflects the interest earned on the cash and cash equivalents balance arising from our special warrant offering in September 1999 and our initial public offering in February 2000. The decrease in interest and other income reflects lower cash balances and lower interest rates. Provision for income taxes. A deferred tax asset of $28.5 million existed as of December 31, 2001 compared to $15.3 million at December 31, 2000. A full valuation allowance was recorded against the deferred tax asset because it is more likely than not that the asset will not be realized. A valuation allowance taken against substantially the entire 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 non-transferable nature of the deferred tax asset under certain conditions. Three and nine months ended December 31, 2000 compared to the three and nine months ended December 31,1999. Revenues. Total revenues for the three months ended December 31, 2000 were $9.3 million, compared to $2.9 million for the three months ended December 31, 1999. License revenues accounted for $8.0 million, or 86.7% of total revenues for the three months ended December 31, 2000, compared with $2.7 million or 93.8% for the three months ended December 31, 1999. Total revenues for the nine months ended December 31, 2000 were $23.3 million, compared to $5.4 million for the nine months ended December 31, 1999. License revenues accounted for $20.4 million, or 87.5% of total revenues for the nine months ended December 31, 2000, compared with $5.1 million or 94.5% for the nine months ended December 31, 1999. Service revenues, including maintenance and services fees, accounted for the remaining $1.2 million or 13.3% of total revenues for the three months ended December 31, 2000, compared with $183,000 or 6.2% for the three months ended December 31, 1999. Service revenues, including maintenance and services fees, accounted for the remaining $2.9 million or 12.5% of total revenues for the nine months ended December 31, 2000, compared with $296,000 or 5.5% for the nine ================================================================================ 16 DELANO TECHNOLOGY CORPORATION - 10 Q - Quarterly Report ================================================================================ months ended December 31, 1999. Approximately 81.5% (1999 - 61.5%) of our total revenues were generated in the United States, 8.9% (1999 - 38.5%) were generated in Canada and 9.6% (1999 - 0.0%) were generated elsewhere in the three months ended December 31, 2000. Approximately 69.1% (1999 - 68.4%) of our total revenues were generated in the United States, 17.1% (1999 - 31.3%) were generated in Canada and 13.8% (1999 - 0.3%) were generated elsewhere in the nine months ended December 31, 2000. Cost of revenues. Cost of product revenues was $89,000 for the three months ended December 31, 2000 or 1.0% of total revenues, compared with $14,000 or 0.5% for the three months ended December 31, 1999. Cost of service revenues was $1.4 million for the three months ended December 31, 2000, or 15.5% of total revenues, compared with $321,000, or 11.0% of total revenues for the three months ended December 31, 1999. Cost of product revenues was $270,000 for the nine months ended December 31, 2000 or 1.2% of total revenues, compared with $20,000 or 0.4% for the nine months ended December 31, 1999. Cost of service revenues was $3.4 million for the nine months ended December 31, 2000, or 14.6% of total revenues, compared with $701,000, or 13.1% of total revenues for the nine months ended December 31, 1999. We anticipate that cost of service revenues will increase in absolute dollars, but at a slower rate than previous quarters 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 $13.6 million for the three months ended December 31, 2000, or 147.2% of total revenues, compared with $3.4 million or 117.4% of total revenues for the three months ended December 31, 1999. Sales and marketing expenses increased to $35.1 million for the nine months ended December 31, 2000, or 150.7% of total revenues, compared with $5.5 million or 101.8% of total revenues for the nine months ended December 31, 1999. This increase was attributable primarily to the addition of sales and marketing personnel and higher marketing costs due to expanded promotional activities. Research and development. Research and development expenses increased to $6.1 million for the three months ended December 31, 2000, or 66.1% of total revenues, compared with $1.1 million, or 36.0% of total revenues for the three months ended December 31, 1999. Research and development expenses increased to $12.3 million for the nine months ended December 31, 2000, or 52.8% of total revenues, compared with $2.2 million, or 41.9% of total revenues for the nine months ended December 31, 1999. This increase was attributable primarily to the addition of product development and related services personnel and to increased consulting and recruiting costs. 