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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 June 30, 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
    
    65-0944514(State or other Jurisdiction of incorporation
or organization)
    
    (I.R.S. Employer
Identification No.)
 902 Clint Moore Road, Suite 230
Boca Raton, Florida
    
    33487(Address of principal executive offices)
    
    (Zip Code)
 Registrants Telephone Number, Including Area Code: (561) 999-8000 Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes 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 July 31, 2004, the Registrant had outstanding 46,911,152 shares of common
stock.




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##### Table of Contents



DALEEN TECHNOLOGIES, INC. AND SUBSIDIARIES
FORM 10-Q QUARTER ENDED JUNE 30, 2004 TABLE OF CONTENTS PAGEPART I  FINANCIAL INFORMATIONItem 1.
    
    Financial Statements.Condensed Unaudited Consolidated Balance Sheets as of December 31, 2003 and June 30, 2004
    
    
    3Condensed Unaudited Consolidated Statements of Operations for the three and six months ended June 30, 2003 and 2004
    
    
    4Condensed Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2003 and 2004
    
    
    5Notes to Condensed Unaudited Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations.
    
    
    19Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk.
    
    
    38Item 4.
    
    Controls and Procedures.
    
    
    39PART II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings.
    
    
    40Item 5.
    
    Other Information.
    
    
    42Item 6.
    
    Exhibits and Reports on Form 8-K.
    
    
    43Signatures
    
    
    44Second Loan Modification AgreementSecurity AgreementSec 302 Principal Executive Officer CertificationSec 302 Principal Financial Officer CertificationSec 906 Principal Executive Officer CertificationSec 906 Principal Financial Officer Certification
 2




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##### Table of Contents



PART I FINANCIAL INFORMATION 
 Item 1. Financial Statements. DALEEN TECHNOLOGIES, INC. AND SUBSIDIARIES 
 CONDENSED UNAUDITED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data) December 31,
    
    June 30,2003
    
    2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    2,497
    
    
    $
    1,400Restricted cash
    
    
    561
    
    
    
    347Accounts receivable, less allowance for doubtful accounts of $887 at December 31, 2003 and $877
at June 30, 2004
    
    
    610
    
    
    
    996Notes receivable
    
    
    
    
    
    
    999Costs in excess of billings
    
    
    2,032
    
    
    
    2,454Unbilled revenue
    
    
    392
    
    
    
    844Other current assets
    
    
    487
    
    
    
    376Total current assets
    
    
    6,579
    
    
    
    7,416Property and equipment, net
    
    
    931
    
    
    
    697Goodwill
    
    
    5,086
    
    
    
    5,086Other assets
    
    
    430
    
    
    
    310Total assets
    
    $
    13,026
    
    
    $
    13,509LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    148
    
    
    $
    400Accrued payroll and other accrued expenses
    
    
    2,267
    
    
    
    4,175Operating loan
    
    
    
    
    
    
    657Related party bridge loan
    
    
    
    
    
    
    2,210Billings in excess of costs
    
    
    97
    
    
    
    150Deferred revenue
    
    
    372
    
    
    
    528Other current liabilities
    
    
    42
    
    
    
    64Total current liabilities
    
    
    2,926
    
    
    
    8,184Other long term liabilities
    
    
    5
    
    
    
    Total liabilities
    
    
    2,931
    
    
    
    8,184Stockholders 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 June 30, 2004, respectively ($110.94 per share liquidation
value equal to $50,291,543 and $49,838,353 at December 31, 2003 and June 30, 2004, respectively)
    
    
    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 46,911,152 outstanding at
June 30, 2004
    
    
    475
    
    
    
    480Additional paid-in capital
    
    
    197,187
    
    
    
    197,636Accumulated deficit
    
    
    (214,528
    )
    
    
    (219,298
    )Treasury stock at cost; 1,019,964 shares at December 31, 2003 and 1,038,184 at June 30, 2004
    
    
    (151
    )
    
    
    (152
    )Total stockholders equity
    
    
    10,095
    
    
    
    5,325Total liabilities and stockholders equity
    
    $
    13,026
    
    
    $
    13,509
 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
(in thousands, except per share data) Three months ended
    
    Six months endedJune 30,
    
    June 30,2003
    
    2004
    
    2003
    
    2004Revenue:Professional services and other
    
    $
    3,982
    
    
    $
    3,150
    
    
    $
    7,809
    
    
    $
    6,816License fees
    
    
    231
    
    
    
    670
    
    
    
    475
    
    
    
    1,257Total revenue
    
    
    4,213
    
    
    
    3,820
    
    
    
    8,284
    
    
    
    8,073Cost of revenue:Professional services and other
    
    
    1,109
    
    
    
    1,344
    
    
    
    2,165
    
    
    
    2,928License fees
    
    
    165
    
    
    
    
    
    
    
    468
    
    
    
    Total cost of revenue
    
    
    1,274
    
    
    
    1,344
    
    
    
    2,633
    
    
    
    2,928Gross margin
    
    
    2,939
    
    
    
    2,476
    
    
    
    5,651
    
    
    
    5,145Operating expenses:Sales and marketing
    
    
    831
    
    
    
    825
    
    
    
    1,732
    
    
    
    1,559Research and development
    
    
    1,602
    
    
    
    1,455
    
    
    
    3,284
    
    
    
    3,107General and administrative
    
    
    1,517
    
    
    
    1,630
    
    
    
    3,129
    
    
    
    3,069Proposed transaction costs
    
    
    
    
    
    
    2,005
    
    
    
    
    
    
    
    2,189Impairment of long lived assets
    
    
    500
    
    
    
    
    
    
    
    500
    
    
    
    Total operating expenses
    
    
    4,450
    
    
    
    5,915
    
    
    
    8,645
    
    
    
    9,924Operating loss
    
    
    (1,511
    )
    
    
    (3,439
    )
    
    
    (2,994
    )
    
    
    (4,779
    )Other Income (expense):Interest income and interest expense, net
    
    
    99
    
    
    
    (28
    )
    
    
    163
    
    
    
    9Total other income (expense), net
    
    
    99
    
    
    
    (28
    )
    
    
    163
    
    
    
    9Net loss applicable to common stockholders
    
    $
    (1,412
    )
    
    $
    (3,467
    )
    
    $
    (2,831
    )
    
    $
    (4,770
    )Net loss applicable to common stockholders per share -basic and diluted
    
    $
    (0.03
    )
    
    $
    (0.07
    )
    
    $
    (0.06
    )
    
    $
    (0.10
    )Weighted average shares outstanding- basic and diluted
    
    
    45,829
    
    
    
    46,923
    
    
    
    45,829
    
    
    
    46,891
 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
(in thousands) Six Months EndedJune 30,
    
    June 30,2003
    
    2004Cash flows from operating activities:Net loss
    
    $
    (2,831
    )
    
    $
    (4,770
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    2,311
    
    
    
    1,307Loss on disposal of property and equipment
    
    
    14
    
    
    
    21Bad debt expense
    
    
    96
    
    
    
    27Impairment of long lived assets
    
    
    500
    
    
    
    Interest income on stockholders notes receivable
    
    
    (2
    )
    
    
    Changes in assets and liabilitiesRestricted cash
    
    
    
    
    
    
    214Accounts receivable
    
    
    589
    
    
    
