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SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2004 OR o
    
    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.  Delaware
(State or other Jurisdiction of incorporation
or organization)
    
    65-0944514
(I.R.S. Employer
Identification No.)
 902 Clint Moore Road, Suite 230
Boca Raton, Florida
(Address of principal executive offices)
    
    33487
(Zip Code)
 Registrants Telephone Number, Including Area Code: (561) 999-8000 Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes þ No o Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes o No þ As of May 1, 2004, the Registrant had outstanding 46,929,372 shares of common
stock.




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##### Table of Contents



DALEEN TECHNOLOGIES, INC. AND SUBSIDIARIES
FORM 10-Q QUARTER ENDED MARCH 31, 2004 TABLE OF CONTENTS PAGEPART I  FINANCIAL INFORMATIONItem 1.
    
    Financial Statements.Condensed Unaudited Consolidated Balance Sheets as of December 31, 2003 and March 31, 2004
    
    
    3Condensed Unaudited Consolidated Statements of Operations for the three months ended March 31, 2003 and 2004
    
    
    4Condensed Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2003 and 2004
    
    
    5Notes to Condensed Unaudited Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations.
    
    
    17Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk.
    
    
    33Item 4.
    
    Controls and Procedures.
    
    
    34PART II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings.
    
    
    35Item 5.
    
    Other Information
    
    
    37Item 6.
    
    Exhibits and Reports on Form 8-K.
    
    
    38Signatures
    
    
    40First Amendment to LeaseAgreement & Plan of MergerForm of Indemnity Escrow AgreementStock Purchase AgreementForm of Indemnity Promissory NoteInvestment AgreementForm of Certificate of IncorporationForm of Certificate of DesignationForm of Stockholders AgreementForm of Registration Rights AgreementForm of Stock Incentive PlanTransaction Support AgreementEmployment Agreement with Gordon QuickSubordinated Bridge Loan AgreementForm of Revolving Promissory NoteSubordination AgreementLoan Modification AgreementWorking Capital Facility AgreementRetention Bonus Agreement with Gordon QuickRetention Bonus Agreement with David McTarnaghanSection 302 PEO CertificationSection 302 PFO CertificationSection 906 PEO CertificationSection 906 PFO Certification
 2




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PART I FINANCIAL INFORMATION 
 Item 1. Financial Statements. DALEEN TECHNOLOGIES, INC. AND SUBSIDIARIES 
 Condensed Unaudited Consolidated Balance Sheets December 31,
    
    March 31,2003
    
    2004(in thousands, except share andper share data)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    2,497
    
    
    $
    2,195Restricted cash
    
    
    561
    
    
    
    506Accounts receivable, less allowance for doubtful accounts
of $887 and $862 at December 31, 2003 and
March 31, 2004 respectively
    
    
    610
    
    
    
    1,151Costs in excess of billings
    
    
    2,032
    
    
    
    2,975Unbilled revenue
    
    
    392
    
    
    
    806Other current assets
    
    
    487
    
    
    
    568Total current assets
    
    
    6,579
    
    
    
    8,201Property and equipment, net
    
    
    931
    
    
    
    786Goodwill
    
    
    5,086
    
    
    
    5,086Other assets
    
    
    430
    
    
    
    481Total assets
    
    $
    13,026
    
    
    $
    14,554LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    148
    
    
    $
    86Accrued payroll and other accrued expenses
    
    
    2,267
    
    
    
    2,825Current portion of capitalized lease
    
    
    26
    
    
    
    9Operating loan
    
    
    
    
    
    
    2,000Billings in excess of costs
    
    
    97
    
    
    
    320Deferred revenue
    
    
    372
    
    
    
    508Other current liabilities
    
    
    16
    
    
    
    3Total current liabilities
    
    
    2,926
    
    
    
    5,751Other long term liabilities
    
    
    5
    
    
    
    11Total liabilities
    
    
    2,931
    
    
    
    5,762Stockholders equity:Series F convertible Preferred Stock $.01 par value; 588,312 shares
authorized ; 453,322 and 449,237 issued and outstanding at December 31,
2003 and March 31, 2004, respectively ($110.94 per share liquidation
value)
    
    
    27,112
    
    
    
    26,659Common stock-$.01 par value; 200,000,000 shares authorized;
47,449,127 shares issued and 46,429,163
outstanding at December 31, 2003 and 47,949,336 shares
issued and 46,929,372 outstanding at
March 31, 2004
    
    
    475
    
    
    
    479Additional paid-in capital
    
    
    197,187
    
    
    
    197,636Accumulated deficit
    
    
    (214,528
    )
    
    
    (215,831
    )Treasury stock at cost; 1,019,964 shares at
December 31, 2003 and March 31, 2004 respectively
    
    
    (151
    )
    
    
    (151
    )Total stockholders equity
    
    
    10,095
    
    
    
    8,792Total liabilities and stockholders equity
    
    $
    13,026
    
    
    $
    14,554
 See accompanying notes to condensed unaudited consolidated financial statements. 3




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DALEEN TECHNOLOGIES, INC. AND SUBSIDIARIES 
 Condensed Unaudited Consolidated Statements of Operations Three months endedMarch 31,2003
    
    2004(In thousands, except per share data)Revenue:Professional services and other
    
    $
    3,824
    
    
    $
    3,667License fees
    
    
    245
    
    
    
    587Total revenue
    
    
    4,069
    
    
    
    4,254Cost of revenue:Professional services and other
    
    
    1,370
    
    
    
    1,584License fees
    
    
    
    
    
    
    Total cost of revenue
    
    
    1,370
    
    
    
    1,584Gross margin
    
    
    2,699
    
    
    
    2,670Operating expenses:Sales and marketing
    
    
    900
    
    
    
    734Research and development
    
    
    1,681
    
    
    
    1,652General and administrative
    
    
    1,614
    
    
    
    1,623Total operating expenses
    
    
    4,195
    
    
    
    4,009Operating loss
    
    
    (1,496
    )
    
    
    (1,339
    )Total interest income and nonoperating income, net
    
    
    78
    
    
    
    36Net loss applicable to common stockholders
    
    $
    (1,418
    )
    
    $
    (1,303
    )Net loss applicable to common stockholders per share -basic and diluted
    
    $
    (0.03
    )
    
    $
    (0.03
    )Weighted average shares outstanding- basic and diluted
    
    
    45,829
    
    
    
    46,858
 See accompanying notes to condensed unaudited consolidated financial statements. 4




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DALEEN TECHNOLOGIES, INC. AND SUBSIDIARIES 
 Condensed Unaudited Consolidated Statements of Cash Flows Three Months EndedMarch 31,
    
    March 31,2003
    
    2004(In thousands)Cash flows from operating activities:Net loss
    
    $
    (1,418
    )
    
    $
    (1,303
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    1,410
    
    
    
    649Bad debt expense
    
    
    5
    
    
    
    11Interest income on stockholders notes receivable
    
    
    (1
    )
    
    
    Changes in assets and liabilitiesRestricted cash
    
    
    
    
    
    
    55Accounts receivable
    
    
    699
    
    
    
    (519
    )Costs in excess of billings
    
    
    (7
    )
    
    
    (943
    )Unbilled revenue
    
    
    5
    
    
    
    (414
    )Other current assets
    
    
    (308
    )
    
    
    (557
    )Other assets
    
    
    (5
    )
    
    
    (44
    )Accounts payable
    
    
    
    
    
    
    (61
    )Accrued payroll and other accrued expenses
    
    
    73
    
    
    
    558Billings in excess of costs
    
    
    89
    
    
    
    223Deferred revenue
    
    
    (616
    )
    
    
    135Other current liabilities
    
    
    8
    
    
    
    (6
    )Net cash used in operating activities
    
    
    (66
    )
    
    
    (2,216
    )Cash flows (used in) provided by financing activities:Payment of capital lease
    
    
    (72
    )
    
    
    (17
    )Proceeds from operating loan
    
    
    
    
    
    
    2,000Net cash (used in) provided by financing activities
    
    
    (72
    )
    
    
    1,983Cash flows used in investing activities:Repayment of stockholders notes receivable
    
    
    12
    
    
    
    Payments related to the Abiliti acquisition
    
    
    (262
    )
    
    
    Capital expenditures
    
    
    (104
    )
    
    
    (68
    )Net cash used in investing activities
    
    
    (354
    )
    
    
    (68
    )Effect of exchange rates on cash and cash equivalents
    
    
    (13
    )
    
    
    (1
    )Net decrease in cash and cash equivalents
    
    
    (492
    )
    
    
    (301
    )Cash and cash equivalents-beginning of period
    
    
    6,585
    
    
    
    2,497Cash and cash equivalents-end of period
    
    $
    6,080
    
    
    $
    2,195
 See accompanying notes to condensed unaudited consolidated financial statements. 5




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Daleen Technologies, Inc. and Subsidiaries 
 Notes to Condensed Unaudited Consolidated Financial Statements
 March 31, 2004
 (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, 2003 has been derived from the Companys audited
consolidated financial statements at that date. These condensed unaudited
consolidated financial statements should be read in conjunction with the
audited consolidated financial statements and notes thereto for the year ended
December 31, 2003, included in the Companys annual report on Form 10-K as of
and for the year ended December 31, 2003, filed with the Securities and
Exchange Commission (the SEC) on March 19, 2004. The results of operations for the three months ended March 31, 2004 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 and Reclassifications The accompanying financial statements include the accounts and operations
of Daleen Technologies, Inc. and its subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications have been made to the 2003 condensed unaudited
consolidated financial statements to conform to the 2004 presentation. (3) Basic and Diluted Net Loss Per Share Basic and diluted net loss per share was computed by dividing net loss
applicable to common stockholders by the weighted average number of shares of
common stock outstanding for each period presented. Common stock equivalents
were not considered since their effect would be antidilutive. Common stock
equivalents amounted to 55,523,212 shares and 56,109,665 shares for the three
months ended March 31, 2004 and 2003, respectively. (4) Liquidity The
Company incurred net losses of approximately $1.3 million for the
three months ended March 31, 2004 and had an accumulated deficit
of $215.8
million at March 31, 2004. Cash and cash equivalents and restricted cash at
March 31, 2004 were $2.7 million. Cash used in operations for the three months
ended March 31, 2004 was $2.2 million. The Company continued to provide
outsourcing services to Allegiance Telecom Company Worldwide (Allegiance)
pursuant to an agreement expiring on December 31, 2004. Allegiance accounted
for 24.8% of total revenue for the three months ended March 31, 2004. There
are no minimum revenues from Allegiance under this agreement. Allegiance has
informed the Company that they are migrating data to another software system
and intend to discontinue use of the Companys services gradually so that all
data will be migrated by June 2004. 6




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As a result of the Companys business concentration risk, past recurring
losses from operations and accumulated deficit, it raises substantial doubt
about the Companys ability to continue as a going concern. In February 2004, the Company closed a revolving loan facility (the
Operating Loan) with Silicon Valley Bank (SVB) and guaranteed by EXIM Bank.
(See Note 5 for a description of terms and financial covenant requirements).
Total funding under the Operating Loan is $2,700,000. The Company can borrow
against the Operating Loan based on estimated funding dates and may have
outstanding borrowings at any given time of up to $2,000,000. The balance on
the Operating Loan as of March 31, 2004 was $2,000,000. Approximately $1.3
million of the Operating Loan was repaid in May 2004. On May 7, 2004 definitive agreements were signed by affiliates of
Quadrangle Capital Partners L.P. (Quadrangle) and Behrman Capital (Behrman)
for investments of $25 million and $5 million, respectively, into Daleen
Holdings, Inc. (DHI) a newly formed holding company that will simultaneously
acquire Daleen and Protek Telecommunications Solutions Limited (Protek), (the
Investment and Acquisition Transactions). As part of the Investment and
Acquisition Transactions, Daleen will become a private company. The Investment
and Acquisition Transactions are subject to the satisfaction of customary
closing conditions including the approval of Daleen stockholders. Upon signing
the definitive agreements, Behrman entered into a $5.1 million bridge loan
facility.(theBridge Loan Facility). The aggregate principal amount
outstanding under the Bridge Loan Facility will be credited against Behrmans
commitment under the Investment and Acquisition Transactions. (See note 15 for
a description and the terms of the Investment and Acquisition Transactions and
Bridge Loan Facility). The Company believes the cash and cash equivalents at March 31, 2004,
together with the Operating Loan proceeds, Bridge Loan Facility and the
additional funding resulting from the Investment and Acquisition Transactions,
may be sufficient to fund operations for the foreseeable future. The Investment
and Acquisition Transactions are subject to a number of closing conditions,
including the approval of the Companys stockholders, and there can be no
assurance that the transactions will be consummated. If the transactions are
not consummated the Company believes the cash and cash equivalents at March 31,
2004 may not be sufficient to fund the operations and the Company will be
required to further reduce operations and/or seek additional financing.
Although the Company is precluded from considering other strategic alternatives
pending completion or termination of the Investment and Acquisition
Transactions, if the transactions are not completed, the Company will consider
other strategic alternatives. There can be no assurance that additional financing will be available, or
that, if available the financing will be obtainable on terms acceptable to the
Company or that additional financing would not be substantially dilutive to the
Companys existing stockholders. There can be no assurance that any other
strategic alternatives will be available, or if available, will be on terms
acceptable to the Company, or all of its stockholders. Failure to consummate
the Investment and Acquisition Transactions will have a material adverse affect
on the Companys ability to operate as a going concern, which may result in
filing for bankruptcy protection, winding down operations and/or liquidation of
assets. The condensed unaudited 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. (5) Operating Loan In February 2004, the Company closed the Operating Loan with SVB and
guaranteed by EXIM Bank. The term of the Operating Loan is fifteen months.
Total funding under the Operating Loan is $2.7 million. The Company can
borrow against the Operating Loan based on estimated funding dates and may have
outstanding borrowings at any given time of up to $2,000,000. The proceeds of
the Operating Loan will be used for operating costs associated with its
contract with Empresa de Telecomunicaciones de Bogotá (ETB), (the ETB
Contract). The Company intends to repay the Operating Loan solely from
revenues received from the ETB Contract. Interest accrues at the rate of prime
plus 2% (minimum 4%) per annum. SVB has a first priority security 7




