ITEM 1.
BUSINESS
ITEM 1A.
ITEM 1A.
RISK FACTORS
ITEM 1B.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
ITEM 2.
ITEM 2.
PROPERTIES
ITEM 3.
Item 3.
Legal Proceedings.
We are not currently involved in any material legal proceedings.
Item 4.
Item 4.
Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of our security holders during the quarter ended March 31, 2008.
PART II
Item 5.
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Hostopia common stock commenced trading on the Toronto Stock Exchange on November 10, 2006 under the symbol “H.” The following table sets forth the high and low sales prices of Hostopia common stock in Canadian dollars as reported on the Toronto Stock Exchange for the periods indicated.
High
Low
Third Quarter (ended December 31, 2007)
CDN $ 6.80
CDN $ 6.00
Fourth Quarter (ended March 31, 2007)
CDN $ 6.50
CDN $ 5.50
First Quarter (ended June 30, 2007)
CDN $ 6.75
CDN $ 5.50
Second Quarter (ended September 30, 2007)
CDN $ 6.37
CDN $ 5.76
Third Quarter (ended December 31, 2007)
CDN $ 6.20
CDN $ 5.51
Fourth Quarter (ended March, 31, 2008)
CDN $ 6.00
CDN $ 4.00
The closing price for Hostopia common stock as reported by the Toronto Stock Exchange March 31, 2008 was $4.72 (CDN$ 4.85) per share.
Holders
As of May 31, 2008, there were 34 holders of record of Hostopia common stock. This figure does not reflect persons or entities that hold their stock in nominee or “street name” through various brokerage firms
Dividend Policy
We have never declared or paid dividends on Hostopia common stock. We intend to retain our earnings for use in our business and therefore we do not anticipate declaring or paying any cash dividends in the foreseeable future.
Securities Authorized for Issuance under Equity Compensation Plans
The description of equity compensation plans required by Regulation S-K, Item 201(d) is incorporated herein by reference to Part III, Item 12 of this Form 10-K.
Performance Graph
The following graph compares the percentage change in our cumulative total stockholder return on Hostopia common stock during a period commencing on November 10, 2006, the date our shares began trading on the Toronto Stock Exchange following our initial public offering, and ending on March 31, 2008 (as measured by dividing (A) the difference between our share price at the end and the beginning of the measurement period by (B) our share price at the beginning of the measurement period) with the cumulative total return of the Toronto Stock Exchange Small Cap Index and the Toronto Stock Exchange Information Tech Index during such period.
The graph assumes that $100 was invested on November 10, 2006 in Hostopia common stock, the TSX Small Cap Index and the TSX Information Tech Index and assumes reinvestment of any dividends. We have not paid any dividends on Hostopia common stock, and we do not include dividends in the representation of our performance. The stock price performance on the graph below does not necessarily indicate future price performance.
11/11/2006
3/31/2007
3/31/2008
Hostopia.com Inc.
TSX Small Cap Index
TSX Information Tech Index
The above performance graph and related material is not “soliciting material,” is not deemed “filed” with the SEC and shall not be deemed incorporated by reference by any general statement incorporating by reference this Form 10-K into any filing under the Securities Act or the Exchange Act, except to the extent that we specifically incorporate this information by reference, and shall not otherwise be deemed filed under such acts.
Recent Sales of Unregistered Securities
None
Recent Purchases of Equity Securities
None.
Use of Proceeds from Sale of Registered Shares
On November 3, 2006, our registration statement on Form S-1 (Registration No. 333-135533), registering 4,200,000 shares of Hostopia common stock, $0.0001 par value, for sale by us was declared effective by the Securities and Exchange Commission. The net proceeds from the initial offering of $18.9 million and the underwriters’ over-allotment option of $3.1 million were initially invested in a money market fund that invests in high quality money market instruments. To March 31, 2008 we had used an estimated $6.5 million of the total net proceeds of $22.0 million to purchase property, equipment, intellectual property and customer contracts/lists.
Item 6.
Item 6. Selected Financial Data.
The following selected financial data for the fiscal years ended March 31, 2008, 2007, 2006, 2005and 2004 are derived from our financial statements which have been audited by KPMG, LLP our independent registered public accounting firms. The data should be read in conjunction with our financial statements and related notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
(2)
The Company adopted SFAS No. 123R using the modified prospective transaction method on April 1, 2006 and as such began accounting for share-based compensation under the fair value method (see Note 1 of Notes to Consolidated Financial Statements).
(3)
The Company recorded a tax recovery in fiscal 2005 when it became more likely than not it would be able to utilize its deferred tax assets and accordingly no further valuation allowance was required.
(1)
Working capital is a financial metric which represents the amount of day-to-day operating liquidity available to a business. It is calculated by deducting current liabilities from current assets.
The information contained in the tables above should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K. Results of operations for periods presented are not necessarily indicative of results of operations for future periods.
Item 7.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operation.
Safe Harbor
The following discussion and analysis contains forward-looking statements. These statements are based on our current expectations, assumptions, estimates and projections about our business and our industry, and involve known and unknown risks, uncertainties and other factors that may cause our or our industry’s results, levels of activity, performance or achievement to be materially different from any future results, levels of activity, performance or achievements expressed or implied in or contemplated by the forward-looking statements. Words such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “will,” “may,” “should,” “estimate,” “predict,” “guidance,” “potential,” “continue” or the negative of such terms or other similar expressions, identify forward-looking statements. Our actual results and the timing of events may differ significantly from those discussed in the forward-looking statements as a result of various factors, including but not limited to, those discussed in Item 1A of this Form 10-K under the caption “Risk Factors” and those discussed elsewhere in this Annual Report and in our other filings with the Securities and Exchange Commission. Hostopia.com Inc .undertakes no obligation to update any forward-looking statement to reflect events after the date of this report.
The following “Overview” section is a brief summary of the significant issues addressed in Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”). Investors should read the relevant sections of the MD&A for a complete discussion of the issues summarized below. The entire MD&A should be read in conjunction with, and is qualified in its entirety by reference to, Item 6. Selected Financial Data and Item 8 Financial Statements and Supplementary Data, including related notes there to, appearing elsewhere in this Form 10-K.
Overview
Hostopia is a provider of Web services that enable small and medium- sized businesses to establish and maintain an Internet presence. We believe we are a leading provider of such Web services based on the number and size of our customers, the number of end-user web sites that we support, the quality of our Web services, and our reputation. Our customers in the United States, Canada and the United Kingdom, which include telecommunication carriers, cable companies, Internet service providers, domain registrars and web hosting service providers furnished us with approximately 309,000 end-users as of March 31, 2008. These communication services providers purchase our Web services on a wholesale basis and resell these services under their own brands to small and medium- sized businesses. We refer to small and medium- sized businesses which use our Web services as “end-users” or “end-user businesses”. In addition we sell our Web services to small Web hosting resellers and directly to end-users. Our Web services include website creation and maintenance applications, managed e-mail with virus and spam protection, e-commerce application services, customer communications and website promotion applications, and website hosting and data transfer. Revenue derived from our Web services is recorded as web hosting and application revenue in our financial statements.
Proposed Merger
On June 19, 2008, Hostopia.com and Deluxe Corporation (NYSE:DLX) announced they had signed a definitive merger agreement, unanimously approved by the boards of both companies, pursuant to which Hostopia would become a wholly-owned subsidiary of Deluxe. If the merger is completed, holders of Hostopia common stock will receive CDN$10.55 in cash for each outstanding Hostopia common share. The transaction is valued at approximately CDN$124 million. The consummation of the merger agreement is subject to the approval by Hostopia shareholders and certain other customary conditions and is expected to close in late July or August. In respect of the merger Hostopia will be filing a Notice of Special Meeting and Information Circular with the relevant securities commission in Canada and the United States. The Information Circular will be made available to stockholders by mail and will also be available on the SEC website and at www.sedar.com. Before making any voting decision with respect to the proposed transaction the stockholders are urged to read the Information Circular and as well as other relevant materials filed with the relevant securities commissions by the Company because they contain important information about the proposed transaction.
Our revenues are primarily derived from the sale of Web services to our customers who in turn resell them to their end-user businesses. Over the past five fiscal years, our revenue growth has been primarily driven by increasing the number of our customers and their respective end-users who purchase our Web services on a recurring subscription basis. Between March 31, 2003 and March 31, 2008, our end-users grew from 65,200 to approximately 309,000, a compound average growth rate of 36.5%. During the same period our revenues increased from approximately $5.5 million to approximately
$27.8 million, a compound average growth rate of 38.0%. During the year ended March 31, 2008 our end-user base grew by approximately 49,000 or 18.8% while our revenue grew by $5.3 million or 23.5%.
We have grown our business primarily by convincing large telecommunication and cable companies that we should provide their end-users with our web services.
This strategy has been highly successful in Canada evidenced by the fact that Bell Canada, TELUS Communications Company and Rogers Cable Communications Inc. are all now our customers. We have expanded geographically into the United States and in August 2005 we entered into an agreement with Verizon Directories Corp. (subsequently acquired by Idearc Inc.) our first large U.S. telecommunications company. In fiscal 2007, we also began marketing our service in the United Kingdom and in November 2006 British Telecommunications PLC became a customer.
Our business growth is dependent primarily on two processes. First, acquiring new customers with large end-user bases and second, helping our current customers grow their web hosting businesses by providing them with marketing assistance and by providing their end-users with a suite of web services.
We track our success in two ways. First, we count the number of end-users we add through the sign-up of new customers in the latest twelve months, both large and small. Second, we track the number of end-users our customers of more than twelve months (existing customers) have added to their web hosting business.
To support the acquisition of new customers we have 8 sales personnel focused on acquiring new business in Canada, the U.S. and now the U.K. To assist them in their sales efforts, and to potentially increase our revenue per end-user, we continue to invest in developing new software for end-users. We have 16 technical professionals currently involved in product development.
When we acquire a new customer, we must migrate their end-users to our platform effectively and efficiently. This essential function is carried out by our Professional Services team presently consisting of 21 personnel.
We also recognize the need for prompt and professional service to our end-users to maintain and grow our end-user count. Accordingly we employ a customer care staff of approximately 77customer care professionals to deal promptly 24 hours a day with any questions our end-users have in respect of our service. To provide our end-users, who are often smaller businesses, with an easy method of establishing a Web presence, we have developed and continue to develop easily self-customized website templates. We currently have over 5,000 templates in our library, the majority of which were developed in the past two years.
In fiscal 2008, we continued to build the capability to provide our end-users with turnkey customized websites with a higher degree of functionality under the trade name Website Experts. As of March 31, 2008, Website Experts had developed a selling relationship with some of our larger customers that we expect to result in revenue growth from website design over the next several years. We also believe the ability to provide economic website design will prove to be a compelling feature of our services as we prospect for new customers.
In May 2007, we acquired the wireless syncing technology of Nexthaus, Inc., headquartered in North Carolina in an all cash transaction of $950,000 plus performance incentives and earn outs of up to $200,000, plus 15% of revenues from the acquired assets for 3 years.. This technology facilitates easy and efficient syncing of calendars and tasks from a mobile phone such as a Blackberry®.
In August 2007, we entered into a patent licensing agreement with j2 Global Communications, Inc. Under the agreement we received a non-exclusive worldwide license to j2 Global’s digital fax patent portfolio in exchange for an upfront payment plus ongoing quarterly royalty payments. The patent license agreement has a 10 year term, which may be renewed thereafter. We believe this agreement will allow us to successfully market a fax-to-email services to our significant communication service provider customer base. A number of our customers are testing our fax-to-mail service. We expect to launch our fax-to-email service to all our customers on July 1, 2008.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses together with disclosure of contingent assets and liabilities. We review our estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances. Actual results may differ from these estimates and estimates may differ under different assumptions or conditions. We believe the following accounting policies, described in greater detail in Note 1 to our consolidated financial statements included in this Form 10-K, to be critical to the judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
Web hosting and applications services
We recognize revenue derived from Web hosting and applications services on a monthly basis as services are performed. The majority of our revenue is derived from our customers that are invoiced the first day of the month during which our Web services will be provided to them. Set-up fees received in advance from our customers are deferred and recognized as revenue on a straight-line basis over the term of the underlying service contract commencing with the delivery of service.
We also receive a portion of our revenue directly from end-user businesses and small web hosting resellers on a monthly, quarterly, semi-annually or annual basis. We defer recognition of revenue that will be earned in a subsequent period and for which an end-user has paid in advance. The portion of web hosting and application services revenue directly received from these end-users and small web hosting resellers is recognized as deferred revenue in the accompanying consolidated balance sheets. As services are performed, we recognize this revenue on a straight line basis over the applicable service period.
Other services
As a domain name reseller, as opposed to a registrar, we recognize domain name registration revenue when we receive payment from customers and end-users since we have no obligation to maintain a domain registry following a sale. Professional service revenue is recorded based upon the extent to which all of the contracted professional services have been provided.
Allowance for Doubtful Accounts
In accordance with our revenue recognition policy, our accounts receivable are based on customers whose payment is reasonably assured. We monitor collections from our customers and maintain an allowance for estimated credit losses for 100% of all customers’ accounts deemed uncollectible. For those accounts receivable not specifically identified as uncollectible, an allowance is maintained for a specific percentage of those receivables based on aging accounts, historical collection experience and current economic expectations. Credit losses have historically been within our expectations and the provisions established in our financial statements, but we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. Because we have several large customers, a change in liquidity of any one customer or our inability to collect from one of these customers could have a material adverse effect on our consolidated financial position.
We record an allowance for estimated credit losses once a contract has been legally terminated with a customer who has ceased to pay for services. While losses from these items have historically been minimal, we cannot guarantee that we will continue to experience the same loss rates that we have in the past.
Accounting for Stock Based Compensation
On April 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payment,” (SFAS No. 123R”) which requires the measurement and recognition of compensation expense for all share-based payments made to employees and directors based on the estimated fair value of the grant on the grant date. Prior to the adoption of SFAS No. 123R, we had elected to apply the disclosure-only provision of SFAS No. 123, “Accounting for Stock-Based Compensation” as amended by SFAS No. 148 in respect of all option grants to employees or directors. Accordingly, with the exception of stock option awards made to consultants, we accounted for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board (APB) Opinion No. 25 and related interpretations. Compensation expense for stock options issued to employees was measured as the excess, if any, of the estimated fair value of Hostopia common stock at the date of grant over the stock option exercise price. As all stock options granted to employees were made with an exercise price equal to the estimated fair value of Hostopia common stock no compensation expense for employee stock options was recognized.
We have adopted SFAS No. 123R using the modified prospective transition method. Under this method prior periods are not revised; however, starting in fiscal 2007 new grants and modified grants of stock options are accounted for in accordance with the fair value method under SFAS No. 123R and awards granted in earlier fiscal years that had not vested at March 31, 2006 are accounted for in accordance with the fair value model of SFAS No. 123. Accordingly, under the modified prospective transition method we recognized stock-based compensation expense that we previously reported only in our pro-forma disclosure.
Stock-based compensation expense recognized in our Consolidated Statement of Operations for fiscal years 2008 and 2007 includes compensation expense for share-based awards granted prior to, but not yet vested as of March 31, 2006, as well as compensation expense for the share-based payment awards granted subsequent to March 31, 2006. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model. The fair value of the option grant, net of expected forfeitures, is then recognized as compensation expense using the straight-line amortization method over the graded vesting period of the options, which is generally three years. In subsequent periods, if actual forfeitures differ from our estimates the calculation of compensation expense will be adjusted to reflect the actual forfeiture experience.
Also, as now required under SFAS No. 123R, any excess income tax benefit booked when an option is exercised will be reported as a financing cash flow rather than an operating cash flow in our Condensed Consolidated Statement of Cash Flows.
See Note 9 in the Consolidated Financial Statements in this Annual Report on Form 10-K for further information regarding our stock-based compensation plans
Accounting for Goodwill, Intangible Assets and Property and Equipment
Since our inception we have fully allocated the purchase price of acquisitions to intangible assets. Other intangible assets including website templates and electronic images are amortized using the straight-line method over their estimated useful life, which has typically been three years. We test for the impairment of intangible assets annually, and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the intangible asset below its carrying amount. Similarly, we annually review the condition and revenue generating potential of our property and equipment to determine whether our amortization policies are satisfactory in the circumstances.
Accounting for Income Taxes
We provide for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be recovered or settled. A valuation allowance is recorded to reduce deferred income tax assets to an amount that in the opinion of management is more likely than not to be realized. We consider factors, such as the reversal of deferred income tax liabilities, projected future taxable income, the character of the income tax asset, tax planning strategies and other factors in the determination of the valuation allowance. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of operations in the year that includes the enactment date. As of March 31, 2008, we did not have any net operating losses or other tax attributes subject to valuation allowances.
In June 2006, the FASB issued Interpretation No. 48 “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB statement No. 109” (“FIN 48”). We adopted the provisions of FIN 48 effective April 1, 2007. Under FIN 48, we recognize the tax benefits of uncertain tax positions only where the position is “more likely than not” to be sustained, assuming examination by tax authorities. The amount to be recognized is the amount that represents the largest amount of tax benefit that is greater than 50% likely of being ultimately realized. For tax positions that are not more likely than not to be sustained upon audit, we will not recognize any portion of the benefit in its consolidated financial statements. A liability will be recognized by the Company for any benefit claimed, or expected to be claimed, in a tax return in excess of the benefit recorded in the financial statements, along with any interest and penalty (if applicable) on the excess. We will also disclose the amount of any uncertain tax positions where it is reasonably possible that the estimate of the tax benefit will change significantly in the next 12 months.
Upon adoption of FIN 48, we had no unrecognized tax benefits or liabilities and no liability in respect of either penalties or interest. Interest or penalties in respect of income taxes, if any, subsequently recognized will be recognized as an income tax expense. There is significant judgment used in determining the likelihood of the Company’s tax positions being sustained upon audit. In future periods, we will adjust any unrecognized tax benefits, as well as the related interest and penalties, in light of changing facts and circumstances. In future periods, favorable resolutions of uncertain tax positions will
be recognized as a reduction to its effective income tax rate while any unfavorable resolutions, in excess of the amount of any unrecognized tax benefit, will result in an increase in income tax expense and higher effective tax rate.
