<PAGE> 1
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[MARK ONE]
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
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)
<TABLE>
<S> <C>
DELAWARE 65-0944514
(State or other Jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
902 CLINT MOORE ROAD 33487
BOCA RATON, FLORIDA (Zip Code)
(Address of principal executive offices)
</TABLE>
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 [ ] No [X]
The number of outstanding shares of the issuer's class of capital stock as of
November 11, 1999, the latest practicable date, is as follows: 18,946,778 shares
of Common Stock, $.01 par value.
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FORM 10-Q
<PAGE> 2
DALEEN TECHNOLOGIES, INC. AND SUBSIDIARY
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
Condensed Consolidated Balance Sheets as of December 31, 1998 and
September 30, 1999 and Pro Forma as of September 30, 1999.................................. 3
Condensed Consolidated Statements of Operations for the three months and
nine months ended September 30, 1999 and 1998.............................................. 5
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 1999 and 1998................................................................ 6
Notes to Condensed Consolidated Financial Statements.......................................... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS......................................................................... 9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ................................... 14
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS............................................................................. 14
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS..................................................... 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.............................................................. 15
SIGNATURES............................................................................................... 16
</TABLE>
2
<PAGE> 3
PART I
FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements.
DALEEN TECHNOLOGIES, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
(In thousands, excepts share and per share data)
<TABLE>
<CAPTION>
Pro Forma
December 31, September 30, September 30,
1998 1999 1999
------------ ------------- -------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents ........................................................... $ 723 $ 8,666 $ 8,666
Restricted cash ..................................................................... -- 123 123
Securities available for sale ....................................................... 5,753 3,083 3,083
Accounts receivable, less allowance for doubtful accounts of $251
(unaudited) at September 30, 1999 and $9 at December 31, 1998 ..................... 1,202 4,613 4,613
Costs in excess of billings ......................................................... 503 1,859 1,859
Other current assets ................................................................ 176 231 231
------ ------- -------
Total current assets .......................................................... 8,357 18,575 18,575
Notes receivable ...................................................................... -- 549 549
Deferred offering costs ............................................................... -- 1,100 1,100
Property and equipment, net ........................................................... 2,516 3,030 3,030
Other assets .......................................................................... 152 533 533
------- ------- -------
Total assets .................................................................. $11,025 $23,787 $23,787
======= ======= =======
LIABILITIES REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable .................................................................... $ 459 $ 680 $ 680
Accrued payroll and other accrued expenses .......................................... 2,237 4,863 4,863
Billings in excess of costs ......................................................... 429 2,736 2,736
Other current liabilities .......................................... ................ -- 48 48
------- ------- --------
Total current liabilities ..................................................... 3,125 8,327 8,327
Redeemable preferred stock
Mandatorily redeemable convertible Series A Preferred Stock-3,000,000 shares
authorized, issued and outstanding ($7,500 liquidation value) as of December 31,
1998 and (unaudited) September 30, 1999; none issued and outstanding pro forma
as of September 30, 1999 (unaudited)............................................... 7,500 7,500 --
Mandatorily redeemable convertible Series D and D-1 Preferred Stock-4,908,379
shares authorized, issued and outstanding at December 31, 1998 and (unaudited)
September 30, 1999 ($15,000 liquidation value); none issued and outstanding pro
forma as of September 30, 1999 (unaudited) ........................................ 14,297 14,416 --
Mandatorily redeemable convertible Series E Preferred Stock-1,496,615 authorized;
none issued and outstanding at December 31, 1998 and 1,496,615 shares issued and
outstanding at September 30, 1999 (unaudited); none issued and outstanding pro
forma as of September 30, 1999 (unaudited) ........................................ -- 13,407 --
</TABLE>
3
(Continued)
<PAGE> 4
DALEEN TECHNOLOGIES, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Pro Forma
December 31, September 30, September 30,
1998 1999 1999
------------ ------------- -------------
(Unaudited)
<S> <C> <C> <C>
Stockholders (deficit) equity:
Series C Convertible Preferred Stock - $.01 par value. Authorized
1,222,222 shares; issued and outstanding 1,213,584 shares at
December 31, 1998 ($4.50 per share liquidation value) and (unaudited)
as of September 30, 1999; and none issued and outstanding proforma as of
September 30, 1999 (unaudited)........................................... $ 5,301 $ 5,301 $ --
Preferred Stock-$.01 par value. Authorized 11,250,000; and none issued or
outstanding.............................................................. -- -- --
Common Stock-$.01 par value. Authorized 70,000,000 shares; issued and
outstanding 3,240,000 shares at December 31, 1998 and 3,696,796 shares at
September 30, 1999 (unaudited); issued and outstanding 14,272,229 shares
proforma as of September 30, 1999 (unaudited)............................ 32 37 143
Stockholders note receivable............................................... -- (435) (435)
Additional paid-in capital................................................. 3,278 4,013 44,531
Accumulated deficit........................................................ 22,508 (28,779) (28,779)
-------- -------- --------
Total stockholders' (deficit) equity....................................... (13,897) (19,863) 15,460
-------- -------- --------
Total liabilities, redeemable preferred stock and
stockholders' (deficit) equity.................................... $ 11,025 $ 23,787 $ 23,787
======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
(Continued)
<PAGE> 5
DALEEN TECHNOLOGIES, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------ ------------------------------
September 30, September 30, September 30, September 30,
1998 1999 1998 1999
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Revenue:
License fees.......................................... $ 973 $ 4,087 $ 1,460 $ 7,836
Professional services and other....................... 1,557 1,996 2,532 5,362
------- ------- ------- -------
Total revenue.......................... 2,530 6,083 3,992 13,198
------- ------- ------- -------
Cost of revenue:
License fees.......................................... -- 5 1 8
Professional services and other....................... 2,040 1,759 3,149 5,415
------- ------- ------- -------
Total cost of revenue.................. 2,040 1,764 3,150 5,423
------- ------- ------- -------
Gross profit............................................... 490 4,319 842 7,775
Operating expenses
Sales and marketing................................... 686 1,086 1,903 2,368
Research and development.............................. 1,411 2,698 4,885 6,187