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interest and EXIM Bank has a second priority security interest in
substantially all of the Companys assets until the Operating Loan is paid in
full. The Operating Loan contains customary representations and warranties and
covenants including maintaining a tangible net worth requirement of $4.0
million. In May 2004, the Operating Loan was amended effective March 31, 2004
to change the tangible net worth requirement to $3.0 million. The Company is
currently in compliance with all covenants under the Operating Loan. The
balance on the Operating Loan as of March 31, 2004 was $2,000,000..
Approximately $1.3 million of the Operating Loan was repaid in May 2004 as a
result of payments received from ETB.. (6) Revenue Recognition The Company recognizes revenue related to outsourcing services under
Emerging Issues Task Force Issue 00-21, Accounting for Revenue Arrangements
with Multiple Deliverables(EITF 00-21). EITF 00-21 relates to accounting
for multiple-deliverable arrangements and specifies circumstances under which a
revenue arrangement should be separated into different revenue-generating
deliverables or units of accounting and how the revenue arrangement should be
allocated to the different deliverables or units of accounting. Revenue related to outsourcing services consists of (1) discovery work and
(2) monthly processing fees generated from the Companys provision of billing
and event management services. These two deliverables are considered separate
units of accounting because these elements can and have been sold separately
and they create stand-alone value for the customer. The revenue associated with
discovery work is recognized on a time and materials basis as the work is
performed. The monthly processing fees are recognized as the related services
are rendered and are billed monthly based on transaction volume processed,
percentage of revenue billed on behalf of customers or monthly minimum charges
per contractual arrangements. The Company primarily recognizes revenue related to site license and
services agreements under Statement of Position 98-9, Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions(SOP
98-9). SOP 98-9 requires recognition of revenue using the residual method
when (1) there is vendor-specific objective evidence (VSOE) of the fair
values of all undelivered elements in a multiple-element arrangement that is
not accounted for using long-term contract accounting, (2) VSOE of fair value
does not exist for one or more of the delivered elements in the arrangement,
and (3) all revenue recognition criteria in Statement of Position 97-2,
Software Revenue Recognition(SOP 97-2) other than the requirement for VSOE
of the fair value of each delivered element of the arrangement are satisfied. The following elements could be included in the Companys software license
arrangements with its customers:  
    
    Software license  
    
    Maintenance and support  
    
    Professional services  
    
    Third party software licenses and maintenance  
    
    Training VSOE exists for all of these elements except for the software license.
The software license is delivered upon the execution of the license agreement.
Based on this delivery and the fact that VSOE exists for all other elements,
the Company recognizes revenue under SOP 98-9 as long as all other revenue
recognition criteria in SOP 97-2 are satisfied. Under SOP 98-9, the arrangement fee is recognized as follows: (1) the
total fair value of the undelivered elements, as indicated by VSOE, is deferred
and subsequently recognized in accordance with the relevant sections of SOP
97-2 and as described below and (2) the difference between the total
arrangement fee and the amount deferred for the undelivered elements is
recognized as revenue related to the delivered elements. 8




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Revenue related to delivered elements of the arrangement is recognized
when persuasive evidence of an arrangement exists, the software has been
delivered, the fee is fixed and determinable and collectibility is probable. Revenue related to undelivered elements of the arrangement is valued by
the price charged when the element is sold separately and is recognized as
follows:  
    
    Revenue related to customer maintenance agreements is
deferred and recognized ratably using the straight-line method
basis over the applicable maintenance period. The VSOE of
maintenance is determined using the rate at which maintenance is
renewed each year and is dependent on the amount of the license
fee as well as the type of maintenance the customer chooses.  
    
    Professional service fees are recognized separately from
the license fee since the services are not considered significant
to the functionality of the software and the software does not
require significant modification, production or customization. In
instances when the services performed in conjunction with certain
contracts are significant to the functionality of the software and
the software requires significant modification and customization
at the customers site, the Company recognizes the total license
and services amount together. There are two types of service
contracts that are entered into with customers: fixed fee and time
and materials. The Company recognizes revenue from fixed fee contracts using
the percentage of completion method, based on the ratio of
total hours incurred to date to total estimated labor hours.
Changes in job performance, job conditions, estimated
profitability and final contract settlement may result in
revisions to costs and income and are recognized in the period
in which the revisions are determined. Contract costs include
all direct material and labor costs and those indirect costs
related to contract performance, such as indirect labor and
supplies. These costs are readily determinable since the
Company uses the costs that would have been charged if the
contract was a time and materials contract. Provisions for
estimated losses on uncompleted contracts are recorded in the
period in which losses are determined. Amounts billed in excess
of revenue recognized to date are classified as Billings in
excess of costs, whereas revenue recognized in excess of
amounts billed are classified as Costs in excess of billings
in the accompanying condensed unaudited consolidated balance
sheets. Revenue under a time and materials arrangement is recognized as
services are performed.  
    
    Third party software is recognized when delivered to the
customer. The value of third party software is based on the
Companys acquisition cost plus a reasonable margin and is readily
determinable since the Company frequently sells these licenses
separate of the other elements.  
    
    Training revenue is recognized when training is provided
to customers and is based on the amount charged for training when
it is sold separately. The Company typically receives 25 percent of the license fee as a down
payment and the balance is typically due between three and nine months from
contract execution. In limited situations, the Company enters into extended
payment terms with certain customers if the Company believes it is a good
business opportunity. When it enters into these arrangements, the Company
evaluates each arrangement individually to determine whether collectibility is
probable and the fees are fixed and determinable. An arrangement fee is not
presumed to be fixed and determinable if payment of a significant portion of
the license fee is due after the normal and customary terms usually offered to
customers by the Company. Revenue related to arrangements containing extended
payment terms where the fees are not considered fixed and determinable is
deferred until payments are due. 9




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In order to ensure that collectibility is probable, the Company performs
credit reviews on each customer. If collectibility is determined to not be
probable upon contract execution, revenue is recognized when cash is received. In October 2003, the Securities and Exchange Commission (the SEC) issued
Staff Accounting Bulletin No. 104, Revenue Recognition,(SAB No. 104) which
was effective as of December 31, 2003. The Companys revenue recognition
policies described above are in compliance with SAB No. 104. (7) Stock-Based Compensation The Company applies the intrinsic-value based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employeesand related interpretations including Financial
Accounting Standards Board (FASB) Interpretation No. 44 Accounting for Certain
Transactions Involving Stock Compensation, an Interpretation of APB No. 25,
issued in March 2000, to account for its fixed plan stock options. Under this
method, compensation expense is recorded on the date of the grant only if the
current price of the underlying stock exceeds the exercise price. Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation,(SFAS No. 123) established accounting and disclosure
requirements using a fair-value-based method of accounting for stock-based
employee compensation plans. As allowed by SFAS No. 123, the Company has
elected to continue to apply the intrinsic-value-based method of accounting
described above, and has adopted only the disclosure requirements of SFAS No.
123. The fair value of each option granted to employees is estimated on the
date of grant using the Black Scholes option pricing model with the following
assumptions: Three Months Ended March 31,2003
    
    2004Expected life
    
    5 years
    
    5 yearsRisk-free interest rate
    
    1.19% - 3.83%
    
    1.20% - 3.86%Volatility
    
    173.6%
    
    145.03%Dividends
    
    None
    
    None
 Had compensation expense for the Companys plans been determined
consistent with SFAS No. 123, the Companys net loss and net loss per share
would have been increased to proforma amounts indicated below (in thousands): For the Three MonthsEnded March 31,2003
    
    2004Net loss, as reported
    
    $
    (1,418
    )
    
    
    (1,303
    )Deduct: Additional stock-based employee
compensation expense determined under the fair
value based method for all awards
    
    
    (713
    )
    
    
    (326
    )Pro forma net loss
    
    $
    (2,131
    )
    
    
    (1,629
    )Loss per share:Basic and diluted  - as reported
    
    $
    (.03
    )
    
    
    (.03
    )Basic and diluted  - pro forma
    
    $
    (.05
    )
    
    
    (.04
    )
 10




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(8) Abiliti Acquisition and 2002 Private Placement On December 20, 2002, pursuant to an Asset Purchase Agreement dated
October 7, 2002 (the Asset Purchase Agreement), Daleen Solutions, an indirect
wholly-owned subsidiary of Daleen, consummated its purchase of
substantially all of the assets and assumption of certain liabilities of
Abiliti (the Abiliti Acquisition). As consideration for the Abiliti
Acquisition, Daleen issued to Abiliti 11,406,284 shares of common stock,
115,681 shares of Series F preferred stock and warrants to purchase 5,666,069
additional shares of common stock at an exercise price of $0.9060 per share
(the Asset Purchase Warrants). The total consideration for the Abiliti
Acquisition was $6.1 million. Concurrently with the consummation of the Abiliti Acquisition, on December
20, 2002, pursuant to an Investment Agreement dated October 7, 2002 (the
Investment Agreement), Daleen completed its private placement of 10,992,136
shares of common stock, 115,681 shares of Series F preferred stock, warrants to
purchase 5,666,069 additional shares of common stock at an exercise price of
$0.906 (the Investment Warrants) per share, and warrants to purchase 500,000
additional shares of common stock at an exercise price of $0.17 per share (the
Additional Warrants), for total proceeds of $5.015 million in cash (the 2002
Private Placement). A portion of the securities were held in escrow ,
including 1,140,629 shares of common stock, 11,568 shares of Series F preferred
stock, and warrants to purchase 566,607 additional shares of the Companys
common stock at an exercise price of $.9060 per share (collectively the
Escrowed Shares). The Escrowed Shares and claims related thereto were
released by the Company in partial consideration of the Bridge Loan Facility. The Abiliti Acquisition was accounted for as a purchase transaction and
accordingly, the acquisition price was allocated to the acquired assets and
assumed liabilities based on their estimated fair value as of the acquisition
date. The excess of the consideration paid over the estimated fair value of net
assets and purchase in-process research and development acquired was recorded
as goodwill. The purchase price was allocated as follows (in thousands): Purchase in-process research and development
    
    $
    104Net assets
    
    $
    921Goodwill
    
    $
    5,086$
    6,111
 (9) Goodwill At December 31, 2003 and March 31, 2004, goodwill represents the excess of
costs over the fair value of assets related to the Abiliti Acquisition (See
Note 8). The Company follows the provisions of Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets(SFAS No.
142). Goodwill and other intangible assets acquired in a purchase business
combination and determined to have an infinite useful life are not amortized,
but instead tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets
with estimable useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 144, Accounting for Impairment or Disposal of
Long-Lived Assets. There has been no impairment to date related to the
goodwill recorded in connection with the Abiliti Acquisition. (10) Business and Credit Concentrations During the three months ended March 31, 2004, 65.4 percent of the
Companys total revenue was attributed to three customers. Sales to these three
customers accounted for 30.1 percent, 24.8 percent, and 10.6 percent of the
total revenue for the three month period. During the three months ended March
31, 2003, 75.2 percent of the Companys total revenue was attributable to three
customers. Sales to these three customers accounted for 47.7 percent, 15.1
percent and 12.4 percent of the total revenue for the three month period. 11




