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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 000-28085
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CAMINUS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 13-4081739
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
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747 THIRD AVENUE
NEW YORK, NEW YORK 10017
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 888-3600
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $.01
PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the common equity held by non-affiliates of
the registrant, computed using the closing sale price of common stock on March
10, 2000, as reported on the Nasdaq National Market, was approximately
$208,943,192 (affiliates included for this computation only: directors,
executive officers and holders of more than 5% of the registrant's common
stock).
The number of shares outstanding of the registrant's common stock as of
March 10, 2000 was 15,240,640.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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CAMINUS CORPORATION
TABLE OF CONTENTS
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PART I.
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 18
Item 3. Legal Proceedings........................................... 18
Item 4. Submission of Matters to a Vote of Security Holders......... 18
PART II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 19
Item 6. Selected Financial Data..................................... 20
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 23
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 44
Item 8. Financial Statements and Supplementary Data................. 45
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 45
PART III.
Item 10. Directors and Executive Officers of the Registrant.......... 45
Item 11. Executive Compensation...................................... 47
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 52
Item 13. Certain Relationships and Related Transactions.............. 54
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K....................................................... 55
SIGNATURES............................................................. 57
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This annual report contains forward-looking statements that involve risks
and uncertainties. The statements contained in this report that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. Without limiting the foregoing, the words "may," "will," "should,"
"could," "expects," "plans," "intends," "anticipates," "believes," "estimates,"
"predicts," "potential," "continue" and similar expressions are intended to
identify forward-looking statements. All forward-looking statements included in
this annual report are based on information available to us up to and including
the date of this document, and we assume no obligation to update any such
forward-looking statements. Our actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth below under "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Certain Factors
that May Affect Our Business" and elsewhere in this annual report. You should
also carefully review the risks outlined in other
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documents that we file from time to time with the Securities and Exchange
Commission, including our Quarterly Reports on Form 10-Q that we will file in
2000.
We use the following registered trademarks: Caminus(R)and Zai*Net(R). We
also use the following trademarks: Zai*Net Manager(TM), Zai*Net Risk
Analytics(TM), Zai*Net Physicals(TM), Zai*Net Models(TM), PowerMarkets(TM),
PowerOptions(TM), GasOptions(TM) ProjectFinance(TM), Zai*Net Weather Delta(TM),
Gas*Master(TM), Power*Master(TM) and Plant*Master(TM). This annual report also
contains trademarks and registered trademarks of other companies, which are the
property of those other companies.
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PART I
ITEM 1. BUSINESS
OVERVIEW
Caminus Corporation is a leading provider of software solutions and
strategic consulting services to participants in energy markets throughout North
America and Europe, including utilities, electrical power generating companies,
energy marketers electric power pools, gas producers, processors and pipelines.
We offer a suite of software solutions and associated services to enable energy
market participants to manage complex risk scenarios and effectively trade and
manage energy transactions, addressing multiple types of risk and energy
commodities, such as electric power, natural gas, crude oil and coal, across
varied geographies. In addition, our strategic consulting practice, which is one
of the leading consulting organizations in the European energy industry,
provides energy market participants with strategic advice regarding where to
compete and how to compete. Our team of subject matter experts provides
strategic advice on long-term energy investment decisions, including decisions
relating to the appropriate use of energy assets and the most effective
operating strategies in deregulating energy markets. As of December 31, 1999, we
had approximately 100 energy enterprise customers of our software solutions and
strategic consulting services. Many of our customers are leaders in the energy
industry, including American Electric Power, Consolidated Edison, Conoco, PG&E
Energy Trading, Preussen Elektra and TXU Electric and Gas.
INDUSTRY BACKGROUND
The energy industry, which includes the electric power, natural gas and
energy trading markets, is currently one of the five largest vertical markets in
the United States, with 1998 revenues of approximately $300 billion. We believe
the global energy market, excluding the United States, is approximately twice as
large as the U.S. market. Energy market participants have historically been
single, highly integrated organizations undertaking all activities of the energy
value chain, from exploration and generation to distribution and end-user
support. In order to introduce and stimulate competition in the energy industry,
governments in the United States, the United Kingdom and continental Europe have
dramatically reduced or eliminated their regulation of natural gas and electric
power markets.
