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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 SEPTEMBER 30, 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.
(Exact name of registrant as specified in Its charter)
DELAWARE 65-0944514
(State or other Jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1750 Clint Moore Road 33487
Boca Raton, Florida (Zip Code)
(Address of principal executive offices)
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 November 1, 2001, there were 21,874,528 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 SEPTEMBER 30, 2001
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Condensed Unaudited Consolidated Financial Statements.
Condensed Unaudited Consolidated Balance Sheets as of December 31, 2000 and September 30, 2001 3
Condensed Unaudited Consolidated Statements of Operations for the three months and nine months
ended September 30, 2000 and 2001 4
Condensed Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30,
2000 and 2001 5
Notes to Condensed Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. 17
Item 3. Quantitative and Qualitative Disclosures about Market Risk. 37
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 38
Item 6. Exhibits and Reports on Form 8-K 38
Signatures 40
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, September 30,
2000 2001
------------ -------------
ASSETS
Current assets:
Cash and cash equivalents $ 22,268 20,951
Restricted cash 931 30
Accounts receivable, less allowance for doubtful accounts of $4,600 at
December 31, 2000 and $4,211 at September 30, 2001 13,929 3,324
Costs in excess of billings 2,213 281
Other current assets 904 440
--------- ---------
Total current assets 40,245 25,026
Notes receivable 493 754
Property and equipment, net 10,146 5,218
Goodwill, net of accumulated amortization of $15,026 at December 31, 2000
and $50,506 at September 30, 2001 43,012 7,553
Other intangible asset, net of accumulated amortization of $786 at December 31, 2000 1,714 --
Other assets 3,852 1,595
--------- ---------
Total assets $ 99,462 40,146
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,968 1,145
Accrued payroll and other accrued expenses 12,731 5,579
Billings in excess of costs 1,466 1,292
Deferred revenue 2,944 1,374
Other current liabilities 1,061 20
--------- ---------
Total current liabilities 21,170 9,410
Long term portion of capitalized lease, net of current portion 607 --
--------- ---------
Total liabilities 21,777 9,410
--------- ---------
Minority interest 184 184
Stockholders' equity:
Series F Convertible Preferred Stock $.01 par value; 356,950 shares
authorized; none issued or outstanding at December 31, 2000; 247,882
shares issued and outstanding ($110.94 per share liquidation value) as of
September 30, 2001 -- 25,539
Preferred stock $.01 par value. Authorized 21,520,286 shares; none issued or outstanding -- --
Common stock $.01 par value. Authorized 200,000,000 shares; issued and outstanding
21,781,727 shares at December 31, 2000 and 21,872,950 shares at September 30, 2001 218 219
Stockholders' notes receivable (274) (236)
Deferred stock compensation (2,148) (129)
Additional paid-in capital 161,460 190,086
Accumulated deficit (81,755) (184,927)
--------- ---------
Total stockholders' equity 77,501 30,552
--------- ---------
Total liabilities and stockholders' equity $ 99,462 40,146
========= =========
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 Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2000 2001 2000 2001
-------- -------- -------- --------
Revenue:
License fees $ 9,456 418 22,247 3,193
Professional services and other 4,569 1,786 12,220 7,601
-------- -------- -------- --------
Total revenue 14,025 2,204 34,467 10,794
-------- -------- -------- --------
Cost of revenue:
License fees 201 1,236 586 1,604
Professional services and other 3,910 1,287 10,204 6,331
-------- -------- -------- --------
Total cost of revenue 4,111 2,523 10,790 7,935
-------- -------- -------- --------
Gross margin (deficiency) 9,914 (319) 23,677 2,859
Operating expenses:
Sales and marketing 4,061 1,826 9,896 8,781
Research and development 7,564 2,430 19,316 10,931
General and administrative 3,701 3,149 11,073 11,976
Amortization of goodwill and other intangibles 4,130 3,661 11,867 11,156
Impairment of long lived assets -- 23,408 -- 27,906
Restructuring charges -- -- -- 7,758
-------- -------- -------- --------
Total operating expenses 19,456 34,474 52,152 78,508
-------- -------- -------- --------
Operating loss (9,542) (34,793) (28,475) (75,649)
Total interest income and nonoperating income, net 488 447 1,914 989
-------- -------- -------- --------
Net loss (9,054) (34,346) (26,561) (74,660)
Less: preferred stock dividends arising from beneficial conversion features -- (2,447) -- (28,512)
-------- -------- -------- --------
Net loss applicable to common stockholders $ (9,054) (36,793) (26,561) (103,172)
======== ======== ======== ========
Net loss applicable to common stockholders per share - basic and diluted $ (0.42) (1.68) (1.23) (4.73)
======== ======== ======== ========
Weighted average shares outstanding - basic and diluted 21,755 21,870 21,635 21,823
======== ======== ======== ========
SEE ACCOMPANYING NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
4
DALEEN TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Unaudited Consolidated Statements of Cash Flows
(In thousands)
Nine Months Ended
--------------------------------
September 30, September 30,
2000 2001
------------- -------------
Cash flows from operating activities:
Net loss $(26,561) (74,660)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,571 2,808
Amortization of deferred stock compensation 495 1,628
Amortization of goodwill and other intangibles 11,867 11,156
Loss on disposal of fixed assets -- 1,992
Impairment of long-lived assets and other assets -- 30,106
Bad debt expense 1,055 2,653
Interest income on stockholders notes receivable (23) (126)
Non cash stock settlement expense -- 495
Changes in assets and liabilities:
Restricted cash (805) 101
Accounts receivable (11,356) 8,983
Costs in excess of billings (1,292) 1,928
Other current assets (1,074) 53
Other assets 418 (158)
Accounts payable 1,216 (1,810)
Accrued payroll and other accrued expenses (2,096) (6,489)
Billings in excess of costs 434 (175)
Deferred revenue 2,554 (1,526)
Other current liabilities 280 (954)
-------- --------
Net cash used in operating activities (23,317) (23,995)
-------- --------
Cash flows provided by financing activities:
Proceeds from sale of Series F convertible preferred stock and warrants, net -- 25,539
Payment of capital lease -- (476)
Proceeds from exercise of stock options and bridge warrants 1,089 27
-------- --------
Net cash provided by financing activities 1,089 25,090
-------- --------
Cash flows provided by (used in) investing activities:
Purchase of securities available for sale (58,464) --
Sales and maturities of securities available for sale 67,848 --
Issuance of stockholders notes receivable (324) (1,186)
Repayment of stockholders notes receivable 138 36
Payments related to the acquisition of Daleen Canada (1,691) --
Capital expenditures (6,346) (768)
-------- --------
Net cash provided by (used in) investing activities 1,161 (1,918)
-------- --------
Effect of exchange rates on cash and cash equivalents (48) (494)
Net decrease in cash and cash equivalents (21,067) (1,317)
Cash and cash equivalents-beginning of period 52,852 22,268
-------- --------
Cash and cash equivalents-end of period $ 31,737 20,951
======== ========
SEE ACCOMPANYING NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
5
DALEEN TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Unaudited Consolidated Financial Statements
September 30, 2001
(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, 2000 has been derived from the Company's audited
consolidated financial statements at that date. These condensed audited
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 amended on
Form 10-K/A, as of and for the year ended December 31, 2000 filed with the
Securities and Exchange Commission ("SEC").
The results of operations for the three or nine months ended September 30,
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 Daleen
Technologies, Inc. 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 amount to 30,232,330 shares and 30,678,693 shares for the three
months and nine months ended September 30, 2001, respectively. Common stock
equivalents amounted to 1,562,394 shares and 1,768,374 shares for the three
months and nine months ended September 30, 2000, respectively.
Net loss applicable to common stockholders differs from net loss in the
three and nine months ended September 30, 2001 due to the preferred stock
dividends arising from the beneficial conversion features from the sale
("Private Placement") of the Series F convertible preferred stock ("Series F
preferred stock") and warrants to purchase additional shares of Series F
preferred stock ("Warrants"). See note 11.
(4) 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 (i) 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, (ii) VSOE of fair
value does not exist for one or more of the delivered elements in the
arrangement, and (iii) 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.
6
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: (i) 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 (ii) the difference between the total arrangement fee
and the amount deferred for the undelivered elements is recognized as revenue
related to the delivered elements.
Revenue related to delivered elements of the arrangement is recognized when
persuasive evidence of an arrangement exists, the software has been delivered,
the fee is fixed and determinable and collectibility is probable.
Revenue related to undelivered elements of the arrangement is valued by the
price charged when the element is sold separately and is recognized as follows:
o Revenue related to customer maintenance agreements on the Company's
software licenses and third-party software maintenance 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 software
license fee since the services are not considered essential to the
functionality of the software and the software does not require
significant modification, production or customization. The Company
generally enters into one of the following types of professional
services contracts with its customers: (i) fixed fee contracts or (ii)
time and materials contracts.
The Company recognizes revenue from fixed fee professional
services contracts using the percentage of completion method,
based on the ratio of total hours incurred to date to total
estimated project labor hours. Changes in job performance,
project scope, 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 condensed consolidated balance sheets. All
out-of-pocket expenses associated with the implementation are
invoiced separately at the actual cost.
The Company recognizes revenue from time and materials
professional services contracts as the services are performed.
All out-of-pocket expenses associated with the professional
services are invoiced separately at their actual cost.
7
o Third party software license fees are 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 third party 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 to 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 generally 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 more than 12 months
after software license delivery. 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 whether collectibility is probable, the Company performs
extensive credit reviews on each customer. If collectibility is determined to
not be probable upon contract execution, revenue is recognized when cash is
received.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements ("SAB No. 101"). SAB No. 101 summarizes
certain of the SEC's views in applying accounting principles generally accepted
in the United States to revenue recognition in financial statements. The Company
adopted the provisions of SAB No. 101 beginning October 1, 2000. The adoption of
SAB No. 101 did not have an impact on the Company's revenue recognition
policies.
(5) RESTRUCTURING ACTIVITIES
In December 2000, management performed a business review to identify areas
where the Company could reduce costs. On January 4, 2001, the Company's Board of
Directors formally approved a plan to reduce operating expenses. The process
culminated with the announcement on January 5, 2001 (the "January
Restructuring") that the Company was taking certain specific cost reduction
measures. The Company recorded a $3.0 million restructuring charge for the nine
months ended September 30, 2001 related to the January Restructuring. Such
charge included the estimated costs related to workforce reductions, downsizing
of facilities, asset writedowns and other costs. Management implemented these
actions associated with the January Restructuring immediately following the
January 5, 2001 announcement.