    (380
    )Costs in excess of billings
    
    
    (380
    )
    
    
    (422
    )Unbilled revenue
    
    
    (126
    )
    
    
    (452
    )Other current assets
    
    
    (583
    )
    
    
    (799
    )Other assets
    
    
    (4
    )
    
    
    47Accounts payable
    
    
    60
    
    
    
    253Accrued payroll and other accrued expenses
    
    
    (387
    )
    
    
    1,911Billings in excess of costs
    
    
    (142
    )
    
    
    53Deferred revenue
    
    
    (407
    )
    
    
    160Other current liabilities
    
    
    (44
    )
    
    
    (10
    )Other liabilities
    
    
    
    
    
    
    54Net cash used in operating activities
    
    
    (1,336
    )
    
    
    (2,786
    )Cash flows (used in) provided by financing activities:Payment of capital lease
    
    
    (110
    )
    
    
    (26
    )Proceeds from operating loan
    
    
    
    
    
    
    657Proceeds from bridge loan
    
    
    
    
    
    
    2,210Net cash (used in) provided by financing activities
    
    
    (110
    )
    
    
    2,841Cash flows used in investing activities:Issuance of notes receivable
    
    
    
    
    
    
    (999
    )Repayment of stockholders notes receivable
    
    
    30
    
    
    
    8Payments related to the Abiliti acquisition
    
    
    (262
    )
    
    
    Capital expenditures
    
    
    (205
    )
    
    
    (154
    )Net cash used in investing activities
    
    
    (437
    )
    
    
    (1,145
    )Effect of exchange rates on cash and cash equivalents
    
    
    (24
    )
    
    
    (7
    )Net decrease in cash and cash equivalents
    
    
    (1,907
    )
    
    
    (1,097
    )Cash and cash equivalents-beginning of period
    
    
    6,589
    
    
    
    2,497Cash and cash equivalents-end of period
    
    $
    4,682
    
    
    $
    1,400
 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
 June 30, 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 or six months ended June 30, 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. (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 55,931,354 and 56,171,248 shares for the three and six
months ended June 30, 2004, respectively. Common stock equivalents were
56,262,532 shares and 56,179,467 shares for the three and six months ended June
30, 2003, respectively. (4) Liquidity The Company incurred a net loss of approximately $4.8 million for the six
months ended June 30, 2004 and had an accumulated deficit of $219.3 million at
June 30, 2004. Cash and cash equivalents and restricted cash at June 30, 2004
were $1.7 million. Cash used in operations for the six months ended June 30,
2004 was $2.8 million. The Company continued to provide outsourcing services to
Allegiance Telecom Company Worldwide (Allegiance) pursuant to an agreement
expiring on December 31, 2004. Allegiance assigned the agreement to XO Communications,
Inc. (XO) on July 23, 2004. Allegiance accounted for 17.1% and 21.2% of total
revenue for the three and six months ended June 30, 2004, respectively. There
are no minimum revenues under this agreement. Allegiances use of the
Companys services declined significantly this year as it migrated data to
another software system. We expect that XO will continue the
migration of data and will ultimately discontinue use of the Companys
services. 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
up to an additional $143,000 in the third and fourth quarters of the year 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 June 30, 2004 was $657,000. At
June 30, 2004, $209,000 was available for additional borrowing as needed. 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
subject to the approval of the companys stockholders. 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. The balance on
the Bridge Loan Facility as of June 30, 2004 was $2.2 million (See notes 5 and 6 for a
description of the terms of the Investment and Acquisition Transactions and
Bridge Loan Facility). In August 2004, the Company made an additional draw of $400,000, so the maximum remaining
balance that may be available is $2.5 million. The Company believes the cash and cash equivalents at June 30, 2004,
together with the Operating Loan proceeds, Bridge Loan Facility proceeds,
provided that Behrman continues to make additional draws available, and the
additional funding resulting from the closing of the Investment and Acquisition
Transactions, may be sufficient to fund operations for the foreseeable future.
The Company does not believe that its cash and cash equivalents at June 30,
2004 will be sufficient to fund operations and that it will be required to
further reduce operations and/or seek additional financing if the Investment
and Acquisition Transactions are not completed. 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 investment by Quadrangle and Behrman
does not close by September 30, 2004, the Investment Agreement will
automatically terminate unless extended by agreement of Quadrangle, Behrman and
the Company. If the transactions are not consummated, it is highly unlikely
that the Company would continue to operate its business substantially as
presently operated. The remainder of the Bridge Loan Facility may be made
available to the Company by Behrman, at its discretion, to fund the Companys
ordinary course working capital needs prior to the closing of the Investment
and Acquisition Transactions and to pay costs incurred in connection with the
Bridge Loan Facility and Investment and Acquisition Transactions. There can be
no assurance that Behrman will continue to make additional draws available or
that other 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. 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 any
other strategic alternatives will be available, or if available, will be on
terms acceptable to the Company, or all of its stockholders. Failure of
Behrman to make additional draws available or 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. 7




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(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 up to an additional $143,000 in
the third and fourth quarters of the year
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 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 to change the tangible net worth requirement to $3.0
million and to waive any default existing prior to the amendment. On June 30,
2004 the Loan was further amended to waive the tangible net worth covenant
violations, and SVB agreed to forbear any exercise of its rights under the
agreement through July 31, 2004. The balance on the Operating Loan as of June
30, 2004 was $657,000. Approximately $1.3 million of the then outstanding
amount was repaid in the second quarter of 2004. In July 2004, an additional
$209,000 was borrowed and approximately $653,000 was repaid in August, 2004. (6) Investment and Acquisition Transactions On May 7, 2004 affiliates of Quadrangle and Behrman signed definitive
agreements to invest $25 million and $5 million, respectively, into DHI, a
newly formed subsidiary of the Company, that, subject to shareholder approval, will simultaneously acquire the
Company and Protek. Quadrangle and Behrman will receive senior convertible redeemable
preferred stock in DHI (DHI Preferred) in consideration for their 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-outs 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 $0.0384 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 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. 8




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(7) Notes Receivable Loan On May 7, 2004 the Company entered into a working capital facility
agreement with Protek Network Management (U.K.) Limited (PNML). Under the
terms of the agreement, the Company agreed to make available to PNML up to $1.5
million to be used for PNMLs working capital needs (PNML Loan). The PNML
Loan carries interest of 6% per year payable monthly in arrears on the last
Business Day of each month. Loan repayment is the earlier of the closing of
the proposed Investment and Acquisition Transactions, the 30th day after
termination of the stock purchase agreement (where no act of default has
occurred) or March 31, 2005. When the PNML Loan is due to be repaid, if there
is no material breach of the stock purchase agreement by Protek or any of its
shareholders, the Company will release and discharge the obligation to repay
$500,000. The PNML Loan is secured by liens on all of PNMLs and Proteks
assets, subject solely to any first liens already existing in favor of PNMLs
creditors. The Company was also granted certain warrants for the stock of
Protek exercisable in the event of certain defaults. At June 30, 2004 the
outstanding balance of the PNML Loan was $1.0 million. (8) 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. 9




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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. 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 10