In the United States, the deregulation of the natural gas industry began in
the early 1990s, while electric power deregulation began in the mid 1990s.
Deregulation is currently underway in more than half of the states, being
undertaken on a statewide basis in some jurisdictions and on a
provider-by-provider basis in others. The pace of this deregulation, both
nationally and on a statewide basis, is accelerating. Deregulation in the United
Kingdom and the Nordic region of Europe began in the late 1980s and early 1990s.
As a result of this deregulation:
- Vertically integrated suppliers are breaking up, energy trading is
becoming more complex and opportunities are being created for new market
entrants;
- Trading volumes are growing rapidly, and price volatility and risk
exposure are increasing significantly;
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- Energy market participants must find information technology solutions and
services that enable them to compete effectively in deregulating energy
markets; and
- Few solutions exist that are specifically targeted to address the buying,
selling and trading of energy in deregulating environments.
Vertically integrated suppliers are breaking up, energy trading is becoming more
complex and opportunities are being created for new market entrants
Traditional, vertically integrated utilities are breaking up on their own
initiative in order to remain competitive and in response to deregulation. This
is creating substantial opportunities for new entrants in the changing energy
marketplace. Vertically integrated monopoly control of wholesale and retail
energy transactions has weakened, creating the necessity for traditional
utilities and new entrants to buy, sell and hedge energy in a rapidly
deregulating wholesale market. For example, in some regions, electric power is
being sold by generators into electric power pools and then purchased from the
pool by electric power marketers and end users. In other cases, competing
suppliers are negotiating contracts directly with end users. Often the market is
a hybrid of these approaches. Today, energy purchase and sale agreements contain
different durations, terms, delivery points and volumes. In addition, the
definition of the product increasingly varies from contract to contract in terms
of power quality, reliability and other measurable attributes.
These factors have increased the range and number of participants in the
electric power, natural gas and energy trading markets. They include the
following:
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MARKET PARTICIPANTS
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ELECTRIC POWER Power generating companies
Independent power producers
Independent system operators
Power pools
Transmission companies
Distributors
Marketers
Retailers
End users
NATURAL GAS Producers
Gatherers
Processors
Storage operators
Pipelines
Local distribution companies
Marketers
Retailers
End users
ENERGY TRADING Commodity exchanges
Over-the-counter traders
Brokers
Financial institutions
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Trading volumes are growing rapidly, and price volatility and risk exposure are
increasing significantly
The increase in the number of market participants has in turn greatly
increased the number and complexity of energy transactions that must be managed
and associated trading risks that must be controlled. According to Enron Corp.,
the world's largest electric power trader, global wholesale electric power
trading volume increased tenfold from 1996 to 1998. In 1998, over 70% of
wholesale electric power trading was among energy marketers who neither produce,
transport nor consume electric power. This growth in market participants has
resulted in increased trading velocity, which is the number of times power is
traded before it is ultimately consumed.
The nature of energy commodities also adds to the complexity of the market.
For example, electric power has distinctive attributes that create more price
volatility than other commodities. Electric power, which is worth different
amounts in different locations, cannot be stored in significant quantities or
transported long distances at economic costs, and costs of generation and
transmission vary significantly. Demand and price in turn can vary dramatically,
with variations dependent upon time of day, day of the week and weather
conditions. All of these factors contribute to substantial price volatility and
thus growing risk exposure.
For example, during the summer of 1998, the electricity market in the
midwestern U.S. witnessed significant increases in wholesale spot market prices.