General and administrative............................ 1,329 2,355 3,086 5,649
------- ------- ------- -------
Total operating expenses............... 3,426 6,139 9,874 14,204
------- ------- ------- -------
Operating loss............................................. (2,936) (1,820) (9,032) (6,429)
------- ------- ------- -------
Total nonoperating income.................................. 528 179 570 279
------- ------- ------- -------
Net loss................................................... (2,408) (1,641) (8,462) (6,150)
Accretion of preferred stock............................... -- (43) -- (122)
------- ------- ------- -------
Net loss applicable to common stockholders................. $(2,408) $(1,684) $(8,462) $(6,272)
======= ======= ======= =======
Net loss applicable to common stockholders per
share - basic and diluted............................. $ (0.74) $ (0.46) $ (2.61) $ (1.85)
======= ======= ======= =======
Weighted average shares used in basic and diluted
per share calculation................................. 3,240 3,659 3,238 3,381
======= ======= ======= =======
Pro forma data:
Pro forma net loss applicable to common stockholders.. $(2,408) $(1,641) $(8,462) $(6,150)
======= ======= ======= =======
Pro forma net loss applicable to common stockholders
per share - basic and diluted.................... $ (0.20) $ (0.11) $ (0.92) $ (0.47)
======= ======= ======= =======
Weighted average shares used in pro forma
basic and diluted per share calculation............... 12,070 14,278 9,194 13,013
======= ======= ======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
(Continued)
<PAGE> 6
DALEEN TECHNOLOGIES, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------------
September 30, September 30,
1998 1999
------------- --------------
<S> <C> <C>
Cash flows from operating activities
Net loss....................................................... $(8,462) $(6,150)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization................................ 553 1,103
Bad debt expense............................................. 186 334
Changes in assets and liabilities:
Restricted cash............................................. -- (123)
Accounts receivable......................................... (2,030) (3,745)
Cash in excess of billings.................................. (520) (1,356)
Other current assets........................................ 38 (55)
Other assets................................................ 59 (1,481)
Accounts payable............................................ 824 221
Accrued payroll and other accrued expenses.................. 1,451 2,626
Billings in excess of costs................................. 189 2,307
Other current liabilities................................... (144) 48
------------- -------------
Net cash used in operating activities................... (7,856) (6,271)
------------- -------------
Cash flows from financing activities:
Payment of notes payable...................................... (1,618) --
Issuance of notes receivable - other.......................... -- (549)
Proceeds from sale of preferred stock - Series C, net......... 279 --
Proceeds from sale of mandatorily redeemable
convertible preferred stock - Series D and D-1, net.......... 14,313 --
Proceeds from sale of preferred stock - Series E, net......... -- 13,404
Proceeds from exercise of stock options and bridge warrants... -- 306
------------- -------------
Net cash provided by financing activities............... 12,974 13,161
------------- -------------
Cash flows from investing activities:
Capital expenditures, net...................................... (1,638) (1,617)
Purchase of securities available for sale...................... (35,125) (38,113)
Sales and maturities of securities available for sale.......... 28,914 40,783
------------- -------------
Net cash (used in) provided by investing activities..... (7,849) 1,053
------------- -------------
Net (decrease) increase in cash and cash equivalents............ (2,731) 7,943
Cash and cash equivalents at beginning of period................ 5,030 723
------------- -------------
Cash and cash equivalents at end of period...................... $ 2,299 $8,666
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements
6
(Continued)
<PAGE> 7
DALEEN TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements 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, they 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. These condensed
consolidated financial statements should be read in connection with the
Company's Registration Statement on Form S-1 dated September 29, 1999
(Registration No. 333-82487).
(2) COMPLETION OF INITIAL PUBLIC OFFERING AND CONVERSION
On October 6, 1999, the Company sold 4,100,000 shares of the Company's
common stock in an initial public offering from which the Company
received proceeds of $45,756,000, net of underwriter commissions and
offering costs. At that time, the Company's convertible preferred stock
was converted into 10,618,578 shares of common stock.
On October 28, 1999, the underwriters exercised their option to
purchase 615,000 additional shares of the Company's common stock, of
which 431,400 shares were issued by the Company and from which the
Company received net proceeds of $4,814,424.
(3) BASIC AND DILUTED NET LOSS PER SHARE
Basic and diluted net loss applicable to common stockholders per share
was computed by dividing net loss applicable to common stockholders by
the weighted average number of shares of common stock outstanding for
each period presented. Common stock equivalents were not considered
since their effect would be antidilutive.
(4) UNAUDITED PRO FORMA FINANCIAL INFORMATION
Unaudited pro forma basic and diluted net loss applicable to common
stockholders per share for the three months and nine months ended
September 30, 1998 and September 30, 1999 was computed by dividing pro
forma net loss applicable to common stockholders by the pro forma
weighted average number of shares of common stock outstanding, which
reflects the conversion of preferred stock as if such conversion
occurred on the first day of the periods presented as follows:
7
<PAGE> 8
<TABLE>
<CAPTION>
(IN THOUSANDS)
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1999
------------- --------------
<S> <C> <C>
Net loss applicable to common stockholders $ (2,408) $ (1,684)
Reversal of accretion of preferred stock 0 43
========== =========
Pro forma net loss applicable to common (2,408) (1,641)
stockholders
Weighted average shares 3,240 3,659
Common stock issued upon conversion of
preferred stock 8,830 10,619
--------- ---------
Pro forma weighted average shares 12,070 14,278
--------- ---------
Pro forma basic and diluted net loss applicable
to common stockholders per share $ (0.20) $ (0.11)
========= =========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1999
------------- --------------
<S> <C> <C>
Net loss applicable to common stockholders $ (8,462) $ (6,272)
Reversal of accretion of preferred stock 0 122
========= =========
Pro forma net loss applicable to common
stockholders (8,462) (6,150)
Weighted average shares 3,238 3,381
Common stock issued upon conversion of
preferred stock 5,956 9,632
========= =========
Pro forma weighted average shares 9,194 13,013
Pro forma basic and diluted net loss applicable
to common stockholders per share $ (0.92) $ (0.47)
========= =========
</TABLE>
8
<PAGE> 9
The unaudited pro forma condensed consolidated balance sheet at
September 30, 1999 reflects the conversion of the Series A, D, D-1
and E Mandatorily Redeemable Convertible Preferred Stock and Series C
Convertible Preferred Stock to common stock as if such conversion
occurred on September 30, 1999.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following should be read in conjunction with the Company's
unaudited condensed consolidated financial statements, and the related notes
thereto, included elsewhere herein. In addition, reference should be made to the
Company's audited consolidated financial statements and notes thereto, and
related Management's Discussion and Analysis of Financial Condition and Results
of Operations included in the Company's Registration Statement on Form S-1 dated
September 29, 1999 (Registration No. 333-82487).