Results of Operations
The following table presents our selected consolidated statement of operations data expressed as a percentage of our total revenue for the periods indicated:
Comparison of fiscal years ended March 31, 2008 and 2007
Revenues
Total revenues increased by $5.3 million or 23.6% to $27.8 million in fiscal 2008 from $22.5 million in fiscal 2007. U.S. revenues increased by 11.5% to $13.7 million. Canadian revenues rose by 27.7% to $12.5 million while U.K. revenue rose to $1.5 million.
During fiscal 2008, the average value of the Canadian dollar appreciated by 10.3% against the U.S. dollar. If this appreciation had not occurred our revenue would have increased by $4.1 million or 18.4%.
Web hosting and application services revenue increased by $4.9 million or 23% to $26.5 million. Our revenue growth was due primarily to a 19% increase in end-users year over year and in part due to the increase in the value of the Canadian dollar. We had approximately 309,000 end-users on our system as of March 31, 2008. New customers added approximately net 46,000 end-users, representing an 18% increase over the number of end-users at the beginning of the year.
Our customer base in place at March 31, 2007 added approximately net 3,000 end-users during fiscal 2008, representing a 1% increase in the number of end-users year over year.
We currently believe we can continue to grow our revenue from existing customers as more and. more small and medium- size business, who are currently clients of our customers, establish websites. In addition we believe our business model and marketing efforts will, as they have in the past, result in us acquiring new small, medium and large customers. This combination of growth from existing customers, acquisitions of smaller website businesses and growth in our customer base is expected to allow as to grow revenues at a rate of between 20 to 24% in fiscal 2009.
Other service revenue, including domain name registration and professional services revenue, increased by $422,000 or 50% to $1.3 million from $845,000. The increase reflects a combination of revenue generated by our Website Experts division and the contribution from our acquisition of Nexthaus in May 2007. Domain name revenue declined modestly due to aggressive pricing.
Cost of Revenues
Total cost of revenues increased by $700,000 or 24% to $3.6 million in fiscal 2008 from $2.9 million in fiscal 2007.
Cost of Web hosting and application services revenues increased by $741,000 or 29% to $3.3 million in fiscal 2008 from $2.6 million in fiscal 2007. These expenses include bandwidth expense, data center costs, software license fees, hardware maintenance fees, referral payments and credit card collection fees. Bandwidth and data center costs increased by approximately $272,000 or 20% due in large part to our 19% increase in end-users as well as additional bandwidth and leased data center space acquired in anticipation of additional growth from acquired business. We did benefit from the favorable resolution of a bandwidth expense adjustment of $112,000 in the final quarter, of which $40,000 related to this fiscal year and the balance to the previous fiscal year. Software licenses fees, hardware maintenance fees and referral payments increased by approximately $465,000 or 52% due to a combination of increased software and hardware maintenance and increased referral payments due to increased revenue. Credit card collection fees increased by approximately $4,000.
We currently believe that our cost of Web hosting and application services revenue will increase in fiscal 2009 compared to fiscal 2008 in line with the expected expansion of our bandwidth requirements and storage facilities to accommodate our anticipated customer growth. We are not anticipating any significant price change in these costs and accordingly expect these costs will remain in a range of between 13% and 14% of revenues.
Cost of other services revenues declined in fiscal 2008 by 12% to $315,000 from $357,000. Other services expense includes the purchase of domain name rights that we resell to end-users. Other services expense decreased as a percentage of domain name revenue due to a change in product mix and the increase in value of the Canadian dollar.
We currently believe the cost of other services revenues will increase in absolute dollar terms in line with increases in other services revenues in 2008 and will continue to be in a range between 1% and 2% of revenues.
Operating Expenses
Total operating expenses increased by 28% to $21.9 million in fiscal 2008 compared to $17.1 million in fiscal 2007. Total operating expenses were 78.7% of total revenues in 2008 compared to 76.0% in 2007.
The 1.7% increase in operating expenses as a percentage of revenue was primarily due to a combination of factors including:
•
Increased personnel to handle our business growth,
•
Increased sales commissions related to new revenue generated during the year
•
Higher customer care costs incurred during the transition to our Miramichi call center
•
Higher amortization expenses related to the acquisition of licensed technology and customer lists,
•
Increased R&D expenses related to the development of new web services including SyncSuite® and Fax to Email, and
•
Increased public company expenses in our first full year as a public company.
Sales and Marketing
Sales and marketing expenses increased by 25% in fiscal 2008 to $6.0 million from $4.8 million in fiscal 2007. Salaries, wages and benefits including stock option benefits increased by $799,000 or 25%. Personnel count remained constant year over year. Wage increases and higher variable commission expense related to contracts signed in fiscal 2007 accounted for the increase. Trade show expenses increased by $96,000 or 27% while we continued to reduce the advertising portion of our marketing effort with a $74,000 or 88% reduction as we continue to emphasize direct customer contact. Allocated expenses including rent, office, telecommunications, travel and contracted expenses in Ukraine increased by $359,000 or 33% due to increased travel and communications. We believe a significant portion of our sales and marketing expenses to be investments in building recurring revenue that will have a greater effect on future years’ revenue than the current year.
We currently believe that sales and marketing expense will increase in absolute dollars in fiscal 2009 compared to 2008, as we continue to grow and expand our customer base and revenues. As a percentage of revenues, sales and marketing expense is expected to decline modestly from fiscal 2008 as the fixed costs related to certain marketing and sales costs are absorbed over a larger revenue base.
Research and Development
Research and development expenses increased by $771,000 or 25% to $3.8 million in fiscal 2008 from $3.1 million in fiscal 2007. Employee compensation including stock based compensation, increased by $643,000 or 27% compared to 2007. Personnel count decreased by 15% as lower cost employees were replaced with higher wage personnel. A significant portion of the wage increase is related to the Nexthaus operation that we acquired in May 2007. We added 3 professionals associated with that business to our development team. Allocated expenses including rent, office, hardware, telecommunications, travel and contracted expenses in Ukraine increased by $128,000 or 17% due to the increase in personnel. Our research and development expense was reduced by the receipt of $60,000 of refundable tax credits from Ontario in the fourth quarter of fiscal 2008.
We currently expect that research and development expenses will increase in absolute dollars in fiscal 2009 compared to fiscal 2008, as we believe continued investment in product development, particularly our wireless syncing technology associated with the Nexthaus acquisition and our Fax to Email development, is required to remain competitive and to develop applications that can maintain or increase our average revenue per customer. As a percentage of revenues, research and development is expected to modestly decline in fiscal 2009 from the 14% in fiscal 2008.
Professional Services
Professional services expenses increased by $358,000 or 21% to $2.1 million in fiscal 2008 from $1.7 million in fiscal 2007. Compensation, including stock option benefits increased by $143,000 or 14% compared to fiscal 2007. Our personnel count in this function remained stable while wage increases contributed to the increase. Allocated expenses including rent, office, telecommunications, travel and contracted expenses in Ukraine increased by $215,000 or 32% due to the increase in end-users migrated to our system.
We currently believe that professional services expenses will increase in absolute dollars in fiscal 2009 compared to 2008, as we continue to acquire and migrate new customers onto our system. However, we expect that the professional services expense ratio will decline modestly from its 8% of revenues in fiscal 2008 as our revenue base continues to grow.
Customer Care
Customer care expenses increased by 29% to $3.9 million in fiscal 2008 from $3.0 million in fiscal 2007. Compensation expense increased by $654,000 or 28%. Personnel count declined by 6, or 7% year over year although it peaked at a higher level during Q2 and Q3 as we transitioned to the Miramichi call center and the continuing increase in business activity. Allocated expenses including rent, office, telecommunications, travel and contracted expenses in Ukraine increased by $208,000 or 31% due to the increase in end-users migrated to our system and a related increase in the number of contractors in Ukraine that assist in handling our written and live chat technical support.
We currently believe that customer care expenses will increase in absolute dollars in fiscal 2009 compared to 2008, as we continue to grow our end user base through existing and new customers. We also expect customer care expenses will grow in line with end-user growth and therefore will remain in the 13% of revenue range now that the Miramichi transition has been completed.
General and Administrative
General and administrative expenses increased by $811,000 or 31% to $2.7 million in fiscal 2008 from $1.9 million in fiscal 2007. Compensation expense including stock based compensation increased by $86,000 or 7%. The number of administrative personnel remained unchanged year over year. Professional fees increased $121,000 in fiscal 2008 and public company expenses increased by $480,000 both of which were the result of Hostopia being a public company for the entire fiscal year compared to our public company status for approximately five months in fiscal 2007. Bad debt expense increased $49,000 during the year. In fiscal 2008, foreign currency expense increased by $20,000 compared to fiscal 2007. Allocated expenses including rent, office, telecommunications and travel increased by $54,000 or 29 % due to ongoing business growth.
We currently believe that general and administrative expenses will increase in absolute dollar terms in fiscal 2009 compared to 2008 as the continued growth in our business will necessitate some additional personnel to cope with the higher
volume of transactions and customers. We also anticipate increases in professional fees related to Sarbanes Oxley Act compliance and higher insurance expenses as well as higher costs, including consulting costs, associated with the implementation of a new accounting software package. Accordingly, while economies of scale will in the longer term offer some modest reduction in the ratio of general and administration expense as a percentage of revenues, it is likely, excluding the costs associated with the proposed merger with Deluxe Corporation. to remain in the 9% - 10% range in fiscal 2009.
Hostopia has incurred and will incur substantial costs in connection with the proposed merger with Deluxe Corporation in its first and second quarter. These costs are primarily associated with professional and financial advisory fees.
Amortization
Amortization expense increased by 31% to $3.4 million in fiscal 2008 from $2.6 million in fiscal 2007. The $794,000 increase was attributable to increased amortization of property and equipment ($275,000), customer lists ($40,000), templates ($118,000) and patents ($361,000).
We currently believe that our amortization expense will increase in absolute dollars in 2009 as we continue to invest in our infrastructure to support a larger end-user base. For example, just prior year end, we signed a definitive agreement to acquire the shared service end-users of Reliant Webhosting Inc. Subsequent to year end we signed two more definitive agreements to acquire the shared service end-users of Luxmovera, LLC and Tucows Inc. These acquisitions will increase the amortization expense of intangible assets in fiscal 2009 by an estimated $1.0 million. Any further acquisitions of complementary businesses would result in additional amortization expense related potentially to both tangible and intangible assets.
Interest income increased to $631,000 in fiscal 2008 from $534,000 in 2007 due to the significant increase in average short-term investments as a result of the net proceeds of approximately $22 million received from our initial public offering in November, 2006. These funds were invested for 12 months in fiscal 2008 compared to approximately 4.5 months in fiscal 2007.
We currently believe interest income will decrease in fiscal 2009 despite our continuing positive cash flow from operations because of a decline in short term interest rates and our investment in long lived assets both tangible and intangible.
Interest expense of $4,206 in fiscal 2008 compares to $16,824 in the prior year and relates to the imputed interest on the non-interest bearing note payable issued on the purchase of a customer’s web hosting business in January 2006. This note payable was fully paid in July 2007.
Income tax expense in fiscal 2008 increased by $132,000 from fiscal 2007 to $1.3 million as higher income before income taxes was offset by a small decrease in the effective tax rate. The 36.3% effective tax rate on fiscal 2008 pre-tax income was 1.4% lower than the 37.7% rate in the previous year.
We currently believe that based on our tax filings for our fiscal 2007 tax year our effective income tax rate of 36.3% in fiscal 2008 is fairly representative of our on-going tax rate in 2009. However, this expectation is subject to changes in the corporate tax rate in the U.S. or a significant expansion of our business outside of North America.
Comparison of fiscal years ended March 31, 2007 and 2006
Revenues
Total revenues increased by $4.5 million or 25.1% to $22.5 million in fiscal 2007 from $18.0 million in fiscal 2006. U.S. revenues increased by 31.5% to $12.3 million. Canadian revenues rose by 14.8% to $9.8 million while U.K. revenue rose to $0.4 million.
During fiscal 2007, the average value of the Canadian dollar appreciated by 4.8% against the U.S. dollar. If this appreciation had not occurred our revenue would have increased by $4.1 million or 22.8%.
Web hosting and application services revenue increased by $4.3 million or 25% to $21.6 million. Our revenue growth was due primarily to a 24% increase in end-users year over year. We had approximately 260,000 end-users on our system as of March 31, 2007. The end-user growth was due to a combination of new customers added in fiscal 2007 and increase in the end-users of our existing customer base. New customers added approximately 25,000 end-users, representing a 12% increase over the number of end-users at the beginning of the year. Our customer base in place at March 31, 2006 added approximately 25,000 end-users during fiscal 2007, representing a 12% increase in the number of end-users year over year.
Other service revenue, including domain name registration and professional services revenue, increased by $183,000 or 28% to $845,000 from $662,000. The primary reason for the increase was the sale of more domain names related to the acquisition of the Web business of a former customer in January 2006 and the sale of 2,500 template licenses in the final quarter of 2007.
Cost of Revenues
Total cost of revenues increased by $918,000 or 45.8% to $2.9 million in fiscal 2007 from $2.0 million in fiscal 2006.
Cost of Web hosting and application services revenues increased by $807,000 or 46% to $2.6 million in fiscal 2007 from $1.8 million in fiscal 2006. These expenses include bandwidth expense, data center costs, software license fees, hardware maintenance fees, referral payments and credit card collection fees. Bandwidth and data center costs increased by approximately $303,000 or 28% due in large part to our 24% increase in end-users as well as additional bandwidth and leased data center space acquired in anticipation of additional end-users expected from several large contracts that were signed but not implemented as of yearend. Software licenses fees, hardware maintenance fees and referral payments increased by approximately $381,000 or 75% due to a combination of increased software and hardware maintenance and increased referral payments due to increased revenue. Credit card collection fees increased by approximately $123,000 or 73% primarily
because of the acquisition of a customer’s end-users in January 2006 and the start up of a new customer in September 2007 for whom we provide billing support and directly incur the gateway account processing costs associated with the end-users.
Cost of other services revenues increased in fiscal 2007 by 45% to $357,000 from $246,000. Other services expense includes the purchase of domain name rights that we resell to end-users. Other services expense increased due in part to the 21% increase in other revenue relating to the sale of domain names to the end-users of the business we acquired from a former customer in January 2006.
Operating Expenses
Total operating expenses increased by 32.3% to $17.1 million in fiscal 2007 compared to $12.9 million in fiscal 2006. Total operating expenses were 76.0% of total revenues in 2007 compared to 71.9% in 2006.
The 4.1% increase in operating expense ratio was primarily due to a combination of factors including:
•
Increased personnel to handle new revenue opportunities that have not yet fully developed,
•
Higher amortization expenses related to the acquisition of licensed technology,
•
Increased R&D expenses related to the development of new web services and enhanced software and service offering,
•
The adoption SFAS No. 123R in respect of fair value share based compensation accounting, and
•
Increased public company expenses following our IPO.
Sales and Marketing
Sales and marketing expenses increased by 23% in fiscal 2007 to $4.8 million from $3.9 million in fiscal 2006. Salaries, wages and benefits including stock option benefits increased by $840,000 or 35%. Personnel count increased by 38% due in part to the requirement to staff inbound sales associates to handle the Web hosting business of a former customer and the hiring of our new Website Experts group that will focus on the burgeoning website design demand that we believe exists in the small business sector. Employee compensation also increased by $109,000 this year as we began expensing share-based compensation under SFAS No. 123R. Trade show expenses declined by $109,000 or 23% while advertising declined by approximately $124,000 or 60% as we decided to reallocate marketing dollars to our direct sales effort. Allocated expenses including rent, office, telecommunications, travel and contracted expenses in Ukraine increased by $270,000 or 34% as we hired sales support personnel to service our expanding customer base. We believe a significant portion of our sales and marketing expenses to be investments in building recurring revenue that will have a greater effect on the future years’ revenue than the current year.
Research and Development
Research and development expenses increased by $962,000 or 46% to $3.1 million in fiscal 2007 from $2.1 million in fiscal 2006. Employee compensation increased by $839,000 or 57% compared to 2006. Personnel count increased by 22% as we continued to invest in enhancing our product offerings and expanding our business. Employee compensation also increased by $21,000 this year as we began expensing share-based compensation under SFAS No. 123R.
Allocated expenses including rent, office, hardware, telecommunications, travel and contracted expenses in Ukraine increased by $123,000 or 20% due to the increase in personnel.
Professional Services
Professional services expenses increased by $322,000 or 23% to $1.7 million in fiscal 2007 from $1.4 million in fiscal 2006. Compensation, including stock option benefits increased by $114,000 or 12% compared to the prior year’s comparable quarter. A personnel count increase of 5 % and wage increases contributed to the increase. Employee compensation also increased by $19,000 as we began expensing share-based compensation under SFAS No. 123R. Allocated expenses including rent, office, telecommunications, travel and contracted expenses in Ukraine increased by $208,000 or 46% due to the increase in end-users migrated to our system.
Customer Care
Customer care expenses increased by 33% to $3.0 million in fiscal 2007 from $2.3 million in fiscal 2006. Compensation expense increased by $467,000 or 25%. Personnel count increased by 20 or 32% to support the increase in our end-users and prepare for anticipated increases in end-users from new customers that have not yet been migrated onto our platform. Employee compensation also increased by $18,000 this year as we began expensing share-based compensation under SFAS No. 123R. Allocated expenses including rent, office, telecommunications, travel and contracted expenses in Ukraine increased by $281,000 or 70% due to the increase in end-users migrated to our system and a related increase in the number of contractors in Ukraine that assist in handling our written and live chat technical support.
