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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ___________
COMMISSION FILE NUMBER: 0-26481
DALEEN TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 65-0944514
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
902 CLINT MOORE ROAD, SUITE 230 33487
BOCA RATON, FLORIDA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (561) 999-8000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the common stock held by non-affiliates of
the Registrant, based upon the average of the closing bid and ask quotations for
the common stock on March 18, 2002 as reported by The Nasdaq National Stock
Market, was approximately $2,785,165. The shares of common stock held by each
officer and director and by each person known to the Registrant who owns 5% or
more of the outstanding common stock have been excluded from this calculation in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes. As of March 18, 2002, the Registrant had outstanding 22,611,255 shares
of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's definitive Proxy Statement for the 2002 Annual Meeting of
Stockholders is incorporated by reference in Part III of this Form 10-K to the
extent stated herein.
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FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the
Securities Exchange Act of 1933, as amended, and the Securities Exchange Act of
1934, as amended by the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are not historical facts but are the intent, belief
or current expectations, of our business and industry, and the assumptions upon
which these statements are based. Words such as "anticipates", "expects",
"intends", "plans", "believes", "seeks", "estimates" and variations of these
words and similar expressions are intended to identify forward-looking
statements. These statements are not guarantees of future performance and are
subject to risks, uncertainties, and other factors, some of which are beyond our
control, are difficult to predict and could cause actual results to differ
materially from those expressed or forecasted in the forward-looking statements.
These risks and uncertainties include those described in "Risks Associated with
Daleen's Business and Future Operating Results", "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and elsewhere in this
Form 10-K. Forward-looking statements that were true at the time made may
ultimately prove to be incorrect or false. Readers are cautioned to not place
undue reliance on forward-looking statements, which reflect our management's
view only as of the date of this report. We undertake no obligation to update or
revise forward-looking statements to reflect changed assumptions, the occurrence
of unanticipated events or changes to future operating results.
You should be aware that some of these statements are subject to known and
unknown risks, uncertainties and other factors, including those discussed in the
section of the Form 10-K entitled "Risks Associated with Daleen's Business and
Future Operating Results" that could cause the actual results to differ
materially from those suggested by the forward-looking statements.
PART I
ITEM 1. BUSINESS
OVERVIEW
Daleen Technologies, Inc. is a global provider of billing and customer care
software solutions that manage the revenue chain for traditional and next
generation communication service providers, retailers and distributors of
digital media, and technology solutions providers. Offering integration with
leading customer relationship management (CRM) and other legacy enterprise
systems, our RevChain(TM) software and Internet Integration Architecture
(IIA(TM)) leverage the latest open Internet technologies to enable providers to
achieve enhanced operational efficiency while driving revenue from their product
and service offerings. RevChain applications deliver proven interoperability and
scalability, making the software highly adaptable and ready for the future. As a
result, service providers are able to accelerate their time-to-revenue, adapt to
new technologies, and extend the value of their technology investment.
Our RevChain product family is composed of individual applications that are
built on our IIA, an Internet computing architecture. The RevChain product line
includes the following:
- RevChain Commerce - a convergent billing and customer care solution;
- RevChain Interact - an Internet interface for customer service
representatives;
- RevChain Care - web-based customer account management and self-care with
electronic bill presentment and payment (EBPP);
- RevChain mCommerce - customer account management and billing on the
mobile device;
- RevChain Express - flat-rate billing and customer care; and
- RevChain Select - original equipment manufacturer (OEM) versions of
RevChain applications.
We can configure our products to address service and feature requirements
for specific industry segments. We offer these pre-configured applications as
packaged industry suites.
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We also offer professional services, product support and customer training
related to the RevChain product family and other products we previously licensed
to customers.
We originally were incorporate in Florida in 1989. In 1999, we changed our
domicile and became incorporated in Delaware.
In September 2000, we formed a wholly-owned subsidiary, Daleen Technologies
Europe B.V., a corporation formed under the laws of The Netherlands. From this
subsidiary, we run our operations in Europe, the Middle East and Africa.
In January 2002, we formed a wholly-owned subsidiary, Daleen Australia Pty
Limited, a corporation formed under the laws of Australia to carry out our
Asia-Pacific operations.
In July 2000, the Company formed a subsidiary, PartnerCommunity, Inc.
("PartnerCommunity"). PartnerCommunity provides partner management software
products and services for providers of data content and communication services.
PartnerCommunity's products enable these service providers to build their own
private community to integrate business processes with their partners and
business customers, and to offer partner management services. In February 2002
we executed a letter of intent to sell substantially all of our ownership
interest in PartnerCommunity. The terms of the transaction are currently being
negotiated in a definitive agreement and include a purchase price of $100,000 in
cash and $200,000 in the form of a note receivable as well as 1,000,000 warrants
with an exercise price of $0.10. Although no assurances can be given, we expect
the transaction to close in early April 2002.
RECENT DEVELOPMENTS
Private Placement of Convertible Preferred Stock
On March 30, 2001, we entered into definitive agreements (collectively, the
"Purchase Agreements") for the sale (the "Private Placement") of $27,500,000 of
Series F convertible preferred stock (the "Series F preferred stock") and
warrants to purchase Series F preferred stock (the "Warrants"). Pursuant to the
terms of the Purchase Agreements, we consummated the Private Placement on June
7, 2001. We received net proceeds on June 7, 2001, of approximately $25.7
million from the Private Placement. The consummation of the Private Placement
was subject to the receipt of approval from our stockholders, including approval
of an amendment to our certificate of incorporation to increase the number of
authorized shares of common stock to 200 million shares and to create and
designate the Series F preferred stock. Our stockholders approved the Private
Placement and the related amendments to the certificate of incorporation at the
Company's annual meeting of stockholders on June 7, 2001.
The offering and sale of the Series F preferred stock and Warrants was
exempt from registration under the Securities Act of 1933, as amended, by virtue
of Rule 506 of Regulation D promulgated thereunder.
Pursuant to the Purchase Agreements, we issued and sold (i) an aggregate of
247,882 shares Series F preferred stock and (ii) Warrants to purchase an
aggregate of 109,068 shares of Series F preferred stock, including Warrants that
we issued to Robertson Stephens, Inc., our placement agent in the Private
Placement. The purchase price per share of the Series F preferred stock (without
giving effect to the allocation of any part of the purchase price to the
Warrants) was $110.94 per share, which is equal to (A) $1.1094, the average
closing price per share of our common stock during the ten trading days ending
on March 30, 2001, the date of the Purchase Agreements, multiplied by (B) 100,
the number of shares of common stock initially issuable upon conversion of a
share of Series F preferred stock. Each share of Series F preferred stock,
including the shares issuable upon exercise of the Warrants, currently are
convertible into 122.4503 shares of common stock, or an aggregate of
approximately 43,708,637 shares of common stock. As of March 18, 2002, 6,000
shares of Series F preferred stock have been converted to common stock resulting
in the issuance of 734,700 shares of common stock. See "Item 5: Market for
Registrant's Common Equity and Related Shareholder Matters -- Private Placement
of Convertible Preferred Stock."
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Restructuring Activities
On January 4, 2001, our Board of Directors approved, and on January 5,
2001, we announced a plan to implement specific cost reduction measures (the
"January Restructuring") that included workforce reductions, downsizing of
facilities and asset writedowns. We implemented the actions associated with the
January Restructuring immediately following the January 5, 2001 announcement.
The workforce reductions in the January Restructuring included the termination
of approximately 140 employees throughout our Boca Raton, Florida, Atlanta,
Georgia, and Toronto, Ontario, Canada facilities, and included employees from
substantially all of our employee groups. The downsizing of facilities included
the downsizing of the Atlanta, Georgia and Toronto, Ontario, Canada facilities
to one floor per each location.
In late March 2001, we initiated a second comprehensive business review to
identify additional areas for cost reductions. As a result, our Board of
Directors approved, and we announced, another restructuring on April 10, 2001
(the "April Restructuring"). The April Restructuring included the consolidation
of our North American workforce into our Boca Raton, Florida corporate offices
and the closure of our Atlanta, Georgia and Toronto, Canada facilities. The
workforce reductions resulted in the termination of 193 employees from
substantially all of our employee groups. In addition, we consolidated our North
American research and development and professional services resources and
further reduced our administrative support functions.
On October 17, 2001, our Board of Directors approved and on October 19,
2001 we announced a plan to further reduce expenses (the "October
Restructuring"). The October Restructuring included workforce reductions of 75
employees, further downsizing of facilities and asset writedowns and other
costs.
For additional information on the January Restructuring, the April
Restructuring and the October Restructuring see "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations-Results of
Operations."
Resignation of Key Executive Officer and Directors
Effective March 31, 2002, William A. Roper, Jr. resigned as a director of
the Company. Mr. Roper had served as a director since July 1999.
Effective December 31, 2001, David B. Corey resigned as an employee and as
a director of the Company. Mr. Corey served as our President and Chief Operating
Officer as well as a member of our Board of Directors. James Daleen, our
Chairman of the Board and Chief Executive Officer has assumed Mr. Corey's duties
and responsibilities. Mr. Corey is entitled to severance benefits under his
employment agreement.
Relocation of Corporate Headquarters
As part of our efforts to reduce expenses, in January 2002, we relocated
our corporate headquarters to 902 Clint Moore Road, Suite 230, Boca Raton,
Florida 33487. Our telephone number remains (561) 999-8000.
INDUSTRY BACKGROUND
RevChain software suites may be configured to address a wide variety of
industry segments, including integrated communications providers, mobile
communications, broadband, digital content, digital markets and application
service providers. These markets are briefly described below:
Integrated Communications Providers (ICPs)
Deregulation in the U.S. telecom market started in 1984 with the breakup of
AT&T into the RBOCs or regional Bell operating companies; also known as ILECs or
incumbent local exchange carriers. This was intensified by the
Telecommunications Act of 1996, which further deregulated the market and
resulted in the formation of competitive local exchange carriers, or CLECs. More
recently, ICPs became the catchphrase for companies providing these types of
services.
The deregulation of communications in the U.S., along with similar
deregulation and privatization trends in Canada, Latin America, Europe and Asia,
have increased competition worldwide by allowing new entrants
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into the market. During this time, customers have begun to demand, and service
providers are making available, an increasing variety of communications
services, including local voice, long distance, mobile voice and data, and
broadband. To diversify their revenue streams and remain competitive, service
providers are finding that they must introduce new products and services while
constantly improving customer loyalty and satisfaction. Driving the highest
level of lifetime value from each customer has become an important focus.
Service providers are differentiating themselves by expanding their product and
service offerings, bundling together and cross-discounting various combinations
of communications services and providing superior customer care.
In today's climate of competition and shrinking margins, ICP's are required
to take a more comprehensive approach to understanding and managing the revenue
chain of the entire enterprise. Customer management and billing, partner
management and service activation solutions are among the key components of a
service provider's information systems, because they enable the provider to
better manage its customers and revenues; dynamically change and grow service
offerings; develop and market new programs and rate plans; and automate and
streamline the processes, transactions and interactions between trading
partners.
Mobile Communications
The past two decades have delivered significant growth in wireless
communications and computer technology, with the last six years offering similar
growth of the Internet. In the middle of this convergence, the wireless industry
is reaping the benefits of Internet technologies with increased demand for many
types of services including Internet service on wireless phones, and handheld
devices that enable Web browsing, messaging between users, remote email, and
receiving and storing various forms of mobile content such as music and images.
At the same time, corporations are starting to depend more on wireless services
to push data and content to employees as well as customers.
The growth in wireless subscribers coupled with an increase in business
deployment of wireless services has resulted in an increase in the number of
wireless data operators, service providers, MVNOs (Mobile Virtual Network
Operators), W-ASPs (Wireless Application Service Providers) and middleware
vendors. Fueling further wireless growth is the scheduled deployment of
third-generation networks that are capable of providing even higher bandwidth
rates to support a new generation of emerging services. Additional opportunities
are also presenting themselves in the form of location-based services where
geographical information, such as the current location of a person or
automobile, can be used to suggest nearby hotels, gas stations, restaurants and
other amenities.
Broadband
Broadband is capable of supporting Internet connections at very high speeds
using technologies such as digital subscriber lines (DSL), cable modems, or
various traditional technologies such as frame relay and asynchronous transfer
mode (ATM). Ultimately, we believe that a convergence of communication services
will occur as voice, data and new forms of digital content such as music, video
and gaming are provided over a single connection, from one provider. With
convenient access to information delivered at high speeds, people will have a
better ability to communicate in real-time and enjoy expanded sources of
information, education, and entertainment.
As demand rises and bandwidth costs continue to decrease, providers must
offer value-added services in order to reach internal profitability goals and
differentiate themselves in the market. To adapt for future growth and dynamic,
value-based service offerings, we believe broadband providers may need to take a
more comprehensive view of their revenue chain, and streamline processes across
the entire enterprise. New offerings may also require partnerships to be formed
between a customer's local broadband service provider and the companies
providing the content for the offering. These partnerships may present
additional billing and settlement challenges for providers and new opportunities
in the market.
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Digital Content
The number of content services is growing with providers offering new forms
of media, videos, music, news/periodicals, reference/encyclopedias, traffic
reports, education, gaming, and software delivery over the Internet. Internet
content providers are focused on providing these services to consumers over
broadband connections, wireless application protocol (WAP) enabled phones, and
personal digital assistants (PDAs). Despite this growth, online and wireless
content providers worldwide are experiencing challenges in translating customer
demand into increased revenues. To differentiate themselves from competitors,
digital content providers need to offer premium, value-based services, which
require real-time customer care and usage/value-based pricing. In addition, they
may find it necessary to establish partnerships with the creators of the content
as well as broadband providers to achieve the most efficient delivery of service
to the end customer. This complex network of collaboration may create the need
for an automated solution to manage the billing and settlement challenges
associated with the complete process of creating, selling, and delivering
digital content.
Digital Markets
Over the last five years of growth, the Internet has been used for many
purposes. One of the interesting models that is developing is the idea of an
Internet-based market exchange or B2B (business to business) exchange. There are
many public market exchanges today that specialize in the buying and selling of
various goods and services between businesses. These exchanges are typically
focused in a particular industry segment such as rubber, steel, or agricultural
products and allow buyers and sellers to bid on products in an online auction or
other buying format. Our RevChain product is licensed under an OEM agreement by
i2 Technologies, Inc. to be part of the TradeMatrixTM suite, offered by i2, to
act as the billing component for commissions on online auctions and trades for
Internet-based market exchanges.
Application Service Providers (ASPs)
ASPs are service firms that deploy, host, implement, manage and support
applications, storage, and Web sites from a central data center across the
Internet, VPNs (virtual private networks), or leased lines. End users access
these applications remotely and usually rent them on a per-user, per-month
basis. This industry enables end users to reduce both application deployment
timeframes and their total cost of ownership.
Competition and consolidation of the ASP industry require current ASPs to
differentiate themselves by quickly becoming more effective and efficient than
their competitors. ASPs need to provide value-added application services and to
price them according to the value perceived by end users based on quality of
service, amount of resources used, and time. We believe success in the ASP
market will be dependent in part upon the ability to overcome pricing and
customer service challenges, in order to accelerate customer adoption and
time-to-revenue.
ISSUES COMMON TO OUR TARGETED MARKETS
The rapid market expansion and growth seen in our targeted markets in
recent years was severely impacted by a general economic slowdown in 2001 that
strongly affected the technology and communications industries. The dramatic
change in business conditions caused many companies to close their doors, while
others took drastic steps to reduce expenses in order to wait out the market
downturn. Shifting their focus from growth and new market penetration, companies
faced increased pressure to retain their current customer base while reducing
their operating costs.
Due to increased pressures and tightening of spending, companies in our
targeted markets have been scrutinizing their technology investments more
fiercely than ever before. Previously planned technology investments are being
reevaluated, forcing companies to stretch the capabilities of their back-office
systems. This has created an extremely difficult challenge for providers whose
survival depends on driving profitable growth. To remain ahead of their
competitors, providers must be able to maximize revenue in their existing
markets, and also react with speed and agility to bring new products and
services to market.
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In order to introduce new offerings, accept and handle new types of data,
and build rate plans in response to intense competition, providers have been
forced to repeatedly modify their legacy systems. This is because many of the
software systems used today in our target markets were developed and implemented
prior to the emergence of today's competitive market and the pervasive use of
the Internet. As a result, these businesses have found themselves maintaining an
extremely complex information systems environment consisting of numerous
proprietary systems that were often designed to work as stand-alone
applications. The majority of these systems are based on older technology
platforms that are more costly to maintain and have only a limited
interoperability with other elements of the information system. They require
significant time, resources and effort to modify, making it difficult for
service providers to respond quickly and competitively with innovative marketing
promotions and new service offerings.
The economic slowdown in 2001 has made succeeding in today's business
environment more difficult than ever before. Providers must have the ability to
create and implement new services quickly, manage them efficiently and issue a
single invoice for complex service bundles, while providing exceptional service
to customers. The evolving business environment requires a more comprehensive
solution than billing applications have previously offered. We believe our
targeted markets can benefit from a solution that is designed to meet the
specific challenges they face in today's market, including the ability to:
- Support multiple, convergent services and the rapid deployment of new
services and pricing programs;
- Utilize standard Internet technologies and applications to manage
relationships with partners and customers;
- Operate seamlessly with other components of the service provider's
information system; and
- Maximize efficiency through ease of implementation, system
administration, and ongoing operations.
THE DALEEN SOLUTION
In 2001, we developed and introduced our RevChain product family, which
represents the evolution of our former customer management and billing products
(known as BillPlex(R) and eCare) into products with significantly enhanced
functionality and a new Internet-based architecture. RevChain is a full product
line that includes a set of industry-focused software suites composed of
individual applications built on an Internet computing architecture. Our
RevChain applications are based on our innovative IIA that leverages the latest
open industry standards for enhanced performance and efficiency. RevChain
applications can be configured for specific industries and may be licensed
together or separately. With the launch of our RevChain product family, we
introduced a new concept, managing the revenue chain, a holistic view of revenue
that encompasses more than just billing. It addresses the need for a linked and
automated process that joins billing seamlessly with CRM and other
mission-critical operational and support systems involved in the creation,
management, provisioning and delivery of products and services. The revenue
chain spans the entire organization - from people and systems involved in the
development of new services, to marketing, sales, customer service, and billing
- - and extends outwardly to the partners and via the Internet to customers. We
believe that our software and product architecture can help providers streamline
these processes, driving greater efficiency in their organizations and more
revenue from their customers and partners.
Our RevChain product applications have been designed to address traditional
and next generation technologies for convergent providers seeking to provide
multiple services. Our innovative Internet architecture has the inherent
flexibility to enable providers to offer new products and services quickly in
response to dynamic market conditions. RevChain applications are designed for
seamless integration with other applications in a service provider's operations
environment, including CRM and Enterprise Resource Planning (ERP) systems. The
open design and use of industry standard technologies, including HTTP, XML, and
J2EE, facilitate integration of our solutions into a provider's existing
infrastructure.
Our products can be configured to address service and feature requirements
for specific industry segments. These pre-configured applications are offered as
packaged industry suites. The application suites can be configured and
integrated to address the requirements, services and features of specific
industries. This has the potential to provide both economic and operational
advantages by reducing the time and costs of
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integration services and streamlining the implementation process. The suites
provide a high level of out-of-the-box functionality as well as the means to
configure specific capabilities to meet each enterprise's specific needs.
Our RevChain product applications are intended to play a key role in a
service provider's business by improving its ability to compete effectively
while simultaneously improving performance and lowering the total cost of
providing services. Our products are designed to enable service providers to
capture the following key business benefits:
Unlock new revenue. RevChain applications are designed to give providers
support for new products, services, business models and delivery channels, along
with the flexibility and configurability to deploy these new offerings faster
and with fewer resources. Our industry suites provide a high level of
"out-of-the-box" functionality with less customization than other product
offerings. Flexible service bundling is designed to allow providers to rapidly
create, test and launch new product and service offerings to drive more revenue
per customer. This is critical as providers seek to maximize their investment
under challenging economic conditions. By supporting next-generation services
such as billing for Quality of Service (QoS), Service Level Agreements (SLAs),
and burstable bandwidth, RevChain provides the functionality to maximize revenue
from providers' advanced networks.
Create operational excellence. RevChain applications are designed to
enable providers to achieve greater return on investment and efficiency through
automation and the elimination of hard costs typically associated with billing
(i.e. paper billing and postage). Integration with CRM and order management
software solutions eliminates the need for multiple manual data entry and
improves the accuracy and integrity of customer data throughout the enterprise;
while advanced billing functionalities streamline the billing process and reduce
the number of errors. RevChain features a patented, dynamic rating and billing
engine and its "plug-in" architecture is designed so that any programmer using
standard C++ tools can add to or enhance the RevChain application to meet
specific business needs thereby reducing the need for more costly technical
staff.
Leverage the power of new technologies. Our IIA is designed based on open
Internet standards and J2EE-compliant Application Programming Interfaces (APIs)
which provide streamlined integration and migration so that providers can handle
increasingly complex billing for convergent services. It leverages today's most
advanced Java-based application development tools and enables unmatched forward
and backward compatibility to bridge the gap between legacy systems and emerging
technologies.
Increase customer satisfaction. RevChain applications are designed to
enable providers to attract and maintain more profitable customer relationships
by improving billing accuracy to reduce the number of complaints, while using
web-based customer self-care, EBPP and online account management to give
customers the information they need when they need it. RevChain's seamless
integration with CRM ensures that customer service representatives (CSRs) have a
more complete view of customers' up-to-the-minute account data and billing
details so that any disputes that arise can be handled quickly and efficiently.
THE DALEEN STRATEGY
Our strategy in 2001 reflected the challenging market conditions and the
growing maturity of our RevChain products. We shifted away from a strategy of
growth by internal expansion toward one of measured growth through partner
sales. This approach supports our financial goals to reduce costs and ongoing
investment and allows us to gain access into new geographies, new markets and
Tier 1 accounts. It also supports the growing demand for broader, pre-integrated
solutions and allows us to leverage the strength of our product architecture and
advanced billing functionalities through collaborative offerings with recognized
industry players. Our goal is to become a leading global provider of billing and
customer care (BCC) software in the telecommunications industry through intense
focus and determined execution in the following five areas:
Aggressively targeting high-potential markets. Our RevChain application
products are designed to meet the needs of a variety of industries including
providers of wireline or wireless services, local and long distance
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voice, data, video, Internet services, and digital media products. Service
providers across all of these industries are increasingly under pressure to
produce revenue at a faster rate, while holding down or reducing their
operational costs. The ability to drive revenue, improve margins and provide
high levels of customer satisfaction is becoming even more crucial for success.
Our strategy is to focus on markets and market segments that are financially
positioned to invest in their technology infrastructures. As these providers
strive to maintain their competitive advantage by introducing new and more
complex offerings, we believe they will require more advanced billing
functionalities to ensure the maximum return on their technology investments.
Building on our technology leadership. Daleen has achieved innovation in
the development and deployment of new technology. With BillPlex, we introduced a
convergent billing and customer care solution. We were one of the first to offer
pre-packaged industry solutions that allowed customers to improve their time-
to-market. Our patented rating engine has the ability to rate and bill for all
types of usage data, regardless of network or source. In 2001, with the
introduction of RevChain and the IIA, we took another step in extending our
technology leadership. RevChain is a convergent billing and customer care
solution built on an open Internet architecture and designed with specific
functionalities that allow providers to seamlessly blend traditional and next
generation services, while driving greater operational efficiency. Built for
scalability, RevChain applications deliver the increased throughput and
performance required by Tier 1 customers, and has proven interoperability with
legacy billing, CRM, and other mission critical enterprise systems. Our RevChain
products achieve what we believe to be a high level of throughput and
scalability for a pre-configured, modular billing system by demonstrating
support for up to 40 million usage-based access lines, or 80 million flat-rate
accounts. We continue to develop RevChain applications, adding advanced support
for partner settlements, dispute processing, and enterprise integration using
XML.
Leveraging strategic partnerships and alliances. Partner relationships
with third party consultants and software providers are a significant part of
our current sales and marketing strategy. We maintain a network of partnerships
and alliances with companies in several categories including OEM/Reseller
partners, ASP partners, system integration and delivery partners, and technology
partners. These strategic alliances help extend our market coverage through
increased exposure into targeted customer accounts, new business leads, joint
development and marketing opportunities, and access to a large pool of highly
trained implementation personnel. Our partnerships with these established
industry players also gives us the opportunity to market RevChain to our
partners' customer bases.
Developing and maintaining long-term customer relationships. Customers are
considered an extension of our organization. We strive to deliver exceptional
levels of service and support that will allow us to develop and maintain
long-term relationships with our customers. In 2001, we were ranked No. 1 in
overall customer satisfaction according to an independent report issued by
U.K.-based management consulting firm, Chorleywood Consulting, Ltd., based on
feedback from our customers. Our flexible pricing model is designed to attract
and retain providers of all sizes through all phases of their growth. We believe
that long-term positive relationships with customers are a key factor that can
lead to additional product sales, customer references and recurring support and
maintenance revenues.
Expanding into new geographic markets. We currently serve customers in the
United States, Canada, Latin America, Europe and the Asia-Pacific region. We
intend to continue to build our business in the U.S. and further penetrate the
Europe, Middle East, Africa and the Asia-Pacific regions. We will be selling
directly and through collaborative relationships with our strategic alliances.
Our expansion efforts are supported by sales offices in Amsterdam, The
Netherlands and Sydney, Australia.
PRODUCTS
A summary of our RevChain applications and their features are outlined
below:
Daleen RevChain Commerce-- RevChain Commerce is a powerful BCC system with
the ability to read, rate, and track virtually any type of usage data from any
source over any network. It offers flexibility and support for rating and
billing high volumes of traditional and next generation wireline and wireless,
local and long distance, voice, data, Internet, and digital content services.
The advanced design and open architecture support rapid service creation and
deployment, discounts and pricing schemes, and cross-service promotions
8
and allows providers to configure both simple and complex services with minimal
resources and implementation time. RevChain Commerce integrates with legacy
billing, CRM and other enterprise applications, to streamline internal processes
and improve data integrity between systems.
RevChain Commerce includes advanced features to support account and service
management, configurable rate plans, real-time credit limits, automatic
prepayment, settlements, and management reports. Sophisticated partner
settlement features provide an automated process for establishing and
maintaining relationships in the provisioning and delivery of collaborative
services. RevChain Commerce supports global operations with support for multiple
languages and tax plans, currency conversion, and customer-sensitive language
and address localization.
Daleen RevChain Interact -- RevChain Interact is a true web-based client
interface that provides direct access to the product catalog and customer
database within the RevChain Commerce applications. It leverages the power of
the Internet to allow CSRs to achieve higher levels of efficiency while
delivering exceptional service. Using a standard Web browser, RevChain Interact
offers CSRs a centralized view into the customer account and provides the
functionality needed to manage customer accounts including customer management
activities, balance management, provisioning of products and services, dispute
processing and collections. The look, feel and familiar web navigation
techniques of our product make it easy to use with minimal training. There is no
client software to install, so providers can deploy new CSRs quickly.
With extensive scaling capabilities for large operations, RevChain Interact
enhances operating efficiency by reducing the database connections, server load,
hardware and software requirements, and minimizing the network bandwidth
necessary to run the system.
Daleen RevChain Care -- RevChain Care is an intuitive software product that
provides convenient customer self-care and EBPP over the Internet creating a new
channel for customer service. RevChain Care provides 24-hour access to accurate,
up-to-date information so customers can view their current and historical
billing and usage data, update personal account information, make payments, and
initiate disputes on line at their convenience. This application can be
customized with minimal effort to extend a service provider's brand and enhance
marketing programs. RevChain Care is pre-integrated with our entire suite of
products and designed for seamless integration with CRM and other
revenue-enhancing operation support systems.
Daleen RevChain mCommerce -- RevChain mCommerce extends billing, customer
management and commerce capabilities to customers over Web-accessible devices.
Customers can view account balances, modify personal information, and make
payments via their mobile device over secure connections.
Daleen RevChain Express -- RevChain Express is a BCC software product
designed to be future-proof for growth-oriented businesses. It provides
comprehensive flat-rate convergent billing functionalities with an option to
quickly and easily upgrade the system in place to handle more complex
usage-based rating models. By eliminating the delays and escalating costs of
migrating data or installing a new system, RevChain Express is a sensible way
for service providers to grow their businesses.
Daleen RevChain Select -- RevChain Select includes OEM versions of our
proven RevChain BCC software, including RevChain Commerce, RevChain Interact and
RevChain Care. These applications are designed to integrate seamlessly with
other mission critical software from OEM's, significantly reducing the costs
associated with development, implementation and training.
PartnerCommunity -- The PartnerCommunity products and services provide
Internet-based partner chain management for network, application, and content
service providers. The PartnerCommunity products and services enable customers
to find and form new partner relationships, integrate systems and business
processes, and automate and manage the operation of key business functions
between companies. In addition to business process integration and partner chain
management services, PartnerCommunity offers the PartnerCommunity@ program, an
innovative packaging of PartnerCommunity services targeted at Web hosting and
managed services providers who wish to offer PartnerCommunity services to their
customers in order to enhance their competitive positions.
9
TECHNOLOGY
RevChain applications are built on an unique open Internet architecture to
deliver maximum return on providers' technology investment. We built our IIA
from the ground up to ensure that our customers continue to distinguish
themselves among competitors and thrive in an economy that demands operational
efficiency. Using advanced Internet technologies and open industry standards, we
designed IIA to be an intelligent, adaptable architecture with extensive
scalability and flexibility needed to support traditional and next generation
services.
This architecture uses standard Internet technologies, including HTTP, XML
and universal J2EE support to deliver flexibility and performance in adapting to
new technologies and service offerings. More cost effective than traditional
client/server applications, IIA provides ubiquitous access and seamless
integration so that users can easily access RevChain applications using only a
standard XML-compliant Web browser or any Internet-ready device.
IIA is more than a framework for seamless integration between our RevChain
applications. Through its interoperability with CRM applications, legacy billing
and enterprise systems, it can enhance the performance of other operational
systems and extend the value of a provider's investment in legacy systems.
The IIA framework includes a service activation layer that integrates to
leading enterprise application integration (EAI) components. This activation
service provides integrated and automated flow-through service activation and
network provisioning to support diversified product and service offerings. It
can be used to activate or deactivate applications, components, and security,
using best-of-breed equipment. The IIA framework means fewer manual steps, fewer
hours correcting errors, and reduced costs.
PROFESSIONAL CONSULTING SERVICES, MAINTENANCE AND TECHNICAL SUPPORT
Our customer services are designed to provide customers with superior
services and support while giving them the tools and knowledge they need to
independently run their day-to-day operations. The following services are
provided:
Professional Consulting Services. We provide a variety of professional
consulting services to assist customers in the implementation, modification and
customization of products and market-based packages. We provide these services
under services agreements with our customers. We work with customers to
establish business models and processes that utilize our products to increase
their market power and lower their operating costs. We are also increasing the
involvement of our third-party integrators to perform implementations for
customers with our oversight.
Maintenance. We have comprehensive maintenance and support programs that
provide customers with timely, high-quality maintenance and support services for
our products. We provide these services under maintenance agreements with our
customers. The maintenance agreement entitles customers to multiple levels of
telephone and email technical support for prompt and professional response to
maintenance issues during and after normal business hours. We also provide
24-hour access to our online maintenance incident tracking system.