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Three customers accounted for 64.3 percent and 45.7 percent of total
accounts receivable at March 31, 2004 and December 31, 2003, respectively. (11) Related Party Transactions Science Applications International Corporation (SAIC) through its
subsidiary SAIC Venture Capital Corporation is a significant stockholder of the
Company. Revenue related to SAIC for the three months ended March 31, 2004 and
March 31, 2003 was $7,500 and $13,800, respectively. SAIC owns 49 percent of
the voting stock of Danet, Inc. (Danet), 100 percent of the voting stock of
Telcordia Technologies, Inc. (Telcordia) and 60 percent of the voting stock
of Intesacol. Danet is a customer and a subcontractor of the Companys
product. There was no revenue recognized related to Danet for the three months
ended March 31, 2004 and 2003. In the three months ended March 31, 2004 and
March 31, 2003, we paid Danet $35,000 and $103,442, respectively, related to
professional services. The Company has a strategic alliance relationship and an
Original Equipment Manufacturer Agreement with Telcordia. Revenue related to
Telcordia for the three months ended March 31, 2004 and March 31, 2003 was $0
and $36,000, respectively. In 2003, Intesacol became a subcontractor of the
Company to perform services under the ETB Contract. In the three months ended
March 31, 2004 and March 31, 2003, the Company paid $0 to Intesacol for
professional services. On May 7, 2004, the Company entered into the Bridge Loan Facility and the
Investment and Acquisition Transactions with Behrman who is a significant
stockholder of the Company. See note 15 for terms and conditions. (12) Legal Proceedings Fazari v. Daleen Technologies, Inc. On December 5, 2001, a class action complaint was filed in the United
States District Court for the Southern District of New York. On April 22, 2002
an amended complaint was filed by two plaintiffs purportedly on behalf of
persons purchasing the Companys common stock between September 20, 1999 and
December 6, 2000. The complaint is styled as Angelo Fazari, on behalf of
himself and all others similarly situated, vs. Daleen Technologies, Inc.,
BancBoston Robertson Stephens Inc., Hambrecht & Quist LLC, Salomon Smith Barney
Inc., James Daleen, David B. Corey and Richard A. Schell. The individual
defendants, Messrs. Corey, Schell and Daleen, have entered into tolling
agreements with the plaintiffs resulting in their dismissal from the case
without prejudice. The remaining defendants include us and certain of the
underwriters from the Companys initial public offering (IPO). More than 300
similar class action lawsuits filed in the Southern District of New York
against numerous companies and their underwriters have been consolidated for
pretrial purposes before one judge under the caption In re Initial Public
Offering Securities Litigation. The complaint includes allegations of violations of (i) Section 11 of the
Securities Act of 1933 by all named defendants, (ii) Section 15 of the
Securities Act of 1933 by the individual defendants and (iii) Section 10(b) of
the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by
the underwriter defendants. Specifically, the plaintiffs allege in the
complaint that, in connection with the IPO, the defendants failed to disclose
excessive commissions purportedly solicited by and paid to the underwriter
defendants in exchange for allocating shares of the Companys common stock in
the IPO to the underwriter defendants preferred customers. Plaintiffs further
allege that the underwriter defendants had agreements with preferred customers
tying the allocation of shares sold in the IPO to the preferred customers
agreements to make additional aftermarket purchases at pre-determined prices.
Plaintiffs further allege that the underwriters used their analysts to issue
favorable reports about the Company to further inflate the Companys share
price following the IPO. Plaintiffs claim that the defendants knew or should
have known of the underwriters actions and that the failure to disclose these
alleged arrangements rendered the prospectus included in the Companys
registration statement on Form S-1 filed with the SEC in September 1999
materially false and misleading. Plaintiffs seek unspecified damages and other
relief. 12




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In June 2003, the Company approved the terms of a proposed settlement
involving the plaintiffs, the insurance companies and numerous issuers,
including the Company and the individual defendants, that includes a waiver by
the insurance companies of any retention amounts under the policies. Court
approval of the settlement is required. Under the terms of the proposed
settlement, there would be no liability to be recorded by the Company other
than legal fees incurred in the initial defense of the action, which are
immaterial. There is no assurance that a settlement with the plaintiffs will be
finalized. In the event that the settlement is not finalized and approved by
the court, the Company intends to defend vigorously against the plaintiffs
claims. The Company believes that it is entitled to indemnification by the
underwriters under the terms of the underwriting agreements. The Company has
notified the underwriters of the action, but the underwriters have not yet
agreed to indemnify the Company. The lead underwriter, BancBoston Robertson
Stephens Inc., has ceased doing business and there is no assurance it will have
the financial resources to provide indemnification. Currently the amount of a
loss, if any, cannot be determined and, accordingly no amounts have been
recorded by the Company in the accompanying unaudited condensed consolidated
financial statements with respect to this litigation. Kops v.Daleen Technologies, Inc., et al. On or about April 7, 2004, a class action complaint was filed in the Court
of Chancery of the State of Delaware in and for New Castle County. The
complaint is styled Kops Investment Advisors LLC v. Daleen Technologies, Inc.,
James Daleen, Gordon Quick, Ofer Nemirovsky, Daniel J. Foreman, Dennis G.
Sisco, Stephen J. Getsy, and John S. McCarthy.The plaintiff is seeking a
temporary and permanent injunction enjoining defendants from proceeding with
the reverse stock split contemplated by the preliminary proxy filed in January,
2004, as well as costs and unspecified damages related to the reverse split. On
May 7, 2004, the Company announced that it will not pursue a stockholder vote
on or the completion of the reverse stock split proposed by the preliminary
proxy statement and the transaction which is the subject of this litigation has
been abandoned. Accordingly, no amounts have been recorded by the Company in
the accompanying unaudited condensed consolidated financial statements with
respect to this litigation. Abiliti-Related Litigation On August 1, 2003, a First Amended Petition, styled as James E. Kientzy
and David K. Wilson vs. Abiliti Solutions, Inc., a corporation, and Daleen
Technologies, Inc., a corporation, and Daleen Solutions, Inc., a corporation
and wholly-owned subsidiary of Daleen, was filed in the Circuit Court of the
County of St. Louis, State of Missouri. The First Amended Petition added Daleen
Technologies and Daleen Solutions as defendants in the named action. The First
Amended Petition contains certain allegations against Abiliti related to the
non-payment of certain promissory notes in the aggregate principal amount of
$1.2 million. The promissory notes that are the subject of the First Amended
Petition are liabilities that were retained by Abiliti pursuant to the terms of
the Abiliti Acquisition. The plaintiffs allege that the purchase of
substantially all of the assets and certain liabilities of Abiliti constituted
a de facto merger and, as a result, Daleen Technologies and its indirect wholly
owned subsidiary, Daleen Solutions, are responsible for payment of the
promissory notes and indemnification of the plaintiffs in connection with
Abilitis counterclaim against the plaintiffs. The First Amended Petition also
seeks to set aside the transfer of Abiliti assets as a fraudulent transfer. In
December 2003, the court granted summary judgment to the plaintiffs against
Abiliti n/k/a Albacore Holdings, Inc. (Albacore) on the promissory notes
awarding a judgment in the amount of $1,796,938.14. However, the judgment
provides that it is not subject to execution until such time as the senior debt
(certain promissory notes and series B preferred stock) is paid in full.
Albacore currently has insufficient assets and no operating income with which
to pay the senior debt. The trial on the remaining claims in this matter has
been set forJuly 2004. The Company has provided notice to Albacore of the
action and Albacore temporarily assumed the defense of the First Amended
Petition on the Companys behalf. However, Albacore has notified the Company
that it does not have the financial resources to defend and/or settle the
claims, pay any judgment ultimately obtained by plaintiffs, or continue to
provide indemnification in connection with this matter. The Escrowed Shares
securing Albacores indemnification 13




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obligations were released in partial consideration of the Behrmans entry
into the Bridge Loan Facility. It appears probable that a settlement
has been reached for $250,000 in this matter. An accrual has been
placed in the condensed unaudited consolidated financial statements
as of March 31, 2004. On October 14, 2003, the Company, Daleen Solutions and Albacore filed a
declaratory judgment action against Houlihan Lokey Howard & Zukin Capital, Inc.
and Houlihan Lokey Howard & Zukin Financial Advisors, Inc. (Houlihan) seeking
a declaration that they are not liable to Houlihan for fees under an engagement
letter between Abiliti Solutions, Inc. and Houlihan (a liability Daleen assumed
in the acquisition of Abiliti). Houlihan filed a counterclaim for fees in
excess of $800,000. The parties agreed to a settlement and the Company paid
Houlihan $55,000 on April 1, 2004. This amount was recorded in accrued payroll
and other accrued expenses at March 31, 2004 in the accompanying unaudited
condensed balance sheet. On December 24, 2003, Daleen Solutions filed a collection action against
Data Integration Systems, Inc. (DIS) seeking payment of license fees,
services fees and equipment in the amount of $694,600 (which includes DIS
obligation to make future payments under the contract). On January 30, 2004,
DIS filed a cross-complaint against Daleen Solutions alleging damages of
$1,500,000. Due to the early stage of the proceeding, a loss and its effect on
the Company, if any, cannot be determined with respect to this litigation and,
accordingly, no amounts have been recorded in the accompanying unaudited
condensed financial statements with respect to this litigation. General litigation On August 5, 2003, the Company reached a settlement in satisfaction of an
outstanding obligation with a customer under a software license agreement.
Under the terms of the settlement, this customer satisfied their obligations by
agreeing to make payments in cash of $365,000 plus interest. The Company
received $250,000 on August 20, 2003, and $57,500 plus interest on November 5,
2003 and received $57,500 plus interest in February 2004. In accordance with
SOP 97-2, the revenue related to the contractual agreement with this customer
is recognized on a cash basis. Therefore, the Company recorded $57,500 as
license revenue in the three months ended March 31, 2004. The Company is involved in other lawsuits and claims incidental to its
ordinary course of business. Management does not believe the outcome of any of
these other activities would have a material adverse effect on the Companys
financial position or results of operations. (13) Capital and Operating Leases The Company signed a lease agreement renewal in Boca Raton, FL in January
2004, which was effective March 1, 2004. This operating lease expires on
February 28, 2009. The Company also signed a lease agreement renewal in
Chesterfield, Missouri on March 25, 2004. The operating lease becomes
effective October 1, 2004 and expires October 31, 2009. In March 2004, the
Company also entered into a lease agreement with a co-location facility in St.
Louis, Missouri to house its data center. The operating lease is effective June
1, 2004 and expires June 30, 2007. The Company also has agreements to lease
office facilities in Atlanta Georgia, and Town and Country, Missouri. These
leases expire in August 2004 and June 2004, respectively. The Abiliti Acquisition included certain computer hardware and furniture
and equipment that are under capital leases, which expire on various dates in
2004. The gross amount of the leased equipment and related accumulated
amortization recorded under capital leases are as follows (in thousands): Furniture and Equipment
    
    $
    141Less accumulated amortization
    
    
    (134
    )$
    7
 14




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Future minimum lease payments under non cancelable operating leases (with
initial or remaining lease terms in excess of one year) and future minimum
capital lease payments as of March 31, 2004 are as follows (in thousands): Year Ending December 31:
    
    Capital Leases
    
    Operating Leases2004
    
    $
    9
    
    
    $
    6322005
    
    
    
    
    
    
    6972006
    
    
    
    
    
    
    7202007
    
    
    
    
    
    
    6442008 and thereafter
    
    
    
    
    
    
    857Total minimum lease payments
    
    
    9
    
    
    
    3,550Less amount representing interest
    
    
    Present value of minimum capital lease payments
    
    
    9Less current installment of obligations under
capital lease payments
    
    
    9Obligation under capital leases, excluding current
installment
    
    $
    
 The Company subleases office space in Atlanta and in St. Louis. The
amounts of minimum operating lease payments reflected in the above table are
offset by future minimum rental receipts from sublessees of $94,808 in 2004. (14) New Accounting Pronouncements In November 2002, the FASB issued Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others,(FIN No. 45) an interpretation of FASB
Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34.
This Interpretation elaborates on the disclosures to be made by a guarantor in
its interim and annual financial statements about its obligations under
guarantees issued. The Interpretation also clarifies that a guarantor is
required to recognize, at inception of a guarantee, a liability for the fair
value of the obligation undertaken. The initial recognition and measurement
provisions of the Interpretation are applicable to guarantees issued or
modified after December 31, 2002. The Company does not have guarantees falling
under the requirements of FIN No. 45 and as a result the adoption of this
interpretation did not have an impact on the Companys consolidated financial
statements. In December 2003, the FASB issued Interpretation No. 46 (FIN 46R)
(revised December 2003), Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulletin No. 51 (ARB 51), which
addresses how a business enterprise should evaluate whether it has a
controlling interest in an entity through means other than voting rights and
accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation
No. 46 (FIN 46), which was issued in January 2003. Before concluding that it is
appropriate to apply ARB 51 voting interest consolidation model to an entity,
an enterprise must first determine that the entity is not a variable interest
entity (VIE). As of the effective date of FIN 46R, an enterprise must evaluate
its involvement with all entities or legal structures created before February
1, 2003, to determine whether consolidation requirements of FIN 46R apply to
those entities. There is no grandfathering of existing entities. Public
companies must apply either FIN 46 or FIN 46R immediately to entities created
after January 31, 2003 and no later than the end of the first reporting period
that ends after March 15, 2004. The adoption of FIN 46 did not have an impact
on the Companys consolidated financial position and results of operations. 15