OVERVIEW
We are a leading provider of next-generation billing and customer care
software that serves as the core platform of an enterprise solution for
integrated communications providers. In March, 1997, our core product, BillPlex,
was introduced, and we installed the product in our first customer site shortly
thereafter. We derive our revenue primarily through license sales of BillPlex
and from related professional services, including implementation and
customization services, maintenance and support activities and training
services. As we have signed new contracts, our license revenues have grown in
dollars as well as a percentage of total revenue, and we expect this trend to
continue in the future.
License revenue of BillPlex includes initial license fees that are
based on the numbers of systems users and computer processors. In addition, we
charge additional license fees on a "pay as you grow" basis as capacity for the
system grows. Also, we have entered into service bureau arrangements with
customers and will receive ongoing fees from these activities in the future.
Results of Operations
Three Months Ended September 30, 1999 and 1998
Total Revenue. Total revenue increased $3.6 million, or 140.4%, to $6.1
million for the three months ended September 30, 1999 from $2.5 million for the
same period in 1998. Revenue increases from both licenses and services occurred
due to a significant increase in the number of implementations in the three
months ended September 30, 1999.
License Fees. License fees increased $3.1 million, or 320.0%, to $4.1
million for the three months ended September 30, 1999 from $1.0 million for the
same period in 1998. License fees constituted 67.2% of total revenue in the
three months ended September 30, 1999 compared to 38.5% in the same period in
1998. This increase was due to continued growth in the number of
implementations.
9
<PAGE> 10
Professional Services and Other. Professional services and other
revenue increased $440,000, or 28.2%, to $2.0 million for the three months ended
September 30, 1999 from $1.6 million in the same period in 1998. Professional
services and other revenue constituted 32.8% of total revenue in the three
months ended September 30, 1999 compared to 61.5% for the same period in 1998.
Total Cost of Revenue. Total cost of revenue decreased $275,000, or
13.5%, to $1.8 million for the three months ended September 30, 1999 from $2.0
million in the same period in 1998. Total cost of revenue includes the cost of
direct labor, benefits, overhead and materials associated with the fulfillment
and delivery of the BillPlex license materials and professional services to
customers. The decrease in cost is primarily due to a substantial reduction in
the use of outside contract systems integrators from 1998 to 1999. Overall, cost
of revenue as a percentage of revenue decreased to 29% in the three months ended
September 30, 1999 from 80.6% in the same period in 1998.
Cost of License Fees. Cost of license fees increased to $5,000 the
three months ended September 30, 1999 from nothing in the same period in 1998.
Cost of license fees increased with the increase in revenue from license fees in
the three months ended September 30, 1999. Cost of license fees approximated
0.1% of license fee revenue in the three months ended September 30, 1999
compared to 0.0% in the same period in 1998. Cost of license fees includes
direct cost of labor, benefits and materials for fulfillment and shipment of the
BillPlex software.
Cost of Professional Services and Other. Cost of professional services
and other costs decreased $281,000, or 13.8%, to $1.8 million for the three
months ended September 30, 1999 from $2.0 million in the same period in 1998.
The decrease in cost is primarily due to a substantial reduction in the use of
outside contract systems integrators from 1998 to 1999.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses earned by sales and marketing personnel,
travel and entertainment, promotional and corporate overhead costs. These
expenses increased $400,000, or 58.3%, to $1.1 million for the three months
ended September 30, 1999 from $686,000 for the same period in 1998. The overall
increase was due to the increase in the number of personnel in sales and
marketing from 1998 to 1999. As a percentage of revenue, these expenses
decreased from 27.1% in 1998 to 17.9% in 1999 as a result of the large increase
in total revenue.
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. Our research and
development expenses increased $1.3 million, or 91.2%, to $2.7 million for the
three months ended September 30, 1999 from $1.4 million for the same period in
1998. The overall increase was primarily the result of additional software
developers, product testing and benchmarking, managers, and quality assurance
personnel in the three months ended September 30, 1999 compared to the same
period in 1998. As a percentage of revenue, these expenses decreased from 55.8%
in 1998 to 44.4% in 1999.
General and Administrative. General and administrative expenses consist
primarily of salaries, benefits and related costs for our executive, finance,
administrative, human resources, and information systems personnel. Our general
and administrative expenses increased $1.0 million, or 77.2% to $2.4 million for
the three months ended September 30, 1999 from $1.3 million in the same period
in 1998. This increase was primarily the result of additional finance,
executive, information systems and human resources personnel, including
recruiting costs, to support the growth of our business. As a percentage of
revenue, general and administrative expenses decreased to 38.7% in the three
months ended September 30, 1999 from 52.5% in the same period in 1998.
Nonoperating Income. Nonoperating income is comprised primarily of
interest income, net of interest expense. Nonoperating income decreased
$349,000, or $66.1%, to $179,000 for the three months ended September 30, 1999
from $528,000 for the same period in 1998. This was principally due to lower
average investments in 1999.
Nine Months Ended September 30, 1999 and 1998
10
<PAGE> 11
Total Revenue. Total revenue increased $9.2 million, or 230.6%, to
$13.2 million for the nine months ended September 30, 1999 from $4.0 million in
the same period in 1998. Revenue increases from both licenses and professional
services occurred due to a significant increase in the number of implementations
in 1999.
License Fees. License fees increased $6.4 million, or 436.7%, to $7.8
million for the nine months ended September 30, 1999 from $1.5 million in the
same period in 1998. License fees constituted 59.4% of total revenue in the nine
months ended September 30, 1999 and 36.6% for the same period in 1998. This
increase was due to continued growth in the number of implementations.
Professional Services and Other. Professional services and other
revenue increased $2.8 million, or 111.8%, to 5.4 million for the nine months
ended September 30, 1999 from $2.5 million in the same period in 1998.
Professional services and other revenue constituted 40.6% of total revenue in
the nine months ended September 30, 1999 compared to 63.4% in the same period in
1998.
Total Cost of Revenue. Total cost of revenue increased $2.3 million, or
72.2%, to $5.4 million for the nine months ended September 30, 1999 from $3.1
million in the same period in 1998. Increases in direct labor, materials and
corporate overhead accounted for this increase and were due to the significant
increase in both license and professional services revenue. These cost increases
were partially offset due to the Company substantially reducing the use of
outside contract systems integrators from 1998 to 1999.
Cost of License Fee. Cost of license fees increased $7,000, or 700%, to
$8,000 in the nine months ended September 30, 1999 from $1,000 in the same
period in 1998. Cost of license fees increased with the increase in revenue from
license fees for the nine months ended September 30, 1999. Cost of license fees
approximated less than 1% of license fee revenue in the nine months ended
September 30, 1999 and 1998.