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 $1.4 million, or 15.1% of total revenues for the three months ended December 31, 2000, compared to $355,000, or 12.1% of total revenues for the three months ended December 31, 1999. General and administrative expenses increased to $3.5 million, or 14.9% of total revenues for the nine months ended December 31, 2000, compared to $767,000, or 14.3% of total revenues for the nine months ended December 31, 1999. The increase is due primarily to the addition of administrative personnel, increased consulting costs and to higher facilities-related expenses necessary to support our growth. Amortization of goodwill and identifiable intangibles. On September 26, 2000, the Company completed its acquisition of Continuity. As a result of the acquisition, $19.4 million was allocated to goodwill, and identifiable intangibles. This amount is being amortized on a straight-line basis over a period of three years for identifiable intangibles, ================================================================================ 17 DELANO TECHNOLOGY CORPORATION - 10 Q - Quarterly Report ================================================================================ and five years for goodwill from October 1, 2000. For the three months and nine months ended December 31, 2000, $1.0 million (1999 - nil) of goodwill amortization was recorded. On October 16, 2000, the Company completed its acquisition of DA. As a result of the acquisition, $94.2 million was allocated to goodwill and identifiable intangibles. This amount is being amortized on a straight-line basis over a period of three years for identifiable intangibles and five years for goodwill from October 16, 2000. For the three months and nine months ended December 31, 2000, $4.1 million (1999 - nil) of goodwill amortization was recorded. Amortization of deferred stock-based compensation. We incurred a charge of $1.0 million for the three months ended December 31, 2000, compared to $451,000 for the three months ended December 31, 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. We incurred a charge of $3.5 million for the nine months ended December 31, 2000, compared to $769,000 for the nine months ended December 31, 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. In-process research and development. In connection with the acquisition of Continuity and DA, net intangibles of $429,000 were allocated to in-process research and development. The fair value allocation to in-process research and development was determined by identifying the research projects for which technical feasibility has not been achieved and which have no alternative future use at the acquisition date, assessing the stage and expected date of completion of the research and development effort at the acquisition date, and calculating the net present value of the cash flows expected to result from the successful deployment of the new technology resulting from the in-process research and development effort. The stages of completion were determined by estimating the costs and time incurred to date relative to the costs and time incurred to develop the in-process technology into a commercially viable technology or product, while considering the relative difficulty of completing various tasks and obstacles necessary to attain technological feasibility. The estimated net present value of cash flows was based on incremental future cash flows from revenues expected to be generated by the technologies in the process of development, taking into account the characteristics and applications of the technologies, the size and growth rate of existing and future markets and an evaluation of past and anticipated technology and product life cycles. Estimated net future cash flows included allocations of operating expenses and income taxes but excluded the expected completion costs of the in-process projects, and were discounted to arrive at a net present value. The discount rate included a factor that took into account the uncertainty surrounding the successful deployment of in-process technology projects. This net present value was allocated to in-process research and development based on the percentage of completion at the acquisition date. Interest and other income, net. Interest and other income, net for the three months ended December 31, 2000 was $926,000, compared to $178,000 for the three months ended December 31, 1999. Interest and other income, net for the nine months ended December 31, 2000 was $3.9 million, compared to $354,000 for the nine months ended December 31, 1999. Interest and other income, net reflects 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 $15.3 million existed as of December 31, 2000. A full valuation allowance was recorded against the deferred tax asset because 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 $23.0 million for the nine months ended December 31, 2001 and cash of $29.2 million for the nine months ended December 31, 2000. Our negative operating cash flow resulted principally from the net losses that we incurred during these periods. The Company has taken restructuring actions in January, April and July 2001 to reduce expenses. ================================================================================ 18 DELANO TECHNOLOGY CORPORATION - 10 Q - Quarterly Report ================================================================================ Our financing activities provided cash of $128,000 in the nine months ended December 31, 2001 and used cash of $831,000 in nine months ended December 31, 2000, mostly related to payments on capital leases net of receipts from issuance of common shares and warrants. Our investing activities, consisting of the purchase or sale of computer equipment, software, furniture and equipment, net of the purchase or sale of short-term investments used cash of $160,000 during the nine months ended December 31, 2001 and used cash of $1.9 million in nine months ended December 31, 2000. In March 1999, we obtained a lease line of credit from a Canadian chartered bank to purchase equipment and furniture. Approximately $89,000 was outstanding as of December 31, 2001. The ceiling on the lease line of credit is Cdn$1,000,000 (approximately $640,000). 