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In October 2003, the Emerging Issues Task Force (EITF) reached a
consensus on its tentative conclusions for EITF 03-05, Applicability of SOP
97-2 to Non-Software Deliverables in an Arrangement Containing More-
Than-Incidental Software(EITF 03-05). EITF 03-05 discusses that
software deliverables are within the scope of SOP 97-2 as are non-software
deliverables. The Company is required to adopt this consensus for fiscal
periods beginning after August 2003. The Company believes the adoption of EITF
03-05 will not have an impact on the Companys consolidated financial
statements. In March 2004, the FASB issued a proposed Statement, Share-Based Payment,
that addresses the accounting for share-based payment transactions in which an
enterprise receives employee services in exchange for (a) equity
instruments of the enterprise or (b) liabilities that are based on the fair
value of the enterprises equity instruments or that may be settled by the
issuance of such equity instruments. The proposed Statement would eliminate the
ability to account for share-based compensation transactions using APB Opinion
No. 25, Accounting for Stock Issued to Employees, and generally would require
instead that such transactions be accounted for using a fair-value based
method. The proposed Statement is effective for awards granted, modified, or
settled in fiscal years beginning after December 15, 2004, for public entitles
that used the fair-value based method of accounting under the original
provisions of SFAS No. 123, Accounting for Stock-Based Compensation for
recognition or pro forma disclosure purposes. The Company is currently
evaluating the impact the proposed Statement may have on its consolidated
financial position, cash flows and results of operations. In April 2004, the Emerging Issues Task Force issued Statement No. 03-06
Participating Securities and the Two-Class Method Under FASB Statement No.
128, Earnings Per Share (EITF 03-06). EITF 03-06 addresses a number of
questions regarding the computation of earnings per share by companies that
have issued securities other than common stock that contractually entitle the
holder to participate in dividends and earnings of the company when, and if, it
declares dividends on its common stock. The issue also provides further
guidance in applying the two-class method of calculating earnings per share,
clarifying what constitutes a participating security and how to apply the
two-class method of computing earnings per share once it is determined that a
security is participating, including how to allocate undistributed earnings to
such a security. EITF 03-06 is
effective for fiscal periods beginning after March 31, 2004. The Company is
currently evaluating the impact the proposed Statement may have on its
consolidated financial position, cash flows and results of operations. (15) Subsequent Events Investment and Acquisition Transactions On May 7, 2004 affiliates of Quadrangle and Behrman signed definitive
agreements to invest $25 million and $5 million, respectively, in cash into
DHI, a newly formed holding company, that will simultaneously acquire Daleen
and Protek. Quadrangle and Behrman will receive senior convertible redeemable
preferred stock in DHI (DHI Preferred) in consideration for their cash
investment. The DHI Preferred will have a dividend of 8% per annum, payable in
kind or in cash at DHIs election. The DHI Preferred will also carry the right
to the issuance of additional shares of preferred equity should DHI not attain
certain specified financial targets. DHI will acquire Protek by purchase of stock from its shareholder and
conversion of outstanding options, for aggregate consideration of up to $20
million, consisting of up to $13 million in cash, $5 million in common stock of
DHI (the DHI Common), and contingent earn-out consisting of $1 million in
cash and $1 million of DHI Common. The purchase price will be subject to
reduction in respect of closing date debt and working capital shortfalls. In connection with the Investment and Acquisition Transactions, Daleen
will become a private company. All outstanding shares of Daleen common stock
will be purchased for $0.0387 per share in cash. The per share purchase price
is based on an aggregate amount equal to approximately ten percent of the total
value received by Daleen stockholders. In addition, as a condition of closing
the Investment and Acquisition Transactions, holders 16




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of Daleen Series F convertible preferred stock (Series F preferred
stock) will be required to waive the $49.8 million redemption value of the
Series F preferred stock. These stockholders will receive an aggregate of
$15.4 million in cash and securities, with the cash component limited to a
maximum of $2.8 million. Immediately prior to the consummation of the
Investment and Acquisition Transactions, Behrman will be contractually
obligated to exchange its shares of Series F preferred stock for $5 million in
DHI Preferred plus the remaining value of its shares of Series F preferred
stock in DHI Common. Other holders of Series F preferred stock will receive a
combination of (a) an aggregate of $2.8 million in value of DHI Common and (b)
the remaining value of their Series F preferred stock in DHI Common; however,
holders of Series F preferred stock will be permitted to convert all of their
Series F preferred stock into DHI Common. In May 2004, the Company entered into the Bridge Loan Facility with
Behrman. The Bridge Loan Facility is for a maximum principal amount of $5.1
million, bearing interest at the rate of 6% per annum (plus a penalty at and
after an event of default). The Company will draw up to $1.5 million of this
amount to fund a $1.5 million working capital facility that it is providing to
Protek in connection with the Investment and Acquisition Transactions, and
$100,000 to fund a facility fee payable to Behrman. Subject to Behrmans
consent, additional amounts may be drawn under the Bridge Loan Facility to fund
the working capital needs of the Company. It is expected that the full
remaining permitted principal amount of the Bridge Loan Facility will be drawn
immediately prior to the closing of the Investment and Acquisition
Transactions. At closing, the Bridge Loan Facility note will be guaranteed by
DHI by offset of the principal amount thereof against the $5 million commitment
of Behrman, plus a cash payment in respect of accrued by unpaid interest. The
Bridge Loan Facility is secured by a lien on all assets of the Company,
subordinated to the interests of SVB and EXIM Bank. 
 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 in our Annual Report on Form 10-K for the year ended
December 31, 2003. 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 are the intent, belief or current
expectations, of our business and industry, and the assumptions upon which
these statements are based. Words such as anticipates, expects, intends,
will, could, would, should, may, plans, believes, seeks,
estimates and variations of these words and the negatives thereof and similar
expressions are intended to identify forward-looking statements. These
statements are not guarantees of future performance and are subject to risks,
uncertainties, and other factors, some of which are beyond our control, are
difficult to predict, and could cause actual results to differ materially from
those expressed or forecasted in the forward-looking statements. These risks
and uncertainties include those described in Risk Factors, Managements
Discussion and Analysis of Financial Condition and Results of Operations and
elsewhere in this report and in the Companys Annual Report on Form 10-K for
the year ended December 31, 2003 filed with the SEC. 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. 17




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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 Risk Factors, that could cause the actual
results to differ materially from those suggested by the forward-looking
statements. Overview From our founding in 1989 and through 1996, we operated as a software
consulting company, performing contract consulting and software development
services in a contract placement and staffing business. We sold the contract
placement and staffing business to a third party in 1996. Since 1996, we have
been a provider of software solutions and have evolved to become a global
provider of advanced billing and customer care, event management and revenue
assurance software for traditional and next generation communication service
providers and other technology solutions providers. As we grew in size and
geography, we added new customer care and management products to enhance our
billing applications. We further expanded our product offerings as a result of
the acquisition of Abiliti Solutions, Inc. in December 2002 (the Abiliti
Acquisition), adding a proven event management software platform and a
carrier-class outsourcing operation. In June 2003, we launched a new revenue
assurance product. Our expanded product suite and flexible delivery channels
allow us to serve a broader range of customer needs in a variety of markets.
In addition to our products and applications, we offer professional consulting
services, training, maintenance, support and third party software fulfillment,
in each case related to the products we develop. Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of
operations included herein are based upon our consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
financial statements requires us to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an on-going basis, we
evaluate our estimates, including those related to our allowance for doubtful
accounts, investments, goodwill impairment, income taxes, restructuring,
long-term service contracts, contingencies and litigation. We base our
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. We discuss below
the critical accounting policies that affect our more significant judgments and
estimates used in the preparation of our unaudited condensed financial
statements. Actual results may differ from these estimates under different
assumptions or conditions. For further information on the critical accounting
policies, see Note 1 to our Notes to Consolidated Financial Statements in the
Companys Annual Report on Form 10-K for the year ended December 31, 2003 filed
with the SEC We believe that the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements. Revenue Recognition Revenue related to outsourcing services consists of (1) discovery work and
(2) monthly processing fees generated from the Companys provision of billing
and event management services. These two deliverables are considered separate
units of accounting because these elements can and have been sold separately
and they create stand alone value for the customer. The revenue associated
with discovery work is recognized on a time and materials basis as the work is
performed. The monthly processing fees are recognized as the related services
are rendered and are billed monthly based on transaction volume processed,
percentage of revenue billed on behalf of customers or monthly minimum charges
per contractual arrangements. 18




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Revenue from site license fees is based on the size of the customers
authorized system, such as number of
authorized users and computer processors, revenue billed through the
system, or other factors. We receive license fees from our customers upon
signing of the license agreement. In some cases we expect to receive
additional license fees as our customers grow and add additional subscribers,
or increase their revenue billed through the system. We also derive license
fee revenue from existing customers who purchase additional products from us to
increase the functionality of their current system. We expect to receive
recurring license fees from these activities in the future. Revenue from license fees is recognized when persuasive evidence of an
arrangement exists, the software is shipped, the fee is fixed and determinable
and collectibility is probable. An arrangement fee is generally not presumed
to be fixed or determinable if payment of a significant portion of the license
fee is not due until after expiration of the license or due after the normal
and customary terms usually given to our customers. At times, we enter into
extended payment terms with certain customers if we believe it is a good
business opportunity. Revenue related to arrangements containing extended
payment terms where the fees are not considered fixed and determinable is
deferred until payments are due. Granting extended payment terms results in a
longer collection period for accounts receivable and slower cash inflows from
operations. If collectibility is not considered probable, revenue is
recognized when the fee is collected. Professional service fees are primarily recognized separately from the
license fee since the services are not considered significant to the
functionality of the software and the software does not require significant
modification, production or customization. In instances when the services
performed in conjunction with certain contracts are significant to the
functionality of the software and the software requires significant
modification and customization at the customer site, the Company recognizes the
total license and services amount together. There are two types of service
contracts that are entered into with customers: fixed fee and time and
materials. We recognize revenue on fixed fee contracts using the percentage of
completion method. The percentage of completion method relies on estimates of
total expected contract revenue and costs. We follow this method since
reasonably dependable estimates of the revenue and costs can be made.
Recognized revenues and profits are subject to revisions as the contract
progresses to completion. Revisions in profit estimates are charged to income
in the period in which the facts that give rise to the revision become known.
We recognize revenue related to professional services under a time and
materials arrangement as services are performed. Revenue related to customer maintenance agreements is deferred and
recognized ratably on a straight-line basis over the maintenance period.
Maintenance is renewable annually and we expect to receive annual maintenance
fees from these activities in the future. Accounts Receivable We maintain an allowance for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. We
continuously monitor collections and payments from our customers and the
allowance for doubtful accounts is based on historical experience and any
specific customer collection issues that we have identified. If the financial
condition of our customers were to continue to deteriorate resulting in an
impairment of their ability to make payments, additional allowances may be
required. As payments are made from our customers related to old receivables
or if the customer goes out of business with no chance of collection, the
allowances will decrease with corresponding receivables as deemed appropriate. Accounting for Income Taxes We record a valuation allowance to reduce our deferred tax assets to the
amount that is more likely than not to be realized. We believe that it is more
likely than not that the deferred tax assets will not be realized and therefore
we have established a valuation allowance for the entire deferred tax assets,
net of deferred tax liabilities. While we have considered future taxable
income and ongoing prudent and feasible tax planning strategies in assessing
the 19




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need for the valuation allowance, in the event we were to determine that
we would be able to realize its deferred tax assets in the future in excess of
its net recorded amount, an adjustment to the deferred tax asset would increase
income in the period such determination was made. Goodwill In 2002, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 142 Goodwill and Other Intangible Assets.Goodwill
is no longer amortized but tested for impairment at least annually. At December
31, 2003 and March 31, 2004 the goodwill balance was related to the Abiliti
Acquisition. At December 31, 2003 we evaluated goodwill for impairment and determined that
goodwill was not impaired. In performing this impairment assessment, management
made judgments regarding the anticipated future cash flows from the Abiliti
Acquisition. Different assumptions in this assessment could have led to a
different result, which could have had a material effect on our reported
earnings. The conditions that could trigger an impairment write-down in the
future include a significant downward trend in our operating results or cash
flow of Daleen Solutions, Inc., a decrease in demand for BillingCentral
services, a change in the competitive environment and other economic factors. Results of Operations In December 2002, we acquired substantially all of the assets and assumed
certain liabilities of Abiliti Solutions, Inc. (Abiliti). The Abiliti
Acquisition created an additional revenue stream to our business that helped
position us to be a long-standing competitor in the marketplace. In addition to
licensing our software, we now offer a comprehensive outsourcing solution
through our BillingCentral carrier-class data center. The recurring revenue
from BillingCentral is significant to our ongoing operations. Additionally, as
a result of the Abiliti Acquisition, we expanded our product suite to include
event management and revenue assurance applications that compliment our
RevChain billing and customer management products. RevChain and Asuriti are
offered as licensed software and outsourced solutions. In 2003, we continued to be a competitor in the billing and OSS market
while managing our costs and use of cash to the lowest levels in our history.
We focused on achieving growth by selling additional services and upgrades to
our installed base of customers and offering our total solutions portfolio to
new and existing customers. In May 2003, we signed the largest customer
contract in our history when we executed a three-year license and services
agreement with a customer in Bogotá, Colombia (the ETB Contract). The ongoing
project implementation in connection with the ETB Contract is on schedule and
we completed Phase 1 of our ongoing implementation. Although revenues from new sales declined in the first quarter 2004, we
expanded our relationship with several existing customers. One customer
renewed its contract for outsourced billing services through BillingCentral
through 2009. Another existing customer purchased our Asuriti event management
and revenue assurance software. This was offset by a decline in revenue from
Allegiance Telecom Company Worldwide (Allegiance). Allegiance has informed us
that they are migrating data to another software system and intend to
discontinue use of our services gradually so that all data will be migrated by
June 2004. Recent Developments Investment and Acquisition Transactions On May 7, 2004 definitive agreements were signed by Quadrangle Capital
Partners L.P. (Quadrangle) and Behrman Capital (Behrman) for investments of
$25 million and $5 million, respectively, into Daleen Holdings, Inc. (DHI) a
newly formed holding company that will simultaneously acquire Daleen and Protek
Telecommunications Solutions Limited (Protek), (the Investment and
Acquisition Transactions). 20