On June 25 and 26, 1998, prices for electric energy rose from $25 per megawatt
hour to as much as $2,600 per megawatt hour, with at least one hourly price
reaching $7,500 per megawatt hour. One month later, more abnormally large price
increases occurred. Several factors occurred simultaneously to cause these price
"spikes." Above average temperatures increased demand to near record levels, and
generating capacity could not keep pace. Transmission constraints also reduced
the ability of utilities to transport electric power. In addition, the overall
lack of accurate information and market experience among various market
participants contributed to the surge in prices, and several parties defaulted
on large electric power sales contracts, thereby forcing their customers to buy
electric power on short notice at substantial prices. In addition, during the
summer of 1999 there were similar spikes in spot market prices. These incidents
are indicative of the significant price volatility of electric power.
Energy market participants must find information technology solutions and
services that enable them to compete effectively in deregulating energy markets
Deregulation of the energy industry is forcing market participants to:
- better understand their current roles in the energy value chain;
- assess their long-term energy strategies, including where to compete and
how to compete; and
- invest in the right information technology solutions to analyze,
implement and support their energy strategies.
To compete in this rapidly changing market, energy market participants need
advice on how to make the transition from participating in a non-competitive,
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regulated market to a highly complex, competitive market. For example, they need
to understand their role in interacting with multiple and diverse market
participants, trading multiple energy commodities and competing in several
markets.
The deregulating energy environment has created an immediate and growing
need for the same operational, trading and risk management infrastructure that
has supported other long-standing markets but, until recently, has been handled
in a rudimentary way in the energy sector. A study conducted by ABB Energy
Information Systems estimates that global energy information technology spending
will grow from $14 billion in 1999 to $24 billion in 2005. To successfully
compete in an environment of greater competition and price volatility, and
significant risk exposure, energy market participants require systems that
provide:
- transaction confirmation;
- portfolio management;
- risk management;
- trading system controls;
- demand, supply and price forecasting;
- decision support; and
- transaction management tools.
Few solutions exist that are specifically targeted to address the buying,
selling and trading of energy in deregulating environments
In response to deregulation in the natural gas industry in the U.S.,
software systems have been developed to manage the physical flow and trading of
natural gas. However, many of these systems are not capable of supporting the
requirements of energy participants in today's deregulating energy markets
because they do not adequately support electric power trading or multiple types
of risk and cannot be integrated with other segments of the energy value chain.
A number of existing solutions, including most internal solutions, are point
solutions that are designed to address costs in the energy market but cannot
conduct trades, manage risks or record and analyze the numerous market-based
variables affecting multiple energy assets across different geographies. These
point solutions, which may consist of little more than off-the-shelf software
applications, first-generation portfolio management tools and spreadsheets, are
often not integrated with the operational and analytical functions of the
enterprise and may be unable to interface with other participants in the energy
industry, such as the emerging energy power pools.
In addition, energy participants have been analyzing energy assets with
traditional analytical models from the financial services industry, such as the
industry-standard Black-Scholes option pricing model, which may be appropriate
for financial instruments but does not account for all the variables relevant to
energy trading, such as volume risk. We believe that over the next several years
energy market participants will require new energy trading systems in order to
effectively compete in the continually changing energy marketplace.
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CAMINUS SOLUTION
We are a leading provider of software solutions and strategic consulting
services to participants in energy markets throughout North America and Europe.
We provide participants in the energy industry with sophisticated software
solutions to manage complex risk scenarios and effectively trade and manage
energy transactions. We also provide our customers with strategic advice
regarding where to compete, both by geographic region and position within the
energy value chain, and how to compete.
We provide energy market participants with sophisticated software systems
to compete in deregulated markets. Our Zai*Net suite of software features:
- AN INTEGRATED, MULTI-FUNCTIONAL SOLUTION TO TRADE AND MANAGE ENERGY
TRANSACTIONS THROUGHOUT THE ENERGY VALUE CHAIN. Our Zai*Net suite of
software products provides decision support for trading, corporate-wide
risk and credit management and complete tracking and invoicing of energy
as it flows through the energy value chain. We offer a solution with
modules ranging from sophisticated analytical tools for understanding and
measuring the unique opportunities and risks in the energy industry to
tools designed to electronically confirm energy flows with gas pipelines,
electric power pools and independent system operators.