The workforce reductions associated with the January Restructuring included
the termination of approximately 140 employees throughout the Company's Boca
Raton, Florida; Atlanta, Georgia; and Toronto, Ontario, Canada facilities and
included employees from substantially all of the Company's employee groups. The
downsizing of facilities included the downsizing of the Atlanta and Toronto
facilities to one floor at each location. The asset writedowns were primarily
related to the disposition of duplicative furniture and equipment and computer
equipment from terminated employees, which was not resaleable. Other costs
included costs incurred that are no longer going to provide benefit to the
Company such as recruiting fees and relocation costs related to employment
offers that were rescinded, penalties for cancellation of a user conference and
trade show and other miscellaneous expenses.
In late March 2001, management initiated a second business review to
identify additional areas for cost reductions. As a result, the Company's Board
of Directors formally approved and the Company announced a plan on April 10,
2001 (the "April Restructuring") to further reduce operating expenses. The
Company recorded a $4.8 million restructuring charge for the nine months ended
September 30, 2001 in connection with the April Restructuring. Such charge
included the estimated costs related to workforce reductions, closing of
facilities, asset writedowns and other costs. Management implemented these
actions immediately following the April 10, 2001 announcement.
8
The workforce reductions associated with the April Restructuring included
the termination of 193 employees throughout all of the Company's facilities. The
Company consolidated its North American workforce into its Boca Raton corporate
offices and closed its Toronto and Atlanta facilities. In addition, the Company
consolidated its North American research and development and professional
services resources and further reduced its administrative support functions. The
asset writedowns were primarily related to computer equipment from terminated
employees, which was not resaleable. Other costs included accounting and legal
fees, penalties for cancellation of software maintenance contracts in Atlanta
and Toronto and penalties for cancellation of a trade show.
The January Restructuring and April Restructuring encompassed the following
components (in thousands):
January April
Restructuring Restructuring Total
------------- ------------- -----
Employee termination benefits $ 1,496 $ 3,192 $ 4,688
Facility costs/rent on idle facilities 763 1,259 2,022
Asset writedowns 620 240 860
Other costs 114 74 188
------- ------- --------
$ 2,993 $ 4,765 $ 7,758
======= ======= ========
The costs were from the following financial statement captions (in
thousands):
January April
Restructuring Restructuring Total
------------- ------------- -----
Costs of sales-professional services $ 387 $ 1,198 $ 1,585
Research and development 522 1,392 1,914
Sales and marketing 278 725 1,003
General and administrative 1,806 1,450 3,256
------- ------- --------
$ 2,993 $ 4,765 $ 7,758
======= ======= ========
Amounts charged against the restructuring accrual for the nine months ended
September 30, 2001 were as follows (in thousands):
January April
Restructuring Restructuring Total
------------- ------------- -----
Employee termination benefits $ 1,332 $ 3,075 $ 4,407
Facility costs/rent on idle facilities 745 291 1,036
Asset writedowns/ sale of assets written off 620 240 860
Other costs 114 48 162
------- ------- --------
$ 2,811 $ 3,654 $ 6,465
======= ======= ========
As of September 30, 2001, an accrual remains on the condensed consolidated
balance sheets in accrued payroll and other accrued expenses related to the
January Restructuring and April Restructuring consisting of the following
components (in thousands):
January April
Restructuring Restructuring Total
------------- ------------- -----
Employee termination benefits $ 164 $ 117 $ 281
Facility costs/rent on idle facilities 18 968 986
Asset writedowns -- -- --
Other costs -- 26 26
------- ------- --------
$ 182 $ 1,111 $ 1,293
======= ======= ========
In October 2001, management initiated a third business review to continue to
identify areas for cost reduction. As a result, the Company's Board of Directors
formally approved a plan to further reduce operating expenses on October 19,
2001 (the "October Restructuring"). On that date, the Company announced and
began to immediately implement the
9
October Restructuring. The Company expects to record a restructuring charge of
at least $2 million in the fourth quarter 2001. Such charge will include the
estimated costs related to workforce reductions due to the termination of 75
employees, further downsizing of facilities, asset writedowns and other costs
which will be comprised mostly of accounting and legal fees associated with the
October Restructuring.
(6) GOODWILL
Goodwill represents the excess of the cost to acquire Inlogic Software Inc.
("Inlogic" or renamed as "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.
In March 2001, the Company reduced goodwill by approximately $1.1 million
due to its decision that it will no longer promote and license certain gateway
products that it originally acquired as a result of its acquisition of Daleen
Canada in December 1999. The development of these gateway products was in
process at the time of the Daleen Canada acquisition and was subsequently
completed. In connection with this decision, the Company accelerated the
amortization for a proportionate amount of goodwill related to these products.
Due to economic conditions and the Company's past revenue performance, the
Company assessed the recoverability of goodwill by determining whether the
amortization of the goodwill over the remaining life can be recovered through
undiscounted future operating cash flows. The Company's carrying value of
goodwill at September 30, 2001 was reduced by the estimated shortfall of cash
flows, discounted at a rate commensurate with the associated risks. This
amounted to a reduction of goodwill in the amount of approximately $23.4 million
for the three months and nine months ended September 30, 2001.
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 additional impairment charges related
to goodwill in future periods.
(7) IMPAIRMENT CHARGES
The Company has recorded an impairment charge of approximately $27.9 million
for the nine months ended September 30, 2001 related to the following (in
thousands):
Employee workforce - other intangible $ 1,545
Property and equipment 1,888
Goodwill 24,473
-------
$27,906
=======
As of March 31, 2001, due to the various restructuring activities initiated,
the Company performed an evaluation of the recoverability of the employee
workforce under Statement of Financial Accounting Standards ("SFAS") No. 121,
"ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF." Management determined that this asset was impaired and recorded
an impairment charge of approximately $1.5 million as of March 31, 2001.
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, was impaired.
The Company recorded an impairment charge of approximately $1.9 million for the
difference between the fair value and the carrying value of the assets as of
March 31, 2001.
See note 6 for discussion of goodwill impairment charge in the three months
and nine months ended September 30, 2001.
10
(8) LIQUIDITY
The Company has continued to experience significant operating losses for the
nine months ended September 30, 2001 and has an accumulated deficit of $184.9
million at September 30, 2001. In order to address its liquidity and to
strengthen its balance sheet, the Company sold Series F preferred stock in the
Private Placement, which resulted in $25.7 million of net proceeds to the
Company on June 7, 2001. Cash used in operations for the nine months ended
September 30, 2001 amounted to approximately $24.0 million.
Cash and cash equivalents at September 30, 2001 was approximately $21.0
million. Although the Company intends to carefully manage the uses of cash and
believes that the cash and cash equivalents at September 30, 2001, together with
the reduction in costs due to the January Restructuring, April Restructuring and
October Restructuring will enable the Company to fund its operations through
2002, the Company may need to further reduce operations and or seek additional
public or private equity financing or financing from other sources. There can be
no assurance that additional financing will be available, or that, if available,
the financing will be obtainable on terms favorable to the Company or that any
additional financing would not be dilutive. Failure to obtain additional
financing may have a material adverse effect on the Company's ability to operate
as a going concern. The accompanying condensed unaudited consolidated 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.
(9) BUSINESS AND CREDIT CONCENTRATIONS
During the three months ended September 30, 2001, 26.0 percent of the
Company's total revenue was attributed to two customers. Sales to these two
customers accounted for 13.5 percent and 12.5 percent of total revenue for the
three-month period. During the three months ended September 30, 2000, 36.2
percent of the Company's total revenue was attributed to three customers. Sales
to these three customers accounted for 12.7 percent, 11.8 percent and 11.7
percent of total revenue for the three-month period.
For the nine months ended September 30, 2001, 29.0 percent of the Company's
total revenue was attributed to two customers. Sales to these two customers
accounted for 17.3 percent and 11.7 percent of total revenue for the nine-month
period. There were no customers which accounted for over 10 percent of the
Company's total revenue for the nine months ended September 30, 2000.
Two customers accounted for 17.0 percent and 21.0 percent of total gross
accounts receivable at September 30, 2001. One customer accounted for 10.9
percent of total accounts receivable at December 31, 2000.
(10) RELATED PARTY TRANSACTIONS
In January 2001 the Company loaned $1,237,823 to its Chairman and Chief
Executive Officer and his wholly-owned limited partnership (collectively "the
Makers"). The loan bears interest at a rate of 8.75% per annum. The principal
and any unpaid accrued interest are payable in full January 31, 2006. The loan
is secured by 901,941 shares of the Company's common stock, and is non-recourse
to the Makers except to the extent of 901,941 shares held as the collateral. As
a result of the note being non-recourse, the Company 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 September 30, 2001, the
allowance was approximately $939,400.
(11) 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. Pursuant to the terms of the
Purchase Agreements, the Company consummated the Private Placement on June 7,
2001. The Company received net proceeds on June 7, 2001 of approximately $25.7
million from the Private Placement. The consummation of the Private Placement
was
11
subject to the receipt of approval from the Company's stockholders, including
approval of an amendment to the Company's certificate of incorporation to
increase the number of authorized shares of common stock to 200 million shares
and to create and designate the Series F preferred stock. The Company's
stockholders approved the Private Placement and the related amendments to the
certificate of incorporation at the Company's annual meeting of stockholders
held on June 7, 2001.
Pursuant to the terms of the Purchase Agreements, the Company issued and
sold (i) an aggregate of 247,882 shares of Series F preferred stock and (ii)
Warrants to purchase an aggregate of 109,068 shares of Series F preferred stock,
including a Warrant that the Company issued to the placement agent.
The purchase price per share of the Series F preferred stock (without giving
effect to the allocation of any part of the purchase price to the Warrants) was
$110.94, which is equal to (i) $1.1094, the average closing price per share of
the Company's common stock during the ten trading days ending on March 30, 2001,
multiplied by (ii) 100, the number of shares of common stock initially issuable
upon conversion of a share of Series F preferred stock.