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. In January, April and July 2001, the Company completed restructurings of its operations to reduce the cost of operating the business and expects quarterly expenses to be less than or equal to the quarter ended December 31, 2001. The Company will also have to pay out certain obligations related to these restructurings. We expect to continue to devote resources to continue our research and development efforts, our sales, support efforts, and marketing efforts. Our expenditures have increased substantially since the date of incorporation, but we anticipate that capital expenditures and quarterly expenses will decrease or stay the same in absolute dollars compared to the December 31, 2001 quarter. At December 31, 2001, we had cash and cash equivalents and short-term investments aggregating $12.6 million. We believe based on current forecasts that our current cash and cash equivalents and short-term investments are sufficient to fund our operations and pay out our obligations as a result of our restructurings 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 acquisitions, we may issue additional securities or need additional equity or debt financing and any such financing may be dilutive to existing investors. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Pursuant to recent accounting guidance to disclose significant accounting policies and business practices that are deemed to be important to the Company's financial condition, the Company has made the following disclosures: The preparation of consolidated financial statements requires Delano to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, Delano evaluates its estimates, including those related to revenue recognition, bad debts, investments, intangible assets, income taxes, restructuring, and contingencies and litigation. Delano bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Revenue recognition - 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: - persuasive evidence of an arrangement exists; - the license fee is fixed or determinable; and - collectibility of the license fee is probable. 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 typically at 18% of license revenue but not in all cases. 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 ================================================================================ 19 DELANO TECHNOLOGY CORPORATION - 10 Q - Quarterly Report ================================================================================ 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. Revenues related to installation and integration services are recognized on a time and material basis as such services are provided. Restructuring charges (recovery) - The Company determined its restructuring charges (recovery) in accordance with Emerging Issues Task Force Issue No. 94-3 ("EITF 94-3") and Staff Accounting Bulletin No. 100 ("SAB 100"). EITF 94-3 and SAB 100 require that the Company commit to an exit plan before it accrues employee termination costs and exit costs. All restructuring related charges involved estimates based on information available at the time the accrual was made. Actual results may differ from these estimates under different assumptions or conditions. RECENT ACCOUNTING PRONOUNCEMENT In October 2001, FASB issued Statement No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets", which retains the fundamental provisions of SFAS 121. Statement 144 also broadens the definition of discontinued operations to include all distinguishable components of an entity that will be eliminated from ongoing operations. SFAS 121 is effective for the Company's year commencing January 1, 2002 to be applied prospectively. The Company expects the adoption of this standard will not have a material impact on its financial position, results of operations or cash flows. ================================================================================ 20 DELANO TECHNOLOGY CORPORATION - 10 Q - Quarterly Report ================================================================================ RISK FACTORS Our future operating results may vary substantially from period to period. The price of our Common Shares will fluctuate in the future, and an investment in our Common Shares 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 herein. This Quarterly Report on Form 10-Q 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 section and elsewhere in this Quarterly Report on Form 10-Q. 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 Quarterly Report on Form 10-Q. 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: - the timing of new releases of our products; - 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; - the mix of sales channels through which our products and services are sold; - the mix of our domestic and international sales; - costs related to the customization of our products; - our ability to expand our operations, and the amount and timing of expenditures related to this expansion; - any costs or expenses related to our move to new corporate offices; and - 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 client's purchasing and budgetary cycles; - the timing of execution of large contracts that materially affect our operating results; and ================================================================================ 21 DELANO TECHNOLOGY CORPORATION - 10 Q - Quarterly Report ================================================================================ - 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. 