Operational Environment Tuning and Performance Level Service. We provide
technical and product configuration support for operational issues and testing
environment support. The support center maintains a close working relationship
with customers, making available all maintenance releases and assisting in
planning and scheduling the implementation of each release. An additional
service, which involves an on-site performance tune up to maximize the billing
operations environment, is also available for existing installed base customers.
Third-party Software Fulfillment. When customers require it, we provide a
complete solution by offering third-party software products to enable their
RevChain applications. We provide platform products, such as the Windows NT(R)
and UNIX(R) operating systems running from an Oracle(R) database. Our RevChain
applications are enabled through BEA's WebLogic product. We also provide
complementary products that integrate with our RevChain applications, such as
GeoStan(TM) Address Validation Software from Sagent;
10
Doc1 from Group 1 for invoice rendering; and tools that support development and
reporting, such as Seagate's Crystal Reports.
TRAINING
We offer training programs using a variety of media to provide customers
with the skills needed to use our software. For RevChain Commerce and RevChain
Interact, our curriculum includes a comprehensive train-the-trainer program via
the Internet to prepare customers' trainers who support CSRs, billing
administrators and billing operators. For customers who are more comfortable
with traditional instructor-led sessions, we offer a full suite of technical and
end-user training programs. A learning consultant is assigned to each customer
to tailor the training of a customer's staff during the life cycle of the
project.
CUSTOMERS AND PARTNERS
The maturity of our RevChain applications and increased emphasis on sales
through our OEM/Reseller partners contributed to our entry into the Tier 1
telecommunications marketplace and visibility into several other industries
during 2001. Our customers consist mainly of local, inter-exchange carriers,
Internet service providers; other data services providers, broadband service
providers, ICPs, and carrier local exchange carriers. These customers are
located in the United States, Canada, Latin America/Caribbean, Asia-Pacific and
Europe and include such companies as AAPT, Terremark Worldwide, Inc., Aether
Systems, Fairpoint Communications, Inc., FLAG Telecom, Illuminet, Inc., InQuent
Technologies, Inc., and EUR Systems, Inc. Our OEM/Reseller partners include i2
Technologies, Inc., and Telcordia Technologies, Inc. For the year ended December
31, 2001, Terremark Worldwide, Inc. accounted for 15% of our total revenue and
i2 Technologies, Inc. accounted for 12% of our total revenue.
SALES AND MARKETING
Sales. Our sales strategy combines direct sales with our strategic
alliance approach to achieve greater reach into markets and targeted customer
segments. Through our direct sales efforts, we develop and manage relationships
with service providers and network operators, using a consultative
problem-solving sales process. We work closely with these customers to define
and determine how their needs can be fulfilled with our products and services.
Certified system integration and delivery partners play a key role in
providing solutions and delivery for our customers and extend the capabilities
of our sales and marketing organization. These partners enhance our direct sales
efforts along with our OEM/Reseller partners, including Telcordia Technologies,
Inc. and i2 Technologies, Inc., who license our RevChain software and offer it
to their customers.
Due to the sophisticated nature of our products and services, the duration
of a sales cycle can typically range anywhere from one to two months and up to
one year or longer. We intend to continue our partner sales strategy through our
development, strategic and marketing alliances.
Marketing. Our marketing organization is focused on building our brand and
establishing a competitive position for our RevChain applications in the
marketplace. By participating in industry events that showcase new technologies
and solutions and international trade shows and conferences, we work to identify
market trends while demonstrating RevChain's ability to meet our customers'
needs. Our marketing programs include coordinated efforts to support our
strategic alliances, conduct ongoing public and media relations programs,
provide corporate and product branding and sales support, plan and manage
events, and maintain relationships with industry analysts.
STRATEGIC ALLIANCES
We have developed strategic alliances that expand the coverage of our
direct sales organization, provide implementation and customization services for
our products, and complete our solutions offerings. Our strategy is to leverage
our current relationships and develop new alliances to help achieve our sales
and
11
implementation targets. These alliances enhance our ability to exploit new
opportunities in our existing markets, expand our addressable market, and drive
new strategic and product initiatives.
Our alliance program is based on four types of relationships:
- Strategic OEM/Reseller Partners;
- ASP Partners;
- System Integration and Delivery Partners;
- Technology Partners
Strategic OEM/Reseller Partners. Our strategic OEM/Reseller partners
license and resell our BCC solutions. Daleen RevChain applications add value to
our partners' products, including operating support systems, business support
systems, legacy systems, and other Internet-based products. Our strategic
OEM/Reseller partners include Telcordia Technologies, Inc., Oracle Corporation,
i2 Technologies, Inc., Scientific Applications International Corporation (SAIC),
Danet, Inc., and EYT, Inc.-formerly Ernst & Young Technologies.
ASP Partners. Daleen's authorized ASP partners are providers of outsourced
services to the broadband, ICP, and ASP industries, offering Internet BCC,
service activation, and customer self-care. Our solutions share an integrated
platform design by using proven tools and systems supported by market-leading
technology. By working with these partners, we provide rapid introduction of new
features to support growth, Tier 1 scalability, rapid migration and deployment.
Our ASP partners include EUR Systems, Synchronoss Technologies, NetworkOSS, Inc.
and Perot Systems.
System Integration and Delivery Partners. We work with recognized systems
integrators to ensure that project implementations are completed on time and
within budget, and that customers' expectations are met or exceeded. Other
services provided by system integration and delivery partners include,
strategic, technological, and management consulting. Our system integration and
delivery partners include Telcordia Technologies, Inc., Cap Gemini Ernst &
Young, Danet, Inc., DMR Consulting, Satyam Computer Services Ltd. and EYT, Inc.
These partners are certified by Daleen and have the ability to implement our
solution in combination with those of other industry leaders.
Technology Partners. We work with leading software, hardware, and network
providers that offer a superior value proposition to joint customers. We engage
with technology partners on joint sales and marketing efforts, as well as
development work and projects to create seamless "best-of-breed" solutions. Our
technology partners include: Aether Systems, Cisco Systems, Intec Telecom
Systems, Oracle Corporation, BEA Systems, Inc., MetaSolv Software, Inc., Juniper
Networks, Extreme Networks, Peoplesoft Inc., ONI Systems, Comptel Corporation,
Vertex, Inc., XACCT Technologies and EHPT USA. Our pre-integrated RevChain
applications offer our mutual customers flexibility and integration capabilities
thus decreasing risk, time-to-implementation, and costs. In addition, we have
developed working relationships with platform partners that create and market
the hardware, operating systems, and database engines on which our technology
runs. They include Microsoft(R) (network operating system and database engine),
Sun Microsystems (operating systems and server hardware) and Oracle (database
engine).
RESEARCH AND DEVELOPMENT
Our product development capabilities are essential to our strategy of
enhancing our core technology, developing additional applications, incorporating
that technology and maintaining the competitiveness of our RevChain product
software. We have invested heavily in software development to ensure that we
have the product design skills and tools for achieving our market leadership
objective. We recognize that our ability to create and extend our products with
each release comes from investing in exceptionally talented software engineers,
quality assurance testers and billing and telecommunications specialists. In
addition, we engage third parties to perform contract labor on research and
development. We have also created a structured process for both platform and
market package releases that serves as a framework for minimizing our product
12
development cycle times and ensuring quality software releases that meet or
exceed our customers' requirements.
Our research and development expenses totaled approximately $9.3 million
for 1999, $27.2 million for 2000, and $12.5 million in 2001. As of March 18,
2002, approximately 44 employees were engaged in research and development
activities, all located in our corporate headquarters in Boca Raton, Florida.
COMPETITION
The markets in which we compete are intensely competitive, highly
fragmented, and rapidly changing. Our RevChain applications compete on the basis
of product functionality, performance, scalability, extensibility, ease of
integration and cost of ownership. As a company, we are also evaluated on our
responsiveness to the needs of customers, specific product features and
functionalities, the timeliness of implementations, quality and reliability of
products, pricing strategies, project management capability, financial condition
and technical expertise.
We received a top honor in 2001 as the global leader in customer
satisfaction in the BCC industry according to a report issued by a U.K.-based
management-consulting firm, Chorleywood Consulting. Twelve leading BCC software
providers, including Amdocs Limited, Portal Software, Inc., Convergys
Corporation, Kenan Systems Corporation and Saville, business unit of ADC
Telecommunications, Inc., formerly Saville Systems PLC were ranked by customers
according to six distinct customer satisfaction criteria: timeliness of
delivery, functionality, delivery within budget, vendor support and maintenance,
system flexibility and interoperability. According to the report, we scored the
highest in each category and had no dissatisfied customers. This was the first
year that we have been included in the independent study and the first time a
single BCC vendor has ranked first on all six customer satisfaction criteria.
Our main competitors include:
- Amdocs Limited;
- Convergys Corporation;
- Portal Software, Inc.;
- Saville, a business unit of ADC Telecommunications, Inc., formerly
Saville Systems PLC; and
- CSG Systems International, Inc.
Several business combinations this year have changed the competitive
landscape. Amdocs Limited acquired the assets of Clarify.com from Nortel
Networks Corporation to add expanded customer care capability in their suite of
products; CSG Systems International, Inc. acquired the products and services of
Kenan Systems Corporation from Lucent Technologies, Inc. to expand their
offering from cable to telecommunications billing; and Convergys Corporation
acquired Geneva Technology Limited. These acquisitions add elements to further
differentiate our competitors and expand their capability to bring a convergent
billing offering to market.
We also compete with the internal information technology departments of
large communications companies, who may elect to develop functionality such as
those provided by our products in-house rather than buying from outside
suppliers.
We believe that our ability to compete depends in part on the performance
of the competition, including the development by others of software that is
competitive with our products and services, the price at which others offer
competitive software and services, the extent of competitors' responsiveness to
customer needs and the ability of our competitors to hire, retain and motivate
key personnel.
We anticipate continued growth and competition in our target markets and
the entrance of new competitors into the customer management and billing,
partner management, and service activation software markets, as well as emerging
players in the overall revenue chain management area. We expect that the market
for our products will remain intensely competitive.
13
INTELLECTUAL PROPERTY
We regard significant portions of our software products and related
processes as proprietary and rely on a combination of patent, copyright,
trademark and trade secret law, contractual provisions and nondisclosure
agreements to protect our intellectual property rights. We were issued a patent
for our dynamically configurable and extensible rating engine used in our
RevChain Commerce product and currently have six other patent applications
pending in the United States. In addition, we have filed a number of trademark
applications to protect our trademarks and tradenames. There is no guarantee
that our pending patent or trademark applications will result in issued patents
or trademarks, or will provide us with any significant competitive advantages.
In addition, we cannot assure you that any of our proprietary rights will not be
challenged, invalidated or circumvented.
When we license our products, we use signed license agreements that limit
access to and distribution of our intellectual property and contain
confidentiality terms customary in the industry. Generally, we license our
products in object code only, a format that does not allow the user to change
the software source code. However, some of our license agreements do require us
to place the source code for our products into escrow. These agreements
generally provide that these licensees would have a limited, non-exclusive right
to use the software source code if there is a bankruptcy proceeding by or
against us, if we cease to do business without a successor or if we discontinue
providing maintenance and support on our products. We generally enter into
employment or independent contractor agreements with our employees and
consultants to ensure and to protect our intellectual property rights.
EMPLOYEES
As of March 18, 2002, we had 116 full-time employees, of whom 24 were in
product implementation and support, 23 in sales and marketing, 44 in research
and product development, and 25 in administration. Ten of these employees are
from PartnerCommunity. We have never had a work stoppage and none of our
employees are represented under collective bargaining agreements. We consider
our relations with our employees to be good.
ITEM 2. PROPERTIES.
We relocated our headquarters in January 2002. We are now located in a
professional office building in Boca Raton, Florida where we lease approximately
31,000 square feet. We occupy these premises under a lease that expires on
January 31, 2004.
We also lease approximately 8,500 square feet of office space in Atlanta,
Georgia. This space is currently being subleased to a third party sub-tenant for
the duration of the lease term. The Atlanta lease expires on August 31, 2004.
We also have a United States sales presence in the metropolitan area of
Atlanta, Georgia, a European sales presence in London, England and Amsterdam,
The Netherlands and a sales presence in Sydney, Australia.
ITEM 3. LEGAL PROCEEDINGS.
Fazari v. Daleen Technologies
On December 5, 2001, a putative class action complaint was filed in the
United States District Court for the Southern District of New York. The
complaint is styled as Angelo Fazari, on behalf of himself and all others
similarly situated, vs. Daleen Technologies, Inc., BancBoston Robertson Stephens
Inc., Hambrecht & Quist LLC, Salomon Smith Barney Inc., James Daleen, David B.
Corey and Richard A. Schell, Index Number 01 CV 10944. The defendants include
us, certain of the underwriters in our initial public offering and certain of
our current and former officers and directors. The complaint was filed by a
single plaintiff purportedly on behalf of persons purchasing our common stock
between September 30, 1999 and December 6, 2000 and seeks class action status.
The complaint includes allegations of violations of (i) Section 11 of the
Securities Act of 1933 by all named defendants, (ii) Section 12(a)(2) of the
Securities Act of 1933 by the underwriter
14
defendants, (iii) Section 15 of the Securities Act of 1933 by the individual
defendants and (iv) Section 10(b) of the Securities Exchange Act of 1934 and
Rule 10b-5 promulgated thereunder by the underwriter defendants. According to
public records, since January 2001 more than 1,000 similar class action lawsuits
have been filed in the Southern District of New York against more than 263
different companies relating to their initial public offerings. These actions
have been consolidated for pretrial purposes before one judge under the caption
"In re Initial Public Offering Securities Litigation" in federal district court
for the Southern District of New York.
Specifically, the plaintiff alleges in the complaint that, in connection
with our initial public offering, the defendants failed to disclose "excessive
commissions" purportedly solicited by and paid to the underwriter defendants in
exchange for allocating shares of our common stock in the initial public
offering to the underwriter defendants' preferred customers. The plaintiff
further alleges that the underwriter defendants had agreements with preferred
customers tying the allocation of shares sold in the our initial public offering
to the preferred customers' agreements to make additional aftermarket purchases
at pre-determined prices. The plaintiff claims that the failure to disclose
these alleged arrangements made our prospectus included in our registration
statement on Form S-1 filed with the SEC in September 1999, materially false and
misleading. Plaintiff seeks unspecified damages and other relief. We intend to
defend vigorously against the plaintiff's claims. We believe that we are
entitled to indemnification by the underwriters under the terms of the
underwriting agreements. We have notified the underwriters of the action, but
the underwriters have not yet agreed to indemnify us.
Settlement of Lawsuit
On June 6, 2001, we settled a lawsuit (the "Litigation") against Mohammad
Aamir, 1303949 Ontario Inc. and The Vengrowth Investment Fund Inc.
(collectively, the "Defendants"). In connection with the settlement, on June 8,
2001, we granted to the Defendants warrants to purchase an aggregate of 750,000
shares of our common stock with an exercise price of $1.134 per share. The
warrants are exercisable for a period of two years. We also executed a license
to an affiliate of certain of the Defendants for a version of one of our
software products as part of the settlement. The Defendants also released us
from any claims they may have had against us.
We are also involved in a number of other lawsuits, claims and
investigations that arise in the ordinary course of business. We do not believe
the outcome of any of these activities would have a material adverse impact on
our financial position or our results of operations. See Item 5 "Market for
Registrant's Common Equity and Related Shareholders Matter - Issuance of
Securities in Settlement of Litigation".
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter of fiscal 2001, there were no matters submitted
to a vote of security holders, through the solicitation of proxies or otherwise.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages at December 31, 2001, and current positions of our
executive officers are listed below in accordance with General Instruction G(3)
of Form 10-K and Instruction 3 of Item 401(b) of Regulation S-K. Unless
otherwise stated, each executive officer has held their position for at least
the last five years. All officers are elected for one year terms or until their
respective successors are chosen. There are no family relationships among the
executive officers nor is there any agreement or understanding between any
officer and any other person pursuant to which the officer was elected.
JAMES DALEEN, 42, our founder, has served as chairman of the board and
chief executive officer of Daleen since our inception in 1989, and has served as
president since January 2002. Mr. Daleen has owned and operated several
companies over the last 15 years. He served as president and chief executive
officer of Sound Impulse Company, an electrical construction company, from 1983
until 1995.
15
JEANNE PRAYTHER, 35, has served as chief financial officer of Daleen since
August 2001. She previously served as Daleen's vice president of finance and
accounting, managing our accounting and financial operations from June 2000
until August 2001. Prior to joining Daleen, Ms. Prayther worked at KPMG LLP for
12 years in the assurance practice, with an emphasis on serving software and
technology public companies, in a senior manager position.
STEVE KIM, 39, has served as executive vice president of products and
technology since joining Daleen in April 2000. Mr. Kim has over 15 years of
experience in the information technology and telecommunications industries.
Prior to joining Daleen, Mr. Kim was vice president of engineering at Clear
Communications from 1996 to 1999.
DAVID MCTARNAGHAN, 39, has served as senior vice president of global sales
since joining Daleen in 1998. Mr. McTarnaghan has over 16 years of experience in
a sales capacity in the information technology and telecommunications
industries. Prior to joining Daleen, Mr. McTarnaghan was general manager at
Fujitsu Business Communications Systems from 1991 to 1998.
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
Our common stock has been traded on The Nasdaq Stock Market under the
symbol "DALN" since October 1, 1999. Prior to that time there was no established
market for the shares. The price per share reflected in the table below
represents the range of low and high closing sale prices for our common stock as
reported by The Nasdaq Stock Market for the periods indicated:
QUARTER ENDED HIGH PRICE LOW PRICE
- ------------- ---------- ---------
March 31, 2000.............................................. $31.75 $16.62
June 30, 2000............................................... $20.31 $ 9.62
September 30, 2000.......................................... $17.81 $13.87
December 31, 2000........................................... $13.25 $ 2.62
March 31, 2001.............................................. $ 4.19 $ 0.94
June 30, 2001............................................... $ 1.57 $ 0.65
September 30, 2001.......................................... $ 1.10 $ 0.42
December 31, 2001........................................... $ 0.57 $ 0.30
The closing sale price of our common stock as reported by The Nasdaq Stock
Market on March 18, 2002 was $0.19 per share.
The number of stockholders of record of our common stock as of March 18,
2002, was approximately 236.
We have never paid cash dividends on our capital stock. We currently intend
to retain any earnings for use in the business and do not anticipate paying any
cash dividends in the foreseeable future.
ISSUANCE OF COMMON STOCK IN ACQUISITION OF INLOGIC
Effective December 16, 1999, we acquired all of the issued and outstanding
capital shares of Inlogic Software Inc., a Nova Scotia corporation ("Inlogic"
renamed "Daleen Canada"). We acquired the capital shares of Inlogic in exchange
for an aggregate of 2,160,239 exchangeable shares (the "Exchangeable Shares")
and 57,435 shares of our Common Stock. The Exchangeable Shares were issued by
our wholly-owned subsidiary, Daleen Canada Corporation, but are exchangeable at
any time into shares of our Common Stock on a one-for-one basis. As of March 21,
2000, an aggregate of 2,145,471 Exchangeable Shares had been converted into
shares of our Common Stock. We also issued options to acquire an aggregate of
167,361 shares of our Common Stock in exchange for all of the outstanding
options to acquire capital shares of Inlogic. The terms of the transaction are
set forth in a Share Purchase Agreement as well as certain other transaction
documents, which are filed as Exhibits to our Current Report on Form 8-K filed
on December 30, 1999.
PRIVATE PLACEMENT OF CONVERTIBLE PREFERRED STOCK
GENERAL. On March 30, 2001, we entered into Purchase Agreements for the
Private Placement of $27,500,000 of Series F preferred stock and Warrants to
purchase Series F preferred stock. Pursuant to the terms of the Purchase
Agreements, we consummated the Private Placement on June 7, 2001. We received
net proceeds on June 7, 2001, of approximately $25.7 million from the Private
Placement. The consummation of the Private Placement was subject to the receipt
of approval from our stockholders, including approval of an amendment to our
certificate of incorporation to increase the number of authorized shares of
common stock to 200 million shares and to create and designate the Series F
preferred stock. Our stockholders approved the Private Placement and the related
amendments to the certificate of incorporation at the Company's annual meeting
of stockholders on June 7, 2001.
The offering and sale of the Series F preferred stock and Warrants was
exempt from registration under the Securities Act of 1933, as amended, by virtue
of Rule 506 of Regulation D promulgated thereunder. Robertson Stephens, Inc.
acted as our placement agent in the Private Placement.
17
TERMS OF SERIES F PREFERRED STOCK. Following is a summary of the terms of
the Series F preferred stock.
Number of Shares; Purchase Price. Pursuant to the Purchase Agreements, we
issued and sold (i) an aggregate of 247,882 shares Series F preferred stock and
(ii) Warrants to purchase an aggregate of 109,068 shares of Series F preferred
stock, including Warrants that we issued to Robertson Stephens, Inc., our
placement agent in the Private Placement. The purchase price per share of the
Series F preferred stock (without giving effect to the allocation of any part of
the purchase price to the Warrants) was $110.94 per share, which is equal to (A)
$1.1094, the average closing price per share of our common stock during the ten
trading days ending on March 30, 2001, the date of the Purchase Agreements,
multiplied by (B) 100, the number of shares of common stock initially issuable
upon conversion of a share of Series F preferred stock.
Conversion Price. Each share of Series F preferred stock is convertible at
any time at the option of the holder into shares of our common stock. The number
of shares of common stock issuable upon conversion of a single share of Series F
preferred stock is determined by dividing the original price per share of the
Series F preferred stock, or $110.94, by the conversion price in effect on the
date of conversion. The initial conversion price was $1.1094. The conversion
price was subject to a limited one-time adjustment (the "reset") as follows:
In the event the average market price (based on the closing price per
share reported by The Nasdaq Stock Market) per share of our common stock
for the ten consecutive trading days beginning with the next trading day
immediately following the date on which we issue an Earnings Release (as
defined below) for the quarter ended June 30, 2001 (the "Reset Average
Market Price") was less than the conversion price, the conversion price was
adjusted automatically to the higher of (A) the Reset Average Market Price
or (B) 75% of the initial conversion price. If we issued more than one
Earnings Release with respect to the quarter ended June 30, 2001, a Reset
Average Market Price was calculated for the ten trading days following each
Earnings Release, and the lower Reset Average Market Price was used for the
purpose of determining the adjusted conversion price. The effective date
for the reset followed our final Earnings Release. "Earnings Release" means
(y) a press release issued by us after March 30, 2001, providing any
material financial metrics regarding revenue or estimated revenue or
earnings or estimated earnings for the quarter ended June 30, 2001, or (z)
a press release issued by us announcing our actual total revenue for the
quarter ended June 30, 2001.
On April 10, 2001, we issued an Earnings Release. The Reset Average Market
Price following this Earnings Release was $0.923. On July 26, 2001, we issued
our final Earnings Release. The Reset Average Market Price following the final
Earnings Release was $0.9060, which was the lowest Reset Average Market Price
following our Earnings Releases. As a result, effective August 9, 2001, the
conversion price of the Series F preferred stock was reset to $0.9060. Based on
the reset conversion price established by the July 26, 2001 final Earnings
Release and pursuant to the terms of the Purchase Agreements, each share of
Series F preferred stock, including the shares issuable upon exercise of the
Warrants, currently are convertible into 122.4503 shares of common stock, or an
aggregate of approximately 43,708,637 shares of common stock. As of March 18,
2002, 6,000 shares of Series F preferred stock have been converted to common
stock resulting in the issuance of 734,700 shares of common stock.
In addition to the reset, in the event we issue common stock or securities
convertible into common stock at a price per share less than the conversion
price of the Series F preferred stock, the conversion price will be reduced to
be equal to the price per share of the securities sold. This adjustment
provision is subject to a number of exceptions, including the issuance of stock
or options to employees and the issuance of stock or options in connection with
acquisitions. The conversion price will also be subject to adjustment as a
result of stock splits and stock dividends on our common stock.
The Series F preferred stock will automatically convert into common stock
at any time after March 30, 2002, if the common stock trades on The Nasdaq
National Market or a national securities exchange at a price per share of at
least $3.3282 for ten trading days within any twenty-day trading period.
Voting Rights. The Series F preferred stock entitles the holders thereof
to vote with the common stock on the basis of 100 votes for each share of Series
F preferred stock. Additionally, so long as at least 50% of the shares of Series
F preferred stock that are ever outstanding at any one time remain outstanding,
we are
18
prevented from the following activities unless we first obtain the approval of a
majority of the outstanding shares of Series F preferred stock:
i) authorize or issue any other class or series of preferred stock
ranking senior to or pari passu with the Series F preferred stock as to
payment of amounts distributable upon our dissolution, liquidation or
winding up or issue any additional shares of Series F preferred stock;
ii) reclassification of any capital stock into shares having
preferences or priorities senior to or pari passu with the Series F
preferred stock;
iii) amend, alter or repeal any rights of the Series F preferred
stock; and
iv) pay dividends on any other class or series of capital stock.
Dividends. Holders of Series F preferred stock have the rights to the
payment of dividends only when and if dividends are declared on our common
stock. In the event we pay dividends on our common stock, the holders of the
Series F preferred stock are entitled to dividends on an as-if-converted basis.
Liquidation Preference. In the event of a dissolution, liquidation or
winding up of our operations, after payment or provision for payment of debts,
but before any distribution to the holders of common stock or any other class or
series of our then outstanding capital stock ranking junior to the Series F
preferred stock, the holders of the Series F preferred stock then outstanding
are entitled to receive a preferential amount of $110.94 per share (the
"Preferential Amount"), which is equal to the original purchase price per share;
provided however, that (i) if the assets to be distributed to the holders of the
Series F preferred stock are insufficient to permit the payment to such holders
of the full Preferential Amount, then all of our assets to be distributed will
be distributed ratably to the holders of the Series F preferred stock and (ii)
if the amount distributable on each share of common stock upon liquidation,
dissolution or winding up of our operations (after taking into account all
distributions that would be necessary to satisfy the Preferential Amounts due to
holders of the Series F preferred stock) is greater than the Preferential Amount
payable on the Series F preferred stock, we, in lieu of distributing the
Preferential Amount to the holders of Series F preferred stock, shall make a
distribution in an amount per share to the holders of Series F preferred stock
(on an as-if converted basis) equal to the amount per share distributed to the
holders of common stock.
Redemption Rights; Rights on Sale of the Company. Unless otherwise agreed
by the holders of at least a majority of the outstanding shares of Series F
preferred stock, voting or consenting as a separate class, in the event of a
"Sale of the Company" we are required to redeem all of the issued and
outstanding shares of Series F preferred stock for a redemption price equal to
the Preferential Amount. A "Sale of the Company" means: (i) the acquisition by
another entity by means of merger or consolidation resulting in the exchange of
at least 50% of the outstanding shares of our capital stock for securities
issued or other consideration paid by the acquiring entity or any parent or
subsidiary thereof (except for a merger or consolidation after the consummation
of which our stockholders immediately prior to such merger or consolidation own
in excess of 50% of the voting securities of the surviving corporation or its
parent corporation); or (ii) the sale or other disposition by us of
substantially all of our assets (other than a sale or transfer of assets to one
or more of our wholly-owned subsidiaries).
Registration Rights. We filed with the Securities and Exchange Commission
a Registration Statement on Form S-3 for the purpose of registering the shares
of common stock issuable upon conversion of the Series F preferred stock. The
Securities and Exchange Commission declared the Registration Statement effective
on September 25, 2001. We also granted to the holders of Series F preferred
stock (i) the right to demand that we effect up to three underwritten public
offerings of the common stock underlying the Series F preferred stock and
Warrants and (ii) "piggyback" registration rights in the event we subsequently
file a registration statement for the sale of capital stock. We previously
granted "piggyback" registration rights to a number of our other stockholders,
including our largest stockholders. As a result, the Registration Statement
covers an aggregate of 56,192,841 shares of common stock. The holders of the
shares of common stock included in the Registration Statement are not obligated
to sell any or all of the shares to be registered. However, it permits the
holders of the registered shares, including the shares of common stock issuable
upon conversion of the Series F preferred stock, to sell their shares of our
common stock in the public market or in
19
private transactions from time to time until all of the shares are sold or the
shares otherwise may be transferred without restriction under the securities
laws.
Terms of the Warrants.
Purchasers of Series F preferred stock received Warrants to purchase an
aggregate of 99,153 shares of Series F preferred stock. Additionally, we issued
to Robertson Stephens Warrants for the purchase of 9,915 shares of Series F
preferred stock. The Warrants have an exercise price of $166.41 per share of
Series F preferred stock and are exercisable at any time for a period of five
years following the closing of the Private Placement. The exercise price per
share is equal to 150% of the original purchase price of the Series F preferred
stock, or $110.94 per share.
Purchasers.
The purchasers of the Series F preferred stock and Warrants include SAIC
Venture Capital Corporation, HarbourVest Partners VI Direct Fund, L.P., managed
by HarbourVest Partners, LLC ("HarbourVest") and St. Paul Venture Capital VI,
LLC, which are, or are affiliates, stockholders of the Company at the time of
the Private Placement. HarbourVest also is the managing partner of HarbourVest
Partners V -- Direct Fund L.P. As of March 18, 2002, Harbourvest beneficially
owned approximately 35.44% of our common stock. SAIC Venture Capital Corporation
beneficially owned approximately 24.91% of our common stock, and St. Paul
Venture Capital VI, LLC and its affiliates beneficially owned approximately
7.36% of our common stock. The percentage of each purchaser assumes the
conversion of all outstanding shares of Series F preferred stock and exercise
and conversion of only their Warrants and any of their warrants to purchase
common stock. William A. Roper is an executive officer of SAIC Venture Capital
Corporation and Ofer Nemirovsky is a managing director of HarbourVest. Mr.
Nemirovsky is a director of the Company and Mr. Roper was a director of the
Company until March 31, 2002. Other purchasers include: ABX Fund, L.P., ABS
Ventures IV, L.P., Halifax Fund, L.P., Baystar Capital, L.P., Baystar
International; Ltd., Special Situations Private Equity Fund, L.P., Special
Situations Cayman Fund, L.P., and Royal Wulff Ventures, LLC.
Use of Proceeds
The gross proceeds as a result of the Private Placement was $27,500,000 and
on June 7, 2001, we received net proceeds of approximately $25,700,000. We paid
the placement agent $1.2 million in cash plus Warrants for the purchase of 9,915
shares of Series F preferred stock. From September 25, 2001, the effective date
of the Registration Statement, to December 31, 2001, we used approximately $12.6
million of the proceeds of the Private Placement for working capital purposes,
restructuring costs and general corporate purposes. All payments represent
estimates of direct or indirect payments of amounts to third parties. The
proceeds have been invested in short-term, interest-bearing, investment-grade
securities or money market funds until allocated for specific use. No amounts
were paid directly or indirectly for the above purposes to any of our directors
or officers of the company, to persons owning ten percent or more of any class
of our equity securities, or to our other affiliates. The use of proceeds
described above does not represent a material change in the use of proceeds
described in the Purchase Agreements.