Each share of Series F preferred stock is convertible at any time at the
option of the holder into shares of the Company's common stock. The number of
shares of common stock issuable upon conversion of a single share of Series F
preferred stock is determined by dividing the original price per share of the
Series F preferred stock, or $110.94, by the conversion price in effect on the
date of conversion. The initial conversion price was $1.1094. The conversion
price was subject to a limited one-time adjustment (the "reset") as follows:
In the event the average market price (based on the closing price per
share reported by The Nasdaq Stock Market) per share of the common stock
for the ten consecutive trading days beginning with the next trading day
immediately following the date on which the Company issued an Earnings
Release (as defined below) for the quarter ended June 30, 2001 (the
"Reset Average Market Price") was less than the conversion price, the
conversion price was adjusted automatically to the higher of (A) the
Reset Average Market Price or (B) 75% of the initial conversion price.
If the Company issued more than one Earnings Release with respect to the
quarter ended June 30, 2001, a Reset Average Market Price was calculated
for the ten trading days following each Earnings Release, and the lower
Reset Average Market Price was used for the purpose of determining the
adjusted conversion price. The effective date for the reset followed the
Company's final Earnings Release. "Earnings Release" means (y) a press
release issued by the Company after March 30, 2001, providing any
material financial metrics regarding revenue or estimated revenue or
earnings or estimated earnings for the quarter ended June 30, 2001, or
(z) a press release issued by the Company announcing its actual total
revenue for the quarter ended June 30, 2001.
On April 10, 2001, the Company issued an Earnings Release. The Reset Average
Market Price following this Earnings Release was $0.923. On July 26, 2001, the
Company issued its final Earnings Release. The Reset Average Market Price
following the final Earnings Release was $0.906, which was the lowest Reset
Average Market Price following the Company's Earnings Releases. As a result,
effective August 9, 2001, the conversion price of the Series F preferred stock
was reset to $0.9060. Based on the reset conversion price established by the
July 26, 2001 final Earnings Release and pursuant to the terms of the Purchase
Agreements, each share of Series F preferred stock is convertible into 122.4503
shares of common stock.
In addition to the reset, in the event the Company issues common stock or
securities convertible into common stock at a price per share less than the
conversion price of the Series F preferred stock, the conversion price will be
reduced to be equal to the price per share of the securities sold by the
Company. This adjustment provision is subject to a number of exceptions,
including the issuance of stock or options to employees and the issuance of
stock or options in connection with acquisitions. The conversion price will also
be subject to adjustment as a result of stock splits and stock dividends on the
common stock.
12
The Series F preferred stock will automatically convert into common stock at
any time after March 30, 2002 if the common stock trades on The Nasdaq National
Market or a national securities exchange at a price per share of at least
$3.3282 for ten trading days within any twenty-day trading period.
In the event the Company pays dividends on its common stock, the holders of
the Series F preferred stock would be entitled to dividends on an
as-if-converted basis.
In the event of an acquisition of the Company by another entity, the Company
will be required to redeem all of the issued and outstanding shares of Series F
preferred stock unless the holders of the Series F preferred stock otherwise
consent.
The Company granted to the purchasers certain demand and piggyback
registration rights.
The Warrants issued are exercisable at any time for a period of five years.
The fair value of all warrants issued to the holders of the Series F preferred
stock is approximately $9.4 million using the Black-Scholes model. $7.7 million
was recorded as a preferred stock dividend on June 7, 2001 and an additional
$1.7 million was recorded in the three months ended September 30, 2001 when the
final reset conversion price was established. The Company used the following
assumptions in the Black-Scholes model.
Expected life 5 years
Dividends None
Risk-free interest rate 4.96%
Expected volatility 68.6%
The Company also recorded a beneficial conversion feature in the amount of
approximately $18.4 million on June 7, 2001 based on the proceeds from the
Series F preferred stock reduced by the amount allocated to the warrants. This
was recorded as a preferred stock dividend. The beneficial conversion feature
was recorded using a conversion price of $0.923, which was the most probable
reset price at June 30, 2001. Due to the reset conversion price established by
the July 26, 2001 final Earnings Release which resulted in a lower conversion
price ($0.906) the Company recorded an additional beneficial conversion feature
during the three months ended September 30, 2001 in the amount of $715,585.
(12) STOCK OPTION PLANS
The Company accounts for its stock option plans in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES", and related interpretations. As such,
compensation expense would be recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price. Compensation
expense is recognized on a straight-line method over the vesting period. SFAS
No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION" ("SFAS No. 123"), permits
entities to recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows
entities to continue to apply the provisions of APB Opinion No. 25 and provide
pro forma net loss and pro forma net loss per share disclosures for employee
stock option grants made in 1995 and future years as if the fair-value-based
method defined in SFAS No. 123 had been applied. The Company has elected to
continue to apply the provisions of APB Opinion No. 25 and provide the pro forma
disclosures provisions of SFAS No. 123.
In March 2000, the FASB issued Financial Interpretation No. 44 ("FIN 44"),
"ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION - AN
INTERPRETATION OF APB NO. 25." FIN 44 clarifies the application of APB Opinion
No. 25 for certain issues including: (i) the definition of employee for purposes
of applying APB Opinion No. 25, (ii) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (iii) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (iv)
the accounting for exchange of stock compensation awards in a business
combination. FIN 44 was effective July 1, 2000, except for the provisions that
relate to modifications that directly or indirectly reduce the exercise price of
an award and the definition of an employee, which
13
were effective after December 15, 1998. The adoption of FIN 44 did not have a
material adverse effect on the Company's financial position or results of
operations.
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.'s common stock and includes incentive stock options
("ISOs") 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 ISOs. The concentrated life of options granted is ten years from grant
date for ISOs granted to other than 10% stockholders and non-qualified stock
options and five years for ISOs 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. Upon exercise of these options, the Company will account for the stock
issued as minority interest in PartnerCommunity, Inc.
DALEEN TECHNOLOGIES, INC.
The Daleen Technologies, Inc. Amended and Restated 1999 Stock Option Plan,
as amended, ("the 1999 Plan") authorizes the Company to automatically adjust the
number of shares of common stock available for issuance on the first day of each
fiscal year beginning in 2000, up to an annual increase of 5,000,000 shares
subject to a maximum of 20% of the fully-diluted shares outstanding at the time.
The number of shares authorized under the 1999 Plan increased to 5,790,145 in
2001. The annual increase in 2002 will be reduced to a maximum of 3,000,000
shares pursuant to an amendment to the 1999 Plan approved by the Board of the
Directors on July 18, 2001.
On July 18, 2001, the Board of Directors approved the Daleen Technologies,
Inc. 2001 Broad-Based Stock Incentive Plan ("the 2001 Plan"). The Plan provides
that the exercise price of the options granted will be issued at no less than
the fair market value of the underlying common stock at the date of grant.
2,000,000 shares were authorized for issuance under the 2001 Plan. On July 18,
2001, the Compensation Committee and the Board of Directors authorized the
issuance of 1,403,250 options to purchase common stock to its employees under
the 2001 Plan at the fair market value at date of grant. The vesting period for
these options is 50% each year for two years from date of grant.
(13) LEGAL PROCEEDINGS
On May 11, 2001, the Company 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. 010CV-210809) and was styled DALEEN TECHNOLOGIES, INC. AND
DALEEN CANADA CORPORATION V. MOHAMMAD AAMIR, 1303949 ONTARIO INC., AND THE
VENGROWTH INVESTMENT FUND INC. All Defendants were former stockholders of
Inlogic. Mr. Aamir was the president and chief executive officer of Inlogic.
On June 6, 2001, the Company settled the lawsuit against the Defendants. In
connection with the settlement, on June 8, 2001, the Company granted to the
Defendants warrants to purchase an aggregate of 750,000 shares of the Company's
common stock with an exercise price of $1.134 per share. The warrants are
immediately exercisable for a period of two years. The issuance of the warrants
resulted in the recognition of non-cash expense of approximately $495,000 in the
nine months ended September 30, 2001, and represents the fair value of such
warrants. The Company also agreed to negotiate in good faith to license its
ecare product to an affiliate of certain of the Defendants as part of the
settlement. The terms of the license are not yet finalized. The Defendants also
agreed to release the Company from any claims they may have had against the
Company.
14
(14) NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued Statement No. 141, "BUSINESS COMBINATIONS"
("SFAS No. 141"), and Statement No. 142, "GOODWILL AND OTHER INTANGIBLE ASSETS"
("SFAS No. 142"). SFAS No. 141 requires that the purchase method of accounting
be used for all business combinations initiated after June 30, 2001 as well as
all purchase method business combinations completed after June 30, 2001. SFAS
No. 141 also specifies criteria for intangible assets acquired in a purchase
method business combination which must be met to be recognized and reported
apart from goodwill, noting that any purchase price allocable to an assembled
workforce may not be accounted for separately. SFAS No. 142 will require that
goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually in accordance
with the provisions of SFAS No. 142. SFAS No. 142 will also require that
intangible assets with definite useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed for
impairment in accordance with SFAS No. 121.
The Company is required to adopt the provisions of SFAS No. 141 immediately
and SFAS No. 142 effective January 1, 2002. Goodwill and intangible assets
acquired in business combinations completed before July 1, 2001 will continue to
be amortized prior to the adoption of SFAS No. 142.
SFAS No. 141 will require, upon adoption of SFAS No. 142, that the Company
evaluate its existing intangible assets and goodwill that were acquired in a
prior purchase business combination, and to make any necessary reclassifications
in order to conform with the new criteria in SFAS No. 141 for recognition apart
from goodwill. Upon adoption of SFAS No. 142, the Company will be required to
reassess the useful lives and residual values of all intangible assets acquired
in purchase business combinations, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. In addition,
to the extent an intangible asset is identified as having an indefinite useful
life, the Company will be required to test the intangible asset for impairment
in accordance with the provisions of SFAS No. 142 within the first interim
period. Any impairment loss will be measured as of the date of adoption and
recognized as the cumulative effect of a change in accounting principle in the
first interim period.
In connection with the transitional goodwill impairment evaluation, SFAS No.