General and Administrative
General and administrative expenses increased by $456,000 or 31% to $1.9 million in fiscal 2007 from $1.5 million in fiscal 2006. Compensation expense increased by $189,000 or 19%. The number of administrative personnel remained unchanged year over year. Employee compensation also increased by $18,000 this year as we began expensing share-based compensation under SFAS No. 123R. Professional fees increased $2,000 in fiscal 2007, while bad debt expense increased by $45,000. In fiscal 2007, foreign currency expense increased by $23,000 compared to fiscal 2006. We also incurred the usual and ongoing expenses related to a public company in the amount of $152,000. We did not incur this type of expense as a private company in the previous year. Allocated expenses including rent, office, telecommunications and travel increased by $13,000 or 7 % due to ongoing business growth.
Amortization
Amortization expense increased by 45% to $2.6 million in fiscal 2007 from $1.8 million in fiscal 2006. The $805,000 increase was attributable to increased amortization of property and equipment ($385,000), customer lists ($298,000), templates ($34,000) and patents ($88,000).
Interest income increased to $534,000 in fiscal 2007 from $28,000 in 2006 due to the significant increase in average short-term investments as a result of the net proceeds of approximately $22 million received from our initial public offering in November, 2006.
Interest expense of $16,824 related to the imputed interest on the non-interest paying note payable issued on the purchase of a customer’s web hosting business in January 2006.
Income tax expense of $1.1 million in fiscal 2007 increased by $59,000 from 2006 as an increase in non deductible expenses more than offset the reduction in pre-tax income. The effective tax rate of 37.7% of pre-tax income is higher than the 34.8% in 2006 primarily due to the increase in non-deductible items.
Liquidity and Capital Resources
As of March 31, 2008, we had $26.2 million of cash and cash equivalents and $28.1 million in working capital, as compared to $27.4 million of cash and cash equivalents and $26.6 million in working capital as of March 31, 2007. Our primary source of liquidity is currently cash and cash equivalents while our cash flow from operations is expected to provide an on-going source of funding.
At March 31, 2008, we had a total of $23.6 million invested in two AAA rated money market funds. Approximately $15.5 million was invested is in a money market fund with that had an approximate 0.5% exposure to structured investment vehicles (“SIVs”).The remaining $8.1million was invested in a fund that had no exposure to SIVs. While these funds are AAA rated as these funds are not insured by the FDIC or any other agency they accordingly involve investment risk, including the possible loss of principal amount invested.
Net cash provided by operations in fiscal 2008 decreased to $2.8 million from $4.6 million in 2007. Net income and items which do not involve cash increased by $1.2 million compared to fiscal 2007 primarily as a result of $339,000 higher net income and $800,000 higher amortization expense. However changes in operating assets and liabilities used $2.2 million of cash in fiscal 2008 compared to providing $641,000 of cash in fiscal 2007. This year over year change was primarily the result of a significant increase in accounts receivable and increased tax payments/installments in both Canada and the United States in fiscal 2008. We currently expect cash flows from operations to continue to grow in fiscal 2009 as our business continues its profitable growth trend.
Net cash provided by financing activities was $1.5 million in fiscal 2008 as we received $1.5 million from employees who exercised their stock options. The $369,000 payment in respect of our long term liability related to an acquisition made in January 2006 was largely offset by the excess tax benefit booked in respect of employee stock options exercised in fiscal 2008. Other than a modest amount of cash we expect to receive from the exercise of employee stock options, we do not believe that financing activities will be a significant source or use of cash in fiscal 2009.
Net cash used in investing activities in fiscal 2008 was $5.6 million compared to $2.4 million in 2007. In fiscal 2008, we purchased $3.3 million of capital assets including approximately $616,000 for a building, furniture and fixtures and equipment to establish a customer care center in Miramichi, New Brunswick. We also invested $2.3 million on licensing of patents and purchasing web design templates and customer lists. We intend to continue investing to maintain and expand our physical and intellectual infrastructure. Accordingly, we anticipate our use of cash for property, equipment and website templates will exceed $3.0 million in fiscal 2009. This amount could increase significantly if we locate an appropriate acquisition candidate or candidates.
Based on our current commitments, plans and projected cash flows we believe that we have sufficient liquidity in the form of cash equivalents as well as cash flows from operations to finance our business growth, including sales and marketing expenses, research and development expenses and capital expenditures in both the short and longer term without the need for additional financing. Our current liquidity should also allow us to make additional investments in our application delivery platform, expand our portfolio of web service, expand further into the UK marketplace and make strategic investments of up to $20 million in complementary businesses, services, products and technologies that we determine are appropriate without the need for additional financing. Acquisitions, if any, in excess of $20 million would most likely require additional equity financing which may not be available at all or at a reasonable cost.
Contractual Obligations
The following summarizes our contractual obligations as of March 31, 2008:
Total
Less than 1 Year
1-3 Years
3-5 Years
More than 5 Years
Operating lease obligations(1)
$ 1,691
$ 764
$ 927
$ -
$ -
Bandwidth and data center purchase obligations
4,251
1,600
2,651
-
-
Patent and License obligations
Other purchase obligations
-
-
Total
$ 6,636
$ 2,490
$ 3,835
$ 169
$ 142
(1)
Our operating lease obligations consist of commitments under office space leases.
The commitment amounts set out in the preceding table are associated with agreements that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used; fixed minimum or variable price provisions; and the approximate timing of the expenditures. Obligations under contract that we can cancel without a significant penalty are not included in the preceding table. During the course of the next fiscal year we expect to negotiate renewals for bandwidth and data center utilization that could result in higher operating expenses than the amounts implied in the preceding table.
Item 7A.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.
Foreign Currency Exchange Risk
The operating results and cash flows that we generate through our revenue activities are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the relationship of the Canadian dollar to the U.S. dollar and to a significantly lesser extent U.K. pounds. We have not entered into any hedging arrangements but we review our currency exposure periodically to ensure that our revenues in non-U.S. currencies are reasonably matched by expenses in those currencies. In fiscal 2008 revenue from customers outside the United States were approximately $12.5 million in Canada and $1.5 million in the U.K. Accordingly, in fiscal 2008, a 5% decrease in the average Canadian dollar and U.K. pound exchange rate would have resulted in a $625.000 and $75,000 decrease in revenues respectively. In fiscal 2008, the average value of the Canadian dollar was $0.9688, a 10.3% increase over its value in our fiscal 2007. In fiscal 2008, the average value of a U.K. pound was $2.0084, a 6.0% increase over its value in our fiscal 2007.
Interest Rate Sensitivity
We had investments in short term bank deposits, bank certificates of deposit and money market funds amounting to $24.4 million at March 31, 2008. We currently do not have any interest bearing debt obligations. Due to the short term nature of our investments, we believe that we do not have any material exposure to changes in the fair value of our short term investments as a result of changes in interest rates. However, we estimate, based on the level of short term interest bearing investments at March 31, 2008, that on an annualized basis a 1% fluctuation in short term interest rates would raise or lower our net income by approximately $0.01 per share.
Item 8.
Item 8. Financial Statements and Supplementary Data.
Hostopia.com Inc.
Page
Report of Independent Registered Public Accountants
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Hostopia.com Inc.
We have audited the accompanying consolidated balance sheets of Hostopia.com Inc. as of March 31, 2008 and 2007, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the three-year period ended March 31, 2008. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hostopia.com Inc. as of March 31, 2008 and 2007, and the results of its operations and its cash flows for each of the years in the three-year period ended March 31, 2008, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 1(l) to the consolidated financial statements, the Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes as of April 1, 2007.
(signed) KPMG LLP
Chartered Accountants, Licensed Public Accountants
Toronto, Ontario
June 24, 2008
HOSTOPIA.COM INC.
Consolidated Balance Sheets
(Expressed in U.S. dollars)
March 31,
Assets
Current assets:
Cash and cash equivalents
$
26,199,954
$
27,367,667
Trade accounts receivable, net of allowance for doubtful accounts of $211,410 (2007 - $114,755)
2,574,356
1,320,422
Deferred tax assets (note 7)
140,000
117,000
Prepaid expense
397,807
377,242
Income taxes recoverable
1,072,257
Total current assets
30,384,374
29,182,331
Property and equipment, net of accumulated amortization of $7,287,593 (2007- $5,163,911) (note 3)
4,102,484
2,922,677
Intangible assets, net of accumulated amortization of $2,815,900 (2007 - $1,594,348) (note 4)
2,700,861
1,690,284
Deferred tax assets (note 7)
1,526,000
1,101,000
Other assets
63,972
60,997
Total assets
$
38,777,691
$
34,957,289
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
$
452,376
$
380,040
Accrued liabilities
854,871
705,229
Payroll and other taxes payable
22,496
34,956
Income taxes payable
-
269,020
Current portion of deferred lease inducements (note 11)
79,900
79,900
Deferred revenue
836,254
983,299
Current portion of long-term liabilities (note 2 (d))
-
72,000
Total current liabilities
2,245,897
2,524,444
Deferred lease inducements (note 11)
163,157
237,035
Long-term liabilities (note 2 (d))
-
292,957
Total liabilities
2,409,054
3,054,436
Stockholders’ equity:
Capital stock (note 8):
Authorized: 30,000,000 common shares, par value $0.0001
Issued and outstanding: 11,636,631 (2007:11,097,251)
common shares
217,122
217,069
Additional paid-in capital
33,312,757
31,054,703
Accumulated other comprehensive loss
(43,881)
(43,881)
Retained earnings
2,882,639
674,962
Total stockholders’ equity
36,368,637
31,902,853
Commitments, contingencies and guarantees (note 12)
Subsequent events (note 14)
Total liabilities and stockholders’ equity
$
38,777,691
$
34,957,289
See accompanying notes to consolidated financial statements.
HOSTOPIA.COM INC.
Consolidated Statements of Operations
(Expressed in U.S. dollars)
Year Ended March 31,
Revenues:
Web hosting and applications services
$
26,511,461
$
21,624,337
$
17,295,329
Other services
1,266,987
845,327
661,578
Total revenues
27,778,448
22,469,664
17,956,907
Cost of revenues:
Web hosting and application services
3,304,899
2,563,605
1,756,263
Other services
315,451
356,636
246,353
Total cost of revenues
3,620,350
2,920,241
2,002,616
Gross Profit
24,158,098
19,549,423
15,954,291
Expenses:
Sales and marketing(1)
5,956,610
4,776,483
3,898,904
Research and development(1)
3,840,198
3,069,528
2,107,626
Professional services(1)
2,073,850
1,715,568
1,393,215
Customer care(1)
3,867,920
3,005,801
2,258,511
General and administrative(1)
2,718,303
1,906,903
1,451,251
Amortization of intangible assets
1,270,682
752,076
332,242
Amortization of property and equipment
2,123,682
1,848,379
1,463,490
21,851,245
17,074,738
12,905,239
Operating income
2,306,853
2,474,685
3,049,052
Interest income
1,165,030
534,027
27,566
Interest expense
(4,206)
(16,824)
(4,566)
Income before income taxes
3,467,677
2,991,888
3,072,052
Income taxes (recovery) (note 7):
Current
1,708,000
1,632,000
455,000
Deferred
(448,000)
(504,000)
614,000
1,260,000
1,128,000
1,069,000
Net income and comprehensive income
$
2,207,677
$
1,863,888
$
2,003,052
Net income per share (note 10):
Basic
$
0.19
$
0.27
$
0.47
Diluted
0.19
0.23
0.28
Weighted average number of common shares
outstanding:
Basic
11,510,957
6,714,560
4,032,336
Diluted
11,605,476
8,237,754
6,683,836
(1) Stock-based compensation is included in
operating expenses as follows:
Sales and marketing
$
125,507
$
129,042
$
19,956
Research and development
138,975
21,095
-
Professional services
16,147
18,713
-
Customer care
19,524
17,530
-
General and administrative
86,430
17,778
-
$
386,583
$
204,158
$
19,956
See accompanying notes to consolidated financial statements.
HOSTOPIA.COM INC.
Consolidated Statements of Stockholders’ Equity
(Expressed in U.S. dollars)
See accompanying notes to consolidated financial statements.
HOSTOPIA.COM INC.
Consolidated Statements of Cash Flows
(Expressed in U.S. dollars)
Year Ended March 31,
Operating activities:
Net income
$
2,207,677
$
1,863,888
$
2,003,052
Items which do not involve cash:
Amortization
3,394,364
2,600,455
1,795,732
Stock-based compensation
386,583
204,158
19,956
Excess tax benefits from stock-based compensation
(350,000)
(48,631)
-
Non-cash interest
4,206
16,824
-
Deferred income taxes
(448,000)
(654,000)
614,000
Deferred lease inducements
(73,878)
(61,503)
63,492
Change in operating assets and liabilities:
Trade accounts receivable
(1,190,913)
254,034
(1,098,741)
Prepaid expenses
(1,047)
(106,979)
(17,821)
Other assets
-
-
(36,542)
Accounts payable
38,066
105,093
(17,259)
Accrued liabilities
88,238
192,322
108,412
Payroll taxes and other taxes payable
(17,894)
6,638
(10,535)
Income taxes payable
(991,277)
162,651
155,000
Deferred revenue
(208,871)
57,365
78,163
Net cash provided by operating activities
2,837,254
4,592,315
3,656,909
Financing activities:
Proceeds from exercise of stock options
1,486,666
130,495
-
Proceeds from exercise of warrants
-
192,000
-
Stock issuance on initial public offering, net of costs
34,858
21,951,518
-
Repayment of long-term liabilities
(369,163)
(155,506)
(38,864)
Excess tax benefits from stock-based compensation
350,000
48,631
-
Net cash from (used in) financing activities
1,502,361
22,167,138
(38,864)
Investing activities:
Acquisition of property and equipment
(3,303,489)
(1,597,341)
(2,080,937)
Acquisition of customer lists (note 2)
(809,608)
-
(151,400)
Acquisition of intellectual property (note 2 and 6)
(1,471,651)
(833,755)
(240,454)
Net cash used in investing activities
(5,584,748)
(2,431,096)
(2,472,791)
Effect of currency translation on cash balances
77,420
1,093
(4,267)
Increase in cash and cash equivalents
(1,167,713)
24,329,450
1,140,987
Cash and cash equivalents, beginning of year
27,367,667
3,038,217
1,897,230
Cash and cash equivalents, end of year
$
26,199,954
$
27,367,667
$
3,038,217
Supplemental cash flow information:
Interest paid
$
4,206
$
16,824
$
4,566
Income taxes paid
2,835,712
1,619,350
300,000
See accompanying notes to consolidated financial statements.
HOSTOPIA.COM INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
Years ended March 31, 2008, 2007 and 2006
Hostopia.com Inc. (the “Company”) was incorporated in the State of Delaware and has developed application software for web hosting and applications services, e-mail and e-commerce that is marketed to users via the Internet.
1.
Significant accounting policies:
(a)
Basis of presentation:
These consolidated financial statements include the accounts of the Company and its subsidiaries, BlueGenesis.com Corp., Internet Names for Business Inc. and Nexthaus Corporation, which are wholly owned. All intercompany accounts and transactions and balances have been eliminated.
These consolidated financial statements are stated in U.S. dollars. They have been prepared in accordance with accounting principles generally accepted in the United States of America.
(b)
Revenue recognition:
The Company’s revenue is derived from web hosting and applications services, Internet private label domain name registration and other services.
Web hosting and applications services revenue consists of fixed fees earned and recognized on a monthly basis by leasing server space and Web services to companies and individuals wishing to have a Web or e-commerce presence. Incremental fees for excess bandwidth usage or data storage are billed and recognized as revenue in the period customers utilize such services. Up-front set-up fees are deferred and recognized in income on a straight-line basis over the term of the underlying service contract.
Other services revenue consists of registration fees and other service income including professional services, revenue from template licensing and other services that is not expected to recur on a monthly basis.
Registration fees charged to end-users for domain name registration services are recognized upon registration of the domain name. End-users typically pay for domain registrations with credit cards. A provision for chargebacks from credit card carriers is included in accrued liabilities and deducted from gross registration fees. Service revenue is earned and recognized as revenue on a time and materials basis as the services are provided.
Fees that have been paid but do not yet qualify for recognition as revenue under the Company’s revenue recognition policy are presented as deferred revenue on the Company’s consolidated balance sheets.
(c)
Cash and cash equivalents:
Cash and cash equivalents include highly liquid instruments with an original maturity of less than 90 days. The carrying amount of cash equivalents is stated at cost which approximates its fair value.
(d)
Allowance for doubtful accounts:
The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make payments. The Company conducts on-going credit evaluations of its customers’ payment history and current credit worthiness. The allowance is maintained for 100% of all accounts deemed to be uncollectible and, for those receivables not specifically identified as uncollectible, an allowance is maintained for a specific per percentage of those receivables based upon the aging accounts, the Company’s historical collection experience and current economic expectations.
(e)
Property and equipment:
Property and equipment are recorded at cost less accumulated amortization. Amortization is recorded on a straight-line basis over the following estimated useful lives:
HOSTOPIA.COM INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
Years ended March 31, 2008, 2008 and 2006
1.
Significant accounting policies (continued):
Computer hardware and software
3 years
Leasehold improvements
lesser of lease term or
estimated useful life
(f)
Intangible assets:
Intangible assets are recorded at cost and are amortized on a straight-line basis over their estimated useful lives as follows:
Customer lists, customer relationships and in-place contracts
3 - 5 years
Intellectual property
3 years
(g)
Impairment of long-lived assets:
Long-lived assets, including property and equipment and intangible assets with finite lives, are amortized over their useful lives. The Company periodically reviews the useful lives and the carrying values of its long-lived assets for continued appropriateness. The Company performs an impairment assessment of long-lived assets held for use whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If the sum of the undiscounted expected future cash flows from the use and eventual disposition of the asset group is less than its carrying amount, it is considered to be impaired. An impairment loss is measured as the amount by which the carrying amount of the asset group exceeds its fair value, which is estimated as the expected future cash flows discounted at a rate commensurate with the risks associated with the recovery of the asset.
(h)
Lease inducements:
Lease inducements are deferred and amortized against rent expense on a straight-line basis over the term of the applicable lease.
(i)
Functional currency:
The U.S. dollar is the functional currency of the Company and of its subsidiaries as the majority of their revenues and non -wage expenditures are denominated in U.S. dollars. Exchange gains and losses resulting from transactions denominated in currencies other than U.S. dollars are included in the result of operations in the year in which they are incurred.