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 December 31, 2001, we had an accumulated deficit of $206.6 million. For the nine months ended December 31, 2001, we had a net loss of $34.2 million, or 306.3% of total revenues for that period. Our revenue in recent periods has been from a limited base of clients, and we may not be able to sustain our revenue. We expect to decrease our operating expenses as part of our restructuring efforts. We may 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. OUR BUSINESS IS IMPACTED BY THE SLOWDOWN IN ECONOMIC CONDITIONS. As a result of recent unfavorable economic conditions and reduced capital spending, software licensing revenues have declined as a percentage of our total revenues. In particular, revenues were impacted during the first and second fiscal quarter of 2002. If the economic conditions in the United States worsen, or if a wider global economic slowdown occurs, we may experience a material adverse impact on our business, operating results, and financial condition. We have taken and expect to continue to take remedial measures to address the recent slowdown in the market for our products that could have long-term effects on our business. In particular, we have reduced our workforce, frozen hiring, and reduced our planned capital expenditure and expense budgets. These measures will reduce our expenses in the face of decreased revenues due to decreased customer orders. However, each of these measures and any additional measures taken in the future to contain expenditures could have long-term effects on our business by reducing our pool of technical talent, decreasing or slowing improvements in our products, and making it more difficult for us to respond to customers. WE MAY NEED TO RAISE ADDITIONAL CAPITAL TO SUSTAIN 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. We believe based on current forecasts that our current cash and cash equivalents are sufficient to fund our operations and pay out our obligations as a result of our restructurings 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. 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 sustain our business could be impeded. 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 December 31, 2001, two customers accounted for 26% and 18% of our total revenues, respectively. We expect that we will continue to be dependent upon a limited number of clients for a significant portion of our revenue in ================================================================================ 22 DELANO TECHNOLOGY CORPORATION - 10 Q - Quarterly Report ================================================================================ 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. 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 $4.2 million for the three months ended December 31, 2001, $2.6 million were derived from licenses of our products and $1.6 million 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 INTERACTION SERVER AND APPLICATIONS FOR A SUBSTANTIAL MAJORITY OF OUR REVENUES FOR THE FORESEEABLE FUTURE. In the three months ended December 31, 2001, we derived most of our revenues from licenses of our Delano Interaction Server and applications. Although we have added a new product offering, we expect to continue to derive a substantial majority of our revenues from sales of the Delano Interaction Server and applications for the foreseeable future. Implementation of our strategy depends on our products 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 our products, 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: - rapid technological change; - frequent new product introductions; - changes in customer requirements; and - evolving industry standards. Our products are designed to work on, or interoperate 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. 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 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. ================================================================================ 23 DELANO TECHNOLOGY CORPORATION - 10 Q - Quarterly Report ================================================================================ 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: - customer dissatisfaction; - cancellation of orders and license agreements; - negative publicity; - loss of revenues; - slower market acceptance; and - 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. We currently do not offer online offerings in any material way. Our competitors include companies providing software that is focused on operational and analytical CRM, such as Kana/Broadbase, e.Piphany, and Xchange Applications. We believe competition will increase as our current competitors increase the sophistication of their offerings and as new participants enter the market. 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 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 INTERACTION SERVER 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 Interaction Server. 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 BUSINESS. 