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SECURITIES AND EXCHANGE COMMISSION
Washington, D.c. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period From ____________ to ____________
Commission File Number: 0-27491
DALEEN TECHNOLOGIES, INC.
(Exact name of registrant as specified in Its charter)
Delaware 65-0944514
(State or other Jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
902 Clint Moore Road, Suite 230
Boca Raton, Florida 33487
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (561) 999-8000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
As of August 5, 2002, there were 23,532,081 shares of registrant's common stock,
$0.01 par value, outstanding.
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DALEEN TECHNOLOGIES, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 2002
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION PAGE
Item 1. Condensed Unaudited Consolidated Financial Statements.
Condensed Unaudited Consolidated Balance Sheets as of December 31, 2001 and June 30, 2002 3
Condensed Unaudited Consolidated Statements of Operations for the three months and six months ended June
30, 2001 and 2002 4
Condensed Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2001 and 2002 5
Notes to Condensed Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk. 36
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 37
Item 4. Submission of Matters to a Vote of Security Holders 37
Item 6. Exhibits and Reports on Form 8-K 38
Signatures 39
2
PART I
FINANCIAL INFORMATION
Item 1. Condensed Unaudited Consolidated Financial Statements.
DALEEN TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Unaudited Consolidated Balance Sheets
(In thousands, except share and per share data)
December 31, June 30,
2001 2002
------------ ---------
ASSETS
Current assets:
Cash and cash equivalents $ 13,093 $ 7,203
Restricted cash 30 30
Accounts receivable, less allowance for doubtful accounts of $3,789 at
December 31, 2001 and $3,388 at June 30, 2002 2,397 1,894
Unbilled revenue 488 45
Other current assets 436 294
--------- ---------
Total current assets 16,444 9,466
Notes receivable, less reserve of $1,188 at December 31, 2001 and
$1,519 at June 30, 2002 659 366
Property and equipment, net 2,704 1,797
Other assets 1,386 1,346
--------- ---------
Total assets $ 21,193 $ 12,975
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 678 $ 212
Accrued payroll and other accrued expenses 3,733 1,831
Billings in excess of costs 1,323 845
Deferred revenue 1,013 697
--------- ---------
Total current liabilities 6,747 3,585
Minority interest 184 --
Stockholders' equity:
Series F Convertible Preferred Stock, $.01 par value; 356,950 shares
authorized; 247,882 and 234,362 issued and outstanding at
December 31, 2001 and June 30, 2002 respectively, ($110.94 per
share liquidation value) 25,564 24,037
Common stock, $.01 par value; 70,000,000 shares authorized;
21,876,554 shares issued and outstanding at December 31, 2001
and 23,532,081 shares issued and outstanding at June 30, 2002 219 235
Stockholders' notes receivable (241) (100)
Deferred stock compensation (88) --
Additional paid-in capital 190,065 191,528
Accumulated deficit (201,257) (206,310)
--------- ---------
Total stockholders' equity 14,262 9,390
--------- ---------
Total liabilities and stockholders' equity $ 21,193 $ 12,975
========= =========
SEE ACCOMPANYING NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
3
DALEEN TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Unaudited Consolidated Statements of Operations
(In thousands, except per share data)
Three months ended Six months ended
June 30, June 30,
--------------------------- ---------------------------
2001 2002 2001 2002
-------- -------- -------- --------
Revenue:
License fees $ 1,063 753 2,775 963
Professional services and other 2,351 1,290 5,750 2,983
-------- -------- -------- --------
Total revenue 3,414 2,043 8,525 3,946
-------- -------- -------- --------
Cost of revenue:
License fees 321 63 368 98
Professional services and other 1,608 608 5,043 1,614
-------- -------- -------- --------
Total cost of revenue 1,929 671 5,411 1,712
-------- -------- -------- --------
Gross margin 1,485 1,372 3,114 2,234
-------- -------- -------- --------
Operating expenses:
Sales and marketing 2,632 1,083 6,955 2,233
Research and development 3,179 1,054 8,506 2,386
General and administrative 5,639 1,250 8,936 2,583
Amortization of goodwill and other intangibles 3,642 -- 8,579 --
Impairment of long lived assets -- -- 3,307 --
Restructuring charges 4,771 745 7,764 745
-------- -------- -------- --------
Total operating expenses 19,863 4,132 44,047 7,947
-------- -------- -------- --------
Operating loss (18,378) (2,760) (40,933) (5,713)
Other Income:
Interest income and nonoperating income, net 373 118 619 268
Gain on sale of subsidiary -- 391 -- 391
-------- -------- -------- --------
Total other income, net 373 509 619 659
-------- -------- -------- --------
Net loss (18,005) (2,251) (40,314) (5,054)
Less: preferred stock dividends arising from beneficial
conversion feature (26,065) -- (26,065) --
-------- -------- -------- --------
Net loss applicable to common stockholders $(44,070) (2,251) (66,379) (5,054)
======== ======== ======== ========
Net loss applicable to common stockholders per share -
basic and diluted $ (2.02) (0.10) (3.05) (0.22)
======== ======== ======== ========
Weighted average shares outstanding- basic and diluted 21,812 23,532 21,799 22,882
======== ======== ======== ========
SEE ACCOMPANYING NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
4
DALEEN TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Unaudited Consolidated Statements of Cash Flows
(In thousands)
Six Months Ended
---------------------------
June 30, June 30,
2001 2002
-------- --------
Cash flows from operating activities:
Net loss $(40,314) $ (5,054)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 2,135 1,307
Amortization of deferred stock compensation 1,611 68
Amortization of goodwill and other intangibles 8,579 --
Loss on disposal of fixed assets 1,994 13
Impairment of long lived assets and other assets 4,307 --
Bad debt expense 1,350 320
Interest income on stockholders' notes receivable (81) (58)
Non-cash stock settlement expense 495 --
Gain on sale of subsidiary -- (391)
Changes in assets and liabilities:
Restricted cash 131 --
Accounts receivable 3,938 345
Costs in excess of billings 1,786 (51)
Unbilled revenue 715 443
Other current assets 201 (109)
Other assets (156) 17
Accounts payable (1,098) (223)
Accrued payroll and other accrued expenses (3,695) (1,595)
Billings in excess of costs (291) (478)
Deferred revenue (754) (308)
Other current liabilities (895) --
-------- --------
Net cash used in operating activities (20,042) (5,754)
-------- --------
Cash flows provided by (used in) financing activities:
Proceeds from sale of Series F preferred stock and warrants, net 25,700 --
Payment of capital lease (300) --
Proceeds from exercise of stock options and bridge warrants 11 --
Payment of deferred offering costs -- (28)
-------- --------
Net cash provided by (used in) financing activities 25,411 (28)
-------- --------
Cash flows used in investing activities:
Issuance of stockholder's notes receivable (1,241) 1
Proceeds from sale of fixed assets -- 1
Net proceeds from sale of subsidiary -- 69
Repayment of stockholder's notes receivable 87 12
Capital expenditures (696) (151)
-------- --------
Net cash used in investing activities (1,850) (68)
-------- --------
Effect of exchange rates on cash and cash equivalents (66) (39)
Net increase (decrease) in cash and cash equivalents 3,453 (5,889)
Cash and cash equivalents-beginning of period 22,268 13,092
-------- --------
Cash and cash equivalents-end of period $ 25,721 $ 7,203
======== ========
SEE ACCOMPANYING NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
5
Daleen Technologies, Inc. and Subsidiaries
Notes to Condensed Unaudited Consolidated Financial Statements
June 30, 2002
(1) BASIS OF PRESENTATION
The accompanying condensed unaudited consolidated financial statements for
Daleen Technologies, Inc. and subsidiaries (collectively, referred to as
"Daleen" or the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these
financial statements do not include all of the information and footnotes
necessary for a fair presentation of financial position, results of operations
and cash flows in conformity with generally accepted accounting principles. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation of the results for the
periods presented have been included. The condensed unaudited consolidated
balance sheet at December 31, 2001 has been derived from the Company's audited
consolidated financial statements at that date. These condensed unaudited
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto for the year ended December
31, 2001, included in the Company's annual report on Form 10-K as of and for the
year ended December 31, 2001 filed with the Securities and Exchange Commission
("SEC") on April 1, 2002.