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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. 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. The Company maintains an allowance for doubtful accounts for estimated
losses resulting from the inability of customers to make required payments. The
Company continuously monitors collections and payments from customers and the
allowance for doubtful accounts is based on historical experience and any
specific customer collection issues that have been identified. If the financial
condition of customers were to continue to deteriorate resulting in an
impairment of their ability to make payments, additional allowances may be
required. Where an allowance for doubtful accounts has been established with
respect to customer receivables, as payments are made on such receivables or if
the customer goes out of business with no chance of collection, the allowances
will decrease with a corresponding adjustment to accounts receivable as deemed
appropriate. In October 2003, 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. In the second quarter of 2003 Daleen signed the ETB Contract. The total
contract price is $10,515,526, but the amount the Company will receive and
recognize as revenue is a net amount of $7,636,863, after Colombian withholding
taxes. Revenue is recognized on a percentage of completion basis
under SOP 81-1 for licenses, third party software and professional services
because the services are significant to the functionality of the software and
there is significant modification of the software. Training revenue is
recognized as services are rendered. ETB is invoiced for licenses, professional
services and third party software as milestones of the project are completed.
These milestones are defined by the contract as three main phases and three
sub-phases within each phase. The phase 1 milestone required a replacement of
the customers legacy system with RevChain including a conversion and debugging
plan; phase 2 requires implementation of RevChain in all functionality to
replace the legacy billing system for all call detail record based services;
and phase 3 requires the implementation of RevChain to replace the legacy
billing system of all ETB services. (9) 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: 11




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##### Table of Contents



Three Months Ended June 30,
    
    Six Months Ended June 30,2003
    
    2004
    
    2003
    
    2004Expected life
    
    5 years
    
    5 years
    
    5 years
    
    5 yearsRisk-free interest rate
    
    
    2.46
    %
    
    
    3.81
    %
    
    
    2.46
    %
    
    
    3.81
    %Volatility
    
    
    141.14
    %
    
    
    154.22
    %
    
    
    141.14
    %
    
    
    154.22
    %Dividends
    
    None
    
    None
    
    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
    
    For the SixMonths Ended
    
    Months EndedJune 30,
    
    June 30,2003
    
    2004
    
    2003
    
    2004Net loss, as reported
    
    $
    (1412
    )
    
    
    (3,467
    )
    
    $
    (2,831
    )
    
    
    (4770
    )Deduct: Additional stock-based employee compensation expense determined
under the fair value based method for all awards
    
    
    (822
    )
    
    
    (56
    )
    
    
    (1,618
    )
    
    
    (382
    )Pro forma net loss
    
    $
    (2,234
    )
    
    
    (3,523
    )
    
    $
    (4,449
    )
    
    
    (5152
    )Loss per share:Basic and diluted  as reported
    
    $
    (.03
    )
    
    
    (.07
    )
    
    $
    (.06
    )
    
    
    (.10
    )Basic and diluted  pro forma
    
    $
    (.05
    )
    
    
    (.08
    )
    
    $
    (.10
    )
    
    
    (.11
    )
 12




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(10) Goodwill At December 31, 2003 and June 30, 2004, goodwill represents the excess of
costs over the fair value of assets related to the Abiliti Acquisition. 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. (11) Business and Credit Concentrations During the three months ended June 30, 2004, 56.8 percent of the Companys
total revenue was attributed to three customers. Sales to these three customers
accounted for 26.9 percent, 17.1 percent, and 12.8 percent of the total revenue
for the three months ended June 30, 2004. During the three months ended June
30, 2003, 64.4 percent of the Companys total revenue was attributable to three
customers. Sales to these three customers accounted for 40.7 percent, 13.0
percent and 10.7 percent of the total revenue for the three months ended June
30, 2004. During the six months ended June 30, 2004, 61.3 percent of the Companys
total revenue was attributed to three customers. Sales to these customers
accounted for 28.6 percent, 21.2 percent and 11.6 percent of the total revenue
for the six months ended June 30, 2004. During the six months ended June 30,
2003, 69.7 percent of the Companys total revenue was attributed to three
customers. Sales to these customers accounted for 44.1 percent, 12.9 percent
and 12.7 percent of the revenue for the six months ended June 30, 2003. Three customers accounted for 66.7 percent and 45.7 percent of total
accounts receivable at June 30, 2004 and December 31, 2003, respectively. (12) 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 and six months ended June 30,
2004 was $7,500 and $15,000, respectively. Revenues related to SAIC for the
three and six months ended June 30, 2003 was $35,000 and $49,000 respectively.
SAIC owns 49 percent of the voting stock of Danet, Inc. 13




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##### Table of Contents



(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 June 30, 2004 and 2003.
In the three and six months ended June 30, 2004, we paid Danet $5,000 and
$35,000, respectively, related to professional services. In the three and six
months ended June 30, 2003, we paid Danet $75,000 and $178,000, respectively
related to professional services. The Company has an OEM License Agreement with
Telcordia. No revenue related to Telcordia was recognized for the three and six months ended June
30, 2004. Revenue related to Telcordia for the three and six months
ended June 30, 2003 was $0 and $4,000, respectively. Intesacol became a subcontractor of the Company for services in Bogotá,
Colombia in June 2003. In the three and six months ended June 30, 2004, we paid Intesacol
$176,100, and $0, respectively. On May 7, 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 has drawn $1 million of this amount to
fund a 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 paid to Behrman. In addition, the Company has drawn $1.1 million
to fund its working capital requirements. The total amount drawn as
of August 12,
2004, is $2.6 million leaving an amount of $2.5 million available for future
use if needed prior to the closing of the Investment and Acquisition
Transactions, subject to Behrmans discretion. 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 but 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. (13) 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 14




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##### Table of Contents



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 June 2004, the Stipulation and Agreement of Settlement with Defendant
Issuers and Individuals was signed on the Companys behalf. Court approval of
the settlement is required. Under the terms of the settlement, there would be
no liability to be recorded by the Company. There is no assurance
the settlement 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 Investment Advisors LLC v. Daleen Technologies, Inc., et al. On or about April 7, 2004, a purported class action complaint was filed in
the Court of Chancery of the State of Delaware in and for New Castle County by
an individual holder of shares of Common Stock of the Company. 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, Behrman Brothers, L.L.C., Behrman Capital II,
L.P., Strategic Entrepreneur Fund II, L.P.On June 21, 2004, the plaintiff filed an
amended complaint alleging that the merger transaction contemplated as part of
the Investment and Acquisition Transactions (Merger) is a freeze-out of
Common Stock by the Series F Preferred stockholders through unfair dealing by
the defendants and that the defendants have breached and continue to breach
their fiduciary duties of loyalty, care and good faith to the plaintiff and
other members of the class. The amended complaint seeks for the Merger, if
consummated, to be rescinded and rescissory damages to be awarded to the class;
for the defendants to be directed to account to the class for all profit
received by the defendants and all damages sustained by the class; and for
costs of the action including attorneys and experts fees to be awarded to the
plaintiff. This case is in the initial stages and the amount of exposure, if
any, is not determinable at this time. Kurt Feierbend v. James Daleen, et al. On May 12, 2004 a purported class action complaint was filed in the Court
of Chancery of the State of Delaware in and for New Castle County by an
individual holder of the Common Stock of the Company. The complaint is styled
Kurt Feierbend v. James Daleen, Gordon Quick, Daniel J. Foreman, Stephen J.
Getsy, John S. McCarthy, Dennis G. Sisco, Ofer Nemirovsky, Daleen Technologies,
Inc., Quadrangle Group LLC, Quadrangle Capital Partners LP, Behrman Capital and
Behrman Brothers, L.L.C. The complaint, which is purported to be brought on
behalf of the public holders of the Common Stock with respect to the Merger,
generally alleges that the Company and our directors breached their fiduciary
duties; that the consideration offered by Quadrangle Capital Partners LP and
Behrman Capital is inadequate and that the transaction was a result of unfair
dealing; that Behrman Capital, as controlling stockholder, breached its
fiduciary duty to our minority stockholders by acting to further its own
interests at the expense of our minority stockholders; and that Behrman
Brothers, Quadrangle Group and Quadrangle Capital Partners LP knowingly aided
and abetted Behrman Capitals violations of fiduciary duty. The complaint seeks
to enjoin the Merger and related transactions, or if the Merger and related
transactions are consummated, to rescind them; to recover damages in an
unstated amount and to recover costs including attorneys fees associated with
the lawsuit. This case is in the initial stages and the amount of exposure, if
any, is not determinable at this time. 15