(j)
Research and development costs:
Costs related to research, design and development of software products are charged to research and development expenses as incurred. Software development costs are capitalized beginning when a product’s technological feasibility has been established, which generally occurs upon completion of a working model, and ending when a product is available for general release to customers. To date, completing a working model of the Company’s product and the general release of the product have substantially coincided. As a result, the Company has not capitalized any software development costs since such costs have not been significant.
HOSTOPIA.COM INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
Years ended March 31, 2008, 2007 and 2006
1.
Significant accounting policies (continued):
(k)
Share-based payments:
On April 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payment,” (“SFAS No. 123R”) which requires the measurement and recognition of compensation expense for all share-based payments made to employees and directors in respect of our stock option plans based on estimated fair values. SFAS No. 123R supersedes our previous accounting under Accounting Principles Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees”.
Prior to the adoption of SFAS 123R, we had elected to apply the disclosure-only provision of SFAS No. 123, “Accounting for Stock-Based Compensation” as amended by SFAS No. 148. Accordingly, in respect of stock option grants to employees we accounted for stock-based compensation using the intrinsic value method prescribed in APB 25 and related interpretations. Under APB 25, compensation expense for stock options was measured as the excess, if any, of the fair value of Hostopia common stock at the date of grant over the stock option exercise price and therefore, prior to April 1, 2006, we recognized no compensation expense for stock options issued to employees.
The table below sets out the pro forma amounts of net income per share that would have resulted in the year ended March 31, 2006 if the Company had accounted for its employee stock plans under the fair value recognition provisions of Statement 123.
Net income as reported
$
2,003,052
Cumulative dividends on redeemable,
convertible preferred shares
(114,792)
Basic and diluted net income
1,888,260
Stock-based compensation expense
(126,506)
Pro forma income
$
1,761,754
Net income per share - basic:
As reported
$
0.47
Pro forma
0.44
Net income per share - diluted:
As reported
0.28
Pro forma
0.26
Under SFAS No. 123, the estimated fair value of options for the pro forma calculation was determined using the Black-Scholes option pricing model with the following assumptions:
Risk-free rate
2.75% - 3.75%
Expected option life
7 years
Dividend yield
-
Volatility factor
75%
Weighted average grant date fair value of option granted
$ 6.40
The pro forma amount was amortized over the vesting period on a straight line basis.
HOSTOPIA.COM INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
Years ended March 31, 2008, 2007 and 2006
1.
Significant accounting policies (continued):
The risk-free interest rate was based on the currently available rate on a U.S. Treasury zero-coupon issue with a remaining term equal to the expected term of the option. The volatility of stock options was based on an average of historical volatility of a peer group of companies comparable to the Company. The expected life of the Company’s options was based on the contract term as the Company was private and it was expected the options would be held for their contracted term. The dividend yield reflected the fact that the Company has never declared or paid any cash dividends and did not anticipate paying cash dividends in the future. Under SFAS No. 123 no forfeiture rate was estimated. Rather, the expense was adjusted as forfeitures occurred.
We adopted SFAS No. 123R using the modified prospective transition method. Under the modified prospective method stock-based compensation expense recognized in our Consolidated Statement of Operations for fiscal 2008 includes compensation expense for share-based awards granted prior to, but not yet vested, as of March 31, 2006 as well as compensation expense for the share-based payment awards granted subsequent to March 31, 2006.
Under SFAS No. 123R, we estimate the fair value of each stock option grant on the date of grant using the Black-Scholes-Merton option pricing model based on assumptions in respect of: (1) the expected term of the share option, (2) the expected volatility of the stock during the expected term of the share option, (3) the dividend rate during the expected term of the share option, and (4) the risk-free rate during the expected term of the share option. We then recognize share-based compensation by amortizing the aggregate grant date fair values, less estimated forfeitures, over the vesting period on a straight-line basis. As stock-based compensation expense recognized in our Consolidated Statement of Operations for fiscal 2008 is based on awards ultimately expected to vest, the expense has been reduced for estimated forfeitures at the time of grant. We will adjust this estimate up or down to reflect actual forfeitures, and, finally the actual number of awards that vest.
Under SFAS No. 123R the benefit of tax deductions in excess of those previously recognized are recognized as additional paid in capital. Such a benefit is recognized as a financing cash flow in our Consolidated Statement of Cash Flows. Any tax deficiency is first offset against existing additional paid-in capital that resulted from previously realized excess tax benefits, with any remaining deficiency being recognized as a charge to tax expense.
See Note 9 in these Consolidated Financial Statements for further information regarding our stock-based compensation plans.
(l)
Income taxes:
The Company provides for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be recovered or settled. A valuation allowance is recorded to reduce deferred income tax assets to an amount, in the opinion of management that is more likely than not to be realized. Management considers factors, such as the reversal of deferred income tax liabilities, projected future taxable income, the character of the income tax asset, tax planning strategies and other factors in the determination of the valuation allowance. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of operations in the year that includes the enactment date.
Effective April 1, 2007, the Company implemented FASB issued Interpretation No. 48 “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB statement No. 109” (“FIN 48”). FIN 48 requires companies to recognize the tax benefits of uncertain tax positions only where the position is “more likely than not” to be sustained, assuming examination by tax authorities. The amount to be recognized is the amount that represents the largest amount of tax benefit that is greater than 50% likely of being ultimately realized. A liability is recognized for any benefit claimed, or expected to be claimed, in a tax return in excess of the benefit recorded in the financial statements, along with any interest and penalty (if applicable) on the excess. Disclosure is also required for those uncertain tax positions where it is reasonably possible that the estimate of the tax benefit will change significantly in the next 12 months. The implementation of FIN 48 had no material effect on the Company’s opening retained earnings.
(m)
Financial instruments and concentration of credit risk:
The carrying values of cash and cash equivalents, trade accounts receivable, accounts payable, accrued liabilities and payroll and other taxes payable approximate their fair values due to their short-term nature.
Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of trade accounts receivable. The Company performs periodic credit evaluations of the financial condition of its customers. Allowances are maintained for potential credit losses consistent with the credit risk of specific customers. As at March 31, 2008, three customers had a balance greater than 10% of the Company’s total accounts receivable, totaling 49%. As at March 31, 2007, three customers had a balance greater than 10% of the Company’s total accounts receivable totaling 59%.
(n)
Use of estimates:
The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the year. Significant items subject to such estimates and assumptions include the carrying amount and useful lives of property and equipment, intangible assets, valuation of allowances for accounts receivable and deferred income taxes. Actual results could differ from those estimates.
(o)
Asset retirement obligations:
The Company accounts for asset retirement obligations in accordance with FASB Statement No. 143, Accounting for Asset Retirement Obligations, which requires that the fair value of an asset retirement obligation be recorded as a liability in the period in which the Company incurs the obligation. The Company did not have any asset retirement obligations in 2008, 2007 or 2006.
(p)
Guarantees:
The Company accounts for guarantees in accordance with FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others, which requires certain disclosures of obligations under guarantees and the recognition of a liability by a guarantor at the inception of certain guarantees entered into or modified after December 31, 2002, based on the fair value of the guarantee. The Company did not provide any guarantees in 2008, 2007 or 2006.
(q)
Consolidation of variable interest entities:
The Company accounts for variable interest entities in accordance with FASB Interpretation No. 46R, Consolidation of Variable Interest Entities Revised (“FIN 46R”). FIN 46R addresses the consolidation of certain entities that are subject to control on a basis other than ownership of voting interests. The Company held no interest in any entities subject to control on a basis other than ownership of voting interests in 2008, 2007 or 2006.
(r)
Comprehensive income:
Comprehensive income includes all changes in equity (net assets) during a period from non-owner sources. During each of the years in the three-year period ended March 31, 2008, comprehensive income was equal to the net income.
(s)
Recent accounting pronouncement not yet adopted:
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 also establishes a fair value hierarchy that prioritizes information used in developing assumptions when pricing an asset or liability. SFAS No. 157 will be effective for the Company beginning in fiscal 2009. In February 2008, the FASB deferred the implementation of SFAS No. 157 for certain non-financial assets and liabilities for fiscal years beginning after November 15, 2008. The Company is assessing the potential effect that the adoption of SFAS No. 157 will have on its consolidated financial condition, results of operations or cash flows.
HOSTOPIA.COM INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
Years ended March 31, 2008, 2007 and 2006
1.
Significant accounting policies (continued):
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - including an amendment to SFAS No. 115”, (“SFAS 159”). SFAS 159 allows entities to choose, at specified election dates, to measure eligible financial assets and liabilities at fair value that are not otherwise required to be measured at fair value. If a company elects the fair value option for an eligible item, changes in that item’s fair value in subsequent reporting periods must be recognized in current earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the potential effect of SFAS 159 on its financial position and results of operations.
In December 2007, the FASB issued Statement No. 141 (revised 2007), ‘‘Business Combinations’’ (‘‘SFAS 141(R)’’), which applies to all transactions or other events in which an entity (the acquirer) obtains control of one or more businesses. SFAS 141(R) establishes principles and requirements for how the acquirer recognizes and measures in its financial statements the assets, liabilities, non-controlling interest and goodwill related to a business combination. SFAS 141(R) also establishes what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after January 1, 2009 and will affect the Company with respect to future business combinations entered into on or after January 1, 2009.
In December 2007, the FASB issued Statement No. 160, ‘‘Non-controlling Interests in Consolidated Financial Statements-an amendment of ARB No. 51’’ (‘‘SFAS 160’’), which establishes accounting and reporting standards for entities that have an outstanding non-controlling interest in one or more subsidiaries or that deconsolidate a subsidiary. A non-controlling interest is the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent. SFAS 160 is effective for the Company’s fiscal year beginning January 1, 2009 and will affect the Company with respect to future business combinations entered into on or after January 1, 2009 to the extent the Company does not acquire 100% of an entity.
2.
Asset acquisitions:
(a)
On May 2, 2007, the Company acquired certain intellectual property for cash from Nexthaus, Inc. a US-based developer of leading-edge software applications for mobile devices. The acquired software uses wireless communications to synchronize data between computers and mobile devices, such as calendar and contact updates from a desktop to a smart phone. $950,000 was paid on closing. An additional $200,000 is payable on the first anniversary of the agreement on achievement of stipulated revenue targets. In addition, 15% of certain designated revenue will be payable on a reseller basis until May 2, 2010. No accrual was made as of March 31, 2008.
(b)
On March 28, 2008, the Company completed the purchase of a customer list, customer relationships and in-place contracts in an arm’s length transaction in the amount of Cdn$478,615 (US$470,096) less an amount ascribed to a liability for providing services to acquired customers under their prepaid contracts and a 10% holdback pending completion of all aspects of the website migration. On closing, the Company paid Cdn$388,702 (US $381,783) in cash. The customer list will be amortized on a straight-line basis over its three-year estimated useful life.
Purchase price:
Customer list, customer relationships and in-place contracts
$
470,096
Liability for future services
( 45,893)
$
424,203
Consideration given:
Cash
$
381,783
Accrued liabilities
42,420
$
424,203
(c)
During fiscal 2008 the Company entered into agreements under which it acquired the right to service and bill the end-users of some of its wholesale customers for a defined period of time, generally three to five years. Under these agreements the Company made an initial upfront payment of $332,572 which was recorded as an intangible asset that is amortized over the term of the arrangement. The Company also pays a monthly commission based on the cash received from the arrangement. These monthly commission payments are expensed as incurred as a cost of revenues.
(d)
On January 31, 2006, the Company entered into an agreement to purchase a customer list, customer relationships and in-place contracts from one of its customers for $1,132,000 less $243,468 for assuming a liability for providing services to the acquired customers under their prepaid contracts. After deducting the $166,599 the vendor owed the Company at that time, the Company paid $151,400 on closing with the remaining amount owed of $570,333 to be paid out based on a payment schedule as follows: 37.5% of revenue collected from acquired customers during the first six months following closing, 25.0% of revenue collected for the following six months, and 12.5% of the revenue collected thereafter, until such time as the total payments equaled $570,333.
The non interest bearing liability of $570,533 was discounted at the rate of 5% per annum. Accordingly, the value of the customer list and the long-term liability was reduced by $28,030, being the estimated imputed interest expense over the expected two-year term of the liability. This $28,030 amount was charged to interest expense. The long-term liability under the agreement was paid off in July 2007.
The customer list is amortized on a straight-line basis over its three-year estimated useful life commencing February 1, 2006.
Purchase price:
Customer list, customer relationships and in-place contracts
$
1,103,970
Liability for future services
(243,468)
$
860,502
Consideration given:
Cash
$
151,400
Trade receivable extinguished
166,599
Long-term liability
542,503
$
860,502
3.
Property and equipment:
Cost
Accumulated
amortization
Net book value
Land and buildings
$
468,307
$
15,610
$
452,697
Computer hardware and software
9,791,366
6,518,454
3,272,912
Furniture and fixtures
641,480
426,149
215,331
Leasehold improvements
488,924
327,380
161,544
$
11,390,077
$
7,287,593
$
4,102,484
Cost
Accumulated amortization
Net book value
Computer hardware and software
$
7,088,272
$
4,576,422
$
2,511,850
Furniture and fixtures
518,931
334,983
183,948
Leasehold improvements
479,385
252,506
226,879
$
8,086,588
$
5,163,911
$
2,922,677
HOSTOPIA.COM INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
Years ended March 31, 2008, 2007 and 2006
4.
Intangible assets:
Cost
Accumulated amortization
Net book value
Customer lists, customer relationships and in-place contracts
$
2,847,476
$
1,758,690
$
1,088,786
Patents and licenses
1,724,925
537,290
1,187,635
Intellectual property
944,360
519,920
424,440
$
5,516,761
$
2,815,900
$
2,700,861
Cost
Accumulated amortization
Net book value
Customer lists, customer relationships and in-place contracts
$
2,037,868
$
1,198,039
$
839,829
Patents
661,925
88,256
573,669
Intellectual property
584,839
308,053
276,786
$
3,284,632
$
1,594,348
$
1,690,284
The weighted average amortization period for customer lists, patents and licenses, and intellectual property is 2.0 years, 2.1 years and 1.6 years respectively. The weighted average amortization period for all intangible assets is 1.8 years.
The following table shows the estimated amortization expense for each of the next five years, assuming no further additions to acquired intangible assets are made:
$
1,234,037
872,092
429,901
106,170
43,068
$
2,685,268
5.
Credit facility:
The Company has obtained a revolving demand operating line of credit of Cdn. $1,000,000, bearing interest at Canadian prime from a Canadian chartered bank. This facility is secured by a General Security Agreement on the assets of the Company and is subject to certain financial and non-financial covenants, the most significant of which include current ratio, tangible net worth and leverage ratio. There are no borrowings under this facility at March 31, 2008.
6.
Related party transactions:
The Company completed transactions, including web hosting and applications service revenue, bandwidth and telephone services, with one of its stockholders, TELUS, in the normal course of operations. The transactions have been recorded at the exchange amount, representing the amount of consideration established and agreed to by the related parties as set out below. In addition, the Company has a commitment to purchase future services from the stockholder, as described in note 13.
Effective June 1, 2007, the Company purchased the remaining templates, images and marketing software from Geeksforless.com Inc., a related party, for $232,921 (Cdn$247,000) in cash, which amount was considered to be fair value. Two directors and/or officers of the Company each owned 27.4% of Geeksforless.com. The Company completed transactions with Geeksforless.com, including outsourced services in the normal course of operations. The transactions have been recorded at the exchange amount, representing the amount of consideration established and agreed to by the parties as set out below.
HOSTOPIA.COM INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
Years ended March 31, 2008, 2007 and 2006
6.
Related party transactions (continued):
Aggregate related party transactions and balances are as follows:
Balance sheets
Accounts receivable
$
5,377
$
7,107
Accounts payable
(19,075)
125,780
Statements of operations
Web hosting and applications
services revenue
$
2,851,114
$
2,205,678
$
1,890,339
Bandwidth
696,839
733,245
592,996
Outsourced services
1,829,731
1,407,709
890,152
Telephone services
213,985
202,447
119,980
7.
Income taxes:
The provision for income taxes differs from the amount computed by applying the statutory income tax rates to net income before income taxes. The sources and tax effects of the differences are as follows:
Income before provision for
income taxes
$
3,467,677
$
2,991,888
$
3,072,052
Basic U.S. federal rate applied to income
before provision for income taxes
$
1,179,010
$
1,017,242
$
1,044,606
State taxes, net of federal benefit
79,886
48,872
44,606
Non-deductible amounts
34,083
1,802
24,259
Increase (decrease) in valuation allowance
-
-
-
Other
(32,979)
60,084
(44,363)
Total income taxes
$
1,260,000
$
1,128,000
$
1,069,000
Income tax expense attributable to income from continuing operations consists of:
Current
Deferred
Total
Year ended March 31, 2008:
U.S. federal
$
613,500
$
(299,700)
$
313,800
State and local
121,600
(41,800)
79,200
International
973,500
(106,500)
867,000
$
1,708,000
$
(448,000)
$
1,260,000
Year ended March 31, 2007:
U.S. federal
$
474,400
$
(307,035)
$
167,365
State and local
198,600
(73,965)
124,635
International
959,000
(123,000)
836,000
$
1,632,000
$
(504,000)
$
1,128,000
HOSTOPIA.COM INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
Years ended March 31, 2008, 2007 and 2006
7.
Income taxes (continued):
Current
Deferred
Total
Year ended December 31, 2006:
U.S. federal
$
408,000
$
550,578
$
958,578
State and local
47,000
63,422
110,422
International
-
-
-
$
455,000
$
614,000
$
1,069,000
Pre-tax income from foreign operations was $2,486,829, $2,656,924 and $1,877,635 for the years ended March 31, 2008, 2007 and 2006, respectively.