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Quadrangle and Behrman will receive senior convertible redeemable
preferred stock in DHI (DHI Preferred) in consideration for their cash
investment. The DHI Preferred will have a dividend of 8% per annum, payable in
kind or in cash at DHIs election. The DHI Preferred will also carry the right
to the issuance of additional shares of preferred equity should DHI not attain
certain specified financial targets. DHI will acquire Protek by purchase of stock from its shareholders and
conversion of outstanding options, for aggregate consideration of up to $20
million, consisting of up to $13 million in cash, $5 million in common stock of
DHI (the DHI Common), and contingent earn-out consisting of $1 million in
cash and $1 million of DHI Common. The purchase price will be subject to
reduction in respect of closing date debt and working capital shortfalls. In connection with the Investment and Acquisition Transactions, we will
become a private company. All outstanding shares of our common stock will be
purchased for $0.0387 per share in cash. The per share purchase price is based
on an aggregate amount equal to approximately ten percent of the total value
received by our stockholders. In addition, as a condition of closing the
Investment and Acquisition Transactions, holders of our Series F convertible
preferred stock (Series F preferred stock) will be required to waive the
$49.8 million redemption value of the Series F preferred stock. These
stockholders will receive an aggregate of $15.4 million in cash and securities,
with the cash component limited to a maximum of $2.8 million. Immediately prior
to the consummation of the Investment and Acquisition Transactions, Behrman
will be contractually obligated to exchange its shares of Series F preferred
stock for $5 million in DHI Preferred plus the remaining value of its shares of
Series F preferred stock in DHI Common. Other holders of Series F preferred
stock will receive a combination of (a) an aggregate of $2.8 million in value
of DHI Common and (B) the remaining value of their Series F preferred stock in
DHI Common; however, holders of Series F preferred stock will be permitted to
convert all of their Series F preferred stock into DHI Common. Despite the decrease in revenue in the first quarter 2004 from the fourth
quarter 2003, we expect to continue to grow in 2004 due to an increased
penetration in sales activity and the improved financial condition that is
expected as a result of the completion of the Investment and Acquisition
Transactions. We believe that in the future our results of operations could be
adversely affected by various factors, including:  
    
    continued decline in business from our three significant customers;  
    
    the inability to close the Investment and Acquisition Transactions;  
    
    the success of merging Proteks and our operations;  
    
    lack of market acceptance of new products, upgrades and services;  
    
    general economic or political condition in Colombia;  
    
    difficulties in implementing strategic alliances;  
    
    inability to retain key personnel;  
    
    changes in accounting rules such as expensing of stock options;  
    
    downward trends in the telecommunications industry;  
    
    introduction of products and services by existing and new competitors; and  
    
    the inability to terminate our public company status. Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003 Total Revenue.Total revenue, which includes professional services and
other revenue and license revenue, increased $185,000, or 4.5%, to $4.3 million
in the three months ended March 31, 2004, from $4.1 million for the same period
in 2003. The increase in revenue is related to the ETB Contract, which was
signed in June 2003, offset by a decrease in outsourcing services revenue
primarily related to a decline in revenues from Allegiance. 21




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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. Consulting services are offered on a fixed
fee basis and on a time and materials basis. Third-party software fulfillment
is offered on a cost plus basis. In addition, these revenues include the
BillingCentral outsourcing operation. Outsourced services are billed monthly
and recognized as services are rendered. Professional services and other
revenue decreased $157,000, or 4.1%, from $3.8 million in same period in 2003.
The decrease was related to a decrease in revenue in our outsourcing services
primarily related to Allegiance, offset by an increase in professional services
and third party software related to the ETB Contract. Professional services
and other revenue decreased to 86.2% of total revenue in the three months ended
March 31, 2004, compared to 94.0% in the same period in 2003. License Fees.Our license fees are derived from licensing our software
products. License fees increased $342,000, or 140.2%, in the three months ended
March 31, 2004 to $587,000, compared to $245,000 for the same period in 2003.
The increase was due to revenue recognized on a percentage of completion basis
under the ETB Contract. In addition, we executed a contract with an existing
customer and delivered an Asuriti license. This is compared to the three months
ended March 31, 2003 in which we recognized a portion of license fees related
to one license contract and one customer exceeding contractually specified
billing revenue levels resulting in additional license fees. License fees
constituted 13.8% of total revenue in the three months ended March 31, 2004,
compared to 6.0% in the same period in 2003. The increase in the percentage of
revenue is due to the increase in license fee revenue in the three months ended
March 31, 2004. Cost of Revenue.Total cost of revenue increased $214,000, or 15.6%, to
$1.6 million in the three months ended March 31, 2004 from $1.4 million in the
same period in 2003. The cost of revenue includes both cost of license fees and
cost of professional services and other. These components include the cost of
direct labor, benefits, third-party fees paid for referrals, overhead and
materials associated with the fulfillment and delivery of license products and
related corporate overhead costs to provide professional services to customers
including the delivery of outsourcing services. The total costs increased due
an increase in third party subcontracting costs for work performed under the
ETB Contract and an increase in third party software costs related to the
increase in third party software revenue. The total cost of revenue as a
percentage of total revenue increased to 37.2% in the three months ended March
31, 2004 from 33.7% in the same period in 2003. The increase in the percentage
of total revenue is due to an increase in the third party software costs
associated with the ETB Contract in the three months ended March 31, 2004. Cost of Professional Services and Other.Cost of professional services
and other includes direct cost of labor, benefits, third-party software
maintenance and related costs to provide professional services, maintenance and
training to our customers. Cost of professional services and other increased
$214,000, or 15.6%, to $1.6 million, in the three months ended March 31, 2004
from $1.4 million in the same period in 2003 mainly due to the increase in
third party subcontracting costs for work performed under the ETB Contract and
an increase in third party software costs related to the increase in third
party software revenue. Cost of professional services and other revenue
increased to 43.2% of professional services and other revenue in the three
months ended March 31, 2004, compared to 35.8% for the same period in 2003.
The increase as a percentage of professional services and other revenue is due
to the increase in costs related to the ETB Contract in the three months ended
March 31, 2004. Cost of License Fees.Cost of license fees includes benefits, packaging
material for fulfillment and shipment of our software products. Cost of
license fees was $0 for the three months ending March 31, 2004 and 2003 due to
all licenses being delivered on CD-Rom and having no fulfillment costs. Sales and Marketing.Sales and marketing expenses consist primarily of
salaries, benefits and commissions 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 $166,000, or 18.5%, to $734,000 in the three months ended
March 31, 2004, compared to $900,000 in the same period in 22




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2003. These costs decreased as a result of our decrease in our travel and
entertainment and trade show costs. As a percentage of total revenue, these
expenses decreased to 17.2% in the three months ended March 31, 2004 compared
to the 22.1%, for same period in 2003. 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 $29,000, or 1.7%, to $1.7 million for the three months ended March
31, 2004, from $1.7 million in the same period in 2003. As a percentage of
revenue, these expenses decreased to 38.8% in the three months ended March 31,
2004 compared to 41.3% in the same period in 2003. General and Administrative.General and administrative expenses consist
primarily of salaries, benefits and related costs for our executive, finance
and accounting, administrative, facilities, human resources and information
systems personnel. Our general and administrative costs increased
$9,000, or
0.6%, to $1.6 million in the three months ended March 31, 2004, from $1.6
million in the same period in 2003. This increase was primarily due
to the settlement of the Abiliti litigation for $250,000 offset by the
ongoing effort of management to continue to reduce costs. As a percentage of
total revenue, these expenses decreased to 38.2% in the three months ended
March 31, 2004 as compared to 39.7% in the same period in 2003. Other Income.Other income decreased $42,000, or 53.0%, to $36,000 in the
three months ended March 31, 2004, from $78,000 for the same period in 2003.
This was primarily attributable to a decrease in investment earnings in the
three months ended March 31, 2004 due to the decrease in our cash balance and a
decrease in interest rates in 2004. Off  Balance Sheet Arrangements We had no off-balance sheet arrangements as of and for the three months
ended March 31, 2004. Liquidity And Capital Resources The following table provides information relating to our material
contractual obligations at March 31, 2004. Payment Due By Period (in thousands)Less Than
    
    
    
    
    
    
    
    
    
    More ThanContractual Obligations
    
    Total
    
    1 Year
    
    1-3 Years
    
    3-5 Years
    
    5 yearsCapital leases
    
    $
    9
    
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    Operating leases
    
    
    3,550
    
    
    
    735
    
    
    
    2,037
    
    
    
    778
    
    
    
    Purchase obligations
    
    
    92
    
    
    
    92
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    3,651
    
    
    
    836
    
    
    
    2,037
    
    
    
    778
    
    
    
    
 Net cash used in operating activities was $2.2 million for the three
months ended March 31, 2004, compared to $66,000 for the three months ended
March 31, 2003. The principal use of cash for both periods was to fund our
losses from operations. Net cash provided by financing activities was $2.0 million for the three
months ended March 31, 2004, compared to $72,000 used in financing activities
for the three months ended March 31, 2003. In 2003 the cash used was related to
payments made under capital leases. In 2004, the cash provided was related to
the borrowing against the Operating Loan established with Silicon Valley Bank. 23




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Net cash used in investing activities was $68,000 for the three months
ended March 31, 2004 compared to $354,000 for the three months ended March 31,
2003. The cash used in investing activities in 2003 was mainly related to
transaction costs related to the Abiliti Acquisition and capital expenditures.
The cash used in 2004 was primarily related to capital expenditures. We
incurred net losses of approximately $1.3 million for the three months
ended March 31, 2004 and had an accumulated deficit of $215.8 million at March
31, 2004. Cash and cash equivalents and restricted cash at March 31, 2004 were
$2.7 million. Cash used in operations for the three months ended March 31,
2004 was $2.2 million. We continued to provide outsourcing services to
Allegiance pursuant to an agreement expiring on December 31, 2004. Allegiance
accounted for 24.8% of total revenue for the three months ended March 31, 2004.
There are no minimum revenues from Allegiance under this agreement.
Allegiance has informed us that they are migrating data to another software
system and intend to discontinue use of our services gradually so that all data
will be migrated by June 2004. As a result of our business concentration risk, past recurring losses from
operations and accumulated deficit, our accountants have raised substantial
doubt about our ability to continue as a going concern. In February 2004, we closed a revolving loan facility (the Operating
Loan) with Silicon Valley Bank (SVB) and guaranteed by EXIM Bank. (See Note
5 of the condensed unaudited consolidated financial statements in Item 1 for a
description of terms). Total funding under the Operating Loan is $2,700,000.
The Company can borrow against the Operating Loan based on estimated funding
dates and may have outstanding borrowings at any given time of up to
$2,000,000. The proceeds of the Operating Loan will be used for operating costs
associated with the ETB Contract. The balance on the Operating Loan as of March
31, 2004 was $2,000,000. Approximately $1.3 million of the Operating Loan was
repaid in May 2004. On May 7, 2004 we announced the Investment and Acquisition Transactions.
As part of the Investment and Acquisition Transactions, we will become a
private company. The Investment and Acquisition Transactions are subject to the
satisfaction of customary closing conditions including the approval of our
stockholders. In May 2004, we entered into bridge loan facility for a maximum principal
amount of $5.1 million, bearing interest at the rate of 6% per annum (plus a
penalty at and after an event of default) (the Bridge Loan Facility). We will
draw up to $1.5 million of this amount to fund a $1.5 million working capital
facility that it is providing to Protek in connection with the Investment and
Acquisition Transactions, and $100,000 to fund a facility fee payable to
Behrman. Subject to Behrmans consent, additional amounts may be drawn under
the Bridge Loan Facility to fund our working capital needs. It is expected that
the full remaining permitted principal amount of the Bridge Loan Facility will
be drawn immediately prior to the closing of the Investment and Acquisition
Transactions. At closing, the Bridge Loan Facility note will be guaranteed by
DHI by offset of the principal amount thereof against the $5 million commitment
of Behrman, plus a cash payment in respect of accrued by unpaid interest. The
Bridge Loan Facility is secured by a lien on all our assets of the Company,
subordinated to the interests of SVB and EXIM Bank. We believe the cash and cash equivalents at March 31, 2004, together with
the Operating Loan proceeds, Behrman Bridge Facility and the additional funding
resulting from the Investment and Acquisition Transactions, may be sufficient
to fund operations for the foreseeable future. The Investment and Acquisition
Transactions are subject to a number of closing conditions, including the
approval of our stockholders, and there can be no assurance that the
transactions will be consummated. If Investment and Acquisition Transactions
are not consummated we believe the cash and cash equivalents at March 31, 2004
may not be sufficient to fund the operations and we will be required to further
reduce operations and/or seek additional financing. Although we are precluded
from considering other strategic alternatives pending completion or termination
of the Investment and Acquisition Transactions, if the transactions are not
completed, we will consider other strategic alternatives. 24