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##### Table of Contents



Russell Winter v. James Daleen, et al. On June 24, 2004, a purported class action complaint virtually identical
to the complaint filed by Feierbend was filed in the Court of Chancery of the
State of Delaware in and for New Castle County by another individual holder of
the Common Stock of the Company. The complaint is styled Russell Winter v.
James Daleen, Gordon Quick, Daniel J. Foreman, Stephen J. Getsy, John S.
McCarthy, Dennis G. Sisco, Ofer Nemirovsky, Daleen Technologies, Inc.,
Quadrangle Group LLC, Quadrangle Capital Partners LP, Behrman Capital and
Behrman Brothers, L.L.C. The complaint, which is purported to be brought on
behalf of the public holders of the Common Stock, generally alleges that the
Company and our directors breached their fiduciary duties; that the
consideration offered by Quadrangle Capital Partners LP and Behrman Capital is
inadequate and that the transaction was a result of unfair dealing; that
Behrman Capital, as controlling stockholder, breached its fiduciary duty to our
minority stockholders by acting to further its own interests at the expense of
our minority stockholders; and that Behrman Brothers, Quadrangle Group and
Quadrangle Capital Partners LP knowingly aided and abetted Behrman Capitals
violations of fiduciary duty. The complaint seeks to enjoin the Merger and
related transactions, or if the Merger and related transactions are
consummated, to rescind them; to recover damages in an unstated amount and to
recover costs including attorneys fees associated with the lawsuit. This case
is in the initial stages and the amount of exposure, if any, is not
determinable at this time. 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 contained certain allegations against Abiliti related to the
non-payment of certain promissory notes in the aggregate principal amount of
$1.2 million. In May, 2004, the Company reached a settlement with the
plaintiffs and the Company made payments to the plaintiffs totaling $250,000.
On June 28, 2004, the action was dismissed with prejudice. 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. This case is in the discovery 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. 16




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##### Table of Contents



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 six months ended June 30, 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. (14) Capital and Operating Leases The Company signed a lease agreement renewal in Boca Raton, Florida 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 an agreement to lease
office facilities in Atlanta, Georgia. This lease expires in August 2004. The Abiliti Acquisition included certain computer hardware and furniture
and equipment that are under capital leases, the only remaining lease expires
in August 2004. 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 June 30, 2004 are as follows (in
thousands): Year Ending December 31:
    
    Capital Leases
    
    Operating Leases2004
    
    $
    2
    
    
    $
    3762005
    
    
    
    
    
    
    6972006
    
    
    
    
    
    
    7212007
    
    
    
    
    
    
    6442008 and thereafter
    
    
    
    
    
    
    883Total minimum lease payments
    
    
    2
    
    
    
    3,321Less amount representing interest
    
    
    Present value of minimum capital lease payments
    
    
    2Less current installment of obligations under
capital lease payments
    
    
    2Obligation 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 $38,435 in 2004. 17




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##### Table of Contents



(15) 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 of Others,(FIN 45). FIN 45
provides additional guidance on the disclosures to be made by a guarantor
in its interim and annual financial statements about its obligations under
certain guarantees that it has issued. As an element of standard commercial
terms in the Companys standard sales contracts, the Company often includes an
indemnification clause that indemnifies the customer against liability and
damages arising from any claims of patent, copyright, or other proprietary
rights of any third party. Due to the nature of the indemnification provided to
its customers, the Company can not estimate the fair value, nor determine the
total nominal amount of the indemnification. The Company evaluates estimated
losses for such indemnifications under SFAS No. 5, Accounting for
Contingencies, as interpreted by FIN 45, considering such factors as the
degree of probability of an unfavorable outcome and the ability to make a
reasonable estimate of the amount of loss. To date, the Company has not
encountered any costs as a result of such obligations and has not accrued any
liabilities related to such indemnifications in its unaudited 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. 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 adoption of EITF 03-05 did 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 adoption of EITF 03-06 did not have an
impact on the Companys consolidated financial position and results of
operations. 18




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Item 2.
    Managements Discussion and Analysis of Financial Condition and Results
of Operations. The following should be read in conjunction with the 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. 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. 19




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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. 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 20




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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 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 June 30, 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. 21




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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 close to
anticipated schedule and work on Phase II has begun. Although revenues from new sales declined in the first half 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 assigned the agreement to XO Communications, Inc.
(XO) on July 23, 2004. We expect XO will continue the migration of data and will ultimately discontinue use of the Companys services. Recent Developments Investment and Acquisition Transactions On May 7, 2004 definitive agreements were signed by Quadrangle Capital
Partners LP, Quadrangle Select Partners LP, Quadrangle Capital Partners-A LP
(Quadrangle) and Behrman Capital II, L.P. and Strategic Entrepreneur Fund II,
L.P. (Behrman) for investments of $25 million and $5 million, respectively,
into Daleen Holdings, Inc. (DHI) a newly formed subsidiary of the Company
that, subject to stockholder approval, will simultaneously acquire Daleen and Protek Telecommunications Solutions
Limited (Protek), (the Investment and Acquisition Transactions). Quadrangle and Behrman will receive senior convertible redeemable
preferred stock in DHI (DHI Preferred) in consideration for their 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 $0.0384 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 22




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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 half of 2004, we expect to be
positioned to grow in the second half of 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.
However, 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;  
    
    whether we succeed in merging the operations of Protek and Daleen;  
    