Cost of Professional Services and Other. Cost of professional services
and other costs increased $2.3 million, or 72.0% to $5.4 million for the nine
months ended September 30, 1999 from $3.1 million in the same period in 1998.
Cost of services increased in the nine months ended September 30, 1999 due to
deploying more resources to support the greater number of implementations
performed in the nine months ended September 30, 1999. Overall, cost of
professional services and other decreased to 41.1% of total revenue in the nine
months ended September 30, 1999 compared to 78.9% in the same period in 1998.
Sales and Marketing. Sales and marketing expenses increased $465,000,
or 24.4%, to $2.4 million for the nine months ended September 30, 1999 from $1.9
million in the same period in 1998. The increase was primarily due to additional
personnel in sales and marketing, and the costs of recruiting and relocating
these personnel.
Research and Development. Research and development expenses increased
$1.3 million, or 26.7%, to $6.2 million for in the nine months ended September
30, 1999 from $4.9 million in the same period in 1998. The increase was due to
significant increased investment in software developers, product testing and
benchmarking, managers, and quality assurance personnel, and outside contractors
to support our product development of BillPlex.
General and Administrative. General and administrative expenses
increased $2.6 million, or 83.1%, to $5.6 million for the nine months ended
September 30, 1999 from $3.1 million in the same period in 1998. This increase
was primarily the result of additional finance, executive, information services
and human resources personnel, including the costs of recruiting and relocation
of these personnel, to support the growth of our business.
Nonoperating Income. Nonoperating income decreased $291,000, or 51.1%,
to $279,000 in the nine months ended September 30, 1999 from $570,000 in the
same period in 1998. This was principally due to lower average investments in
1999.
LIQUIDITY AND CAPITAL RESOURCES
Since inception we have invested $4.1 million in capital expenditures.
Beyond our capital expenditures,
11
<PAGE> 12
the funds we have raised have been applied to support our working capital needs.
Our sources of liquidity as of September 30, 1999 consisted principally of cash
and cash equivalents of $8.7 million and securities available for sale of $3.1
million, which consist of short term securities invested in fixed income bonds.
The carrying value of our financial instruments approximated their fair values
based on current market prices and rates.
On October 6, 1999, the Company sold 4,100,000 shares of its common
stock in an initial public offering from which the company received proceeds of
$45,756,000, net of underwriter commissions and offering costs. At that time,
all shares of the Company's convertible preferred stock was converted into
10,618,578 shares of common stock.
On October 28, 1999, the underwriters exercised the option to purchase
615,000 additional shares of the Company's common stock, of which $431,400
shares were issued by the Company and from which the Company received net
proceeds of $4,814,424.
Net cash used in operating activities was $6.3 million in the nine
months ended September 30, 1999 and $7.9 million in the nine months ended
September 30, 1998. The principal use of cash was to fund our losses from
operations.
Cash provided by investing activities was $1.3 million in the nine
months ended September 30, 1999 and cash used was $7.8 million in the nine
months ended September 30, 1998. Excess funds are deposited in short-term
securities which are then rolled over or cashed depending on the Company's needs
at the maturity date.
Net cash provided by financing activities was $13.1 million in the nine
months ended September 30, 1999 and $13.0 million in the nine months ended
September 30, 1998. Cash provided by financing activities has consisted of sales
of our common and preferred stock.
We believe that the net proceeds from the initial public offering,
together with our current cash, cash equivalents, and securities available for
sale, will be sufficient to meet our anticipated cash needs for working capital
and capital expenditures for at least the next 18 months.
YEAR 2000 READINESS
State of Readiness of our BillPlex product. Our review of the Year 2000
readiness of BillPlex is performed as a part of our normal quality assurance
program. The current version performs in accordance with the Year 2000
disclosure. We have created a version 2.3 of BillPlex on which we have completed
systematic Year 2000 tests. We have found no material Year 2000 compliance
issues with respect to version 2.3 of BillPlex. Because BillPlex can be
interfaced to a number of third-party systems, we have incorporated programming
techniques in our applications designed to help insulate BillPlex from possible
non-compliant data inputs from those third-party applications. In addition, the
database engine used by BillPlex is designed to store and manipulate date
information in a Year 2000 ready manner.
Our normal quality assurance testing includes testing of certain
functionality with the hardware system clock set to dates in the year 2000 and
includes testing of certain dates in the year 2000 as inputs. We have only
shipped versions of BillPlex that have passed these tests. We anticipate
additional testing to be performed in the future. All new products introduced by
us are expected to be Year 2000 compliant.
BillPlex operates in complex network environments and directly and
indirectly interacts with a number of other hardware and software systems. We
have not performed comprehensive tests on all hardware on which BillPlex may
operate or extensive tests on all hardware, software, switches and other devices
that may operate in conjunction with BillPlex, or provide data to or receive
data from BillPlex. Custom interfaces written by us, our partners, our
customers, or other third parties have also not been tested. Since our testing
does not cover every possible system configuration or computing environment,
some of our customers may have Year 2000 problems with products that we believe
are Year 2000 compliant.
12
<PAGE> 13
State of Readiness of our Internal Systems. We may be affected by Year
2000 issues related to non-compliant internal systems developed by us or by
third-party vendors. Based on the information made available to us by the
respective manufacturers or publishers, we believe that we have identified and
corrected all of the major computers, software applications and related
equipment used within our internal operations that must be modified, upgraded,
or replaced to minimize the possibility of a material disruption to our
business.
Systems Other Than Information Technology Systems. Our internal
operations and businesses are also dependent upon computer-controlled systems of
third parties such as suppliers, customers, and service providers. The operation
of our office and facilities equipment, such as fax machines, photocopiers,
security systems, elevators, other common devices and utilities may be affected
by the Year 2000 problem. We are currently assessing the potential effect of,
and costs of remediating, the Year 2000 problem on this equipment. We believe
that absent a critical failure beyond our control, such as prolonged loss of
electrical or telephone service, Year 2000 problems experienced by third-parties
will not have a material impact upon us, but, we have no contingency plan for
such critical failures as electrical and phone service.
Suppliers. We have gathered information from our significant suppliers
to identify and, to the extent possible, resolve issues involving the Year 2000
problem. Based on written certifications or oral representations from these
suppliers, we do not believe our business will be materially affected due to the
failure of any of these suppliers to be Year 2000 ready. However, we have
limited or no control over the actions of our suppliers. Thus, while we expect
that we will be able to resolve any significant Year 2000 problems with our
systems, we cannot guarantee that our suppliers will resolve any or all Year
2000 problems with their systems before our business is materially disrupted.