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 retaining and in some cases recruiting 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 ================================================================================ 24 DELANO TECHNOLOGY CORPORATION - 10 Q - Quarterly Report ================================================================================ 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 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. FAILURE TO INTEGRATE OUR EXECUTIVE TEAM MAY INTERFERE WITH OPERATIONS. Our executive team has largely been hired in the past two years. 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. 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 entered into non-exclusive distribution agreements with various parties, including Nortel Networks, 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. We may not be able to derive significant revenues in the future from these agreements. WE HAVE COMPLETED TWO ACQUISITIONS, AND THOSE ACQUISITIONS MAY RESULT IN DISRUPTIONS TO OUR BUSINESS AND MANAGEMENT DUE TO DIFFICULTIES IN ASSIMILATING PERSONNEL AND OPERATIONS. We may not realize the benefits from the acquisitions we have completed. In September 2000, we acquired Continuity, and in October 2000, we acquired DA. In July, 2001 we completed a restructuring of our operations that resulted in a reduction of many of the employees from the acquired companies. We may not be able to successfully assimilate the remaining personnel, operations, acquired technology and products into our business. This is particularly difficult since DA's operation is located in Kansas while we are headquartered in Markham, Canada. Key personnel from the acquired companies may in the future decide that they do not want to work for us. In addition, products of these companies will have to be integrated into our products, and it is uncertain whether we may accomplish this easily or at all. These difficulties could disrupt our ongoing business, distract management and employees or increase expenses. Acquisitions are inherently risky and we may also face unexpected costs, which may adversely affect operating results in any quarter. THE ACQUISITIONS OF CONTINUITY AND DIGITAL ARCHAEOLOGY INTO OUR COMPANY COULD ADVERSELY AFFECT OUR COMBINED FINANCIAL RESULTS. If the benefits of the acquisitions of Continuity and DA into our company do not exceed the costs associated with these acquisitions, including any dilution to our stockholders resulting from the issuance of shares in connection with the acquisitions, our financial results, including earnings per share, could be adversely affected. IF WE ACQUIRE ADDITIONAL COMPANIES, PRODUCTS OR TECHNOLOGIES, WE MAY FACE RISKS SIMILAR TO THOSE FACED IN OUR OTHER ACQUISITIONS. If we are presented with appropriate opportunities, we may make other investments in complementary companies, products or technologies. We may not realize the anticipated benefits of any other acquisition or investment. If we acquire another company, we will likely face the same risks, uncertainties and disruptions as discussed above with respect to our other acquisitions. Furthermore, we may have to incur debt or issue equity securities to pay for any additional future acquisitions or investments, the issuance of which could be dilutive to our company or our existing stockholders. In addition, our profitability may suffer because of acquisition-related costs or amortization costs for acquired goodwill and other intangible assets. ================================================================================ 25 DELANO TECHNOLOGY CORPORATION - 10 Q - Quarterly Report ================================================================================ WE MAY SEEK TO GROW BY MAKING ACQUISITIONS AND WE MAY NOT BE ABLE TO SUCCESSFULLY COMPLETE ANY ACQUISITIONS WE UNDERTAKE OR INTEGRATE ANY ACQUIRED BUSINESS WITH OUR OWN. We may consider other investments in complementary companies, products or technologies. If we undertake such 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. 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 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: - laws and contractual restrictions may be insufficient to prevent misappropriation of our technology or deter others from developing similar technologies; ================================================================================ 26 DELANO TECHNOLOGY CORPORATION - 10 Q - Quarterly Report ================================================================================ - 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; - 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 - 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. 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 numbers of competitors grow 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 client's 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 client's expectations in a timely manner, we could experience: - loss of, or delay in revenues expected from the new product and an immediate and significant loss of market share; - loss of existing clients that upgrade to the new product and of new clients; ================================================================================ 27 DELANO TECHNOLOGY CORPORATION - 10 Q - Quarterly Report ================================================================================ - failure to achieve market acceptance; - diversion of development resources; - injury to our reputation; - increased service and warranty costs; - legal actions by clients against us; and - 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 