- THE ABILITY TO SUPPORT MULTIPLE COMMODITIES AND TYPES OF RISKS ACROSS
VARIED GEOGRAPHIES. Our Zai*Net suite of integrated software products
supports multiple traded energy commodities, including electric power and
natural gas via various energy trading instruments. Our software includes
not only U.S. and European gas and electric power functionality, but also
specific geographic business capabilities, including functions tailored
for the North Sea and Asian crude oil markets.
We also have one of the leading strategic consulting practices in the
European energy industry. Based in Cambridge, England, our team of subject
matter experts provides strategic advice on long-term energy investment
decisions, including decisions relating to the appropriate use of energy assets
and the most effective operating strategies in deregulating energy markets. Our
strategic consultants are among Europe's most respected energy experts and,
through their extensive consulting work with regulators, understand what
deregulated market participants require to be effective competitors.
Our customers seek solutions that enable them to compete globally in
rapidly changing energy markets. We believe that our strong presence in the
United States and Europe gives us a significant advantage over our competitors
and positions us for strong penetration of these and other markets. We have
offices in the United States and in the United Kingdom. Our customers represent
some of the world's largest energy enterprises. We are the leading consultants
on energy policy to regulators in the United Kingdom, one of Europe's most
deregulated energy markets.
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STRATEGY
Our objective is to become the leading provider of software solutions and
strategic consulting services to participants in energy markets throughout the
world. Key elements of our strategy include:
Extending our product leadership
We offer a sophisticated suite of software solutions for the energy
industry and plan to continue to introduce new products that bring added value
to energy market participants. We intend to expand our product offerings by
taking advantage of the flexible structure of our existing software solutions,
which allows us to integrate new product offerings easily. Leveraging the
significant subject matter expertise of our strategic consultants, we continue
to develop software solutions responsive to the evolving needs of our current
and potential customers. For example, during 2000 we plan to introduce our
Zai*Net Weather Delta product, which we believe will significantly improve the
ability of our customers to manage weather risk. We are also continuing to
systematically configure our products to be Web-enabled. We have also
established Web-based hosting of some of our applications to make our products
available cost-effectively to smaller market participants, and improve the
effectiveness of larger enterprises. We plan to invest heavily in the growth of
our global development capability and hire additional product development
personnel in both the United States and Europe.
Maintaining and expanding our strategic consulting leadership
Our experience and in-depth understanding of competitive energy markets has
enabled our team of strategic consultants to be at the forefront of changes in
the U.K. and continental European energy sectors. This leadership provides us
with a special understanding of the needs of our energy clients. We intend to
build on this leadership position by expanding our strategic consulting services
in deregulating energy markets, including Germany, Spain and Italy. During 1998,
we increased our number of consultants in Europe from 23 to 28 in anticipation
of expanding our consulting services and we are planning a significant increase
in personnel in 2000. We also plan to begin building strategic consulting
operations in the United States in 2000.
Continuing to build a global distribution channel
The selling and marketing of sophisticated software solutions to address
the needs of global energy markets requires a highly trained sales channel with
comprehensive subject matter expertise. We have hired a significant number of
experts who can bring added value to the sales and marketing process. We plan to
substantially increase the size of our sales channel by the end of 2000 and to
expand its scope beyond the larger energy enterprises to target mid and small
market participants. We also intend to actively pursue opportunities to sell our
software solutions to our installed base of strategic consulting customers as
well as provide strategic consulting services to our software customers.
Expanding global presence
We currently have three offices in the United States and two in the United
Kingdom. As of December 31, 1999, we had 109 employees in the United States and
75 employees in Europe. We believe that our strong international presence
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provides us with a competitive advantage in providing solutions to energy market
participants that are seeking to compete globally in rapidly changing energy
markets. We intend to continue to expand in the foreseeable future to pursue
market opportunities in other markets experiencing energy deregulation,
particularly markets in Europe.
Developing strategic alliances to address the evolving needs of energy market
participants
We are seeking to form relationships with leading providers of products and
services that complement our software solutions. In July 1999, we formed a
strategic alliance with ABB Energy Information Systems, a unit of the ABB Group,
which is one of the world's largest vendors serving the energy industry.
Together with ABB Energy Information Systems, we are developing a comprehensive
end-to-end software solution designed to enable vertically integrated energy
suppliers to manage transactions and risks along the entire energy value chain,
from generation and wholesale acquisition of energy through retail sales. We
believe our combined solution will be one of the first end-to-end solutions in
the energy industry and will strengthen our leadership position in the industry.
We have also entered into strategic marketing arrangements with other companies,
including Siemens, Financial Engineering Associates, PH Energy Analysis and SS&C
Technologies, Inc. We plan to develop additional strategic relationships that
will assist our sales and marketing efforts in new geographic markets.
Continuing to grow through acquisitions
We have achieved a leadership position through acquisitions that have
helped us implement our business strategy. We were formed as a limited liability
company in April 1998 for the purpose of acquiring Zai*Net Software, L.P. and
Caminus Limited. In November 1998, we acquired Positron Energy Consulting. We
have successfully integrated the operations of these companies. In July 1999, we
acquired DC Systems, Inc., a software and services company specializing in
physical gas systems. We plan to pursue acquisitions that continue to add to our
subject matter expertise, bring us new products and services and help us
aggressively grow our market share throughout the world. We currently have no
commitments or agreements with respect to any acquisition. We intend to analyze
potential acquisitions and pursue those opportunities that complement or
supplement our business strategy.
PRODUCTS AND SERVICES
Software Products
Our suite of software products is one of the most comprehensive in the
energy industry. Branded under the "Zai*Net" name, our product suite provides an
integrated energy trading, risk management, scheduling and analytics system to
support multiple functional areas of the energy enterprise. It also allows
energy professionals to model physical assets so they can be effectively
employed in conjunction with a firm's trading and marketing operations.
The Zai*Net product suite offers a software solution covering a range of
functions, including trading, transaction management, risk management, analytics
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and physical scheduling across front, middle and back office operations. Full
integration among the Zai*Net product suite enables energy market participants
to trade, process transactions and manage risk from the wholesale acquisition of
energy through its sale and scheduling. Key benefits of our product suite
include the ability to:
- Manage risk among multiple energy commodities on an enterprise-wide
basis;
- Provide and track operational results from a trader level to a business
unit or enterprise level;
- Maintain trading data in a centralized database with a single,
consolidated, auditable solution;
- Integrate energy trading, risk/control, credit, back office,
treasury/finance and management reporting on a single system;
- Analyze the financial risk and potential impact of long-term energy
investment decisions; and
- Simulate the behavior of deregulating energy markets to forecast future
market prices.
Our software solutions consist of the following three tightly integrated
product groups:
- Zai*Net Manager, our core product, supports energy trading operations and
records and manages transactions and risks of energy commodities;
- Zai*Net Risk Analytics provides advanced risk assessment and management
tools for competitive energy markets; and
- Zai*Net Physicals manages physical energy scheduling operations and
invoicing.
We also offer a fourth product group, Zai*Net Models, to analyze
competitive electric power and natural gas markets, and value energy assets.
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[ZAINET PRODUCT SUITE FLOWCHART]
The omitted graphic is a visual model of our Zai*Net product suite. There
are two boxes. The upper box contains the Zai*Net Models product group:
PowerMarkets, PowerOptions, GasOptions, and ProjectFinance. Below that, there is
a bullet-point list of their functions: long term energy investment analysis,
asset valuation and option valuation.