Issuance of Securities in Settlement of Litigation
In connection with the settlement of the Litigation as described above in
Item 3 "Legal Proceedings -- Settlement of Lawsuit", on June 8, 2001, we granted
to the Defendants warrants to purchase an aggregate of 750,000 shares of our
common stock with an exercise price of $1.134 per share. The warrants are for
two years and are immediately exercisable. We issued the warrants pursuant to
the exemption provided by Section 4(2) of the Securities Act of 1934, as
amended.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with the consolidated financial statements, including the notes thereto, and
"Management's Discussion and Analysis of Financial Condition
20
and Results of Operations" included in Item 7 of this Form 10-K. The following
selected financial data concerning Daleen for and as of the end of each of the
years in the five year period ended December 31, 2001, are derived from the
audited consolidated financial statements of Daleen. The selected financial data
is qualified in its entirety by the more detailed information and consolidated
financial statements, including the notes thereto, included elsewhere in this
report. The audited consolidated financial statements of Daleen as of December
31, 2001 and 2000 and for each of the years in the three year period ended
December 31, 2001, and the report of KPMG LLP thereon, are included elsewhere in
this report.
SELECTED CONSOLIDATED FINANCIAL DATA
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1997 1998 1999 2000 2001
------- -------- --------- -------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
Revenue:
License fees.............................. $ -- 1,879 12,404 26,886 3,565
Professional services and other........... 156 3,352 8,321 16,743 8,867
------- -------- --------- -------- ---------
Total revenue..................... 156 5,231 20,725 43,629 12,432
------- -------- --------- -------- ---------
Cost of revenue:
License fees.............................. 0 3 64 682 1,646
Professional services and other........... 293 4,239 7,721 13,878 7,302
------- -------- --------- -------- ---------
Total cost of revenue............. 293 4,242 7,785 14,560 8,948
------- -------- --------- -------- ---------
Gross margin................................ (137) 989 12,940 29,069 3,484
Operating expenses:
Sales and marketing....................... 962 2,435 4,342 14,680 10,895
Research and development.................. 1,669 6,653 9,348 27,215 12,502
Purchased in-process research and
development............................ -- -- 6,347 -- --
General and administrative................ 3,704 4,824 8,965 18,210 13,820
Amortization of goodwill and other
intangibles............................ -- -- 607 15,205 12,014
Impairment of long-lived assets........... -- -- -- -- 34,604
Restructuring charges..................... -- -- -- -- 11,763
------- -------- --------- -------- ---------
Total operating expenses.......... 6,335 13,912 29,609 75,310 95,598
------- -------- --------- -------- ---------
Operating loss.............................. (6,472) (12,923) (16,669) (46,241) (92,114)
Nonoperating income (expense)............... (1,512) 754 1,329 2,456 1,125
------- -------- --------- -------- ---------
Net loss.................................... (7,984) (12,169) (15,340) (43,785) (90,989)
Accretion of preferred stock................ -- (65) (122) -- --
Preferred stock dividends arising from
beneficial conversion features............ -- -- -- -- (28,512)
------- -------- --------- -------- ---------
Net loss applicable to common
stockholders.............................. $(7,984) (12,234) (15,462) (43,785) (119,501)
======= ======== ========= ======== =========
Net loss applicable to common stockholders
per share -- basic and diluted............ $ (3.48) (3.78) (1.06) (2.02) (5.47)
======= ======== ========= ======== =========
Weighted average shares -- basic and
diluted................................... 2,295 3,240 14,548 21,671 21,836
======= ======== ========= ======== =========
DECEMBER 31,
-----------------------------------------------------
1997 1998 1999 2000 2001
------- -------- --------- -------- ---------
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................... $ 5,030 $ 723 $ 52,852 $ 22,268 $ 13,093
Total assets...................... 8,516 11,025 133,881 99,462 21,193
Notes payable............................... 1,618 -- -- -- --
Current portion of long-term debt and
obligations under capital leases.......... -- -- -- 129 --
Long-term debt and obligations under capital
leases, less current portion.............. -- -- -- 607 --
Stockholders' (deficit) equity.............. $(1,946) (13,897) 119,457 77,501 14,262
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THE FOLLOWING SHOULD BE READ IN CONJUNCTION WITH THE ACCOMPANYING CONSOLIDATED
FINANCIAL STATEMENTS AND THE RELATED NOTES THERETO INCLUDED ELSEWHERE HEREIN.
OVERVIEW
From our founding in 1989 and through 1996, we operated as a software
consulting company, performing contract consulting and software development
services in a contract placement and staffing business. We sold the contract
placement and staffing business to a third party in 1996. Since 1996, we have
been a provider of software solutions and have evolved to be a global provider
of Internet software solutions that manage the revenue chain for traditional and
next generation communications service providers. Our RevChain applications
enable service providers to automate and manage their entire revenue chain. In
addition to our RevChain product family, we offer professional consulting
services, training, maintenance, support and third party software fulfillment,
in each case related to the products we develop. We recognized the first
material revenue from software license fees in 1998.
Historically, we operated our business with primarily a direct sales model
and our products and services were sold through our direct sales force. We also
utilized strategic alliance partners, including operational support system
providers, software application companies, consulting firms and systems
integration firms, to provide some level of sales and marketing support to
deliver a complete solution and successful implementation to our customers. In
order to address a broader market and to satisfy customers' requirements
associated with the use of independent consulting and systems integration firms,
beginning in the first quarter of 2001 we increased our focus on indirect sales
through our strategic alliance partners to assist our strategic alliance
partners in sales to their customers. We believe that an increased focus on
these strategic alliances will enable us to more easily enter into new markets
and reach potential new customers for our products. In addition, we have
continued to maintain a reduced direct sales force for those sales opportunities
that do not include or require third party strategic alliance partners. We are
currently working with several of these partners under various agreements to
generate new business opportunities through joint sales and marketing efforts.
Our success will depend to a large extent on the willingness and ability of our
alliance partners to devote sufficient resources and efforts to marketing our
products versus the products of others. There are no guarantees that this
strategy will be successful.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of
operations included herein are based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, we evaluate our
estimates, including those related to our bad debts, investments, intangible
assets, income taxes, restructuring, long-term service contracts, contingencies
and litigation. We base our estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
We believe that the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
Revenue Recognition
Revenue from license fees is based on the size of the customers' authorized
system, such as number of authorized users and computer processors, revenue
billed through the system, or other factors. We receive license fees from our
customers upon signing of the license agreement. In some cases we expect to
receive additional license fees as our customers grow and add additional
subscribers, or increase their revenue billed
22
through the system. We also derive license fee revenue from existing customers
who purchase additional products from us to increase the functionality of their
current system. We have also entered into arrangements with service bureau
providers and application service providers that utilize our products to service
their customers. We expect to receive recurring license fees from these
activities in the future.
Revenue from license fees is recognized when persuasive evidence of an
arrangement exists, the software is shipped, the fee is fixed and determinable
and collectibility is probable. An arrangement fee is generally not presumed to
be fixed or determinable if payment of a significant portion of the licensing
fees is not due until after expiration of the license or due after the normal
and customary terms usually given to our customers. At times, we enter into
extended payment terms with certain customers if we believe it is a good
business opportunity. Revenue related to arrangements containing extended
payment terms where the fees are not considered fixed and determinable is
deferred until payments are due. Granting extended payment terms results in a
longer collection period for accounts receivable and slower cash inflows from
operations. If collectibility is not considered probable, revenue is recognized
when the fee is collected.
If the contract requires us to perform services not considered essential to
the functionality of the software, the revenue related to the software services
is recognized using the percentage of completion method, based on the ratio of
total labor hours incurred to date to total estimated labor hours. The
percentage of completion method relies on estimates of total expected contract
revenue and costs. We follow this method since reasonably dependable estimates
of the revenue and costs can be made. Recognized revenues and profits are
subject to revisions as the contract progresses to completion. Revisions in
profit estimates are charged to income in the period in which the facts that
give rise to the revision become known.
Revenue related to professional services under a time and material
arrangement is recognized as services are performed.
Revenue related to customer maintenance agreements is deferred and
recognized ratably on a straight-line basis over the maintenance period of the
agreement. Maintenance is renewable annually and we expect to receive annual
maintenance fees from these activities in the future.
Accounts Receivable
We maintain an allowance for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments We
continuously monitor collections and payments from our customers and the
allowance for doubtful accounts is based on historical experience and any
specific customer collection issues that we have identified. If the financial
condition of our customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required.
Investment in Third Parties
We have an investment in a technology company having operations in areas
within our strategic focus. We would record an investment impairment charge when
we believe an investment has experienced a decline in value that is other than
temporary. Future adverse changes in market conditions, or poor operating
results of underlying investments, could result in losses or an inability to
recover the carrying value of the investments that may not be reflected in an
investment's current carrying value, thereby possibly requiring an impairment
charge in the future.
Accounting for Income Taxes
We record a valuation allowance to reduce our deferred tax assets to the
amount that is more likely than not to be realized. While we have considered
future taxable income and ongoing prudent and feasible tax planning strategies
in assessing the need for the valuation allowance, in the event we were to
determine that we would be able to realize its deferred tax assets in the future
in excess of its net recorded amount, an adjustment to the deferred tax asset
would increase income in the period such determination was made.
23
Goodwill
We continually evaluate whether events and changes in circumstances warrant
revised estimates of useful lives or recognition of an impairment loss of
unamortized goodwill. The conditions that would trigger an impairment.
Assessment of unamortized goodwill include a significant, sustained negative
trend in our operating results or cash flows, a decrease in demand for our
products, a Change in the competitive environment and other industry and
economic factors. We measure impairment of unamortized goodwill utilizing the
undiscounted cash flow method. The estimated cash flows are then compared to our
goodwill amounts; if the unamortized balance of the goodwill exceeds the
estimated cash flows, the excess of the unamortized balance is written off.
During the year ended December 31, 2001 we wrote off approximately $31.2 million
of unamortized goodwill.
RESULTS OF OPERATIONS
In December 1999, we acquired all of the issued and outstanding capital
shares of Daleen Canada, a Nova Scotia corporation (formerly known as Inlogic
Software Inc.).
The acquisition of Inlogic resulted in a one-time charge of $6.3 million in
the year ended December 31, 1999 related to the write-off of purchased
in-process research and development. This in-process research and development
related to numerous Inlogic products that provide web interface and other
operational support systems. The Inlogic products were in the early stages of
their development at the time of acquisition and were undergoing further
development and integration with our BillPlex product. The value assigned to
in-process research and development was determined based on management's
estimates of the percentage of completion of the underlying development effort,
resulting net cash flows from Inlogic products, and the discounting of such cash
flows back to their present value. In aggregate, Inlogic had spent approximately
$4 million in research and development expenditures associated with the
in-process technology and had estimated that an additional $11 million would be
spent in order to complete all in-process products. This included coding,
testing, benchmarking, documentation and certification.
In projecting net cash flows resulting from Inlogic products, we estimated
revenues, cost of sales, research and development, sales and marketing and
general and administrative expenses for each product. Economic rents for the use
of other contributory assets were then deducted from the net operating profit.
These include charges for workforce (2.9%), working capital (4.2%) and fixed
assets (0.3%). These estimates were based on the following assumptions:
- The estimated revenues were projected to increase by an average annual
growth rate of 90%. Additionally, the estimates used show revenue growth
slowing to 50% and 25% in 2005 and 2006. Projections of revenue growth
were based on management's estimates of market size and growth, supported
by independent market data for the communication software and services
industry and the nature and timing of the development of product
enhancements and new products by us and its competitors.
- The estimated gross margins were expected to climb from 74% to a peak of
80% in 2003 and 2004, with margins declining in 2005 and 2006.
- The estimated total operating expenses were expected to increase as a
percentage of revenue from 121% in 2000 to 50% in 2004 as the Company
achieves economies of scale.
The projected net cash flows for Inlogic products were discounted using a
25% weighted average cost of capital ("WACC"). The 25% rate was based upon the
weighted average cost of equity and long-term debt. The WACC calculation
produces the average required rate of return of an investment in an operating
enterprise. In determining the appropriate WACC, we used a higher WACC for the
in-process technology (35%) due to the risks inherent in the development
process.
No assurances were given that the underlying assumptions used to estimate
projected net cash flows would transpire as estimated. Operating results are
subject to uncertain market events and risks which are beyond our control, such
as trends in technology, government regulations, market size and growth, and
product
24
introductions, delays in product development, changes in operating expenses and
gross margins, or other actions by competitors. For these reasons actual results
differed from the projected results.
For the years ended December 31, 2000 and 2001, actual results were lower
than our estimates primarily due to changes in market conditions during the
fourth quarter of 2000 and throughout 2001. Due to the changes in economic
conditions and our past revenue performance, we assessed the recoverability of
goodwill in 2001 by determining whether the amortization of the goodwill over
the remaining life could be recovered through undiscounted future operating cash
flows. As a result, we wrote off the remaining balance of goodwill in the year
ended December 31, 2001, which amounted to a reduction of goodwill in the amount
of approximately $31.2 million. This was mainly due to the estimated shortfall
of cash flows, discounted at a rate commensurate with the associated risks.
On January 4, 2001, our Board of Directors approved, and on January 5,
2001, we announced a plan to implement the January Restructuring. We recorded a
$3.0 million restructuring charge in the year ended December 31, 2001 related to
the January Restructuring. This charge included the estimated costs related to
workforce reductions, downsizing of facilities, asset writedowns and other
costs. We implemented the actions associated with the January Restructuring
immediately following the January 5, 2001 announcement. The workforce reductions
in the January Restructuring included the termination of approximately 140
employees throughout our Boca Raton, Florida; Atlanta, Georgia; and Toronto,
Ontario, Canada facilities, and included employees from substantially all of our
employee groups. The downsizing of facilities included the downsizing of the
Atlanta and Toronto facilities to one floor per each location. The asset
writedowns were primarily related to the disposition of duplicative furniture
and equipment and computer equipment from terminated employees, which was not
resaleable. Other costs included costs incurred that are no longer going to
provide benefit to us such as recruiting fees and relocation costs related to
employment offers that were rescinded, penalties for cancellation of a user
conference and trade show, and other miscellaneous expenses.
In late March 2001, we initiated a second comprehensive business review to
identify additional areas for cost reductions. As a result, our Board of
Directors approved, and we announced, the April Restructuring. The April
Restructuring included the consolidation of our North American workforce into
our Boca Raton, Florida corporate offices and the closure of our Toronto and
Atlanta facilities. In addition, we consolidated our North American research and
development and professional services resources and further reduced our
administrative support functions. We recorded a $4.8 million restructuring
charge in the year ended December 31, 2001 related to the April Restructuring.
This charge included the estimated costs related to workforce reductions of 193
employees from substantially all of our employee's groups, closing of
facilities, asset writedowns and other costs. Other costs included accounting
and legal fees, penalties for cancellation of software maintenance contracts in
Atlanta and Toronto and penalties for cancellation of a trade show. We
implemented the actions associated with the April Restructuring immediately
following the April 10, 2001 announcement.
On October 17, 2001, our Board of Directors approved the October
Restructuring and we announced a plan to further reduce expenses on October 19,
2001. We recorded a $4.1 million restructuring charge in the year ended December
31, 2001 related to the October Restructuring. This charge included the
estimated costs related to workforce reductions of 75 employees from
substantially all of our employee's groups, further downsizing of facilities
including rental property lease termination charges of $1.4 million, asset
writedowns, and other costs. We started to implement these actions immediately
following the October 17, 2001 announcement.
Due to the termination of employees in the January Restructuring, the April
Restructuring, and the October Restructuring and assuming we do not hire any
additional employees, we expect to achieve an annualized savings related to the
cost of salaries and benefits for these terminated employees of approximately
$29.8 million. The anticipated savings are from the following line items in our
consolidated statements of operations: approximately $9.2 million in cost of
professional services and other; approximately $10.9 million in research and
development; approximately $6.1 million in sales and marketing; and
approximately $3.6 million in general and administrative.
In recent years we have invested heavily in sales and marketing, research
and development, and general operating expenses in order to increase our market
position, develop our products and build our infrastructure.
25
With the recent implementations of our January Restructuring, April
Restructuring and October Restructuring, we expect operating expenses to
decrease in 2002 in areas such as compensation and benefits, capitalized
expenditures, facilities and travel costs.
We currently have a net operating loss carryforward for U.S. federal and
state income tax purposes in excess of $107.3 million, and are continuing to
experience operating losses for tax purposes. In addition, we have net operating
loss carryforwards for Canada in the amount of approximately $22 million.
Therefore, we currently do not pay any federal income taxes. However, the amount
of the net operating loss and credit carryforwards that we may utilize each year
may be limited due to changes in stock ownership that have occurred over the
past several years and the recent Private Placement of Series F preferred stock.
The following table sets forth the results of operations expressed as a
percentage of total revenue for the periods indicated. These historical results
are not necessarily indicative of results to be expected for any future period.
DALEEN TECHNOLOGIES, INC.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
-------------------------
1999 2000 2001
----- ------ ------
AS A PERCENTAGE OF TOTAL REVENUE
Revenue:
License fees.............................................. 59.9% 61.6% 28.7%
Professional services and other........................... 40.1 38.4 71.3
----- ------ ------
Total revenue..................................... 100.0 100.0 100.0
Cost of revenue:
License fees.............................................. 0.3 1.6 13.2
Professional services and other........................... 37.3 31.8 58.7
----- ------ ------
Total cost of revenue............................. 37.6 33.4 71.9
----- ------ ------
Gross Margin................................................ 62.4 66.6 28.1
Operating Expenses:
Sales and marketing....................................... 21.0 33.6 87.6
Research and development.................................. 45.1 62.4 100.6
Purchased in process research and development............. 30.6 -- --
General and administrative................................ 43.3 41.7 111.2
Amortization of goodwill and other intangibles............ 2.9 34.9 96.6
Impairment of long-lived assets........................... -- -- 278.3
Restructuring charges..................................... -- -- 94.6
----- ------ ------
Total operating expenses.......................... 142.9 172.6 768.9
----- ------ ------
Operating loss.............................................. (80.5) (106.1) (740.8)
Nonoperating income......................................... 6.4 5.6 9.1
----- ------ ------
Net loss.................................................... (74.1)% (100.5)% (731.7)%
===== ====== ======
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Total Revenue. Total revenue, which includes license revenue and
professional services and other revenue, decreased $31.2 million, or 71.5%, to
$12.4 million in the year ended December 31, 2001 from $43.6 million for the
same period in 2000. The primary reason for the lower revenue is related to
fewer license contracts being signed in the year ended December 31, 2001 as
compared to the same period in 2000. In addition, the reduced number of
contracts signed in 2001 also decreased our services revenue due to less ongoing
product implementations related to licensing our software products and the need
for third-party software fulfillment.
26
License Fees. Our license fees are derived from licensing our software
products. License fees decreased $23.3 million, or 86.7%, in the year ended
December 31, 2001 to $3.6 million, compared to $26.9 million for the same period
in 2000. This decrease was due to fewer license contracts being signed in the
year ended December 31, 2001 compared to the same period in 2000. The primary
reasons for this reduction include an overall reduction in technology spending,
market conditions in our industry, the impact of recent global events,
competition, lengthening of the sales cycle and postponement of customer
licensing decisions. License fees constituted 28.7% of total revenue in the year
ended December 31, 2001, compared to 61.6% in the same period in 2000.
Professional Services and Other. Our professional services and other
consists of revenue from professional consulting services, training, maintenance
and support, and third party software fulfillment, all related to the software
products we develop and license. We offer consulting services on a fixed fee
basis and on a time and materials basis. We offer third party software
fulfillment based on our acquisition cost plus a reasonable margin. Professional
services and other revenue decreased $7.9 million, or 47.0%, in the year ended
December 31, 2001 to $8.9 million, compared to $16.7 million in the same period
in 2000. The decrease was due to less ongoing product implementations, fewer
maintenance contracts due to customer combinations and insolvency, and less
revenue associated with third-party software fulfillment. Professional services
and other revenue constituted 71.3% of total revenue in the year ended December
31, 2001, compared to 38.4% for the same period in 2000. The increase as a
percentage of total revenue is due to a reduction in license fee revenue in the
year ended December 31, 2001.
Total Cost of Revenue. Total cost of revenue decreased $5.6 million, or
38.5%, to $8.9 million in the year ended December 31, 2001 from $14.6 million in
the same period in 2000. Total cost of revenue includes both cost of license
fees and cost of professional services and other. These components include the
cost of direct labor, benefits, overhead and materials associated with the
fulfillment and delivery of licensed products, and related corporate overhead
costs to provide professional services to our customers. These costs decreased
due to the decrease in total revenue as well as the result of our cost reduction
measures taken in the January Restructuring, the April Restructuring and the
October Restructuring. The cost reductions included a decrease in professional
services personnel and other overhead costs which were reduced when we closed
the Atlanta, Georgia office in connection with the April Restructuring. The
Atlanta office primarily operated as a professional services facility. Overall,
total cost of revenue as a percentage of total revenue increased to 71.9% in the
year ended December 31, 2001, compared to 33.4% in the same period in 2000. This
increase resulted from the decrease in total revenue and a $1.2 million
write-off of prepaid third-party software license costs because certain
third-party products are no longer being integrated with our product.
Cost of License Fees. Cost of license fees includes direct cost of labor,
benefits and packaging material for fulfillment and shipment of our software
products and amortization expense related to prepaid third-party software
licenses. Cost of license fees increased to $1.6 million, or 13.2%, in the year
ended December 31, 2001, from $682,000, or 1.6%, in the same period in 2000 due
to the amortization expense related to prepaid third-party licenses, which are
being amortized over the term of their respective agreements. In the year ended
December 31, 2001, we wrote down $1.2 million of certain prepaid third-party
software licenses because they are no longer integrated with our product. These
prepaid third-party license agreements did not exist in the same period in 2000.
Cost of license fees increased to 46.2% of license revenue in the year ended
December 31, 2001, compared to 2.5% for the same period in 2000 due to the
decrease in license revenue and writedown of prepaid third-party software
licenses.
Cost of Professional Services and Other. Cost of professional services and
other includes direct cost of labor, benefits, third party software and related
corporate overhead costs to provide professional services and training to our
customers. Cost of professional services and other decreased $6.6 million, or
47.4%, to $7.3 million in the year ended December 31, 2001, from $13.9 million
in the same period in 2000. These costs decreased as a result of our cost
reduction measures taken with the January Restructuring, the April Restructuring
and the October Restructuring. In addition, the revenue related to professional
services and other has decreased. Cost of professional services and other
remained consistent at 82.4% of professional services and other revenue in the
year ended December 31, 2001, compared to 82.9% for the same period in 2000.
27
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, benefits, commissions and bonuses for sales, marketing and partner
management personnel, travel and entertainment, trade show and marketing program
costs, promotional and related corporate overhead costs. These expenses
decreased $3.8 million, or 25.8%, to $10.9 million in the year ended December
31, 2001, from $14.7 million for the same period in 2000. The decrease was due
to a decrease in sales commissions and the cost reduction measures associated
with the January Restructuring, the April Restructuring and the October
Restructuring, slightly offset by an increased sales presence in The
Netherlands. As a percentage of revenue, these expenses increased from 33.6% in
the year ended December 31, 2000 to 87.6% for the same period in 2001 mainly due
to the decrease in total revenue in the year ended December 31, 2001 compared to
the same period in 2000.
Research and Development. Research and development expenses consist
primarily of salaries, benefits and bonuses for software developers, product
testing and benchmarking, management and quality assurance personnel,
subcontractor costs and related corporate overhead costs. Our research and
development expenses decreased $14.7 million, or 54.1%, to $12.5 million in the
year ended December 31, 2001, from $27.2 million for the same period in 2000.
The overall decrease was primarily due to the cost reduction measures associated
with the January Restructuring, the April Restructuring and the October
Restructuring. The cost reductions included a decrease in research and
development personnel and other costs, which were reduced when we closed the
Toronto, Ontario, Canada facility in connection with the April Restructuring.
The Toronto facility primarily operated as a research and development facility.
As a percentage of revenue, these expenses increased from 62.4% in 2000 to
100.6% in 2001. This was a result of the lower revenue recognized in the year
ended December 31, 2001 compared to the same period in 2000.
General and Administrative. General and administrative expenses consist
primarily of salaries, benefits and bonuses for executive, finance and
accounting, facilities, human resources and information systems personnel. It
also consists of non-cash stock compensation expense and provision for bad debts
and related corporate overhead costs. Our general and administrative expenses
decreased $4.4 million, or 24.1%, to $13.8 million in the year ended December
31, 2001, from $18.2 million in the same period in 2000. The decrease was due to
the net effect of the following increases and decreases. The increases were due
to approximately $4.2 million of non-cash charges recorded in the year ended
December 31, 2001 encompassing: (i) an asset write-down of $1.0 million related
to an investment; (ii) the issuance of warrants in connection with a legal
settlement resulting in a charge of approximately $495,000; (iii) an increase in
the allowance for a non-recourse loan to an executive officer in the amount of
approximately $1,032,000 due to the decline in our stock price at December 31,
2001; and (iv) a $1.7 million charge to our provision for bad debt due to market
conditions in the telecommunications industry and certain customers
significantly reducing or liquidating their operations. The increases were
offset by the decrease in administrative personnel and administrative charges
associated with the January Restructuring, the April Restructuring and the
October Restructuring. As a percentage of revenue, general and administrative
expenses increased to 111.2% in the year ended December 31, 2001 from 41.7% in
the same period in 2000. This was a result of the lower revenue recognized in
2001 and the non-cash charges described above incurred in the year ended
December 31, 2001 compared to the same period in 2000.
Amortization of Goodwill and Other Intangibles. Goodwill, which related to
our acquisition of Daleen Canada, was being amortized over a four-year period.
Amortization expense decreased $3.2 million, or 21.0%, to $12.0 million in the
year ended December 31, 2001 from $15.2 million for the same period in 2000.
This was primarily due to the amortization expense related to the employee
workforce, which was considered impaired and written off at March 31, 2001 due
to the April Restructuring. This resulted in only three months of amortization
of the employee workforce being recorded in the year ended December 31, 2001. In
addition, goodwill was considered impaired and written off during the year. This
resulted in the additional reduction in amortization expense.
Impairment of Long-Lived Assets. Impairment charges related to long-lived
assets in the year ended December 31, 2001 consisted of (i) write-off of
employee workforce of $1.5 million; (ii) impairment of property and equipment
associated with the January Restructuring, the April Restructuring and the
October Restructuring in the aggregate amount of $1.9 million; and (iii) an
impairment of goodwill in the amount of $31.2 million. Due to various
restructuring activities initiated by us, we performed an evaluation of the
28
recoverability of the employee workforce acquired in the Inlogic acquisition
under Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of" ("SFAS No. 121"). We determined that
this asset was impaired and in connection with this determination, we recorded
an impairment charge in the year ended December 31, 2001 in the amount of
approximately $1.5 million. In addition, we determined that certain property,
leasehold improvements and equipment, which mainly represented computer
equipment and furniture from the Toronto and Atlanta facilities, was impaired.
We recorded an impairment charge of approximately $1.9 million during the year
ended December 31, 2001 representing the difference between the fair value and
the carrying value of the assets. We recorded an impairment charge to goodwill
in the amount of approximately $1.1 million in March, 2001 related to certain
gateway products acquired from Daleen Canada on December 16, 1999 which we do
not plan to promote and license in the future. In addition, due to economic
conditions and our past revenue performance, we assessed the recoverability of
the goodwill under SFAS No. 121 by determining whether the amortization of the
goodwill over the remaining life could be recovered through undiscounted future
operating cash flows. This resulted in a writedown of goodwill in the amount of
approximately $23.4 million in August 2001 and $6.7 million in December 2001.
This was mainly due to the estimated shortfall of cash flows discounted at a
rate commensurate with the associated risks.
Restructuring Charges. Restructuring charges incurred by us in the year
ended December 31, 2001, related to the January Restructuring, the April
Restructuring, and the October Restructuring totaled $11.8 million. These
charges included $6.3 million of employee termination benefits, $2.5 million of
facility costs, $2.9 million of asset writedowns, and $220,000 of other
restructuring costs which include penalties incurred for cancellations of trade
shows and marketing programs, recruiting fees and relocation costs related to
employment offers that were rescinded, penalties incurred for cancellation of
software maintenance contracts, legal fees and other costs. The costs were from
the following financial statement captions:
JANUARY APRIL OCTOBER
RESTRUCTURING RESTRUCTURING RESTRUCTURING TOTAL
------------- ------------- ------------- ------------
Cost of sales -- professional
services.......................... $ 387,000 $1.2 million $ 134,000 $1.7 million
Research and development............ $ 522,000 $1.4 million $ 694,000 $2.6 million
Sales and marketing................. $ 278,000 $ 725,000 $ 568,000 $1.6 million
General and administrative.......... $1.8 million $1.5 million $2.7 million $6.0 million
Included in the above totals, is $110,000 related to foreign currency
translation exchange losses.
Total restructuring charges for the year ended December 31, 2001 was $11.8
million compared to $0 in the same period in 2000. There were no restructuring
actions taken in 2000.
Nonoperating Income. Nonoperating income is comprised primarily of
interest income, net of interest expense. Nonoperating income decreased $1.4
million, or 54.2%, to $1.1 million in the year ended December 31, 2001 from $2.5
million for the same period in 2000. This was primarily attributable to the
decrease in investment earnings due to the decrease in our cash balance during
2001 compared to 2000.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Total Revenue. Total revenue, which includes license fees and professional
services and other revenue, increased $22.9 million, or 110.5%, to $43.6 million
in 2000 from $20.7 million in 1999. Revenue increased from both license fees and
professional services and other due to increased sales and customer contracts
for our products and services, increased market acceptance of our products,
additional ongoing product implementations and increased revenue due to
maintenance and support agreements.
License Fees. Our license fees are derived from licensing our software
products and ongoing royalties received from third party users of our products.
License fees increased $14.5 million, or 116.8%, to $26.9 million in 2000 from
$12.4 million in 1999. These increases were due to an increase in the number and
size of license contracts in 2000 and increased market acceptance of our
products. License fees constituted 61.6% of total revenue in 2000 compared to
59.9% in 1999.
29
Professional Services and Other. Our professional services and other
consists of revenue from professional consulting services, training, maintenance
and support, and third party software fulfillment related to our products.
Consulting services are offered on a fixed fee basis and on a time and material
basis. Third party software fulfillment is offered on a "cost plus" basis.
Professional services and other revenue increased $8.4 million, or 101.2%, to
$16.7 million in 2000 from $8.3 million in 1999. This increase was due to
increased sales and customer contracts, implementations and product sales
associated with our acquisition of Daleen Canada, and increased revenue related
to maintenance and support as our customer base grows. Professional services and
other revenue decreased to 38.4% of total revenue in 2000 compared to 40.1% in
1999.
Cost of Revenue. Total cost of revenue increased $6.8 million, or 87.0%,
to $14.6 million in 2000 from $7.8 million in 1999. Total cost of revenue
includes both cost of license fees and cost of professional services and other.
These components include the cost of direct labor, benefits, third party fees
paid for product referrals, overhead and materials associated with the
fulfillment and delivery of the license products, and related corporate overhead
costs to provide professional services to customers. These costs increased as we
hired additional personnel to support the new and existing implementations that
we performed for our products. Total cost of revenue as a percentage of total
revenue decreased to 33.4% in 2000 from 37.6% in 1999 primarily related to
improved efficiencies during implementations.