Asia and, to date, have been limited. We may expand our existing international operations and establish additional facilities in other parts of Asia via our joint venture, specifically Australia, Singapore, Hong Kong, Taiwan, Malaysia, Korea, Indonesia, China, New Zealand and Thailand. We intend to increase our penetration of these markets by intensifying global activities, and allying ourselves with selected international third-party distribution companies, consulting organizations and software vendors. The expansion of our existing international operations and entry into additional international markets are key parts of our growth strategy and may require significant management attention and financial resources. In addition, to expand our international sales operations, we will need to, among other things: - expand our international sales channel management and support organizations; - develop relationships with international service providers and additional distributors and systems integrators; and - 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. ================================================================================ 28 DELANO TECHNOLOGY CORPORATION - 10 Q - Quarterly Report ================================================================================ 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: - 75% or more of our gross income is passive income, which includes interest, dividends and some types of rents and royalties; or - 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 U.S. Internal Revenue Code of 1986, as amended (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 our Annual Report on Form 10-K, 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. ================================================================================ 29 DELANO TECHNOLOGY CORPORATION - 10 Q - Quarterly Report ================================================================================ 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 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 common shares. ITEM 3: QUALITATIVE AND QUANTITATIVE MARKET RISK We develop products in Canada and sell these products in North America, Europe and Asia Pacific. Generally, our sales are made in local currency, which to date has been mostly United States 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 interest income is sensitive to changes in the general level of U.S. interest rates, particularly since the majority of our investments are in short-term instruments. Due to the nature of our short-term investments, we have concluded that there is no material market risk exposure. ================================================================================ 30 DELANO TECHNOLOGY CORPORATION - 10 Q - Quarterly Report ================================================================================ PART II: OTHER INFORMATION ITEM 1: LEGAL PROCEEDINGS During the period from August 2 to October 1, 2001, three purported securities class action lawsuits were filed against the Company in the U.S. District Court for the Southern District of New York, Shapiro, et al. v. Delano Technology Corporation, et al., Ellis Investments Ltd, et al. v. Delano Technology Corporation, et al., and Wendy and Joe Scavuzzo, et al. v. Delano Technology Corporation, et al. The complaints also name one or more of the Company's underwriters in the Company's initial public offering and certain officers and directors of the Company. The complaints allege violations of the federal securities laws regarding statements in the Company's initial public offering registration statement concerning the underwriters' activities in connection with the underwriting of the Company's Common Shares to the public. The actions seek rescission of the plaintiff's alleged purchases of Company Common Shares and other damages and costs associated with the litigation. Various plaintiffs have filed similar actions asserting virtually identical allegations against more than 100 other companies. The Company believes it has meritorious defenses to these lawsuits and will vigorously defend itself. ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS Not applicable ITEM 3: DEFAULTS UPON SENIOR SECURITIES Not applicable ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable ITEM 5: OTHER INFORMATION Not applicable ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Restricted Share Agreement by and between the Company and Vikas Kapoor, dated as of October 5, 2001 (incorporated by reference to Exhibit 99.3 to the October 31, 2001 8-K) (b) Reports on Form 8-K The Company filed a Report on Form 8-K dated October 31, 2001 announcing Vikas Kapoor as the Chief Executive Officer of the Company and certain subsidiaries of the Company. ================================================================================ 31 DELANO TECHNOLOGY CORPORATION - 10 Q - Quarterly Report ================================================================================ 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. February 13, 2002 Delano Technology Corporation /s/ Vikas Kapoor Chief Executive Officer - ------------------------------- (Principal Executive Officer) Vikas Kapoor /s/ David Garland Vice President, Finance - ------------------------------- (Principal Financial Officer David Garland And Principal Accounting Officer) ================================================================================ 32 -----END PRIVACY-ENHANCED MESSAGE-----