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There can be no assurance that additional financing will be available, or
that, if available the financing will be obtainable on terms acceptable to us
or that additional financing would not be substantially dilutive to our
existing stockholders. There can be no assurance that any other strategic
alternatives will be available, or if available, will be on terms acceptable to
us, or all of our stockholders. Failure to consummate the Investment and
Acquisition Transactions will have a material adverse affect on our ability to
operate as a going concern, which may result in filing for bankruptcy
protection, winding down operations and/or liquidation of assets. The condensed
unaudited financial statements have been prepared assuming that we will
continue as a going concern, and do not include any adjustments that might
result from the outcome of this uncertainty. New Accounting Pronouncements See Note 14 to our condensed unaudited consolidated financial statements
in Part I Item 1 to this Form 10-Q for certain new accounting pronouncements. RISKS ASSOCIATED WITH DALEENS BUSINESS AND FUTURE OPERATING RESULTS RISK FACTORS Our future operating results may vary substantially from period to period.
The price of our common stock will fluctuate in the future, and an investment
in our common stock is subject to a variety of risks, including but not limited
to the specific risks identified below. In addition to risk factors associated
with our business and operations, risk factors relating to our outstanding
Series F preferred stock are set forth below under the caption Risks
Associated with our Series F Preferred Stock and risk factors associated with
the Investment and Acquisition Transactions are also set forth 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 set forth in this report. Risks Associated with the Investment and Acquisition Transactions If the Investment and Acquisition Transactions do not close, our transaction
expenses may exceed cash and cash equivalents on hand at the time of
termination. If the Investment and Acquisition Transactions do not close, we are
unlikely to have the resources needed to fund our transaction-related expenses,
including without limitation the requirement that we pay Quadrangles expenses
upon any termination. We may also owe more than $1.6 million to Behrman for
advances on the Bridge Loan Facility with no guarantee of recovery of up to
$1.5 million advanced to Protek. In addition, our own transaction expenses may
exceed cash and cash equivalents on hand at the time of termination and we may
not have sufficient working capital to repay the Bridge Loan Facility or to
fund the ongoing operations of our business. Risks Associated with our Business and Operations Our business relies in part on a limited number of customers and unfavorable
developments in relation to a major customer may adversely affect our revenues,
operating results and cash flows. Three customers accounted for an aggregate of 65.4%of our total revenue
for the three months ended March 31, 2004, with ETB accounting for 30.1%,
Allegiance, accounting for 24.8%, and SBC accounting for 10.6% of our total
revenue for the three months ended March 31, 2004. If an unfavorable
development occurs with respect to any significant customer it would likely
materially adversely impact our total revenues and financial results. 25




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We provide outsourcing services to our largest customer, Allegiance,
pursuant to a contract expiring on December 31, 2004. There are no minimum
revenues from Allegiance under this agreement. Allegiance has informed us that
they are migrating data to another software system and intend to discontinue
use of our services gradually so that all data will be migrated by June 2004. In addition, we entered into the ETB Contract in May 2003. ETB may
terminate the ETB Contract at anytime for any reason. If ETB terminates the
ETB Contract for any reason, other than our breach of the contract, ETB must
pay the proportionate fees for services performed and licenses provided prior
to the date of termination. The project is divided into phases and invoicing
is tied to performance milestones. The first significant payments were made in
the fourth quarter of 2003 and May 2004. Payments will continue periodically
throughout 2004 and 2005. There can be no assurance that we will achieve
anticipated revenues or receive prompt payments from ETB throughout the
contract period. Additional capital and/or strategic alternatives may be required for us to
continue our operations and as a result, our independent public accountants
have expressed doubts over our ability to continue as a going concern. We
incurred net losses of approximately $1.3 million for the three months
ended March 31, 2004, and we had an accumulated deficit of
approximately $215.8
million as of March 31, 2004. Our cash and cash equivalents and restricted cash
at March 31, 2004 were $2.7 million. Cash used in operations for the three
months ended March 31, 2004 was $2.2 million. As a result of our business
concentration risk, our past recurring losses from operations and our
accumulated deficit, the independent auditors report included in our December
31, 2003 consolidated financial statements 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. Net cash used in operating activities was $2.2 million for the three
months ended March 31, 2004, compared to $66,000 for the three months ended
March 31, 2003. The principal use of cash for both periods was to fund our
losses from operations. Net cash provided by financing activities was $2.0 million for the three
months ended March 31, 2004, compared to $72,000 used in financing activities
for the three months ended March 31, 2003. In 2003 the cash used was related to
payments made under capital leases. In 2004, the cash provided was related to
the borrowing against a line of credit established with SVB. Net cash used in investing activities was $68,000 for the three months
ended March 31, 2004 compared to $354,000 for the three months ended March 31,
2003. The cash used in investing activities in 2003 consisted mainly of
transaction costs related to the Abiliti Acquisition and capital expenditures.
The cash used in 2004 was primarily related to capital expenditures. There is no assurance that we can effectively implement our aggregation
strategy and even if we can, it might not be successful and could be dilutive
to our existing stockholders. We intend to augment our growth through targeted aggregations, including
but not limited to mergers, acquisitions or other strategic transactions
pursuant to which we would combine some or all of our resources with other
billing and OSS companies. If we fail to properly evaluate and execute
aggregations, our business and prospects may be seriously harmed. To
successfully complete any particular aggregation transaction, we must properly
evaluate the technology; accurately forecast the financial impact of the
transaction, including accounting charges and transaction expenses; integrate
and retain personnel; combine potentially different corporate cultures; and
effectively integrate products and services, research and development, sales
and marketing and support 26




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operations. Pursuit of our aggregation strategy may distract management from
day-to-day operations and may be disruptive to our ongoing business. Further,
our ability to implement our aggregation strategy may be limited by the
availability of suitable candidates and our ability to obtain sufficient
additional capital to pursue this strategy. There can be no assurance that we
will be able to identify suitable candidates or have capital available to us to
complete any aggregation transactions, or that the terms of any such
transaction or additional capital will be acceptable to us. Additionally, the terms of any aggregation transaction or capital raising
transaction may require us to issue additional shares of our common stock or
securities convertible into our common stock, which would be dilutive to our
existing stockholders, and which could materially and adversely affect the
market price of our common stock, or an aggregation may result in a change in
the character of your investment. Any aggregation transaction may result in
additional costs, expenses and other obligations, and could result in
additional ongoing capital needs, all of which could materially and adversely
affect our results of operations and financial condition. We have not achieved profitability in the past and may continue to incur net
losses. We
incurred net losses of approximately $1.3 million for the year ended
March 31, 2004. As of March 31, 2004, we had an accumulated deficit of
approximately $215.8 million. We have not achieved profitability to date and
may not do so in the foreseeable future. In order to achieve profitability, we may need to further reduce our
operations, seek additional financing and/or pursue other strategic
alternatives. There are no assurances that we will achieve profitability in
the future and, even if we do, we may not be able to sustain or increase
profitability on a quarterly or annual basis. If we default on the Operating Loan, SVB may hold our accounts or take
possession of the collateral, including without limitation our intellectual
property. We recently closed the Operating Loan with SVB that permits us to have
outstanding borrowings at any given time up to $2,000,000. The Operating Loan
is subject to representations and warranties and covenants and includes
numerous events of default including maintaining a tangible net worth
requirement of $3,000,000. As of March 31, 2004 we are in compliance with the
representations and warranties and covenants under the Operating Loan. If we
were to breach any of the representations and warranties or covenants or in the
event we trigger an event of default, SVB may institute a hold on our operating
account and may seek to take possession of the collateral, including without
limitation our intellectual property. Many of our customers and potential customers lack financial resources, and if
they cannot secure adequate financing, we may lose or fail to obtain their
business, which would adversely affect our revenues, operating results and cash
flows. Many of our customers and potential customers lack significant financial
resources or are experiencing liquidity difficulties as a result of the
tightening of the financial markets and the prolonged weakness in the U.S.
economy in recent years. Further, this general economic weakness has resulted
in delays or reductions in expenditures for information technology, which has,
and may continue to adversely affect demand for our products and services. The adverse conditions being experienced by customers for our products
could adversely affect their ability to purchase additional products, renew
maintenance and support agreements, obtain outsourcing services from us or meet
their financial obligations to us in a timely manner. Also, our business,
operating results, and cash flows may be adversely affected to the extent that
any of our customers seeks bankruptcy protection or cease operations, and by
the consolidation of companies within the technology sector. Any of these
factors may adversely affect our collections of accounts receivable from our
customers, and may affect the timing of our revenue recognition 27




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where we provide financing to our customers. See Risk Factors Our
business relies in part on a limited number of customers and unfavorable
developments in relation to a major customer may adversely affect our revenues,
operating results and cash flows. Our expansion into select international markets may not succeed as a result of
legal, business and economic risks specific to international operations. Our expansion into select international markets is subject to risks
generally associated with international operations and our future international
operations might not succeed for a number of reasons, including but not limited
to dependence on third-party systems integrators; difficulties in staffing and
managing foreign operations; language barriers; difficulties in localizing
products and supporting customers in foreign countries; reduced protection for
intellectual property rights in some countries; greater difficulty in
collecting accounts receivable; local standards of contracting and doing
business, including performance bond requirements and penalty clauses, and
uncertainties inherent in transnational operations such as export and import
regulations and other local laws, taxation issues, tariffs, trade barriers and
fluctuations in currency conversion rates. To the extent that we are unable to
successfully manage expansion of our business into these international markets
due to any of the foregoing factors, our business could be adversely affected. Our future success will depend in part upon our ability to continually enhance
our product and service offerings to meet the changing needs of our customers,
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 and service offerings to meet the
requirements of our customers in a rapidly developing and evolving market.
Since 2001, we have significantly reduced the amount of cash we expend for
research and development. This reduction may make it more difficult to enhance
future product and service offerings. If we are unable to anticipate or
respond adequately to customer needs, our business and financial performance
will be adversely affected. Design 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 result in costly
redesigns, cause delays in product introductions, or cause customer
dissatisfaction, any of which could seriously harm our business. Our software
products are highly complex and may, from time to time, contain design defects
or software errors that may be difficult to detect and correct. Although we
have license agreements with our customers that contain provisions designed to
limit our exposure to potential claims and liabilities arising from customer
problems, these provisions may not effectively protect us against all claims.
In addition, claims and liabilities arising from customer problems could
significantly damage our reputation and adversely affect our business and
results of operations. If we cannot continue to obtain or implement the third-party software that we
incorporate into our products, we may have to delay our product development or
redesign efforts, which could adversely affect our revenues and results of
operations. Our products involve 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 products, or fail to be supported
by their vendors, it would be necessary for us to redesign our products. We
might encounter difficulties in accomplishing any necessary redesign in a
cost-effective or timely manner. We also could experience difficulties
integrating our products 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 products or services, which could
adversely affect our business and financial performance. 28




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We permit certain third parties to sell and implement our products, and any
failure by these parties to successfully implement or support our products may
reflect negatively on our products. Third parties such as systems integration firms and OEM partners help us
to market, sell, implement and support our products. If these third parties
discontinue their relationship with us, or fail to adequately implement and
support our products, we may experience increased difficulty in attracting and
retaining customers, or incur unanticipated costs and expenses necessary to
satisfy customer needs, and it may reflect negatively on our reputation in the
marketplace for our products. 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 market for our products and services is highly competitive. We
directly compete with both independent providers of products and services and
in-house systems developed by existing and potential clients. In addition, some
independent providers are entering into strategic alliances with other
independent providers, resulting in new competitors or competitors with greater
resources. Many of our current and potential competitors have significantly
greater financial, marketing, technical, and other competitive resources, many
with significant and well-established international operations. In addition,
our 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. There can be no assurance
that we will be able to adapt to market demands or compete successfully with
existing and new competitors. We may be unable to protect our proprietary technology, and our competitors may
infringe on our technology, or develop competitive technology, any one of which
could harm the value of our proprietary technology. 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. There can be no assurance, however, that these
protections will prevent misappropriation of our intellectual property,
particularly in foreign countries where intellectual property laws may not
protect proprietary rights as fully as the laws of the United States. If we
have to resort to legal proceedings to enforce our intellectual property
rights, the proceedings could be burdensome and expensive and the outcome
uncertain. Also, our competitors could independently develop similar or
superior technology without violating our proprietary rights. Any
misappropriation of our technology or development of competing technology could
seriously harm our business and could materially and adversely affect our
financial performance. Claims by others that we infringe their proprietary technology could be costly
and harm our business. Third parties could claim that our products or technology infringes on
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 products. If we faced a claim
relating to proprietary technology, we may need to incur additional costs and
expenses to license such technology, or to develop non-infringing technology in
order to sell our affected products, which could adversely affect our financial
performance. 29




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Loss of our senior management or other key personnel would harm our business if
we are unable to hire suitable replacements. Our future success depends to a significant extent on the continued
services of our senior management and other key personnel. If we lost the
services of our key employees and we were unable to hire suitable replacements,
it would harm our business. We have employment and non-compete agreements with
our executive officers. However, these agreements do not obligate them to
continue working for us. Our success also depends in large part on our ability
to motivate and retain highly skilled information technology professionals,
software programmers, and sales and marketing professionals. Our recent
restructurings and cost reductions may create uncertainties that could
adversely affect our ability to retain our employees. Significant turnover of
our personnel could hinder our ability to effectively serve our existing
customers and in competing for new business, either of which could adversely
affect our business and results of operations. The delisting of our common stock from The Nasdaq SmallCap Market may have made
trading more difficult and may result in further declines in the share price. In December 2002, our common stock was delisted from The Nasdaq SmallCap
Market and subsequent to this event, our common stock has been quoted on the
OTC service. The OTC is generally considered less desirable and less liquid
than the market for securities quoted on The Nasdaq SmallCap Market. This may
have made trading shares of our common stock more difficult for investors,
leading to increased volatility and potentially further declines in the trading
price of our common stock. It may also make it more difficult for us to raise
additional capital, and we may incur additional costs under state blue sky
securities laws if we choose to issue additional equity securities. 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 been volatile due in part to the
volatility in the communications and technology areas of the equity securities
markets, and our results of operations. We anticipate that the trading price
for our common stock will continue to experience volatility in the future.
Factors that may affect the fluctuation in the trading price of our common
stock may include but are not limited to: quarter-to-quarter variations in our
operating results; our ability to raise additional capital and/or engage in
strategic alternatives; failure to meet market expectations of our performance;
announcements and technological innovations or new products by us or our
competitors; the projected level of business activity or perceived growth (or
the lack thereof) in the market; increased price competition; and general
conditions in the Internet, technology and the telecommunications industries. We are the target of a securities class action lawsuit and the volatility of
our stock price may lead to additional legal proceedings being brought against
us which could result in substantial costs and divert management attention and
resources. In December 2001, a class action complaint was filed and is pending in the
United States District Court for the Southern District of New York against us
and certain of the underwriters of our initial public offering. The complaint
alleges that the defendants failed to disclose excessive commissions paid to
the underwriters in exchange for allocating shares to preferred customers, and
that the underwriters had agreements with preferred customers tying the
allocation of shares to the preferred customers agreements to make additional
aftermarket purchases at pre-determined prices. The complaint alleges that the
failure to disclose these alleged arrangements made our prospectus materially
false and misleading. Plaintiffs seek unspecified damages and other relief. 30




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We have approved the terms of a proposed settlement involving the
plaintiffs, the insurance companies and numerous issuers, including us and the
individual defendants, that includes a waiver by the insurance companies of any
retention amounts under the policies. However, court approval of the
settlement will be required and there can be no assurance that the settlement
will be finalized. We intend to vigorously defend against the plaintiffs
claims if settlement discussions are unsuccessful. Any such defense may result
in substantial costs and divert managements attention, which may adversely
affect our business and results of operations. While we believe that we are
entitled to be indemnified by the underwriters under the terms of the
underwriting agreement, there can be no assurance that indemnification will be
available to us, or the amount of any such indemnification. Furthermore,
BancBoston Robertson Stephens Inc., the lead underwriter in our initial public
offering, has ceased doing business. See Part II Item 1Legal Proceedings in
this report for a more complete discussion concerning this litigation. In addition, in the past, other types of securities class action
litigation have often been brought against companies following periods of
volatility in the market price of its securities. We may in the future be the
target of similar litigation. While we are not aware of any other complaints
being filed against us, and we do not know of any facts and circumstances that
could give rise to such an action, any securities litigation may result in
substantial costs and divert managements attention and resources, which may
seriously harm our business. Claims related to the liabilities retained by Abiliti in the Abiliti
Acquisition remain unresolved and because Abiliti has exhausted its remaining
assets, we will be forced to pay the costs of defending such claims, and
settlement or judgment amounts, if any. Certain claims related to the liabilities retained by Abiliti in the
Abiliti Acquisition remain unresolved. Abiliti is obligated to indemnify us
for all such claims and is currently defending us in the action entitled James
E. Kientzy and David K. Wilson vs. Abiliti Solutions, Inc., a corporation, and
Daleen Technologies, Inc., a corporation, and Daleen Solutions, Inc., a
corporation and wholly-owned subsidiary of Daleen.It appears
probable that a settlement in the amount of $250,000 has been reached
in this matter. There is an additional action entitled
Tamara Cooper v. Albacore Holdings, Inc. b/d/a Abiliti Solutions, Inc., Daleen
Solutions, Inc. and Gordon Quick.Albacore has notified its insurance carrier
and made demand for defense of this matter, but no response to such
demand has been received. Albacore has notified us that it does not have the
financial resources to defend and/or settle the claims, pay any judgment
ultimately obtained by plaintiffs, or continue to provide indemnification in
connection with these matters and we will be forced to pay the costs of defense
and the settlement related to the James E. Kientzy and David K.
Wilson v. Abiliti Solutions, et al litigation or any judgment
amounts in the Tamara Cooper v. Albacore Holdings et al
litigation if one is forth coming judgment amounts, if any. Delaware law, our certificate of incorporation and our bylaws contain
anti-takeover provisions that may delay, deter 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 of
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, 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 generally 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. These provisions do not apply to the holders
of our Series F preferred stock. 31




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Risks Associated with our Series F Preferred Stock The holders of our Series F preferred stock have rights that are senior to
those of the holders of our common stock in the event of the sale of our
Company or in the event of our liquidation, dissolution or winding up. The holders of the Series F preferred stock will have a claim against our
assets senior to the claim of the holders of our common stock in the event of
our liquidation, dissolution or winding up. The aggregate amount of that
senior claim will be at least $110.94 per share of Series F preferred stock
(the Preferential Amount), or approximately $49.8 million based on the number
of shares of Series F preferred stock outstanding at May 1, 2004. Additionally, unless otherwise agreed by the holders of at least a
majority of the outstanding shares of Series F preferred stock, in the event of
a Sale of the Company, we are required to redeem all of the issued and
outstanding shares of Series F preferred stock for the Preferential Amount per
share. A Sale of the Company means, with certain limited exceptions: (i) the
acquisition by another entity by means of merger or consolidation resulting in
the exchange of at least 50% of the outstanding shares of our capital stock for
securities issued or other consideration paid by the acquiring entity or any
parent subsidiary thereof; or (ii) the sale or other disposition by us of
substantially all of our assets. As a result, in the event of a Sale of the
Company, the holders of the Series F preferred stock will be entitled to the
first $49.8 million of the transaction value based on the Series F preferred
stock outstanding at May 1, 2004. The holders of our Series F preferred stock have significant voting rights that
are senior to those of the holders of our common stock. The holders of the Series F preferred stock have voting rights entitling
them to vote together with the holders of our common stock as a single class
and on the basis of 100 votes per share of Series F preferred stock held by
such holder, subject to certain anti-dilution adjustments. As of May 1, 2004,
the voting power of the holders of the currently outstanding shares of Series F
preferred stock constitutes approximately 49.0% of the entire voting class of
common stock, without giving effect to the shares of our common stock currently
owned by the holders of the Series F preferred stock, or the exercise of
warrants to acquire our common stock and warrants to acquire our Series F
preferred stock (Series F Warrants) held by such holders, or 55.39% if the
warrant holders exercise their Series F Warrants. Additionally, certain holders of our Series F preferred stock beneficially
own a significant number of shares of our outstanding common stock. When
combined with the shares of common stock that they beneficially own, the
holders of our outstanding shares of Series F preferred stock control
approximately 78.15% of the vote on any proposal submitted to the holders of
our common stock, or 89.83% of the vote if the holders of the Series F
preferred stock exercise their Series F Warrants and their warrants to purchase
common stock. When considering both the Series F preferred stock and shares of
our common stock owned, the three largest beneficial owners of our Series F
preferred stock, the Behrman Funds, HarbourVest Partners V  Direct Fund L.P.
and HarbourVest VI  Direct Fund L.P. (collectively HarbourVest) and SAIC
Venture Capital Corporation control 47.89%, 13.97% and 9.81%, respectively, or
in the aggregate, approximately 71.67% of the voting power on matters submitted
to our common stockholders. This combined voting power would generally give
these stockholders the power to control the outcome on most important corporate
decisions, including but not limited to the Reverse Split, election of
directors, mergers, acquisitions and other significant corporate transactions
and amendments to our certificate of incorporation, if such beneficial owners
act together or in common on any particular matter. In the event that we seek stockholder approval of a transaction or action
involving the Sale of the Company and/or the liquidation, dissolution or
winding up of the Company, or other transaction, the holders of the Series F
preferred stock will control a majority of the vote and, as a result, would
control or significantly influence the outcome of a proposal with respect to
such a transaction or action, whether or not the holders of our common stock
support or oppose the proposal. 32




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In the event of conversion of the Series F preferred stock, the holders
are entitled to vote the number of shares of common stock issued upon
conversion. Each share of outstanding Series F preferred stock is currently
convertible into 122.4503 shares of common stock, or an aggregate of
approximately 55 million shares of common stock assuming the conversion of all
of the shares of Series F preferred stock outstanding as of May 1, 2004. Additionally, the holders of the Series F preferred stock are entitled to
vote as a separate class on certain matters, including:  
    
    the authorization or issuance of any other class or
series of preferred stock ranking senior to or equal with the
Series F preferred stock as to payment of amounts distributable
upon our dissolution, liquidation or winding up;  
    
    the issuance of any additional shares of Series F
preferred stock;  
    
    the reclassification of any capital stock into shares
having preferences or priorities senior to or equal with the
Series F preferred stock;  
    
    the amendment, alteration, or repeal of any rights of the
Series F preferred stock; and  
    
    the payment of dividends on any other class or series of
our capital stock, including the payment of dividends on our
common stock. Our Series F preferred stock provides for anti-dilution adjustments to the
Series F preferred stock conversion price, which could result in a reduction of
the conversion price. Subject to certain exceptions, the conversion price of the Series F
preferred stock will be reduced each time, if any, that we issue common stock,
convertible preferred stock, options, warrants or other rights to acquire
common stock at a price per share of common stock that is less than the
conversion price of the Series F preferred stock then in effect. A reduction
in the conversion price of the Series F preferred stock will increase the
number of shares of common stock issuable upon conversion of the Series F
preferred stock. The Series F preferred stock is automatically convertible only in limited
circumstances and, as a result could be outstanding indefinitely. The Series F preferred stock will convert automatically into common stock
only if the closing price of our common stock on The Nasdaq National Market or
a national securities exchange is at least $3.3282 per share for ten out of any
20 trading day period. Otherwise, the shares of Series F preferred stock are
convertible only at the option of the holder. Further, the Series F preferred
stock is not subject to automatic conversion if our common stock is not then
listed for trading on The Nasdaq National Market or a national securities
exchange. Each Series F 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 Series F Warrant holder and will not be convertible or
callable at our election. As a result of these provisions, the Series F
preferred stock may remain outstanding indefinitely. 
 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. 33




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Item 4. Controls and Procedures. Our management, under the supervision and with the participation of our
Chief Executive Officer (CEO) and Chief Financial Officer (CFO), performed an
evaluation of the effectiveness of our disclosure controls and procedures as of
the end of the period covered by this report on Form 10-Q. Based upon that
evaluation, the CEO and CFO concluded that our disclosure controls and
procedures were effective as of the end of such period. There were no changes in our internal control over financial reporting
identified in connection with the evaluation of such internal control that
occurred during our last fiscal quarter that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting. 34




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PART II OTHER INFORMATION 
 Item 1. Legal Proceedings Stockholder Litigation Fazari vs. Daleen Technologies, Inc., et al.: On December 5, 2001, a class
action complaint was filed in the United States District Court for the Southern
District of New York. On April 22, 2002 an amended complaint was filed by two
plaintiffs purportedly on behalf of persons purchasing the Companys common
stock between September 20, 1999 and December 6, 2000. The complaint is styled
as Angelo Fazari, on behalf of himself and all others similarly situated, vs.
Daleen Technologies, Inc., BancBoston Robertson Stephens Inc., Hambrecht &
Quist LLC, Salomon Smith Barney Inc., James Daleen, David B. Corey and Richard
A. Schell. The individual defendants, Messrs. Corey, Schell and Daleen, have
entered into tolling agreements with the plaintiffs resulting in their
dismissal from the case without prejudice. The remaining defendants include us
and certain of the underwriters from the Companys initial public offering
(IPO). More than 300 similar class action lawsuits filed in the Southern
District of New York against numerous companies and their underwriters have
been consolidated for pretrial purposes before one judge under the caption In
re Initial Public Offering Securities Litigation. The complaint includes allegations of violations of (i) Section 11 of the
Securities Act of 1933 by all named defendants, (ii) Section 15 of the
Securities Act of 1933 by the individual defendants and (iii) Section 10(b) of
the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by
the underwriter defendants. Specifically, the plaintiffs allege in the
complaint that, in connection with the IPO, the defendants failed to disclose
excessive commissions purportedly solicited by and paid to the underwriter
defendants in exchange for allocating shares of the Companys common stock in
the IPO to the underwriter defendants preferred customers. Plaintiffs further
allege that the underwriter defendants had agreements with preferred customers
tying the allocation of shares sold in the IPO to the preferred customers
agreements to make additional aftermarket purchases at pre-determined prices.
Plaintiffs further allege that the underwriters used their analysts to issue
favorable reports about the Company to further inflate the Companys share
price following the IPO. Plaintiffs claim that the defendants knew or should
have known of the underwriters actions and that the failure to disclose these
alleged arrangements rendered the prospectus included in the Companys
registration statement on Form S-1 filed with the SEC in September 1999
materially false and misleading. Plaintiffs seek unspecified damages and other
relief. In September 2003, we approved the terms of a proposed settlement
involving the plaintiffs, the insurance companies and numerous issuers,
including us and the individual defendants, that includes a waiver by the
insurance companies of any retention amounts under the policies. Court
approval of the settlement is required. Under the terms of the proposed
settlement, there would be no liability to be recorded by us other than legal
fees incurred in the initial defense of the action, which are immaterial. There
is no assurance that a settlement with the plaintiffs will be finalized. In
the event that the settlement is not finalized and approved by the court, we
intend to defend vigorously against the plaintiffs claims. We believe that we
are entitled to indemnification by the underwriters under the terms of the
underwriting agreements. We have notified the underwriters of the action, but
the underwriters have not yet agreed to indemnify the Company. The lead
underwriter, BancBoston Robertson Stephens Inc., has ceased doing business and
there is no assurance it will have the financial resources to provide
indemnification. Currently the amount of a loss, if any, cannot be determined.
In the event that the court does not approve the settlement, we intend to
defend vigorously against the plaintiffs claims. Kops Investment Advisors v. Daleen Technologies, Inc., et al.On or about
April 7, 2004, a class action complaint was filed in the Court of Chancery of
the State of Delaware in and for New Castle County. The complaint is styled
Kops Investment Advisors LLC v. Daleen Technologies, Inc., James Daleen, Gordon
Quick, Ofer Nemirovsky, Daniel J. Foreman, Dennis G. Sisco, Stephen J. Getsy,
and John S. McCarthy.The plaintiff is seeking a temporary 35