142 will require the Company to perform an assessment of whether there is an
indication that goodwill is impaired as of the date of adoption. To accomplish
this, the Company must identify its reporting units and determine the carrying
value of each reporting unit by assigning the assets and liabilities, including
the existing goodwill and intangible assets, to those reporting units as of the
date of adoption. The Company will then have up to six months from the date of
adoption to determine the fair value of each reporting unit and compare it to
the reporting unit's carrying amount. To the extent a reporting unit's carrying
amount exceeds its fair value, an indication exists that the reporting unit's
goodwill may be impaired and the Company must perform the second step of the
transitional impairment test. In the second step, the Company must compare the
implied fair value to all of its assets (recognized and unrecognized) and
liabilities in a manner similar to a purchase price allocation in accordance
with SFAS No. 141, to its carrying amount, both of which would be measured as of
the date of adoption. This second step is required to be completed as soon as
possible, but no later than the end of the year of adoption. Any transitional
impairment loss will be recognized as the cumulative effect of a change in
accounting principle in the Company's statement of operations.
As of the date of adoption, the Company expects to have unamortized goodwill
in the amount of approximately $6.7 million, which will be subject to the
transition provisions of SFAS No. 141 and SFAS No. 142. Amortization expense and
impairment of goodwill was approximately $14.4 million and $26.4 million for the
year ended December 31, 2000 and nine months ended September 30, 2001,
respectively.
Because of the extensive effort needed to comply with adopting SFAS No. 141
and SFAS No. 142, it is not practicable to reasonably estimate the impact of
adopting SFAS No. 141 and SFAS No. 142 on the Company's financial statements at
the date of this report, including whether any transitional impairment losses
will be required to be recognized as the cumulative effect of a change in
accounting principle.
15
In July 2001 FASB issued Statement No. 143, "ACCOUNTING FOR ASSET RETIREMENT
OBLIGATIONS" ("SFAS No. 143"). That standard requires entities to record the
fair value of a liability for an asset retirement obligation in the period in
which it is incurred. When the liability is initially recorded, the entity will
capitalize a cost by increasing the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its present value each period,
and the capitalized cost is depreciated over the useful life of the related
asset. Upon settlement of the liability, an entity either settles the obligation
for its recorded amount or incurs a gain or loss upon settlement. The standard
is effective for fiscal years beginning after June 15, 2002, with earlier
adoption permitted. The Company believes the adoption of SFAS No. 143 will not
have a significant impact on the Company's financial position or operating
results.
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, "ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS",
("SFAS No. 144"). This statement is effective for fiscal years beginning after
December 15, 2001. This statement supercedes SFAS No. 121, while retaining many
of the requirements of such statement. Under SFAS No. 144 assets held for sale
will be included in discontinued operations if the operations and cash flows
will be or have been eliminated from the ongoing operations of the entity and
the entity will not have any significant continuing involvement in the
operations of the company. The Company is currently evaluating the impact SFAS
No. 144 will have on its consolidated financial position and results of
operations.
16
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, as amended on Form
10-K/A, 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", "goals" 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, as
amended on Form 10-K/A, for the year ended December 31, 2000 filed with the
Securities and Exchange Commission. 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, and 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.
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 operational support system providers,
other software application companies, consulting firms and systems integration
firms, provided 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
17
integration firms, beginning in the first quarter of 2001 we increased our focus
on indirect sales through our strategic alliance partners and to assist our
strategic alliance partners in sales to their customers. We believe that an
increased focus on these strategic alliances will enable us to more easily enter
into new markets and reach potential new customers for our products. In
addition, we will continue to maintain a reduced direct sales force for those
sales opportunities that do not include or require third party strategic
alliance partners. We believe that the launch of our RevChain product family in
the first quarter enhanced our ability to increase our focus on this
distribution strategy. Our 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 essential 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.
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
reduction in market growth in the second half of 2000, combined with reduced
information technology spending, we implemented three extensive restructuring
actions in 2001 which have resulted in a reduction of operating costs in areas
such as compensation and benefits, facilities, capitalized expenditures, travel
costs and other operating costs.
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"). We recorded a $3.0 million restructuring charge in the nine
months ended September 30, 2001 related to the January Restructuring. This
charge included the estimated costs related to workforce reductions, downsizing
of facilities, asset writedowns and other costs. We implemented the actions
associated with the January Restructuring immediately following the January 5,
2001 announcement. The workforce reductions in the January Restructuring
included the termination of approximately 140 employees throughout the Company's
Boca Raton, Florida; Atlanta, Georgia; and Toronto, Ontario, Canada facilities,
and included employees from substantially all of the Company's employee groups.
The downsizing of facilities included the downsizing of the Atlanta and Toronto
facilities to one floor per each location. The asset writedowns were primarily
related to the disposition of duplicative furniture and equipment and computer
equipment from terminated employees, which was not resaleable. Other costs
included costs incurred that are no longer going to provide benefit to us such
as recruiting fees and relocation costs related to employment offers that were
rescinded, penalties for cancellation of a user conference and trade show, and
other miscellaneous expenses.
In late March 2001, we initiated a second comprehensive business review to
identify additional areas for cost reductions. As a result, our Board of
Directors approved, and we announced, 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 and Atlanta facilities. In addition, we
consolidated our North American research and development and professional
services resources and further reduced our administrative support functions. We
recorded a $4.8 million restructuring charge in the nine months ended September
30, 2001 related to the April Restructuring. This charge included the estimated
costs related to workforce reductions of 193 employees, 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
("October Restructuring") we announced a plan to further reduce expenses. We
expect to record a restructuring charge of at least $2.0 million in the fourth
quarter 2001. Such charge will include the estimated costs related to workforce
reductions in the amount of 75 employees, further downsizing of facilities,
asset writedowns and other costs. We started to implement these actions
immediately following the October 19, 2001 announcement.
18
Due to the termination of employees in the January Restructuring, April
Restructuring, and October Restructuring and assuming we do not hire any
additional employees, we expect to achieve an annualized savings relating to the
cost of salaries and benefits for these terminated employees of approximately
$29.8 million. The anticipated savings are from the following departments:
approximately $9.2 million in cost of professional services and other;
approximately $10.9 million in research and development; approximately $6.1
million in sales and marketing; and approximately $3.6 million in general and
administrative.
RECENT DEVELOPMENTS
PRIVATE PLACEMENT OF SERIES F CONVERTIBLE PREFERRED STOCK. On March 30,
2001, we entered into definitive agreements (collectively, the "Purchase
Agreements") for the sale ("private placement") of $27.5 million of Series F
convertible preferred stock (the "Series F preferred stock") and warrants to
purchase additional shares of Series F preferred stock (the "Warrants").
Pursuant to the terms of the Purchase Agreements, we consummated the private
placement on June 7, 2001. We received net proceeds on June 7, 2001 of
approximately $25.7 million from the private placement. The consummation of the
private placement was subject to the receipt of approval from our stockholders,
including approval of an amendment to our certificate of incorporation to
increase the number of authorized shares of common stock to 200 million shares
and to create and designate the Series F preferred stock. Our stockholders
approved the private placement and the related amendments to our certificate of
incorporation at our 2001 Annual Meeting of Stockholders held on June 7, 2001.
Pursuant to the Purchase Agreements, we issued and sold (i) an aggregate of
247,882 shares Series F preferred stock and (ii) Warrants to purchase an
aggregate of 109,068 shares of Series F preferred stock, including a Warrant
that we issued to Robertson Stephens, Inc., which acted as our placement agent
in the private placement. The purchase price per share of the Series F preferred
stock (without giving effect to the allocation of any part of the purchase price
to the Warrants) was $110.94 per share, which is equal to (A) $1.1094, the
average closing price per share of our common stock during the ten trading days
ending on March 30, 2001, the date of the Purchase Agreements, multiplied by (B)
100, the number of shares of common stock initially issuable upon conversion of
a share of Series F preferred stock.
Each share of Series F preferred stock is convertible at any time at the
option of the holder into shares of our common stock. The number of shares of
common stock issuable upon conversion of a single share of Series F preferred
stock is determined by dividing the original price per share of the Series F
preferred stock, or $110.94, by the conversion price in effect on the date of
conversion. The initial conversion price was $1.1094. The conversion price was
subject to a limited one-time adjustment (the "reset") as follows:
In the event the average market price (based on the closing price per
share reported by The Nasdaq Stock Market) per share of our common stock
for the ten consecutive trading days beginning with the next trading day
immediately following the date on which we issue an Earnings Release (as
defined below) for the quarter ended June 30, 2001 (the "Reset Average
Market Price") was less than the conversion price, the conversion price
was adjusted automatically to the higher of (A) the Reset Average Market
Price or (B) 75% of the initial conversion price. If we issued more than
one Earnings Release with respect to the quarter ended June 30, 2001, a
Reset Average Market Price was calculated for the ten trading days
following each Earnings Release, and the lower Reset Average Market
Price was used for the purpose of determining the adjusted conversion
price. The effective date for the reset followed our final Earnings
Release. "Earnings Release" means (y) a press release issued by us after
March 30, 2001, providing any material financial metrics regarding
revenue or estimated revenue or earnings or estimated earnings for the
quarter ended June 30, 2001, or (z) a press release issued by us
announcing our actual total revenue for the quarter ended June 30, 2001.
On April 10, 2001, we issued an Earnings Release. The Reset Average Market
Price following this Earnings Release was $0.923. On July 26, 2001, we issued
our final Earnings Release. The Reset Average Market Price following the final
Earnings Release was $0.906, which was the lowest Reset Average Market Price
following our Earnings Releases. As a result, effective August 9, 2001, the
conversion price of the Series F preferred stock was reset to $0.906. Based on
the
19
reset conversion price established by the July 26, 2001 final Earnings Release
and pursuant to the terms of the Purchase Agreements, each share of Series F
preferred stock is convertible into 122.4503 shares of common stock, or an
aggregate of approximately 43,708,634 shares of common stock.
In addition to the reset, in the event we issue common stock or securities
convertible into common stock at a price per share less than the conversion
price of the Series F preferred stock, the conversion price will be reduced to
be equal to the price per share of the securities sold. This adjustment
provision is subject to a number of exceptions, including the issuance of stock
or options to employees and the issuance of stock or options in connection with
acquisitions. The conversion price will also be subject to adjustment as a
result of stock splits and stock dividends on the common stock.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2000
TOTAL REVENUE. Total revenue, which includes license revenue and
professional services and other revenue, decreased $11.8 million, or 84.3%, to
$2.2 million in the three months ended September 30, 2001 from $14.0 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 third quarter 2001 than in the third quarter 2000. In
addition, the number of contracts being signed in recent quarters has decreased
our services 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 $9.0 million, or 95.6%, in the three months
ended September 30, 2001 to $418,300 compared to $9.5 million for the same
period in 2000. This decrease was due to fewer license contracts being signed in
the third 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, the impact of recent global events, competition,
lengthening of the sales cycle and postponement of customer licensing decisions.
License fees constituted 19.0% of total revenue in the three months ended
September 30, 2001, compared to 67.4% in the same period in 2000.
PROFESSIONAL SERVICES AND OTHER. Our professional services and other revenue
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 $2.8 million, or 60.9%, in the three months
ended September 30, 2001 to $1.8 million, compared to $4.6 million in the same
period in 2000. The decrease was due to less ongoing product implementations,
fewer maintenance contracts due to customer insolvency, and less revenue
associated with third-party software fulfillment. Professional services and
other revenue constituted 81.0% of total revenue in the three months ended
September 30, 2001, compared to 32.6% for the same period in 2000. The increase
as a percentage of total revenue is due to a reduction in license revenue in the
quarter.
TOTAL COST OF REVENUE. Total cost of revenue decreased $1.6 million, or
38.6%, to $2.5 million in the three months ended September 30, 2001 from $4.1
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 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 as well as the result of our cost reduction measures
taken in the January Restructuring and April Restructuring. The cost reductions
included a decrease in professional services personnel and other overhead costs
which were reduced when we closed the Atlanta, Georgia office in connection with
the April Restructuring. The Atlanta office primarily operated as a professional
services facility. Overall, total cost of revenue as a percentage of total
revenue increased to 114.5% in the three months ended September 30, 2001,
compared to 29.3% in the
20
same period in 2000. This increase resulted from the decrease in total revenue
and a $1.2 million write-off of prepaid third-party software license costs since
certain third-party products are no longer integrated with our product.
COST OF LICENSE FEES. Cost of license fees includes direct cost of labor,
benefits and packaging material for fulfillment and shipment of our software
products and amortization expense related to prepaid third-party software
licenses. Cost of license fees increased to $1.2 million, or 514.7%, in the
three months ended September 30, 2001, from $201,133 in the same period in 2000
due to the amortization expense related to prepaid third-party software licenses
which are being amortized over the term of their respective agreements. In the
three months ended September 30, 2001, we wrote down $1.2 million of certain of
these prepaid third-party software licenses since they are no longer integrated
with our product. These prepaid third-party license agreements did not exist in
the same period in 2000. Cost of license fees increased to 295.6% of license
revenue in the three months ended September 30, 2001, compared to 2.1% for the
same period in 2000 primarily due to the decrease in license revenue and
writedown of prepaid third-party software licenses.
COST OF PROFESSIONAL SERVICES AND OTHER. Cost of professional services and
other includes direct cost of labor, benefits, third party software and related
corporate overhead costs to provide professional services and training to our
customers. Cost of professional services and other decreased $2.6 million, or
67.1%, to $1.3 million in the three months ended September 30, 2001, from $3.9
million in the same period in 2000. These costs decreased as a result of our
cost reduction measures taken in the January Restructuring and the April
Restructuring. In addition, the revenue related to professional services and
other has decreased. Cost of professional services and other decreased to 72.0%
of professional services and other revenue in the three months ended September
30, 2001, compared to 85.6% for the same period in 2000 due to the cost
reduction measures related to the January Restructuring and the 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 costs and related corporate overhead costs. These expenses
decreased $2.2 million, or 55%, to $1.8 million in the three months ended
September 30, 2001, from $4.1 million for the same period in 2000. These costs
decreased as a result of a decrease in our trade show presence, decrease in
sales commissions as well as the cost reduction measures taken with the January
Restructuring and the April Restructuring. As a percentage of revenue, these
expenses increased from 29.0% in the three months ended September 30, 2000 to
82.8% for the same period in 2001 mainly due to the decrease in total revenue in
the three months ended September 30, 2001 compared to the same period in 2000.
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 $5.1 million, or 67.9%, to $2.4 million in the three months ended
September 30, 2001, from $7.6 million for the same period in 2000. The overall
decrease was primarily due to the cost reduction measures associated with the
January Restructuring and the April Restructuring. The cost reductions included
a decrease in research and development personnel and other costs, which were
reduced when we closed the Toronto, Ontario, Canada facility in connection with
the April Restructuring. The Toronto facility primarily operated as a research
and development facility. As a percentage of revenue, these expenses increased
from 53.9% in 2000 to 110.2% in 2001. This was a direct result of the lower
revenue recognized in the three months ended September 30, 2001 compared to the
same period in 2000.
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 $551,700, or 14.9%, to $3.1 million in the three months ended
September 30, 2001, from $3.7 million in the same period in 2000. This overall
decrease was attributed to the decrease in administrative personnel and
administrative charges associated with the January Restructuring and April
Restructuring and a decrease in stock compensation expense. These decreases were
offset by an increase in the allowance for a non-recourse loan to an executive
officer of the Company in the amount of approximately $390,000 due to the
decline in our stock price at September 30, 2001 and an $800,000 charge to our
provision for bad debt for the three months ended
21
September 30, 2001. We increased the allowance for doubtful accounts due to
market conditions in the telecommunication industry and certain customers
significantly reducing or liquidating their operations. As a percentage of
revenue, general and administrative expenses increased to 142.8% in the three
months ended September 30, 2001 from 26.4% in the same period in 2000. This was
a direct result of the lower revenue recognized in the three months ended
September 30, 2001 compared to the same period in 2000.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Goodwill, which relates to
our acquisition of Inlogic Software Inc. ("Inlogic"), is being amortized over a
four-year period. Amortization expense decreased $469,523, or 11.4%, to $3.7
million in the three months ended September 30, 2001 from $4.1 million for the
same period in 2000. This was primarily due to the amortization expense recorded
in the prior period related to the employee workforce which was considered
impaired and written off at March 31, 2001 due to the April Restructuring.
Therefore, no amortization of the employee workforce was recorded in the three
months ended September 30, 2001.
IMPAIRMENT OF LONG-LIVED ASSETS. Impairment charges in the three months
ended September 30, 2001 consisted of an impairment charge related to goodwill.
Due to economic conditions and the Company's past revenue performance, we
performed an evaluation of the recoverability of the goodwill under Statement of
Financial Accounting Standards (SFAS) No. 121 over the remaining useful life and
determined that the undiscounted future operating cash flows projected was less
than the goodwill balance at September 30, 2001. This resulted in a writedown of
goodwill in the amount of approximately $23.4 million in the three months ended
September 30, 2001.
NONOPERATING INCOME. Nonoperating income is comprised primarily of interest
income, net of interest expense. Nonoperating income decreased $41,000, or 8.3%,
to $447,000 in the three months ended September 30, 2001 from $488,000 for the
same period in 2000. This was primarily attributable to the decrease in
investment earnings due to the decrease in our cash balance during 2001 compared
to 2000.
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2000
TOTAL REVENUE. Total revenue, which includes license revenue and
professional services and other revenue, decreased $23.7 million, or 68.7%, to
$10.8 million in the nine months ended September 30, 2001 from $34.5 million for
the same period in 2000. The primary reason for lower revenue is related to
fewer license contracts being signed in the nine months ended September 30, 2001
than in the same period in 2000. In addition, the number of contracts being
signed in recent quarters has decreased our services 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 $19.1 million, or 85.6%, in the nine months
ended September 30, 2001 to $3.2 million, compared to $22.2 million for the same
period in 2000. This decrease was due to fewer license contracts being signed in
the nine months ended September 30, 2001 compared to the same period in 2000.
The primary reasons for this reduction include an overall reduction in
technology spending, market conditions in our industry, the impact of recent
global events, competition, lengthening of the sales cycle and postponement of
customer licensing decisions. License fees constituted 29.6% of total revenue in
the nine months ended September 30, 2001, compared to 64.5% in the same period
in 2000.
PROFESSIONAL SERVICES AND OTHER. Our professional services and other
consists of revenue from professional consulting services, training, maintenance
and support, and third party software fulfillment, all related to the software
products we develop and license. We offer consulting services on a fixed fee
basis and on a time and materials basis. We offer third party software
fulfillment based on our acquisition cost plus a reasonable margin. Professional
services and other revenue decreased $4.6 million, or 37.8%, in the nine months
ended September 30, 2001 to $7.6 million, compared to $12.2 million in the same
period in 2000. The decrease was due to less ongoing product implementations,
fewer maintenance contracts due to customer insolvency, and less revenue
associated with third-party software fulfillment. Professional services and
other revenue constituted 70.4% of total revenue in the nine months ended
September 30, 2001, compared to
22
35.5% for the same period in 2000. The increase as a percentage of total revenue
is due to a reduction in license revenue in the nine months ended September 30,
2001.
TOTAL COST OF REVENUE. Total cost of revenue decreased $2.9 million, or
26.5%, to $7.9 million in the nine months ended September 30, 2001 from $10.8
million in the same period in 2000. Total cost of revenue includes both cost of
license fees and cost of professional services and other. These components
include the cost of direct labor, benefits, overhead and materials associated
with the fulfillment and delivery of licensed products, and related corporate
overhead costs to provide professional services to our customers. These costs
decreased due to the decrease in total revenue as well as the result of our cost
reduction measures taken in the January Restructuring and April Restructuring.
The cost reductions included a decrease in professional services personnel and
other overhead costs which were reduced when we closed the Atlanta, Georgia
office in connection with the April Restructuring. The Atlanta office primarily
operated as a professional services facility. Overall, total cost of revenue as
a percentage of total revenue increased to 73.5% in the nine months ended
September 30, 2001, compared to 31.3% in the same period in 2000. This increase
resulted from the decrease in total revenue and a $1.2 million write-off of
prepaid third-party software license costs because certain third-party products
are no longer integrated with our product.
COST OF LICENSE FEES. Cost of license fees includes direct cost of labor,
benefits and packaging material for fulfillment and shipment of our software
products and amortization expense related to prepaid third-party software
licenses. Cost of license fees increased to $1.6 million, or 173.5%, in the nine
months ended September 30, 2001, from $587,000 in the same period in 2000 due to
the amortization expense related to prepaid third-party licenses, which are
being amortized over the term of their respective agreements. In the nine months
ended September 30, 2001, we wrote down $1.2 million of certain prepaid
third-party software licenses because they are no longer integrated with our
product. These prepaid third-party license agreements did not exist in the same
period in 2000. Cost of license fees increased to 50.2% of license revenue in
the nine months ended September 30, 2001, compared to 2.6% for the same period
in 2000 due to the decrease in license revenue and writedown of prepaid
third-party software licenses.
COST OF PROFESSIONAL SERVICES AND OTHER. Cost of professional services and
other includes direct cost of labor, benefits, third party software and related
corporate overhead costs to provide professional services and training to our
customers. Cost of professional services and other decreased $3.9 million, or
38.0%, to $6.3 million in the nine months ended September 30, 2001, from $10.2
million in the same period in 2000. These costs decreased as a result of our
cost reduction measures taken with the January Restructuring and the April
Restructuring. In addition, the revenue related to professional services and
other has decreased. Cost of professional services and other remained consistent
at 83.3% of professional services and other revenue in the nine months ended
September 30, 2001, compared to 83.5% for the same period in 2000.
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 $1.1 million, or 11.3%, to $8.8 million in the nine months ended
September 30, 2001, from $9.9 million for the same period in 2000. The decrease
was due to a decrease in sales commissions and the cost reduction measures
associated with the January Restructuring and the April Restructuring slightly
offset by an increased sales presence in the Netherlands. As a percentage of
revenue, these expenses increased from 28.7% in the nine months ended September
30, 2000 to 81.4% for the same period in 2001 mainly due to the decrease in
total revenue in the nine months ended September 30, 2001 compared to the same
period in 2000.
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 $8.4 million, or 43.4%, to $10.9 million in the nine months ended
September 30, 2001, from $19.3 million for the same period in 2000. The overall
decrease was primarily due to the cost reduction measures associated with the
January Restructuring and the April Restructuring. The cost reductions included
a decrease in research and development personnel and other costs which were
reduced when we closed the Toronto, Ontario, Canada facility in connection with
the April Restructuring. The Toronto
23
facility primarily operated as a research and development facility. As a
percentage of revenue, these expenses increased from 56.0% in 2000 to 101.3% in
2001. This was a result of the lower revenue recognized in the nine months ended
September 30, 2001 compared to the same period in 2000.
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,
facility 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 increased $903,000, or 8.2%, to $12.0 million in the
nine months ended September 30, 2001, from $11.1 million in the same period in
2000. The increase was due to approximately $5.6 million of non-cash charges
recorded in the nine months ended September 30, 2001 encompassing: (i) an asset
write-down of $1.0 million related to an investment; (ii) the issuance of
warrants in connection with a legal settlement resulting in a charge of
approximately $495,000; (iii) an increase in the allowance for a non-recourse
loan to an executive officer in the amount of approximately $939,000 due to the
decline in our stock price at September 30, 2001; and (iv) a $1.6 million charge
to our provision for bad debt due to market conditions in the telecommunications
industry and certain customers significantly reducing or liquidating their
operations. The increases were offset by the decrease in administrative
personnel and administrative charges associated with the January Restructuring
and April Restructuring. As a percentage of revenue, general and administrative
expenses increased to 111.0% in the nine months ended September 30, 2001 from
32.1% in the same period in 2000. This was a result of the lower revenue
recognized in 2001 and the non-cash charges incurred in the nine months ended
September 30, 2001 compared to the same period in 2000.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Goodwill, which relates to
our acquisition of Inlogic, is being amortized over a four-year period.
Amortization expense decreased $711,000, or 5.9%, to $11.2 million in the nine
months ended September 30, 2001 from $11.9 million for the same period in 2000.
This was primarily due to the amortization expense recorded in the prior period
related to the employee workforce, which was considered impaired and written off
at March 31, 2001 due to the April Restructuring. Therefore, only three months
of amortization of the employee workforce was recorded in the nine months ended
September 30, 2001.
IMPAIRMENT OF LONG-LIVED ASSETS. Impairment charges in the nine months ended
September 30, 2001 consisted of (i) write-off of employee workforce of $1.5
million; (ii) impairment of property and equipment associated with the January
Restructuring and April Restructuring in the amount of $1.9 million; and (iii)
an impairment of goodwill in the amount of $24.5 million. Due to various
restructuring activities initiated by the Company, we performed an evaluation of
the recoverability of the employee workforce acquired in the Inlogic acquisition
under SFAS No. 121. We determined that this asset was impaired and in connection
with this determination, we recorded an impairment charge in the nine months
ended September 30, 2001 in the amount of approximately $1.5 million. In
addition, we determined that certain property, leasehold improvements and
equipment, which mainly represented computer equipment and furniture from the
Toronto and Atlanta facilities, was impaired. We recorded an impairment charge
of approximately $1.9 million during the nine months ended September 30, 2001
representing the difference between the fair value and the carrying value of the
assets. We recorded an impairment charge of goodwill in the amount of
approximately $1.1 million in March, 2001 related to certain gateway products
acquired from Inlogic on December 16, 1999 which we do not plan to promote and
license in the future. In addition, due to economic conditions and the Company's
past revenue performance, we performed an evaluation of the recoverability of
the goodwill under SFAS No. 121 over the remaining useful life and determined
that the undiscounted future operating cash flows projected was less than the
goodwill balance at September 30, 2001. This resulted in a writedown of goodwill
in the amount of approximately $23.4 million in the nine months ended September
30, 2001.
RESTRUCTURING CHARGES. Restructuring charges incurred by us in the nine
months ended September 30, 2001, related to the January Restructuring and April
Restructuring, totaled $7.7 million. These charges included $4.7 million of
employee termination benefits, $2.0 million of facility costs, $860,000 of asset
writedowns, and $188,000 of other restructuring costs such as penalties incurred
for cancellations of trade shows and marketing programs, recruiting fees and
relocation costs related to employment offers that were rescinded, penalties
incurred for cancellation of software maintenance contracts, legal fees and
other costs. The costs were from the following financial statement captions:
24
January April
-------------- ------------
Cost of sales - professional services $387,000 $1.2 million
Research and development $522,000 $1.4 million
Sales and marketing $278,000 $725,000
General and administrative $1.8 million $1.5 million
Total restructuring charges for the nine months ended September 30, 2001 was
$7.8 million compared to $0 in the nine months ended September 30, 2000. There
were no restructuring actions taken in 2000.
NONOPERATING INCOME. Nonoperating income is comprised primarily of interest
income, net of interest expense. Nonoperating income decreased $924,000, or
48.3%, to $989,000 in the nine months ended September 30, 2001 from $1.9 million
for the same period in 2000. This was primarily attributable to the decrease in
investment earnings due to the decrease in our cash balance during 2001 compared
to 2000.
LIQUIDITY AND CAPITAL RESOURCES
On March 30, 2001, we entered into Purchase Agreements in a private
placement of $27.5 million of Series F preferred stock and Warrants. Pursuant to
the terms of the Purchase Agreements, we consummated the private placement on
June 7, 2001. We received net proceeds on June 7, 2001 of approximately $25.7
million from the private placement. At September 30, 2001, our total cash and
cash equivalents totaled $21.0 million.
Net cash used in operating activities was $24.0 million for the nine months
ended September 30, 2001, compared to $23.3 million for the nine months ended
September 30, 2000. The principal use of cash for both periods was to fund our
losses from operations.
Net cash provided by financing activities was $25.1 million for the nine
months ended September 30, 2001, compared to $1.1 million for the nine months
ended September 30, 2000. In 2001, the cash provided was primarily related to
the net proceeds received from the private placement. In 2000, cash was provided
by proceeds from the exercise of stock options and bridge warrants.
Net cash used in investing activities was $1.9 million for the nine months
ended September 30, 2001 compared to net cash provided by investing activities
of $1.2 million for the nine months ended September 30, 2000. The cash used in
2001 was primarily related to a non-recourse note receivable issued to our
chairman and chief executive officer for approximately $1.2 million and capital
expenditures of approximately $768,000. The cash provided in the nine months
ended September 30, 2000 was primarily related to the sales of securities
available for sale offset by approximately $6.3 million of capital expenditures.
We continued to experience significant operating losses during the nine
months ended September 30, 2001. The business environment in which we are
operating is changing rapidly and there is continued weakness in the market
conditions. The January Restructuring and April Restructuring actions resulted
in a reduction in operating expense levels and, based on expected revenue and
cash collections as well as the October Restructuring, it is reasonably possible
that there will be reduction in cash requirements on a quarterly basis going
forward.
Although we intend to carefully manage the use of cash and we believe the
cash and cash equivalents at September 30, 2001, together with the reduction in
costs due to the January Restructuring, April Restructuring and October
Restructuring, will enable the Company to fund its operations through 2002, we
may need to further reduce our operations and seek additional financing. 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.
Failure to obtain additional financing may have a material adverse effect on our
ability to operate as a going concern. Our condensed unaudited consolidated
financial statements included elsewhere in this Form 10-Q have been prepared
assuming that we
25
will continue as a going concern, and do not include any adjustments that might
result from the outcome of this uncertainty.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued Statement No. 141, "BUSINESS COMBINATIONS"
("SFAS No. 141"), and Statement No. 142, "GOODWILL AND OTHER INTANGIBLE ASSETS"
("SFAS No. 142"). SFAS No. 141 requires that the purchase method of accounting
be used for all business combinations initiated after June 30, 2001 as well as
all purchase method business combinations completed after June 30, 2001. SFAS
No. 141 also specifies criteria intangible assets acquired in a purchase method
business combination that must be met to be recognized and reported apart from
goodwill, noting that any purchase price allocable to an assembled workforce may
not be accounted for separately. SFAS No. 142 will require that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. SFAS No. 142 will also require that intangible
assets with definite useful lives be amortized over their respective estimated
useful lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF".
We are required to adopt the provisions of SFAS No. 141 immediately and SFAS
No. 142 effective January 1, 2002. Goodwill and intangible assets acquired in
business combinations completed before July 1, 2001 will continue to be
amortized prior to the adoption of SFAS No. 142.
SFAS No. 141 will require upon adoption of SFAS No. 142 that we evaluate our
existing intangible assets and goodwill that were acquired in a prior purchase
business combination, and to make any necessary reclassifications in order to
conform with the new criteria in SFAS No. 141 for recognition apart from
goodwill. Upon adoption of SFAS No. 142, we will be required to reassess the
useful lives and residual values of all intangible assets acquired in purchase
business combinations, and make any necessary amortization period adjustments by
the end of the first interim period after adoption. In addition, to the extent
an intangible asset is identified as having an indefinite useful life, we will
be required to test the intangible asset for impairment in accordance with the
provisions of SFAS No. 142 within the first interim period. Any impairment loss
will be measured as of the date of adoption and recognized as the cumulative
effect of a change in accounting principle in the first interim period.
In connection with the transitional goodwill impairment evaluation, SFAS No.
142 we will be required to perform an assessment of whether there is an
indication that goodwill is impaired as of the date of adoption. To accomplish
this, we must identify our reporting units and determine the carrying value of
each reporting unit by assigning the assets and liabilities, including the
existing goodwill and intangible assets, to those reporting units as of the date
of adoption. We will then have up to six months from the date of adoption to
determine the fair value of each reporting unit and compare it to the reporting
unit's carrying amount. To the extent a reporting unit's carrying amount exceeds
its fair value, an indication exists that the reporting unit's goodwill may be
impaired and we must perform the second step of the transitional impairment
test. In the second step, we must compare the implied fair value to all of its
assets (recognized and unrecognized) and liabilities in a manner similar to a
purchase price allocation in accordance with SFAS No. 141, to our carrying
amount, both of which would be measured as of the date of adoption. This second
step is required to be completed as soon as possible, but no later than the end
of the year of adoption. Any transitional impairment loss will be recognized as
the cumulative effect of a change in accounting principle in our statement of
operations.
As of the date of adoption, we expect to have unamortized goodwill in the
amount of approximately $6.7 million, which will be subject to the transition
provisions of SFAS No. 141 and SFAS No. 142. Amortization expense and impairment
charges related to goodwill was approximately $14.4 million and $26.7 million
for the year ended December 31, 2000 and nine months ended September 30, 2001,
respectively.
Because of the extensive effort needed to comply with adopting SFAS No. 141
and SFAS No. 142, it is not practical to reasonably estimate the impact of
adopting SFAS No. 141 and SFAS No. 142 on our financial statements at the date
of
26
this report, including whether any transitional impairment losses will be
required to be recognized as the cumulative effect of a change in accounting
principle.
In July 2001, FASB issued Statement No. 143, "ACCOUNTING FOR ASSET
RETIREMENT OBLIGATIONS" ("SFAS No. 143"). SFAS No. 143 requires entities to
record the fair value of a liability for an asset retirement obligation in the
period in which it is incurred. When the liability is initially recorded, the
entity will capitalize a cost by increasing the carrying amount of the related
long-lived asset. Over time, the liability is accredited to its present value
each period, and the capitalized cost is depreciated over the useful life of the
related asset. Upon settlement of the liability, an entity either settles the
obligation for its recorded amount or incurs a gain or loss upon settlement. The
standard is effective for fiscal years beginning after June 15, 2002, with
earlier adoption permitted. We believe the adoption of SFAS No. 143 will not
have a significant impact on our financial position or operating results.
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, "ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS" ("SFAS
No. 144"). This statement is effective for fiscal years beginning after December
15, 2001. This statement supercedes SFAS No. 121, while retaining many of the
requirements of such statement. Under SFAS No. 144 assets held for sale will be
included in discontinued operations if the operations and cash flows will be or
have been eliminated from our ongoing operations and will not have any
significant continuing involvement in our operations. We are currently
evaluating the impact SFAS No. 144 will have on our consolidated financial
position or results of operations.
RISKS ASSOCIATED WITH DALEEN'S BUSINESS AND FUTURE OPERATING RESULTS
Our future operating results may vary substantially from period to period.
The price of our common stock will fluctuate in the future, and an investment in
our common stock is subject to a variety of risks, including but not limited to
the specific risks identified below. 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.
OUR INDEPENDENT PUBLIC ACCOUNTANTS HAVE EXPRESSED DOUBTS OVER OUR ABILITY TO
CONTINUE AS A GOING CONCERN.
We incurred net losses of approximately $74.7 million for the nine months
ended September 30, 2001 and net losses of $43.8 million for the year ended
December 31, 2000. Our cash and cash equivalents at September 30, 2001 was $21.0
million. Cash used in operations for the nine months ended September 30, 2001
was $24.0 million. As of September 30, 2001, we had an accumulated deficit of
approximately $184.9 million. As a result of our financial condition the
independent auditors' report covering our December 31, 2000 consolidated
financial statements and financial statement schedule contains an explanatory
paragraph that states that our recurring losses from operations and accumulated
deficit raised substantial doubt about our ability to continue as a going
concern. We initiated cost reduction measures in the January Restructuring,
April Restructuring and October Restructuring in order to reduce our operating
expenses, including workforce reductions, reduction of office space, asset
writedowns and consolidation of our North American research and development and
professional services resources.
In order to address our liquidity issue and to strengthen our balance sheet,
we sold the Series F preferred stock in the private placement, which resulted in
net proceeds on June 7, 2001 of $25.7 million. We believe that our current cash
and cash equivalents, including the net proceeds received from the private
placement, together with the January Restructuring, April Restructuring and
October Restructuring, will be sufficient to fund our operations through 2002.
However, there is no assurance that we will be able to continue as a going
concern beyond such time. 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 improve profitability, we may be required
to further reduce our operations and seek additional financing. We may seek to
raise additional funds through public or private equity financing or from other
sources. 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.
27
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 $74.7 million for the nine months
ended September 30, 2001, and net losses of approximately $43.8 million for the
year ended December 31, 2000. As of September 30, 2001, we had an accumulated
deficit of approximately $184.9 million. We have not realized any profit to date
and do not expect to achieve profitability until 2002, which may not occur. To
achieve this objective, we need to generate significant additional revenue from
licensing of our products and related services and support revenues. We have
reduced our fixed operating expenses through the cost reduction measures
implemented in the January Restructuring and April Restructuring and expect to
further reduce our expenses through the cost reduction measures implemented in
the October Restructuring, which included workforce reductions, reduction of
office space, asset writedowns, and other miscellaneous cost reductions. We
consolidated our North American workforce into our Boca Raton, Florida facility
and we closed our Toronto, Ontario, Canada and Atlanta, Georgia offices. 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. We may be required to further reduce our operations and seek
additional financing. 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 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
in the last two weeks of the quarter. As a result,
28
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, WHICH COULD CAUSE OUR COMMON STOCK PRICE
TO DECLINE AND MAKE TRADING IN OUR COMMON STOCK MORE DIFFICULT TO INVESTORS.
Our common stock is currently quoted on The Nasdaq National Market. We must
satisfy Nasdaq's minimum listing maintenance requirements to maintain our
listing on The Nasdaq National Market. Nasdaq's listing maintenance requirements
set forth in its Marketplace Rules include a series of financial tests relating
to net tangible assets, public float, number of market makers and shareholders,
market capitalization, and maintaining a minimum closing bid price of $1.00 per
share for shares of our common stock. If the minimum closing bid price of our
common stock were to be below $1.00 for 30 consecutive trading days, or if we
are unable to meet Nasdaq's standards for any other reason, our common stock
could be delisted from The Nasdaq National Market. As of August 23, 2001, our
common stock had a closing bid price of less than $1.00 for more than 30
consecutive trading days. On August 30, 2001, we received a letter from Nasdaq
notifying us that our common stock had failed to maintain a minimum bid price of
$1.00 over the previous 30 consecutive trading days as required by the
applicable Nasdaq Marketplace Rule.
Ordinarily, Nasdaq would provide us 90 calendar days to regain compliance
with the Marketplace Rules. During such time, if the bid price of our common
stock were to be at least $1.00 per share for a minimum of 10 consecutive
trading days, Nasdaq would make a determination of whether we were in compliance
with the Marketplace Rules. Under certain circumstances, Nasdaq may have
required that we maintain a closing bid price at or above $1.00 per share for
more than 10 consecutive trading days. If we were not able to demonstrate
compliance with the Marketplace Rules on or before the end of the 90-day period,
Nasdaq would have provided us with written notification that our common stock
would be delisted from The Nasdaq National Market. At that time, we would have
had the opportunity to appeal the decision to delist to a Nasdaq Listing
Qualifications Panel.
Subsequent to the tragic terrorist attacks of September 11, 2001, Nasdaq
placed a moratorium on the minimum bid price requirement, as well as the public
float requirement. As a result of this moratorium, these two requirements have
been suspended until January 1, 2002, at which time the counting of the 30-day
period will start over at zero with the respect to any deficiencies existing on
or before such date.
Since August 23, 2001, our common stock has continuously had a closing bid
price of less than $1.00. If the minimum closing bid price of our common stock
were to be below $1.00 for 30 consecutive trading days beginning January 1,
2002, or if we are unable to meet Nasdaq's standards for any other reason, our
common stock could be delisted from The Nasdaq National Market. 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 FACE SIGNIFICANT COMPETITION FROM COMPANIES THAT HAVE GREATER RESOURCES THAN
WE DO AND THE MARKETS IN WHICH WE COMPETE ARE RELATIVELY NEW, INTENSELY
COMPETITIVE, HIGHLY FRAGMENTED AND RAPIDLY CHANGING.
The markets in which we compete are relatively new, intensely competitive,
highly fragmented and rapidly changing. In some markets, limited capital
resources are causing reduced spending in information technology. We expect
competition to increase in the future, both from existing competitors as well as
new entrants in our current markets. Our
29
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 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,
and sales and implementation of our products. In order to address a broader
market and to satisfy customers' requirements associated with the use of
independent consulting and systems integration firms, we have increased our
focus on indirect sales through our strategic alliance partners, including
operational support system providers, other software application companies,
consulting firms and systems integration firms. To be successful, we must
maintain our relationships with these firms, develop additional similar
relationships and generate new business opportunities through joint marketing
and sales efforts. We may encounter difficulties in forging and maintaining
long-term relationships with these firms for a variety of reasons. These firms
may discontinue their relationships with us, fail to devote sufficient resources
to market our products or develop relationships with our competitors. Many of
these firms also work with competing software companies, and our success will
depend on their willingness and ability to devote sufficient resources and
efforts to marketing our products versus the products of others. In addition,
these firms may delay the product implementation or negatively affect our
customer relationships. Our agreements with these firms typically are in the
form of a non-exclusive referral fee or license and package discount arrangement
that may be terminated by either party without cause or penalty and with limited
notice.