Cost of License Fees. Cost of license fees includes direct cost of labor,
benefits and packaging material for fulfillment and shipment of our software
products, third-party software license payments and related documentation and
third-party referral fees associated with customer contracts. Cost of license
fees increased to $682,000, or 965.6%, in 2000 from $64,000 in 1999 due to the
increased number of software contracts, hiring of personnel focused primarily on
product fulfillment, third party software royalty payments and third party
referral fees.
Cost of Professional Services and Other. Cost of professional services and
other includes direct cost of labor, benefits, third party software and related
overhead costs to provide professional services to customers. Cost of
professional services and other increased $6.2 million, or 79.7%, to $13.9
million in 2000 from $7.7 million in 1999. These costs increased as we hired
additional personnel to support new and existing implementations in 2000 and
costs related to our acquisition of Daleen Canada. Cost of professional services
and other decreased to 82.8% of professional services and other revenue in 2000
compared to 92.8% in 1999. The percentage decrease is primarily the result of
increased professional services implementations, increased services revenue
together with improved efficiencies during product implementation.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, benefits, commissions and bonuses earned by sales, marketing and
partner management personnel, travel and entertainment, tradeshow and marketing
program costs, promotional and related corporate overhead costs. These expenses
increased $10.4 million, or 238.1%, to $14.7 million in 2000 from $4.3 million
in 1999. The overall increase was due to the increase in the number of personnel
in the sales, marketing, and partner management organizations from 1999 to 2000,
commissions associated with increased revenue and increased involvement in
marketing programs and trade shows. As a percentage of total revenue, these
expenses increased to 33.6% in 2000 from 21.0% in 1999 due to support needed to
continue to drive the increase in revenue.
Research and Development. Research and development expenses consist
primarily of salaries, benefits and bonuses for software developers, product
testing and benchmarking, management and quality assurance personnel,
subcontractor costs and related corporate overhead costs. Our research and
development expenses increased $17.9 million, or 191.1%, to $27.2 million in
2000 from $9.3 million for 1999. The overall increase was primarily the result
of development efforts associated with the acquisition of Daleen Canada,
additional products and upgrades, additional software developers, increased
product testing and benchmarking, additional managers and quality assurance
personnel. We also incurred costs associated with our use of subcontractors to
accelerate development of new releases of our RevChain products. The third party
development firms were subcontracted out to supplement our internal development
resources. As a percentage of total revenue, these expenses increased to 62.4%
in 2000 from 45.1% in 1999.
General and Administrative. General and administrative expenses consist
primarily of salaries, benefits and bonuses for executive, finance and
accounting, administrative, facilities, human resources and information
30
systems personnel. It also consists of non-cash stock compensation expense,
provision for bad debts and related corporate overhead costs. Our general and
administrative expenses increased $9.2 million, or 249.1%, to $18.2 million in
2000 from $9.0 million for 1999. This increase was primarily the result of
operating as a public company and hiring and retaining additional executive,
finance and accounting, information services and human resources personnel to
support the growth of our business. In addition, our provision for bad debts
increased $3.9 million for the year ended December 31, 2000. We increased the
allowance for doubtful accounts due to market conditions in the
telecommunications industry, constraint of capital resources, certain customers
declaring bankruptcy and having funding issues.
We also increased stock compensation expense due to recording expense over
the vesting period related to options issued primarily in connection with our
acquisition of Daleen Canada along with certain other stock options granted by
us. In each case, the exercise prices of the options were below the fair market
value of our common stock on the date of grant.
As a percentage of total revenue, general and administrative expenses
decreased to 41.7% in 2000 from 43.3% in 1999.
Amortization of Goodwill and Other Intangibles. Goodwill and other
intangibles are the result of the acquisition of Daleen Canada and are being
amortized over a four-year period. Our amortization increased $14.6 million to
$15.2 million in 2000 from $607,000 in 1999.
Nonoperating Income. Nonoperating income is comprised primarily of
interest income, net of interest expense. Nonoperating income increased $1.2
million, or 84.8%, to $2.5 million in 2000 from $1.3 million in 1999. The
increase of nonoperating income for 2000 over 1999 was primarily attributable to
the investment earnings of the proceeds of our initial public offering, received
in the fourth quarter of 1999.
SEASONALITY
Our operating results have varied significantly from quarter to quarter in
the past and may continue to vary significantly from quarter to quarter in the
future due to a variety of factors. Factors that can contribute to variations
include delays in completing contract negotiations with large contracts without
an offset by a corresponding reduction in fixed costs. Also, quarterly
fluctuations can occur as a result of delays in completing contracts with
customers where we derive a large part of our revenue each quarter from a small
number of customers. We have not experienced seasonal fluctuations. However, as
we grow, we may experience similar quarterly fluctuations due to seasonality.
For all these reasons, we believe that results of operations for interim periods
should not be relied upon as any indication of the results to be expected in any
future period.
LIQUIDITY AND CAPITAL RESOURCES
In order to address our liquidity and to strengthen our balance sheet, we
entered into Purchase Agreements in a private placement of $27.5 million of
Series F preferred stock and Warrants. This resulted in the receipt of $25.7
million of net proceeds on June 7, 2001.
Net cash used in operating activities was $31.9 million for the year ended
December 31, 2001, compared to $30.0 million for the year ended December 31,
2000. The principal use of cash for both periods was to fund our losses from
operations.
Net cash provided by financing activities was $25.1 million for the year
ended December 31, 2001, compared to $1.5 million for the year ended December
31, 2000. In 2001, the cash provided was primarily related to the net proceeds
received from the Series F preferred stock Private Placement. In 2000, cash was
provided by proceeds from the exercise of stock options and bridge warrants.
Net cash used in investing activities was $1.9 million for the year ended
December 31, 2001 compared to $2.0 million for the year ended December 31, 2000.
The cash used in 2001 was primarily related to a non-recourse note receivable
issued to our chairman and chief executive officer for approximately $1.2
million and capital expenditures of approximately $780,000. The cash used in
2000 was primarily related to approximately
31
$7.7 million of capital expenditures and payments related to the acquisition of
Daleen Canada and an investment of $1.5 million in a technology company. These
payments were primarily offset by the purchases and sales of securities
available for sale.
We continued to experience significant operating losses during the year
ended December 31, 2001 and we had an accumulated deficit of $201.3 million at
December 31, 2001. The business environment in which we operate is changing
rapidly and there is continued weakness in market conditions. The January
Restructuring, April Restructuring and October Restructuring resulted in a
reduction in operating expense levels and, based on expected revenue and cash
collections, it is reasonably possible that there will be reduction in cash
requirements on a quarterly basis going forward.
Cash and cash equivalents at December 31, 2001 are $13.1 million. We intend
to manage the use of cash and we believe the cash and cash equivalents together
with the reduction in costs due to the January Restructuring, April
Restructuring and October Restructuring, may be sufficient fund our operations
through 2002. However, we may be required to further reduce our operations
and/or seek additional public or private equity financing or financing from
other sources. We also will need to consider other options, which may include
but are not limited to, forming strategic partnerships or alliances and/or
considering other strategic alternatives, including a possible merger, sale of
assets or other business combination. There can be no assurance that additional
financing will be available, or that, if available, the financing will be
obtainable on terms acceptable to us. We would expect that any additional
financing would be dilutive to our stockholders. Further, there can be no
assurance that any other strategic alternatives will be available, or if
available will be on terms acceptable to us, or all of our stockholders. Failure
to obtain additional financing or to engage in one or more strategic
alternatives may have a material adverse effect on our ability to meet our
financial obligations and to continue to operate as a going concern which may
result in filing for bankruptcy protection, winding down of our operations
and/or liquidation of our assets. Our audited consolidated financial statements
included elsewhere in this Form 10-K have been prepared assuming that we will
continue as a going concern, and do not include any adjustments that might
result from the outcome of this uncertainty. See "Risks Associated with Daleen's
Business and Operating Results" beginning on page 33.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued Statement No. 141, "Business
Combinations'("SFAS No. 141"), and Statement No. 142, "Goodwill And Other
Intangible Assets'("SFAS No. 142"). SFAS No. 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001 as well as all purchase method business combinations completed after
June 30, 2001. SFAS No. 141 also specifies criteria for intangible assets
acquired in a purchase method business combination that must be met to be
recognized and reported apart from goodwill, noting that any purchase price
allocable to an assembled workforce may not be accounted for separately. SFAS
No. 142 will require that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 will
also require that intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 121, "Accounting For The
Impairment Of Long-Lived Assets And For Long-Lived Assets To Be Disposed Of".
We are required to adopt the provisions of SFAS No. 141 immediately and
SFAS No. 142 effective January 1, 2002. Goodwill and intangible assets acquired
in business combinations completed before July 1, 2001 will continue to be
amortized prior to the adoption of SFAS No. 142.
SFAS No. 141 will require upon adoption of SFAS No. 142 that we evaluate
our existing intangible assets and goodwill that were acquired in a prior
purchase business combination, and to make any necessary reclassifications in
order to conform with the new criteria in SFAS No. 141 for recognition apart
from goodwill. Upon adoption of SFAS No. 142, we will be required to reassess
the useful lives and residual values of all intangible assets acquired in
purchase business combinations, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. In addition,
to the extent an intangible asset is identified as having an indefinite useful
life, we will be required to test the intangible asset for
32
impairment in accordance with the provisions of SFAS No. 142 within the first
interim period. Any impairment loss will be measured as of the date of adoption
and recognized as the cumulative effect of a change in accounting principle in
the first interim period.
As of the date of adoption, we will have no unamortized goodwill or
intangible assets and as a result we do not believe SFAS No. 141 and 142 will
impact our financial statements.
In July 2001, FASB issued Statement No. 143, "Accounting For Asset
Retirement Obligations" ("SFAS No. 143"). SFAS No. 143 requires entities to
record the fair value of a liability for an asset retirement obligation in the
period in which it is incurred. When the liability is initially recorded, the
entity will capitalize a cost by increasing the carrying amount of the related
long-lived asset. Over time, the liability is accredited to its present value
each period, and the capitalized cost is depreciated over the useful life of the
related asset. Upon settlement of the liability, an entity either settles the
obligation for its recorded amount or incurs a gain or loss upon settlement. The
standard is effective for fiscal years beginning after June 15, 2002, with
earlier adoption permitted. We do not believe that the adoption of SFAS No. 143
will have a significant impact on our financial position or operating results.
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, "Accounting For The Impairment Or Disposal Of Long-Lived Assets" ("SFAS
No. 144"). This statement is effective for fiscal years beginning after December
15, 2001. This statement supercedes SFAS No. 121, while retaining many of the
requirements of such statement. Under SFAS No. 144 assets held for sale will be
included in discontinued operations if the operations and cash flows will be or
have been eliminated from our ongoing operations and will not have any
significant continuing involvement in our operations. We are currently
evaluating the impact SFAS No. 144 will have on our consolidated financial
position or results of operations.
RISKS ASSOCIATED WITH DALEEN'S BUSINESS AND FUTURE OPERATING RESULTS
Our future operating results may vary substantially from period to period.
The price of our common stock will fluctuate in the future, and an investment in
our common stock is subject to a variety of risks, including but not limited to
the specific risks identified below. In addition to general risk factors, risk
factors resulting from our Series F preferred stock are set forth below under
the caption "Risks Associated with our Series F preferred stock" beginning on
page 41. Inevitably, some investors in our securities will experience gains
while others will experience losses depending on the prices at which they
purchase and sell securities. Prospective and existing investors are strongly
urged to carefully consider the various cautionary statements and risks in this
report.
RISKS ASSOCIATED WITH OUR BUSINESS AND OPERATIONS
ADDITIONAL CAPITAL AND/OR OTHER STRATEGIC ALTERNATIVES MAY BE REQUIRED FOR US TO
HAVE THE ABILITY TO CONTINUE AS A GOING CONCERN, AS A RESULT, OUR INDEPENDENT
PUBLIC ACCOUNTANTS HAVE EXPRESSED DOUBTS OVER OUR ABILITY TO CONTINUE AS A GOING
CONCERN.
We incurred net losses of approximately $90.9 million for the year ended
December 31, 2001 and net losses of $43.8 million for the year ended December
31, 2000. Our cash and cash equivalents at December 31, 2001 was $13.1 million.
Cash used in operations for the year ended December 31, 2001 was $31.9 million.
As of December 31, 2001, we had an accumulated deficit of approximately $201.3
million. As a result of our financial condition, the independent auditors'
report covering our December 31, 2001 consolidated financial statements and
financial statement schedule contains an explanatory paragraph that states that
our recurring losses from operations and accumulated deficit raised substantial
doubt about our ability to continue as a going concern. We initiated cost
reduction measures in the January Restructuring, April Restructuring, and
October Restructuring in order to reduce our operating expenses, including
workforce reductions, reduction of office space, asset writedowns and
consolidation of our North American research and development and professional
services resources.
We believe that our current cash and cash equivalents, including the net
proceeds received from the Private Placement of Series F preferred stock,
together with the January Restructuring, April Restructuring
33
and October Restructuring, may be sufficient to fund our operations through
2002. However, there is no assurance that we will be able to continue as a going
concern if we do not raise additional capital and/or engage in one or more
strategic alternatives, including business combinations. Further, such belief is
based on a number of assumptions, some of which are beyond our control. Although
we intend to carefully manage our use of cash and attempt to increase revenues,
we may be required to further reduce our operations and/or seek additional
public or private equity financing or financing from other sources. We also will
need to consider other options, which may include but are not limited to forming
strategic partnerships or alliances and/or considering other strategic
alternative, including a possible merger, sale of assets or other business
combination. We have not yet identified the source of any additional financing,
nor can we predict whether additional financing can be obtained, or if obtained,
the terms of such financing. We would expect that any additional financing would
be dilutive to our stockholders. Further, there can be no assurance that any
other strategic alternatives will be available, or if available, will be on
terms acceptable to the Company, or all of its stockholders. Failure to obtain
additional financing or to engage in one or more strategic alternatives may have
a material adverse effect on our ability to meet our financial obligations and
to continue to operate as a going concern, which may result in filing for
bankruptcy protection, winding down of our operations and/or a liquidation of
our assets. See "Risks Associated with our Series F preferred stock - The
holders of our Series F preferred stock have rights that are senior to those of
the holders of our common stock in the event of the sale of our Company or in
the event of our liquidation, dissolution or winding up" below for a discussion
of the terms of the Series F preferred stock applicable in the event of a
business combination, liquidation event or issuance of equity securities.
WE HAVE NOT ACHIEVED PROFITABILITY AND MAY CONTINUE TO INCUR NET LOSSES FOR AT
LEAST THE NEXT SEVERAL QUARTERS.
We incurred net losses of approximately $90.9 million for the year ended
December 31, 2001, and net losses of approximately $43.8 million for the year
ended December 31, 2000. As of December 31, 2001, we had an accumulated deficit
of approximately $201.3 million. We have not realized any profit to date and do
not expect to achieve profitability until later in 2002, which may not occur. To
achieve this objective, we need to generate significant additional revenue from
licensing of our products and related services and support revenues. We have
reduced our fixed operating expenses through the cost reduction measures
implemented in the January Restructuring, April Restructuring and October
Restructuring, which included workforce reductions, reduction of office space,
asset writedowns, and other miscellaneous cost reductions. We consolidated our
North American workforce into our Boca Raton, Florida facility and we closed our
Toronto, Ontario, Canada and Atlanta, Georgia offices.
There is no assurance we will achieve these objectives and thus achieve
profitability. We may be required to further reduce our operations and seek
additional financing and/or pursue other strategic alternatives. In addition,
even if we do achieve profitability, we may not be able to sustain or increase
profitability on a quarterly or annual basis in the future.
OUR REVENUE IS DIFFICULT TO PREDICT AND QUARTERLY OPERATING RESULTS MAY
FLUCTUATE IN FUTURE PERIODS, AS A RESULT OF WHICH WE MAY FAIL TO MEET
EXPECTATIONS, WHICH MAY CAUSE OUR COMMON STOCK PRICE TO DECLINE.
Our revenue and operating results have varied and may continue to vary
significantly from quarter to quarter due to a number of factors. This
fluctuation may cause our operating results to be below the expectations of
public market analysts and investors, and the price of our common stock may
fall. Factors that could cause quarterly fluctuations include:
- variations in demand for our products and services;
- competitive pressures;
- further decrease in corporate information technology spending and decline
in economic conditions and market;
- prospective customers delaying their decision to acquire licenses for our
products;
- our quarterly revenue and expense levels;
34
- our ability to develop and attain market acceptance of enhancements to
the RevChain product applications and any new products and services;
- the pace of product implementation and the timing of customer acceptance;
- industry consolidation reducing the number of potential customers;
- the willingness of customers to conduct business with us related to
concerns over operating losses and our long term financial viability;
- changes in our pricing policies or the pricing policies of our
competitors; and
- the mix of sales channels through which our products and services are
sold.
The timing of revenue and revenue recognition is difficult to predict.
Historically, in any given quarter, most of our revenue has been attributable to
a limited number of relatively large contracts and we expect this to continue.
Further, our customer contract bookings and revenue recognized tends to occur
predominantly in the last two weeks of the quarter. As a result, our quarterly
results of operations are difficult to predict and the deferral of even a small
number of contract bookings or delays associated with delivery of products in a
particular quarter could significantly reduce our revenue and increase our net
loss which would hurt our quarterly financial performance. As a result of a
reduced number of new contracts, our revenue for the quarters ended June 30,
September 30 and December 31, 2001 was derived primarily from our existing
customers that signed contracts in prior periods. In addition, a substantial
portion of our costs are relatively fixed and based upon anticipated revenue. A
failure to book an expected order in a given quarter would not be offset by a
corresponding reduction in costs and could adversely affect our operating
results.
THE LOW PRICE OF OUR COMMON STOCK COULD RESULT IN THE DELISTING OF OUR COMMON
STOCK FROM THE NASDAQ NATIONAL MARKET, WHICH COULD CAUSE OUR COMMON STOCK PRICE
TO DECLINE AND MAKE TRADING IN OUR COMMON STOCK MORE DIFFICULT TO INVESTORS.
Our common stock is currently quoted on The Nasdaq National Market. We must
satisfy The Nasdaq Stock Market's ("Nasdaq") minimum listing maintenance
requirements to maintain our listing on The Nasdaq National Market. Nasdaq's
listing maintenance requirements set forth in its Marketplace Rules include a
series of financial tests relating to stockholders' equity, public float, number
of market makers and stockholders, market capitalization, and maintaining a
minimum closing bid price of $1.00 per share for shares of our common stock. If
the minimum closing bid price of our common stock is below $1.00 for 30
consecutive trading days, or if we are unable to meet Nasdaq's standards for any
other reason, our common stock could be delisted from The Nasdaq National
Market. As of August 23, 2001, our common stock had a closing bid price of less
than $1.00 for more than 30 consecutive trading days. On August 30, 2001, we
received a letter from Nasdaq notifying us that our common stock had failed to
maintain a minimum bid price of $1.00 over the previous 30 consecutive trading
days as required by the applicable Nasdaq Marketplace Rule. Subsequent to the
tragic terrorist attacks of September 11, 2001, Nasdaq placed a moratorium on
the minimum bid price requirement, as well as the public float requirement. As a
result of this moratorium, these two requirements were suspended until January
1, 2002, at which time the counting of the 30-day period started over at zero
with the respect to any deficiencies existing on or before such date.
On February 14, 2002, we received a letter from Nasdaq notifying us that
our common stock had failed to maintain a minimum bid price of $1.00 over the
previous 30 consecutive trading days as required by the applicable Nasdaq
Marketplace Rule. We have until May 15, 2002 to regain compliance with this
Marketplace Rule. During such time, if the bid price of our common stock were to
be at least $1.00 per share for a minimum of 10 consecutive trading days, Nasdaq
would make a determination of whether we were in compliance with the Marketplace
Rules. Under certain circumstances, Nasdaq may require that we maintain a
closing bid price at or above $1.00 per share for more than 10 consecutive
trading days. If we are not able to demonstrate compliance with this Marketplace
Rule on or before May 15, 2002, Nasdaq will provide us with written notification
that our common stock will be delisted from The Nasdaq National Market. At that
time, we will have the opportunity to appeal the decision to delist to a Nasdaq
Listing Qualifications Panel.
35
In addition to the requirement that we maintain a minimum closing bid
price, The Nasdaq National Market requires that we maintain a minimum market
value of publicly held shares ("MVPHS") of $5 million. Nasdaq defines "publicly
held shares" to include all of the outstanding common stock, other than shares
held by our officers and directors or by beneficial owners of 10% or more of our
common stock. On February 22, 2002, we received a letter from Nasdaq notifying
us that our common stock failed to maintain the minimum MVPHS. We have until May
23, 2002 to regain compliance with this MarketPlace Rule. If, at any time before
May 23, 2002, the MVPHS of our common stock is $5 million or greater for a
minimum of 10 consecutive trading days, Nasdaq will make a determination of
whether we are in compliance with the applicable MarketPlace Rule. Under certain
circumstances, to ensure that we can sustain long-term compliance, Nasdaq may
require that we maintain the MVPHS at or above $5 million for more than 10
consecutive trading days. If we are not able to demonstrate compliance with this
MarketPlace Rule on or before May 23, 2002, Nasdaq will provide us written
notification that our common stock will be delisted from The Nasdaq National
Market. At that time, we will have the opportunity to appeal that decision to
delist to a Nasdaq Qualifications Panel. Based upon our calculations, the MVPHS
of our common stock was $4,296,138 as of March 18, 2002. We note that the May
23, 2002 deadline relates only to the MVPHS deficiency. The Company may be
delisted prior to that date for failure to maintain the minimum bid price of
$1.00 per share.
We currently intend to apply to transfer the securities to The Nasdaq
SmallCap Market. To transfer, we must satisfy the continued inclusion
requirements for the SmallCap Market, which make available an extended grace
period for the minimum $1.00 bid price requirement and has a MVPHS requirement
of $1 million. If we submit a transfer application and pay the applicable
listing fee by May 15, 2002, initiation of delisting proceedings will be stayed
pending the review of the transfer application. If the transfer application is
approved, we will have until August 13, 2002 to regain compliance. If at this
date the Company is in compliance with the initial listing requirements of The
Nasdaq SmallCap Market, we will be granted an additional 180 day grace period,
or until February 10, 2003, for compliance with the $1.00 per share minimum bid
requirement. In the event the bid price of the stock maintains the $1.00 per
share requirements for 30 consecutive days by February 10, 2003, we may be
eligible to transfer back to The Nasdaq National Market. If the transfer
application is not approved, we will receive notification that the securities
will be delisted. At that time, we will have the opportunity to appeal the
decision to delist to a Nasdaq Listing Qualifications Panel.
If our common stock is delisted from The Nasdaq National Market, the common
stock would trade on either The Nasdaq SmallCap Market (if the transfer
application is approved) or on the OTC Bulletin Board, both of which are viewed
by most investors as less desirable and less liquid marketplaces. Thus,
delisting from The Nasdaq National Market could make trading our shares more
difficult for investors, leading to further declines in share price. It would
also make it more difficult for us to raise additional capital. In addition, we
would incur additional costs under state blue sky laws to sell equity if our
common stock is delisted from The Nasdaq National Market.
WE FACE SIGNIFICANT COMPETITION FROM COMPANIES THAT HAVE GREATER RESOURCES THAN
WE DO AND THE MARKETS IN WHICH WE COMPETE ARE RELATIVELY NEW, INTENSELY
COMPETITIVE, HIGHLY FRAGMENTED AND RAPIDLY CHANGING.
The markets in which we compete are relatively new, intensely competitive,
highly fragmented and rapidly changing. In some markets, limited capital
resources are causing reduced spending in information technology. We expect
competition to increase in the future, both from existing competitors as well as
new entrants in our current markets. Our principal competitors include other
internet enabled billing and customer care system providers, operation support
system providers, systems integrators and service bureaus, and the internal
information technology departments of larger communications companies which may
elect to develop functionalities similar to those provided by our product
in-house rather than buying them from us. Many of our current and future
competitors may have advantages over us, including:
- longer operating histories;
- larger customer bases;
- substantially greater financial, technical, research and development and
sales and marketing resources;
- a lead in expanding their business internationally;
36
- greater name recognition; and
- ability to more easily provide a comprehensive hardware and software
solution.
Our current and potential competitors have established, and may continue to
establish in the future, cooperative relationships among themselves or with
third parties, including telecom hardware vendors, that would increase their
ability to compete with us. In addition, competitors may be able to adapt more
quickly than we can to new or emerging technologies and changes in customer
needs, or to devote more resources to promoting and selling their products. If
we fail to adapt to market demands and to compete successfully with existing and
new competitors, our business and financial performance would suffer.
WE DEPEND ON STRATEGIC BUSINESS ALLIANCES WITH THIRD PARTIES, INCLUDING SOFTWARE
FIRMS, CONSULTING FIRMS AND SYSTEMS INTEGRATION FIRMS, TO SELL AND IMPLEMENT OUR
PRODUCTS, AND ANY FAILURE TO DEVELOP OR MAINTAIN THESE ALLIANCES COULD HURT OUR
FUTURE GROWTH IN REVENUE AND OUR GOALS FOR ACHIEVING PROFITABILITY.
Third parties such as operation support system providers, other software
firms, consulting firms and systems integration firms help us with marketing,
sales, implementation and support of our products. In order to address a broader
market and to satisfy customers' requirements associated with the use of
independent consulting and systems integration firms, we have increased our
focus on indirect sales through our strategic alliance partners, including
operational support system providers, other software application companies,
consulting firms and systems integration firms. To be successful, we must
maintain our relationships with these firms, develop additional similar
relationships and generate new business opportunities through joint marketing
and sales efforts. We may encounter difficulties in forging and maintaining
long-term relationships with these firms for a variety of reasons. These firms
may discontinue their relationships with us, fail to devote sufficient resources
to market, implement and support our products or develop relationships with our
competitors. Many of these firms also work with competing software companies,
and our success will depend on their willingness and ability to devote
sufficient resources and efforts to marketing our products versus the products
of others. In addition, these firms may delay the product implementation or
negatively affect our customer relationships. Our agreements with these firms
typically are in the form of a non-exclusive referral fee or license and package
discount arrangement that may be terminated by either party without cause or
penalty and with limited notice.
MANY OF OUR CUSTOMERS AND POTENTIAL CUSTOMERS ARE NEW ENTRANTS INTO THEIR
MARKETS AND LACK FINANCIAL RESOURCES, AS A RESULT OF WHICH IF THEY CANNOT SECURE
ADEQUATE FINANCING, WE MAY NOT MAINTAIN THEIR BUSINESS, WHICH WOULD NEGATIVELY
IMPACT OUR REVENUE AND RESULTS OF OPERATIONS.
Many of our customers and potential customers are new entrants into their
markets and lack significant financial resources. These companies rely to a
large degree, on access to the capital markets for growth that have cut back
over the past several months. Their failure to raise capital has hurt their
financial viability and their ability to purchase our products. The lack of
funding has caused potential customers to reduce information technology
spending. If our potential customers cannot obtain the resources to purchase our
products, they may turn to other options such as service bureaus, which would
hurt our business. Also, because we do at times provide financing arrangements
to customers, their ability to make payments to us may impact when we can
recognize revenue.
The revenue growth and profitability of our business depends significantly
on the overall demand for software products and services that manage the revenue
chain as it has been defined, particularly in the product and service segments
in which we compete. Softening demand for these products and services caused by
worsening economic conditions may result in decreased revenues or earning levels
or growth rates. Recently, the U.S. and European economies have weakened. This
has resulted in companies delaying or reducing expenditures, including
expenditures for information technology. Highly publicized bankruptcies such as
those at Global Crossing, Kmart and Enron have caused further tightening of the
credit and equity markets overall. Telecommunication providers are among the
most affected by these changes. The credit and equity situation has caused many
of the telecommunication providers to significantly cut back capital spending on
information technology. This reduction in capital spending has had and may
continue to have an adverse impact on us.
37
In addition, our current customers' ability to generate revenues or
otherwise obtain capital could adversely impact on their ability to purchase
additional products or renew maintenance and support agreements with us. If they
go out of business there will be no future licenses or services to support
revenue. The lack of funding available in our customers' markets, the recent
economic downturn in the technology market and customers shutting down
operations, combining or declaring bankruptcy may cause our accounts receivable
to continue to increase. There is no assurance we will be able to collect all of
our outstanding receivables.
OUR LENGTHY SALES CYCLE MAKES IT DIFFICULT TO PREDICT THE TIMING OF SALES AND
THE RESULTING REVENUE, AND REVENUE MAY VARY FROM PERIOD TO PERIOD, WHICH MAY
ADVERSELY AFFECT OUR COMMON STOCK PRICE.
The sales cycle associated with the purchase of our products is lengthy,
and the time between the initial proposal to a prospective customer and the
signing of a license agreement can be as long as one year. Our products involve
a commitment of capital which may be significant to the customer, with attendant
delays frequently associated with large capital expenditures and implementation
procedures within an organization. These delays may reduce our revenue in a
particular period without a corresponding reduction in our costs, which could
hurt our results of operations for that period.
THE PRICE OF OUR COMMON STOCK HAS BEEN, AND WILL CONTINUE TO BE VOLATILE, WHICH
INCREASES THE RISK OF AN INVESTMENT IN OUR COMMON STOCK.
The trading price of our common stock has fluctuated in the past and will
fluctuate in the future. This future fluctuation could be a result of a number
of factors, many of which are outside our control. Some of these factors
include:
- quarter-to-quarter variations in our operating results;
- failure to meet the expectations of industry analysts;
- announcements and technological innovations or new products by us or our
competitors;
- increased price competition; and
- general conditions in the Internet, technology and the telecommunications
industries.
The stock market has experienced extreme price and volume fluctuations
which have particularly affected the market prices of many Internet and computer
software companies, including ours.
WE ARE THE TARGET OF SECURITIES CLASS ACTION LITIGATION AND THE VOLATILITY OF
OUR STOCK PRICE MAY LEAD TO ADDITIONAL LEGAL PROCEEDINGS BEING BROUGHT AGAINST
THE COMPANY WHICH COULD RESULT IN SUBSTANTIAL COSTS AND DIVERT MANAGEMENT
ATTENTION AND RESOURCES.
In December 2001 a putative class action complaint was filed in the United
States District Court for the Southern District of New York against us, certain
of the underwriters of our initial public offering and certain of our current
and former officers and directors. The complaint alleges that the defendants
failed to disclose "excessive commissions" paid to the underwriters in exchange
for allocating shares to preferred customers, that the underwriters had
agreements with preferred customers tying the allocation of shares to the
preferred customers' agreements to make additional aftermarket purchases at
pre-determined prices. The failure to disclose these alleged arrangements made
our prospectus materially false and misleading. Plaintiff seeks unspecified
damages and other relief. We intend to defend vigorously against the plaintiff's
claims. Such defense may result in substantial costs and divert management
attention and resources, which may seriously harm our business. We believe we
are entitled to indemnification by the underwriters under the terms of the
underwriting agreements. We have notified the underwriters of the action, but
the underwriters have not yet agreed to indemnify us and no assurances can be
given that such indemnification will be available.