Significant components of the Company’s deferred tax assets are as follows:
Property and equipment
$
646,000
$
520,000
Intellectual property
706,000
426,000
Stock-based compensation
140,000
117,000
Other
174,000
155,000
Deferred tax assets
$
1,666,000
$
1,218,000
In assessing the reliability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers projected future taxable income, uncertainties related to the industry in which the Company operates and tax planning strategies in making this assessment. In order to fully realize the net deferred tax assets recognized at March 31, 2008, the Company will need to realize approximately $4,300,000 in tax expenses in excess of amounts currently expensed by the Company for accounting purposes. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the existing valuation allowances.
Upon adoption of FIN 48, the Company had no unrecognized tax benefits liability and no liability in respect of either penalties or interest.
Interest or penalties in respect of income taxes is recognized as an income tax expense. During the years ended March 31, 2008, 2007, and 2006, the Company recognized $2,391, $26,292, $272 in interest and penalties.
There is significant judgment used in determining the likelihood of the Company’s tax positions being sustained upon audit. In future the Company will adjust any unrecognized tax benefits, as well as the related interest and penalties, in light of changing facts and circumstances. In future favorable resolution of uncertain tax positions will be recognized as a reduction to its effective income tax rate while any unfavorable resolution, in excess of the amount of unrecognized tax benefit liability, will result in an increase in income tax expense and higher effective tax rate.
Hostopia and its subsidiaries have filed income tax returns in the U.S. federal jurisdiction, Florida, Canada and the province of Ontario in respect of previous fiscal period. In respect of the current fiscal period Hostopia will also be filing income tax return in North Carolina in addition to the previously cited jurisdiction. Hostopia may be subject to reassessment in all of these jurisdictions, with the exception of North Carolina, for years beginning in 2000. The Internal Revenue Service contacted the Company in March 2008 and indicated it intends to commence an audit of the Company’s year ended March 31, 2007.
HOSTOPIA.COM INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
8.
Capital stock:
All common share amounts have been restated to give effect to the one-for-five share consolidation approved at a special stockholders’ meeting held on May 18, 2006.
Authorized:
30,000,000 common shares, par value $0.0001
Issued:
11,636,631 common shares; (2007: 11,097,251 common shares)
$
217,122
$
217,069
(a)
On November 10, 2006, the Company completed its initial public offering (“IPO”) in which it sold 4,200,000 common shares at a price of $5.30 (Cdn$6.00) per share. A total of $22,283,137 (Cdn$25,200,000) in gross proceeds was raised in the IPO. After deducting the underwriters’ commission and offering expenses of $3,422,680, net proceeds of the IPO were $18,860,457. All 2,127,658 outstanding shares of the Company’s Series A redeemable, convertible preferred shares were converted into shares of common stock, on a one-for-one basis, at the closing of the IPO with a par value of $212.77.
On December 7, 2006, the underwriters exercised their option to purchase an additional 15% of the common shares issued in the IPO or 630,000 shares at a price of Cdn$6.00 per share. A total of $3,091,352 (Cdn$3,553,200) was raised after deducting the underwriters’ commission.
(b)
On December 21, 2006, the Company issued 60,000 common shares pursuant to the exercise of warrants for proceeds of $192,000.
(c)
During the year ended March 31, 2007, the Company issued 47,257 common shares pursuant to the exercise of stock options for proceeds of $130,495.
(d)
During the year ended March 31, 2008, the Company issued 539,380 common shares pursuant to the exercise of stock options for proceeds of $1,486,666.
9.
Share-based payments and related stock option plans:
2000 Stock Option Plan:
All common share amounts have been restated to give effect to the one-for-five share on May 18, 2006. Under the terms of the Company’s 2000 Stock Option Plan the Board of Directors of the Company were able to grant options to its employees, non-employees and officers for up to 900,000 common shares. The exercise price of each option equaled a price that was not less than the price of the Company’s stock on the date of grant and an option’s maximum term was seven years. Options vested over a three-year period from the date of grant.
2006 Stock Option Plan
On June 26, 2006, the Company’s Board of Directors approved, for presentation to the shareholders, the termination and replacement of the Company’s 2000 Stock Option Plan with the 2006 Stock Option Plan. At the Company’s Annual General Meeting the shareholders approved the 2006 Stock Option Plan and the termination of the 2000 Stock Option Plan. Under the terms of the 2006 Stock Option Plan, the Company is permitted to issue stock options and stock appreciation rights to eligible participants for up to 10% of the total outstanding shares of common stock. The exercise price of each option must equal a price that is not less than the five day volume weighted price of the Company’s stock on the date of grant. The maximum contract term of an option is seven years. Options vest on a graded basis over a three year period from the date of grant.
At March 31, 2008 a total of 1,163,663 common shares were reserved for issuance under the 2000 and 2006 Stock Option Plans.
During the current fiscal year, the Company granted 312,500 options on June 8, 2007, and 50,000 options on February 22, 2008 with exercise prices of $5.87 and $5.34 respectively, being the fair value of the common shares on those dates.
HOSTOPIA.COM INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
Years ended March 31, 2008, 2007 and 2006
9.
Share-based payments and related stock option plans (continued):
The estimated fair value of option on the grant days were determined using the Black-Scholes-Merton option pricing model based on the following assumptions:
Risk-free rate
2.90-4.54%
4.65% - 4.77%
2.75% - 3.75%
Expected option life
5 years
5 years
7 years
Dividend yields
Nil
Nil
Nil
Volatility factor
55%
67%
75%
Weighted average grant date fair value of option granted
$3.01
$4.01
$6.40
The risk-free interest rate was based on the currently available rate on U.S. Treasury zero-coupon bonds with a remaining term equal to the expected term of the option. The expected volatility of stock options was based on the average volatility of a group of peer companies because of to the short term nature of the Company’s historical data. The expected life of the Company’s options was based on the “simplified method” as provided for by the SEC Staff Accounting Bulletin SAB 110 for companies with limited historical exercise experience. Under the “simplified method” the expected term is equal to the mean of the vesting term and the term to expiry. The dividend yield reflects the fact that the Company has never declared or paid any cash dividends and does not currently anticipate paying cash dividends in the future.
The total compensation expense related to all share-based compensation plans was $386,583, $204,158 and $19,956 for the years ended March 31, 2008, 2007 and 2006, respectively. The income tax benefit related to share-based compensation was $93,678, $10,305 and nil for the years ended March 31, 2008, 2007 and 2006, respectively. Excess tax benefits of $350,000 related to the exercise of options in fiscal 2008 was booked to additional paid in capital and recognized as cash flow from financing.
As of March 31, 2008, there was $799,614 of total unrecognized compensation cost related to unvested option awards. This cost is expected to be recognized over a weighted-average period of 2.1 years.
In fiscal 2008, the intrinsic value of the 539,380 stock options exercised was $1,496,237 and cash received on exercise totaled $1,486,666. In fiscal 2007 the intrinsic value of the 47,257 stock options exercised was $129,236 and cash received on exercise totaled $130,495. No options were exercised in fiscal 2006. It is our policy to issue new shares from treasury to satisfy share option exercises.
HOSTOPIA.COM INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
Years ended March 31, 2008, 2007 and 2006
9.
Share-based payments and related stock option plans (continued):
The following table summarizes the stock option activity in fiscal, 2008, 2007 and 2006.
Number of common shares under stock option plan
Weighted average exercise price per share
Weighted average term to maturity
Total intrinsic value
Outstanding, March 31, 2005
818,400
$
3.15
Granted
58,040
8.87
Forfeited
(37,160)
5.25
Outstanding, March 31, 2006
839,280
3.45
Granted
42,500
6.71
Exercised
(47,257)
2.76
Forfeited
(24,203)
6.12
Outstanding, March 31, 2007
810,320
3.58
Granted
362,500
5.80
Exercised
(539,380)
2.76
Forfeited
(39,750)
6.05
Outstanding, March 31, 2008
593,690
$
5.52
4.9
$
201,426
Exercisable, March 31, 2008
208,340
$
4.75
2.5
$
201,426
The following table summarizes the options outstanding and vested by range of exercise price as at March 31, 2008.
HOSTOPIA.COM INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
Years ended March 31, 2008, 2007 and 2006
10.
Net income per share:
The following table sets forth the computation of net income per share:
Basic and diluted net income per share:
Diluted net income attributable to common stockholders
$
2,207,677
$
1,863,888
$
2,003,052
Cumulative dividends on redeemable, convertible
preferred shares
-
(71,034)
(114,792)
Basic net income attributable to common stockholders
$
2,207,677
$
1,792,854
$
1,888,260
Basic net income per share
$
0.19
$
0.27
$
0.47
Diluted net income per share
$
0.19
$
0.23
$
0.28
Weighted average number of shares outstanding:
Basic
11,510,597
6,714,560
4,032,336
Effect of dilutive securities:
Series A redeemable, convertible
preferred shares
-
1,299,912
2,127,658
Stock options
94,519
205,889
487,993
Warrants
-
17,393
35,849
Diluted
11,605,476
8,237,754
6,683,836
During 2008, 2007 and 2006, the calculation did not include 454,230, 117,295 and 32,560 options, respectively, as the effect would have been anti-dilutive.
Concurrent with the Company’s Initial Public Offering on November 10, 2006, the Series A preferred shares were converted into common shares on a one for one basis.
11.
Deferred lease inducements:
In 2006, the Company entered into a long-term lease agreement for office space that included certain lease inducements. These inducements included leasehold improvements funded by the lessor in the amount of $180,000 and a rent-free period of six months.
HOSTOPIA.COM INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
Years ended March 31, 2008, 2007 and 2006
12.
Commitments and contingencies:
The Company is committed to payments under operating leases for its premises through August 2012 and certain minimum payments with respect to its lease of data centre space, the purchase of bandwidth and certain revenue contracts. Annual payments for the fiscal years ending March 31 are as follows:
$
2,490,000
2,187,000
1,482,000
167,000
60,000
54,000
$
6,440,000
Rent expense recorded in 2008 was $664,577 (2007 - $529,430; 2006 - $487,782).
In the ordinary course of business, and included in the above commitment schedule, the Company has entered into an agreement with one of its stockholders to acquire bandwidth and data centre services from December 2007 to November 2010. The remaining aggregate minimum payment obligation amounts to Cdn$1,902,696.
In the normal course of its operations, the Company may be subject to litigation and claims from time to time. Management believes that adequate provisions have been recorded in the accounts where required. Although it is not possible to estimate the extent of potential costs, if any, management believes that the ultimate resolution of such contingencies would not have a material adverse effect on the Company’s results of operations, financial position or on its liquidity.
13.
Enterprise wide information:
The Company operates in a single reportable operating segment, that is, the development of application software for web hosting and applications services, e-mail and e-commerce that is marketed to users via the Internet. The single reportable operating segment primarily derives its revenue from the provision of web hosting and applications services, domain name registrations and services. As at March 31, 2008, 14% (2007 - 11%; 2006 - 35%) of all assets related to the Company’s operations were located in Canada and the remainder located in the U.S. As at March 31, 2008, 65% (2007 - 69%; 2006 - 70%) of all long-lived assets related to the Company’s operations were located in Canada and the remainder located in the U.S. Revenue attributable to geographic location is based on the location of the customer and was as follows:
Canada
$
12,520,938
$
9,804,969
$
8,534,493
United States
13,711,909
12,296,483
9,348,410
United Kingdom
1,545,601
368,212
74,004
$
27,778,448
$
22,469,664
$
17,596,907
For the year ended March 31, 2008, revenue greater than 10% was derived from one customer in the amount of $3,654,721.
HOSTOPIA.COM INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
Years ended March 31, 2008, 2007 and 2006
14.
Subsequent events:
1)
On April 25, 2008, the Company entered into an agreement to acquire the webhosting business, including the customer list operating under the brand name uplinkearth from Luxmovera, LLC. The Company paid a deposit of $300,006. The acquisition is expected to close on June 30, 2008. Additional payments on closing and following account migration are expected to total approximately $1.2 million.
2)
On May 5, 2008, the Company entered into an agreement to acquire certain shared hosting customer assets, including 14,000 Domain Direct, NetIdentity and ItsYourDomain (IYD) customer accounts from Tucows Inc. The Company paid $320,000 on May 5 and an additional amount of $1,133,615 on May 16. The amount paid is subject to a purchase price adjustment following the completion of the account migration.
3)
On June 19, 2008, Hostopia.com and Deluxe Corporation (NYSE:DLX) announced they had signed a definitive merger agreement, unanimously approved by the boards of both companies, pursuant to which Hostopia would become a wholly-owned subsidiary of Deluxe. If the merger is completed, holders of Hostopia common stock will receive CDN$10.55 in cash for each outstanding Hostopia common share. The transaction is valued at approximately CDN$124 million. The consummation of the merger agreement is subject to the approval by Hostopia shareholders and certain other customary conditions and is expected to close in late July or August.
15.
Supplementary information:
Balance at beginning of year
Charged to (recovered) costs and expenses
Write-offs during year
Balance at end of year
Allowance for doubtful accounts
$
114,755
$
129,020
$
(32,365)
$
211,410
48,650
72,105
(6,000)
114,755
54,316
27,848
(33,514)
48,650
Quarterly Results of Operations
The following table sets forth the selected unaudited quarterly consolidated statements of operations data for the eight quarters ended March 31, 2008. The information for each of these quarters has been prepared on the same basis as the audited consolidated financial statements included in this form 10-K and, in the opinion of management, includes all adjustments necessary for the fair presentation of the results of operations for such periods. This data should be read in conjunction with the audited consolidated financial statements and the related notes included in this form 10-K. These quarterly operating results are not necessarily indicative of our operating results for any future period.
Item 9.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not Applicable
Item 9A.
Item 9A.
Controls and Procedures.
Evaluation of disclosure controls and procedures.
Based on their evaluation as of March 31, 2008, our Chief Executive Officer and Chief Financial Officer, have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective to ensure that the information required to be disclosed by us in this Annual Report on Form 10-K was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
Evaluation of internal controls over financial reporting
Our management, under the supervision of our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act. Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of our consolidated financial statements for external purposes in accordance with generally accepted accounting principles. Our Chief Executive Officer and Chief Financial Officer assessed the effectiveness of our internal control over financial reporting as of March 31, 2008. In making this assessment, they used the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on this assessment, our Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2008, our internal control over financial reporting is effective based on those criteria. Notwithstanding the foregoing, all internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective may not prevent or detect misstatements and can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
This annual report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report.
Changes in internal controls.
There were no changes in our internal controls over financial reporting during the year ended March 31, 2008 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Limitations on the effectiveness of controls.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, a control can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, a control may become inadequate because of changes in conditions or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Item 9B.
Item 9B.
Other Information.
Not applicable.
PART III
Item 10.
Item 10.
Directors and Executive Officers of the Registrant.
The table and information that follow set forth the names, ages and positions of our directors and executive officers as at May 31, 2008:
Name and Municipality of Residence
Age
Current Position
Principal Occupation
Director Since
Colin Campbell
Fort Lauderdale, Florida, USA
Chief Executive Officer and Director
Chief Executive Officer of Hostopia.com
December 10, 1999
William Campbell
Toronto, Ontario, Canada
President and Director
President of Hostopia.com
December 10, 1999
Peter Kostandenou
Toronto, Ontario, Canada
Chief Operating Officer
Chief Operating Officer of Hostopia.com
Michael Mugan
Pickering, Ontario, Canada
Chief Financial Officer
Chief Financial Officer of Hostopia.com
n/a
Paul D. Engels
North York, Ontario, Canada
Executive Vice President, Chief Marketing Officer
Executive Vice President and Chief Marketing Officer of Hostopia.com
n/a
Dirk Bhagat
Toronto, Ontario, Canada
Chief Technology Officer
Chief Technology Officer of Hostopia.com
n/a
Michael Cytrynbaum(2)(3)
West Vancouver, British Columbia, Canada
Director
President of First Fiscal Management Ltd.
August 14, 2003
Mathew George(1)
Vancouver, British Columbia, Canada
Director
Vice President of TELUS Ventures (a division of TELUS Corporation)
December 27, 2001
Robert Kidd(1)(3)
Mississauga, Ontario, Canada
Director
President of Location Research Company of Canada Limited
May 15, 2000
Christopher Scatliff(1)(2)(3)
Oakville, Ontario, Canada
Director
Chief Executive Officer of KORE Wireless Group Inc.
May 15, 2000
Randall Bast(2)
Fort Lauderdale, Florida, USA
Director
Managing Partner of 20/20 Capital Partners
September 6, 2007
(1)
Member of Audit Committee.
(2)
Member of Compensation Committee
(3)
Member of Nominating and Corporate Governance Committee.
Our directors hold office until the next annual meeting of the stockholders and the election and qualification of their successors, or until their resignation or removal. Officers are appointed by the board of directors and serve at the discretion of the board.
The Company has a separately-designated audit committee. The audit committee currently consists of Messrs. Kidd (chairman), George and Scatliff, each of whom is an independent director under the Canadian Securities Administrator’s (“CSA”) and NASDAQ Stock Market Inc.’s qualification standards. Our board of directors has determined that Mr. Kidd qualifies as an “audit committee financial expert,” as defined by the CSA and SEC rules and regulations.
We have adopted a written code of ethics that applies to our senior officers including our principal executive officer, principal financial officer and principal accounting officer, or persons performing similar functions. The code of ethics is posted on our website at www.hostopia.com. The code of ethics for senior officers may be found as follows:
1.
From our website home page left clicking on “Investors” on the tool bar at the top of the page,
2.
Next, left click on “Corporate Governance” on the drop down menu, and
3.
Finally, left click on “Senior Officers - Code of Ethics” located on the Corporate Governance web page.
Amendments to, and waivers from, the code of ethics that applies to any of these officers, or persons performing similar functions, and that relates to any element of the code of ethics definition enumerated in Item 406(b) of Regulation S-K, will be disclosed at the website address provided above and, to the extent required by applicable regulations, on a Current Report on Form 8-K.
The Company does not have a formal policy regarding the attendance of its directors at annual or special meetings of stockholders, but the Company encourages directors to attend such meetings. Five independent directors attended our last annual general meeting of shareholders held on September 6, 2007.