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and permanent injunction enjoining defendants from proceeding with the
reverse stock split contemplated by the preliminary proxy filed in January,
2004, as well as costs and unspecified damages related to the reverse split. On
May 7, 2004, we announced that we will not pursue a stockholder vote on or the
completion of the reverse stock split proposed by the preliminary proxy
statement and the transaction which is the subject of this litigation has been
abandoned. Due to the early stage of the proceeding, a loss and its effect on
us, if any, cannot be determined with respect to this litigation. Abiliti-Related Litigation On August 1, 2003, a First Amended Petition, styled as James E. Kientzy
and David K. Wilson vs. Abiliti Solutions, Inc., a corporation, and Daleen
Technologies, Inc., a corporation, and Daleen Solutions, Inc., a corporation
and wholly-owned subsidiary of Daleen, was filed in the Circuit Court of the
County of St. Louis, State of Missouri. The First Amended Petition added
Daleen Technologies and Daleen Solutions as defendants in the named action.
The First Amended Petition contains certain allegations against Abiliti related
to the non-payment of certain promissory notes in the aggregate principal
amount of $1.2 million. The promissory notes that are the subject of the First
Amended Petition are liabilities that were retained by Abiliti pursuant to the
terms of the Abiliti Acquisition. The plaintiffs allege that the purchase of
substantially all of the assets and certain liabilities of Abiliti constituted
a de facto merger and, as a result, Daleen Technologies and its indirect wholly
owned subsidiary, Daleen Solutions, are responsible for payment of the
promissory notes and indemnification of the plaintiffs in connection with
Abilitis counterclaim against the plaintiffs. The First Amended Petition also
seeks to set aside the transfer of Abiliti assets as a fraudulent transfer. In
December 2003, the court granted summary judgment to the plaintiffs against
Abiliti n/k/a Albacore Holdings, Inc. (Albacore) on the promissory notes
awarding a judgment in the amount of $1,796,938.14. However, the judgment
provides that it is not subject to execution until such time as the senior debt
(certain promissory notes and series B preferred stock) is paid in full.
Albacore currently has insufficient assets and no operating income with which
to pay the senior debt. Daleen Solutions and Daleen Technologies believe that
they are entitled to indemnification by Albacore pursuant to the terms of the
purchase agreement relating to the Abiliti Acquisition. Albacore has notified
us that it does not have the financial resources to defend and/or settle the
claim, pay any judgment ultimately obtained by plaintiffs, or continue to
provide indemnification in connection with this matter and we will be forced to
pay the costs of defense and settlement or judgment amounts. It appears probable
that a settlement has been reached for $250,000 in this matter. An
accrual has been recorded in the condensed unaudited consolidated
financial statements as of March 31, 2004. On October 14, 2003, Daleen, Daleen Solutions and Albacore filed a
declaratory judgment action against Houlihan Lokey Howard & Zukin Capital, Inc.
and Houlihan Lokey Howard & Zukin Financial Advisors, Inc. (Houlihan) seeking
a declaration that they are not liable to Houlihan for fees under an engagement
letter between Abiliti Solutions, Inc. and Houlihan (a liability Daleen assumed
in the acquisition of Abiliti). Houlihan filed a counterclaim for fees in
excess of $800,000. The parties have settled and we paid $55,000 to Houilhan on
April 1, 2004. On December 24, 2003, Daleen Solutions filed a collection action against
Data Integration Systems, Inc. (DIS) seeking payment of license fees,
services fees and equipment in the amount of $694,600 (which includes DIS
obligation to make future payments under the contract). On January 30, 2004,
DIS filed a cross-complaint against Daleen Solutions alleging damages of
$1,500,000. Due to the early stage of the proceeding, a loss and its effect on
us, if any, cannot be determined with respect to this litigation. 36




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General litigation On August 5, 2003, we reached a settlement in satisfaction of an
outstanding obligation with a customer under a software license agreement.
Under the terms of the settlement, this customer satisfied their obligations by
agreeing to make payments in cash of $365,000 plus interest. We received
$250,000 on August 20, 2003, and $57,500 plus interest on November 5, 2003 and
received $57,500 plus interest on February 6, 2004. In accordance with SOP
97-2, the revenue related to the contractual agreement with this customer is
recognized on a cash basis. Therefore, we recorded $57,500 as license revenue
in the three months ended March 31, 2004. We are involved in other lawsuits and claims incidental to the ordinary
course of our business. Management does not believe the outcome of any of
these other activities would have a material adverse effect on our financial
position or results of operations. 
 Item 5. Other Information. Investment and Acquisition Transactions On May 7, 2004 Quadrangle and Behrman signed definitive agreements to
invest $25 million and $5 million, respectively, in cash into DHI, a newly
formed holding company, that will simultaneously acquire us and Protek. Quadrangle and Behrman will receive senior convertible redeemable
preferred stock in DHI Preferred in consideration for their cash investment.
The DHI Preferred will have a dividend of 6% per annum, payable in kind or in
cash at DHIs election. The DHI Preferred will also carry the right to the
issuance of additional shares of preferred equity should DHI not attain certain
specified financial targets. DHI will acquire Protek by purchase of stock from its shareholder and
conversion of outstanding options, for aggregate consideration of up to $20
million, consisting of up to $13 million in cash, $5 million in common stock of
DHI Common, and contingent earn-out consisting of $1 million in cash and $1
million of DHI Common. The purchase price will be subject to reduction in
respect of closing date debt and working capital shortfalls. In connection with the Investment and Acquisition Transactions, we will
become a private company. All outstanding shares of our common stock will be
purchased for $0.0387 per share in cash. The per share purchase price is based
on an aggregate amount equal to approximately ten percent of the total value
received by our stockholders. In addition, as a condition of closing the
Investment and Acquisition Transactions, holders of our Series F preferred
stock will be required to waive the $49.8 million redemption value of the
Series F preferred stock. These stockholders will receive an aggregate of
$15.4 million in cash and securities, with the cash component limited to a
maximum of $2.8 million. Immediately prior to the consummation of the
Investment and Acquisition Transactions, Behrman will be contractually
obligated to exchange its shares of Series F preferred stock for $5 million in
DHI Preferred plus the remaining value of its shares of Series F preferred
stock in DHI Common. Other holders of Series F preferred stock will receive a
combination of (a) an aggregate of $2.8 million in value of DHI Common and (b)
the remaining value of their Series F preferred stock in DHI Common; however,
holders of Series F preferred stock will be permitted to convert all of their
Series F preferred stock into DHI Common. Behrman extended to Daleen a $5.1 million Bridge Loan Facility. The Bridge
Loan Facility will bear interest at a rate of 8% per annum. The aggregate
amount of this Bridge Loan Facility will be credited against Behrmans
commitment under the Investment and Acquisition Transactions pursuant to a note
purchase agreement with DHI. In order to assist Protek with ordinary course working capital needs
during the period between the signing and closing of the transactions, we will
provide Protek with a bridge facility of not more than $1.5 million (Protek
Bridge Facility). We will fund the Protek Bridge Facility with proceeds of the
Bridge Loan Facility. $500,000 of this amount will be treated as a deposit and
creditable to the purchase price for Protek, as described above. The
Protek Bridge Facility will be secured by liens on all of Proteks assets,
subject solely to any first liens already existing in favor of Proteks
creditors. Earnings Release The results of operations and financial condition as of and for the three months ended
March 31, 2004 reported in this Form 10-Q differ from the results reported in the earnings release filed on April
23, 2004 due to the settlement discussions that have occurred since that date related to the litigation
described in Part II Item 1 Legal Proceedings. It has become probable since the filing of the earnings release
that a settlement will be reached and therefore an accrual has been recorded on the unaudited condensed financial
statements as of March 31, 2004 for $250,000. 37




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Resignation of Chief Financial Officer Jeanne T. Prayther, Daleens chief financial officer, has announced her
intent to resign as an officer of Daleen effective on May 28, 2004. Ms.
Praythers resignation is for personal reasons. 
 Item 6. Exhibits And Reports On Form 8-K. (a) Exhibit List ExhibitNumber
    
    Description10.1
    
    First Amendment to Lease, dated March 25, 2004, between Olympia Properties,
L.L.C. and Daleen Solutions, Inc. filed herewith.10.2
    
    Agreement and Plan of Merger and Share Exchange, dated as of May 7, among
the Company, Daleen Holdings, Inc., Parallel Acquisition, Inc., Behrman
Capital II, L.P., and Strategic Entrepreneur Fund II, L.P. filed herewith.10.3
    
    Form of Indemnity Escrow Agreement among Daleen Holdings, Inc., Behrman
Capital II, L.P., Strategic Entrepreneur Fund II, L.P., SunTrust Bank, as
escrow agent, and certain other parties thereto filed herewith.10.4
    
    Stock Purchase Agreement, dated as of May 7, 2004, among Daleen Holdings,
Inc, Protek Telecommunications Solutions Limited, and certain other parties
thereto filed herewith.10.5
    
    Form of Indemnity Promissory Note by Daleen Holdings, Inc. in favor of the
Holder thereto filed herewith.10.6
    
    Series A Convertible Redeemable PIK Preferred Stock Investment Agreement,
dated as of May 7, 2004, among Daleen Holdings, Inc., Quadrangle Capital
Partners LP, Quadrangle Select Partners LP, Quadrangle Capital Partners-A
LP, Behrman Capital II, L.P., Strategic Entrepreneur Fund II, L.P., and any
person who become party thereto filed herewith.10.7
    
    Form of Certificate of Incorporation of Daleen Holdings, Inc. filed herewith.10.8
    
    Form of Certificate of Designations of Daleen Holdings, Inc. in respect the
Series A Convertible Redeemable PIK Preferred Stock and the Series A-1
Convertible Redeemable PIK Preferred Stock filed herewith.10.9
    
    Form of Stockholders Agreement among Daleen Holdings, Inc., Quadrangle
Capital Partners LP, Quadrangle Select Partners LP, Quadrangle Capital
Partners-A LP, Behrman Capital II, L.P., Strategic Entrepreneur Fund II,
L.P., and other persons party thereto filed herewith.10.10
    
    Form of Registration Rights Agreement between Daleen Holdings, Inc. and the
other persons party thereto filed herewith.10.11
    
    Form of 2004 Stock Incentive Plan of Daleen Holdings, Inc. filed herewith.10.12
    
    Transaction Support Agreement, dated as of May 7, 2004, among the Company,
Daleen Holdings, Inc., Quadrangle Capital Partners LP, Quadrangle Select
Partners LP, Quadrangle Capital Partners-A LP, Behrman Capital II, L.P.,
Strategic Entrepreneur Fund II, Protek Telecommunications Solutions Ltd,
Paul A. Beaumont, Geoff Butcher, and Ian Watterson filed herewith.10.13
    
    Employment Agreement, dated as of May 7, 2004, between Daleen Holdings,
Inc. and Gordon D. Quick filed herewith.10.14
    
    Subordinated Bridge Loan Agreement, dated as of May 7, 2004, among the
Company, Behrman Capital II, L.P., and Strategic Entrepreneur Fund II, L.P.
filed herewith.10.15
    
    Form of Revolving Subordinated Promissory Note by the Company in favor of
the Holder thereto filed herewith.10.16
    
    Subordination Agreement, dated as of May 7, 2004, among Behrman Capital II,
L.P., Strategic Entrepreneur Fund II, L.P., and Silicon Valley Bank, and
approved by the Company filed herewith.10.17
    
    Loan Modification Agreement, dated as of May 7, 2004, among the Company,
Daleen IAC, LLP, DSI, Inc., Daleen Solutions, Inc. and Silicon Valley Bank
filed herewith.10.18
    
    Working Capital Facility Agreement, dated as of May 7, 2004, between the
Company and Protek Network Management (U.K.) Limited filed herewith.10.19
    
    Retention Bonus Agreement, dated May 6, 2004, between the Company and Gordon
D. Quick filed herewith.
 38




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ExhibitNumber
    
    Description10.20
    
    Retention Bonus Agreement, dated May 6, 2004, between the Company and David
McTarnaghan filed herewith.31.1
    
    Certification of Principal Executive Officer pursuant to Rule 13a-14(a)
under the Securities Exchange Act of 1934, as amended, filed herewith.31.2
    
    Certification of Principal Financial Officer pursuant to Rule 13a-14(a)
under the Securities Exchange Act of 1934, as amended, filed herewith.32.1
    
    Certification of Principal Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002,
furnished herewith.32.2
    
    Certification of Principal Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002,
furnished herewith.
 (b) Reports on Form 8-K Report on Form 8-K, items 5 and 7, filed on January 28, 2004 with respect
to the filing of a preliminary proxy statement on Schedule 14A and Schedule
13E-3 related to the reverse stock split. Report on Form 8-K item 12, furnished under item 9 on February 24, 2004
with respect to Daleens fourth quarter 2003 financial operating results. 39




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. DALEEN TECHNOLOGIES, INC. /s/  GORDON QUICKDate: May 17, 2004
    GORDON QUICKPresident and Chief Executive Officer (Principal
Executive Officer) Date: May 17, 2004
    /s/  JEANNE PRAYTHERChief Financial Officer (Principal Financial Officerand Principal Accounting Officer) 40