Any failure of our suppliers to resolve Year 2000 problems with their systems in
a timely manner could have a material adverse effect on our business, financial
condition, or operating results.
Customers. Our customers rely heavily on technology. We cannot assure
you that our customers will successfully address their own Year 2000 problems.
Their failure to do so could cause them to change their purchasing decisions,
which could have a material adverse effect on our business, financial condition,
or operating results.
Most Likely Consequences of Year 2000 Problems. We believe we have
identified and resolved all internal Year 2000 problems that could materially
adversely affect our business, financial condition, or operating results. We
also believe, however, that it is not possible to determine with complete
certainty that we have identified or corrected all Year 2000 problems affecting
us. The number of devices that could be affected and the interactions among
these devices are simply too numerous. In addition, we cannot accurately predict
how many failures related to the Year 2000 problem will occur, or the severity,
duration, or financial consequences of those failures.
Risks. Any failure by us to make our products Year 2000 compliant could
result in a decrease in sales of our products, an increase in allocation of
resources to address Year 2000 problems of our customers without additional
revenue commensurate with such dedication of resources, or an increase in
litigation costs relating to losses suffered by our customers due to such Year
2000 problems. Failures of our internal systems could prevent us from processing
orders, issuing invoices, and developing products, and could require us to
devote significant resources to correcting such problems. Due to the general
uncertainty inherent in the Year 2000 computer problem, resulting from the
uncertainty of the Year 2000 readiness of third-party suppliers and vendors, we
are unable to determine at this time whether the consequences of Year 2000
failures will have a material impact on our business, results of operation, and
financial condition.
Contingency Plans. We are currently nearing completion of the
development of contingency plans to be implemented as part of our efforts to
identify and correct Year 2000 problems affecting our internal systems.
Depending on the systems affected, these plans could include:
- accelerated replacement of affected equipment or software;
- short to medium-term use of backup equipment and software;
13
<PAGE> 14
- increased work hours for our personnel or use of contract
personnel to correct on an accelerated schedule any Year 2000
problems which arise or to provide manual workarounds for
information systems; and
- other similar approaches.
If we are required to implement any of these contingency plans, those
plans could have a material adverse effect on our business, financial condition
or operating results.
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q and certain documents incorporated
by reference into this Form 10-Q contain forward-looking statements. These
forward-looking statements relate to future events or our future financial
performance, and involve known and unknown risks and uncertainties that may
cause our or our industry's actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by these
forward-looking statements. In some cases, you can identify forward-looking
statements by works such as may, will, should, expects, plans, anticipates,
believes, estimates, predicts, potential or continue, or the negative of these
and similar words.
Forward-looking statements include, without limitation, the extent and
timing of future revenue and expenses and customer demand for our products and
services as described in our Form S-1 Registration Statement dated as of
September 29, 1999 (Registration No. 333-82487) under "Risk Factors." These
risk factors include statements regarding the fact that we have not achieved
profitability and may continue to incur net losses, our limited history
operating as a software company, our quarterly operating results may fluctuate
in future quarters, our business is highly dependent on a limited number of
customers, our competition, our ability to effectively manage the growth of
our operations, and other risk factors identified in the Registration
Statement. See also the Safe Harbor Compliance Statement attached as
Exhibit 99.1 to this Report.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. Our actual results could
differ materially from the results anticipated in these forward-looking
statements. Moreover, neither we nor any other person assumes responsibility
for the accuracy and completeness of forward-looking statements. We are under
no duty to update any of the forward-looking statements after the date of this
Form 10-Q to conform these statements to actual results.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our financial instruments consist of cash that is invested in
institutional money market accounts and short term securities invested in
corporate fixed income bonds. At September 30, 1999, the carrying value of our
financial instruments approximated their fair values based on current market
prices and rates. 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.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are not a party to any material legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On October 6, 1999, the Company sold 4,100,000 shares of its common
stock in an initial public offering from which we received proceeds of
$45,756,000 net of underwriter commissions and offering costs. At that time,
there were 3,000,000 million shares of Series A Preferred Stock issued in
September, 1997; 1,213,584 shares of Series C Convertible Preferred Stock issued
in November, 1997; 4,221,846 shares of Series D Preferred Stock issued in June,
1998; 686,533 shares of Series D-1 Preferred Stock issued in June, 1998; and
1,496,615 shares of Series E Preferred Stock issued in June, 1999. All
redeemable preferred stock automatically converted into 10,618,578 common shares
upon the effectiveness of the initial public offering.
14
<PAGE> 15
On October 28, 1999, the underwriters exercised their option to
purchase additional shares to cover over-allotments. 431,400 common shares were
purchased from which the Company received proceeds of $4,814,424 net of
underwriter commissions and offering costs.
ITEM 3. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibits
Exhibit 27.1 Financial Data Schedule (for SEC use only).
Exhibit 99.1 Safe Harbor Compliance Statement.
Reports to be filed on Form 8-K
(b) No reports on Form 8-K were filed during the quarter ended
September 30, 1999.
15
<PAGE> 16
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 15, 1999 /s/ James Daleen
-----------------------------------
James Daleen
Chairman of the Board of Directors and Chief
Executive Officer
(Principal Executive Officer)
Date: November 15, 1999 /s/ Richard A. Schell
-----------------------------------
Richard A. Schell
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
EXHIBIT 27.1
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF DALEEN TECHNOLOGIES, INC. FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 8,789
<SECURITIES> 3,083
<RECEIVABLES> 6,723
<ALLOWANCES> 251
<INVENTORY> 0
<CURRENT-ASSETS> 231
<PP&E> 4,133
<DEPRECIATION> 1,103
<TOTAL-ASSETS> 23,787
<CURRENT-LIABILITIES> 8,327
<BONDS> 0
35,323
5,301
<COMMON> 37
<OTHER-SE> (25,201)
<TOTAL-LIABILITY-AND-EQUITY> 23,787
<SALES> 13,198
<TOTAL-REVENUES> 13,198
<CGS> 5,423
<TOTAL-COSTS> 19,627
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1
<INCOME-PRETAX> (6,272)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,272)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,272)
<EPS-BASIC> (1.85)
<EPS-DILUTED> (1.85)
</TABLE>
<PAGE> 1
EXHIBIT 99.1
SAFE HARBOR COMPLIANCE STATEMENT
In passing the Private Securities Litigation Reform Act of 1995, or the
Reform Act, Congress encouraged public companies to make "forward-looking
statements" by creating a safe harbor to protect companies from securities law
liability in connection with these statements. We intend to qualify both our
written and oral forward-looking statements for protection under the Reform Act
and any other similar safe harbor provisions.