Executive Officers
The following is a description of the business background of the executive officers of Hostopia.com:
Colin Campbell, our Chief Executive Officer, has served in that capacity since April 2006. In addition, he was our Chief Operating Officer from April 2006 to February 2008. He was Chief Operating Officer from January 2001 to November 2005. He was President and Chief Operating Officer from November 2005 to April 2006. From November 1999 to December 2000, Mr. Campbell held the position of Senior Vice President, Internet Services at Look Communications Inc., a communications service provider, where he was responsible for leading the Internet team, guiding Internet product and services development, and for mergers and acquisitions in that product area. Mr. Campbell was a founding member of the Canadian Internet Registration Authority and served as a board member from June 2001 to January 2003. Mr. Campbell was Chief Operating Officer of TUCOWS Interactive Inc., a web services and online software delivery services provider, from 1997 to 1999 and was Chief Operating Officer of Internet Direct, an Internet service provider which later merged with I.D. Internet Direct Inc., an Internet service provider from 1994 to 1999. Mr. Campbell has a Bachelor of Arts in Commerce from the University of Toronto.
William Campbell has served as our President since April 2006. Mr. Campbell was our Chief Executive Officer from August 2001 until April 2006, and was Chief Technology Officer from August 2001 until June 2005. Mr. Campbell held the position of Chief Technology Officer in TUCOWS Interactive Inc., a web services and online software delivery services provider, from 1997 to 1999 and the position of Chief Technology Officer in Internet Direct, an Internet service provider which later merged with I.D. Internet Direct Inc., an Internet service provider from 1994 to 1999. Mr. Campbell has a diploma from Control Data Institute.
Peter Kostandenou has served as our Chief Operating Officer since February 2008. Mr. Kostandenou was our Vice President of Customer Care from December 2006 and was Director of Customer Care from November 2005 to December 2006. From June 2003 until November 2005, he was a private investor. During the time period September 2000 until June 2003, he founded and was president of 1567550 Ontario Inc. (o/a OpenBox Liquidations). Prior to that, he was the Senior Customer Care Manager for Enbridge, a large Canadian public company utility. Mr. Kostandenou holds a Bachelor of Arts from York University, and is currently enrolled in the MBA program through the Edinburgh Business School.
Michael Mugan has served as our Chief Financial Officer since May 2000. Mr. Mugan has extensive experience with public companies in several sectors of the economy. Mr. Mugan was with a predecessor firm of KPMG LLP, an accounting firm, from 1972 to 1981. He obtained his Chartered Accountant’s degree in 1974 and progressed to Senior Manager. In 1981, he joined the Resource Group of George Weston Limited, a food processing and distribution company and became Vice President, Finance of that Group in 1985. In 1998, he formed a consulting business involved in various assignments within the high technology and agribusiness industries. After completing an initial assignment with us early in 2000, he joined Hostopia.com and took on the responsibilities of Chief Financial Officer. Mr. Mugan has a Bachelor of Commerce (Honours) Degree from the University of Windsor.
Paul D. Engels has served as our Executive Vice President and Chief Marketing Officer since November 2005. Mr. Engels was also our Vice President, Marketing and Sales from January 2004 to November 2005 and Vice President, Marketing and Business Development from January 2002 to January 2004. Mr. Engels has a 20-year background in senior sales, marketing and product management roles in leading technology and Internet related businesses. He served as Director, Software Products at Pitney Bowes of Canada Ltd., a business services company, from 1990 to 1992, as Vice President, Marketing at Internet Direct /Look from 1998 to 2000, and as Vice President Marketing, Enterprise Solutions at Sprint
Canada, a telecommunications services provider, from 2000 to 2001. Mr. Engels has a Bachelor of Arts (Honours, Joint Specialist in Political Economy) from the University of Toronto.
Dirk Bhagat joined Hostopia.com in April 2000 and has served as our Chief Technology Officer since June 2005. Mr. Bhagat was also our Vice President of Research and Development from November 2003 to June 2005. Prior to this, Mr. Bhagat served as Director of Technology from February 2002 to November 2003. Mr. Bhagat has extensive experience in systems and software development and engineering, including public-key encryption infrastructure, computational complexity theory and Internet security. Mr. Bhagat has a Bachelor of Science in Software Engineering from the University of Toronto.
Non-Executive Directors
Michael Cytrynbaum is President of First Fiscal Management Ltd. a private consulting company specializing in financial reorganizations, mergers and acquisitions, strategic planning and negotiation. Mr. Cytrynbaum also serves as chairman of Look Communications Inc., a communications service provider and Ignition Point Technologies Corp., a broadband communication provider, both publicly traded companies. In addition, he is a director of two junior resource companies, Callinan Mines Limited and Central Minera Corp., as well as being a director of Peer 1 Network Enterprises, Inc., a provider of high-performance Internet bandwidth. Mr. Cytrynbaum was a founding director of Microcell Telecommunications Inc. and remained on the board of that company for ten years. Mr. Cytrynbaum has a Bachelor of Arts and a Bachelor of Common Law from McGill University.
Mathew George is Vice President of TELUS Ventures, the strategic venture investment arm of TELUS Corporation. TELUS Ventures manages a venture capital fund that invests in emerging U.S. and Canadian technology companies. Mr. George joined Telus Ventures in June 2001 from the Abu Dhabi Investment Authority where he worked from 1999 to 2001 and was responsible for the global co investment and direct private equity investment activities of Abu Dhabi Investment Authority’s Private Equity group. Mr. George has also worked in the Mergers & Acquisitions Group at Warburg Dillon Read from 1996 to 1998 and Barclays de Zoete Wedd from 1995 to 1996, both in London and New York. In addition to serving on our board, Mr. George is a director of Apparent Networks, Inc., Vision Critical Communications Inc. and the Arts Club Theatre Company. Mr. George is a Chartered Financial Analyst and a member of the Chartered Financial Analysts Institute and the Vancouver Society of Financial Analysts. Mr. George holds a Masters of Business Management from the Ecole des Hautes Etudes Commerciales in Paris, with specialization in Analytical Finance from the University of Chicago’s Graduate School of Business. His Bachelor of Technology (Honours) degree in Electrical & Electronics Engineering is from the Regional Engineering College in Calicut, India.
Robert H. Kidd is Vice Chairman of Appleby College Foundation and was until its sale in January 2008 a director of Genesis Microchip Inc.. Mr. Kidd is President of Location Research Company of Canada Limited. Mr. Kidd served as Chief Financial Officer of Technology Convergence Inc. from 2000 to 2002, of Lions Gate Entertainment Corp. from 1997 to 1998, and of InContext Systems Inc. from 1995 to 1996. He served as Senior Vice President, Chief Financial Officer and director of George Weston Limited from 1981 to 1995, as a partner of a predecessor firm of KPMG LLP, from 1973 to 1981 and as a Lecturer in Finance, Faculty of Management Studies, University of Toronto, from 1971 to 1981. Mr. Kidd has served on several professional committees, including the Toronto Stock Exchange Investors & Issuers Advisory Committee from 1993 to 1998, the Canadian Institute of Chartered Accountants Emerging Issues Committee from 1992 to 1997 and the Canadian Securities Administrators Committee on Conflicts of Interest in Underwriting from 1994 to 1996. Mr. Kidd has a Bachelor of Commerce from the University of Toronto and a Masters of Business Administration from York University. Mr. Kidd is a Fellow of the Institute of Chartered Accountants of Ontario.
Christopher Scatliff is founder and Chief Executive Officer of KORE Wireless Group Inc., a Virginia based mobile virtual network operator specializing in machine-to-machine wireless communications. From 2000 to 2001 he was Executive Vice President of Itemus Inc. From 1996 until 2000, he was President and Chief Executive Officer of UUNET Canada (now MCI Canada). Mr. Scatliff was also a member of UUNET’s International Management Board from 1998 to 2000 with executive responsibility for Latin America. Mr. Scatliff served on the Canadian Government Ministerial Advisory Group for the 1998 OECD Conference in Ottawa. Previously, Mr. Scatliff was Vice President and Managing Director from 1993 to 1996 for Europe, Middle East, and Africa for Computer Sciences Corporation based in London, England. He has a Bachelor of Science degree in Physics from the University of Manitoba.
Randall Bast was elected a director of Hostopia.com in September 2007. He is the Managing Partner of 20/20 Capital Partners, a boutique investment and advisory services firm. From 2000 - 2002, Mr. Bast was a Vice President at Citrix Systems, Inc. (Nasdaq: CTXS). Prior to that time, Mr. Bast was the founder and former Chief Executive Officer of Innovex Group, Inc. a technology consulting company with numerous Fortune 1000 and emerging growth clients, which was acquired by Citrix Systems, Inc. in 2000. Mr. Bast has served on the board of the South Florida Chapter of Young Entrepreneur's Organization (YEO), the University of Florida MBA Advisory
Board, the University School of Nova Southeastern University (NSU), and the Young Entrepreneur's Council for the Wayne Huizenga School of Business at Nova Southeastern University. He has both a Bachelor of Science (Finance) and a Masters of Business Administration from the University of Florida.
Michael Cytrynbaum is President of First Fiscal Management Ltd. a private consulting company specializing in financial reorganizations, mergers and acquisitions, strategic planning and negotiation. Mr. Cytrynbaum also serves as chairman of Look Communications Inc., a communications service provider and Ignition Point Technologies Corp., a broadband communication provider, both publicly traded companies. In addition, he is a director of two junior resource companies, Callinan Mines Limited and Central Minera Corp., as well as being a director of Peer 1 Network Enterprises, Inc., a provider of high-performance Internet bandwidth. Mr. Cytrynbaum was a founding director of Microcell Telecommunications Inc. and remained on the board of that company for ten years. Mr. Cytrynbaum has a Bachelor of Arts and a Bachelor of Common Law from McGill University.
Mathew George is Vice President of TELUS Ventures, the strategic venture investment arm of TELUS Corporation. TELUS Ventures manages a venture capital fund that invests in emerging U.S. and Canadian technology companies. Mr. George joined Telus Ventures in June 2001 from the Abu Dhabi Investment Authority where he worked from 1999 to 2001 and was responsible for the global co-investment and direct private equity investment activities of Abu Dhabi Investment Authority's Private Equity group. Mr. George has also worked in the Mergers & Acquisitions Group at Warburg Dillon Read from 1996 to 1998 and Barclays de Zoete Wedd from 1995 to 1996, both in London and New York. In addition to serving on our board, Mr. George is a director of Apparent Networks, Inc., Vision Critical Communications Inc. and the Arts Club Theatre Company. Mr. George is a Chartered Financial Analyst and a member of the Chartered Financial Analysts Institute and the Vancouver Society of Financial Analysts. Mr. George holds a Masters of Business Management from the Ecole des Hautes Etudes Commerciales in Paris, with specialization in Analytical Finance from the University of Chicago Graduate School of Business. His Bachelor of Technology (Honours) degree in Electrical & Electronics Engineering is from the Regional Engineering College in Calicut, India.
Robert H. Kidd is a director of Genesis Microchip Inc. and Vice Chairman Appleby College Foundation. Mr. Kidd is President of Location Research Company of Canada Limited. Mr. Kidd served as Chief Financial Officer of Technology Convergence Inc. from 2000 to 2002, of Lions Gate Entertainment Corp. from 1997 to 1998, and of InContext Systems Inc. from 1995 to 1996. He served as Senior Vice President, Chief Financial Officer and director of George Weston Limited from 1981 to 1995, as a partner of a predecessor firm of KPMG LLP, from 1973 to 1981 and as a Lecturer in Finance, Faculty of Management Studies, University of Toronto, from 1971 to 1981. Mr. Kidd has served on several professional committees, including the Toronto Stock Exchange Investors & Issuers Advisory Committee from 1993 to 1998, the Canadian Institute of Chartered Accountants Emerging Issues Committee from 1992 to 1997 and the Canadian Securities Administrators Committee on Conflicts of Interest in Underwriting from 1994 to 1996. Mr. Kidd has a Bachelor of Commerce from the University of Toronto and a Masters of Business Administration from York University. Mr. Kidd is a Fellow of the Institute of Chartered Accountants of Ontario.
Christopher Scatliff is founder and Chief Executive Officer of KORE Wireless Group Inc., a Virginia-based mobile virtual network operator specializing in machine-to-machine wireless communications. From 2000 to 2001 he was Executive Vice President of Itemus Inc. From 1996 until 2000, he was President and Chief Executive Officer of UUNET Canada (now MCI Canada). Mr. Scatliff was also a member of UUNET's International Management Board from 1998 to 2000 with executive responsibility for Latin America. Mr. Scatliff served on the Canadian Government Ministerial Advisory Group for the 1998 OECD Conference in Ottawa. Previously, Mr. Scatliff was Vice President and Managing Director from 1993 to 1996 for Europe, Middle East, and Africa for Computer Sciences Corporation based in London, England. He has a Bachelor of Science degree in Physics from the University of Manitoba.
Corporate Cease Trade Orders or Bankruptcies
Mr. Cytrynbaum has been a director and the Chairman of the Board of Look since May 1996 and Mr. Colin Campbell was Senior Vice-President of Internet Services from November 1999 to December 2000 and a director of Look from November 1999 to March 2003. On September 4, 2001, Look was granted protection from its creditors under the Companies’ Creditors Arrangement Act (Canada) (CCAA), pursuant to a court order issued by the Superior Court of the Province of Ontario. Under the terms of the court order, Look was required to present to the court a Plan of Arrangement and Compromise setting out the terms of the restructuring of its debt and other obligations. The Plan of Arrangement and Compromise was filed with the court on November 14, 2001, received creditor approval on December 14, 2001, final court approval on December 21, 2001, and was implemented on February 11, 2002.
Mr. Cytrynbaum was a director of Microcell Telecommunications Inc. (Microcell) from December 1993 to May 2003. Microcell elected to restructure its operations under the CCAA and filed for and received an initial order for protection
under the CCAA on January 3, 2003 from the Superior Court of the Province of Quebec. On March 17, 2003, Microcell’s Plan of Reorganization and of Compromise and Arrangement was voted upon and approved by secured and affected unsecured creditors. On March 18, 2003, the court issued an order sanctioning the Plan of Reorganization and of Compromise and Arrangement, and it became effective on May 1, 2003.
Central Minera Corp. is a reporting issuer in British Columbia. The British Columbia Securities Commission issued a cease trade order against this company on November 6, 2007, for failure to file within the prescribed time period comparative financial statements and Form 51-102F1 - Management’s Discussion and Analysis (the “Required Records”) for its financial year ended June 30, 2007, as required under Part 5 of National Instrument 51-102 - Continuous Disclosure Obligations. Central Minera Corp. filed the Required Records on December 24, 2007 and the cease trade order was revoked by the British Columbia Securities Commission on December 27, 2007. Michael Cytrynbaum was at the time of issuance of the cease trade order, and is as of June 25, 2008, a director and the President of this company.
Mr. Scatliff was appointed Executive Vice President and an officer of Vengold Inc. (Vengold) on April 4, 2000 as part of Vengold’s acquisition of his private company Exceleration.net Inc. Vengold subsequently changed its name to Itemus Inc. (Itemus). Mr. Scatliff resigned from Itemus effective April 5, 2001. Subsequent to Mr. Scatliff’s involvement, Itemus filed for bankruptcy on July 31, 2001, and a cease trade order was issued on November 15, 2001 by the Ontario Securities Commission. Itemus was dissolved on September 19, 2005.
To the best of our knowledge, other than as disclosed above, none of our directors, officers or stockholders holding a sufficient number of securities to affect materially the control of Hostopia.com, is, or within the last ten years to the date of this Form 10-K has been, a director or officer of any other issuer that, while that person was acting in the capacity of a director or officer of that issuer, was the subject of a cease trade order or similar order, or any order that denied the issuer access to any statutory exemptions under securities legislation for a period of more than 30 consecutive days, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold the assets of that issuer.
Penalties or Sanctions
To the best of our knowledge, none of our directors, officers or stockholders holding a sufficient number of securities to affect materially the control of Hostopia.com, has been subject to any penalties or sanctions imposed by a court relating to securities legislation or by a securities regulatory authority or has entered into a settlement agreement with a securities regulatory authority or been subject to any other penalties or sanctions imposed by a court or regulatory body that would likely be considered important to a reasonable investor making an investment decision.
Personal Bankruptcies
To the best of our knowledge, none of our directors, officers or stockholders holding a sufficient number of securities to affect materially the control of Hostopia.com, nor any personal holding company of any such person has, within the ten years before the date of this Form 10-K, become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or been subject to or instituted any proceedings, arrangement or compromise with creditors, or had a receiver, receiver manager or trustee appointed to hold the assets of that person.
Indebtedness of Directors and Executive Officers
As at the date of this Form 10-K, no amount was owed to us or any of our subsidiaries by any director or executive officer.
The Board of Directors has delegated the power and authority to review, modify and approve compensation policies and practices and to administer the Company’s stock option plan to the Compensation Committee. The Compensation Committee annually evaluates and establishes the compensation policies for the Chief Executive Officer and other named executive officers. Messrs. Scatliff, Cytrynbaum, and Bast comprise the Compensation Committee and are non-employees and independent as defined by the relevant Canadian and U.S. securities regulations.
Compensation Philosophy
Our philosophy is to design and maintain a straight-forward and simple compensation structure designed based on the role that each of our “named executives” plays within our organization. While the weighting of components differs for each executive, our goal is that the total value of each named executive’s compensation package approximate the median value of total compensation received by executives with similar responsibilities at comparable companies. To meet this goal the Compensation Committee commissioned a compensation study and report from AON Corporation.
We believe compensation packages should provide a reasonable core salary as well as a combination of short and long term incentives to motivate the executives to grow the company profitably now and into the future. Accordingly, for fiscal 2009, compensation for our named executive officers consists of a base salary and, with the exception of our Chief Financial Officer (CFO), targeted incentive cash bonuses based on the executive’s overall performance and individual contribution as well as our success in meeting our annual financial targets. In addition, each of the named executives is motivated to align their decision making with the long term success of the Company through their on-going participation in the Company’s 2000 and 2006 Stock Option Plans. None of the named executives’ compensation package contains any deferred compensation component related to retirement nor do the packages contain any perquisites.