In addition, in the past, other types of securities class action litigation
has often been brought against a company following periods of volatility in the
market price of its securities. We may in the future be the target of similar
litigation. While we are not aware of any other complaints being filed against
us, and we do not know of any facts and circumstances that could give rise to a
valid course of action, any securities litigation may
38
result in substantial costs and divert management's attention and resources,
which may seriously harm our business.
OUR STRATEGY TO EXPAND INTO INTERNATIONAL MARKETS THROUGH DIRECT SALES EFFORTS
AND THROUGH STRATEGIC RELATIONSHIPS MAY NOT SUCCEED AS A RESULT OF LEGAL,
BUSINESS AND ECONOMIC RISKS SPECIFIC TO INTERNATIONAL OPERATIONS.
Our strategy includes expansion into international markets through a
combination of direct sales efforts and strategic relationships. In addition to
risks generally associated with international operations, our future
international operations might not succeed for a number of reasons, including:
- dependence on sales efforts of third party distributors and systems
integrators;
- difficulties in staffing and managing foreign operations;
- difficulties in localizing products and supporting customers in foreign
countries;
- reduced protection for intellectual property rights in some countries;
- greater difficulty in collecting accounts receivable; and
- uncertainties inherent in transnational operations such as export and
import regulations, taxation issues, tariffs and trade barriers.
To the extent that we are unable to successfully manage expansion of our
business into international markets due to any of the foregoing factors, our
business could be adversely affected.
OUR FUTURE SUCCESS WILL DEPEND IN PART UPON OUR ABILITY TO CONTINUALLY ENHANCE
OUR PRODUCT OFFERING TO MEET THE CHANGING NEEDS OF SERVICE PROVIDERS, AND IF WE
ARE NOT ABLE TO DO SO WE WILL LOSE FUTURE BUSINESS TO OUR COMPETITORS.
We believe that our future success will depend to a significant extent upon
our ability to enhance our product offering and packaged industry suites and to
introduce new products and features to meet the requirements of our customers in
a rapidly developing and evolving market. We devote significant resources to
refining and expanding our software products, developing our pre-configured
industry suites and investigating complimentary products and technologies. The
requirements of our customers may change and our present or future products or
packaged industry suites may not satisfy the evolving needs of our targeted
markets. Due to our cost reduction measures, we have significantly reduced the
amount of cash we will utilize for research and development. This reduction may
make it more difficult to enhance future product offerings. If we are unable to
anticipate or respond adequately to customer needs, we will lose business and
our financial performance will suffer.
IF WE CANNOT CONTINUE TO OBTAIN OR IMPLEMENT THE THIRD-PARTY SOFTWARE THAT WE
INCORPORATE INTO OUR PRODUCT OFFERING, WE MAY HAVE TO DELAY OUR PRODUCT
DEVELOPMENT OR REDESIGN EFFORTS, WHICH COULD HAVE AN ADVERSE EFFECT ON OUR
REVENUE AND RESULTS OF OPERATIONS.
Our product offering involves integration with products and systems
developed by third parties. If any of these third-party products should become
unavailable for any reason, fail under operation with our product offering, or
fail to be supported by their vendors, it would be necessary for us to redesign
our product offering. We might encounter difficulties in accomplishing any
necessary redesign in a cost-effective or timely manner. We also could
experience difficulties integrating our product offering with other hardware and
software. Furthermore, if new releases of third-party products and systems occur
before we develop products compatible with these new releases, we could
experience a decline in demand for our product offering which could cause our
business and financial performance to suffer.
WE MAY BE UNABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY, AND OUR COMPETITORS MAY
INFRINGE ON OUR TECHNOLOGY, OR DEVELOP COMPETITIVE TECHNOLOGY, ANY ONE OF WHICH
COULD HARM THE VALUE OF OUR PROPRIETARY TECHNOLOGY.
Any misappropriation of our technology or the development of competitive
technology could seriously harm our business. We regard a substantial portion of
our software product as proprietary and rely on a
39
combination of patent, copyright, trademark and trade secret laws, customer
license agreements and employee and third-party agreements to protect our
proprietary rights. These steps may not be adequate, and we do not know if they
will prevent misappropriation of our intellectual property, particularly in
foreign countries where the laws may not protect proprietary rights as fully as
do the laws of the United States. Other companies could independently develop
similar or superior technology without violating our proprietary rights. If we
have to resort to legal proceedings to enforce our intellectual property rights,
the proceedings could be burdensome and expensive and could involve a high
degree of risk.
CLAIMS BY OTHERS THAT WE INFRINGE THEIR PROPRIETARY TECHNOLOGY COULD BE COSTLY
AND HARM OUR BUSINESS.
Third parties could claim that our current or future products or technology
infringe their proprietary rights. An infringement claim against us could be
costly even if the claim is invalid, and could distract our management from the
operation of our business. Furthermore, a judgment against us could require us
to pay substantial damages and could also include an injunction or other court
order, that could prevent us from selling our product offering. If we faced a
claim relating to proprietary technology or information, we might seek to
license technology or information, or modify our own, but we might not be able
to do so. Our failure to obtain the necessary licenses or other rights or to
develop non-infringing technology could prevent us from selling our products and
could seriously harm our business.
LOSS OF OUR SENIOR MANAGEMENT PERSONNEL, PARTICULARLY JAMES DALEEN, WOULD LIKELY
HURT OUR BUSINESS.
Our future success depends to a significant extent on the continued
services of our senior management and other key personnel, particularly James
Daleen, our founder and chief executive officer. If we lost the services of Mr.
Daleen or other key employees it would likely hurt our business. We have
employment and non-compete agreements with some of our executive officers,
including Mr. Daleen. However, these agreements do not obligate them to continue
working for us.
PRODUCT DEFECTS OR SOFTWARE ERRORS IN OUR PRODUCTS COULD ADVERSELY AFFECT OUR
BUSINESS DUE TO COSTLY REDESIGNS, PRODUCTION DELAYS AND CUSTOMER
DISSATISFACTION.
Design defects or software errors in our products may cause delays in
product introductions or damage customer satisfaction, either of which could
seriously harm our business. Our software products are highly complex and may,
from time to time, contain design defects or software errors that may be
difficult to detect and correct. Although we have license agreements with our
customers that contain provisions designed to limit our exposure to potential
claims and liabilities arising from customer problems, these provisions may not
effectively protect us against all claims. In addition, claims and liabilities
arising from customer problems could significantly damage our reputation and
hurt our business.
IN THE EVENT WE ACQUIRE THIRD PARTIES OR THIRD PARTY TECHNOLOGIES, SUCH
ACQUISITIONS COULD RESULT IN DISRUPTIONS TO OUR BUSINESS AND DIVERSION OF
MANAGEMENT, AND COULD REQUIRE THAT WE ENGAGE IN FINANCING TRANSACTIONS THAT
COULD HURT OUR FINANCIAL PERFORMANCE.
We may in the future make acquisitions of companies, products or
technologies, or enter into strategic relationship agreements that require
substantial up-front investments. We will be required to assimilate the acquired
businesses and may be unable to maintain uniform standards, controls, procedures
and policies if we fail to do so effectively. We may have to incur debt or issue
equity securities to pay for any future acquisitions. The issuance of equity
securities for any acquisition could be substantially dilutive to our
stockholders. In addition, our profitability may suffer because of
acquisition-related costs or amortization costs for acquired intangible assets.
OUR SUCCESS DEPENDS IN PART ON OUR ABILITY TO MOTIVATE AND RETAIN HIGHLY SKILLED
EMPLOYEES, WHICH IS DIFFICULT IN TODAY'S STRUGGLING TECHNOLOGY MARKET.
Our success depends in large part on our ability to motivate and retain
highly skilled information technology professionals, software programmers and
sales and marketing professionals. Our restructurings and general cost
reductions may create uncertainties that could affect motivation and our ability
to retain our employees. While qualified personnel in these fields may be
readily employable, turnover of such personnel
40
could create a lack of continuity that could prevent us from managing and
competing for existing and future projects or to compete for new customer
contracts.
DELAWARE LAW, OUR CERTIFICATE OF INCORPORATION AND OUR BYLAWS CONTAIN
ANTI-TAKEOVER PROVISIONS THAT MAY DELAY, DEFER OR PREVENT A CHANGE OF CONTROL.
Certain provisions of Delaware Law, our certificate of incorporation and
our bylaws contain provisions that could delay, deter or prevent a change in
control of Daleen. Our certificate of incorporation and bylaws, among other
things, provide for a classified board of directors, restrict the ability of
stockholders to call stockholders meetings by allowing only stockholders
holding, in the aggregate, not less than 10% of the capital stock entitled to
cast votes at these meetings to call a meeting, preclude stockholders from
raising new business for consideration at stockholder meetings unless the
proponent has provided us with timely advance notice of the new business, and
limit business that may be conducted at stockholder meetings to those matters
properly specified in notices delivered to us. Moreover, we have not opted out
of Section 203 of the Delaware General Corporation Law, which prohibits mergers,
sales of material assets and some types of self-dealing transactions between a
corporation and a holder of 15% or more of the corporation's outstanding voting
stock for a period of three years following the date the stockholder became a
15% holder, unless an applicable exemption from the rule is available. These
provisions do not apply to the purchasers of our Series F preferred stock.
RISKS ASSOCIATED WITH OUR SERIES F PREFERRED STOCK
THE HOLDERS OF OUR SERIES F PREFERRED STOCK HAVE RIGHTS THAT ARE SENIOR TO THOSE
OF THE HOLDERS OF OUR COMMON STOCK IN THE EVENT OF THE SALE OF OUR COMPANY OR IN
THE EVENT OF OUR LIQUIDATION, DISSOLUTION OR WINDING UP.
The holders of the Series F preferred stock will have a claim against our
assets senior to the claim of the holders of our common stock in the event of
our liquidation, dissolution or winding up. The aggregate amount of that senior
claim will be at least $110.94 per share of Series F preferred stock (the
"Preferential Amount"), or approximately $26.8 million based on the numbers of
shares of Series F preferred stock outstanding at March 18, 2002.
Additionally, unless otherwise agreed by the holders of at least a majority
of the outstanding shares of Series F preferred stock, in the event of a "Sale
of the Company" (as defined under the caption "Item 5. Market for Registrant's
Common Equity and Related Shareholder Matter - Private Placement of Convertible
Preferred Stock"), we are required to redeem all of the issued and outstanding
shares of Series F preferred stock for the Preferential Amount per share. As a
result, in the event of a Sale of the Company, the holders of the Series F
preferred stock would be entitled to the first approximately $26.8 million of
the transaction value based on the number of shares of Series F preferred stock
outstanding on March 18, 2002.
THE HOLDERS OF OUR SERIES F PREFERRED STOCK HAVE SIGNIFICANT VOTING RIGHTS THAT
ARE SENIOR TO THOSE OF THE HOLDERS OF OUR COMMON STOCK.
The holders of the Series F preferred stock have voting rights entitling
them to vote together with the holders of our common stock as a single class and
on the basis of 100 votes per share of Series F preferred stock, subject to
adjustment for any stock split, stock dividend, reverse stock split,
reclassification or consolidation of or on our common stock. As of March 18,
2002, the voting rights of the holders of Series F preferred stock, excluding
shares of common stock currently owned by the holders of the Series F preferred
stock, would constitute a majority of the entire voting class of common stock,
or more than 60%, if the Warrant holders exercise the Warrants.
As discussed below, the holders of the Series F preferred stock have the
right to vote together with the holders of our common stock as a single class
and on the basis of 100 votes per share of Series F preferred stock. As a
result, the holders of the outstanding Series F preferred stock would control a
majority of the outstanding vote. Additionally, certain of the holders of Series
F preferred stock would beneficially own a significant number of shares of our
outstanding common stock. When combined with the shares of common stock that
they beneficially own, the holders of our Series F preferred stock would control
more than 58% of the vote on any proposal submitted to the holders of our
outstanding common stock, or more than 67% of the
41
vote if the holders of the Series F preferred stock exercise their Warrants and
warrants to purchase common stock. In the event that we seek stockholder
approval of a transaction or action involving the Sale of the Company and/or the
liquidation, dissolution or winding down or the Company, the holders of the
Series F preferred stock will control a majority of the vote and, as a result,
would control or significantly influence the outcome of a proposal with respect
to such a transaction or action, whether or not the holders of our common stock
support or oppose the proposal. See "-- The holders of our Series F preferred
stock have significant voting rights that are senior to those of the holders of
our common stock" and "The Private Placement investors acquired voting power of
our capital stock sufficient to enable the investors to control or significantly
influence all major corporate decisions" below.
On March 18, 2002, we had 22,611,255 shares of common stock issued and
outstanding and 241,882 shares of Series F preferred stock issued and
outstanding. Additionally, we had outstanding Warrants for the purchase of an
aggregate of 109,068 shares of Series F preferred stock.
Following the conversion of the Series F preferred stock, the holders will
be entitled to vote the number of shares of common stock issued upon conversion.
As a result, the holders of Series F preferred stock have a significant ability
to determine the outcome of matters submitted to our stockholders for a vote,
including a vote with respect to a Sale of the Company and/or liquidation,
dissolution or winding down of the Company. Additionally, the holders of the
Series F preferred stock are entitled to vote as a separate class on certain
matters, including:
- the authorization or issuance of any other class or series of preferred
stock ranking senior to or equal with the Series F preferred stock as to
payment of amounts distributable upon dissolution, liquidation or winding
down of Daleen;
- the issuance of any additional shares of Series F preferred stock;
- the reclassification of any capital stock into shares having preferences
or priorities senior to or equal with the Series F preferred stock;
- the amendment, alteration, or repeal of any rights of the Series F
preferred stock; and
- the payment of dividends on any other class or series of capital stock of
Daleen, including the payment of dividends on our common stock.
As a result of these preferences and senior rights, the holders of the
Series F preferred stock have rights that are senior to the common stock in
numerous respects.
The holders of the Series F preferred stock have other rights and
preferences, including the right to convert the Series F preferred stock into an
increased number of shares of common stock as a result anti-dilution
adjustments.
THE PRIVATE PLACEMENT PROVIDED THE INVESTORS IN THE SERIES F PREFERRED STOCK
WITH SUBSTANTIAL EQUITY OWNERSHIP IN DALEEN AND HAD A SIGNIFICANT DILUTIVE
EFFECT ON EXISTING STOCKHOLDERS.
The Series F preferred stock is convertible at any time into a substantial
percentage of the outstanding shares of our common stock. The issuance of the
Series F preferred stock has resulted in substantial dilution to the interests
of the holders of our common stock. The exercise of the Warrants will result in
further dilution. The number of shares of our common stock issuable upon
conversion of the Series F preferred stock, and the extent of dilution to
existing stockholders, depends on a number of factors, including events that
cause an adjustment to the conversion price.
Due to the reset provision of the Series F preferred stock, the conversion
price is $0.9060. On March 18, 2002, we issued 734,700 shares of common stock
upon conversion of 6,000 shares of Series F preferred stock. Based on the number
of shares of Series F preferred stock that remained outstanding as of March 18,
2002, if all of the holders of the Series F preferred stock and Warrants
exercise the Warrants in full and convert all of the remaining shares of Series
F preferred stock and Warrants into shares of common stock, we would issue an
aggregate of approximately 42,973,937 additional shares of common stock.
42
OUR SERIES F PREFERRED STOCK PROVIDES FOR ANTI-DILUTION ADJUSTMENTS TO THE
SERIES F PREFERRED STOCK CONVERSION PRICE, WHICH COULD RESULT IN A REDUCTION OF
THE CONVERSION PRICE.
Subject to certain exceptions, the conversion price of the Series F
preferred stock will be reduced each time, if any, that we issue common stock,
options, warrants or other rights to acquire common stock at a price per share
of common stock that is less than the conversion price of the Series F preferred
stock then in effect. A reduction in the conversion price of the Series F
preferred stock will increase the number of shares of common stock issuable upon
conversion of the Series F preferred stock.
THE SERIES F PREFERRED STOCK IS AUTOMATICALLY CONVERTIBLE ONLY IN LIMITED
CIRCUMSTANCES AND, AS A RESULT COULD BE OUTSTANDING INDEFINITELY.
The Series F preferred stock will convert automatically into common stock
only if, after March 30, 2002, the closing price of our common stock on The
Nasdaq National Market or a national securities exchange is at least $3.3282 per
share for ten out of any 20 trading day period. Otherwise, the shares of Series
F preferred stock are convertible only at the option of the holder. Further, the
Series F preferred stock is not subject to automatic conversion if our common
stock is not then listed for trading on The Nasdaq National Market or a national
securities exchange. Each Warrant is exercisable for Series F preferred stock in
whole or in part at any time during a five-year exercise period at the sole
discretion of the Warrant holder and will not be convertible or callable at the
election of us. As a result of these provisions, the Series F preferred stock
may remain outstanding indefinitely.
THE PRIVATE PLACEMENT INVESTORS ACQUIRED VOTING POWER OF OUR CAPITAL STOCK
SUFFICIENT TO ENABLE THE INVESTORS TO CONTROL OR SIGNIFICANTLY INFLUENCE ALL
MAJOR CORPORATE DECISIONS.
The holders of the Series F preferred stock and Warrants hold a percentage
of the voting power of our capital stock that will enable such holders to elect
directors and to control to a significant extent major corporate decisions
involving Daleen and our assets that are subject to a vote of our stockholders.
The voting rights of the holders of the Series F preferred stock, when combined
with the common stock owned by their affiliates, currently represents more than
a majority of the voting power of Daleen.
Following is information on HarbourVest Partners VI-Direct Fund L.P., one
of the purchasers in the Private Placement as of March 18, 2002:
- HarbourVest Partners VI-Direct Fund L.P. is managed by HarbourVest, which
also manages HarbourVest Partners V-Direct Fund L.P.
- HarbourVest, through funds it manages, beneficially owns approximately
35.44% of our common stock, based on a Series F preferred stock
conversion price of $0.9060 and assuming conversion of all of the
outstanding shares of Series F preferred stock and exercise of all
HarbourVest funds' Warrants and outstanding warrants to purchase our
common stock.
- Prior to the conversion of the Series F preferred stock, but assuming
exercise of the HarbourVest funds' Warrants and their other warrants,
HarbourVest would control approximately 34.24% of the voting power of
Daleen, or 27.42% prior to exercising the HarbourVest funds' Warrants and
other warrants, based on the voting rights of the Series F preferred
stock.
Following is information on SAIC Venture Capital Corporation, one of the
purchasers in the private placement, as of March 18, 2002:
- SAIC Venture Capital Corporation beneficially owns approximately 24.91%
of our outstanding common stock, based on a Series F preferred stock
conversion price of $0.9060 and assuming conversion of all of the
outstanding shares of Series F preferred stock and exercise of SAIC
Venture Capital Corporation's Warrants.
- Prior to the conversion of the Series F preferred stock, but assuming
exercise of its Warrants, SAIC Venture Capital Corporation would control
approximately 23.66% of the voting power of Daleen, or 19.25% prior to
the exercise of its Warrants, based on the voting rights of the Series F
preferred stock.
43
SALES OF A SUBSTANTIAL NUMBER OF SHARES OF COMMON STOCK IN THE PUBLIC MARKET,
COULD LOWER OUR STOCK PRICE AND IMPAIR OUR ABILITY TO RAISE FUNDS IN NEW STOCK
OFFERINGS.
Pursuant to the terms of the Purchase Agreements, the Company has filed
with the Securities and Exchange Commission a Registration Statement on Form S-3
for the purpose of registering the shares of common stock issuable upon
conversion of the Series F preferred stock. The Securities and Exchange
Commission declared the Registration statement effective on September 25, 2001.
Pursuant to other agreements with third parties, the Company has included in the
Registration Statement shares of common stock held or that may be acquired by
certain other stockholders of the Company. As a result, the Registration
Statement covers an aggregate of 56,192,841 shares of common stock. The holders
of the shares of common stock included in the Registration Statement are not
obligated to sell any or all of the shares to be registered. However, it permits
the holders of the registered shares, including the shares of common stock
issuable upon conversion of the Series F preferred stock, to sell their shares
of our common stock in the public market or in private transactions from time to
time until all of the shares are sold or the shares otherwise may be transferred
without restriction under the securities laws.
Future sales of a substantial number of shares of our common stock in the
public market, or the perception that such sales could occur, including any
perceptions that may be created upon the actual conversion of Series F preferred
stock, could adversely affect the prevailing market price of our common stock.
Additionally, a decrease in the market price of our common stock could make it
more difficult for us to raise additional capital through the sale of equity
securities.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our financial instruments consist of cash that is invested in institutional
money market accounts and less than 90-day securities invested in corporate
fixed income bonds. We do not use derivative financial instruments in our
operations or investments and do not have significant operations that are
subject to fluctuations in commodities prices or foreign currency exchange
rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our financial statements are submitted as a separate section of this
Report, beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Our Board of Directors currently consists of Paul G. Cataford, James
Daleen, Daniel J. Foreman, Stephen J. Getsy, P.J. Hilbert and Ofer Nemirovsky.
William A. Roper, Jr. recently submitted his resignation from the Board of
Directors effective March 31, 2002.
In accordance with General Instruction G(3) of the Form 10-K, additional
information relating to the directors of Daleen, including directors who are
executive officers of Daleen, is set forth in Daleen's Proxy Statement for the
2002 Annual Meeting of Stockholders (the "Proxy Statement") and is incorporated
herein by reference. Pursuant to Instruction 3 of Item 401(b) of Regulation S-K
and General Instruction G(3) of Form 10-K, information relating to the executive
officers of Daleen is set forth under the caption "Executive Officers of the
Registrant" in Part I, Item 4A of this report.
Compliance with Section 16(a) of the Securities Exchange Act of 1934:
Section 16(a) of the Securities Exchange of 1934, as amended, and regulations of
the Securities and Exchange Commission thereunder require our directors and
executive officers and any persons who own more than 10% of Daleen's Common
Stock, as well as certain affiliates of such persons, to file reports with the
Securities and Exchange
44
Commission and the National Association of Securities Dealers, Inc. with respect
to their ownership of our common stock. Directors, executive officers and
persons owning more than 10% of our common stock are required by Securities and
Exchange Commission regulations to furnish us with copies of all Section 16(a)
reports they file. Based solely on its review of the copies of such reports
received by it and written representations that no other reports were required
of those persons, we believe that during fiscal 2001, all filing requirements
applicable to its directors and executive officers were complied with, except
that Jeanne Prayther filed a Form-3 shortly after the required deadline for
filing. We are not aware of any other persons other than directors and executive
officers and their affiliates who own more than 10% of our common stock.
ITEM 11. EXECUTIVE COMPENSATION.
In accordance with General Instruction G(3) of Form 10-K, the information
relating to executive compensation is set forth in the Proxy Statement and is
incorporated herein by reference; provided, such incorporation by reference
shall not be deemed to include or incorporate by reference the information
referred to in Item 402 (a)(8) of Regulation S-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
In accordance with General Instruction G(3) of Form 10-K, the information
relating to security ownership by certain persons is set forth in the Proxy
Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In accordance with General Instruction G(3) of Form 10-K, the information
relating to certain relationships and related transactions is set forth under
the caption "Related Party Transactions" in the Proxy Statement and is
incorporated herein by reference.
45
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
1. Financial Statements
The financial statements are submitted as a separate section of this
report, beginning on page F-1.
2. Financial Statement Schedule
Schedule II Valuation and Qualifying Accounts. Submitted as a separate
section of the financial statements on page F-31.
(b) Exhibits. The following exhibits are filed as part of, or are
incorporated by reference into, this report on Form 10-K:
EXHIBIT LIST
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1(a)+ Certificate of Incorporation of Daleen Technologies, Inc.
(Incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1 (File No. 333-82487)
filed on September 30, 1999)
3.1(b)+ Certificate of Amendment to Certificate of Incorporation of
Daleen Technologies, Inc. (Incorporated by reference to
Exhibit 10.2 to the Company's Form 8-K (File No. 0-27491)
filed on June 15, 2001)
3.2+ Bylaws of Daleen Technologies, Inc. (Incorporated by
reference to Exhibit 3.2 to the Company's Registration
Statement on Form S-1 (File No 333-82487) filed on September
30, 1999). (Incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement on Form S-1 (File No
333-82487) filed on September 30, 1999)
4.1+ See Exhibits 3.1(a), 3.1(b) and 3.2 for provisions of the
certificate of incorporation, as amended, and bylaws of
Daleen Technologies, Inc. defining rights of the holders of
common stock and preferred stock of Daleen Technologies,
Inc. (Incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-1 (File No.
333-82487) filed on September 30, 1999 and incorporated by
reference to Exhibit 10.2 to the Company's Form 8-K (File
No. 0-27491) filed on June 15, 2001)
4.2+ Specimen stock certificate (Incorporated by reference to
Exhibit 4.2 to the Company's Registration Statement on Form
S-1 (File No. 333-82487) filed on September 30, 1999)
10.1+ Employment Agreement, dated December 1, 1994, between James
Daleen and Daleen Technologies, Inc. (Incorporated by
reference to Exhibit 10.1 to the Company's Registration
Statement on Form S-1 (File No. 333-82487) filed on
September 30, 1999)
10.2+ Amendment to Employment Agreement dated September 5, 1997,
between James Daleen and Daleen Technologies, Inc.
(Incorporated by reference to Exhibit 10.2 to the Company's
Registration Statement on Form S-1 (File No 333-82487) filed
on September 30, 1999)
10.3+ Third Amendment to the Employment Agreement, effective March
1, 1999, between James Daleen and Daleen Technologies, Inc.
(Incorporated by reference to Exhibit 10.3 to the Company's
Registration Statement on Form S-1 (File No. 333-82487)
filed on September 30, 1999)
10.4+ Employment Agreement, dated, January 31, 1998, between David
B. Corey and Daleen Technologies, Inc. (Incorporated by
reference to Exhibit 10.4 to the Company's Registration
Statement on Form S-1 (File No. 333-82487) filed on
September 30, 1999)
46
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.5+ Employment Agreement, dated April 28, 1999, between Stephen
M. Wagman and Daleen Technologies, Inc. (Incorporated by
reference to Exhibit 10.9 to the Company's Registration
Statement on Form S-1 (File No. 333-82487) filed on
September 30, 1999)
10.6+ Form of Indemnification Agreement (Incorporated by reference
to Exhibit 10.10 to the Company's Registration Statement on
Form S-1 (File No 333-82487) filed on September 30, 1999)
10.7+ Daleen Technologies, Inc. Amended and Restated Stock
Incentive Plan (Incorporated by reference to Exhibit 10.11
to the Company's Registration Statement on Form S-1 (File
No. 333-82487) filed on September 30, 1999)
10.8+ Daleen Technologies, Inc. 1998 Incentive Stock Option Plan
(Incorporated by reference to Exhibit 10.12 to the Company's
Registration Statement on Form S-1 (File No. 333-82487)
filed on September 30, 1999)
10.9+ Daleen Technologies, Inc. 1997 Incentive Stock Option Plan
(Incorporated by reference to Exhibit 10.13 to the Company's
Registration Statement on Form S-1 (File No. 333-82487)
filed on September 30, 1999)
10.10+ Daleen Technologies, Inc. 1995 Incentive Stock Option Plan
(Incorporated by reference to Exhibit 10.14 to the Company's
Registration Statement on Form S-1 (File No. 333-82487)
filed on September 30, 1999)
10.11+ Daleen Technologies, Inc. 1998 Employee Non-Qualified Stock
Option Plan (Incorporated by reference to Exhibit 10.15 to
the Company's Registration Statement on Form S-1 (File No.
333-82487) filed on September 30, 1999)
10.12+ Daleen Technologies, Inc. 1996 Employee Non-Qualified Stock
Option Plan (Incorporated by reference to Exhibit 10.16 to
the Company's Registration Statement on Form S-1 (File No.
333-82487) filed on September 30, 1999)
10.13+ Daleen Technologies, Inc. 1994 Employee Non-Qualified Stock
Option Plan (Incorporated by reference to Exhibit 10.17 to
the Company's Registration Statement on Form S-1 (File No.
333-82487) filed on September 30, 1999)
10.14+ Lease Agreement, dated August 4, 1992, by Innovative
Selective Software, Inc., and Crow-Childress-Donner, Limited
(Incorporated by reference to Exhibit 10.18 to the Company's
Registration Statement on Form S-1 (File No. 333-82487)
filed on September 30, 1999)
10.15+ First Amendment to Lease Agreement, dated December 29, 1994,
by Daleen Technologies Inc, successor to Innovative
Selective Software, Inc., and Regent Holding Corporation,
successor to Crow-Childress-Donner (Incorporated by
reference to Exhibit 10.19 to the Company's Registration
Statement on Form S-1 (File No. 333-82487) filed on
September 30, 1999)
10.16+ Lease Agreement, dated August 27, 1998, by Daleen
Technologies, Inc. and Regent Holding Corporation
(Incorporated by reference to Exhibit 10.20 to the Company's
Registration Statement on Form S-1 (File No. 333-82487)
filed on September 30, 1999)
10.17+ First Amendment to Lease, dated December 2, 1998, between
Daleen Technologies, Inc. and Regent Holding Corporation
(Incorporated by reference to Exhibit 10.21 to the Company's
Registration Statement on Form S-1 (File No. 333-82487)
filed on September 30, 1999)
10.18+ Second Amendment to Lease, dated January 16, 1999, between
Daleen Technologies, Inc. and Regent Holding Corporation
(Incorporated by reference to Exhibit 10.22 to the Company's
Registration Statement on Form S-1 (File No. 333-82487)
filed on September 30, 1999)
10.19+ Sublease Agreement, dated August 2, 1999, between W.R. Grace
& Co. and Daleen Technologies, Inc. (Incorporated by
reference to Exhibit 10.24 to the Company's Registration
Statement on Form S-1 (File No. 333-82487) filed on
September 30, 1999)
47
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.20+ Employment Agreement, dated April 7, 1997, between John Z.
Yin and Daleen Technologies, Inc. (Incorporated by reference
to Exhibit 10.25 to the Company's Registration Statement on
Form S-1 (File No. 333-82487) filed on September 30, 1999)
10.21+ Employment Agreement, dated April 7, 1997, betwee n Frank
Dickinson and Daleen Technologies, Inc. (Incorporated by
reference to Exhibit 10.26 to the Company's Registration
Statement on Form S-1 (File No. 333-82487) filed on
September 30, 1999)
10.22+ Employment Agreement, dated July 22, 1998, between David
McTarnaghan and Daleen Technologies, Inc. (Incorporated by
reference to Exhibit 10.27 to the Company's Registration
Statement on Form S-1 (File No. 333-82487) filed on
September 30, 1999)
10.23+ Indemnity Escrow Agreement dated December 16, 1999, between
the Company, Daleen Canada Corporation, Inlogic Software
Inc., the shareholders of Inlogic Software Inc., and
Montreal Trust Company of Canada, as escrow agent
(Incorporated by reference to Exhibit 10.1 to the Company's
Form 8-K (File No. 333-82487) filed on December 30, 1999)
10.24+ Employee/Shareholder Escrow Agreement dated December 16,
1999, between the Company, Daleen Canada Corporation,
Inlogic Software Inc., the employee shareholders of Inlogic
Software Inc., and Montreal Trust Company of Canada, as
escrow agent (Incorporated by reference to Exhibit 10.2 to
the Company's Form 8-K (File No. 333-82487) filed on
December 30, 1999)
10.25+ Exchange Trust Agreement dated December 16, 1999, between
the Company, Daleen Canada Corporation, Daleen Callco
Corporation, the shareholders of Inlogic Software Inc., and
Montreal Trust Company of Canada, as trustee (Incorporated
by reference to Exhibit 10.4 to the Company's Form 8-K (File
No. 333-82487) filed on December 30, 1999)
10.26+ Registration Rights Agreement dated December 16, 1999,
between the Company and the shareholders of Inlogic Software
Inc. (Incorporated by reference to Exhibit 10.5 to the
Company's Form 8-K (File No. 333-82487) filed on December
30, 1999)
10.27+ Loan Agreement dated August 18, 2000 by and between Bank of
America, N.A., a national banking association and Daleen
Technologies, Inc. (Incorporated by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q (File
No. 0-27491) filed on November 14, 2000)
10.28+ Promissory Note dated August 18, 2000 by and between Bank of
America, N.A., a national banking association and Daleen
Technologies, Inc. (Incorporated by reference to Exhibit
10.2 to the Company's Quarterly Report on Form 10-Q (File
No. 0-27491) filed on November 14, 2000)
10.29+ Office Lease Agreement dated May 5, 2000, between Daleen
Technologies, Inc., Daleen Canada Corporation and The Atrium
on Bay Inc. (Incorporated by reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q (File No.