"Forward-looking statements" are defined by the Reform Act. Generally,
forward-looking statements include expressed expectations of future events and
the assumptions on which these expectations are based. All forward-looking
statements are inherently uncertain as they are based on various expectations
and assumptions concerning future events and they are subject to numerous known
and unknown risks and uncertainties that could cause actual events or results to
differ materially from those projected. Due to those uncertainties and risks,
the investment community is urged not to place undue reliance on our written or
oral forward-looking statements. We do not undertake any obligation to update or
revise this Safe Harbor Compliance Statement for Forward-Looking Statements to
reflect future developments. In addition, we do not undertake any obligation to
update or revise forward-looking statements to reflect changed assumptions, the
occurrence of unanticipated events or changes to future operating results over
time.
We provide the following risk factor disclosure in connection with our
continuing effort to qualify our written and oral forward-looking statements for
the safe harbor protection of the Reform Act and any other similar safe harbor
provisions. Important factors currently known to our management that could cause
actual results to differ materially from those in forward-looking statements
include the disclosures contained in the Quarterly Report on Form 10-Q to which
this statement is appended as an exhibit and also include the following:
RISKS RELATED TO DALEEN
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 $12.2 million in 1998, $8.0
million in 1997 and $1.5 million in 1996. As of June 30, 1999, we had an
accumulated deficit of approximately $27.1 million. We have not yet realized any
profit and we cannot predict when, if ever, we will achieve profitability. We
expect to significantly increase our sales and marketing, product development
and administrative expenses. As a result, we will need to generate significant
additional revenue from sales of our products to achieve and maintain
profitability. For this reason, we expect to continue to incur net losses for at
least the next several quarters, even if sales of our products continue to grow.
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.
IT IS DIFFICULT TO EVALUATE OUR BUSINESS BECAUSE WE HAVE A LIMITED HISTORY
OPERATING AS A SOFTWARE COMPANY.
We have a limited operating history as a software company. As a result,
the progress of our business to date and our historical financial information
are of limited value in predicting our future operating results. In 1996, we
changed our business from providing consulting services to operating as a
software company. We introduced our principal product, BillPlex, in 1997 and we
had no license revenue until 1998. As of August 31, 1999, we had signed
contracts with only 22 customers and, of these, only five had completed
implementation and were using BillPlex in their day-to-day operations. Because
our software offering is new, we have little revenue from recurring sources and
must depend heavily on revenue from new sales. Changing our business also
required us to adjust our business processes and make a number of significant
personnel changes, including changes and additions to our sales and marketing,
professional services and support, research and development and management
teams. For all these reasons, as you evaluate our business, you must consider
the risks and difficulties frequently encountered by early stage companies in
new and rapidly evolving markets. Our new business strategy may not be
successful and we may not successfully address these risks.
<PAGE> 2
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE IN FUTURE PERIODS, AND WE MAY FAIL
TO MEET EXPECTATIONS.
Our revenue and operating results may vary significantly from quarter
to quarter due to a number of factors. This fluctuation may cause our operating
results to be below the expectations of public market analysts and investors,
and the price of our common stock may fall. Factors that could cause quarterly
fluctuations include:
- variations in demand for our products and services;
- our ability to develop and attain market acceptance of
enhancements to BillPlex and any new products and services;
- the pace of product implementation and the timing of customer
acceptance;
- changes in our pricing policies or the pricing policies of our
competitors;
- delays of purchases in 1999 and early 2000 by customers who
temporarily stop purchasing software or reduce information
technology spending due to year 2000 concerns; and
- the mix of sales channels through which our products and
services are sold.
In any given quarter, most of our revenue has been attributable to a
small number of relatively large contracts and we expect this to continue. As a
result, the cancellation or deferral of even a small number of contracts in a
particular quarter could significantly reduce our revenue, 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. As a result
of these factors, we believe that period-to-period comparisons of our revenue
and operating results are not necessarily meaningful.
OUR BUSINESS IS HIGHLY DEPENDENT ON A LIMITED NUMBER OF CUSTOMERS.
All of our revenue is currently derived from a very limited number of
customers. If a large contract is cancelled or deferred, or if an anticipated
contract does not materialize, our financial results could be materially harmed.
In addition, continued industry consolidation or the formation of alliances
among network operators and service providers could reduce our customer base,
reduce the number of potential customers we can target and decrease the demand
for our products and services. We had two customers who accounted for 100% of
our total revenue in 1997, five customers who accounted for 99% of our total
revenue in 1998, and five customers who accounted for 64% of our total revenue
in the first six months of 1999. Most of our major customers typically pay us
up-front license fees and they do not have any obligation to purchase additional
licenses. There can be no assurance these customers will purchase licenses for
additional seats or processors or continue with our maintenance programs.
WE FACE SIGNIFICANT COMPETITION FROM COMPANIES THAT MAY HAVE GREATER RESOURCES
THAN WE DO.
2
<PAGE> 3
The communications billing and customer care systems business is very
competitive. We expect competition to increase in the future. Our principal
competitors include other 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 outside suppliers.
Many of our current and future competitors may have advantages over us,
including:
- longer operating histories;
- larger customer bases;
- substantially greater financial, technical, sales and
marketing resources;
- greater name recognition; and
- ability to more easily provide a comprehensive hardware and
software solution.
Our current and potential competitors have established, and may
continue to establish in the future, cooperative relationships among themselves
or with third parties 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.
IF WE FAIL TO EFFECTIVELY MANAGE THE GROWTH OF OUR OPERATIONS, OUR ABILITY TO
PURSUE OUR STRATEGY WOULD BE COMPROMISED AND OUR BUSINESS WOULD SUFFER.
Our business could suffer if we fail to effectively manage our growth.
We continue to increase the scope of our operations, have grown our employee
headcount substantially, and expect to continue to hire new employees at a rapid
pace. Similarly, our revenue grew from $156,000 in 1997 to $5.2 million in 1998.
Our revenue for the six months ended June 30, 1999 was $7.1 million. Continued
growth could place a significant strain on our management systems and resources.
We will need to continue to improve our financial and managerial controls and
reporting systems and procedures, and will need to expand, train and manage our
work force.
OUR LENGTHY SALES CYCLE MAKES IT DIFFICULT TO ANTICIPATE THE TIMING OF SALES,
AND REVENUE MAY VARY FROM PERIOD TO PERIOD.