Elements of the Executive Compensation Program
Base Salary. The Compensation Committee recognizes the importance of maintaining base cash compensation levels that are competitive with companies in similar businesses and with similar characteristics such as revenue and capitalization. The base salary for each executive officer was initially established through negotiation at the time the officer was hired, taking into account such officer’s qualifications, experience, prior salary and competitive salary information at that time. Year-to-year adjustments to each executive officer’s base salary are determined by an assessment of their sustained performance against his or her individual job responsibilities including, where appropriate, how such performance influences our business results as well as the individual’s experience and potential for advancement. Base salary is targeted at between 45% and 80 % of total compensation.
Annual Incentive Bonuses. The compensation packages for all named executives, with the exception of the CFO, provide for target bonus amounts, intended to motivate the executives to achieve certain bookings, revenue and profitability goals as determined by the CEO and the Compensation Committee. The CFO may receive a bonus based on his meeting certain operational and functional goals and responsibilities. However, his bonus is not tied to the achievement of financial results to prevent any conflict or perceived conflict of interest in the preparation of our financial results. Use of financial goals establishes a direct link between the executive’s pay and our short term success. Payouts of bonuses are based upon the Compensation Committee’s review and analysis as to the extent that both the Company and the individual operating objectives have been achieved. The Compensation Committee may modify goals and criteria if circumstances change during the year. The annual incentive bonus is targeted at between 10% and 45% of total compensation.
Long-Term Incentives. All named executives also receive long-term incentive compensation through grants of stock options, previously under our 2000 plan and going forward under our 2006 plan. We believe these grant programs provide our executive officers with the opportunity to purchase and maintain an equity interest in Hostopia and to share in the appreciation of the value of Hostopia common stock. We believe that these grants directly motivate an executive to maximize long-term stockholder value and align the financial interests of the executives and other employees with those of the stockholders. The grants also utilize a graded vesting period (generally over three years) that encourages these key executives to continue in our employ. The Compensation Committee and then our Board of Directors, consider each grant subjectively, considering factors such as the individual performance of the executive officer and the anticipated contribution of the executive officer to the attainment of our long-term strategic performance goals. Options granted in prior years are also taken into consideration. The vesting of options to the named executives may be tied to the Company meeting certain profitability targets.. The long term incentive component is targeted at between 10 and 20% of total compensation.
CEO Compensation
Mr. Colin Campbell’s base salary for fiscal 2008 of $195,000 was established based on a compensation study and report we commissioned from the AON Corporation in respect of executive and director’s compensation. Mr. Campbell’s compensation for fiscal 2008 also provides for a target bonus of 45% of his base salary if the Company achieves its planned level of profitability. Mr. Campbell has the potential of receiving a bonus of up to 100% of his base salary if the Company achieves a level of profitability well in excess of its targeted level of profitability. In June 2007, Mr. Campbell was granted 50,000 stock options with a strike price equal to the market price of the Company’s shares on the Toronto Stock Exchange at the time of the grant. 25,000 of these options were subject to forfeiture had the Company not achieved a defined level of profitability in fiscal 2008.
The Compensation Committee intends to review the Chief Executive Officer’s compensation arrangement annually. His compensation will then be determined based on industry comparables, his individual performance for the fiscal year under review, as well as our company’s performance. The Compensation Committee believes Mr. Campbell’s total compensation is at a median level when compared with chief executive officer’s compensation of companies of similar size within the Web hosting and application service provider industry.
Section 162(m) Compliance
All compensation paid to executive officers of Hostopia is deductible under Internal Revenue Code 162(m).
Executive Compensation Summary
The following table shows information regarding the compensation earned by our principal executive officer, our principal financial officer and our other three most highly compensated executive officers, collectively referred to as the “named executive officers”, during the years ended March 31, 2006, 2007 and 2008. In accordance with the rules of the SEC, this table does not include perquisites and other personal benefits, if any, received by the named executive officers that do not exceed in aggregate $10,000.
Summary Compensation Table
(1)
Premiums on life insurance
(2)
The amount shown in this column represents stock options awarded under our 2000 and 2006 Stock Option Plans. See Exhibits 10.1 and 10.2 respectively incorporated by reference in this Form 10-K. This column reflects the dollar amount recognized for financial statement reporting purposes, disregarding the effect of the estimate of forfeitures related to service-based vesting conditions, for fiscal yeas ended March 31, 2008, in accordance with SFAS 123R and thus includes amounts from awards granted prior to fiscal 2007. Assumptions used in the calculation of this amount are included in note 9 to the Company’s audited financial statements for the fiscal year ended March 31, 2008 included in Item 8 on this Form 10-K.
(3)
The total amount reported herein represents compensation for the individual’s services as an executive officer.
Grants of Plan-Based Awards in Last Fiscal Year
During the year ended March 31, 2008, we granted options to purchase an aggregate of 362,500 shares of Hostopia common stock, of which 250,000 were granted to named executives as outlined in the table below. All options were granted at the fair market value of Hostopia common stock as of the date of grant.
Grant of Plan-Based Awards
Each of the named executives received an award of 50,000 options in fiscal 2008 of which 25,000 were subject to forfeiture if the Company did not meet a profitability target established by the Compensation Committee for fiscal 2008. This performance target was met so the maximum 50,000 options granted will vest on a graded basis over three years with one-third vesting on each of December 8, 2008, June 8, 2009 and June 8, 2010 subject to the named executive meeting the requisite service requirement under the 2006 Stock Option Plan
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth specified information concerning stock options held as of March 31, 2007 by each of the named executive officers.
Outstanding Equity Awards at Fiscal Year-End
(1)
All amounts are fully vested.
(2)
The unvested shares vest on November 30, 2008.
(3)
Of the total amount, one-third vest on December 8, 2008, one-third vest on June 8, 2009 and the remaining one-third vest on June 8, 2010.
Option exercises
The following table sets forth specified information in respect of stock options exercised by each of the named executive officers during the year ended March 31, 2008.
Option Exercises
Employment Contracts and Termination of Employment and Change-in-Control Contracts
We are party to employment contracts providing for an annual salary of Cdn$225,000 to Mr. William Campbell, Cdn$225,000 to Mr. Colin Campbell, Cdn$200,000 to Mr. Mugan, Cdn$160,000 to Mr. Engels and Cdn$137,800 to Mr. Bhagat. The employment contacts for Mr. William Campbell and Mr. Colin Campbell expire on March 31, 2009 and the employment contracts for Mr. Mugan, Mr. Engels and Mr. Bhagat continue for an indefinite term. Mr. Engels is eligible to receive bonuses based upon both sales and earnings goals established by our board of directors. Mr. Bhagat is eligible, based on his performance, to receive annual bonuses not to exceed 20% of his annual base salary. Messrs. W. Campbell and C. Campbell are each eligible, based on performance, to receive an annual bonus up to 100% of their annual salary, with the bonus targeted to 50% of their annual salary.
Pursuant to our agreements with each of Messrs. W. Campbell and C. Campbell, we may terminate the agreement without cause, by paying an amount equal to two weeks’ salary multiplied by the number of years the executive was employed by us. With respect to our agreement with Mr. Mugan we may terminate this agreement without cause and without notice, provided that we pay an amount equal to six months’ salary plus one month’s salary for each year or partial year of his employment. With respect to our agreement with Mr. Engels we may terminate this agreement without cause and without notice, provided that we pay an amount equal to not less than six months’ salary plus an amount equal to two weeks of salary for each year of employment. Mr. Engels is also entitled to commissions earned up to the date of termination, in the event we terminate the agreement. With respect to Mr. Bhagat in the event we terminate the agreement without cause, he shall be entitled to receive a payment equal to the greater of (i) 26 weeks’ salary, and (ii) two weeks’ salary multiplied by the number of years he was employed by us.
Other than the payment of directors’ fees as described below, we have no service contracts with any director or officer. There are no arrangements or agreements made or proposed to be made between us and any of our named executive officers pursuant to which a payment or other benefit is to be made or given by way of compensation in the event of that officer’s resignation, retirement or other termination of employment, or in the event of a change of control of us or a change in the named executive officer’s responsibilities following such change in control.
Compensation of Directors
Each independent director is eligible to receive a retainer of Cdn$17,000 per year, and Cdn$250 for attending each meeting of the board or any committee of the board. If board and committee meetings are held on the same day, then no additional compensation will be paid for attendance at the committee meetings. Committee chairs receive an additional Cdn$8,000 per year. All our directors are compensated for reasonable out-of-pocket expenses in connection with attending meetings of our board or its committees.
The following table summarizes the compensation received by our non-executive directors for the year ended March 31, 2008.
(4)
No option grants were made to Directors in fiscal 2008. The amount shown in this column represents stock options awarded under our 2000 Stock Option Plan. See Exhibit 10.1 incorporated by reference in this Form 10-K. This column reflects the dollar amount recognized for financial statement reporting purposes, disregarding the effect of the estimate of forfeitures related to service-based vesting conditions, for fiscal the year ended March 31, 2008, in accordance with SFAS 123R and thus includes amounts from awards granted prior to fiscal 2007. Assumptions used in the calculation of this amount are included in footnote 10 to the Company’s audited financial statements for the fiscal year ended March 31, 2008 included in Item 8 on this Form 10-K.
Compensation Committee Interlocks and Insider Participation
During the year ended March 31, 2008, Mr. Chris Scatliff, Mr. Michael Cytrynbaum, and Mr. David McMahon, while still a director and Mr. Randall Bast after becoming a director, served as members of the Compensation Committee. All members of the Compensation Committee were independent.
During the year ended March 31, 2008:
•
None of the members of the Compensation Committee entered into (or agreed to enter into) any transaction or series of transactions with us or any of our subsidiaries in which the amount involved exceeded $60,000 in which he had or will have a direct or indirect material interest;
•
None of our executive officers was a director or Compensation Committee member of another entity, an executive officer of which served on our Compensation Committee; and
•
None of our executive officers served on the Compensation Committee (or another board committee with similar functions) of another entity, an executive officer of which served as a director on our board of directors.
Compensation Committee Report
This report of the compensation committee is not “soliciting material,” is not deemed “filed” with the SEC and shall not be deemed incorporated by reference by any general statement incorporating by reference this Form 10-K into any filing under the Securities Act or the Exchange Act, except to the extent that we specifically incorporate this information by reference, and shall not otherwise be deemed filed under such acts.
The Compensation Committee of the Company has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this Form 10-K report for the fiscal year ended March 31, 2007.
Compensation Committee
Chris Scatliff, Chair
Michael Cytrynbaum
Randall Bast
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth information, as of the date of this Form 10-K, regarding the beneficial ownership of Hostopia common stock by:
•
Each person that is a beneficial owner of more than 5% of our outstanding common stock;
•
Each of our named executive officers;
•
Each of our directors; and
•
All directors and named executive officers as a group.
Beneficial ownership is determined under the rules of the SEC and generally includes voting or investment power over securities. Except in cases where community property laws apply or as indicated in the footnotes to this table, we believe that each stockholder identified in the table possesses sole voting and investment power over all shares of common stock shown as beneficially owned by the stockholder. Percentage of beneficial ownership is based on 11,636,631 shares of Hostopia common stock outstanding as of March 31, 2008. Shares of common stock subject to options that are currently exercisable or exercisable within 60 days of the date of this Form 10-K are considered outstanding and beneficially owned by the person holding the options for the purposes of computing the percentage ownership of that person but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. Other than as specifically noted otherwise, the address of each individual listed in the table is c/o Hostopia.com Inc., 5915 Airport Road, 11th Floor, Mississauga, Ontario L4V 1T1.
*
Represents beneficial ownership of less than one percent.
(1)
Shares issuable pursuant to the exercise of stock options and warrants exercisable within 60 days are deemed outstanding and held by the holder of such shares but are not deemed outstanding for computing the percentage of outstanding common stock beneficially owned by any other person.
(2)
Messrs. Nemanic, Colin Campbell and William Campbell control 1555706 Ontario Limited which owns 851,063 shares of common stock. 1555706 Ontario Limited is owned 32.55% by Mr. Nemanic, 27.90% by Mr. Colin Campbell, 32.55% by Mr. William Campbell and 7.0% by Ms. Lillian Campbell, the mother of Mr. Colin Campbell and Mr. William Campbell.
(3)
Includes 1,154,006 shares of common stock and also includes 237,447 shares of common stock held by 1555706 Ontario Limited based on Mr. Campbell’s proportionate interest in 1555706 Ontario Limited.
(4)
Includes 850,006 shares of common stock, 264,000 shares of common stock owned by The 1999 William Campbell Family Trust and 40,000 common shares owned by Mr. Campbell’s spouse, Marie Campbell. Also includes 277,021 shares of common stock held by 1555706 Ontario Limited based on Mr. Campbell’s proportionate interest in 1555706 Ontario Limited.
(5)
Includes 1,030,606 shares of common stock and also includes 277,021 shares of common stock held by 1555706 Ontario Limited based on Mr. Nemanic’s proportionate interest in 1555706 Ontario Limited.
(6)
Mr. Mathew George represents TELUS Corporation on our board of directors. TELUS Communications Company is a wholly owned subsidiary of TELUS Corporation.
(7)
Includes 25,000 shares of common stock issuable upon exercise of options.
(8)
Includes 4,400 shares of common stock issuable upon exercise of options. Also includes 43,500 shares of common stock owned by Location Research Company of Canada Limited, which is wholly owned by Mr. Kidd and his spouse, Elizabeth Kidd.
(9)
Includes 4,800 shares of common stock issuable upon exercise of options.
(10)
Includes 4,000 shares of common stock issuable upon exercise of options.
(11)
Includes 48,000 shares of common stock issuable upon exercise of options.
(12)
Includes 20,400 shares of common stock issuable upon exercise of options.
(13)
Based on information reported by Burgundy Asset Management Ltd., an eligible institutional investor, on November 30, 2006 pursuant to Part 4 of National Instrument 62-103.
(14)
Based on information reported by CCM Master Qualified Fund, Ltd., an eligible institutional investor, on March 10, 2008 pursuant to Part 4 of National Instrument 62-103.
Securities Authorized for Issuance under Equity Compensation Plans
The following table summarizes equity compensation plan information as at March 31, 2007.
(1)
The Company is permitted to issue stock options and stock appreciation rights to eligible participants for up to 10% of total outstanding shares of common stock.
Item 13.
Certain Relationships and Related Transactions.
We currently have an agreement as detailed below with Geeksforless.com Inc (GFL). Mr. Colin Campbell and Mr. William Campbell (each of whom was a director and/or officer of Hostopia.com during all of fiscal 2008 and each of whom are holders of more than 5% of our outstanding shares of common stock) each hold 27.4% of the outstanding shares of GFL. The total amount expensed with respect to this contract in fiscal 2008 was $1,829,731.
In July 2005, we entered into a services agreement with GFL, for software programming services, technical support and technical services. Under this services agreement, we retain all intellectual property rights in or to the software or services provided by GFL, and GFL and its contractors agree to enter into intellectual property rights agreements in favor of Hostopia.com, regarding the treatment of confidential information, the ownership of intellectual property and the assignment of rights, prior to undertaking any work under the agreement. The initial term of the agreement was one year, and it automatically renews for additional one year terms unless terminated. The agreement may be terminated by us at any time upon 30 days’ written notice, by GFL at any time after June 30, 2010 upon 12 months’ written notice, and by either party upon 21 days’ written notice in the event of an uncured breach by the other party of its obligations under the agreement. This agreement with GFL stipulates fixed prices that will increase in 2008 and 2009 based upon the rate of inflation in Ukraine to
a maximum of 10% per year. We believe that the terms of this agreement are equivalent to terms we would have received in an agreement with an arm’s length party.
All right, title and interest in another agreement that we had previously entered into with GFL, concerning website templates jointly owned with GFL, was acquired by us on June 1, 2007 for $232,921 in cash.
We have entered into an agreement with TELUS Communications Company (TELUS) to provide web hosting and related services. We also have a number of service agreements with TELUS for the purchase of bandwidth, data center space and telephony services as described below. Prior to our initial public offering, TELUS Corporation, the parent of TELUS, held 40% of the issued and outstanding shares of our Series A redeemable convertible preferred stock, which automatically converted to shares of common stock on a one-for-one basis upon the closing of this offering. Consequently, TELUS Corporation currently holds 851,063 shares or 7.3% of Hostopia common stock as of March 31, 2008. One of our directors, Mr. Mathew George is an employee of TELUS or its affiliates.
In December 2007, we renewed services agreements for three years with TELUS whereby we agreed to purchase or lease bandwidth, data centre space, and telephone line services. These agreements expire in December 2007. The total amount expensed with respect to these contracts in fiscal 2008 was $910,824
In August 2001 we entered into a services agreement with TELUS with an initial term of three years whereby we agreed to provide them with web hosting, electronic commerce, and e-mail solutions and other related services. Upon the expiry of the initial term, the agreement automatically renewed and will continue until notice of termination is provided. The agreement may be terminated by TELUS upon 30 days’ notice, subject to payment by TELUS of an amount equal to one half of the average monthly billings for the prior six months multiplied by the number of months remaining in the term. The agreement may also be terminated by either party upon 60 days’ notice at the end of the initial term or any renewal term. In addition, either party may terminate the agreement upon 30 days’ written notice in the event of an uncured breach by the other party of its obligations under the agreement, or in the case of bankruptcy or insolvency proceedings being instituted with respect to the other party. The Company recognized $2,851,114 of revenues in respect of this service agreement in fiscal 2008.
The Nominating and Corporate Governance Committee is responsible for evaluating and confirming to the Board the fairness of any non-routine transaction involving the Company and a related party.
Item 14.
Principal Accounting Fees and Services.
The aggregate fees billed to our company by KPMG LLP, our independent registered public accounting firm, for the indicated services were as follows:
(1)
Audit Fees consist of fees billed for professional services performed by KPMG LLP for the audit of our annual financial statements, review of financial statements included in our Quarterly Reports on Form 10-Q, and in fiscal 2007 services that are normally provided in connection with a Form S-1 filing and its related translation into French as well as a Form S-8 filing.