0-27491) filed on August 14, 2000)
10.30+ Second Amendment to Lease, dated May 31, 2000, between
Daleen Technologies, Inc. and Regent Holding Corporation.
(Incorporated by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q (File No. 0-27491) filed on
August 14, 2000)
10.31+ Third Amendment to Lease, dated May 31, 2000, between Daleen
Technologies, Inc. and Regent Holding Corporation.
(Incorporated by reference to Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q (File No. 0-27491) filed on
August 14, 2000)
10.32+ Daleen Technologies, Inc. Amended & Restated 1999 Stock
Incentive Plan (Incorporated by reference to Exhibit 10 .37
to the Company's Form 10-K405 (File No. 0-27491) filed on
April 5, 2001)
48
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.33+ Promissory Note and Stock Pledge Agreement dated January 11,
2001 by and between James Daleen and J.D. Investment Company
Limited Partnership and Daleen Technologies, Inc.
(Incorporated by reference to Exhibit 10.38 to the Company's
Form 10-K405 (File No. 0-27491) filed on April 5, 2001.)
10.34+ PartnerCommunity Inc. 2000 Stock Incentive Plan
(Incorporated by reference to Exhibit 10.39 to the Company's
Form 10-K405 (File No 0-27491) filed on April 5, 2001)
10.35+ Securities Purchase Agreement dated March 30, 2001 by and
between Daleen Technologies, Inc. and the Escrow Purchasers
named therein (Incorporated by reference to Exhibit 10.45 to
the Company's Form 10-K405 (File No 0-27491) filed on April
5, 2001)
10.36+ Form of Certificate of Amendment for the Series F
Convertible Preferred Stock (Incorporated by reference to
Exhibit 10.46 to the Company's Form 10-K405 (File No.
0-27491) filed on April 5, 2001)
10.37+ Form of Warrant Agreement by and between Daleen
Technologies, Inc. and the Escrow Purchasers name therein
(Incorporated by reference to Exhibit 10.47 to the Company's
Form 10-K405 (File No. 0-27491) filed on April 5, 2001)
10.38+ Registration Rights Agreement dated March 30, 2001 by and
between Daleen Technologies, Inc. and the Escrow Purchasers
named therein (Incorporated by reference to Exhibit 10.48 to
the Company's Form 10-K405 (File No 0-27491) filed on April
5, 2001)
10.39+ Escrow Agreement dated March 30, 2001 by and between Daleen
Technologies, Inc. and the Escrow Purchasers named therein
(Incorporated by reference to Exhibit 10.49 to the Company's
Form 10-K405 (File No 0-27491) filed on April 5, 2001)
10.40+ Employment Agreement, dated April 21, 2000 between Steven
Kim and Daleen Technologies (Incorporated by reference to
Exhibit 10.9 to the Company's Form 10-Q (File No. 0-27491)
filed on May 15, 2001)
10.41+ Amendment, dated September 10, 2001, to Exhibit B of
Employment Agreement dated January 31, 1998 by and between
Daleen Technologies, Inc. and David B. Corey (Incorporated
by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q (File No. 0-27491) filed on November 14,
2001)
10.42+ Agreement of Interpretation, dated October 23, 2001,
regarding Employment Agreement dated January 31, 1998, as
amended, by and between Daleen Technologies, Inc. and David
B. Corey (Incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q (File No 0-27491)
filed on November 14, 2001)
10.43+ Relocation Agreement, dated July 11, 2001, by and between
Daleen Technologies, Inc. and David B. Corey (Incorporated
by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q (File No 0-27491) filed on November 14,
2001)
10.44+ Employment Agreement, dated May 31, 2000, by and between
Daleen Technologies, Inc. and Jeanne T. Prayther
(Incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q (File No 0-27491) filed on
November 14, 2001)
10.45+ Amendment, dated August 22, 2001, to Employment Agreement
dated May 31, 2000 by and between Daleen Technologies, Inc.
and Jeanne T. Prayther (Incorporated by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q (File
No. 0-27491) filed on November 14, 2001)
10.46+ Retention Bonus Agreement, dated August 22, 2001, by and
between Daleen Technologies, Inc. and Jeanne T. Prayther
(Incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q (File No 0-27491) filed on
November 14, 2001)
49
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.47+ Amendment, dated September 20, 2001, to Employment Agreement
dated April 21, 2000 by and between Daleen Technologies,
Inc. and Steven R. Kim (Incorporated by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q (File
No. 0-27491) filed on November 14, 2001)
10.48+ Amendment, dated July 18, 2001, to the Daleen Technologies,
Inc. Amended and Restated 1999 Stock Incentive Plan
(Incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q (File No 0-27491) filed on
November 14, 2001)
10.49+ Daleen Technologies, Inc. 2001 Broad-Based Stock Incentive
Plan (Incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q (File No. 0-27491)
filed on November 14, 2001)
10.50 Severance and Release Agreement dated effective December 31,
2001 by and between Daleen Technologies, Inc. and David B.
Corey
10.51 Lease Termination Agreement dated December 31, 2001 by and
between Daleen Technologies, Inc. and Rodney K. Longman
10.52 Partial Lease Termination Agreement dated effective December
31, 2001 by and between Daleen Technologies, Inc. and Boss
Lakeside Three, LLC
21.1 Subsidiaries
23.1 Independent Auditors' Consent
- ---------------
+ Previously filed.
(c) Reports on Form 8-K:
1. Report on Form 8-K filed October 19, 2001 with respect to the
October Restructuring.
2. Report on Form 8-K filed October 25, 2001 with respect to third
quarter financial operating results.
3. Report on Form 8-K filed December 14, 2001 with respect to the
filing of a class action lawsuit.
50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 1st day of
April, 2002.
Daleen Technologies, Inc.
By: /s/ JAMES DALEEN
------------------------------------
James Daleen
Chairman of the Board, President and
Chief Executive Officer (Principal
Executive Officer)
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ JAMES DALEEN Chairman of the Board, President
- ------------------------------------------------ and Chief Executive Officer
James Daleen (Principal Executive Officer) April 1, 2002
/s/ JEANNE T. PRAYTHER Chief Financial Officer (Principal
- ------------------------------------------------ Financial and Accounting
Jeanne T. Prayther Officer) April 1, 2002
/s/ PAUL G. CATAFORD Director
- ------------------------------------------------
Paul G. Cataford April 1, 2002
/s/ DANIEL J. FOREMAN Director
- ------------------------------------------------
Daniel J. Foreman April 1, 2002
/s/ STEPHEN J. GETSY Director
- ------------------------------------------------
Stephen J. Getsy April 1, 2002
/s/ PAULA J. HILBERT Director
- ------------------------------------------------
Paula J. Hilbert April 1, 2002
/s/ OFER NEMIROVSKY Director
- ------------------------------------------------
Ofer Nemirovsky April 1, 2002
51
DALEEN TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 2001
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Daleen Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of Daleen
Technologies, Inc. and Subsidiaries as of December 31, 2000 and 2001, and the
related consolidated statements of operations, redeemable preferred stock and
stockholders' (deficit) equity and cash flows for each of the years in the
three-year period ended December 31, 2001. In connection with our audits of the
consolidated financial statements, we have also audited the financial statement
schedule for each of the years in the three-year period ended December 31, 2001,
as listed in item 14(a)2 of the Company's 2001 Annual Report on Form 10-K. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 Daleen
Technologies, Inc. and Subsidiaries as of December 31, 2000 and 2001, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
The accompanying consolidated financial statements and financial statement
schedule have been prepared assuming that the Company will continue as a going
concern. As discussed in Note 2 to the consolidated financial statements, the
Company has suffered recurring losses from operations and has an accumulated
deficit of $201.3 million at December 31, 2001. These matters raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 2. The consolidated
financial statements and financial statement schedule do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ KPMG LLP
Miami, Florida
January 22, 2002 except as to note 19 which is as of March 29, 2002
F-2
DALEEN TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 2001
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2000 2001
-------- ---------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 22,268 $ 13,093
Restricted cash........................................... 931 30
Accounts receivable, less allowance for doubtful accounts
of $4,600 at December 31, 2000 and $3,789 at December
31, 2001............................................... 13,091 2,397
Costs in excess of billings............................... 2,213 5
Unbilled revenue.......................................... 838 488
Other current assets...................................... 904 431
-------- ---------
Total current assets.............................. 40,245 16,444
Notes receivable, less reserve of $0 at December 31, 2000
and $1,188 at December 31, 2001........................... 493 659
Property and equipment, net................................. 10,146 2,704
Goodwill, net of accumulated amortization of $15,026 at
December 31, 2000 and $58,060 at December 31, 2001........ 43,012 --
Other intangible asset, net of accumulated amortization of
$786 at December 31, 2000 and $1,500 at December 31,
2001...................................................... 1,714 --
Other assets................................................ 3,852 1,386
-------- ---------
Total assets...................................... $ 99,462 $ 21,193
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 2,968 $ 678
Accrued payroll and other accrued expenses................ 12,731 3,733
Billings in excess of costs............................... 1,466 1,323
Deferred revenue.......................................... 2,944 1,013
Other current liabilities................................. 1,061 --
-------- ---------
Total current liabilities......................... 21,170 6,747
Long term portion of capitalized lease...................... 607 --
-------- ---------
Total liabilities................................. 21,777 6,747
Commitments and contingencies
Minority interest........................................... 184 184
Stockholders' equity:
Series F Convertible Preferred Stock $.01 par value;
356,950 shares authorized; none issued or outstanding
at December 31, 2000; 247,882 shares issued and
outstanding ($110.94 per share liquidation value) as of
December 31, 2001...................................... -- 25,564
Common stock-$.01 par value. 70,000,000 shares authorized;
21,781,727 shares issued and outstanding at December
31, 2000 and 21,876,554 shares issued and outstanding
at December 31, 2001................................... 218 219
Stockholders notes receivable............................. (274) (241)
Deferred stock compensation............................... (2,148) (88)
Additional paid-in capital................................ 161,460 190,065
Accumulated deficit....................................... (81,755) (201,257)
-------- ---------
Total stockholders' equity........................ 77,501 14,262
-------- ---------
Total liabilities and stockholders' equity........ $ 99,462 $ 21,193
======== =========
See accompanying notes to consolidated financial statements.
F-3
DALEEN TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1999 2000 2001
-------- -------- ---------
Revenue:
License fees.............................................. $ 12,404 $ 26,886 $ 3,565
Professional services and other........................... 8,321 16,743 8,867
-------- -------- ---------
Total revenue..................................... 20,725 43,629 12,432
-------- -------- ---------
Cost of revenue:
License fees.............................................. 64 682 1,646
Professional services and other........................... 7,721 13,878 7,302
-------- -------- ---------
Total cost of revenue............................. 7,785 14,560 8,948
-------- -------- ---------
Gross Margin................................................ 12,940 29,069 3,484
Operating expenses:
Sales and marketing....................................... 4,342 14,680 10,895
Research and development.................................. 9,348 27,215 12,502
Purchased in-process research and development............. 6,347 -- --
General and administrative................................ 8,965 18,210 13,820
Amortization of goodwill and other intangibles............ 607 15,205 12,014
Impairment of long-lived assets........................... -- -- 34,604
Restructuring charges..................................... -- -- 11,763
-------- -------- ---------
Total operating expenses.......................... 29,609 75,310 95,598
-------- -------- ---------
Operating loss.............................................. (16,669) (46,241) (92,114)
-------- -------- ---------
Nonoperating income:
Interest income, net...................................... 961 2,335 875
Other income.............................................. 368 121 250
-------- -------- ---------
Total nonoperating income......................... 1,329 2,456 1,125
-------- -------- ---------
Net loss.................................................... (15,340) (43,785) (90,989)
Accretion of preferred stock................................ (122) -- --
Preferred stock dividends arising from beneficial conversion
features.................................................. -- -- (28,512)
-------- -------- ---------
Net loss applicable to common stockholders.................. $(15,462) $(43,785) $(119,501)
======== ======== =========
Net loss applicable to common stockholders per share --basic
and diluted............................................... $ (1.06) $ (2.02) $ (5.47)
======== ======== =========
Weighted average shares -- basic and diluted................ 14,548 21,671 21,836
======== ======== =========
See accompanying notes to consolidated financial statements.
F-4
DALEEN TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' (DEFICIT) EQUITY
YEARS ENDED DECEMBER 31, 1999, 2000, AND 2001
(IN THOUSANDS, EXCEPT SHARE DATA)
REDEEMABLE PREFERRED STOCK
------------------------------------------------------------------------------
SERIES A SERIES D AND D-1 SERIES E
-------------------- --------------------- ---------------------
NUMBER NUMBER NUMBER
OF OF OF
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT TOTAL
---------- ------- ---------- -------- ---------- -------- -------
Balance, December 31, 1998............... 3,000,000 7,500 4,908,379 14,297 -- -- 21,797
Deferred stock compensation............. -- -- -- -- -- -- --
Non-cash stock compensation expense..... -- -- -- -- -- -- --
Issuance of preferred stock-Series E,
net................................... -- -- -- -- 1,496,615 13,404 13,404
Accretion of preferred stock............ -- -- -- 119 -- 3 122
Exercise of stock options and
warrants.............................. -- -- -- -- -- -- --
Payment of stockholder note
receivable............................ -- -- -- -- -- -- --
Issuance of common stock for initial
public offering, net of expenses...... -- -- -- -- -- -- --
Conversion of mandatorily redeemable
preferred stock issuance of initial
public offering....................... (3,000,000) (7,500) (4,908,379) (14,416) (1,496,615) (13,407) (35,323)
Acquisition of Inlogic Software, Inc.
plus expenses......................... -- -- -- -- -- -- --
Net loss................................ -- -- -- -- -- -- --
---------- ------- ---------- -------- ---------- -------- -------
Balance, December 31, 1999............... -- -- -- -- -- -- --
Additional expenses associated with
initial public offering............... -- -- -- -- -- -- --
Forfeitures of unvested stock options... -- -- -- -- -- -- --
Non-cash stock compensation expense..... -- -- -- -- -- -- --
Exercise of stock options and
warrants.............................. -- -- -- -- -- -- --
Payment of stockholder note
receivable............................ -- -- -- -- -- -- --
Non-cash interest on stockholder loan... -- -- -- -- -- -- --
Issuance of stockholder note............ -- -- -- -- -- -- --
Net loss................................ -- -- -- -- -- -- --
---------- ------- ---------- -------- ---------- -------- -------
Balance, December 31, 2000............... -- $ -- -- $ -- -- $ -- $ --
Issuance of preferred stock-Series F,
net................................... -- -- -- -- -- -- --
Options issued for consulting services
related to Series F issuance.......... -- -- -- -- -- -- --
Preferred stock dividends arising from
beneficial conversion features........ -- -- -- -- -- -- --
Issuance of warrants related to Series F
preferred stock....................... -- -- -- -- -- -- --
Forfeitures of unvested stock options... -- -- -- -- -- -- --
Non-cash stock compensation expense..... -- -- -- -- -- -- --
Exercise of stock options and
warrants.............................. -- -- -- -- -- -- --
Payment of stockholder note
receivable............................ -- -- -- -- -- -- --
Non-cash interest on stockholder note... -- -- -- -- -- -- --
Warrants issued-Non-cash settlement
expense............................... -- -- -- -- -- -- --
Net loss................................ -- -- -- -- -- -- --
---------- ------- ---------- -------- ---------- -------- -------
Balance, December 31, 2001............... -- -- -- -- -- -- --
========== ======= ========== ======== ========== ======== =======
SERIES C SERIES F
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
-------------------- ----------------- ----------------------- STOCK-
NUMBER NUMBER NUMBER HOLDER
OF OF OF PAR NOTES
SHARES AMOUNT SHARES AMOUNT SHARES VALUE RECEIVABLE
---------- ------- ------- ------- ---------- ---------- ----------
Balance, December 31, 1998............... 1,213,584 5,301 -- -- 3,240,020 32 --
Deferred stock compensation............. -- -- -- -- -- -- --
Non-cash stock compensation expense..... -- -- -- -- -- -- --
Issuance of preferred stock-Series E,
net................................... -- -- -- -- -- -- --
Accretion of preferred stock............ -- -- -- -- -- -- --
Exercise of stock options and
warrants.............................. -- -- -- -- 800,574 8 (574)
Payment of stockholder note
receivable............................ -- -- -- -- -- -- 372
Issuance of common stock for initial
public offering, net of expenses...... -- -- -- -- 4,531,400 46 --
Conversion of mandatorily redeemable
preferred stock issuance of initial
public offering....................... (1,213,584) (5,301) -- -- 10,618,578 106 --
Acquisition of Inlogic Software, Inc.
plus expenses......................... -- -- -- -- 2,217,674 22 --
Net loss................................ -- -- -- -- -- -- --
---------- ------- ------- ------- ---------- ---------- ------
Balance, December 31, 1999............... -- -- -- -- 21,408,246 214 (202)
Additional expenses associated with
initial public offering............... -- -- -- -- -- -- --
Forfeitures of unvested stock options... -- -- -- -- -- -- --
Non-cash stock compensation expense..... -- -- -- -- -- -- --
Exercise of stock options and
warrants.............................. -- -- -- -- 373,481 4 --
Payment of stockholder note
receivable............................ -- -- -- -- -- -- 122
Non-cash interest on stockholder loan... -- -- -- -- -- -- (10)
Issuance of stockholder note............ -- -- -- -- (184)
Net loss................................ -- -- -- -- -- -- --
---------- ------- ------- ------- ---------- ---------- ------
Balance, December 31, 2000............... -- $ -- -- -- 21,781,727 $ 218 $ (274)
Issuance of preferred stock-Series F,
net................................... -- -- 247,882 25,564 -- -- --
Options issued for consulting services
related to Series F issuance.......... -- -- -- -- -- -- --
Preferred stock dividends arising from
beneficial conversion features........ -- -- -- -- -- -- --
Issuance of warrants related to Series F
preferred stock....................... -- -- -- -- -- -- --
Forfeitures of unvested stock options... -- -- -- -- -- -- --
Non-cash stock compensation expense..... -- -- -- -- -- -- --
Exercise of stock options and
warrants.............................. -- -- -- -- 94,827 1 --
Payment of stockholder note
receivable............................ -- -- -- -- -- -- 53
Non-cash interest on stockholder note... -- -- -- -- -- -- (20)
Warrants issued-Non-cash settlement
expense............................... -- -- -- -- -- -- --
Net loss................................ -- -- -- -- -- -- --
---------- ------- ------- ------- ---------- ---------- ------
Balance, December 31, 2001............... -- -- 247,882 25,564 21,876,554 219 (241)
========== ======= ======= ======= ========== ========== ======
DEFERRED ADDI-
STOCK TIONAL ACCUMU-
COMPEN- PAID-IN LATED
SATION CAPITAL DEFICIT TOTAL
-------- -------- -------- --------
Balance, December 31, 1998............... -- 3,278 (22,508) (13,897)
Deferred stock compensation............. (3,110) 3,110 -- --
Non-cash stock compensation expense..... 79 -- -- 79
Issuance of preferred stock-Series E,
net................................... -- -- -- --
Accretion of preferred stock............ -- -- (122) (122)
Exercise of stock options and
warrants.............................. -- 1,817 -- 1,251
Payment of stockholder note
receivable............................ -- -- -- 372
Issuance of common stock for initial
public offering, net of expenses...... -- 48,940 -- 48,986
Conversion of mandatorily redeemable
preferred stock issuance of initial
public offering....................... -- 40,517 -- 35,322
Acquisition of Inlogic Software, Inc.
plus expenses......................... -- 62,784 -- 62,806
Net loss................................ -- -- (15,340) (15,340)
------- -------- -------- --------
Balance, December 31, 1999............... (3,031) 160,446 (37,970) 119,457
Additional expenses associated with
initial public offering............... -- (135) -- (135)
Forfeitures of unvested stock options... 444 (444) -- --
Non-cash stock compensation expense..... 439 -- -- 439
Exercise of stock options and
warrants.............................. -- 1,593 -- 1,597
Payment of stockholder note
receivable............................ -- -- -- 122
Non-cash interest on stockholder loan... -- -- -- (10)
Issuance of stockholder note............ -- -- -- (184)
Net loss................................ -- -- (43,785) (43,785)
------- -------- -------- --------
Balance, December 31, 2000............... $(2,148) $161,460 (81,755) $ 77,501
Issuance of preferred stock-Series F,
net................................... -- -- -- 25,564
Options issued for consulting services
related to Series F issuance.......... -- 8 -- 8
Preferred stock dividends arising from
beneficial conversion features........ -- 19,067 (19,067) --
Issuance of warrants related to Series F
preferred stock....................... -- 9,446 (9,446) --
Forfeitures of unvested stock options... 421 (421) --
Non-cash stock compensation expense..... 1,639 1,639
Exercise of stock options and
warrants.............................. -- 10 -- 11
Payment of stockholder note
receivable............................ 53
Non-cash interest on stockholder note... -- -- -- (20)
Warrants issued-Non-cash settlement
expense............................... -- 495 -- 495
Net loss................................ -- -- (90,989) (90,989)
------- -------- -------- --------
Balance, December 31, 2001............... (88) 190,065 (201,257) 14,262
======= ======== ======== ========
See accompanying notes to consolidated financial statements
F-5
DALEEN TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
(IN THOUSANDS)
1999 2000 2001
-------- -------- --------
Cash flows from operating activities:
Net loss.................................................. $(15,340) $(43,785) $(90,989)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization......................... 1,591 3,092 4,304
Amortization of deferred stock compensation........... 79 439 1,639
Amortization of goodwill and other intangibles........ 607 15,205 12,014
Loss on disposal of fixed assets...................... -- -- 3,185
Impairment of long-lived assets and other assets...... -- -- 36,803
Bad debt expense...................................... 762 4,439 2,863
Interest income on stockholders notes receivable...... (139) (38) (168)
Purchased in-process research and development......... 6,347 -- --
Stock settlement expense.............................. -- -- 495
Changes in assets and liabilities:
Restricted cash..................................... (124) (807) 101
Accounts receivable................................. (2,506) (13,850) 8,992
Costs in excess of billings......................... (3,147) 1,301 2,202
Unbilled revenue.................................... (136) (702) 350
Other current assets................................ (25) 15 (26)
Notes receivable.................................... (159) (304) --
Other assets........................................ (204) (1,784) (42)
Accounts payable.................................... (194) 1,890 (2,274)
Accrued payroll and other accrued expenses.......... 2,934 638 (8,314)
Billings in excess of costs......................... 390 697 (143)
Deferred revenue.................................... 873 2,071 (1,931)
Other current liabilities........................... (617) 1,520 (924)
-------- -------- --------
Net cash used in operating activities........... (9,008) (29,963) (31,863)
-------- -------- --------
Cash flows provided by financing activities:
Proceeds from sale of preferred stock-Series E, net....... 13,404 -- --
Proceeds from sale of Series F convertible preferred stock
and warrants, net....................................... -- -- 25,564
Payment of capital lease.................................. -- (9) (476)
Net proceeds from initial public offering................. 48,986 (136) --
Issuance of notes receivable-shareholders................. (435) -- --
Repayment of notes receivable............................. 372 -- --
Acquisition of cash from Daleen Canada, Inc............... 3,874 -- --
Proceeds from exercise of stock options and bridge
warrants................................................ 1,825 1,597 11
-------- -------- --------
Net cash provided by financing activities....... 68,026 1,452 25,099
-------- -------- --------
Cash flows (used in) investing activities:
Purchase of securities available for sale................. (53,750) -- --
Sales and maturities of securities available for sale..... 50,117 9,385 --
Issuance of stockholders notes receivable................. -- (3) (1,187)
Repayment of stockholders notes receivable................ -- 122 33
Payments related to the acquisition of Daleen Canada...... -- (2,246) --
Investment in BizProLink.................................. -- (1,500) --
Capital expenditures...................................... (3,507) (7,738) (780)
-------- -------- --------
Net cash used in investing activities........... (7,140) (1,980) (1,934)
-------- -------- --------
Effect of exchange rates on cash and cash equivalents....... 251 (93) (477)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........ 52,129 (30,584) (9,175)
Cash and cash equivalents-beginning of year................. 723 52,852 22,268
-------- -------- --------
Cash and cash equivalents-end of year....................... $ 52,852 $ 22,268 $ 13,093
======== ======== ========
Supplemental disclosures of cash flow information: Cash paid
during the year for:
Interest................................................ $ 1 $ -- $ --
======== ======== ========
Non-cash investing and financing activities (in thousands)
Issuance of common stock and stock options for the
acquisition of Daleen Canada, Inc......................... $ 65,319 -- $ --
======== ======== ========
Accrued acquisition costs................................. $ 2,067 -- --
======== ======== ========
Deferred compensation..................................... $ 3,110 -- --
======== ======== ========
Preferred stock converted to common stock upon initial
public offering......................................... $ 35,201 -- --
======== ======== ========
Capital lease additions................................... $ -- 721 --
======== ======== ========
Forfeitures of unvested stock options..................... $ -- 444 421
======== ======== ========
Sale of equipment at book value........................... $ -- 50 389
======== ======== ========
Issuance of notes receivable.............................. $ -- 184 1,241
======== ======== ========
See accompanying notes to consolidated financial statements.
F-6
DALEEN TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 2001
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Business
Daleen Technologies, Inc. (the "Company") is a global provider of billing
and customer care software solutions that manage the revenue chain for
traditional and next generation communication service providers, retailers and
distributors of digital media, and technology solutions providers. Offering
integration with leading customer relationship management and other legacy
enterprise systems, the Company's RevChain(TM) software and Internet Integration
Architecture (IIA(TM)) leverage the latest open Internet technologies to enable
service providers to achieve enhanced operational efficiency while driving
revenue from their product and service offerings. RevChain applications deliver
interoperability and scalability, making the software highly adaptable and ready
for the future. As a result, service providers are able to accelerate their
time-to-revenue, adapt to new technologies, and extend the value of their
technology investment.
The Company has a professional services department to provide a variety of
professional consulting services to assist customers with implementation, custom
integration and configuration services, as well as training and support for
customers and business partners. The Company maintains a customer service
department to provide technical assistance to customers, in addition to
providing customer care for upgrades and new releases of its products.
In February 1996, the Company formed a foreign sales corporation, Daleen
International, Inc., which is wholly-owned. Daleen International, Inc. had no
operations for each of the years in the three year period ended December 31,
2001.
In December 1999, the Company completed its acquisition of a wholly owned
subsidiary, Inlogic Software Inc. (renamed "Daleen Canada"). See note 3 for
description of acquisition.
In July 2000, the Company formed a subsidiary, PartnerCommunity, Inc.
("PartnerCommunity"). PartnerCommunity provides partner management software
products and services for providers of data content and communication services.
PartnerCommunity's products enable these service providers to build their own
private community to integrate business processes with their partners and
business customers, and to offer partner management services. See note 19.
In September 2000, the Company formed a wholly-owned subsidiary to carry
out the European operations, Daleen Technologies Europe B.V., a corporation
formed under the laws of The Netherlands with its registered office in
Amsterdam.
In January 2002, the Company formed a wholly-owned subsidiary, Daleen
Australia Pty Limited, a corporation formed under the laws of Australia to carry
out the Asia-Pacific operations.
(b) Principles of Consolidation
The consolidated financial statements include the accounts and operations
of the Company and its subsidiaries. All intercompany accounts and transactions
have been eliminated.
(c) Revenue Recognition
The Company recognizes revenue under Statement of Position 98-9,
Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions ("SOP 98-9"). SOP 98-9 requires recognition of revenue using the
"residual method" when (1) there is vendor-specific objective evidence ("VSOE")
of the fair values of all undelivered elements in a multiple-element arrangement
that is not accounted for using long-term contract accounting, (2) VSOE of fair
value does not exist for one or more of the delivered elements in the
arrangement, and (3) all revenue recognition criteria in Statement of Position
97-2, Software Revenue
F-7
DALEEN TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Recognition ("SOP 97-2") other than the requirement for VSOE of the fair value
of each delivered element of the arrangement are satisfied.
The following elements could be included in the Company's arrangements with
its customers:
- Software license
- Maintenance and support
- Professional services
- Third party software licenses and maintenance
- Training
VSOE exists for all of these elements except for the software license. The
software license is delivered upon the execution of the license agreement. Based
on this delivery and the fact that VSOE exists for all other elements, the
Company recognizes revenue under SOP 98-9 as long as all other revenue
recognition criteria in SOP 97-2 are satisfied.
Under SOP 98-9, the arrangement fee is recognized as follows: (1) the total
fair value of the undelivered elements, as indicated by VSOE, is deferred and
subsequently recognized in accordance with the relevant sections of SOP 97-2 and
as described below and (2) the difference between the total arrangement fee and
the amount deferred for the undelivered elements is recognized as revenue
related to the delivered elements.
Revenue related to delivered elements of the arrangement is recognized when
persuasive evidence of an arrangement exists, the software has been delivered,
the fee is fixed and determinable and collectibility is probable.
Revenue related to undelivered elements of the arrangement is valued by the
price charged when the element is sold separately and is recognized as follows:
- Revenue related to customer maintenance agreements is deferred and
recognized ratably using the straight-line method basis over the
applicable maintenance period. The VSOE of maintenance is determined
using the rate that maintenance is renewed at each year and is dependent
on the amount of the license fee as well as the type of maintenance the
customer chooses.
- Professional service fees are recognized separately from the license fee
since the services are not considered significant to the functionality of
the software and the software does not require significant modification,
production or customization. There are two types of service contracts
that are entered into with customers: fixed fee and time and materials.
The Company recognizes revenue from fixed fee contracts using the
percentage of completion method, based on the ratio of total hours
incurred to date to total estimated labor hours. Changes in job
performance, job conditions, estimated profitability and final contract
settlement may result in revisions to costs and income and are
recognized in the period in which the revisions are determined. Contract
costs include all direct material and labor costs and those indirect
costs related to contract performance, such as indirect labor and
supplies. These costs are readily determinable since the Company uses
the costs that would have been charged if the contract was a time and
materials contract. Provisions for estimated losses on uncompleted
contracts are recorded in the period in which losses are determined.