MANY OF OUR CUSTOMERS AND POTENTIAL CUSTOMERS ARE NEW ENTRANTS INTO THEIR
MARKETS AND LACK FINANCIAL RESOURCES, AS A RESULT OF WHICH IF THEY CANNOT SECURE
ADEQUATE FINANCING, WE MAY NOT MAINTAIN THEIR BUSINESS, WHICH WOULD NEGATIVELY
IMPACT OUR REVENUE AND RESULTS OF OPERATIONS.
Many of our customers and potential customers are new entrants into their
markets and lack significant financial resources. These companies rely to a
large degree, on access to the capital markets for growth that have cut back
over the past several months. Their failure to raise capital has hurt their
financial viability and their ability to purchase our
30
products. The lack of funding has caused potential customers to reduce
information technology spending. If our potential customers cannot obtain the
resources to purchase our products, they may turn to other options such as
service bureaus, which would hurt our business. Also, because we do at times
provide financing arrangements to customers, their ability to make payments to
us may impact when we can recognize revenue.
The revenue growth and profitability of our business depends significantly
on the overall demand for software products and services that manage the revenue
chain as it has been defined, particularly in the product and service segments
in which we compete. Softening demand for these products and services caused by
worsening economic conditions may result in decreased revenues or earning levels
or growth rates. Recently, the U.S. economy has weakened. This has resulted in
companies delaying or reducing expenditures, including expenditures 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 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 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.
31
THE VOLATILITY OF OUR STOCK PRICE MAY LEAD TO LEGAL PROCEEDING BEING BROUGHT
AGAINST THE COMPANY
In the past, securities class actions 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 complaints being filed against Daleen, and we do not know
of any facts and circumstances that could give rise to a valid cause of action,
any securities litigation may result in substantial costs and divert
management's attention and resources, which may seriously harm our business.
Further, we will vigorously defend Daleen against any such litigation.
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 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.
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
32
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, 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, EITHER 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 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, PARTICULARLY JAMES DALEEN, WOULD LIKELY
HURT OUR BUSINESS.
Our future success depends to a significant extent on the continued services
of our senior management and other key personnel, particularly James Daleen, our
founder and chief executive officer. If we lost the services of Mr. Daleen or
other key employees it would likely hurt our business. We have employment and
non-compete agreements with some of our executive officers, including Mr.
Daleen. However, these agreements do not obligate them to continue working for
us.
PRODUCT DEFECTS OR SOFTWARE ERRORS IN OUR PRODUCTS COULD ADVERSELY AFFECT OUR
BUSINESS DUE TO COSTLY REDESIGNS, PRODUCTION DELAYS AND CUSTOMER
DISSATISFACTION.
Design defects or software errors in our products may cause delays in
product introductions or damage customer satisfaction, either of which could
seriously harm our business. Our software products are highly complex and may,
from time to time, contain design defects or software errors that may be
difficult to detect and correct. Although we have
33
license agreements with our customers that contain provisions designed to limit
our exposure to potential claims and liabilities arising from customer problems,
these provisions may not effectively protect us against all claims. In addition,
claims and liabilities arising from customer problems could significantly damage
our reputation and hurt our business.
IN THE EVENT WE ACQUIRE THIRD PARTIES OR THIRD PARTY TECHNOLOGIES, SUCH
ACQUISITIONS COULD RESULT IN DISRUPTIONS TO OUR BUSINESS AND DIVERSION OF
MANAGEMENT, AND COULD REQUIRE THAT WE ENGAGE IN FINANCING TRANSACTIONS THAT
COULD HURT OUR FINANCIAL PERFORMANCE.
We may in the future make acquisitions of companies, products or
technologies, or enter into strategic relationship agreements that require
substantial up-front investments. We will be required to assimilate the acquired
businesses and may be unable to maintain uniform standards, controls, procedures
and policies if we fail to do so effectively. We may have to incur debt or issue
equity securities to pay for any future acquisitions. The issuance of equity
securities for any acquisition could be substantially dilutive to our
stockholders. In addition, our profitability may suffer because of
acquisition-related costs or amortization costs for acquired intangible assets.
OUR SUCCESS DEPENDS IN PART ON OUR ABILITY TO ATTRACT AND RETAIN SKILLED
EMPLOYEES, WHICH IS DIFFICULT AND EXPENSIVE IN TODAY'S TECHNOLOGY LABOR MARKET.
Our success depends in large part on our ability to attract, train, motivate
and retain highly skilled information technology professionals, software
programmers and sales and marketing professionals. Qualified personnel in these
fields are in great demand and are likely to remain a limited resource. We may
be unable to continue to retain the skilled employees we require. Any inability
to do so 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.
THE HOLDERS OF OUR SERIES F PREFERRED STOCK HAVE RIGHTS THAT ARE SENIOR TO THOSE
OF THE HOLDERS OF OUR COMMON STOCK.
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 $27.5 million. The holders of the Series F preferred
stock also 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 November 1, 2001, 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. On November 1, we had 21,874,528 shares of common stock
issued and outstanding and 247,882 shares of Series F preferred stock issued and
34
outstanding. Additionally, we had outstanding Warrants for the purchase of an
aggregate of 109,068 shares of Series F preferred stock.
Following the conversion of the Series F preferred stock, the holders will
be entitled to vote the number of shares of common stock issued upon conversion.
As a result, the holders of Series F preferred stock have a significant ability
to determine the outcome of matters submitted to our stockholders for a vote.
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 up 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 Series F 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 provisions of the Series F preferred stock, the conversion
price is $0.9060. Assuming that the holders of the Series F preferred stock and
Warrants exercise the Warrants in full and convert all of their shares of Series
F preferred stock into shares of common stock, we would issue an aggregate of
approximately 43,708,634 shares of common stock. Based on the number of shares
of our common stock outstanding on November 1, 2001, this would represent 66.65%
of our outstanding 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,
options, warrants or other rights to acquire common stock at a price per share
of common stock that is less than the conversion
35
price of the Series F preferred stock then in effect. A reduction in the
conversion price of the Series F preferred stock will increase the number of
shares of common stock issuable upon conversion of the Series F preferred stock.
THE SERIES F PREFERRED STOCK IS AUTOMATICALLY CONVERTIBLE ONLY IN LIMITED
CIRCUMSTANCES AND, AS A RESULT COULD BE OUTSTANDING INDEFINITELY.
The Series F preferred stock will convert automatically into common stock
only if, after March 30, 2002, the closing price of our common stock on The
Nasdaq National Market or a national securities exchange is at least $3.3282 per
share for ten out of any 20 trading day period. Otherwise, the shares of Series
F preferred stock are convertible only at the option of the holder. Further, the
Series F preferred stock is not subject to automatic conversion if our common
stock is not then listed for trading on The Nasdaq National Market or a national
securities exchange. Each Warrant is exercisable for Series F preferred stock in
whole or in part at any time during a five-year exercise period at the sole
discretion of the Warrant holder and will not be convertible or callable at the
election of Daleen. 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:
o HarbourVest Partners VI-Direct Fund L.P. is managed by HarbourVest
Partners, LLC, which also manages HarbourVest Partners V-Direct Fund
L.P.
o HarbourVest Partners, LLC, through funds it manages, beneficially owns
approximately 35.4% 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 of
the 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 Partners, LLC would control approximately 34.3% of the
voting power of Daleen, or 27.5% 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 6, 2001:
o SAIC Venture Capital Corporation beneficially owns approximately 24.9%
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 23.7% of the voting power of Daleen, or 19.3% prior to the
exercise of its Warrants, based on the voting rights of the Series F
preferred stock.
36
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 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.
37
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 was styled DALEEN TECHNOLOGIES, INC. AND
DALEEN CANADA CORPORATION V. MOHAMMAD AAMIR, 1303949 ONTARIO INC., AND THE
VENGROWTH INVESTMENT FUND INC. All Defendants were former stockholders of
Inlogic Software Inc. ("Inlogic"). Mr. Aamir was the president and chief
executive officer of Inlogic.
On June 6, 2001, we settled this lawsuit against the Defendants. In
connection with the settlement, on June 8, 2001, we granted to the Defendants
warrants to purchase an aggregate of 750,000 shares of our common stock with an
exercise price of $1.134 per share. The warrants are immediately exercisable for
a period of two years. The Company also agreed to negotiate in good faith to
license to an affiliate of certain of the Defendants its ecare product as part
of the settlement. The terms of the license are not yet finalized. The
Defendants also agreed to release us from any claims they may have had against
us.
We are the defendant in a number of other 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit List
Exhibit
Number Description
------- -----------
10.1 Amendment, dated September 10, 2001, to Exhibit B of Employment
Agreement dated January 31, 1998 by and between Daleen
Technologies, Inc. and David B. Corey.
10.2 Agreement of Interpretation, dated October 23, 2001, regarding
Employment Agreement dated January 31, 1998, as amended, by and
between Daleen Technologies, Inc. and David B. Corey.
10.3 Relocation Agreement, dated July 11, 2001, by and between
Daleen Technologies, Inc. and David B. Corey.
10.4 Employment Agreement, dated May 31, 2000, by and between Daleen
Technologies, Inc. and Jeanne T. Prayther.
10.5 Amendment, dated August 22, 2001, to Employment Agreement dated
May 31, 2000 by and between Daleen Technologies, Inc. and
Jeanne T. Prayther.
10.6 Retention Bonus Agreement, dated August 22, 2001, by and
between Daleen Technologies, Inc. and Jeanne T. Prayther.
10.7 Amendment, dated September 20, 2001, to Employment Agreement
dated April 21, 2000 by and between Daleen Technologies, Inc.
and Steven R. Kim.
38
10.8 Amendment, dated July 18, 2001, to the Daleen Technologies,
Inc. Amended and Restated 1999 Stock Incentive Plan.
10.9 Daleen Technologies, Inc. 2001 Broad-Based Stock Incentive
Plan.
-------------------
+ Previously filed.
(b) Reports on Form 8-K
None
39
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: November 14, 2001 /s/ JAMES DALEEN
-----------------------------------------
James Daleen
Chairman of the Board of Directors
and Chief Executive Officer
(Principal Executive Officer)
Date: November 14, 2001 /s/ JEANNE PRAYTHER
-----------------------------------------
Jeanne Prayther
Acting Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
40