The sales cycle associated with the purchase of our products is
lengthy, and the time between the initial proposal to a prospective customer and
the signing of a license agreement can be as long as one year. Our products
involve a commitment of capital which may be significant to the customer, with
attendant delays frequently associated with large capital expenditures and
implementation procedures within an organization. These delays may reduce our
revenue in a
3
<PAGE> 4
particular period without a corresponding reduction in our costs, which could
hurt our results of operations for that period.
THE SKILLED EMPLOYEES THAT WE NEED MAY BE DIFFICULT AND EXPENSIVE TO HIRE AND
RETAIN IN TODAY'S TIGHT 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 attract or 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. In
addition, an increase in expenses required to attract and retain qualified
personnel may reduce our operating margins.
WE DEPEND IN SOME CASES ON STRATEGIC BUSINESS ALLIANCES TO SELL AND IMPLEMENT
OUR PRODUCTS, AND ANY FAILURE TO DEVELOP OR MAINTAIN THESE ALLIANCES COULD HURT
OUR FUTURE GROWTH.
Third parties such as operation support system providers, consulting
firms and systems integration firms help us with marketing, sales and
implementation of our products. To achieve our goals, 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. 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.
WE RELY HEAVILY ON SALES OF ONE PRODUCT.
Since our introduction of BillPlex in 1997, substantially all of our
revenue has been attributable to this product. We expect to continue to be
heavily dependent on this product. As a result, a decline in demand for BillPlex
or failure to achieve broad market acceptance of BillPlex would cause our
business and financial performance to suffer.
IF OUR CUSTOMERS CANNOT SECURE ADEQUATE FINANCING, WE MAY NOT GET THEIR
BUSINESS.
Many of our potential customers are new entrants into the
communications market and lack significant financial resources. These companies
rely to a large degree on access to the capital markets for growth. Their
failure to raise capital would hurt their financial viability and their demand
for our products. If our potential customers cannot obtain the resources to
purchase
4
<PAGE> 5
our products, they may turn to other options such as service bureaus, which
would hurt our business.
IF WE DO NOT CONTINUALLY ENHANCE OUR PRODUCT OFFERING TO MEET THE CHANGING NEEDS
OF SERVICE PROVIDERS, WE WILL LOSE FUTURE BUSINESS TO OUR COMPETITORS.
We believe that our future success will depend to a significant extent
upon our ability to enhance our product offering and 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 BillPlex software, developing additional pre-configured market-based
packages and investigating complimentary products and technologies. We believe
our product currently meets customer requirements regarding scalability and
throughput, and we are working to improve our system performance. However, the
requirements of our customers may change and our present or future products may
not satisfy the evolving needs of the communications market. If we are unable to
anticipate or respond adequately to customer needs, or achieve sufficient
throughput and scalability, we will lose business and our financial performance
will suffer.
IF WE CANNOT CONTINUE TO OBTAIN OR IMPLEMENT THE THIRD-PARTY SOFTWARE THAT WE
INCORPORATE INTO OUR PRODUCT OFFERING, WE MAY HAVE TO DELAY OUR PRODUCT
DEVELOPMENT OR REDESIGN EFFORTS.
Our product offering involves integration with products and systems
developed by third parties. If any of these third-party products should become
unavailable for any reason, fail under operation with our product offering or
fail to be supported by their vendors, it would be necessary for us to redesign
our product offering. We might encounter difficulties in accomplishing any
necessary redesign in a cost-effective or timely manner. We also could
experience difficulties integrating our product offering with other hardware and
software. Furthermore, if new releases of third-party products and systems occur
before we develop products compatible with these new releases, we could
experience a decline in demand for our product offering, which could cause our
business and financial performance to suffer.
LOSS OF OUR SENIOR MANAGEMENT PERSONNEL WOULD LIKELY HURT OUR BUSINESS.
Our future success depends to a significant extent on the continued
services of our senior management and other key personnel, particularly James
Daleen, our founder and chief executive officer. If we lost the services of Mr.
Daleen or other key employees it would likely hurt our business. We have
employment and non-compete agreements with some of our executive officers,
including Mr. Daleen. However, these agreements do not obligate them to continue
working for us.
5
<PAGE> 6
WE MAY BE UNABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY, AND OUR COMPETITORS MAY
INFRINGE ON OUR TECHNOLOGY.
Any misappropriation of our technology or the development of
competitive technology could seriously harm our business. We regard a
substantial portion of our software product as proprietary and rely on a
combination of patent, copyright, trademark and trade secret laws, customer
license agreements and employee and third-party agreements to protect our
proprietary rights. These steps may not be adequate, and we do not know if they
will prevent misappropriation of our intellectual property, particularly in
foreign countries where the laws may not protect proprietary rights as fully as
do the laws of the United States. Other companies could independently develop
similar or superior technology without violating our proprietary rights. If we
have to resort to legal proceedings to enforce our intellectual property rights,
the proceedings could be burdensome and expensive and could involve a high
degree of risk.
CLAIMS BY OTHERS THAT WE INFRINGE THEIR PROPRIETARY TECHNOLOGY COULD DIVERT OUR
RESOURCES, RESULT IN UNEXPECTED LICENSE FEES AND HARM OUR BUSINESS.
Third parties could claim that our current or future products or
technology infringe their proprietary rights. An infringement claim against us
could be costly even if the claim is invalid, and could distract our management
from the operation of our business. Furthermore, a judgment against us could
require us to pay substantial damages and could also include an injunction or
other court order that could prevent us from selling our product offering. If we
faced a claim relating to proprietary technology or information, we might seek
to license technology or information, or develop our own, but we might not be
able to do so. Our failure to obtain the necessary licenses or other rights or
to develop non-infringing technology could prevent us from selling our products
and could seriously harm our business.
PRODUCT DEFECTS OR SOFTWARE ERRORS COULD ADVERSELY AFFECT OUR BUSINESS DUE TO
COSTLY REDESIGNS, PRODUCTION DELAYS AND CUSTOMER DISSATISFACTION.
Design defects or software errors in our product may cause delays in
product introductions or damage customer satisfaction, either of which could
seriously harm our business. Our software products are highly complex and may,
from time to time, contain design defects or software errors that may be
difficult to detect and correct. We have a customer support organization that is
responsible for providing maintenance and support to our customers. Maintenance
and support includes identifying and correcting any reported product defects or
software errors.
Although we have license agreements with our customers that contain
provisions designed to limit our exposure to potential claims and liabilities
arising from customer problems, these provisions may not effectively protect us
against all claims. In addition, claims and liabilities arising from customer
problems could significantly damage our reputation and hurt our business.