Amounts billed in excess of revenue recognized to date are classified as
"Billings in excess of costs", whereas revenue recognized in excess of
amounts billed are classified as "Costs in excess of billings" in the
accompanying consolidated balance sheets.
Revenue related to professional services under a time and materials
arrangement is recognized as services are performed.
F-8
DALEEN TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- Third party software is recognized when delivered to the customer. The
value of third party software is based on the Company's acquisition cost
plus a reasonable margin and is readily determinable since the Company
frequently sells these licenses separate of the other elements.
- Training revenue is recognized when training is provided to customers and
is based on the amount charged for training when it is sold separately.
The Company typically receives 25% of the license fee as a down payment and
the balance is typically due between three and nine months from contract
execution. In limited situations, the Company enters into extended payment terms
with certain customers if the Company believes it is a good business
opportunity. When it enters into these arrangements, the Company evaluates each
arrangement individually to determine whether collectibility is probable and the
fees are fixed and determinable. An arrangement fee is not presumed to be fixed
and determinable if payment of a significant portion of the licensing fee is not
due until after expiration of the license or due after the normal and customary
terms usually by the Company to customers. Revenue related to arrangements
containing extended payment terms where the fees are not considered fixed and
determinable is deferred until payments are due.
In order to ensure that collectibility is probable, the Company performs
credit reviews on each customer. If collectibility is determined to not be
probable upon contract execution, revenue is recognized when cash is received.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements ("SAB No. 101"). SAB No. 101 summarizes
certain of the SEC's views in applying accounting principles generally accepted
in the U.S to revenue recognition in financial statements. The Company adopted
the provisions of SAB No. 101 beginning October 1, 2000. The adoption of SAB No.
101 did not have an impact on the Company's revenue recognition policies.
(d) Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
(e) Notes Receivable
Full recourse notes receivable are recorded at cost, less any related
allowance for impaired notes receivable. Management, considering current
information and events regarding the borrowers' ability to repay their
obligations, considers a note to be impaired when it is probable that the
Company will be unable to collect all amounts due according to the contractual
terms of the note agreement. When a loan is considered to be impaired, the
amount of the impairment is measured based on the present value of expected
future cash flows discounted at the note's effective interest rate. See note 15.
Non-recourse notes receivable are recorded at cost, less any related
allowance for the difference between the fair value of the note plus accrued
interest and the fair value of the underlying collateral. See note 15.
(f) Property and Equipment, Net
Property and equipment is stated at cost. Depreciation on property and
equipment is calculated using the straight-line method over the estimated useful
lives of the assets, ranging from three to seven years. Leasehold improvements
are amortized over their useful lives or the term of the related lease,
whichever is shorter.
F-9
DALEEN TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(g) Software Development Costs
The Company accounts for software development costs under Statement of
Financial Accounting Standards (SFAS) No. 86, Accounting for Costs of Computer
Software to Be Sold, Leased or Otherwise Marketed ("SFAS No. 86"). Under SFAS
No. 86, the costs associated with software development are required to be
capitalized after technological feasibility has been established. Based on the
Company's product development process, technological feasibility is generally
established upon completion of the working model. Costs incurred by the Company
between completion of the working model and the point at which the product is
ready for general release are insignificant and, as a result, the Company has
not capitalized any software development costs.
(h) Impairment of Long-Lived Assets and Long-Lived Assets To Be Disposed Of
Pursuant to Statement of Financial Accounting Standards No. 121 ("SFAS No.
121") Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of, the Company reviews long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Impairment of assets to be held and used is
determined by a comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell. See note 5 for description of impairment charges during the year
ended December 31, 2001.
(i) Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. 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 apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized as a change in
expense in the period that includes the enactment date.
(j) Stock Option Plans
The Company accounts for its stock option plans in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. As such, compensation
expense would be recorded on the date of grant only if the current market price
of the underlying stock exceeded the exercise price. Compensation expense is
recognized on a straight-line method over the vesting period. Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation,
("SFAS No. 123") permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net loss and pro forma
net loss per share disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company applies the provisions of APB Opinion No. 25 and provides
the pro forma disclosures provisions of SFAS No. 123.
In March 2000, the FASB issued Financial Interpretation No. 44 ("FIN 44").
"Accounting for Certain Transactions Involving Stock Compensation--an
Interpretation of APB No. 25." FIN 44 clarifies the application of APB 25 for
certain issues including: (a) the definition of employee for purposes of
applying APB 25, (b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the
F-10
DALEEN TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for exchange of stock
compensation awards in a business combination. FIN 44 was effective July 1,
2000, except for the provisions that relate to modifications that directly or
indirectly reduce the exercise price of an award and the definition of an
employee, which were effective after December 15, 1998. The adoption of FIN 44
did not have an impact on the Company's financial position or results of
operations.
(k) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, Disclosures About Fair
Value of Financial Instruments (SFAS No. 107), requires disclosure of fair value
of certain financial instruments. Cash and cash equivalents, restricted cash,
accounts receivable, costs in excess of billings and other current assets, as
well as accounts payable, accrued payroll and other accrued expenses, billings
in excess of costs, deferred revenue and other current liabilities, as reflected
in the consolidated financial statements, approximate fair value because of the
short-term maturity of these instruments.
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates are subjective in nature and involve uncertainties and matters
of significant judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
(l) Use of Estimates
Management has made a number of estimates and assumptions relating to the
reporting of assets and liabilities and the disclosure of contingent assets and
liabilities to prepare these accompanying financial statements in conformity
with generally accepted accounting principles. Actual results could differ from
those estimates.
(m) Goodwill and Other Intangible Assets
Goodwill represented the excess of the cost to acquire Daleen Canada over
the fair value of the assets and liabilities purchased (see note 3). Goodwill
was being amortized on a straight-line basis over four years, the expected
period to be benefited.
Other intangibles represented the fair value of the employee work force
acquired from Daleen Canada and were also being amortized over four years.
Due to economic conditions and the Company's past revenue performance, the
Company assessed the recoverability of these intangible assets by determining
whether the amortization of the goodwill and other intangible asset balances
over their remaining lives could be recovered through undiscounted future
operating cash flows over the remaining amortization period. The Company's
carrying value of goodwill and other intangible assets was reduced by the
estimated shortfall of cash flows, discounted at a rate commensurate with the
associated risks. These assets were written off during the year ended December
31, 2001. See footnote 5 related to impairment charges for the year ended
December 31, 2001.
(n) Basic and Diluted Net Loss per Share
Basic and diluted net loss applicable to common stockholders per share was
computed by dividing net loss applicable to common stockholders by the
weighted-average number of shares of common stock outstanding for each period
presented. Common stock equivalents were not considered for each of the years in
the three-year period ended December 31, 2001 since their effect would be
antidilutive. Common stock equivalents amounted to 30,631,828 shares as of
December 31, 2001. Net loss applicable to common stockholders differs
F-11
DALEEN TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
from net loss in the year ended December 31, 1999 due to the accretion on the
Company's preferred stock outstanding during the respective periods. Net loss
applicable to common stockholders differs from net loss in the year ended
December 31, 2001 due to the preferred stock dividends arising from the
beneficial conversion features from the sale ("Private Placement") of the Series
F convertible preferred stock ("Series F preferred stock") and warrants to
purchase additional shares of Series F preferred stock ("Warrants"). See note 6.
(o) Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS No. 130").
SFAS No. 130 establishes standards for reporting and displaying comprehensive
income and its components in a full set of general-purpose financial statements.
SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in financial statements and (b) display the
accumulated balance of other comprehensive income separately from accumulated
deficit and additional paid in capital in the equity section of the balance
sheets. Comprehensive income is defined as a change in equity during the
financial reporting period of a business enterprise resulting from non-owner
sources. There were no differences between net loss and comprehensive loss for
each of the years in the three-year period ended December 31, 2001.
(p) Foreign Currency Translation
The functional currency of the Company's foreign subsidiaries is the
respective local currencies. The translation of the foreign currency into U.S.
dollars is performed for balance sheet accounts using the current exchange rates
in effect at the balance sheet date and for revenue and expense accounts using
average rates prevailing during the year. The adjustments resulting from the
translation of foreign currency financial statements for the three-year period
ended December 31, 2001 were immaterial and were recorded in the consolidated
statements of operations for the respective periods.
The Company enters into transactions based on the Company's local currency,
which results in limited foreign currency risk. The Company did not engage in
foreign currency hedging in the three-year period ended December 31, 2001.
(q) Segment Information
Statement of Financial Accounting Standards No. 131, Disclosure about
Segments of an Enterprise and Related Information ("SFAS No. 131") establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires those enterprises
to report selected information about operating segments in interim financial
reports issued to stockholders. The Company operates in one segment for
management reporting purposes, the development and marketing of revenue chain
software. Although the Company has subsidiaries, the Company does not assess the
performance of its subsidiaries on a stand-alone basis. The revenue generated by
the foreign operations of the Company was not material in the periods presented.
(r) Derivatives
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS No. 133). SFAS No. 133 established
accounting and reporting standards for derivative instruments embedded in other
contracts and for hedging activities. SFAS No. 133, as amended, is effective for
all quarters beginning after June 15, 2000. The Company adopted SFAS No. 133 in
July 2000. The adoption of SFAS No. 133 did not have an affect on the Company's
consolidated financial position or results of operations since the Company has
no derivative instruments or participates in hedging.
F-12
DALEEN TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(s) Investment in Nonpublic Affiliate
The Company accounts for its minority equity investment in a nonpublic
affiliate using the cost method.
(2) LIQUIDITY
The Company has continued to experience significant operating losses during
the year ended December 31, 2001, and has an accumulated deficit of $201.3
million at December 31, 2001. In order to address its liquidity and to
strengthen its balance sheet, the Company entered into definitive agreements
(collectively, the "Purchase Agreements") for the Private Placement of Series F
preferred stock and the Warrants. See note 6. This resulted in the receipt of
$25.7 million of net proceeds to the Company on June 7, 2001.
Cash and cash equivalents at December 31, 2001 are $13.1 million. Cash used
in operations in 2001 was $31.9 million. The Company intends to manage the use
of cash, and believes that the cash and cash equivalents together with the
reduction of costs related to the restructuring activities that took place in
2001 (see note 4), may be sufficient for the Company to fund its operations
through 2002. However, the Company may be required to further reduce operations
and/or seek additional public or private equity financing or financing from
other sources. The Company will also need to consider other options, which may
include but are not limited to, forming strategic partnerships or alliances
and/or considering other strategic alternatives, including a possible merger,
sale of assets or other business combination. There can be no assurance that
additional financing will be available, or that, if available the financing will
be obtainable on terms acceptable to the Company or that any additional
financing would not be dilutive. Further, there can be no assurance that any
other strategic alternatives will be available, or if available, will be on
terms acceptable to the Company, or all of its stockholders. Failure to obtain
additional financing or to engage in one or more of the strategic alternatives
may have a material adverse effect on the Company's ability to meet their
financial obligations and to continue to operate as a going concern which may
result in filing for bankruptcy protection, winding down our operations and/or a
liquidation of our assets. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
(3) ACQUISITION
On December 16, 1999 ("the acquisition date"), the Company acquired the
stock of Daleen Canada in a purchase business combination. This transaction
expanded the Company's customer management and billing product through the
addition of Internet-enabled customer care and electronic bill presentment and
payment, together with business-to-business gateway solutions. All of Daleen
Canada's shares and options were exchanged for the following:
- 2,217,674 shares of common stock valued at $60.7 million. The valuation
of the common stock was determined by the stock price two days after
December 16, 1999, which was the date of the acquisition, was announced
and terms were agreed.
- Issuance of 167,361 stock options to Daleen Canada's employees valued at
$4.6 million. Valuation was determined using the Black-Scholes option
pricing model on the date of the acquisition.
In addition, the Company incurred direct acquisition costs of approximately
$2.2 million.
The transaction resulted in a one-time charge of $6.3 million related to
the write-off of purchased in-process research and development. In process
research and development relates to the development of numerous products that
provide web interfaces and other operational support system products at the time
of the acquisition, the products were in the early stages of their development
and were undergoing further development and integration with our products. The
value assigned to in-process research and development was determined based on
management's estimates of the percentage of completion of the underlying
F-13
DALEEN TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
development effort, resulting net cash flows from Daleen Canada's products and
the discounting of such cash flows back to their present value.
The acquisition was accounted for as a purchase transaction and,
accordingly, the acquisition price was allocated to the acquired assets and
assumed liabilities based on their estimated fair values as of the acquisition
date. Other intangibles represent the purchased employee work force of Daleen
Canada. The excess of the consideration paid over the estimated fair value of
net assets, other intangible and purchased in-process research and development
acquired was recorded as goodwill, which is being amortized over four years.
The consolidated statement of operations for the year ended December 31,
1999 included the operating results of Daleen Canada from the date of
acquisition. The purchase price was allocated as follows (in thousands):
Purchased in process research and development............... $ 6,347
Working capital............................................. 360
Deferred compensation....................................... 2,530
Employee work force......................................... 2,500
Goodwill.................................................... 55,792
-------
$67,529
=======
The following unaudited pro forma results of operations of the Company for
the year ended December 31, 1999 assume the acquisition occurred as of the
beginning of 1999. The pro forma results give effect to certain adjustments,
which include depreciation and amortization of intangible assets. The costs
associated with the in-process research and development were not included in the
pro forma results since they are considered to be a one-time non-recurring
charge. The pro forma results have been prepared for comparative purposes only
and do not purport to indicate the results of operations that would actually
have occurred had the combinations been in effect on the dates indicated, or
which may occur in the future. The unaudited pro forma results of operations for
1999 are as follows (in thousands):
Total revenue............................................... $ 22,577
========
Net loss applicable to common stockholders.................. $(27,517)
========
Net loss applicable to common stockholders per share - basic
and diluted............................................... $ (1.64)
========
(4) RESTRUCTURING ACTIVITIES
On January 4, 2001, the Company's Board of Directors formally approved a
plan to reduce operating expenses. The process culminated with the announcement
on January 5, 2001 (the "January Restructuring") that the Company was taking
certain specific cost reduction measures. The Company recorded a $3.0 million
restructuring charge for the year ended December 31, 2001 related to the January
Restructuring. Such charge included the estimated costs related to workforce
reductions, downsizing of facilities, asset writedowns and other costs.
Management implemented these actions associated with the January Restructuring
immediately following the January 5, 2001 announcement.
The workforce reductions associated with the January Restructuring included
the termination of approximately 140 employees throughout the Company's Boca
Raton, Florida; Atlanta, Georgia; and Toronto, Ontario, Canada facilities and
included employees from substantially all of the Company's employee groups. The
downsizing of facilities included the downsizing of the Atlanta and Toronto
facilities to one floor at each location. The asset writedowns were primarily
related to the disposition of duplicative furniture and equipment
F-14
DALEEN TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and computer equipment from terminated employees, which was not resaleable.
Other costs included costs incurred that are no longer going to provide benefit
to the Company such as recruiting fees and relocation costs related to
employment offers that were rescinded, penalties for cancellation of a user
conference and trade show and other miscellaneous expenses.
In late March 2001, management initiated a second business review to
identify additional areas for cost reductions. As a result, the Company's Board
of Directors formally approved and the Company announced a plan on April 10,
2001 (the "April Restructuring") to further reduce operating expenses. The
Company recorded a $4.8 million restructuring charge for the year ended December
31, 2001 in connection with the April Restructuring. Such charge included the
estimated costs related to workforce reductions, closing of facilities, asset
writedowns and other costs. Management implemented these actions immediately
following the April 10, 2001 announcement.
The workforce reductions associated with the April Restructuring included
the termination of 193 employees throughout all of the Company's facilities. The
Company consolidated its North American workforce into its Boca Raton corporate
offices and closed its Toronto and Atlanta facilities. In addition, the Company
consolidated its North American research and development and professional
services resources and further reduced its administrative support functions. The
asset writedowns were primarily related to computer equipment from terminated
employees, which was not resaleable. Other costs included accounting and legal
fees, penalties for cancellation of software maintenance contracts in Atlanta
and Toronto and penalties for cancellation of a trade show.
In October 2001, management initiated a third business review to continue
to identify areas for cost reduction. As a result, the Company's Board of
Directors formally approved a plan to further reduce operating expenses on
October 19, 2001 (the "October Restructuring"). Management began to implement
these actions immediately following the October 19, 2001 announcement. The
Company recorded a restructuring charge of $4.1 million in the year ended
December 31, 2001 in connection with the October Restructuring. Such charge
included the estimated costs related to workforce reductions due to the
termination of 75 employees throughout all of the employee's groups, further
downsizing of facilities which included lease buyout charges of $1.4 million,
asset writedowns, and other costs which were comprised mostly of accounting and
legal fees associated with the October Restructuring.
The January Restructuring, April Restructuring, and October Restructuring
encompassed the following components (in thousands):
JANUARY APRIL OCTOBER
RESTRUCTURING RESTRUCTURING RESTRUCTURING TOTAL
------------- ------------- ------------- -------
Employee termination benefits............ $1,496 $3,192 $1,641 $ 6,329
Facility costs/rent on idle facilities... 763 1,259 443 2,465
Asset writedowns (see note 5)............ 620 240 1,999 2,859
Other costs.............................. 114 74 32 220
Foreign currency translation charges..... -- -- -- (110)
------ ------ ------ -------
$2,993 $4,765 $4,115 $11,763
====== ====== ====== =======
F-15
DALEEN TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The costs were from the following financial statement captions (in
thousands):
JANUARY APRIL OCTOBER
RESTRUCTURING RESTRUCTURING RESTRUCTURING TOTAL
------------- ------------- ------------- -------
Costs of sales-professional services..... $ 387 $1,198 $ 134 $ 1,719
Research and development................. 522 1,392 694 2,608
Sales and marketing...................... 278 725 568 1,571
General and administrative............... 1,806 1,450 2,719 5,975
------ ------ ------ -------
$2,993 $4,765 $4,115 $11,873
====== ====== ====== =======
Included in the above totals is $110,000 related to foreign currency
translation exchange losses.
Amounts charged against the restructuring accrual for the year ended
December 31, 2001 were as follows (in thousands):
JANUARY APRIL OCTOBER
RESTRUCTURING RESTRUCTURING RESTRUCTURING TOTAL
------------- ------------- ------------- -------
Employee termination benefits............ $1,385 $3,143 $1,272 $ 5,800
Facility costs/rent on idle facilities... 749 1,224 405 2,378
Asset writedowns......................... 620 240 1,999 2,859
Other costs.............................. 114 48 22 184
Foreign exchange currency translation
changes................................ -- -- -- (110)
------ ------ ------ -------
$2,868 $4,655 $3,698 $11,111
====== ====== ====== =======
As of December 31, 2001, an accrual remains on the consolidated balance
sheets in accrued payroll and other accrued expenses related to the January
Restructuring, April Restructuring and October Restructuring consisting of the
following components (in thousands):
JANUARY APRIL OCTOBER
RESTRUCTURING RESTRUCTURING RESTRUCTURING TOTAL
------------- ------------- ------------- -----
Employee termination benefits............... $ 20 $ 50 $ 369 $439
Facility costs/rent on idle facilities...... 105 50 38 193
Other costs................................. -- 10 10 20
------ ------ ------ ----
$ 125 $ 110 $ 417 $652
====== ====== ====== ====
(5) IMPAIRMENT CHARGES
The Company recorded an impairment charge for the year ended December 31,
2001 related to the following (in thousands):
Employee workforce -- other intangible...................... $ 1,545
Property and equipment.................................... 1,888
Goodwill.................................................. 31,171
-------
$34,604
=======
Due to the Company's operating results and the various restructuring
activities initiated as described in note 4, the Company performed an evaluation
of the recoverability of the employee workforce under Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting For The Impairment Of
Long-Lived Assets And For Long-Lived Assets To Be Disposed Of." in March 2001.
Management determined
F-16
DALEEN TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
that this asset was impaired and recorded an impairment charge of approximately
$1.5 million for the year ended December 31, 2001.
In March 2001, the Company determined that certain property, leasehold
improvements and equipment, which mainly represented computer equipment and
furniture from the Toronto and Atlanta facilities, was impaired. The Company
recorded an impairment charge of approximately $1.9 million for the difference
between the fair value and the carrying value of the assets for the year ended
December 31, 2001.
In March 2001, the Company reduced goodwill by approximately $1.1 million
due to its decision that it will no longer promote and license certain gateway
products that it originally acquired as a result of its acquisition of Daleen
Canada in December 1999. The development of these gateway products was in
process at the time of the Daleen Canada acquisition and was subsequently
completed. In connection with this decision, the Company accelerated the
amortization for a proportionate amount of goodwill related to these products.
Due to economic conditions and the Company's past revenue performance, the
Company assessed the recoverability of goodwill by determining whether the
amortization of the goodwill over the remaining life can be recovered through
undiscounted future operating cash flows. The Company's carrying value of
goodwill was reduced by the estimated shortfall of cash flows, discounted at a
rate commensurate with the associated risks. This amounted to an additional
reduction of goodwill in the amount of approximately $30.1 million for the year
ended December 31, 2001.
(6) SERIES F PREFERRED STOCK
On March 30, 2001, the Company entered into , the Purchase Agreements for
the Private Placement of $27.5 million of Series F preferred stock and Warrants.
Pursuant to the terms of the Purchase Agreements, the Company consummated the
Private Placement on June 7, 2001. The Company received net proceeds on June 7,
2001 of approximately $25.7 million from the Private Placement. The consummation
of the Private Placement was subject to the receipt of approval from the
Company's stockholders, including approval of an amendment to the Company's
certificate of incorporation to increase the number of authorized shares of
common stock to 200 million shares and to create and designate the Series F
preferred stock. The Company's stockholders approved the Private Placement and
the related amendments to the certificate of incorporation at the Company's
annual meeting of stockholders held on June 7, 2001.
Pursuant to the terms of the Purchase Agreements, the Company issued and
sold (i) an aggregate of 247,882 shares of Series F preferred stock and (ii)
Warrants to purchase an aggregate of 109,068 shares of Series F preferred stock,
including a Warrant that the Company issued to the placement agent. Purchasers
of Series F preferred stock received Warrants to purchase an aggregate of 99,153
shares of Series F preferred stock. Additionally, we issued to Robertson
Stephens Warrants for the purchase of 9,915 shares of Series F preferred stock.
The Warrants have an exercise price of $166.41 per share of Series F preferred
stock and are exercisable at any time for a period of five years following the
closing of the Private Placement. The exercise price per share is equal to 150%
of the Original Price.
The purchase price per share of the Series F preferred stock (without
giving effect to the allocation of any part of the purchase price to the
Warrants) was $110.94, which is equal to (i) $1.1094, the average closing price
per share of the Company's common stock during the ten trading days ending on
March 30, 2001, multiplied by (ii) 100, the number of shares of common stock
initially issuable upon conversion of a share of Series F preferred stock.
Each share of Series F preferred stock is convertible at any time at the
option of the holder into shares of the Company's common stock. The number of
shares of common stock issuable upon conversion of a single share of Series F
preferred stock is determined by dividing the original price per share of the
Series F preferred
F-17
DALEEN TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stock, or $110.94, by the conversion price in effect on the date of conversion.
The initial conversion price was $1.1094. The conversion price was subject to a
limited one-time adjustment (the "reset") as follows:
In the event the average market price (based on the closing price per share
reported by The Nasdaq National Stock Market) per share of the common stock
for the ten consecutive trading days beginning with the next trading day
immediately following the date on which the Company issued an Earnings
Release (as defined below) for the quarter ended June 30, 2001 (the "Reset
Average Market Price") was less than the conversion price, the conversion
price was adjusted automatically to the higher of (A) the Reset Average
Market Price or (B) 75% of the initial conversion price. If the Company
issued more than one Earnings Release with respect to the quarter ended
June 30, 2001, a Reset Average Market Price was calculated for the ten
trading days following each Earnings Release, and the lower Reset Average
Market Price was used for the purpose of determining the adjusted
conversion price. The effective date for the reset followed the Company's
final Earnings Release. "Earnings Release" means (y) a press release issued
by the Company after March 30, 2001, providing any material financial
metrics regarding revenue or estimated revenue or earnings or estimated
earnings for the quarter ended June 30, 2001, or (z) a press release issued
by the Company announcing its actual total revenue for the quarter ended
June 30, 2001.
On April 10, 2001, the Company issued an Earnings Release. The Reset
Average Market Price following this Earnings Release was $0.923. On July 26,
2001, the Company issued its final Earnings Release. The Reset Average Market
Price following the final Earnings Release was $0.9060, which was the lowest
Reset Average Market Price following the Company's Earnings Releases. As a
result, effective August 9, 2001, the conversion price of the Series F preferred
stock was reset to $0.9060. Based on the reset conversion price established by
the July 26, 2001 final Earnings Release and pursuant to the terms of the
Purchase Agreements, each share of Series F preferred stock is convertible into
122.4503 shares of common stock.
In addition to the reset, in the event the Company issues common stock or
securities convertible into common stock at a price per share less than the
conversion price of the Series F preferred stock, the conversion price will be
reduced to be equal to the price per share of the securities sold by the
Company. This adjustment provision is subject to a number of exceptions,
including the issuance of stock or options to employees and the issuance of
stock or options in connection with acquisitions. The conversion price will also
be subject to adjustment as a result of stock splits and stock dividends on the
common stock.
The Series F preferred stock will automatically convert into common stock
at any time after March 30, 2002 if the common stock trades on The Nasdaq
National Market or a national securities exchange at a price per share of at
least $3.3282 for ten trading days within any twenty-day trading period.
In the event, and only in such event, the Company pays dividends on its
common stock, the holders of the Series F preferred stock would be entitled to
dividends on an as-if-converted basis.
In the event of an acquisition of the Company by another entity, the
Company will be required to redeem all of the issued and outstanding shares of
Series F preferred stock unless the holders of the Series F preferred stock
otherwise consent.
The Company granted to the purchasers certain demand and piggyback
registration rights.
The Warrants issued are exercisable at any time for a period of five years.
The fair value of all warrants issued to the holders of the Series F preferred
stock is approximately $9.4 million using the Black-Scholes model for the year
ended December 31, 2001. The Company used the following assumptions in the
Black-Scholes model.
F-18
DALEEN TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Expected life............................................... 5 years
Dividends................................................... None
Risk-free interest rate..................................... 4.96%
Expected volatility......................................... 68.6%
Due to the reset conversion price established by the July 26, 2001 final
Earnings Release which resulted in a final conversion price of $0.9060 the
Company recorded a beneficial conversion feature during the year ended December
31, 2001 in the amount of $19.1 million based on the proceeds from the Series F
preferred stock reduced by the amount allocated to the warrants. This was
recorded as a preferred stock dividend.
(7) INITIAL PUBLIC OFFERING
On October 6, 1999, the Company and certain selling stockholders sold 4.1
million shares of its common stock in an initial public offering ("IPO") from
which the Company received proceeds of approximately $44.2 million after payment
of underwriter discounts and commissions and payment of IPO expenses.
Concurrently, the outstanding preferred stock as described in note 10 was
automatically converted to common stock.
On October 28, 1999, the underwriters of the Company's IPO exercised their
option to purchase 431,000 additional shares of the Company's common stock from
which the Company received proceeds of $4.8 million.
(8) PROPERTY AND EQUIPMENT, NET
Property and equipment, net consist of the following at December 31 (in
thousands):
ESTIMATED
2000 2001 USEFUL LIFE
------- ------ -----------
Computer hardware........................................ $ 6,208 4,327 3-5 years
Purchased computer software.............................. 2,851 1,934 3-5 years
Office furniture and equipment........................... 4,237 1,367 5-7 years
Leasehold improvements................................... 2,799 860 lease term
Patents & trademarks..................................... 11 69 20 years
Construction in progress................................. 474 -- --
------- ------
16,580 8,557
Less accumulated depreciation and amortization........... (6,434) (5,853)
Property and equipment, net.............................. $10,146 2,704
======= ======
(9) INCOME TAXES
Pretax losses are derived from the following sources (in thousands):
1999 2000 2001
------- ------ ------
Domestic.................................................... $ 8,284 33,626 82,185
Foreign..................................................... 7,056 10,159 8,804
------- ------ ------
$15,340 43,785 90,989
======= ====== ======
The Company did not recognize an income tax benefit for any of the years in
the three year period ended December 31, 2001. This differed from an income tax
benefit computed by applying the Federal income tax rate of 34 percent to pretax
losses as a result of the following (in thousands):
F-19
DALEEN TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1999 2000 2001
------ ------- -------
Computed "expected" tax benefit............................ $5,216 14,887 30,936
Increase (reduction) in income taxes resulting from:
State income taxes (net of federal benefit).............. 515 1,562 3,197
Increase in the valuation allowance for deferred tax
assets................................................ (6,146) (16,876) (33,449)
Other items.............................................. 415 427 (684)
------ ------- -------
$ -- -- --
====== ======= =======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at December 31, 2000 and 2001, are presented
below (in thousands):
2000 2001
-------- --------
Deferred tax assets:
Net operating loss carryforwards.......................... $ 26,380 42,523
Depreciation and amortization............................. 362 560
Daleen Canada goodwill.................................... 4,821 20,133
Allowance for doubtful accounts........................... 1,740 1,882
Research and experimentation credit carryforwards......... 1,325 1,664
Accrued expenses.......................................... 343 814
Other..................................................... (23) 821
-------- --------
Gross deferred tax assets.............................. 34,948 68,397
Less valuation allowance............................. (34,438) (67,887)
-------- --------
Total deferred tax asset............................... $ 510 510
Deferred tax liabilities:
Costs in excess of billings............................... 510 510
Net deferred tax asset................................. $ -- --
======== ========
Realization of deferred tax assets is dependent upon generating sufficient
taxable income. Management believes that it is more likely than not that these
assets will not be realized and, therefore, has established a valuation
allowance for the entire deferred tax assets, net of the deferred tax
liabilities. The valuation allowance increased $33.4 million and $16.9 million
for the years ended December 31, 2001 and 2000, respectively. Of the total
increase in the valuation allowance for the years ended December 31, 2001 and
2000 approximately $37,000 and $326,000 respectively was attributed to net
operating losses generated from the exercise of non-statutory employee stock
options [the benefit of which will be credited to additional paid-in capital
when realized]. In addition, in 2000 approximately $888,000 was attributed to
the redetermination of the deferred tax asset from the 1999 acquisition of
Daleen Canada.
Net operating loss carryforwards for U.S. and State income tax purposes
amount to approximately $107.3 million and expire through year 2021. Of the
total net operating loss carry forward, the future utilization of approximately
$14,824,000 will be subject to an annual limitation prescribed by the tax law as
a result in a change in the ownership of the Company which occurred in 1998. In
addition, approximately $67,500,000 of net operating losses will be limited due
to the closing of the Series F preferred stock in 2001. Total net operating loss
carryforwards includes approximately $1,749,000 of tax benefits from the
exercise of employee stock options that expire through year 2021 and will be
credited to additional paid-in capital when they are realized. In addition, the
Company has net operating loss carryforwards for Canada of approximately
$22,000,000, which expire through year 2008.