The results of operations for the three or six months ended June 30, 2002
are not necessarily indicative of results that may be expected for any other
interim period or for the full fiscal year.
(2) PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of Daleen
Technologies, Inc. and its subsidiaries, which include the accounts of
PartnerCommunity, Inc. through June 24, 2002. On June 24, 2002, the Company sold
this subsidiary (see note 14). All significant intercompany balances and
transactions have been eliminated in consolidation.
(3) BASIC AND DILUTED NET LOSS PER SHARE
Basic and diluted net loss 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 since their effect would be antidilutive. Common stock
equivalents amount to 28,697,699 shares and 28,717,699 shares for the three
months and six months ended June 30, 2002, respectively. Common stock
equivalents amounted to 29,924,932 shares and 30,264,172 shares for the three
months and six months ended June 30, 2001.
Net loss applicable to common stockholders differs from net loss in the
three and six months ended June 30, 2001 due to the preferred stock dividends
arising from the beneficial conversion features from the sale ("Private
Placement") in June 2001 of the Series F convertible preferred stock ("Series F
preferred stock") and warrants to purchase additional shares of Series F
preferred stock ("Warrants").
(4) LIQUIDITY
The Company continued to experience operating losses for the six months
ended June 30, 2002 and has an accumulated deficit of $206.3 million at June 30,
2002. Cash and cash equivalents at June 30, 2002 was $7.2 million. Cash used in
operations for the six months ended June 30, 2002 was $5.8 million which was
principally used to fund the operating losses.
6
The Company continues to manage its use of cash and believes that the cash
and cash equivalents at June 30, 2002, together with the reduction of costs
related to the restructuring activities that took place in 2001 and 2002, may be
sufficient to fund the Company's operations through December 31, 2002. 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
is also considering 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
combinations. 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
substantially dilutive to the Company's existing stockholders. 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 the Company's
ability to operate as a going concern which may result in filing for bankruptcy
protection, winding down operations and/or liquidation of assets. The condensed
unaudited financial statements have been prepared assuming that the Company will
continue as a going concern, and do not include any adjustments that might
result from the outcome of this uncertainty.
(5) 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 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:
o Software license
o Maintenance and support
o Professional services
o Third-party software licenses and maintenance
o 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.
7
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:
o 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.
o 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.
o 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.
o 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 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 assess 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.
8
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 United States to revenue recognition in financial statements. The Company
recognizes revenue in accordance with SAB No. 101.
(6) RESTRUCTURING ACTIVITIES
During 2001 the Company performed various restructuring activities. For the
year ended December 31, 2001, the Company recorded $11.8 million of
restructuring charges related to restructuring activities which were announced
on January 5, 2001 (the "January Restructuring"), April 10, 2001 (the "April
Restructuring"), and October 17, 2001 (the "October Restructuring"). Management
started to implement these actions immediately following the announcements. The
Company recorded a $3.0 million restructuring charge for the six months ended
June 30, 2001 related to the January Restructuring. The Company recorded a $4.8
million restructuring charge for the three months and six months ended June 30,
2001 related to the April Restructuring. Such charges included the estimated
costs related to workforce reductions, closing and downsizing of facilities,
asset writedowns and other costs.
In May 2002, management initiated another business review continuing to
identify additional areas for cost reduction. As a result, the Company's Board
of Directors formally approved a plan to further reduce operating expenses on
May 13, 2002 (the "2002 Restructuring"). On May 14, 2002 the Company announced
and immediately began to implement the 2002 Restructuring. The Company recorded
a $745,000 restructuring charge for the three and six months ended June 30, 2002
related to the 2002 Restructuring in accrued restructuring. Such charge included
the estimated costs related to workforce reductions, due to the termination of
35 employees from substantially all of the Company's employee groups.
The costs were from the following financial statement captions (in
thousands):
Cost of sales - professional services $ 140
Research and development 168
Sales and marketing 148
General and administrative 289
-------
$ 745
=======
At December 31, 2001, an accrual remained on the condensed unaudited
consolidated balance sheet related to the January Restructuring, April
Restructuring and October Restructuring in the amount of $652,000. During the
six months ended June 30, 2002, the Company recorded $745,000 against the
accrual related to the 2002 Restructuring.
Amounts charged against the restructuring accrual for the six months ended
June 30, 2002 were as follows (in thousands):
January April October 2002
Restructuring Restructuring Restructuring Restructuring Total
------------- ------------- ------------- ------------- -----
Employee termination benefits $ 19 $ 45 $210 $475 $749
Facility costs/rent on idle facilities 21 32 22 -- 75
Asset writedowns -- -- 109 -- 109
Other costs -- -- 2 -- 2
---- ---- ---- ---- ----
$ 40 $ 77 $343 $475 $935
==== ==== ==== ==== ====
9
As of June 30, 2002, an accrual remains on the condensed unaudited
consolidated balance sheets in accrued payroll and other accrued expenses
related to the January Restructuring, April Restructuring, October Restructuring
and 2002 Restructuring consisting of the following components (in thousands):
January April October 2002
Restructuring Restructuring Restructuring Restructuring Total
------------- ------------- ------------- ------------- -----
Employee termination benefits $ 1 $ 23 $ 70 $270 $364
Facility costs/rent on idle facilities 82 -- -- -- 82
Asset writedowns -- -- -- -- --
Other costs 2 10 4 -- 16
---- ---- ---- ---- ----
$ 85 $ 33 $ 74 $270 $462
==== ==== ==== ==== ====
(7) IMPAIRMENT CHARGES
The Company recorded an impairment charge of approximately $3.3 million in
the six months ended June 30, 2001 related to the following (in thousands):
Employee workforce - other intangible asset $ 1,565
Property and equipment 1,742
-------
$ 3,307
=======
Due to the various restructuring activities initiated by the Company, 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" was performed.
Management of the Company determined that the asset was impaired.
As of March 31, 2001, the Company determined that certain property,
leasehold improvements and equipment, which mainly represented computer
equipment and furniture from the Toronto and Atlanta facilities, which were
closed, was impaired. The Company recorded an impairment charge during the six
months ended June 30, 2001 for the difference between the fair value and the
carrying value of the assets.
(8) GOODWILL
In January 2002, the Company adopted Statement No. 141, "BUSINESS
COMBINATIONS" 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 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 requires goodwill to no longer be
amortized but instead tested for impairment at least annually in accordance with
the provisions of SFAS No. 142. SFAS No. 142 also requires the Company to
10
evaluate goodwill whenever events and changes in circumstances suggest that the
carrying amount may be recoverable from its estimated future cash flows.
Due to economic conditions and the Company's past revenue performance, the
Company assessed the recoverability of goodwill and other intangibles in 2001 by
determining whether the amortization of the goodwill and other intangibles over
the remaining life could be recovered through undiscounted future operating cash
flows over the remaining amortization period. The Company's carrying value of
goodwill and other intangibles was reduced by the estimated short fall of cash
flows, discounted at a rate commensurate with the associated risks. The carrying
value was written off at December 31, 2001. As a result, as of the date of
adoption of SFAS No. 141 and SFAS No. 142, there was no impact to the Company's
financial statements.
(9) BUSINESS AND CREDIT CONCENTRATIONS
During the three months ended June 30, 2002 and 2001, 36.1 percent and 19.1
percent, respectively, of the Company's total revenue was attributed to one
customer.
For the six months ended June 30, 2002, 33.2 percent of the Company's total
revenue was attributed to two customers. Sales to one of the two customers
accounted for 18.7 percent and sales to the other accounted for 14.5 percent of
total revenue for the six-month period. For the six months ended June 30, 2001,
29.7 percent of total revenue was attributed to two customers. Sales to one of
these two customers accounted for 18.2 percent and sales to the other accounted
for 11.5 percent of the Company's total revenue for the six-month period.
One customer accounted for 27.9% of total accounts receivable at June 30,
2002. One customer accounted for 38.0% of total gross accounts receivable at
December 31, 2001.
(10) RELATED PARTY TRANSACTIONS
A former member of the Company's board of directors, who resigned effective
March 31, 2002, is a corporate executive vice president of Science Applications
International Corporation ("SAIC"). SAIC, through its subsidiary SAIC Venture
Capital Corporation, is a significant stockholder of the Company. Revenue
related to SAIC for the three and six months ended June 30, 2002 was $20,600 and
$65,600, respectively. Revenue related to SAIC for the three and six months
ended June 30, 2001 was $27,523 and $36,293 respectively. SAIC owns 44 percent
of the voting stock of Danet, Inc. ("Danet") and 100 percent of the voting stock
of Telcordia Technologies, Inc. ("Telcordia"). Danet is a customer and a
distributor of the Company's product. Revenue related to Danet for the six
months ended June 30, 2001 and 2002 was $7,129 and $279, respectively. The
Company has a strategic alliance relationship and an OEM Agreement and Services
Agreement with Telcordia. Revenue related to Telcordia for the three and six
months ended June 30, 2002 was $142,519 and $608,289, respectively. There were
no sales to Telcordia for the three and six months ended June 30, 2001.
In January 2001, the Company loaned $1,237,823 to its Chairman, President
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 is
payable in full January 31, 2006; interest is payable annually on January 31.
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 of the
Company's common stock held as the collateral. On January 31, 2002, an interest
payment of $119,871 was due and payable. That interest payment has not been
made. As a result of non-payment of this interest, this note is in default.
Pursuant to the terms of the loan, the Company may, at its option, give notice
of default due to the nonpayment of interest. In that event, the principal and
interest on the loan would become due and payable. As a result of the loan being
non-recourse, the Company's remedy at that time would be to take possession of
the Company's common stock held as collateral for the loan. At such time, the
loan would be deemed satisfied.
11
As a result of the loan being non-recourse, the Company recorded an
allowance for the difference between the face value of the loan plus accrued
interest and the fair market value of the underlying collateral. At June 30,
2002, the allowance was approximately $1,242,000.
(11) SERIES F PREFERRED STOCK
In March 2002, the holders of 13,520 shares of Series F preferred stock
converted their shares into common stock resulting in the issuance of 1,655,528
shares of common stock and a reduction in the number of outstanding shares of
Series F preferred stock to 234,362 shares.
(12) LEGAL PROCEEDINGS
FAZARI v. DALEEN TECHNOLOGIES, INC.
On December 5, 2001, a class action complaint was filed in the United States
District Court for the Southern District of New York. On April 22, 2002 an
amended complaint was filed by two plaintiffs purportedly on behalf of persons
purchasing the Company's common stock between September 20, 1999 and December 6,
2000. 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 initial public
offering ("IPO") and certain current and former officers and directors of the
Company. The complaint includes allegations of violations of (i) Section 11 of
the Securities Act of 1933 by all named defendants, (ii) Section 15 of the
Securities Act of 1933 by the individual defendants and (iii) Section 10(b) of
the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by the
underwriter defendants. In the past year, more than 300 similar class action
lawsuits have been filed in the Southern District of New York. 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 plaintiffs allege 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. Plaintiffs further allege that the
underwriter defendants had agreements with preferred customers tying the
allocation of shares sold in the Company's IPO to the preferred customers'
agreements to make additional aftermarket purchases at pre-determined prices.
Plaintiffs further allege that the underwriters used their analysts to issue
favorable reports about the Company to further inflate the Company's share price
following the IPO. Plaintiffs claim that the defendants knew or should have
known of the underwriters actions and that the failure to disclose these alleged
arrangements rendered the Company's prospectus included in its registration
statement on Form S-1 filed with the SEC in September 1999 materially false and
misleading. Plaintiffs seek unspecified damages and other relief. The Company
intends to defend vigorously against the plaintiffs' 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 although no assurances can be given that
such indemnification will be available. The Company has notified the
underwriters of the action, but the underwriters have not yet agreed to
indemnify the Company. The Company is currently in mediation with the plaintiffs
in an attempt to facilitate a resolution of this matter against the issuer
defendants. A Motion to Dismiss was filed by the issuers and individual
defendants on July 15, 2002. The plaintiffs have initiated discussions related
to a possible stipulated dismissal of certain of the individual defendants.
12
GENERAL LITIGATION
The Company is involved in a number of other lawsuits and claims incidental
in its ordinary course of business. The Company does not believe the outcome of
any of these activities would have a material adverse effect on the financial
position or operating results of the Company.
(13) NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, Financial Accounting Standards Board ("FASB"), issued
Statement of Financial Accounting Standards No. 143, "ACCOUNTING FOR ASSET
RETIREMENT OBLIGATIONS" ("SFAS No. 143"). That statement 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 the fiscal years beginning after June 15, 2002, with
earlier adoption permitted. The Company believes the adoption of the SFAS No.
143 will not have a significant impact on the Company's financial position and
results of operations.
In August 2001, 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 adopted SFAS No. 144 as of January 1, 2002. The adoption
had no impact to the Company's financial statements.
On April 30 2002, the FASB issued FASB Statement of Financial Accounting
Standards No. 145 (" SFAS No. 145"), "RESCISSION OF FASB STATEMENTS NO. 4, 44,
AND 64, AMENDMENT TO FASB STATEMENT NO. 13, AND TECHNICAL CORRECTIONS". Through
this rescission, SFAS No. 145 eliminates the requirement (in both SFAS No. 4 and
SFAS No. 64) that gains and losses from the extinguishment of debt be aggregated
and, if material, classified as an extraordinary item, net of the related income
tax effect. In addition SFAS No. 145 requires sale-leaseback transactions and
certain lease modifications that have economic effects that are similar to
sale-leaseback treatment for certain modifications of a capital lease that
result in the lease being classified as an operating lease. SFAS No. 145 also
makes several other technical corrections to existing pronouncements that may
change accounting practice. SFAS No. 145 is effective for fiscal years beginning
after May 15, 2002. The early adoption had no impact on the Company's financial
statements.
In July 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Exit or Disposal Activities" ("SFAS No. 146"). SFAS No.
146 will be effective for disposal activities initiated after December 31, 2002.
The Company is in the process of evaluating the effect that adopting SFAS No.
146 will have on its financial statements.
(14) SALE OF SUBSIDIARY
On June 24, 2002, the Company sold all if its common and preferred stock in
PartnerCommunity, Inc. ("PartnerCommunity"), a majority owned subsidiary, in
exchange for net cash proceeds of approximately $69,000; a promissory note for
$200,000 payable in 30 months which bears interest at a rate of 8% per year
payable annually; and five year warrants to purchase 1,200,000 shares of
PartnerCommunity preferred stock at a price of $.10 per share. The estimated
fair value of the warrants of $165,700 was recorded as an other asset in the
condensed unaudited balance sheet of the Company. The fair value of the warrants
was calculated using the Black-Scholes model. The Company recorded a gain on
sale of the subsidiary of approximately $391,000 in the three and six months
ended June 30. 2002.
The Company placed a 100% reserve against the note receivable due to the
long term nature of the note and the uncertainty of collectibility. As cash is
received, the Company will record an additional gain on the transaction.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following should be read in conjunction with the condensed unaudited
consolidated financial statements, and the related notes thereto, included
elsewhere in this Quarterly Report on Form 10-Q. In addition, reference should
be made to our audited consolidated financial statements and notes thereto, and
related Management's Discussion and Analysis of Financial Condition and Results
of Operations included with our Annual Report on Form 10-K for the year ended
December 31, 2001.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the
Securities Act of 1933 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 rather are based on current
expectations, estimates and projections about our business and industry, our
beliefs and assumptions. Words such as "anticipates", "expects", "intends",
"plans", "believes", "seeks", "estimates" and variations of these words and
similar expressions are intended to identify forward-looking statements. These
statements are not guarantees of future performance and are subject to known and
unknown 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
report and in the Company's Annual Report on Form 10-K for the year ended
December 31, 2001 filed with the Securities and Exchange Commission on April 1,
2002. 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 this report 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.
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(R) applications
enable service providers to automate and manage their entire revenue chain. In
addition to our RevChain(R) 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
14
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 condensed unaudited consolidated
financial statements included elsewhere in this Quarterly Report on Form 10-Q,
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, 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 condensed
unaudited 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 generally 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 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 continue 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
15
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.
NOTES RECEIVABLE
We maintain an allowance for employees' notes receivable that are
non-recourse except against the collateral, for the difference between the face
value of the note plus accrued interest and the fair market value of the
underlying collateral which consists of our common stock. If the common stock
price were to decrease, additional allowances may be needed. Likewise, if the
common stock price were to increase, a decrease in the allowance may be needed.
An increase in the allowance would decrease income in the period the common
stock price decreased while a decrease in the allowance would increase income in
the period the common stock price increased.
We also maintain an allowance for former employee notes receivable that are
full recourse for estimated losses resulting from the inability of our prior
employees to make payments. We continually monitor the notes receivable and the
allowance is based on specific issues that we have identified. If the financial
condition of the holder of the notes were to deteriorate, resulting in such
holders inability to make required 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 also have warrants to purchase preferred stock of
a former subsidiary. We would record an investment impairment charge when we
believe these investments have experienced a decline in value that is other than
temporary. Future adverse changes in market conditions, or poor operating
results of these investments, could result in losses or an inability to recover
the carrying value of investments that may not be reflected in our 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 our 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.
16
RESULTS OF OPERATIONS
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 recorded a $3.0 million restructuring charge in the three
months ended March 31, 2001 related to the January Restructuring. 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.
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 Toronto, Canada and Atlanta, Georgia facilities. The
April Restructuring included the consolidation of our North American research
and development and professional services resources and further reduced our
administrative support functions. The workforce reductions resulted in the
termination of 193 employees from substantially all of our employee 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 and on October 19, 2001
we announced a plan to further reduce expenses (the "October Restructuring").
The October Restructuring included the estimated costs related to workforce
reductions of 75 employees from substantially all of our employee 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 19, 2001 announcement.
On May 13, 2002, our Board of Directors approved and on May 14, 2002 we
announced, a plan to further reduce expenses (the "2002 Restructuring"). The
2002 Restructuring included the estimated costs related to workforce reductions
of 35 employees from substantially all of our employee groups. We implemented
the actions associated with the 2002 Restructuring immediately following the May
14, 2002 announcement.
Due to the termination of employees in the January Restructuring, the April
Restructuring, the October Restructuring and the 2002 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 $33.2 million. The anticipated savings are from the
following: approximately $9.8 million in cost of professional services and
other; approximately $12.2 million in research and development; approximately
$7.0 million in sales and marketing; and approximately $4.2 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. With the recent
implementations of our January Restructuring, April Restructuring, October
Restructuring and 2002 Restructuring, we expect operating expenses to continue
to decrease in 2002 in areas such as compensation and benefits, capitalized
expenditures, facilities and travel costs.
17
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
TOTAL REVENUE. Total revenue, which includes license revenue and
professional services and other revenue, decreased $1.4 million, or 40.2%, to
$2.0 million in the three months ended June 30, 2002, from $3.4 million for the
same period in 2001. The primary reason for lower revenue during the recent
quarter is related to the decrease in the number of contracts being signed in
recent quarters, which has resulted in a decrease in our professional services
and other revenue due to less ongoing product implementations related to
licensing our software products and the need for third-party software
fulfillment. In addition, there was a decrease in license revenue due to fewer
license contracts being signed in the second quarter 2002 than the second
quarter 2001.
LICENSE FEES. Our license fees are derived from licensing our software
products. License fees decreased $311,000, or 29.2%, in the three months ended
June 30, 2002 to $753,000, compared to $1.1 million for the same period in 2001.
This decrease was due to fewer license contracts being signed in the second
quarter 2002 compared to the same period in 2001. The primary reasons for this
reduction include an overall reduction in technology spending, market conditions
in the industries in which our customers operate, competition, lengthening of
the sales cycle and postponement of customer licensing decisions. License fees
constituted 36.8% of total revenue in the three months ended June 30, 2002,
compared to 31.1% in the same period in 2001.
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 both on a fixed
fee basis and on a time and materials basis. We also offer third-party software
fulfillment based on our acquisition cost plus a reasonable margin. Professional
services and other revenue decreased $1.1 million, or 45.1%, in the three months
ended June 30, 2002 to $1.3 million, compared to $2.4 million in the same period
in 2001. The decrease was due to less ongoing product implementations, fewer
maintenance contracts primarily due to customer insolvency and less revenue
associated with third-party software fulfillment. Professional services and
other revenue constituted 63.2% of total revenue in the three months ended June
30, 2002, compared to 68.9% for the same period in 2001.
TOTAL COST OF REVENUE. Total cost of revenue decreased $1.3 million, or
65.2%, to $671,000 in the three months ended June 30, 2002 from $1.9 million in
the same period in 2001. 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 license products, amortization expense related to
prepaid third-party licenses and related corporate overhead costs to provide
professional services to our customers. These costs decreased due to a decrease
in total revenue, decrease in amortization expense related to prepaid
third-party licenses, as well as the result of our cost reduction measures taken
in the October Restructuring and the 2002 Restructuring. The cost reductions
included a decrease in professional services personnel and other overhead costs.
Overall, total cost of revenue as a percentage of total revenue decreased to
32.8% in the three months ended June 30, 2002, compared to 56.5% in the same
period in 2001. This decrease resulted from the decrease in total revenue,
decrease in amortization expense related to prepaid third-party license and the
cost reductions related to the October Restructuring and the 2002 Restructuring.
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 licenses. Cost
of license fees decreased $258,000 or 80.5% to $63,000, in the three months
ended June 30, 2002, from $321,000 in the same period in 2001, due to a decrease
in amortization expense related to prepaid third-party licenses. The majority of
license fees recognized in the three months ended June 30, 2002 related to "pay
as you grow" revenue from existing customers. Therefore, it did not require any
amortization of third-party licenses. However, in the three months ended June
30, 2001, we recorded amortization of prepaid third-party licenses due to the
license revenue being derived from new customers. In addition, the amortization
period on the prepaid licenses has been completed, therefore, no amortization
related to prepaid licenses will be required in the future.
18
Cost of license fees as a percentage of license revenue decreased to 8.3% in the
three months ended June 30, 2002, compared to 30.2% for the same period in 2001,
due to the decrease in amortization.
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 $1.0 million, or
62.2% to $608,000, in the three months ended June 30, 2002, from $1.6 million in
the same period in 2001. These costs decreased due to a decrease in total
revenue, as well as the result of our cost reduction measures taken in the
October Restructuring and the 2002 Restructuring. Cost of professional services
and other decreased to 47.1% of professional services and other revenue in the
three months ended June 30, 2002, compared to 68.4% for the same period 2001 due
to cost reduction measures related to October Restructuring and the 2002
Restructuring.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses earned by sales, marketing and partner
management personnel, travel and entertainment, trade show and marketing program
costs, promotional and related corporate overhead costs. These expenses
decreased $1.5 million or 58.8%, to $1.1 million in the three months ended June
30, 2002, from $2.6 million for the same period in 2001. These costs decreased
as a result of a decrease in our trade show presence, a decrease in sales
commissions, as well as the cost reduction measures taken with the October
Restructuring and 2002 Restructuring. As a percentage of revenue, sales and
marketing expenses decreased to 53.0% in the three months ended June 30, 2002,
from 77.1% in the same period in 2001 mainly due to the cost reduction measures
related to the October Restructuring and 2002 Restructuring.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of salaries and benefits 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 $2.1 million, or 66.8%, to $1.1 million in the three months ended June
30, 2002, from $3.2 million for the same period in 2001. The overall decrease
was primarily due to the cost reductions associated with the October
Restructuring and 2002 Restructuring. The cost reductions included a decrease in
research and development personnel and other costs. As a percentage of revenue,
research and development expenses decreased to 51.6% in the three months ended
June 30, 2002 compared to 93.1% in the same period in 2001, mainly due to the
cost reduction measures related to the October Restructuring and the 2002
Restructuring.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of salaries, benefits and related costs for our executive, finance and
accounting, facilities, human resources and information systems personnel, and
related corporate overhead costs. It also consists of non-cash stock
compensation expense and provision for bad debt. Our general and administrative
expenses decreased $4.4 million, or 77.8%, to $1.3 million in the three months
ended June 30, 2002, from $5.6 million in the same period in 2001. The decrease
was attributed to the decrease in administrative personnel and administrative
costs associated with the October Restructuring and the 2002 Restructuring. In
addition, in the three months ended June 30, 2001, there was approximately $3.4
million of charges which did not occur in the three months ended June 30, 2002.
These charges encompassed (i) an asset writedown 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) a charge of $1.2 million
related to the amortization of stock compensation expense due to options issued
in 1999 and 2000 with exercise prices at below fair market value; and (iv) the
charge to our provision for bad debt for the three months ended June 30, 2001
was approximately $925,000. The provision for bad debts for the three months
ended June 30, 2002 was $201,000. As a percentage of revenue, general and
administrative expenses decreased to 61.2% in the three months ended June 30,
2002 from 165.1% in the same period in 2001 due to cost reduction measures
related to the October Restructuring and the 2002 Restructuring and the non-cash
charges recorded in the three months ended June 30, 2001.
19
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization expense
decreased $3.6 million, or 100%, to $0 in the three months ended June 30, 2002,
from $3.6 million for the same period in 2001. Goodwill and other intangibles
was considered impaired and written off during 2001. Therefore, no amortization
of goodwill and other intangibles was recorded in the three months ended June
30, 2002.
RESTRUCTURING CHARGES. Restructuring charges decreased $4.0 million, or
84.4%, to $745,000 in the three months ended June 30, 2002 from $4.8 million for
the same period in 2001. Restructuring charges incurred by us in the three
months ended June 30, 2002 related to the 2002 Restructuring. These charges were
related to employee terminations benefits. The costs were from the following
financial statements captions:
Cost of sales - professional services $ 140,000
Research and development $ 168,000
Sales and marketing $ 148,000
General and administrative $ 289,000
---------
$ 745,000
=========
Restructuring charges incurred by us in the three months ended June 30,
2001, were related to the April Restructuring and were higher than the same
period in 2002 due to more employees being terminated, costs related to the
closing of the Toronto and Atlanta facilities, and asset writedowns.
OTHER INCOME. Other income increased $137,000, or 36.7%, to $509,000 in the
three months ended June 30, 2002, from $373,000 for the same period in 2001.
This was primarily attributable to the gain on the sale of our majority owned
subsidiary PartnerCommunity, Inc., of $391,000 offset by a decrease in
investment earnings due to the decrease in interest rates in 2002 compared to
2001.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
TOTAL REVENUE. Total revenue, which includes license revenue and
professional services and other revenue, decreased $4.6 million, or 53.7%, to
$3.9 million in the six months ended June 30, 2002 from $8.5 million for the
same period in 2001. The primary reason for lower revenue is related to fewer
license contracts being signed in the six months ended June 30, 2002 than in the
same period in 2001. In addition, the number of contracts being signed in recent
quarters has decreased our professional services and other revenue due to less
ongoing product implementations related to licensing our software products and
the need for third-party software fulfillment.
LICENSE FEES. Our license fees are derived from licensing our software
products. License fees decreased $1.8 million, or 65.3%, in the six months ended
June 30, 2002 to $963,000 compared to $2.8 million for the same period in 2001.
This decrease was due to fewer license contracts being signed in the six months
ended June 30, 2002 compared to the same period in 2001. The primary reasons for
this reduction include an overall reduction in technology spending, market
conditions in the industries in which our customers operate, competition,
lengthening of the sales cycle and postponement of customer licensing decisions.
License fees constituted 24.4% of total revenue in the six months ended June 30,
2002, compared to 32.6% in the same period in 2001.
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 $2.8 million, or 48.1%, in the six months
ended June 30, 2002 to $3.0 million, compared to $5.8 million in the same period
in 2001. The decrease was due to less ongoing product implementations, fewer
maintenance contracts primarily due to customer insolvency, and less revenue
20
associated with third-party software fulfillment. Professional services and
other revenue constituted 75.6% of total revenue in the six months ended June
30, 2002, compared to 67.4% for the same period in 2001. The increase as a
percentage of total revenue is due to a reduction in license revenue in the six
months ended June 30, 2002.