    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 June 30, 2004 Compared to Three Months Ended June 30, 2003 Total Revenue.Total revenue, which includes professional services and
other revenue and license revenue, decreased $393,000, or 9.3% to $3.8 million
in the three months ended June 30, 2004, from $4.2 million for the same period
in 2003. The primary reason for the decrease in revenue related to the decrease
in outsourced services revenue as a result of the continuing decrease in the
revenue from Allegiance which was offset by a slight increase in license
revenue, and increased training revenue related to Empresa de
Telecomunicaciones de Bogotá (ETB). 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. In addition, these revenues include the
BillingCentral outsourcing operation. 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. Outsourced services are billed
monthly and recognized as services are rendered. Professional services and
other revenue decreased $832,000, or 20.9%, to $3.1 million in the three months
ended June 30, 2004 from $4.0 million for the same period in 2003. The decrease
was primarily related to the decrease in outsourced services revenue related to
Allegiance, slightly offset by increased training revenue and third party
software sales related to ETB. Professional services and other revenue
decreased to 82.5% of total revenue in the three months ended June 30, 2004,
compared to 94.5% in the same period in 2003. This decrease in percentage is
due to an increase in license revenue in the three months ended June 30, 2004. License Fees.Our license fees are derived from licensing our software
products. License fees increased $439,000, or 190.3%, in the three months ended
June 30, 2004 to $670,000, from $231,000 for the same period in 2003. In the
three months ended June 30, 2004 we recognized additional license fees from
existing customers related to the licensing of additional software products. License
fees constituted 17.5% of total revenue in the three months ended June 30,
2004, compared to 5.5% in the same period in 2003. The increase in license fees
as a percentage 23




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of total revenue is due to the decrease in professional services and other
revenue in the three months ended June 30, 2004 as well as an increase in
license revenue compared to the same period in 2003. Cost of Revenue.Cost of revenue increased $70,000, or 5.5%, to $1.3
million in the three months ended June 30, 2004 from $1.3 million in the same
period in 2003. The cost of revenue includes both cost of professional services
and other and cost of license fees. These components include the cost of direct
labor, benefits, third-party software license payments, third-party software
maintenance, 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 to the increase in third party
subcontracting costs associated with the ETB Contract and third party software
associated with the increase in third party software revenue. These were
partly offset by a decrease in the cost of sales related to our license
revenue. The total cost of revenue as a percentage of total revenue increased
to 35.2% in the three months ended June 30, 2004 from 30.2% in the same period
in 2003. The increase as a percentage of total revenue is due to a decrease in
total revenue with no decrease in costs in the three months ended June 30,
2004. Cost of Professional Services and Other.Cost of professional services
and other includes cost of direct 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
$235,000, or 21.2%, to $1.3, in the three months ended June 30, 2004 from $1.1
million in the same period in 2003 mainly due to the increase in direct costs
and third party software costs in the three months ended June 30, 2003. Cost of
professional services and other increased to 42.7% of professional services and
other revenue in the three months ended June 30, 2004, compared to 27.9% for
the same period in 2003. The increase as a percentage of professional services
and other revenue is due to the decrease in professional services and other
revenue in the three months ended June 30, 2004. Cost of License Fees.Cost of license fees includes direct cost of labor,
benefits, packaging material for fulfillment and shipment of our software
products and integrated third party software license payments. Cost of license
fees decreased $165,000, or 100%, to $0 in the three months ended June 30, 2004
from $165,000 in the same period in 2003. The total costs decreased primarily
due to the write off of a prepaid license that was no longer available for
integration with our product. Cost of license fees as a percentage of license
revenue decreased to 0% in the three months ended June 30, 2004, compared to
71.4% in the same period in 2003. 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 $6,000, or 0.7%, to $825,000 in the three months ended June 30, 2004,
compared to $831,000 in the same period in 2003. As a percentage of total
revenue, these expenses increased to 21.6% in the three months ended June 30,
2004 compared to the 19.7%, 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 $147,000, or 9.2%, to $1.5 million for the three months ended June
30, 2004, from $1.6 million in the same period in 2003. The decrease was
primarily due to a decrease in labor costs associated with personnel decreases.
As a percentage of revenue, these expenses increased to 38.1% in the three
months ended June 30, 2004 compared to 38.0% in the same period in 2003. The
increase as a percentage of total revenue is due to the decrease in total
revenue in the three months ended June 30, 2004. 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 $113,000, or
7.4%, to $1.6 million in the three months ended June 30, 2004, from $1.5
million in the same period in 2003. This increase was 24




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primarily due to an increase of approximately $30,000 in compensation to
our board of directors for their attendance at an increased number of Board of
Directors meetings associated with the proposed Investment and Acquisition
Transactions, and an increase in bad debt expense due to a recovery of $77,000
in the three months ended June, 2003. As a percentage of total revenue, these
expenses increased to 42.7% in the three months ended June 30, 2004 as compared
to 36.0% in the same period in 2003. The increase as a percentage of total
revenue is due to the decrease in total revenue in the three months ended June
30, 2004. Proposed transaction costs.Proposed transaction costs consist of those
costs that are incurred as a result of the proposed Investment and Acquisition
Transactions. The costs include legal and accounting fees, investment banking
fees, and any other qualified expenses. These costs amounted to $2.0 million in
the three months ended June 30, 2004. There were no comparable costs in the
three months ended June 30, 2003. Impairment of Long Lived Assets.Impairment charges decreased $500,000,
or 100%, to $0 in the three months ended June 30, 2004 from $500,000 for the
same period in 2003. Impairment charges consisted of an impairment of an
investment in a third party technology company due to decline in fair value
which was other than temporary. This investment was fully written off at June
30, 2003. Other Income/Expenses.Other income/expenses decreased $127,000, or
127.9%, to negative $28,000 in the three months ended June 30, 2004, from
$99,000 for the same period in 2003. The decrease was a result of
the decrease in our cash balance and an increase in interest expenses
associated with the revolving loan facility with Silicon Valley Bank (SVB)
(the Operating Loan) and the Behrman $5.1 million bridge loan facility
(Bridge Loan Facility) in 2004. Six Months Ended June 30, 2004 Compared To Six Months Ended June 30, 2003 Total Revenue. Total revenue, which includes professional services and
other revenue and license revenue, decreased $211,000 or 2.5%, to $8.1 million
in the six months ended June 30, 2004 from $8.3 million for the same period in
2003. The primary reason for the decrease in revenue is related to the
reduction in outsourcing services revenue. Professional Services and Other. Our professional services and other
consists of revenue from professional consulting services, training,
maintenance and support, and third-party software fulfillment, all related to
the software products we develop. In addition, these revenues include the
BillingCentral outsourcing operation. 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. Outsourced services are billed
monthly and recognized as services are rendered. Professional services and
other revenue decreased $993,000, or 12.7%, in the six months ended June 30,
2004 to $6.8 million, compared to $7.8 million in the same period in 2003. The
decrease was primarily related to a decrease in revenue earned by our
outsourcing services. Professional services and other revenue constituted 84.4%
of total revenue in the six months ended June 30, 2004, compared to 94.3% for
the same period in 2003. The decrease as a percentage of total revenue is due
to an increase in license revenue in the six months ended June 30, 2004. License Fees. Our license fees are derived from licensing our software
products. License fees increased $782,000, or 164.4%, in the six months ended
June 30, 2004 to $1.3 million from $475,000 for the same period in 2003.
License fees constituted 15.6% of total revenue in the six months ended June
30, 2004, compared to 5.7% in the same period in 2003. Cost of Revenue. Cost of revenue increased $295,000, or 11.2%, to $2.9
million in the six months ended June 30, 2004, from $2.6 million in the same
period in 2003. The cost of revenue includes both cost of professional services
and other and cost of license fees. These components include the cost of direct
labor, benefits, overhead and materials associated with the fulfillment and
delivery of licensed products, amortization expense related to 25