F-20
DALEEN TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) ACCRUED PAYROLL AND OTHER ACCRUED EXPENSES
Accrued payroll and other accrued expenses consist of the following at
December 31 (in thousands):
2000 2001
------- -----
Accrued payroll and related expenses........................ $ 1,788 1,322
Due to subcontractors....................................... 1,251 167
Accrued bonuses............................................. 2,865 214
Dividend payable to former Inlogic shareholders............. 800 --
Accrued accounts payable.................................... 2,037 15
Accrued software licenses................................... 1,262 290
Sales tax payable........................................... 698 201
Accrued professional fees................................... 713 630
Deferred rent............................................... 525 --
Restructuring accrual....................................... -- 652
Other accrued expenses...................................... 792 242
------- -----
$12,731 3,733
======= =====
(11) COMMITMENTS
(a) Leases
The Company entered into agreements to lease office facilities and certain
equipment in Boca Raton, Florida; Atlanta, Georgia; and Toronto, Ontario,
Canada. These operating leases expire on various dates through May 2008. Due to
the January Restructuring, April Restructuring and October Restructuring, the
facilities in Atlanta and Toronto were closed during 2001. The leases were
either bought out and terminated or the space is currently being sublet.
Generally accepted accounting principles require that the full costs of a
lease be recognized ratably over the term of the lease. Accordingly, the Company
recorded deferred credits as of December 31, 2000 of $524,973 to reflect the
excess of rent expense over cash payments related to these leases. These credits
are included as part of accrued payroll and other accrued expenses in the
consolidated balance sheets in that period. There is no deferred rent at
December 31, 2001 due to the lease terminations that occurred during 2001.
The Company leased certain furniture and equipment under a capital lease
that expired December 2006. The Company bought out and terminated this lease
during year 2001. The gross amount of the furniture and equipment and related
accumulation amortization recorded under capital leases at December 31, 2000 was
as follows (in thousands):
Furniture and Equipment..................................... $721
Less accumulated amortization............................... (10)
----
$711
====
F-21
DALEEN TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) as of December 31, 2001
are as follows (in thousands):
YEAR ENDING DECEMBER 31, 2001
2002........................................................ $ 736
2003........................................................ 759
2004........................................................ 192
2005 and thereafter......................................... --
------
Total minimum lease payments................................ $1,687
======
The Company subleases some office space in Toronto and in Atlanta. The
amounts of minimum lease payments reflected in the above table are offset by
future minimum rental receipts from sub lessee of $214,498, $233,089 and
$131,511 in years 2002, 2003 and 2004, respectively.
Total rent expense for operating leases was $648,324, $2,648,113 and
$3,611,288 for the years ended December 31, 1999, 2000 and 2001, respectively.
The expense for year 2001 was offset by $137,606 of sublet income. In addition
to rent payments, the Company paid $1,646,354 for lease termination agreements
in Atlanta, Toronto and Boca Raton, which was included in restructuring charges
for the year ended December 31, 2001. See note 4.
(b) Contribution Plans
Daleen Technologies, Inc. 401(k) Profit Sharing Plan ("the Plan") covers
substantially all of its U.S. employees. The Company matched 35% of the
employees' contribution in 2000 and 2001 and 25% in 1999, up to a maximum of 8
percent deferral made by the employees. In addition, the Plan allows
discretionary contributions from the Company. The total expense associated with
the Plan for 1999, 2000, and 2001, was $237,995, $571,587 and $185,507
respectively.
In 2000, Daleen Canada established a Group Retirement Plan (the "Daleen
Canada Plan"). The Daleen Canada Plan consisted of a Deferred Profit Sharing
Plan (DPSP) and a Group Registered Retirement Savings Plan (RRSP). The Daleen
Canada Plan covered substantially all of its Canadian employees. The Plan
contributed to the DPSP $0.35 for each $1.00 of employee contribution to the
RRSP, to a maximum of 2.8% of total earnings subject to maximum limits set by
the Income Tax Act. The total expense for this plan was $25,489 in the year 2000
and $28,854 in the year 2001. The Plan is currently inactive due to the
implementation of the April Restructuring and termination of all of the Canadian
employees.
(c) Employment Agreements
The Company has an employment agreement with specified employment terms
with one executive that provides for an annual base salary, annual salary
increases, an annual bonus and periodic stock option grants subject to the
approval by the compensation committee of the Company's Board of Directors. The
term of the agreement is three years and provides for an annual base salary of
$286,000. This agreement, and other employment agreements with other executives
that do not have specified employment terms, provide for severance payments of
up to two years base salary.
(12) STOCKHOLDERS' EQUITY
(a) Stock Options
The Company has eight fixed stock option plans: the 1994 Employee
Non-Qualified Stock Option Plan ("the 1994 Plan"), the 1995 Qualified Employee
Incentive Stock Option Plan ("the 1995 Plan"), the 1996
F-22
DALEEN TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Employee Non-Qualified Stock Option Plan ("the 1996 Plan"), the 1997 Employee
Incentive Stock Option Plan ("the 1997 Plan"), the 1998 Non-Qualified Employee
Stock Option Plan ("the 1998 Plan"), the 1998 Qualified Employee Incentive Stock
Option Plan ("the 1998 ISO Plan"), the Amended and Restated 1999 Stock Incentive
Plan ("the 1999 Plan") and the 2001 Broad-Based Stock Incentive Plan ("the 2001
Plan"). Each Plan provides that the exercise price of the options granted will
be issued at no less than the fair market value of the underlying common stock
at the date of grant. A summary of the Company's stock option plans is presented
below:
SHARES
AUTHORIZED CONTRACTUAL
FOR ISSUANCE LIFE
UNDER PLAN VESTING PERIOD OF OPTIONS
------------ ------------------------------- -------------------
1994 Plan...................... 125,000 100% upon grant 5 years from grant
1995 Plan...................... 200,000 100% upon grant 5 years from grant
1996 Plan...................... 400,000 100% upon grant 5 years from grant
1997 Plan...................... 200,000 1/3 each year for first three 5 years from grant
years from grant
1998 Plan...................... 500,000 23% to 50% per year beginning 5 years from grant
one year from grant
1998 ISO Plan.................. 1,600,000 25% each year for first four 5 years from grant
years from grant
1999 Plan...................... 5,790,145 25% each year for first four 10 years from grant
years from grant
2001 Plan...................... 2,000,000 Discretion of the Board of 10 years from grant
Directors
The 1999 Plan authorizes the Company to automatically adjust the number of
shares of common stock available for issuance on the first day of each fiscal
year beginning in 2000, up to an annual increase of 5,000,000 shares subject to
a maximum of 20% of the fully-diluted shares outstanding at the time. The annual
increase in 2002 was reduced to a maximum of 3,000,000 shares pursuant to an
amendment to the 1999 Plan approved by Board of Directors. The number of shares
authorized under the 1999 Plan has increased to 8,790,145 shares in 2002.
The options issued in 2001 under the 2001 Plan have a vesting period of two
years from grant.
A summary of the status of the Company's stock option plans, as of December
31, 1999, 2000 and 2001, and changes during the years then ended, is presented
below:
1999 2000 2001
--------------------- --------------------- ----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------- --------- --------- ---------- ---------
Outstanding at beginning of
year........................... 2,363,697 $2.89 3,794,256 10.58 5,420,963 11.75
Granted.......................... 2,250,613 15.98 2,702,076 13.35 4,196,851 0.96
Exercised........................ (800,574) 2.04 (391,006) 2.88 (94,827) 0.23
Forfeited........................ (19,480) 4.74 (684,363) 17.04 (3,782,455) 9.94
--------- --------- ----------
Outstanding at end of year....... 3,794,256 10.58 5,420,963 11.75 5,740,532 5.33
========= ========= ==========
Options exercisable at end of
year........................... 742,930 2.87 1,252,384 7.58 1,730,079 8.24
========= ========= ==========
F-23
DALEEN TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options outstanding
and exercisable at December 31, 2001:
OPTIONS OUTSTANDING OPTION EXERCISABLE
-------------------------------------- -----------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- ------------------------ ----------- ------------ --------- ----------- ---------
$.35............................ 781,000 9.9 $ .35 -- $ --
$.38-$.85....................... 397,550 9.41 .79 -- --
$.86 to .88..................... 1,382,750 9.54 .88 -- --
$1.03-$3.00..................... 505,050 7.16 2.07 137,739 2.64
$3.09-$3.25..................... 1,008,001 1.52 3.25 880,310 3.25
$3.44-$9.44..................... 646,780 8.39 8.19 254,436 8.14
$10.00-$21.38................... 957,493 8.17 18.18 428,691 18.91
$21.88-$33.75................... 55,908 8.04 26.83 25,903 28.03
$38.81.......................... 5,000 7.88 38.81 2,500 38.81
$52.69.......................... 1,000 7.90 52.69 500 52.69
--------- ---------
5,740,532 7.59 $ 5.33 1,730,079 $ 8.24
========= =========
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock option plans. The fair value of each option granted to
employees is estimated on the date of grant using the Black-Scholes Option
Pricing model with the following assumptions:
1999 2000 2001
------- ------- -----------
Expected life........................................... 5 years 5 years 5 years
Dividends............................................... None None None
Risk-free interest rate................................. 5.65% 5.32% 2.17-5.07%
Expected volatility..................................... 116.8% 125.0% 106.4%
Had compensation expense for the Company's plans been determined consistent
with FAS No. 123, the Company's net loss and net loss per share would have been
increased to pro forma amounts indicated below (in thousands):
PRO FORMA DISCLOSURES 1999 2000 2001
- --------------------- -------- -------- --------
Net loss:
As reported.......................................... $(15,340) (43,785) (90,989)
Pro forma............................................ (16,569) (55,127) (97,030)
Net loss per share:
As reported.......................................... (1.05) (2.02) (4.17)
Pro forma............................................ (1.15) (2.54) (4.44)
In June 2000, the Company granted stock options to a marketing executive
under the 1999 Plan at an exercise price less than the fair market value of the
underlying common stock of the Company at the date of grant. These grants
resulted in the recognition of compensation expense of $586,000 over their
one-year vesting period, which began in July 2000. Approximately $293,000 and
$293,000 was recorded as sales and marketing expense for the years ended
December 31, 2000 and 2001, respectively.
F-24
DALEEN TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(b) Stock Option Plan - PartnerCommunity, Inc.
In 2001, the Company approved the 2000 Stock Incentive Plan (the "PC Plan")
for it's subsidiary, PartnerCommunity. The PC Plan authorized PartnerCommunity
to issue Stock Incentives not to exceed 2,500,000 shares of PartnerCommunity
common stock and includes Incentive Stock Options and Non Incentive Stock Option
transactions. Employees and Key Persons of PartnerCommunity selected by the
Board of Directors of PartnerCommunity shall be eligible for the grant of Stock
Incentives under the PC Plan. Only Employees shall be eligible to receive a
grant of ISO's. The Concentrated Life of options granted is ten (10) years from
grant date for ISO's and Non-ISO's granted to other than 10% Shareholders and
five (5) years for ISO's granted to 10% Shareholders. No options were granted in
year 2000 under the PC Plan. In January 2001, the PC Plan granted 787,000
options to employees at $0.70 per share. The Company determined the SFAS 123
calculation for proforma compensation cost for this Plan is immaterial.
(c) Common and Preferred Stock
In November 1997, the Company began an offering of Series C convertible
preferred stock ("Series C Preferred Stock"). The Series C Preferred Stock was
offered for $4.50 per share and was convertible at the option of the holder to
common stock on a one-to-one basis. The Company raised a total of approximately
$5,301,000 for 1,213,584 shares of Series C Preferred Stock, of which
approximately $5,092,000 and $279,000 was received in 1997 and 1998,
respectively. In connection with this offering the Company issued warrants to
purchase an additional 285,000 shares of the Company's common stock at $4.50 per
share. The Company completed its initial public offering in October 1999. The
Series C Preferred Stock automatically converted to common stock upon the
completion of the IPO. At that time, all Series C Preferred Stock was converted
to common stock on a one-to-one basis.
In 2000, PartnerCommunity designated 10,000,000 shares, par value $0.0001
per share, of its authorized preferred stock as Series A Convertible Preferred
Stock (the "Series A Preferred-PartnerCommunity"). PartnerCommunity issued 9.5
million shares of Series A Preferred-PartnerCommunity to the Company. The
Company contributed $3 million and certain assets for those shares. This
transaction was eliminated upon consolidation. The remaining 500,000 shares of
Series A-PartnerCommunity were issued to an executive of PartnerCommunity for
consideration of $184,000 payable to PartnerCommunity in the form of a
promissory note. See note 19.
(d) Warrants
In addition to the Series F preferred stock Warrants, the Company has
outstanding warrants for the purchase of 2,479,147 shares at December 31, 2001.
Warrants for the purchase of 1,250,000 shares of common stock are related to
Series B Preferred Stock and expire in 2002 and warrants for the purchase of
285,000 shares of common stock are related to Series C Preferred Stock and
expire in 2003. Warrants for the purchase of 750,000 shares of common stock are
related to Series F preferred stock and expire in 2003. The remaining warrants
were issued in connection with issuance of debt in 1997 and 1998 with exercise
prices between $3 to $4 per share. These warrants expire throughout 2002 and
2003.
(13) REDEEMABLE PREFERRED STOCK
On September 12, 1997, the Company completed a sale of mandatorily
redeemable convertible Series A preferred stock ("Series A Preferred Stock") to
a venture capital fund. The Company issued 3,000,000 shares of Series A
Preferred Stock to the fund at $2.50 per share for total proceeds of $7,500,000.
The Series A Preferred Stock was convertible on a one-to-one basis into the
Company's common stock at the option of the holder, until an IPO occurs, at
which time the Series A Preferred Stock would be automatically converted. In
addition, the Company issued to the venture capital fund 1,250,000 warrants to
purchase Series B Preferred
F-25
DALEEN TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock at $4.00 per share. As a result of the offering of the Series D Preferred
Stock, the warrants were repriced to $3.056. The Series B Preferred Stock was
also convertible to common stock on a one-to-one basis and had the same
automatic conversion features as the Series A Preferred Stock.
In June 1998, the Company completed a private placement with a group of
venture capital funds for an investment of $15,000,006 in the Company. Under the
terms of the private placement, the Company issued 4,221,846 shares and 686,533
shares, respectively, of newly authorized Series D and D-1 redeemable
convertible preferred stock ("Series D and D-1 Preferred Stock"). The Series D
and D-1 Preferred Stock was convertible on a one-to-one basis into the Company's
common stock at the option of the holder and was automatically convertible to
common stock in the event of an IPO of at least $20,000,000 at a price per share
of at least three times the Series D and D-1 Preferred Stock conversion price
($9.00). The fair market value was equal to the conversion price per share at
the date of issuance. The Company was required to redeem one-third of the Series
D and D-1 Preferred Stock on each of June 18, 2002, 2003 and 2004. Costs of the
offering were $768,275 and were recorded as a discount to the fair value of the
Series D and D-1 Preferred Stock at its date of issuance. This discount was
accreted into the carrying value of the Series D and D-1 Preferred Stock, using
the effective interest method, so that one-third of the carrying value of the
Series D and D-1 Preferred Stock will equal its redemption value on each of June
18, 2002, 2003 and 2004. The net proceeds of the private placement after payment
of expenses were used for working capital and to repay notes payable and accrued
interest of approximately $1,800,000.
In June, 1999 the Company completed a sale of mandatorily redeemable
convertible Series E Preferred Stock ("Series E Preferred Stock") to a private
company. The Company issued 1,496,615 shares of Series E Preferred Stock at
$9.00 per share for total proceeds of $13.5 million. The Series E Preferred
Stock was convertible on a one to one basis into the Company's common stock at
the option of the holder, until an IPO occurs, at which time the Series E
Preferred Stock is automatically converted.
The Company completed its IPO in October 1999. At that time, all Redeemable
Preferred Stock was converted to common stock based on the above features.
(14) BUSINESS AND CREDIT CONCENTRATIONS
A greater percentage of business is now being performed with customers
located in different areas of the United States and in Latin America and Europe.
There were no sales during the years ended December 31, 1999 and 2000 to
any customers, which represented greater than 10% of total revenue. For the year
ended December 31, 2001, 27% of the Company's total revenue were attributed to
two customers. Sales to two customers accounted for 15% and 12%. For the
three-year period ended December 31, 2001, all of the Company's sales were to
customers in or related to the telecommunications industry. In addition, there
were accounts receivable from three customers, one customer and two customers at
December 31, 1999, 2000 and 2001, respectively, each of which exceeded 10% of
total accounts receivable and aggregated approximately $1,597,640, $2,017,500
and $3,154,212, respectively.
The Company estimates an allowance for doubtful accounts based on an
analysis of collections in prior years, the credit worthiness of its customers,
general economic conditions and other factors. The current financial
difficulties in the target markets the customers operate in and the recent
economic downturn caused the Company to increase its allowance for doubtful
accounts for the year ended December 31, 2001. Consequently, the continuation of
these factors could affect the Company's estimate of its doubtful accounts.
(15) RELATED PARTY TRANSACTIONS
A former member of the board of directors (resigned effective March 31,
2002) is the Senior Vice President and Chief Financial Officer of Science
Applications International Corporation ("SAIC"). SAIC is
F-26
DALEEN TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
a significant stockholder of the Company. Revenue related to SAIC for the year
ended December 31, 1999, 2000 and 2001 was $0, $382,603 and $36,893,
respectively. SAIC owns 43 percent of all voting stock of Danet, Inc. and 100
percent of the voting stock of Telcordia. Danet is a customer and a distributor
of the Company. Sales to Danet for the years ended December 31, 1999, 2000 and
2001 amounted to $1,031,350, $0 and $7,688, respectively. The Company paid
Danet, in its capacity as a subcontractor for assistance with product
development services, $99,468, $144,862 and $249,018 for the years ended
December 31, 1999, 2000 and 2001, respectively. The Company has a strategic
alliance relationship with Telcordia. Revenue related to Telcordia for the years
ended December 31, 1999, 2000 and 2001 was $0, $0 and $291,315, respectively. No
payments were made to Telcordia during that period.
The Company has made loans to several executive officers and other
employees for purposes of providing funds primarily for the payment of tax
obligations resulting from the exercise of options to purchase the Company's
common stock. The loans bear interest at a rate of 8.75% per annum. All
principal and accrued interest payable under the notes is due not later than
five years from their issue date. The loans are full recourse. Additionally,
each borrower has pledged the common stock issued upon exercise of his options
as security for the loan. As of December 31, 2000 and 2001, the balance on these
loans was approximately $493,000 and $500,000, respectively with an allowance
for impairment of $113,793 at December 31, 2001.
The Company also has loans to executive officers for purposes of providing
funds for the exercise of vested, non-qualified stock options. The loans bear
interest at a rate of 8.75% per annum. These loans are full recourse against the
borrower. In addition, each officer has pledged the stock issued upon exercise
of the non-qualified option as security for his respective loan. As of December
31, 2000 and 2001, the aggregate outstanding balance on these loans was
approximately $274,000 and $241,000 respectively.
In January 2001, the Company loaned $1,237,823 to its Chairman and Chief
Executive Officer and his limited partnership (collectively "the Makers"). The
loan bears interest at a rate of 8.75% per annum. The principal and any unpaid
accrued interest are payable in full January 31, 2006. The loan is secured by
901,941 shares of the Company's common stock, and is non-recourse to the Makers
except to the extent of 901,941 shares held as the collateral. As a result of
the note being non-recourse, the Company recorded an allowance for the
difference between the face value of the note plus accrued interest and the fair
market value of the underlying collateral. At December 31, 2001, the allowance
was approximately $1,032,000.
BizProLink.Com, Inc. ("BizProLink"), a nonpublic entity, is a customer of
the Company. BizProLink purchased a software license from the Company. Revenue
recognized related to BizProLink during the years ended December 31, 1999, 2000
and 2001 amounted to $0, $897,500 and $422,300, respectively. In November 2000,
the Company purchased 296,699 shares of Series B Convertible Preferred Stock,
$.001 par value, from BizProLink for $1,500,000. The purchase agreement contains
a call provision, which states that any time after the fifth anniversary of the
Closing Date, and before consumption of an initial public offering, BizProLink,
Inc. has the right but not the obligation, to repurchase all the Series B
Preferred Stock at a price per share equal to the greater of (i) the fair value
thereof as determined in writing by an Independent Investment Bank mutually
acceptable to the Company and BizProLink and (ii) the price per share at which
the Series B Preferred Stock was issued as adjusted for stock splits or similar
transactions. The investment was written down to $500,000 during 2001 due to
BizProLink receiving a lower valuation since the initial investment. The
investment in BizProLink is included in other assets in the accompanying balance
sheet.
F-27
DALEEN TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUPPLEMENTARY FINANCIAL INFORMATION-REG SK229.302
(16) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
THREE MONTHS ENDED THREE MONTHS ENDED THREE MONTHS ENDED THREE MONTHS ENDED
---------------------- -------------------- ---------------------- ---------------------------
MARCH 31, MARCH 31, JUNE 30, JUNE 30, SEPTEMBER SEPTEMBER DECEMBER 31, DECEMBER 31,
2001 2000 2001 2000 2001 2000 2001 2000
--------- --------- -------- -------- --------- --------- ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Net Sales............... $ 5,174 8,970 3,414 11,473 2,204 14,025 1,638 9,175
-------- ------ ------- ------ ------- ------ ------- -------
Gross profit............ 1,690 5,880 1,485 7,732 (319) 9,914 626 5,399
-------- ------ ------- ------ ------- ------ ------- -------
Operating loss.......... (22,503) (9,951) (18,378) (8,977) (34,793) (9,542) (16,504) (17,754)
-------- ------ ------- ------ ------- ------ ------- -------
Net loss applicable to
common stockholders... $(22,308) (9,153) (44,070) (8,352) (36,793) (9,054) (16,329) (17,224)
======== ====== ======= ====== ======= ====== ======= =======
Net loss per
share -- basic and
diluted............... $ (1.02) (0.43) (2.02) (0.38) (1.68) (0.42) (0.75) (0.79)
======== ====== ======= ====== ======= ====== ======= =======
Note: These numbers do not agree to the years ended December 31, 2001 and 2000
due to foreign currency adjustment
In the three months ended December 31, 2001 the Company recorded a
restructuring charge related to the October Restructuring in the amount of $4.1
million. See note 4.
The Company recorded a goodwill impairment charge in the three months ended
December 31, 2001 in the amount of $6.6 million. This was a result of the
Company performing an assessment of the recoverability of their intangible
assets by determining the amortization of the goodwill over the remaining life
could not be recovered through undiscounted future operating cash flows over the
remaining amortization period.
The provision for bad debts increased in the three months ended December
31, 2000, by approximately $3 million due to developing market conditions in the
telecommunications industry, constraint of available funding for customers,
increases in overall accounts receivable and certain customers declaring
bankruptcy.
(17) LEGAL PROCEEDINGS
Settlement of Lawsuit
On June 6, 2001, the Company settled a lawsuit against Mohammad Aamir,
1303949 Ontario Inc. and the Vengrowth Investment Fund Inc. (collectively, the
"Defendants"). In connection with the settlement, on June 8, 2001, the Company
granted to the Defendants warrants to purchase an aggregate of 750,000 shares of
the Company's common stock with an exercise price of $1.134 per share. The
warrants are exercisable for a period of two years. The issuance of the warrants
resulted in the recognition of non-cash expense of approximately $495,000 in the
year ended December 31, 2001, and represents the fair value of such warrants.
The Company also executed a license to an affiliate of certain of the Defendants
for a version of one of the Company's software products as part of the
settlement. The Defendants also released the Company from any claims they may
have had against the Company.
Fazari v. Daleen Technologies, Inc.
On December 5, 2001, a putative class action complaint was filed in the
United States District Court for the Southern District of New York. The
complaint is styled as Angelo Fazari, on behalf of himself and all others
similarly situated, vs. Daleen Technologies, Inc., BancBoston Robertson Stephens
Inc., Hambrecht & Quist LLC, Salomon Smith Barney Inc., James Daleen, David B.
Corey and Richard A. Schell, Index Number 01 CV 10944. The defendants include
the Company, certain of the underwriters in the Company's IPO and certain
current and former officers and directors of the Company. The complaint was
filed by a single plaintiff
F-28
DALEEN TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
purportedly on behalf of persons purchasing the Company's common stock between
September 30, 1999 and December 6, 2000 and seeks class action status. The
complaint includes allegations of violations of (i) Section 11 of the Securities
Act of 1933 by all named defendants, (ii) Section 12(a)(2) of the Securities Act
of 1933 by the underwriter defendants, (iii) Section 15 of the Securities Act of
1933 by the individual defendants and (iv) Section 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by the underwriter
defendants. According to public records, since January 2001 more than 1,000
similar class action lawsuits have been filed in the Southern District of New
York against more than 263 different companies relating to their initial public
offerings. These actions have been consolidated for pretrial purposes before one
judge under the caption "In re Initial Public Offering Securities Litigation" in
federal district court for the Southern District of New York.
Specifically, the plaintiff alleges in the complaint that, in connection
with the Company's IPO, the defendants failed to disclose "excessive
commissions" purportedly solicited by and paid to the underwriter defendants in
exchange for allocating shares of the Company's common stock in the IPO to the
underwriter defendants' preferred customers. The plaintiff further alleges that
the underwriter defendants had agreements with preferred customers tying the
allocation of shares sold in the Company's initial public offering to the
preferred customers' agreements to make additional aftermarket purchases at
pre-determined prices. The plaintiff claims that the failure to disclose these
alleged arrangements made the Company's prospectus included in its registration
statement on Form S-1 filed with the SEC in September 1999 materially false and
misleading. Plaintiff seeks unspecified damages and other relief. The Company
intends to defend vigorously against the plaintiff's claims. Currently a loss
cannot be determined because the lawsuit is in its initial stages. The Company
believes that it is entitled to indemnification by the underwriters under the
terms of the underwriting agreements. The Company has notified the underwriters
of the action, but the underwriters have not yet agreed to indemnify the
Company.
The Company is the defendant in a number of lawsuits and claims incidental
in its ordinary course of business. The Company does not believe the outcome of
any of this litigation would have a material adverse impact on the financial
position or the results of operations of the Company.
(18) NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued Statement No. 141, "Business
Combinations'("SFAS No. 141"), and Statement No. 142, "Goodwill And Other
Intangible Assets'("SFAS No. 142"). SFAS No. 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001 as well as all purchase method business combinations completed after
June 30, 2001. SFAS No. 141 also specifies criteria for intangible assets
acquired in a purchase method business combination which must be met to be
recognized and reported apart from goodwill, noting that any purchase price
allocable to an assembled workforce may not be accounted for separately. SFAS
No. 142 will require that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 will
also require that intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 121.
The Company is required to adopt the provisions of SFAS No. 141 immediately
and SFAS No. 142 effective January 1, 2002. Goodwill and intangible assets
acquired in business combinations completed before July 1, 2001 will continue to
be amortized prior to the adoption of SFAS No. 142.
SFAS No. 141 will require, upon adoption of SFAS No. 142, that the Company
evaluate its existing intangible assets and goodwill that were acquired in a
prior purchase business combination, and to make any necessary reclassifications
in order to conform with the new criteria in SFAS No. 141 for recognition apart
from goodwill. Upon adoption of SFAS No. 142, the Company will be required to
reassess the useful lives and
F-29
DALEEN TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
residual values of all intangible assets acquired in purchase business
combinations, and make any necessary amortization period adjustments by the end
of the first interim period after adoption. In addition, to the extent an
intangible asset is identified as having an indefinite useful life, the Company
will be required to test the intangible asset for impairment in accordance with
the provisions of SFAS No. 142 within the first interim period. Any impairment
loss will be measured as of the date of adoption and recognized as the
cumulative effect of a change in accounting principle in the first interim
period.
As of the date of adoption, the Company will have no unamortized goodwill
or intangible assets and as a result does not believe SFAS No. 141 and SFAS No.
142 will impact the Company's financial statements.
In July 2001 FASB issued Statement No. 143, "Accounting For Asset
Retirement Obligations" ("SFAS No. 143"). That standard requires entities to
record the fair value of a liability for an asset retirement obligation in the
period in which it is incurred. When the liability is initially recorded, the
entity will capitalize a cost by increasing the carrying amount of the related
long-lived asset. Over time, the liability is accreted to its present value each
period, and the capitalized cost is depreciated over the useful life of the
related asset. Upon settlement of the liability, an entity either settles the
obligation for its recorded amount or incurs a gain or loss upon settlement. The
standard is effective for fiscal years beginning after June 15, 2002, with
earlier adoption permitted. The Company believes the adoption of SFAS No. 143
will not have a significant impact on the Company's financial position or
operating results.
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, "Accounting For The Impairment Or Disposal Of Long-Lived Assets",
("SFAS No. 144"). This statement is effective for fiscal years beginning after
December 15, 2001. This statement supercedes SFAS No. 121, while retaining many
of the requirements of such statement. Under SFAS No. 144 assets held for sale
will be included in discontinued operations if the operations and cash flows
will be or have been eliminated from the ongoing operations of the entity and
the entity will not have any significant continuing involvement in the
operations of the company. The Company is currently evaluating the impact SFAS
No. 144 will have on its consolidated financial position and results of
operations.
(19) SUBSEQUENT EVENTS
Potential Sale of PartnerCommunity
In February 2002 we executed a letter of intent to sell substantially all
of our ownership interest in PartnerCommunity. The terms of the transaction are
currently being negotiated in a definitive agreement and though the Company
expects the transaction to close in early April 2002, no assurance can be given
that the transaction will be consummated.
Conversion of Series F preferred stock
As of March 29, 2002, 13,520 shares of Series F preferred stock have been
converted to common stock resulting in the issuance of 1,655,524 shares of
common stock.
F-30
SCHEDULE II
DALEEN TECHNOLOGIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR EACH OF THE YEARS IN THE THREE YEAR PERIOD
ENDED DECEMBER 31, 2001
-------------------------------------------------------------------------
BALANCE AT BALANCE AT
BEGINNING OF INLOGIC END OF
YEAR CHARGES(A) ACQUISITION(B) DEDUCTIONS(C) YEAR
------------ ----------- --------------- ------------- ----------
Description:
Reserves and allowances deducted
from asset accounts 1999
Allowance for doubtful
accounts................ $ 9,045 761,936 30,000 ( 94,046) 706,935
========== ========= ====== ========== =========
Description:
Reserves and allowances deducted
from asset accounts 2000
Allowance for doubtful
accounts................ $ 706,935 4,439,405 -- ( 546,340) 4,600,000
========== ========= ====== ========== =========
Description:
Reserves and allowances deducted
from asset accounts 2001
Allowance for doubtful
accounts................ $4,600,000 1,675,000 -- (2,486,346) 3,788,654
Reserve for notes
receivable.............. -- 1,188,102 -- 1,188,102
---------- --------- ------ ---------- ---------
Total................ $4,600,000 2,863,102 -- (2,486,346) 4,976,756
========== ========= ====== ========== =========
- ---------------
(a) Charges to the reserve account represent increase in reserve levels and
establishment of specific reserves charged to expense with respect to trade
receivable and notes receivable.
(b) Amount acquired in Inlogic acquisition.
(c) Deductions to the reserve account represent write-offs net of recoveries
which occurred during the year.
F-31