(2)
Tax Fees consist of fees billed in the indicated year for professional services performed by KPMG LLP with respect to tax compliance, tax advice and tax planning.
The Audit Committee has considered whether the provision of non-audit services is compatible with maintaining the independence of KPMG LLP, and has concluded that the provision of such services is compatible with maintaining the independence of our auditors.
Audit Committee Policy Regarding Pre-Approval of Audit and Permissible Non-Audit Services by Our Independent Registered Public Accounting Firm
Our audit committee has established a policy that all audit and permissible non-audit services provided by our independent audit firm will be pre-approved by the audit committee. These services may include audit services, audit-related services, tax services and other services. The audit committee considers whether the provision of each non-audit service is
compatible with maintaining the independence of our auditors. Pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. Our independent audit firm and management are required to periodically report to the audit committee regarding the extent of services provided by the independent audit firm in accordance with this pre-approval, and the fees for the services performed to date. All of the audit, audit-related and tax fees described above were pre-approved by our audit committee. The audit committee may delegate to one or more designated members of the audit committee the authority to grant the required pre-approvals, provided that such approvals are presented to the audit committee at a subsequent meeting.
PART IV
Item 15.
Exhibits and Financial Statement Schedules.
The following documents are filed as part of this Annual Report on Form 10-K:
1.
Financial Statements
Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements
Consolidated Statements of Income for the Fiscal Years ended March 31, 2006, 2007, and 2008
Consolidated Balance Sheets as of March 31, 2007 and 2008
Consolidated Statements of Changes in Stockholders’ Equity for the Fiscal Years ended March 31, 2006, 2007, and 2008
Consolidated Statements of Cash Flows for the Fiscal Years ended March 31, 2006, 2007, and 2008
2.
Financial Statement Schedules
All schedules are omitted because they are either not applicable or the required information is provided in the financial statements or related notes.
3.
Exhibits.
The following exhibits are filed as part of this report or hereby incorporated by reference to exhibits previously filed with the Securities and Exchange Commission:
Exhibit No.
Description of Document
3.1(1)
Amended and Restated Certificate of Incorporation of Hostopia.com Inc.
3.2(2)
Amended and Restated Bylaws of Hostopia.com Inc.
4.1(1)
Registration Rights Agreement dated December 27, 2001
4.2(3)
Specimen Stock Certificate.
10.1(1)
2000 Stock option Plan and forms of related agreements.
10.2(2)
2006 Stock Option Plan and forms of related agreements.
10.3(1)
Employment Agreement of William Campbell, dated June 1, 2006.+
10.4(1)
Employment Agreement of Colin Campbell, dated June 1, 2006.+
10.5(1)
Employment Agreement of Michael Mugan, dated April 1, 2006.+
10.6(1)
Employment Agreement of Paul Engels, dated April 1, 2006.+
10.7(1)
Employment Agreement with Dirk Bhagat, dated June 1, 2006.+
10.8(5)
Form of Indemnification Agreement between registrant and each of its directors and executive officers.
10.9(1)
Asset purchase agreement between the registrant and FortuneCity.com Inc., dated January 31, 2006.
10.10(1)
Services agreement between registrant and Geeksforless.com Inc., dated July 1, 2005.
10.11(1)
Lease between Badenhurst-Airway Centre Ltd. And the registrant dated September 30, 2002, as amended.
10.12(1)
Revolving Line of Credit Facility.
10.13(5)
Employment Agreement with Peter Kostandenou, dated April 1, 2008.+
10.14(5)
Template Purchase Agreement between registrant and Geeksforless.com Inc., dated June 1, 2007.
10.15(4)
Agreement and Plan of Merger, dated as of June 18, 2008, among Deluxe Corporation, Deluxe Business Operations, Inc., Helix Merger Corp. and Hostopia.com Inc
Exhibit No.
Description of Document
21.1(1)
Subsidiaries of the registrant.
23.1(5)
Consent of KPMG LLP, Independent Registered Public Accounting Firm.
31.1(5)
CEO Certification required by Rule 13a-14(a) or Rule 15d-14(a).
31.2(5)
CFO Certification required by Rule 13a-14(a) or Rule 15d-14(a).
32.1(5)
Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350).
32.2(5)
Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350).
(1)
Filed as an Exhibit to the Registrant’s registration statement on Form S-1 (No. 333-135533), filed with the SEC on June 30, 2006 and incorporated herein by reference.
(2)
Filed as an Exhibit to Registrant’s registration statement on Form S-1A (No. 333-13533), filed with the SEC on August 11, 2006 and incorporated herein by reference.
(3)
Filed as an Exhibit to Registrant’s registration statement on Form S-1A (No. 333-13533), filed with the SEC on October 5, 2006 and incorporated herein by reference.
(4)
Filed as an Exhibit to Registrant’s current report Form 8-K, filed with the SEC on June 18,2008
(5)
Filed as an exhibit with this Form 10-K
+
Indicates management contract or compensatory plan.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Hostopia.com Inc.
__________________________________________________
(Registrant)
June 26, 2008
__________________________________________________
Date
/s/ Michael J. Mugan
__________________________________________________
Michael J. Mugan
Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Act of 1934, this report has been signed by the following persons on behalf of the Registrant in the capacities and on the date indicated:
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth information, as of the date of this Form 10-K, regarding the beneficial ownership of Hostopia common stock by:
•
Each person that is a beneficial owner of more than 5% of our outstanding common stock;
•
Each of our named executive officers;
•
Each of our directors; and
•
All directors and named executive officers as a group.
Beneficial ownership is determined under the rules of the SEC and generally includes voting or investment power over securities. Except in cases where community property laws apply or as indicated in the footnotes to this table, we believe that each stockholder identified in the table possesses sole voting and investment power over all shares of common stock shown as beneficially owned by the stockholder. Percentage of beneficial ownership is based on 11,636,631 shares of Hostopia common stock outstanding as of March 31, 2008. Shares of common stock subject to options that are currently exercisable or exercisable within 60 days of the date of this Form 10-K are considered outstanding and beneficially owned by the person holding the options for the purposes of computing the percentage ownership of that person but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. Other than as specifically noted otherwise, the address of each individual listed in the table is c/o Hostopia.com Inc., 5915 Airport Road, 11th Floor, Mississauga, Ontario L4V 1T1.
*
Represents beneficial ownership of less than one percent.
(1)
Shares issuable pursuant to the exercise of stock options and warrants exercisable within 60 days are deemed outstanding and held by the holder of such shares but are not deemed outstanding for computing the percentage of outstanding common stock beneficially owned by any other person.
(2)
Messrs. Nemanic, Colin Campbell and William Campbell control 1555706 Ontario Limited which owns 851,063 shares of common stock. 1555706 Ontario Limited is owned 32.55% by Mr. Nemanic, 27.90% by Mr. Colin Campbell, 32.55% by Mr. William Campbell and 7.0% by Ms. Lillian Campbell, the mother of Mr. Colin Campbell and Mr. William Campbell.
(3)
Includes 1,154,006 shares of common stock and also includes 237,447 shares of common stock held by 1555706 Ontario Limited based on Mr. Campbell’s proportionate interest in 1555706 Ontario Limited.
(4)
Includes 850,006 shares of common stock, 264,000 shares of common stock owned by The 1999 William Campbell Family Trust and 40,000 common shares owned by Mr. Campbell’s spouse, Marie Campbell. Also includes 277,021 shares of common stock held by 1555706 Ontario Limited based on Mr. Campbell’s proportionate interest in 1555706 Ontario Limited.
(5)
Includes 1,030,606 shares of common stock and also includes 277,021 shares of common stock held by 1555706 Ontario Limited based on Mr. Nemanic’s proportionate interest in 1555706 Ontario Limited.
(6)
Mr. Mathew George represents TELUS Corporation on our board of directors. TELUS Communications Company is a wholly owned subsidiary of TELUS Corporation.
(7)
Includes 25,000 shares of common stock issuable upon exercise of options.
(8)
Includes 4,400 shares of common stock issuable upon exercise of options. Also includes 43,500 shares of common stock owned by Location Research Company of Canada Limited, which is wholly owned by Mr. Kidd and his spouse, Elizabeth Kidd.
(9)
Includes 4,800 shares of common stock issuable upon exercise of options.
(10)
Includes 4,000 shares of common stock issuable upon exercise of options.
(11)
Includes 48,000 shares of common stock issuable upon exercise of options.
(12)
Includes 20,400 shares of common stock issuable upon exercise of options.
(13)
Based on information reported by Burgundy Asset Management Ltd., an eligible institutional investor, on November 30, 2006 pursuant to Part 4 of National Instrument 62-103.
(14)
Based on information reported by CCM Master Qualified Fund, Ltd., an eligible institutional investor, on March 10, 2008 pursuant to Part 4 of National Instrument 62-103.
Securities Authorized for Issuance under Equity Compensation Plans
The following table summarizes equity compensation plan information as at March 31, 2007.
(1)
The Company is permitted to issue stock options and stock appreciation rights to eligible participants for up to 10% of total outstanding shares of common stock.
Item 13.
Item 13.
Certain Relationships and Related Transactions.
We currently have an agreement as detailed below with Geeksforless.com Inc (GFL). Mr. Colin Campbell and Mr. William Campbell (each of whom was a director and/or officer of Hostopia.com during all of fiscal 2008 and each of whom are holders of more than 5% of our outstanding shares of common stock) each hold 27.4% of the outstanding shares of GFL. The total amount expensed with respect to this contract in fiscal 2008 was $1,829,731.
In July 2005, we entered into a services agreement with GFL, for software programming services, technical support and technical services. Under this services agreement, we retain all intellectual property rights in or to the software or services provided by GFL, and GFL and its contractors agree to enter into intellectual property rights agreements in favor of Hostopia.com, regarding the treatment of confidential information, the ownership of intellectual property and the assignment of rights, prior to undertaking any work under the agreement. The initial term of the agreement was one year, and it automatically renews for additional one year terms unless terminated. The agreement may be terminated by us at any time upon 30 days’ written notice, by GFL at any time after June 30, 2010 upon 12 months’ written notice, and by either party upon 21 days’ written notice in the event of an uncured breach by the other party of its obligations under the agreement. This agreement with GFL stipulates fixed prices that will increase in 2008 and 2009 based upon the rate of inflation in Ukraine to
a maximum of 10% per year. We believe that the terms of this agreement are equivalent to terms we would have received in an agreement with an arm’s length party.
All right, title and interest in another agreement that we had previously entered into with GFL, concerning website templates jointly owned with GFL, was acquired by us on June 1, 2007 for $232,921 in cash.
We have entered into an agreement with TELUS Communications Company (TELUS) to provide web hosting and related services. We also have a number of service agreements with TELUS for the purchase of bandwidth, data center space and telephony services as described below. Prior to our initial public offering, TELUS Corporation, the parent of TELUS, held 40% of the issued and outstanding shares of our Series A redeemable convertible preferred stock, which automatically converted to shares of common stock on a one-for-one basis upon the closing of this offering. Consequently, TELUS Corporation currently holds 851,063 shares or 7.3% of Hostopia common stock as of March 31, 2008. One of our directors, Mr. Mathew George is an employee of TELUS or its affiliates.
In December 2007, we renewed services agreements for three years with TELUS whereby we agreed to purchase or lease bandwidth, data centre space, and telephone line services. These agreements expire in December 2007. The total amount expensed with respect to these contracts in fiscal 2008 was $910,824
In August 2001 we entered into a services agreement with TELUS with an initial term of three years whereby we agreed to provide them with web hosting, electronic commerce, and e-mail solutions and other related services. Upon the expiry of the initial term, the agreement automatically renewed and will continue until notice of termination is provided. The agreement may be terminated by TELUS upon 30 days’ notice, subject to payment by TELUS of an amount equal to one half of the average monthly billings for the prior six months multiplied by the number of months remaining in the term. The agreement may also be terminated by either party upon 60 days’ notice at the end of the initial term or any renewal term. In addition, either party may terminate the agreement upon 30 days’ written notice in the event of an uncured breach by the other party of its obligations under the agreement, or in the case of bankruptcy or insolvency proceedings being instituted with respect to the other party. The Company recognized $2,851,114 of revenues in respect of this service agreement in fiscal 2008.
The Nominating and Corporate Governance Committee is responsible for evaluating and confirming to the Board the fairness of any non-routine transaction involving the Company and a related party.
Item 14.
Item 14.
Principal Accounting Fees and Services.
The aggregate fees billed to our company by KPMG LLP, our independent registered public accounting firm, for the indicated services were as follows:
(1)
Audit Fees consist of fees billed for professional services performed by KPMG LLP for the audit of our annual financial statements, review of financial statements included in our Quarterly Reports on Form 10-Q, and in fiscal 2007 services that are normally provided in connection with a Form S-1 filing and its related translation into French as well as a Form S-8 filing.
(2)
Tax Fees consist of fees billed in the indicated year for professional services performed by KPMG LLP with respect to tax compliance, tax advice and tax planning.
The Audit Committee has considered whether the provision of non-audit services is compatible with maintaining the independence of KPMG LLP, and has concluded that the provision of such services is compatible with maintaining the independence of our auditors.
Audit Committee Policy Regarding Pre-Approval of Audit and Permissible Non-Audit Services by Our Independent Registered Public Accounting Firm
Our audit committee has established a policy that all audit and permissible non-audit services provided by our independent audit firm will be pre-approved by the audit committee. These services may include audit services, audit-related services, tax services and other services. The audit committee considers whether the provision of each non-audit service is
compatible with maintaining the independence of our auditors. Pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. Our independent audit firm and management are required to periodically report to the audit committee regarding the extent of services provided by the independent audit firm in accordance with this pre-approval, and the fees for the services performed to date. All of the audit, audit-related and tax fees described above were pre-approved by our audit committee. The audit committee may delegate to one or more designated members of the audit committee the authority to grant the required pre-approvals, provided that such approvals are presented to the audit committee at a subsequent meeting.
PART IV
Item 15.
Item 15.
Exhibits and Financial Statement Schedules.
The following documents are filed as part of this Annual Report on Form 10-K:
1.
Financial Statements
Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements
Consolidated Statements of Income for the Fiscal Years ended March 31, 2006, 2007, and 2008
Consolidated Balance Sheets as of March 31, 2007 and 2008
Consolidated Statements of Changes in Stockholders’ Equity for the Fiscal Years ended March 31, 2006, 2007, and 2008
Consolidated Statements of Cash Flows for the Fiscal Years ended March 31, 2006, 2007, and 2008
2.
Financial Statement Schedules
All schedules are omitted because they are either not applicable or the required information is provided in the financial statements or related notes.
3.
Exhibits.
The following exhibits are filed as part of this report or hereby incorporated by reference to exhibits previously filed with the Securities and Exchange Commission:
Exhibit No.
Description of Document
3.1(1)
Amended and Restated Certificate of Incorporation of Hostopia.com Inc.
3.2(2)
Amended and Restated Bylaws of Hostopia.com Inc.
4.1(1)
Registration Rights Agreement dated December 27, 2001
4.2(3)
Specimen Stock Certificate.
10.1(1)
2000 Stock option Plan and forms of related agreements.
10.2(2)
2006 Stock Option Plan and forms of related agreements.
10.3(1)
Employment Agreement of William Campbell, dated June 1, 2006.+
10.4(1)
Employment Agreement of Colin Campbell, dated June 1, 2006.+
10.5(1)
Employment Agreement of Michael Mugan, dated April 1, 2006.+
10.6(1)
Employment Agreement of Paul Engels, dated April 1, 2006.+
10.7(1)
Employment Agreement with Dirk Bhagat, dated June 1, 2006.+
10.8(5)
Form of Indemnification Agreement between registrant and each of its directors and executive officers.
10.9(1)
Asset purchase agreement between the registrant and FortuneCity.com Inc., dated January 31, 2006.
10.10(1)
Services agreement between registrant and Geeksforless.com Inc., dated July 1, 2005.
10.11(1)
Lease between Badenhurst-Airway Centre Ltd. And the registrant dated September 30, 2002, as amended.
10.12(1)
Revolving Line of Credit Facility.
10.13(5)
Employment Agreement with Peter Kostandenou, dated April 1, 2008.+
10.14(5)
Template Purchase Agreement between registrant and Geeksforless.com Inc., dated June 1, 2007.
10.15(4)
Agreement and Plan of Merger, dated as of June 18, 2008, among Deluxe Corporation, Deluxe Business Operations, Inc., Helix Merger Corp. and Hostopia.com Inc
Exhibit No.
Description of Document
21.1(1)
Subsidiaries of the registrant.
23.1(5)
Consent of KPMG LLP, Independent Registered Public Accounting Firm.
31.1(5)
CEO Certification required by Rule 13a-14(a) or Rule 15d-14(a).
31.2(5)
CFO Certification required by Rule 13a-14(a) or Rule 15d-14(a).
32.1(5)
Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350).
32.2(5)
Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350).
(1)
Filed as an Exhibit to the Registrant’s registration statement on Form S-1 (No. 333-135533), filed with the SEC on June 30, 2006 and incorporated herein by reference.
(2)
Filed as an Exhibit to Registrant’s registration statement on Form S-1A (No. 333-13533), filed with the SEC on August 11, 2006 and incorporated herein by reference.
(3)
Filed as an Exhibit to Registrant’s registration statement on Form S-1A (No. 333-13533), filed with the SEC on October 5, 2006 and incorporated herein by reference.
(4)
Filed as an Exhibit to Registrant’s current report Form 8-K, filed with the SEC on June 18,2008
(5)
Filed as an exhibit with this Form 10-K
+
Indicates management contract or compensatory plan.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Hostopia.com Inc.
__________________________________________________
(Registrant)
June 26, 2008
__________________________________________________
Date
/s/ Michael J. Mugan
__________________________________________________
Michael J. Mugan
Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Act of 1934, this report has been signed by the following persons on behalf of the Registrant in the capacities and on the date indicated: