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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[Mark One]
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER: 0-27491
DALEEN TECHNOLOGIES, INC.
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(Exact name of registrant as specified in Its charter)
DELAWARE 65-0944514
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(State or other Jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1750 CLINT MOORE ROAD
BOCA RATON, FLORIDA 33487
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(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 May 7, 2001, there were 21,794,163 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 MARCH 31, 2001
TABLE OF CONTENTS
PAGE
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PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
Condensed Consolidated Balance Sheets as of December 31, 2000 and March 31,
2001 (unaudited) 3
Condensed Consolidated Statements of Operations for the three months ended
March 31, 2000 and 2001 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the three months ended
March 31, 2000 and 2001 (unaudited) 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. 23
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 24
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PART I
FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
DALEEN TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except share and per share data)
(unaudited)
DECEMBER 31, MARCH 31,
2000 2001
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 22,268 8,279
Restricted cash 931 933
Accounts receivable, less allowance for doubtful accounts of $4,600 at
December 31, 2000 and $4,211 at March 31, 2001 13,929 11,672
Costs in excess of billings 2,213 710
Other current assets 904 2,579
--------- ---------
Total current assets 40,245 24,173
Notes receivable 493 1,456
Property and equipment, net 10,146 6,788
Goodwill, net of accumulated amortization of $15,026 at
December 31, 2000 and $19,814 at March 31, 2001 43,012 38,246
Other intangible asset, net of accumulated amortization
of $786 at December 31, 2000 1,714 --
Other assets 3,852 4,258
--------- ---------
Total assets $ 99,462 74,921
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,968 2,167
Accrued payroll and other accrued expenses 12,731 12,421
Billings in excess of costs 1,466 1,164
Deferred revenue 2,839 2,653
Other current liabilities 1,166 210
--------- ---------
Total current liabilities 21,170 18,615
Long term portion of capitalized lease 607 609
--------- ---------
Total liabilities 21,777 19,224
Minority interest 184 184
Stockholders' equity:
Common stock, $.01 par value. Authorized 70,000,000 shares; issued
and outstanding 21,781,727 shares at December 31, 2000 and
21,792,424 at March 31, 2001 218 218
Stockholders' notes receivable (274) (226)
Deferred stock compensation (2,148) (1,813)
Additional paid-in capital 161,460 161,398
Accumulated deficit (81,755) (104,064)
--------- ---------
Total stockholders' equity 77,501 55,513
--------- ---------
Total liabilities and stockholders' equity $ 99,462 74,921
========= =========
SEE ACCOMPANYING NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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DALEEN TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
-----------------------
2000 2001
-------- --------
Revenue:
License fees $ 5,702 1,712
Professional services and other 3,268 3,462
-------- --------
Total revenue 8,970 5,174
-------- --------
Cost of revenue:
License fees 158 47
Professional services and other 2,932 3,437
-------- --------
Total cost of revenue 3,090 3,484
-------- --------
Gross margin 5,880 1,690
Operating expenses:
Sales and marketing 3,169 4,325
Research and development 4,994 5,335
General and administrative 3,995 3,296
Amortization of goodwill and other intangibles 3,673 4,937
Restructure and impairment charges -- 6,300
-------- --------
Total operating expenses 15,831 24,193
-------- --------
Operating loss (9,951) (22,503)
Total interest income and nonoperating income, net 798 195
-------- --------
Net loss applicable to common stockholders $ (9,153) (22,308)
======== ========
Net loss per share--basic and diluted $ (0.43) (1.02)
======== ========
Weighted average shares outstanding--basic and diluted 21,445 21,787
======== ========
SEE ACCOMPANYING NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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DALEEN TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
THREE MONTHS ENDED
MARCH 31,
-----------------------
2000 2001
-------- --------
Cash flows from operating activities:
Net loss $ (9,153) (22,308)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 548 832
Loss on disposal of fixed assets -- 3,342
Amortization of deferred stock compensation 185 280
Amortization of goodwill and other intangibles 3,673 4,937
Impairment of other intangible -- 1,544
Bad debt expense 595 425
Interest income on stockholder loans (4) (38)
Changes in assets and liabilities:
Restricted cash (801) (2)
Accounts receivable (3,632) 2,088
Costs in excess of billings (2,192) 1,496
Other current assets 212 87
Other assets 193 (106)
Accounts payable (352) (781)
Accrued payroll and other accrued expenses (1,137) (2,128)
Billings in excess of costs 1,620 (303)
Deferred revenue 887 (185)
Other current liabilities (312) (938)
-------- --------
Net cash used in operating activities (9,670) (11,758)
-------- --------
Cash flows used in financing activities:
Payment of capital lease -- (35)
Proceeds from exercise of stock options and warrants 316 --
Payment to former Inlogic stockholders (4,800) --
Payment of deferred offering costs (28) (97)
-------- --------
Net cash used in financing activities (4,512) (132)
-------- --------
Cash flows used in investing activities:
Purchase of securities available for sale (8,472) --
Issuance of stockholders notes receivable -- (1,238)
Repayment of stockholders notes receivable 120 86
Sales and maturities of securities available for sale 9,413 --
Capital expenditures (2,360) (946)
-------- --------
Net cash used in investing activities (1,299) (2,098)
-------- --------
Effect of exchange rates on cash and cash equivalents 10 (1)
-------- --------
Net decrease in cash and cash equivalents (15,471) (13,989)
Cash and cash equivalents at beginning of period 52,852 22,268
-------- --------
Cash and cash equivalents at end of period $ 37,381 8,279
======== ========
Supplemental disclosures of noncash activities:
Deferred offering costs $ -- 1,564
======== ========
Capital lease additions $ -- 33
======== ========
Forfeitures of unvested stock options $ -- $ 63
======== ========
SEE ACCOMPANYING NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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DALEEN TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying condensed 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 consolidated balance sheet
at December 31, 2000 has been derived from the Company's audited consolidated
financial statements at that date. These condensed consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and notes thereto for the year ended December 31, 2000, included in
the Company's annual report on Form 10-K as of and for the year ended December
31, 2000 filed with the Securities and Exchange Commission ("SEC") on April 5,
2001.
The results of operations for the three months ended March 31, 2001 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 the Company
and its subsidiaries. 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 amounted to 76,803 shares for the three months ended March 31, 2001.
(4) REVENUE RECOGNITION
The Company recognizes revenue under Statement of Position 97-2, SOFTWARE
REVENUE RECOGNITION ("SOP 97-2") for all software transactions entered into that
do not require significant production, modification or customization. SOP 97-2
requires revenue earned on software arrangements involving multiple elements to
be allocated to each element based on vendor specific objective evidence
("VSOE") of the relative fair values of the elements. VSOE is determined by the
price charged when the element is sold separately. The revenue allocated is
recognized when persuasive evidence of an arrangement exists, the software has
been delivered, 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 fee is not due
until after expiration of the license or more than 12 months after delivery.
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Revenue related to arrangements containing extended payment terms where the fees
are not considered fixed and determinable is deferred until payments are due. If
collectibility is determined to not be probable, revenue is recognized when cash
is received.
In March 1999, the Company adopted Statement of Position 98-9, MODIFICATION
OF SOP 97-2, SOFTWARE REVENUE RECOGNITION, WITH RESPECT TO CERTAIN TRANSACTIONS
("SOP 98-9"). SOP 98-9 amends SOP 97-2 to require recognition of revenue using
the "residual method" when (1) there is 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 SOP 97-2 other than the requirement for VSOE of the fair
value of each delivered element of the arrangement are satisfied. Under the
residual method, 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
(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.
The Company recognizes revenue from fixed fee service contracts using the
percentage of completion method based on the ratio of total labor 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. Provisions for estimated losses on uncompleted contracts are
made in the period in which such 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 condensed consolidated balance
sheets.
Revenue related to professional services under a time and materials
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.
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. In March
2000, the SEC issued SAB No. 101A, which delayed the implementation date of SAB
No. 101. In June 2000, the SEC issued SAB No. 101B, which further delayed the
implementation date of SAB No. 101. The Company adopted the provisions of SAB
No. 101 beginning October 1, 2000. The adoption of SAB No. 101 did not have an
impact on the Company's revenue recognition policies.
(5) RESTRUCTURING ACTIVITIES
In December 2000, management performed a comprehensive business review to
identify areas where the Company could reduce costs. This process culminated
with the announcement on January 5, 2001 (the "January Restructuring") that the
Company was taking certain specific cost reduction measures including reductions
in number of employees, consolidation of certain business activities and asset
writedowns. The January Restructuring resulted in the Company incurring a
restructuring charge of approximately $2.9 million in the three months ended
March 31, 2001.
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As of March 31, 2001, an accrual of $618,000 remains on the condensed
consolidated balance sheet related to the January Restructuring consisting of
approximately $260,000 related to severance and $358,000 related to rent on idle
facilities.
In March 2001 management initiated a second comprehensive business review to
identify additional areas for cost reductions due to existing market conditions.
As a result, the Company announced on April 10, 2001 ("the April Restructuring")
that the Company was consolidating its North American workforce into its Boca
Raton, Florida corporate offices and was closing its Toronto and Atlanta
facilities. In addition, the Company consolidated its North American research
and development and professional services resources, and further reduced its
administrative support functions. The April Restructuring resulted in the
Company incurring an impairment charge of approximately $1.7 million in the
three months ended March 31, 2001 for the remaining book value of the assembled
workforce that was included in the other intangibles related to the Inlogic
Software, Inc. acquisition (renamed "Daleen Canada"). In addition, as of March
31, 2001, the Company wrote down approximately $1.7 million of fixed assets
related to assets which will no longer be in use as a result of the closing down
of its Atlanta and Toronto facilities.
The Company expects to incur additional charges to operations of at least
$4 million in the second quarter 2001 associated with the April Restructuring.
These charges will include expected severance to be paid, rent on idle
facilities and other costs associated with the consolidation activities.
(6) LIQUIDITY
The Company continued to experience significant operating losses in the
three months ended March 31, 2001 and has an accumulated deficit of $104.1
million at March 31, 2001. Cash and cash equivalents at March 31, 2001 were $8.3
million. Cash used in operations in the three months ended March 31, 2001 was
$11.8 million. Beyond capital expenditures, the funds used since December 31,
2000 have been primarily applied to support working capital needs and payments
related to the January restructuring.
In March 2001, the Company entered into definitive agreements for the sale
(the "Private Placement") of $27.5 million of Series F convertible preferred
stock ("Series F Preferred Stock"). The funds were placed in escrow pending
stockholder approval. See note 10.
Although the Company intends to carefully manage the uses of cash, the
Company will need alternative sources of capital prior to receipt of funds
described in note 10. The alternative sources of capital likely will be in the
form of debt securities, possibly with an equity component ("bridge financing").
The Company has not yet identified the source of the bridge financing nor can
they predict whether the bridge financing can be obtained or, if obtained, the
terms of such financing.
Management believes that the cash on hand, the bridge financing, the net
proceeds of the Private Placement, together with the reduction of costs achieved
by the January Restructuring and the April Restructuring will enable the Company
to meet its financial obligations through 2001. Failure to obtain the
stockholder approval of the Private Placement by July 30, 2001 and receive the
proceeds of the Private Placement from escrow will have a materially adverse
effect on the Company's ability to continue to operate as a going concern.
(7) GOODWILL
Goodwill represents the excess of the cost to acquire Daleen Canada over the
fair value of the assets and liabilities purchased. Goodwill is being amortized
on a straight-line basis over four years, the expected period to be benefited.
The Company assesses the recoverability of goodwill by determining whether
the amortization of the goodwill over the remaining life can be recovered
through undiscounted future operating cash flows over the remaining amortization
period. The Company's carrying value of goodwill would be reduced by the
estimated shortfall of cash flows, discounted at a rate commensurate with the
associated risks. The assessment of the recoverability of goodwill will be
impacted if the estimated future operating cash flows are not achieved.
In March 2001, the Company reduced goodwill by approximately $1.1 million
due to certain gateway products acquired from Daleen Canada which the Company
does not plan to promote and license in the future. In connection with this
decision, the Company accelerated the amortization for a proportionate amount
of goodwill related to these products.
At March 31, 2001, management believes the $38.2 million net book value of
goodwill is recoverable from future cash flows over the remaining amortization
period. However, the business environment in which the Company is operating is
changing rapidly. In addition, the Company's liquidity situation (see note 6)
and the resultant actions taken by management in 2001 to restructure the
Company (see note 5) will result in management continuing to review during 2001
the recoverability of all long-lived assets, including goodwill. In light of
the Company's current operating environment, future projected cash flows may be
subject to significant variability. As a result, it is possible that the
Company will recognize impairment charges related to goodwill in 2001.
(8) BUSINESS AND CREDIT CONCENTRATIONS
During the three months ended March 31, 2001, 28.2% of the Company's total
revenue was attributed to one customer. For the three months ended March 31,
2000, 20.6% of the Company's total revenue was attributed to two customers.
(9) RELATED PARTY TRANSACTIONS
In January 2001 the Company loaned its Chairman and Chief Executive Officer
and his wholly-owned limited partnership ("Makers") $1,237,823. The loan bears
interest at a rate of 8.75% per annum. The principal and any unpaid accrued
interest are payable in full January 31, 2006. The loan is secured by 901,941
shares of the Company's common stock, and is non-recourse to the Makers except
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to the extent of the collateral. As a result of the note being non-recourse, the
Company has recorded an allowance for the difference between the face value of
the note plus accrued interest and the fair market value of the underlying
collateral. At March 31, 2001, the allowance was approximately $275,000.
(10) SERIES F PREFERRED STOCK
On March 30, 2001, the Company entered into definitive agreements
(collectively, the "Purchase Agreements") for the Private Placement of
$27.5 million of Series F preferred stock and warrants to purchase preferred
stock ("the Warrants"). The consummation of the Private Placement is subject to
the receipt of formal approval from the Company's stockholders, including
approval of an amendment to the Company's Certificate of Incorporation to
increase the number of authorized shares of common stock and to create and
designate the Series F Preferred Stock. The purchasers deposited $27.5 million
in escrow. These escrowed funds will be released to the Company upon receipt of
stockholder approval by July 30, 2001. If the Company does not obtain
stockholder approval on or before July 30, 2001, or such later date as may be
agreed upon in writing by the Company and the purchasers, the Private Placement
will be deemed null and void and the escrow funds will be returned to the
purchasers. Pursuant to the Company's Certificate of Incorporation, the approval
of the holders of 66 2/3% of the Company's outstanding common stock will be
required to amend the Company's Certificate of Incorporation to increase the
number of shares of authorized common stock and to create and designate the
terms of the Series F Preferred Stock. Both of these amendments are required for
the consummation of the Private Placement. Certain stockholders of the Company,
including stockholders that have agreed to purchase Series F Preferred Stock and
Warrants in the Private Placement, as well as the directors of the Company and
their affiliates, have agreed to vote their shares of the Company's common stock
in favor of the Private Placement. These stockholders own approximately 51.3% of
the outstanding common stock of the Company. Accordingly, the Company must
obtain the approval of the holders of an additional 15.4% of the outstanding
common stock in order to obtain stockholder approval.
Pursuant to the terms of the Purchase Agreements, the Company will issue and
sell (i) an aggregate of 247,882 shares of Series F Preferred Stock and (ii)
Warrants to purchase an aggregate of 99,153 shares of Series F Preferred Stock.
Upon consummation of the Private Placement, the Company will also issue to the
placement agent Warrants for the purchase of 9,915 shares of Series F Preferred
Stock and will pay the placement agent $1.2 million. The purchase price per
share of the Series F Preferred Stock is $110.94, which is equal to (i) the
average closing price per share of the Company's common stock during the ten
trading days ending on March 30, 2001, multiplied by (ii) 100, the number of
shares of common stock initially issuable upon conversion of a share of Series F
Preferred Stock. Each share of Series F Preferred Stock will be convertible at
any time at the option of the holder. Each share of Series F Preferred Stock
initially will be convertible into 100 shares of common stock of the Company.
The conversion price is subject to a limited one time adjustment ("the reset")
in the event the average market price per share of the common stock for ten
consecutive trading days beginning with the next trading day immediately
following the date on which the Company issues an earning release for the
quarter ended June 30, 2001 is less than the conversion price. The term
"earnings release" means (i) a press release issued by us after March 30, 2001,
providing any material financial metrics regarding revenue or estimated revenue
or earnings or estimated earnings for the quarter ended June 30, 2001, or (ii) a
press release issued by us announcing our actual total revenue for the quarter
ended June 30, 2001. The conversion price will be adjusted automatically to the
higher of (A) average market price or (B) 75% of the initial conversion price.
On April 10, 2001 the Company issued an earnings release, which resulted in a
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reset of $0.923. The conversion price will be adjusted to $0.923 unless there is
a lower reset following a subsequent earnings release. In no event will the
conversion price be less than $0.8321 as a result of the reset.
In the event the Company issues common stock or securities convertible into
common stock at a price per share less than the conversion price of the Series F
Preferred Stock, the conversion price will be reduced to be equal to the price
per share of the securities sold by the Company. This adjustment provision is
subject to a number of exceptions, including the issuance of stock or options to
employees and the issuance of stock or options in connection with acquisitions.
The conversion price will also be subject to adjustment as a result of stock
splits and stock dividends on the common stock.
The Series F Preferred Stock will automatically convert into common stock at
any time after March 30, 2002 if the common stock trades on The Nasdaq National
Market at a price per share of at least $3.3282 for ten trading days within any
twenty day trading period.
In the event the Company pays dividends on its common stock, the holders of
the Series F Preferred Stock would be entitled to dividends on an
as-if-converted basis.
In the event of an acquisition of the Company by another entity, the Company
will be required to redeem all of the issued and outstanding shares of Series F
Preferred Stock unless the holders of the Series F Preferred Stock otherwise
consent.
The Company granted to the purchasers certain demand and piggyback
registration rights.
(11) STOCK OPTION PLAN - PARTNERCOMMUNITY, INC.
In 2001, the Company approved the 2000 Stock Incentive Plan (the "PC Plan")
for its subsidiary, PartnerCommunity, Inc. The PC Plan authorized
PartnerCommunity, Inc. to issue stock incentives not to exceed 2,500,000 shares
of PartnerCommunity, Inc. common stock and includes incentive stock options and
non-qualified stock option transactions. Employees and key persons of
PartnerCommunity, Inc. selected by the Board of Directors of PartnerCommunity,
Inc are eligible for the grant of stock incentives under the PC Plan. Only
employees of PartnerCommunity, Inc. shall be eligible to receive a grant of
ISO's. The concentrated life of options granted is ten (10) years from grant
date for incentive stock options and non-qualified stock options granted to
other than 10% stockholders and five (5) years for incentive stock options
granted to 10% stockholders. In January 2001, PartnerCommunity, Inc granted
options to purchase 787,000 shares of PartnerCommunity, Inc. common stock under
the PC Plan to employees at $.70 per share.
(12) NEW ACCOUNTING PRONOUNCEMENTS
In September 2000, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 140 ("SFAS No. 140"),
"ACCOUNTING FOR TRANSFER AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS
OF LIABILITIES. SFAS No. 140 provides guidance on accounting for (1)
securitization transactions involving financial assets; (2) sales of financial
assets (including loan participations); (3) factoring transactions; (4) wash
sales; (5) servicing assets and liabilities; (6) collateralized borrowing
arrangements; (7) securities lending transactions; (8) repurchase agreements;
and (9) extinguishment of liabilities. The provisions of SFAS No. 140 will
become effective for transactions entered into after March 31, 2001. The Company
believes the adoption of SFAS No. 140 will not have a significant impact of the
Company's financial position or operating results.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following should be read in conjunction with the unaudited condensed
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, 2000.
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, 2000 filed with the Securities and Exchange Commission on April 5,
2001. 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
We are a provider of Internet software solutions that manage the revenue
chain for next-generation service providers, enterprise business and technology
solutions providers. Our RevChain(TM) product family enables service providers
to automate and manage their entire revenue chain including services, customers,
orders and fulfillment and billing and settlement across the span of the
enterprise. Our RevChain solutions extend from the back office to interfacing
with customers, whether through the Internet or with customer service
representatives, and manage mutual service offerings across partner
relationships. These modular solutions integrate with third-party solutions and
deliver proven scalability, making the software highly adaptable and ready for
the future. As a result, service providers, enterprise business and technology
solutions providers are able to accelerate time-to-revenue, rapidly adapt to new
opportunities, and leverage the power of the Internet, thereby providing a
competitive advantage in their business. In addition to our products, we offer
professional consulting services, training, maintenance, support and third-party
software fulfillment related to the products we develop.
In recent years we have invested heavily in research and development, sales
and marketing, and general operating expenses in order to increase our market
position, develop our products and build our infrastructure. As a result of
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reduction in market growth in the second half of 2000 combined with reduced
information technology spending, we implemented a series of extensive
restructuring actions in 2001 which we expect will result in a reduction of
future operating costs in areas such as compensation and benefits, facilities,
capitalized expenditures, travel costs and other operating costs. On January 5,
2001 ("January Restructuring"), we executed specific cost reduction measures
including reduction in the number of employees, consolidation of certain
business activities and asset writedowns. On April 10, 2001 ("April
Restructuring"), we implemented additional cost reduction and restructuring
measures including the consolidation of our North American workforce into our
Boca Raton, Florida corporate office and the closing of both our Atlanta and
Toronto facilities. In addition, we consolidated our North American research and
development and professional services resources and further reduced our
administrative support functions.
Historically, we have operated our business with primarily a direct sales
model. Our products and services were sold through our direct sales force. Our
strategic alliance partners, including operation support system providers, other
software application companies, consulting firms and system integration firms
provided some level of sales and marketing support to deliver a complete
solution and successful implementation to our customers. Changes in both
customer requirements and the overall market environment required that we make
adjustments in our direct sales model to meet our goals of creating a
profitable, sustainable business model. As a result, we will be increasing our
focus on implementing a broader "go-to-market" model and distribution strategy
including building strong relationships with strategic alliance partners,
software application providers and hardware manufacturers. Our new distribution
strategy will include maintaining a reduced direct sales force to address
customer-purchasing preferences. The launch of our RevChain product family in
the first quarter provided the foundation for the evolution of our business
model and distribution strategy. Our new RevChain product line, associated
positioning, packaging and underlying pure Internet architecture provide the
added-value and competitive differentiation we believe are critical to attract
and maintain relationships with partners critical to our overall success. 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000
TOTAL REVENUE. Total revenue, which includes license revenue and
professional services and other revenue, decreased $3.8 million, or 42.3%, to
$5.2 million in the three months ended March 31, 2001 from $9.0 million for the
same period in 2000. The primary reason for lower revenue during the recent
quarter related to a decrease in license revenue due to fewer license contracts
being signed in the first quarter 2001 than the first quarter 2000. This
decrease was slightly offset by an increase in services revenue due to ongoing
product implementations and increased revenue primarily due to maintenance and
support agreements.
LICENSE FEES. Our license fees are derived from licensing our software
products. License fees decreased $4.0 million, or 70.0%, in the three months
ended March 31, 2001 to $1.7 million compared to $5.7 million for the same
period in 2000. This decrease was due to fewer license contracts being signed in
the first quarter 2001 compared to the same period in 2000. The primary reasons
for this reduction include an overall reduction in technology spending, market
conditions in our industry, lengthening of the sales cycle and postponement of
customer licensing decisions. License fees constituted 33.0% of total revenue in
the three months ended March 31, 2001, compared to 63.6% in the same period in
2000.
PROFESSIONAL SERVICES AND OTHER. Our professional services and other
consists of revenue from professional consulting services, training, maintenance
and support, and third party software fulfillment, all related to the software
products we develop and license. Consulting services are offered on a price
established "bundled" basis and on a time and materials basis. Third party
software fulfillment is offered on a "cost plus" basis. Professional services
and other revenue increased $194,000, or 6.0%, in the three months ended March
31, 2001 to $3.5 million, compared to $3.3 million in the same period in 2000.
The increase was due to ongoing product implementations and increased revenue
related to maintenance and support contracts. Professional services and other
revenue constituted 66.9% of total revenue in the three months ended March 31,
2001, compared to 36.4% for the same period in 2000. The increase as a
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percentage of total revenue is due to a reduction in license revenue in the
quarter.
TOTAL COST OF REVENUE. Total cost of revenue increased $394,000, or 12.8%,
to $3.5 million in the three months ended March 31, 2001 from $3.1 million in
the same period in 2000. Total cost of revenue includes both cost of license
fees and cost of professional services and other. These components include the
cost of direct labor, benefits, overhead and materials associated with the
fulfillment and delivery of license products, and related corporate overhead
costs to provide professional services to our customers. These costs increased
as we hired additional personnel in 2000 to support new and existing
implementations that we performed for our software products. Overall, total cost
of revenue as a percentage of total revenue increased to 67.3% in the three
months ended March 31, 2001, compared to 34.4% in the same period in 2000. This
increase resulted from the increase in total cost of revenue and the decrease in
total revenue.
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. Cost of license fees decreased to $47,000, or 70.2%, in the three
months ended March 31, 2001, from $158,000 in the same period in 2000 due to
fewer license contracts being signed in the three months ended March 31, 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 increased $505,000, or 17.2%,
to $3.4 million in the three months ended March 31, 2001, from $2.9 million in
the same period in 2000. These costs increased as we hired additional personnel
in 2000 to support new and existing implementations and to be able to deploy
more resources in order to respond to specific customer requests and issues.
Cost of professional services and other increased to 99.3% of professional
services and other revenue in 2001, compared to 89.8% in 2000 due to the
additional personnel hired who were not fully utilized. We expect professional
services and other costs and this percentage to be reduced in future quarters
due to the January Restructuring and April 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
increased $1.2 million or 36.5%, to $4.3 million in the three months ended March
31, 2001, from $3.2 million for the same period in 2000. The overall increase
was due to the increase in the number of personnel in the sales, marketing and
partner management organizations from 2000 to 2001. In addition, the increase
was due to the costs associated with launching our RevChain product family in
three months ended March 31, 2001. As a percentage of revenue, these expenses
increased from 35.3% in 2000 to 83.6% in 2001. We expect sales and marketing
costs and this percentage to be reduced in the future due to the January
Restructuring and April 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
increased $341,000, or 6.8%, to $5.3 million in the three months ended March 31,
2001, from $5.0 million for the same period in 2000. The overall increase was
primarily the result of development efforts associated with additional products
and upgrades and functional enhancements to our products. In addition, the use
of subcontractors increased in order to accelerate development of new releases
of our product and provide additional functionality. As a percentage of revenue,
these expenses increased from 55.7% in 2000 to 103.1% in 2001. This was a direct
result of the increased expenses and lower revenue recognized in the three
months ended March 31, 2001 compared to the same period in 2000. We expect
research and development costs and this percentage to be reduced in the future
due to the January Restructuring and April Restructuring.
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GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of salaries, benefits and related costs for our executive, finance and
accounting, human resources and information systems personnel, facility costs
and related corporate overhead. It also consists of non-cash stock compensation
expense and related corporate overhead costs. Our general and administrative
expenses decreased $698,000, or 17.4%, to $3.3 million in the three months ended
March 31, 2001, from $4.0 million in the same period in 2000. This decrease was
primarily the result of a decrease in administrative personnel and
administrative costs as a result of our January Restructuring. In addition,
recruiting costs decreased substantially for the three months ended March 31,
2001 compared to the same period in 2000. As a percentage of revenue, general
and administrative expenses increased to 63.7% in the three months ended March
31, 2001 from 42.5% in the same period in 2000. This was a direct result of the
lower revenue recognized in the three months ended March 31, 2001 compared to
the same period in 2000. We expect general and administrative costs to be
reduced in the future due to the January Restructuring and April Restructuring.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Goodwill and other
intangibles are being amortized over a four-year period. Amortization expense
increased $1.3 million, or 34.4% to $4.9 million in the three months ended March
31, 2001 from $3.7 million for the same period in 2000. This was primarily
due to the accelerated amortization we recorded in the three months ended March
31, 2001 related to certain gateway products acquired from Inlogic Software,
Inc. on December 16, 1999 (renamed "Daleen Canada) which we do not plan to
promote and license in the future.
NONOPERATING INCOME. Nonoperating income is comprised primarily of interest
income, net of interest expense. Nonoperating income decreased $604,000, or
75.6%, to $195,000 in the three months ended March 31, 2001 from $798,000 for
the same period in 2000. This was primarily attributable to the decrease in
investment earnings due to the decrease in our cash balance in 2001 compared to
2000.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2001, our total cash and cash equivalents totaled $8.3 million.
Beyond our capital expenditures, the funds used since December 31, 2000 have
been primarily applied to support our working capital needs and payments related
to the January Restructuring.
Net cash used in operating activities was $11.8 million for the three months
ended March 31, 2001, compared to $9.7 million for the three months ended March
31, 2000. The principal use of cash for both periods was to fund our losses from
operations.
Net cash used in financing activities was $132,000 for the three
months ended March 31, 2001, compared to $4.5 million for the three months ended
March 31, 2000. In 2001, the principal use of cash was for the payment of
expenses related to the Series F Preferred Stock Offering. In 2000, we paid
dividends to the former stockholders of Daleen Canada, which were declared prior
to our acquisition of this company.
Net cash used in investing activities was $2.1 million for the three months
ended March 31, 2001 compared to $1.3 million for the three months ended March
31, 2000. The cash was principally used for capital expenditures in the ordinary
course of business in the three months ended March 31, 2000. The Company reduced
its capital expenditures in the three months ended March 31, 2001. The use of
cash in 2001 was primarily related to the note receivable issued to our Chairman
and Chief Executive Officer for approximately $1.2 million.
We continued to experience significant operating losses in the three months
ended March 31, 2001. The business environment in which we are operating is
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changing rapidly and there is continued weakness in the market conditions. In
addition, we will recognize additional restructuring charges in the second
quarter 2001 including certain charges related to employee severance, lease
termination costs, and other miscellaneous operating costs associated with the
restructuring actions. The January Restructuring and April Restructuring are
expected to result in reduced operating expense levels and reduced cash
requirements on a quarterly basis going forward.
In March 2001, we entered into definitive agreements (the "Purchase
Agreements") for the sale ("Private Placement") of $27.5 million of Series F
convertible preferred stock ("Series F Preferred Stock") and warrants to
purchase preferred stock ("the Warrants"). The $27.5 million purchase price has
been placed in escrow pending receipt of stockholders approval. The consummation
of the Private Placement is subject to receipt of stockholder approval (the
"Requisite Stockholder Approval"). The stockholders will vote on such matters at
the annual meeting of stockholders currently scheduled for June 7, 2001.
Pursuant to our Certificate of Incorporation, the approval of the holders of 66
2/3 % of our outstanding common stock will be required to amend our Certificate
of Incorporation to increase the number of shares of authorized common stock and
to create and designate the terms of the Series F Preferred Stock. Both of these
amendments are required for the consummation of the Private Placement. Certain
of our stockholders who own approximately 51.3% of our outstanding common stock,
have agreed to vote in favor of the Private Placement and related matter. In the
event more than 66 2/3% of our stockholders do not approve the Private Placement
by July 30, 2001, or such later date as agreed in writing by us and the
purchasers, the funds held in escrow will be returned to the purchasers. In such
case, our cash on hand will not be sufficient to allow us to sustain our
operations and meet our financial obligations in 2001. We believe that receipt
of Requisite Stockholder Approval is reasonably likely but no assurances can be
given.
In addition to executing its current business plan, we may consider
additional options, which include, but are not limited to, forming strategic
partnerships or alliances and/or considering other strategic alternatives.
There can be no assurance that we will be able to realize our strategic
alternatives on favorable terms or at all.
Although we intend to carefully manage our uses of cash, we will need
alternative sources of capital prior to our receipt of the funds from the
Private Placement. The alternative sources of capital likely will be in the form
of debt securities, possibly with an equity component ("bridge financing"). We
have not yet identified the source of the bridge financing nor can we predict
whether bridge financing can be obtained or, if obtained, the terms of such
financing.
We believe that the cash on hand, the bridge financing, the net proceeds of
the Private Placement, together with the reduction of costs achieved by the
January Restructuring and the April Restructuring will be sufficient to meet our
anticipated cash needs in 2001. Failure to obtain the Requisite Stockholder
Approval of the Private Placement will have a materially adverse effect on our
ability to meet our financial obligations. We may require additional funds to
support our working capital requirements, support our international and business
development expansion efforts or for other purposes. Additionally, we may seek
to raise additional funds through public or private equity financing or from
other sources. There can be no assurance that additional financing will be
available at all or that, if available, the financing will be obtainable on
terms favorable to us or that any additional financing would not be dilutive.
NEW ACCOUNTING PRONOUNCEMENTS
In September 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 140 ("SFAS No. 140"),
"ACCOUNTING FOR TRANSFER AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS
OF LIABILITIES (A REPLACEMENT OF SFAS NO. 125)". SFAS No. 140 provides guidance
on accounting for (1) securitization transactions involving financial assets;
(2) sales of financial assets (including loan participations); (3) factoring
transactions; (4) wash sales; (5) servicing assets and liabilities; (6)
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collateralized borrowing arrangements; (7) securities lending transactions; (8)
repurchase agreements; and (9) extinguishment of liabilities. The provisions of
SFAS No. 140 will become effective for transactions entered into after March 31,
2001. The adoption of SFAS No. 140 will not have a significant impact on our
consolidated 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. 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.
ADDITIONAL CAPITAL FROM PRIVATE PLACEMENT REQUIRED TO FUND OPERATIONS FOR THE
REMAINDER OF 2001.
Current cash and cash equivalents will be insufficient to fund operations
for the remainder of 2001. Our cash and cash equivalents at March 31, 2001 were
$8.3 million. Cash used in operations for the three months ended March 31, 2001
was $12.0 million. During this period, we incurred significant costs related to
development of our products, entrance into international markets, marketing
programs and severance payments related to the January Restructuring. The
January Restructuring included a reduction in the number of employees, reduction
of office space, consolidation of certain business activities and asset
writedowns. We also implemented additional cost reduction measures related
to the April Restructuring including a further reduction in workforce,
consolidation of our facilities and closure of our Atlanta and Toronto offices.
In addition, we consolidated our North American research and development and
professional services resources and further reduced our administrative support
functions.
We believe the current cash and cash equivalents will be insufficient to
fund our operations for the remainder of 2001. As a result, the independent
auditor's report covering our December 31, 2000 consolidated financial
statements and financial statement schedule was modified to reflect such
concerns. See Management's Discussion and Analysis of Financial Condition and
Results of Operations for further information.
In order to address our liquidity issue and to strengthen our balance sheet,
on March 30, 2001, we entered into Purchase Agreements for the Private Placement
of $27.5 million of Series F Preferred Stock. The proceeds from the Private
Placement were placed in escrow pending receipt of stockholder approval of the
Private Placement. Pursuant to our Certificate of Incorporation, the approval of
the holders of 66 2/3% of our outstanding common stock will be required to amend
our Certificate of Incorporation to increase the number of shares of authorized
common stock and to create and designate the terms of the Series F Preferred
Stock. Both of these amendments are required for the consummation of the Private
Placement. In the event the holders of at least 66 2/3% of our common stock do
not approve the Private Placement by July 30, 2001, or such later date as the
purchasers and we may subsequently agree in writing, the funds held in escrow
will be returned to the purchasers. The stockholders will vote on such matters
at the annual stockholders' meeting, currently scheduled for June 7, 2001.
Certain of our stockholders, including stockholders that have agreed to purchase
Series F Preferred Stock and Warrants in the Private Placement as well as our
directors and their affiliates, have agreed to vote their shares of our common
stock in favor of the Private Placement. These stockholders own approximately
51.3% of our outstanding common stock. Accordingly, we must obtain Requisite
Stockholder Approval. We believe that receipt of Requisite Stockholder Approval
is reasonably likely but no assurances can be given.
Although we intend to carefully manage our uses of cash, we will need
a bridge financing to provide alternative sources of capital prior to our
receipt of the funds from the Private Placement. The bridge financing likely
will be in the form of debt securities, possibly with an equity component. We
have not yet identified the source of this additional financing nor can we
predict whether additional financing can be obtained or, if obtained, the terms
of such financing.
Unless we obtain adequate additional funding we will be required to further
reduce or modify our capital expenditures and to reduce our operations. These
changes resulting from lack of capital would adversely affect our business,
results of operations and financial condition and will significantly impact our
status as a going concern.
We also announced the January Restructuring and April Restructuring in an
attempt to reduce certain operating costs.
The proceeds from the Private Placement and the cost reductions contemplated
by the January Restructuring and April Restructuring are necessary for us to
sustain operations and meet our financial obligations for the remainder of 2001.
If the Private Placement is not completed, we will be required to
immediately seek alternative sources of financing. We cannot assure you on what
terms alternative financing might be available or that we will be able to secure
alternative sources of financing at all.
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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 $22.3 million for the three months
ended March 31, 2001. As of March 31, 2001, we had an accumulated deficit of
approximately $104.1 million. We have not realized any profit to date and do not
expect to achieve profitability until the second half of 2001, which may not
occur. To achieve this objective, we need to generate significant additional
revenue from licensing of our products and related services and support
revenues. We expect to reduce our fixed operating expenses through the
implementation of our January Restructuring and April Restructuring, which
included workforce reductions, consolidation of facilities and departments,
asset writedowns, and other miscellaneous cost reductions. We consolidated our
North American workforce into our Boca Raton, Florida facility and we closed our
Toronto and Atlanta offices. We also consolidated our North American research
and development and professional services resources. There is no assurance we
will achieve these objectives and thus achieve profitability. 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 QUARTERLY OPERATING RESULTS MAY FLUCTUATE IN FUTURE PERIODS, AND WE MAY FAIL
TO MEET EXPECTATIONS.
Our revenue and operating results may vary significantly from quarter to
quarter due to a number of factors. This fluctuation may cause our operating
results to be below the expectations of public market analysts and investors,
and the price of our common stock may fall. Factors that could cause quarterly
fluctuations include:
o Variations in demand for our products and services;
o Competitive pressures;
o Further decrease in corporate information technology spending and
decline in economic conditions and market;
o Prospective customers delaying their decision to acquire licenses for
our products;
o Our quarterly revenue and expense levels;
o Our ability to develop and attain market acceptance of enhancements to
the RevChain product family 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 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. 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
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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. In addition, a substantial
portion of our costs are relatively fixed and based upon anticipated revenue. A
failure to book an expected order in a given quarter would not be offset by a
corresponding reduction in costs and could adversely affect our operating
results.
THE LOW PRICE OF OUR COMMON STOCK COULD RESULT IN THE DELISTING OF OUR COMMON
STOCK FROM THE NASDAQ NATIONAL MARKET.
Our common stock is currently quoted on The Nasdaq National Market. We must
satisfy Nasdaq's minimum listing maintenance requirements to maintain our
listing on The Nasdaq National Market. Nasdaq listing maintenance requirements
include a series of financial tests relating to net tangible assets, public
float, number of market makers and shareholders, market capitalization, and
maintaining a minimum bid price of $1.00 for shares of our common stock. The
minimum closing bid price of our common stock has recently dropped to under
$1.00 per share. If the minimum bid price of our common stock were to remain
below $1.00 for 30 consecutive trading days, or if we are unable to continue to
meet Nasdaq's standards for any other reason, our common stock could be delisted
from The Nasdaq National Market. If our common stock is delisted from The Nasdaq
National Market, the common stock would trade on either The Nasdaq SmallCap
Market or on the OTC Bulletin Board, both of which are viewed by most investors
as less desirable and less liquid marketplaces. Thus, delisting from The Nasdaq
National Market could make trading our shares more difficult for investors,
leading to further declines in share price. It would also make it more difficult
for us to raise additional capital. In addition, we would incur additional costs
under state blue sky laws to sell equity if our common stock is delisted from
The Nasdaq National Market.
WE ARE INVOLVED IN LEGAL PROCEEDINGS AGAINST CERTAIN FORMER STOCKHOLDERS OF
INLOGIC SOFTWARE INC., WHICH PROCEEDINGS, IF DETERMINED ADVERSELY TO US, COULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL CONDITION.
On May 11, 2001, we commenced a lawsuit against Mohammad Aamir, 1303949
Ontario Inc. and The Vengrowth Investment Fund Inc. (collectively, the
"Defendants"). The case was filed in the Ontario Superior Court of Justice
(Court File No. 01-CV-210809) and is styled DALEEN TECHNOLOGIES, INC. AND DALEEN
CANADA CORPORATION V. MOHAMMAD AAMIR, 1303949 ONTARIO INC., AND THE VENGROWTH
INVESTMENT FUND INC. All Defendants are former stockholders of Inlogic Software
Inc. ("Inlogic"), a Nova Scotia unlimited liability company that we acquired in
December 1999. Additionally, Mr. Aamir was the president and chief executive
officer of Inlogic.
We acquired Inlogic pursuant to a Share Purchase Agreement dated
December 16, 1999. In our Statement of Claim, we seek indemnification from the
Defendants in the amount of [Cdn] $15 million plus restitution of a further Cdn
$140,000, along with interest and attorney's fees and expenses. We seek this
relief based, among other things, on our allegations that the Defendants
breached certain representations and warranties that they made in the Share
Purchase Agreement, including representations and warranties related to their
business and financial plans, products, customer relationships and intellectual
properties. We currently are considering additional legal action that may be
available to us against the Defendants in connection with our acquisition of
Inlogic. Based on our prior communications with the Defendants, we anticipate
that the Defendants may likely file a counterclaim or other legal action against
us seeking substantial damages based upon the Defendants' allegations that we
breached certain of our representations and warranties in the Share Purchase
Agreement. In the event the Defendants file a counterclaim or other action
against us, it is our intention to vigorously defend against such claims. No
assurance can be given as to the ultimate outcome of these legal proceedings or
the impact that these proceedings or any threatened actions will have on our
business or operations. Further, these proceedings may require a significant
amount of time from our executive officers and directors, which may have a
material adverse impact on our business and operations.
WE FACE SIGNIFICANT COMPETITION FROM COMPANIES THAT MAY HAVE GREATER RESOURCES
THAN WE DO.
The markets in which we compete are relatively new, intensely competitive,
highly fragmented and rapidly changing. In some markets, limited capital
resources are causing reduced spending in information technology. We expect
competition to increase in the future, both from existing competitors as well as
new entrants in our current markets. Our principal competitors include other
internet enabled billing and customer care system providers, operation support
system providers, systems integrators and service bureaus, and the internal
information technology departments of larger communications companies, which may
elect to develop functionalities similar to those provided by our product
in-house rather than buying them from us. Many of our current and future
competitors may have advantages over us, including:
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, that would increase their
ability to compete with us. In addition, competitors may be able to adapt more
quickly than we can to new or emerging technologies and changes in customer
needs, or to devote more resources to promoting and selling their products. If
we fail to adapt to market demands and to compete successfully with existing and
new competitors, our business and financial performance would suffer.
WE DEPEND ON STRATEGIC BUSINESS ALLIANCES TO SELL AND IMPLEMENT OUR PRODUCTS,
AND ANY FAILURE TO DEVELOP OR MAINTAIN THESE ALLIANCES COULD HURT OUR FUTURE
GROWTH.
Third parties such as operation support system providers, other software
firms, consulting firms and systems integration firms help us with marketing and
sales and implementation of our products. We plan to increase our reliance on
systems integration firms to implement our products. To be successful, we must
maintain our relationships with these firms, develop additional similar
relationships and generate new business opportunities through joint marketing
and sales efforts. We may encounter difficulties in forging and maintaining
long-term relationships with these firms for a variety of reasons. These firms
may discontinue their relationships with us, fail to devote sufficient resources
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to market our products or develop relationships with our competitors. Many of
these firms also work with competing software companies, and our success will
depend on their willingness and ability to devote sufficient resources and
efforts to marketing our products versus the products of others. In addition,
these firms may delay the product implementation or negatively affect our
customer relationships. Our agreements with these firms typically are in the
form of a non-exclusive referral fee or license and package discount arrangement
that may be terminated by either party without cause or penalty and with limited
notice.
IF OUR CUSTOMERS CANNOT SECURE ADEQUATE FINANCING, WE MAY NOT MAINTAIN THEIR
BUSINESS OR WE MAY NOT BE ABLE TO RECOGNIZE REVENUE AS QUICKLY, IF AT ALL.
Many of our potential customers are new entrants into their markets and lack
significant financial resources. These companies rely to a large degree on
access to the capital markets for growth which have cut back over the past
several months. Their failure to raise capital has hurt their financial
viability and their ability to purchase our products. The lack of funding has
caused potential customers to reduce information technology spending. If our
potential customers cannot obtain the resources to purchase our products, they
may turn to other options such as service bureaus, which would hurt our
business. Also, because we do at times provide financing arrangements to
customers, their ability to make payments to us may impact when we can recognize
revenue.
The revenue growth and profitability of our business depends significantly
on the overall demand for software products and services that manage the revenue
chain as it has been defined, particularly in the product and service segments
in which we compete. Softening demand for these products and services caused by
worsening economic conditions may result in decreased revenues or earning levels
or growth rates. The U.S. economy has weakened over the past year. This has
resulted in companies delaying or reducing expenditures, such as for information
technology.
In addition, our current customers' ability to generate revenues or
otherwise obtain capital could adversely impact on their ability to purchase
additional products or renew maintenance and support agreements with us. If they
go out of business there will be no future licenses 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 or
declaring bankruptcy may cause our accounts receivable to continue to increase.
There is no assurance we will be able to collect all of these outstanding
receivables.
OUR LENGTHY SALES CYCLE MAKES IT DIFFICULT TO ANTICIPATE THE TIMING OF SALES,
AND REVENUE MAY VARY FROM PERIOD TO PERIOD.
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.
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THE PRICE OF OUR COMMON STOCK HAS BEEN, AND WILL CONTINUE TO BE VOLATILE.
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 and telecommunications industry.
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, and which we believe have often been
unrelated to the operating performance of these companies or our company.
OUR STRATEGY TO EXPAND INTO INTERNATIONAL MARKETS 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 strategic relationships and internal business expansion. 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;
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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 and trade barriers.
To the extent that we are unable to successfully manage expansion of our
business into international markets due to any of the foregoing factors, our
business could be adversely affected.
WE RECENTLY INTRODUCED OUR REVCHAIN FAMILY OF INDUSTRY-FOCUSED SOFTWARE SUITES,
THE SUCCESS OF WHICH WILL BE DEPENDENT UPON MARKET ACCEPTANCE.
We introduced the RevChain product family in early 2001. This new product
family is an evolution of our former customer management and billing products
that were significantly enhanced and re-positioned to address the customer need
for managing the entire revenue chain. The RevChain product family consists of
several industry-focused suites, some of which are in the early stages of their
release, and are undergoing further development. As a result, the market's
acceptance of our new RevChain product family, and the maturity of some of the
industry-focused product suites, may have an affect on our business and
financial performance, including our revenues.
IF WE DO NOT CONTINUALLY ENHANCE OUR PRODUCT OFFERING TO MEET THE CHANGING NEEDS
OF SERVICE PROVIDERS, 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. If we are unable to anticipate or respond adequately to customer needs,
we will lose business and our financial performance will suffer.
IF WE CANNOT CONTINUE TO OBTAIN OR IMPLEMENT THE THIRD-PARTY SOFTWARE THAT WE
INCORPORATE INTO OUR PRODUCT OFFERING, WE MAY HAVE TO DELAY OUR PRODUCT
DEVELOPMENT OR REDESIGN EFFORTS.
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.
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,
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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 DIVERT OUR
RESOURCES, RESULT IN UNEXPECTED LICENSE FEES 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 develop 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.
Our future success depends to a significant extent on the continued services
of our senior management and other key personnel, particularly James Daleen, our
founder and chief executive officer. If we lost the services of Mr. Daleen or
other key employees it would likely hurt our business. We have employment and
non-compete agreements with some of our executive officers, including Mr.
Daleen. However, these agreements do not obligate them to continue working for
us.
PRODUCT DEFECTS OR SOFTWARE ERRORS COULD ADVERSELY AFFECT OUR BUSINESS DUE TO
COSTLY REDESIGNS, PRODUCTION DELAYS AND CUSTOMER DISSATISFACTION.
Design defects or software errors in our products may cause delays in
product introductions or damage customer satisfaction, either of which could
seriously harm our business. Our software products are highly complex and may,
from time to time, contain design defects or software errors that may be
difficult to detect and correct. We have a customer support organization that is
responsible for providing maintenance and support to our customers. Maintenance
and support includes identifying and correcting any reported product defects or
software errors and our margins may be affected if the amounts of resources
needed to address these issues are substantial. 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.
POTENTIAL ACQUISITIONS OF COMPANIES OR TECHNOLOGIES COULD RESULT IN DISRUPTIONS
TO OUR BUSINESS, 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
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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 goodwill and other
intangible assets.
THE ANTI-TAKEOVER PROVISIONS WE HAVE ADOPTED 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.
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.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are the defendant in a number of lawsuits and claims incidental in our
ordinary course of business. We do not believe the outcome of any of this
litigation would have a material adverse impact on our financial position or our
results of operations.
On May 11, 2001, we commenced a lawsuit against Mohammad Aamir, 1303949
Ontario Inc. and The Vengrowth Investment Fund Inc. (collectively, the
"Defendants"). The case was filed in the Ontario Superior Court of Justice
(Court File No. 01-CV-210809) and is styled DALEEN TECHNOLOGIES, INC. AND DALEEN
CANADA CORPORATION V. MOHAMMAD AAMIR, 1303949 ONTARIO INC., AND THE VENGROWTH
INVESTMENT FUND INC. All Defendants are former stockholders of Inlogic Software
Inc. ("Inlogic"), a Nova Scotia unlimited liability company that we acquired in
December 1999. Additionally, Mr. Aamir was the president and chief executive
officer of Inlogic. We acquired Inlogic pursuant to a Share Purchase Agreement
dated December 16, 1999. In our Statement of Claim, we seek indemnification from
the Defendants in the amount of [Cdn] $15 million plus restitution of a further
Cdn $140,000, along with interest and attorney's fees and expenses. In the
alternative to the claim for indemnification we are seeking damages against the
Defendant Mohammad Aamir in the amount of Cdn $15 million. We seek this relief
based, among other things, on our allegations that the Defendants breached
certain representations and warranties that they made in the Share Purchase
Agreement, including representations and warranties related to their business
and financial plans, products, customer relationships and intellectual
properties. We currently are considering additional legal action that may be
available to us against the Defendants in connection with our acquisition of
Inlogic. Based on our prior communications with the Defendants, we anticipate
that the Defendants may file a counterclaim or other legal action against the
Company seeking substantial damages based upon the Defendants' allegations that
we breached certain of our representations and warranties in the Share Purchase
Agreement. In the event the Defendants file a counterclaim or other action
against us, it is our intention to vigorously defend against such claims. No
assurance can be given as to the ultimate outcome of these legal proceedings or
any threatened actions related to these proceedings.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit List
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.1+ Daleen Technologies, Inc. Amended & Restated 1999 Stock Incentive
Plan [incorporated by reference to Exhibit 10.37 to the Company's
Form 10-K filed on April 5, 2001 (File No. 0-27491)].
10.2+ Promissory Note and Stock Pledge Agreement dated January 11, 2001 by
and between James Daleen and J.D. Investment Company Limited
Partnership and Daleen Technologies, Inc. [incorporated by reference
to Exhibit 10.38 to the Company's Form 10-K filed on April 5, 2001
(File No. 0-27491)].
10.3+ PartnerCommunity, Inc. 2000 Stock Incentive Plan [incorporated by
reference to Exhibit 10.39 to the Company's Form 10-K filed on April
5, 2001 (File No. 0-27491)].
10.4+ Securities Purchase Agreement dated March 30, 2001 by and between
Daleen Technologies, Inc. and the Escrow Purchasers named therein
[incorporated by reference to Exhibit 10.45 to the Company's Form
10-K filed on April 5, 2001 (File No. 0-27491)].
10.5+ Form of Certificate of Amendment for the Series F Convertible
Preferred Stock [incorporated by reference to Exhibit 10.46 to the
Company's Form 10-K filed on April 5, 2001 (File No. 0-27491)].
10.6+ From of Warrant Agreement by and between Daleen Technologies, Inc.
and the Escrow Purchasers named therein [incorporated by reference
to Exhibit 10.47 to the Company's Form 10-K filed on April 5, 2001
(File No. 0-27491)].
10.7+ Registration Rights Agreement dated March 30, 2001 by and between
Daleen Technologies, Inc. and the Escrow Purchasers named therein
[incorporated by reference to Exhibit 10.48 to the Company's Form
10-K filed on April 5, 2001 (File No. 0-27491)].
10.8+ Escrow Agreement dated March 30, 2001 by and between Daleen
Technologies, Inc. and the Escrow Purchasers named therein
[incorporated by reference to Exhibit 10.49 to the Company's Form
10-K filed on April 5, 2001 (File No. 0-27491)].
10.9 Employment Agreement, dated April 21, 2000 between Steven Kim and
Daleen Technologies, Inc.
------------------
+Previously filed.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended March 31,
2001.
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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: May 15, 2001 /s/ JAMES DALEEN
--------------------------------
JAMES DALEEN
Chairman of the Board of Directors
and Chief Executive Officer
(Principal Executive Officer)
Date: May 15, 2001 /s/ STEPHEN M. WAGMAN
--------------------------------
STEPHEN M. WAGMAN
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
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