TOTAL COST OF REVENUE. Total cost of revenue decreased $3.7 million, or
68.4%, to $1.7 million in the six months ended June 30, 2002, from $5.4 million
in the same period in 2001. 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, amortization expense related to
prepaid third-party licenses and related corporate overhead costs to provide
professional services to our customers. These costs decreased due to the
decrease in total revenue, decrease in amortization of prepaid third-party
license fees as well as the result of our cost reduction measures taken in the
April Restructuring, October Restructuring and 2002 Restructuring. The cost
reductions included a decrease in professional services personnel and other
overhead costs. Overall, total cost of revenue as a percentage of total revenue
decreased to 43.4% in the six months ended June 30, 2002, compared to 63.5% in
the same period in 2001. This decrease resulted from the decrease in total
revenue, decrease in amortization expense related to prepaid third-party
licenses and the cost reductions related to the April Restructuring, October
Restructuring and 2002 Restructuring.
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 licenses. Cost
of license fees decreased $270,000 or 73.4% to $98,000, in the six months ended
June 30, 2002, from $368,000 in the same period in 2001 due to a decrease in
amortization expense related to prepaid third-party licenses. Cost of license
fees decreased to 10.2% of license revenue in 2002, compared to 13.3% in 2001.
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 $3.4 million, or
68.0%, to $1.6 million in the six months ended June 30, 2002, from $5.0 million
in the same period in 2001. These costs decreased as a result of our cost
reduction measures taken with the April Restructuring, October Restructuring and
the 2002 Restructuring. In addition, the revenue related to professional
services and other has decreased. Cost of professional services and other
decreased to 54.1% of professional services and other revenue in the six months
ended June 30, 2002, compared to 87.7% for the same period in 2001 due to cost
reductions resulting from the April Restructuring, October Restructuring and
2002 Restructuring.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses earned by sales, marketing and partner
management personnel, travel and entertainment, trade show and marketing program
costs, promotional and related corporate overhead costs. These expenses
decreased $4.7 million, or 67.9%, to $2.2 million in the six months ended June
30, 2002, from $7.0 million for the same period in 2001. The decrease was a
result of a decrease in our trade show presence, decrease in sales commissions
as well as the cost reduction measures taken with the April Restructuring,
October Restructuring and the 2002 Restructuring. As a percentage of revenue,
these expenses decreased from 81.6% in the six months ended June 30, 2001, to
56.6% for the same period in 2002 mainly due to the cost reduction measures
related to the April Restructuring, October Restructuring and 2002
Restructuring.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of salaries and benefits 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 $6.1 million, or 72.0%, to $2.4 million in the six months ended June
30, 2002, from $8.5 million for the same period in 2001. The decrease was a
result of the cost reduction measures associated with the April Restructuring,
October Restructuring and the 2002 Restructuring. The cost reductions included a
decrease in research and development personnel and other costs. As a percentage
of revenue, these expenses decreased from 99.8% in 2001 to 60.5% in
21
2002 mainly due to the cost reduction measures related to the April
Restructuring, October Restructuring and 2002 Restructuring.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of salaries, benefits and related costs for our executive, finance and
accounting, facilities, human resources and information systems personnel, and
related corporate overhead costs. It also consists of non-cash stock
compensation expense and provision for bad debt. Our general and administrative
expenses decreased $6.4 million, or 71.1%, to $2.6 million in the six months
ended June 30, 2002, from $8.9 million in the same period in 2001. The decrease
was attributed to the aggregate amount of approximately $4.1 million non-cash
charges recorded in the six months ended June 30, 2001, which did not occur in
the six months ended June 30, 2002, 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) a charge of $1.5 million related to amortization of stock
compensation expense due to options issued in 1999 and 2000 with exercise prices
below fair market value; and (iv) a $1.4 million charge to our provision for bad
debt for the six months ended June 30, 2001 compared to a $320,000 charge for
the six months ended June 30, 2002. The provision in the six month period in
2001 was due to the market conditions in the telecommunications industry and
certain customers significantly reducing or liquidating their operations in
2001. The decrease in general and administrative expenses also was a direct
result of the cost reduction measures associated with the April Restructuring,
October Restructuring and 2002 Restructuring. As a percentage of revenue,
general and administrative expenses decreased to 65.5% in the six months ended
June 30, 2002 from 104.8% in the same period in 2001 due to the reduction, of
the non-cash charges as well as the cost reduction measures related to the April
Restructuring, October Restructuring and 2002 Restructuring.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization expense
decreased $8.6 million, or 100%, to $0 in the six months ended June 30, 2002,
from $8.6 million for the same period in 2001. Goodwill and other intangibles
were considered impaired and written off during 2001. Therefore no amortization
of goodwill and other intangibles was recorded in the six months ended June 30,
2002.
IMPAIRMENT OF LONG-LIVED ASSETS. Impairment charges decreased $3.3 million,
or 100%, to $0 in the six months ended June 30, 2002, from $3.3 million for the
same period in 2001. Impairment charges in the six months ended June 30, 2001
consisted of an impairment of the employee workforce of $1.6 million and a
charge of approximately $1.7 million representing the difference between the
fair value and the carrying value of certain property, leasehold improvements
and equipment.
RESTRUCTURING CHARGES. Restructuring charges decreased $7.0 million, or
90.4%, to approximately $745,000 in the six months ended June 30, 2002, from
$7.8 million for the same period in 2001. Restructuring charges incurred by us
in the six months ended June 30, 2002 related to the 2002 Restructuring. These
charges were related to employee termination benefits. The costs were from the
following financial statement captions:
Cost of sales - professional services $ 140,000
Research and development $ 168,000
Sales and marketing $ 148,000
General and administrative $ 289,000
---------
$ 745,000
=========
Restructuring charges incurred by us in the six months ended June 30, 2001
related to the January Restructuring and April Restructuring and were higher
than the same period in 2002, were due to more employees being terminated, costs
related to the closing of the Toronto and Atlanta facilities, and asset
writedowns.
22
OTHER INCOME. Other income increased $40,000 or 6.5%, to $659,000 in the six
months ended June 30, 2002 from $619,000 for the same period in 2001. This was
primarily attributable to the decrease in investment earnings due to the
decrease in interest rates in 2002 compared to 2001, offset by the gain on sale
of subsidiary of $391,000.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $5.8 million for the six months
ended June 30, 2002, compared to $20.0 million for the six months ended June 30,
2001. The principal use of cash for both periods was to fund our losses from
operations.
Net cash used in financing activities was $28,000 for the six months ended
June 30, 2002 compared to the net cash provided by financing activities of $25.4
million for the six months ended June 30, 2001. In 2002, cash was used for
additional expenses related to the private placement. In 2001, the cash provided
was primarily related to the net proceeds received from the private placement.
Net cash used in investing activities was $68,000 for the six months ended
June 30, 2002, compared to the $1.9 million for the six months ended June 30,
2001. The cash used in the six months ended June 30, 2002 was primarily related
to capital expenditures of approximately $151,000 offset by net proceeds of
$69,000 from the sale of the PartnerCommunity, Inc.. The cash used in the six
months ended June 30, 2001 was primarily related to a non-recourse note
receivable issued to our Chairman, President and Chief Executive Officer for
approximately $1.2 million and capital expenditures of approximately $696,000.
We continued to experience operating losses during the six months ended June
30, 2002 and had an accumulated deficit of $206.3 million at June 30, 2002. Cash
and cash equivalents at June 30, 2002 were $7.2 million. The cash used during
the six months ended June 30, 2002 was a significant improvement from prior
periods. The January Restructuring, April Restructuring, October Restructuring
and 2002 Restructuring resulted in a reduction in operating expense levels, and
cash usage requirements in the six months ended June 30, 2002.
We intend to continue to manage our use of cash and we believe the cash and
cash equivalents together with the reduction in costs due to the January
Restructuring, April Restructuring, October Restructuring and 2002
Restructuring, may be sufficient to fund our operations through December 31,
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 or that any additional financing would not be substantially
dilutive to our existing 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 operations and/or liquidation of our assets. Our
condensed unaudited consolidated financial statements included elsewhere in this
Form 10-Q 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."
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, Financial Accounting Standards Board ("FASB"), issued
Statement of Financial Accounting Standards No. 143, "ACCOUNTING FOR ASSET
RETIREMENT OBLIGATIONS" ("SFAS No. 143"). That statement requires
23
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 the fiscal years beginning after
June 15, 2002, with earlier adoption permitted. We believe the adoption of the
SFAS No. 143 will not have a significant impact on our financial position and
operating results.
In August 2001, 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. We adopted SFAS No. 144 as of January 1, 2002. The adoption had no
impact to our financial statements.
On April 30 2002, the FASB issued FASB Statement of Financials Accounting
Standards No. 145 (" SFAS No. 145"), "RESCISSION OF FASB STATEMENTS NO. 4, 44,
AND 64, AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL CORRECTIONS". Through
this rescission, SFAS No. 145 eliminates the requirement (in both SFAS No. 4 and
SFAS No. 64) that gains and losses from the extinguishment of debt be aggregated
and, if material, classified as an extraordinary item, net of the related income
tax effect. In addition, SFAS No. 145 requires sale-leaseback to treatment for
certain modifications of a capital lease that result in the lease being
classified as an operating lease. SFAS No. 145 also makes several other
technical corrections to existing pronouncements that may change accounting
practice. SFAS No. 145 is effective for fiscal years beginning after May 15,
2002. The early adoption had no impact on our financial statements.
In July 2002, the FASB issued a Statement of Financial Accounting Standards
No. 146, "Accounting for Exit or Dismissal Activities" ("SFAS No. 146"). SFAS
No. 146 will be effective for disposal activities initiated by us after December
31, 2002. We are in the process of evaluating the effect that adopting SFAS
No.146 will have on our financial statements.
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 33. 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 $5.1 million for the six months
ended June 30, 2002. Our cash and cash equivalents at June 30, 2002 was $7.2
million. Cash used in operations for the six months ended June 30, 2002 was $5.8
million. As a result of our financial condition, the independent auditors'
report covering our
24
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, October Restructuring and 2002
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 cash and cash equivalents as of June 30, 2002 together
with the January Restructuring, April Restructuring, October Restructuring and
2002 Restructuring, may be sufficient to fund our operations through December
31, 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 a possible merger, sale of assets or other
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 likely will 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. 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 substantially
dilutive to our existing 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. 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 $5.1 million for the six months
ended June 30, 2002. As of June 30, 2002, we had an accumulated deficit of
approximately $206.3 million. We have not realized any profit to date and may
not achieve profitability in the near future. 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, October Restructuring and 2002
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.
We likely will be required to further reduce our operations, 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
25
market analysts and investors, and the price of our common stock may fall.
Factors that could cause quarterly fluctuations include:
o variations in demand for our products and services;
o competitive pressures;
o continued low levels of corporate information technology spending;
o prospective customers delaying their decision to acquire licenses
for our products;
o prospective customers' concerns of over their own financial
viability and use of cash;
o general market and economic conditions;
o our ability to develop and attain market acceptance of enhancements
to the RevChain product applications and any new products and
services;
o the pace of product implementation and the timing of customer
acceptance;
o industry consolidation reducing the number of potential customers;
o the willingness of potential customers to conduct business with us
related to concerns over operating losses and our long term
financial viability;
o changes in our pricing policies or the pricing policies of our
competitors; and
o 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 three months ended June 30,
2002 and previous quarters 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 SMALLCAP MARKET, WHICH COULD CAUSE OUR COMMON STOCK PRICE
TO DECLINE AND MAKE TRADING IN OUR COMMON STOCK MORE DIFFICULT TO INVESTORS.
Our common stock was transferred to The Nasdaq SmallCap Market
effective July 12, 2002, as a result of its delisting from The Nasdaq National
Market for failure to maintain a minimum bid price of $1.00 as required by the
applicable Nasdaq Marketplace Rule and, as well as our failure to maintain the
required minimum value of publicly held shares. The Nasdaq SmallCap Market is
viewed by most investors as a less desirable and less liquid marketplace than
The Nasdaq National Market.
26
We must satisfy The Nasdaq SmallCap Market's minimum listing
maintenance requirements to maintain our listing on The Nasdaq SmallCap Market.
The listing maintenance requirements set forth in Nasdaq's Marketplace Rules
include a series of financial tests relating to stockholders' equity, market
capitalization, net income, public float, market value of public float, number
of market makers and stockholders, and maintaining a minimum closing bid price
of $1.00 per share for shares of our common stock. On or before August 13, 2002,
we must demonstrate a closing bid price of at least $1.00 per share and must
maintain a price of at least $1.00 for a period of ten days immediately
thereafter to regain compliance. If we are unable to achieve a $1.00 bid price
at the expiration of this period, we may be eligible for an additional 180-day
extension of the bid price exception, or until February 10, 2003, provided we
demonstrate stockholders' equity of at least $5,000,000, a market capitalization
of at least $50,000,000 or net income of at least $750,000 for the year ended
2001 or in two of the last three fiscal years based upon the most recently filed
financial information. We must also demonstrate compliance with all requirements
for continued listing on The Nasdaq SmallCap Market. As of June 30, 2002, our
stockholders' equity was $9.4 million.
If our common stock is delisted from The Nasdaq SmallCap Market, the
common stock would trade on either the OTC Bulletin Board or the "pink sheets",
both of which are viewed by most investors as less desirable and less liquid
marketplaces. Thus, delisting from The Nasdaq SmallCap 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 SmallCap 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. 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. Several of our competitors have
recently gone through business combinations with other competitors that may
result in an advantage for them due to combinations in technology, experience,
financial resources and other economic synergies. Many of our current and future
competitors may have advantages over us, including:
o longer operating histories;
o larger customer bases;
o substantially greater financial, technical, research and development
and sales and marketing resources;
o a lead in expanding their business internationally;
o greater name recognition; and
o 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, and system implementers, that
would increase their ability to compete with us. In addition, competitors may be
able to
27
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, they may fail to devote sufficient
resources to adequately market our products, their business may, they may
refocus their efforts to other market, they may fail to implement and support
our products, they may develop relationships with our competitors, or they may
fail to honor the terms of our agreements or make payments when due. 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 LACK FINANCIAL RESOURCES, AND 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 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 year. 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 is a solution we do not currently offer and 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, Enron and WorldCom 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.
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
28
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:
o quarter-to-quarter variations in our operating results;
o failure to meet the expectations of industry analysts;
o announcements and technological innovations or new products by us or
our competitors;
o increased price competition; and
o 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 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 complaint alleges that 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
29
indemnify us and no assurances can be given that such indemnification will be
available. A motion to dismiss was filed by the issuers and individual
defendants on July 15, 2002. The plaintiffs have initiated discussions related
to a possible stipulated dismissal of certain of the individual defendants.
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
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:
o dependence on sales efforts of third-party distributors and systems
integrators;
o difficulties in staffing and managing foreign operations;
o difficulties in localizing products and supporting customers in
foreign countries;
o reduced protection for intellectual property rights in some
countries;
o greater difficulty in collecting accounts receivable; and
o uncertainties inherent in transnational operations such as export
and import regulations, taxation issues, tariffs, trade barriers and
fluctuations in currency conversion rates.
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.
30
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 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 WOULD LIKELY HURT OUR BUSINESS IF WE ARE
UNABLE TO HIRE SUITABLE REPLACEMENTS.
Our future success depends to a significant extent on the continued services
of our senior management and other key personnel. If we lost the services of our
key employees and we were unable to hire suitable replacements, it would likely
hurt our business. We have employment and non-compete agreements with some of
our executive officers. 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
31
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
and the time and focus required of Management to complete such an aquisition.
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 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.
32
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 August 5, 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", we are required to redeem all of the issued and outstanding
shares of Series F preferred stock for the Preferential Amount per share. 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 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). 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 August 5, 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 August 5,
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 that were issued
to purchase Series F preferred stock (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 shares of Series F preferred stock
control a majority of the outstanding vote. Additionally, certain of the holders
of Series F preferred stock 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 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 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 of the Company, or other transaction, 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 August 5, 2002, we had 23,532,081 shares of common stock issued and
outstanding and 234,362 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.
33
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:
o 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;
o the issuance of any additional shares of Series F preferred stock;
o the reclassification of any capital stock into shares having
preferences or priorities senior to or equal with the Series F
preferred stock;
o the amendment, alteration, or repeal of any rights of the Series F
preferred stock; and
o 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 of the Series F preferred stock is $0.9060. Based on the number of shares
of Series F preferred stock that were outstanding as of August 5, 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 42,053,109 additional shares of common stock.
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,
convertible preferred 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
34
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 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 August 5, 2002:
o HarbourVest Partners VI-Direct Fund L.P. is managed by HarbourVest,
which also manages HarbourVest Partners V-Direct Fund L.P.
o 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.
o 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 34.13% of the
voting power of Daleen, or 27.32% 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 August 5, 2002:
o 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.
o Prior to the conversion of the Series F preferred stock, but
assuming exercise of its Warrants, SAIC Venture Capital Corporation
would control approximately 23.58% of the voting power of
35
Daleen, or 19.18% prior to the exercise of its Warrants, based on
the voting rights of the Series F preferred stock.
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.
ITEM 3. 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 subject to
fluctuations in commodities prices or foreign currency exchange rates.
36
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On December 5, 2001, a class action complaint was filed in the United States
District Court for the Southern District of New York. On April 22, 2002 an
amended complaint was filed by two plaintiffs purportedly on behalf of persons
purchasing our common stock between September 20, 1999 and December 6, 2000. 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
current and former officers and directors. The complaint includes allegations of
violations of (i) Section 11 of the Securities Act of 1933 by all named
defendants, (ii) Section 15 of the Securities Act of 1933 by the individual
defendants and (iii) Section 10(b) of the Securities Exchange Act of 1934 and
Rule 10b-5 promulgated thereunder by the underwriter defendants. In the past
year, more than 300 similar class action lawsuits have been filed in the
Southern District of New York. 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 plaintiffs allege 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. Plaintiffs further
allege that the underwriter defendants had agreements with preferred customers
tying the allocation of shares sold in our initial public offering to the
preferred customers' agreements to make additional aftermarket purchases at
pre-determined prices. Plaintiffs further allege that the underwriters used
their analysts to issue favorable reports about the Company to further inflate
our share price following our initial public offering. Plaintiffs claim that we
and certain of our officers and directors knew or should have known of the
underwriters actions and the failure to disclose these alleged arrangements
rendered our prospectus included in our registration statement on Form S-1 filed
with the Securities and Exchange Commission in September 1999 materially false
and misleading. Plaintiffs seek unspecified damages and other relief. We intend
to defend vigorously against the plaintiffs claims. 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. We are currently in mediation
with the plaintiffs in an attempt to facilitate a resolution of this matter
against the defendants. A Motion to dismiss was filed by the issuers and
individual defendants on July 15, 2002. The plaintiffs have initiated
discussions related to a possible stipulated dismissal of certain of the
individual defendants.
We are involved in a number of other lawsuits and claims incidental in our
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its 2002 Annual Meeting of Stockholders on June 11, 2002
(the "Annual Meeting"). At the Annual Meeting, the stockholders of the Company
voted on and approved each of the following proposals:
Proposal One: To approve the election of James Daleen and Ofer Nemirovsky as
directors to serve for a term expiring at the 2005 annual meeting of
stockholders and to approve the election of Stephen J. Getsy as a director
to serve for a term expiring at the 2004 annual meeting of stockholders.
37
Proposal Two: To approve and adopt the Daleen Technologies, Inc. 2001
Broad-Based Stock Incentive Plan.
The total number of shares of our common stock issued, outstanding and
entitled to vote at the Annual Meeting was 23,532,081 shares, of which
18,873,890 shares of common stock were present at the meeting in person or by
proxy. The total number of shares of our Series F Convertible Preferred Stock
outstanding and entitled to vote all matters as a class with the common stock
(on the basis of 100 votes per share of Series F Preferred Stock) was 234,362
shares, of which 175,771 shares of Series F Preferred Stock were present at the
meeting in person or by proxy.
The following list indicates the number of votes received by each of the
nominees for election to the Company's Board of Directors in Proposal One:
For Withheld Result
---------- -------- ------
James Daleen 36,354,380 96,610 Approved
Ofer Nemirovsky 36,330,230 120,760 Approved
Stephen J. Getsy 36,360,580 90,410 Approved
Proposal Two was approved by the holders of 59.9% of the outstanding shares
of common stock and Series F Preferred Stock (voting on a 100-1 basis as a
single class with the holders of common stock) entitled to vote at the annual
meeting. Specifically 28,118,939 shares were voted in favor of this proposal,
345,038 shares were voted against this proposal, 9,643 shares abstained from
voting on this proposal and there were 7,977,370 broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit List
Exhibit
Number Description
------- -----------
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by
Chief Executive Officer
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by
Chief Financial Officer
(b) Reports on Form 8-K
Report on Form 8-K filed May 22, 2002 with respect to The Nasdaq National
Market delisting notice and the Company requesting a hearing before a listing
qualifications panel to appeal the delisting.
Report on Form 8-K filed June 27, 2002 with respect to the sale of
PartnerCommunity, Inc.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DALEEN TECHNOLOGIES, INC.
Date: August 12, 2002 /s/ JAMES DALEEN
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JAMES DALEEN
Chairman of the Board of Directors,
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 12, 2002 /s/ JEANNE T. PRAYTHER
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JEANNE T. PRAYTHER
Chief Financial Officer (Principal
Financial Officer and Principal
Accounting Officer)
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