6
<PAGE> 7
YEAR 2000 ISSUES MAY DISRUPT OUR OPERATIONS AND CAUSE US TO LOSE REVENUE.
Failure of BillPlex to be year 2000 compliant could result in a
significant decrease in market acceptance of our product and legal liability. If
a claim were to be brought against us, regardless of its merit, the claim would
likely be time-consuming and expensive to defend, would divert management time
and attention and could result in adverse publicity. We intend to have this
testing process completed during the third quarter of 1999. BillPlex operates in
complex network environments and directly and indirectly interacts with a number
of other hardware and software systems. We have not performed extensive tests on
all hardware, software, switches and other devices that may operate in
conjunction with BillPlex, or provide data to or receive data from BillPlex. We
also have not tested custom interfaces written for BillPlex. Some of our
customers may have year 2000 problems with products that we believe are year
2000 ready.
We may also be affected by year 2000 issues related to non-compliant
internal systems developed by us or by third-party vendors. If the internal
systems developed by us prove to be non-compliant, or if our third-party vendors
or any suppliers of non-information technology systems do not identify year 2000
problems with their products or fail to correct their year 2000 problems, we
could have failures that result in an interruption of our normal business
activities or operations.
OUR STRATEGY TO EXPAND INTO INTERNATIONAL MARKETS MAY NOT SUCCEED AS A RESULT OF
LEGAL BUSINESS AND ECONOMIC RISKS SPECIFIC TO INTERNATIONAL OPERATIONS.
Our strategy includes expansion into international markets through a
combination of strategic relationships and internal business expansion. In
addition to risks generally associated with international operations, our future
international operations might not succeed for a number of reasons, including:
- dependence on sales efforts of third party distributors;
- difficulties in localizing products and supporting customers
in foreign countries;
- greater difficulty in collecting accounts receivable; and
- legal uncertainties inherent in transnational operations such
as export and import regulations, taxation issues, tariffs and
trade barriers.
ACQUISITIONS OF COMPANIES OR TECHNOLOGIES COULD RESULT IN DISRUPTIONS TO OUR
BUSINESS, DIVERSION OF MANAGEMENT AND COULD REQUIRE THAT WE ENGAGE IN FINANCING
TRANSACTIONS THAT COULD HURT OUR FINANCIAL PERFORMANCE.
Although we have not done so in the past, we may in the future make
acquisitions of other companies, products or technologies, or enter into
strategic relationship agreements that require substantial up-front investments.
If so, 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. Acquisitions may also disrupt our operations and
divert
7
<PAGE> 8
management's attention from the day-to-day operation of our business, which
could impair our relationships with our current employees, customers and
strategic marketing alliances.
We may have to incur debt or issue equity securities to pay for any
future acquisitions. The issuance of equity securities for any acquisition could
be substantially dilutive to our stockholders. In addition, our profitability
may suffer because of acquisition-related costs or amortization costs for
acquired goodwill and other intangible assets.
RISKS RELATED TO OUR COMMON STOCK
THE MARKET PRICE OF OUR COMMON STOCK MAY BE VOLATILE, AND YOU MAY EXPERIENCE
INVESTMENT LOSSES.
Many factors could cause the market price of our common stock to rise
and fall. Some of these factors are:
- variations in our quarterly operating results;
- acquisitions or strategic alliances by us or others in our
industry;
- changes in estimates of our performance or recommendations by
financial analysts; and
- market conditions and regulatory trends in the communications
industry.
In addition, the stock market experiences significant price and volume
fluctuations. These fluctuations particularly affect the market prices of the
securities of many high-technology companies. These broad market fluctuations
could adversely affect the market price of our common stock. When the market
price of a stock has been volatile, holders of that stock have often instituted
securities class action litigation against the company that issued the stock. If
any of our stockholders brought a securities class action lawsuit against us, we
could incur substantial costs defending the lawsuit. The lawsuit could also
divert the time and attention of our management. Any of these events could
seriously harm our business.
OUR EXECUTIVE OFFICERS AND DIRECTORS OWN A LARGE PERCENTAGE OF OUR VOTING STOCK
AND COULD EXERT SIGNIFICANT INFLUENCE OVER MATTERS REQUIRING STOCKHOLDER
APPROVAL.
Our officers and directors beneficially own approximately 56% of
our common stock. As a result, our officers and directors will significantly
influence:
- the election of our directors;
- any decision to amend our certificate of incorporation or
bylaws;
- any decision to engage in a merger, sale of assets or other
corporate transaction; and
- the outcome of other matters submitted for stockholders' vote.
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The concentration of stock ownership by our officers and directors may
discourage a potential acquirer from making a tender offer or attempting to
obtain control of Daleen Technologies, which in turn could reduce our stock
price or prevent our stockholders from realizing a premium over our stock price.
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE CAUSING INVESTOR
LOSSES.
Sales of a substantial number of shares of our common stock in the
public market could adversely affect the market price of our common stock. As of
November 10, 1999, approximately 19 million shares of our common stock were
outstanding. All of the 4,100,000 shares sold in our initial public offering are
freely tradable unless held by our affiliates. The remaining shares of our
common stock outstanding will be restricted as a result of securities laws or
lock-up agreements signed by the holders and will be available for sale in the
public market from time to time.
BancBoston Robertson Stephens Inc. may, in its sole discretion and at
any time without prior notice, release all or any portion of the common stock
subject to lock-up agreements.
ANTI-TAKEOVER PROVISIONS AND OUR RIGHT TO ISSUE PREFERRED STOCK COULD MAKE A
THIRD-PARTY ACQUISITION OF DALEEN TECHNOLOGIES DIFFICULT EVEN IF AN ACQUISITION
WOULD BE BENEFICIAL TO US.
We are a Delaware corporation. There are provisions in our charter and
bylaws and the anti-takeover provisions of Delaware law that could make it more
difficult for a third party to acquire control of us, even if a change in
control would be beneficial to stockholders. In addition, our bylaws provide for
a classified board, with board members serving staggered three-year terms. The
Delaware anti-takeover provisions and the existence of a classified board could
make it more difficult for a third party to acquire us.
Our board of directors has the authority to issue up to 10,000,000
shares of preferred stock. Without any further vote or action on the part of the
stockholders, the board of directors will have the authority to determine the
price, rights, preferences, privileges and restrictions of the preferred stock.
This preferred stock, if issued, may have preference over the rights of the
holders of common stock. Although the ability to issue preferred stock provides
us with flexibility in connection with possible acquisitions and general
corporate purposes, the issuance may also make it more difficult for a third
party to acquire a majority of our outstanding voting stock.
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