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prepaid third-party licenses and related corporate overhead costs to
provide professional services to our customers. These costs increased due to an
increase in third party subcontracting for work performed under the ETB
Contract and an increase in third party software costs related to an increase
in third party software revenue. The total cost of revenue as a percentage of
total revenue increased to 36.3% in the six months ended June 30, 2004,
compared to 31.8% in the same period in 2003. This increase in the cost of
revenue as a percentage of total revenue resulted from the decrease in total
revenue in the six months ended June 30, 2004. Cost of Professional Services and Other. Cost of professional services and
other includes cost of direct labor, benefits, third-party software and related
corporate overhead costs to provide professional services and training to our
customers. Cost of professional services and other increased $763,000, or
35.2%, to $2.9 million in the six months ended June 30, 2004, from $2.2 million
in the same period in 2003. These costs increased mainly due to the increase in
subcontracting costs for work performed under the ETB Contract and third party
software costs related to the increase in third party software revenue. Cost of
professional services and other increased to 43.0% of professional services and
other revenue in the six months ended June 30, 2004, compared to 27.7% for the
same period in 2003 due to the decrease in professional services and other
revenue. Cost of License Fees.Cost of license fees includes direct cost of labor,
benefits and packaging material for fulfillment and shipment of our software
products and amortization expense related to prepaid third-party licenses. Cost
of license fees decreased $468,000 or 100% to $0, in the six months ended June
30, 2004, from $468,000 in the same period in 2003 due to the $202,000
write-off of prepaid third-party software license costs in addition to a stamp
tax expense in Colombia related to the ETB Contract. Cost of license fees
decreased to 0% of license revenue in the six months ended June 30, 2004,
compared to 98.5% for the same period in 2003. Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses earned by sales, marketing and partner
management personnel, travel and entertainment, trade show and marketing
program costs, promotional and related corporate overhead costs. These expenses
decreased $173,000, or 10.0%, to $1.6 million in the six months ended June 30,
2004, from $1.7 million for the same period in 2003. As a percentage of total
revenue, these expenses decreased to 19.3% in the six months ended June 30,
2004 compared to 20.9% for the 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 $176,000, or 5.4%, to $3.1 million in the six months ended June 30,
2004, from $3.3 million for the same period in 2003. As a percentage of
revenue, these expenses decreased to 38.5% in the six months ended June 30,
2004 compared to 39.6% for 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, facilities, human resources and information systems personnel,
and related corporate overhead costs. Our general and administrative expenses
decreased $60,000, or 1.9%, to $3.1 million in the six months ended June 30,
2004, from $3.1 million in the same period in 2003. The decrease was primarily
due to decreases in rental expenses associated with expired leases and reduced
depreciation expenses which are the result of disposals of assets and the
increase in fully depreciated assets. These decreases were offset by the
settlement of Abiliti litigation for $250,000, an increase in compensation to
the Board of Directors, and an increase in bad debt expense. As a percentage of
revenue, general and administrative expenses increased to 38.0% in the six
months ended June 30, 2004 from 37.8% in the same period in 2003. Proposed
transaction costs.Proposed transaction costs consist of those costs that are
incurred as a result of the proposed Investment and Acquisition Transactions.
The costs include legal and accounting fees, investment banking fees, and any
other qualified expenses. These costs amounted to $2.2 million in the six
months ended June 30, 2004. There were no comparable costs in the six months
ended June 30, 2003. 26




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Impairment of Long-Lived Assets. Impairment charges decreased $500,000, or
100%, to $0 in the six months ended June 30, 2004, from $500,000 for the same
period in 2003. Impairment charges consisted of the impairment of an investment
in a third-party technology company due to a decline in fair value which was
other than temporary. This investment was fully written off at June 30, 2003. Other Income/Expenses. Other income/expenses decreased $154,000 or 94.5%,
to $9,000 in the six months ended June 30, 2004 from $163,000 for the same
period in 2003. The decrease was due partially to the addition of interest
expense associated with the Operating Loan and the Bridge Loan Facility as well
as the decrease in investment earnings due to the decrease in interest rates in
2004 compared to 2003. Off  Balance Sheet Arrangements We had no off-balance sheet arrangements as of and for the three months
ended June 30, 2004. Liquidity And Capital Resources The following table provides information relating to our material
contractual obligations at June 30, 2004. Payment Due By Period (in thousands)Less Than
    
    
    
    
    
    
    
    
    
    More ThanContractual Obligations
    
    Total
    
    1 Year
    
    1-3 Years
    
    3-5 Years
    
    5 yearsCapital leases
    
    $
    2
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    Operating leases
    
    
    3,321
    
    
    
    763
    
    
    
    1383
    
    
    
    1069
    
    
    
    106Purchase obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    3,323
    
    
    
    765
    
    
    
    1383
    
    
    
    1069
    
    
    
    106
 Net cash used in operating activities was $2.8 million for the six months
ended June 30, 2004, compared to $1.3 million for the six months ended June 30,
2003. The principal use of cash for both periods was to fund our losses from
operations. Net cash provided by financing activities was $2.8 million for the six
months ended June 30, 2004, compared to $110,000 used in financing activities
for the six months ended June 30, 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 and the Bridge Loan Facility. Net cash used in investing activities was $1.1 for the six months ended
June 30, 2004 compared to $437,000 for the six months ended June 30, 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 the PNML Loan. We incurred net losses of approximately $4.8 million for the six months
ended June 30, 2004 and had an accumulated deficit of $219 million at June 30,
2004. Cash and cash equivalents and restricted cash at June 30, 2004 were
$1.7million. Cash used in operations for the six months ended June 30, 2004 was
$2.8 million. We continued to provide outsourcing services to Allegiance
pursuant to an agreement expiring on December 31, 2004. Allegiance accounted
for 21.2% of total revenue for the six months ended June 30, 2004. There are no
minimum revenues from Allegiance under this agreement. Allegiance
assigned the Agreement to XO Communications, Inc. (XO) on
July 23, 2004. We expect that XO Communications, Inc. will continue the
migration of data and will ultimately discontinue use of the Companys
services. 27




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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 May 2003, we executed a license and services agreement with ETB for our
RevChain products. The project is expected to provide more than $7.6 million in
additional revenues. The first significant payments were received in the fourth
quarter of 2003 for approximately $787,000. We also received approximately $1.3
million in the second quarter of 2004. Payments are expected in the third and
fourth quarters of 2004 in the amounts of $878,000 million and $3.1 million
respectively. The final large payment of $1.1 million is expected in the first
quarter of 2005 with smaller payments due throughout the term of the contract.
Payments the company makes to subcontractors supporting the ETB Contract are
paid within two weeks of receipt of the corresponding payments from ETB. 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 June
30, 2004 was $657,000. 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, subject to Company shareholder approval, 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, 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 has drawn $1,000,000 million of this
amount to fund a 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 paid to Behrman. In addition, the Company has drawn $1.1
million to fund its working capital requirements. The total amount drawn as of
August 12, 2004, is $2.6 million leaving an amount of $2.5 million available for
future use if needed prior to the closing of the Investment and Acquisition
Transactions, subject to Behrmans discretion. 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 but 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. We believe the cash and cash equivalents at June 30, 2004, together with
the Operating Loan proceeds, Bridge Loan Facility proceeds, provided that
Behrman continues to make additional draws available, and the additional
funding resulting from the closing of the Investment and Acquisition
Transactions, may be sufficient to fund operations for the foreseeable future.
We do not believe that our cash and cash equivalents at June 30, 2004 will be
sufficient to fund our operations and that we will be required to further
reduce operations and/or seek additional financing if the Investment and
Acquisition Transactions are not completed. 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 the investment by Quadrangle and Behrman
does not close by September 30, 2004, the Investment Agreement will
automatically terminate unless extended by agreement of Quadrangle, Behrman and
us. If the Investment and Acquisition Transactions are not consummated, it is
highly unlikely that we would continue to operate our business substantially as
presently operated. The remainder of the Bridge Loan Facility may be made
available to us by Behrman, at its discretion, to fund our ordinary course
working capital needs prior to the closing of the 28




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Investment and Acquisition Transactions and to pay costs we incur in
connection with the Bridge Loan Facility and Investment and Acquisition
Transactions. There can be no assurance that Behrman will continue to make
additional draws available or that other 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. 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. 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 of Behrman to make
additional draws available or 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 15 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, we will not have
sufficient funds to continue to operations and we will not have sufficient
funds to pay our transaction expenses. If the Investment and Acquisition Transactions are not completed, it is
highly unlikely that we would have sufficient funds to continue to operate our
business substantially as presently operated and we would be required to
further reduce operations and/or seek additional financing. 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 the investment by Quadrangle and
Behrman does not close by September 30, 2004, the Investment Agreement will
automatically terminate unless extended by agreement of Quadrangle, Behrman and
the Company. There can be no assurance that 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. 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. 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 of Behrman to make
additional draws available or failure to consummate the Investment 29




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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. 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 $2.6 million to Behrman for
advances on the Bridge Loan Facility with no guarantee of recovery of up to
$1.0 million advanced to Protek. In addition, it is likely that our own
transaction expenses will exceed cash and cash equivalents on hand at the time
of termination and we will not have sufficient working capital to repay the
Bridge Loan Facility. We are the target of three securities class action lawsuits related to the
proposed Merger which could result in substantial costs and divert management
attention and resources. On or about April 7, 2004, a purported class action complaint was filed
and on June 21, 2004, the plaintiff filed an amended complaint alleging that the
merger transaction contemplated as part of the Investment and Acquisition
Transactions (Merger) is a freeze out of Common Stock by the Series F
Preferred stockholders through unfair dealing by the defendants and that the
defendants have breached and continue to breach their fiduciary duties of
loyalty, care and good faith to the plaintiff and other members of the class.
The amended complaint seeks for the Merger, if consummated, to be rescinded and
set aside or for rescissory damages to be awarded to the class; for the
defendants to be directed to account to the class for all profit received by
the defendants and all damages sustained by the class; and for costs of the
action including attorneys and experts fees to be awarded to the plaintiff. On
May 12, 2004 and June 24, 2004, two additional purported class action
complaints were filed by individual shareholders. These complaints generally
allege that the Company and our directors breached their fiduciary duties; that
the consideration offered by Quadrangle Capital Partners LP and Behrman Capital
is inadequate and that the transaction was a result of unfair dealing; that
Behrman Capital, as controlling stockholder, breached its fiduciary duty to our
minority stockholders by acting to further its own interests at the expense of
our minority stockholders; and that Behrman Brothers, Quadrangle Group and
Quadrangle Capital Partners LP knowingly aided and abetted Behrman Capitals
violations of fiduciary duty. The complaints seek to enjoin the Merger and
related transactions, or if the Merger and related transactions are
consummated, to rescind them; to recover damages in an unstated amount and to
recover costs including attorneys fees associated with the lawsuit. We intend
to vigorously defend against the plaintiffs claims, but any such defense may
result in substantial costs and divert managements attention, which may
adversely affect our business and results of operations. Even if we ultimately
were to prevail on the merits, given our limited and declining cash position,
if these lawsuits result in a significant delay in the Merger, the effect could
be to deprive our stockholders of value. If any of these litigations were to
result in a permanent injunction against consummation of the Merger or related
transactions, the Merger Agreement and related transaction agreements would be
subject to termination as contemplated by the Transaction Support Agreement.
See 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 and
Risks Associated with our Business and Operations  Our cash position has
deteriorated and if we are unable to obtain sufficient working capital, we may
be unable to meet ordinary course obligations as they become due. Risks Associated with our Business and Operations Our cash position has deteriorated and if we are unable to obtain sufficient
working capital, we may be unable to meet ordinary course obligations as they
become due. The deterioration of our cash position has continued and we are
increasingly exposed to the risk of cash flow mismatches. Should such cash flow
incidents occur prior to closing of the Investment and Acquisition
Transactions, we expect to seek Behrmans agreement to permit us to make
additional draws on our Bridge Loan Facility. Behrman has indicated to us that
it will monitor our financial condition with care and that it currently 30




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intends to assist us with additional draws under the Bridge Loan Facility
as events warrant; however, Behrman has provided no contractual or other
commitment to make such funds available. If we are unable to obtain additional
draws under the Bridge Loan Facility, we may be unable to meet ordinary course
obligations as they come due. 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 61.3% of our total revenue
for the six months ended June 30, 2004, with ETB accounting for 28.6%,
Allegiance, accounting for 21.2%, and SBC accounting for 11.6% of our total
revenue for the six months ended June 30, 2004. If an unfavorable development
occurs with respect to any significant customer it would likely materially
adversely impact our total revenues and financial results. 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 been migrating data to another
software system and intends to discontinue use of our services. 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. 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 registered public accounting firm
has expressed doubts over our ability to continue as a going concern. We incurred net losses of approximately $4.8 million for the six months
ended June 30, 2004, and we had an accumulated deficit of approximately $219
million as of June 30, 2004. Our cash and cash equivalents and restricted cash
at June 30, 2004 were $1.7 million. Cash used in operations for the six months
ended June 30, 2004 was $2.8 million. As a result of our business concentration
risk, our past recurring losses from operations and our accumulated deficit,
the independent registered public accounting firms 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 $2.8 million for the six months
ended June 30, 2004, compared to $1.3 for the six months ended June 30, 2003.
The principal use of cash for both periods was to fund our losses from
operations. Net cash provided by financing activities was $2.8 million for the six
months ended June 30, 2004, compared to $110,000 used in financing activities
for the six months ended June 30, 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 an Operating Loan established with SVB and the Bridge
Loan Facility. Net cash used in investing activities was $1.1 million for the six months
ended June 30, 2004 compared to $437,000 for the six months ended June 30,
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 the PNML Loan. 31




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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 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 $4.8 million for the six months
ended June 30, 2004. As of June 30, 2004, we had an accumulated deficit of
approximately $219 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. In February, 2004, we entered into an 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. This requirement has been waived until July 31,
2004. If we were to breach any of the other 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. We expect
to be in default under one of the financial covenants of the Operating Loan for
July 2004. SVB has granted us a forbearance from enforcement of its rights in
respect of such default through July 31, 2004. If we are in default for July
2004, and no further forbearance is granted, SVB will be entitled to exercise
its rights under the Operating Loan. The Operating Loan is secured by a first
priority lien on all of our assets. 32




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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 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. 33




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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. 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 34




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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. 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 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 related to our IPO 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 35




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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. 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. 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 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 the
insurance carrier has accepted responsibility for a portion of the defense
costs, subject to a retention amount. 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. Accordingly, we are forced to
pay the costs of defense, including the balance of the retention amount and the
portion of the defense costs rejected not covered by the insurance carrier, and
settlement or 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. 36




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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, Behrman, 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. 37




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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. 38




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Item 4.
    Controls and Procedures. Our management, under the supervision and with the participation of our
Chief Executive Officer (CEO) who is also our principal financial and
accounting officer, 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 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. 39




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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 June, 2004, the Stipulation and Agreement of Settlement with Defendant
Issuers and Individuals has been signed on the Companys behalf. Court
approval of the settlement is required. Under the terms of the settlement,
there would be no liability to be recorded by us. There is no
assurance that the settlement 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 LLC v. Daleen Technologies, Inc., et al. On or about April 7, 2004, a purported class action complaint was filed in
the Court of Chancery of the State of Delaware in and for New Castle County by
an individual holder of shares of Common Stock of the Company. 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, Behrman Brothers, 40




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L.L.C., Behrman Capital II, L.P., Strategic Entrepreneur Fund II, L.P.On
June 21, 2004, the plaintiff filed an amended complaint alleging that the Merger is a
freeze out of Common Stock by the Series F Preferred stockholders through
unfair dealing by the defendants and that the defendants have breached and
continue to breach their fiduciary duties of loyalty, care and good faith to
the plaintiff and other members of the class. The amended complaint seeks for
the Merger, if consummated, to be rescinded and set aside or for rescissory
damages to be awarded to the class; for the defendants to be directed to
account to the class for all profit received by the defendants and all damages
sustained by the class; and for costs of the action including attorneys and
experts fees to be awarded to the plaintiff. This case is in the initial stages
and the amount of exposure, if any, is not determinable at this time. Kurt Feierbend v. James Daleen, et al. On May 12, 2004 a purported class action complaint was filed in the Court
of Chancery of the State of Delaware in and for New Castle County by an
individual holder of the Common Stock of the Company. The complaint is styled
Kurt Feierbend v. James Daleen, Gordon Quick, Daniel J. Foreman, Stephen J.
Getsy, John S. McCarthy, Dennis G. Sisco, Ofer Nemirovsky, Daleen Technologies,
Inc., Quadrangle Group LLC, Quadrangle Capital Partners LP, Behrman Capital and
Behrman Brothers, L.L.C. The complaint, which is purported to be brought on
behalf of the public holders of the Common Stock, generally alleges that the
Company and our directors breached their fiduciary duties; that the
consideration offered by Quadrangle Capital Partners LP and Behrman Capital is
inadequate and that the transaction was a result of unfair dealing; that
Behrman Capital, as controlling stockholder, breached its fiduciary duty to our
minority stockholders by acting to further its own interests at the expense of
our minority stockholders; and that Behrman Brothers, Quadrangle Group and
Quadrangle Capital Partners LP knowingly aided and abetted Behrman Capitals
violations of fiduciary duty. The complaint seeks to enjoin the Merger and
related transactions, or if the Merger and related transactions are
consummated, to rescind them; to recover damages in an unstated amount and to
recover costs including attorneys fees associated with the lawsuit. This case
is in the initial stages and the amount of exposure, if any, is not
determinable at this time. Russell Winter v. James Daleen, et al. On June 24, 2004, a purported class action complaint virtually identical
to the complaint filed by Feierbend was filed in the Court of Chancery of the
State of Delaware in and for New Castle County by another individual holder of
the Common Stock of the Company. The complaint is styled Russell Winter v.
James Daleen, Gordon Quick, Daniel J. Foreman, Stephen J. Getsy, John S.
McCarthy, Dennis G. Sisco, Ofer Nemirovsky, Daleen Technologies, Inc.,
Quadrangle Group LLC, Quadrangle Capital Partners LP, Behrman Capital and
Behrman Brothers, L.L.C. The complaint, which is purported to be brought on
behalf of the public holders of the Common Stock, generally alleges that the
Company and our directors breached their fiduciary duties; that the
consideration offered by Quadrangle Capital Partners LP and Behrman Capital is
inadequate and that the transaction was a result of unfair dealing; that
Behrman Capital, as controlling stockholder, breached its fiduciary duty to our
minority stockholders by acting to further its own interests at the expense of
our minority stockholders; and that Behrman Brothers, Quadrangle Group and
Quadrangle Capital Partners LP knowingly aided and abetted Behrman Capitals
violations of fiduciary duty. The complaint seeks to enjoin the Merger and
related transactions, or if the Merger and related transactions are
consummated, to rescind them; to recover damages in an unstated amount and to
recover costs including attorneys fees associated with the lawsuit. This case
is in the initial stages and the amount of exposure, if any, is not
determinable at this time. 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 41




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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 contained certain allegations against
Abiliti related to the non-payment of certain promissory notes in the aggregate
principal amount of $1.2 million. In May, 2004, we reached a settlement with
the plaintiffs and we made payments to the plaintiffs totaling $250,000. On
June 28, 2004, the action was dismissed with prejudice. 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. This case is in the discovery stage of the proceeding. A loss and
its effect on us, if any, cannot be determined with respect to this litigation. General litigation 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 subsidiary of the Company, that, subject to our shareholder approval, will simultaneously acquire us and
Protek. Quadrangle and Behrman will receive senior convertible redeemable
preferred stock in DHI Preferred in consideration for their 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 shareholders and
conversion of outstanding options, for aggregate consideration of up to $20
million, consisting of up to $13 million in cash, $5 million of DHI Common, and
contingent earn-out consisting of up to $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 $0.0384 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. 42




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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 Network Management (U.K.) Limited (PNML) with a bridge
facility of not more than $1.5 million (PNML Loan). We will fund the PNML
Loan 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 PNML Loan is secured by liens on all of PNMLs and
Proteks assets, subject solely to any first liens already existing in favor of
PNMLs creditors. The Company was also granted certain warrants for the stock
of Protek exercisable in the event of certain defaults. Resignation of Chief Financial Officer Jeanne T. Prayther, Daleens chief financial officer, resigned as an
officer of Daleen effective on May 28, 2004. Ms. Praythers resignation was
for personal reasons. 
  Item 6.
    Exhibits And Reports On Form 8-K. (a) Exhibit List ExhibitNumber
    
    Description10.1
    
    Second Loan Modification Agreement, dated as of June 30, 2004,
among the Company, Daleen IAC, LLP, DSI, Inc., Daleen Solutions,
Inc. and Silicon Valley Bank filed herewith.10.2
    
    Security Agreement, dated July 2, 2004 among the Company, Daleen
IAC, LLP, DSI, Inc., Daleen Solutions, Inc. and Behrman Capital
II, L.P. 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, item 12, furnished under item 9 on April 23, 2004 with
respect to Daleens first quarter 2004 financial operating results. Report on Form 8-K item 5, filed on May 7, 2004 with respect to the
announcement of the Investment and Acquisition Transactions. 43




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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: August 16, 2004
    GORDON QUICKPresident and Chief Executive Officer
(Principal Executive Officer) Date: August 16, 2004
    /s/  GORDON QUICKGORDON QUICKPresident and Chief Executive Officer
(Principal Financial and Accounting Officer) 44