Below the Zai*Net Models box lies a second, larger box, containing three
smaller boxes within, each representing one of three tightly integrated product
groups. The first box is labeled "Zai*Net Risk Analytics." Inside the box is a
description of its purpose, Corporate Risk Management and a bullet-point list of
its functions: basis exposure, profit & loss attribution, Monte Carlo
Value-at-Risk and potential credit exposure.
The second box is labeled "Zai*Net Manager." Inside the box is a
description of its purpose, Trading, Transaction & Risk Management and a
three-column list of its functions. The first column, "Front Office", lists
trade capture, position/ portfolio management, and pricing & profit & loss. The
second column, "Middle Office", lists Value-at-Risk, credit exposure, portfolio
stress analysis, and audit trail. The third column, "Back Office" lists
reporting confirmations and invoicing.
The third box is labeled "ZaiNet Physicals". This box is divided-side into
three software subgroups. The first subgroup is titled Power*Master. Its listed
functions are: hourly power schedules, curtailments & actualization, pathing
information, and tagging. The second software subgroup is titled Gas*Master and
lists as its functions: gas schedules, pipeline rate schedules, interconnect
movements, and storage. The third software subgroup is Plant*Master, which lists
its functions as: gas plants and processing management.
Zai*Net Manager Product Group
The Zai*Net Manager software is designed to increase the efficiency of a
customer's daily trading operations by recording and managing transactions and
associated risks of energy related commodities. It is used by energy traders and
marketers, risk managers, credit officers and others involved in trading energy
commodities and managing energy risk exposure. The Zai*Net Manager software
serves as the core system and integrates front, middle and back office trading
functionality for multiple traded energy commodities, including:
- electric power
- natural gas
- crude oil
- refined products
- natural gas liquids
- coal
- emission allowances
- weather derivatives
- foreign exchange transactions
The software also provides pricing and back office support for all traded
instruments, including multiple types of physicals, swaps, over-the-counter
options, listed options and futures.
The Zai*Net Manager software's real-time risk management capability
provides aggregated portfolio numbers that instantaneously reflect position and
price changes. The software is designed to handle enterprise-wide, high-level
risk management and is also capable of detailed energy commodity position
tracking, analysis and accounting for diverse local trading requirements.
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The Value-at-Risk, or VaR, functionality computes corporate-wide VaR, a
widely accepted method for evaluating and measuring market risk, by a number of
categories. The VaR software analyzes information about the risk, or likely gain
or loss, in a given portfolio. The software also provides credit risk analysis
on a real-time basis to minimize current exposure. Portfolio stress analysis
enables risk managers to monitor the impact of price and volatility movements,
and the passage of time on a specified portfolio's position and profit and loss.
Full system audit capability tracks "who did what when" in the system, and "as
of" reporting -- the ability to recreate a previous day's profit and loss
position -- is integrated throughout the system.
Zai*Net Risk Analytics Product Group
Zai*Net Risk Analytics software provides an advanced set of risk assessment
and management tools designed specifically for competitive energy markets. It is
used by energy traders and marketers, risk managers, credit officers and others
involved in managing energy risk exposure. The software utilizes sophisticated
modeling, analysis and simulation methods to help understand business risks.
Zai*Net Risk Analytics software complements and is integrated with Zai*Net
Manager and Zai*Net Physicals software to facilitate the accurate valuation and
management of energy portfolios.
The Zai*Net Risk Analytics software allows users to track portfolio
performance versus projected risks so they can better understand the behavior of
the portfolio under a range of possible price movements, enabling them to more
effectively manage trading and risk.
Zai*Net Risk Analytics software provides capabilities that allow energy
market participants to carefully monitor their risk profiles and credit
positions to manage, analyze and isolate specific risks. It includes the
following modules:
- BASIS BREAKDOWN REPORTING breaks down the risk factors of a single
transaction or group of transactions according to varying price
movements, which are commonly referred to as fixed, basis and index
prices. This enables more detailed analysis of each element of portfolio
risk.
- PROFIT & LOSS (P&L) ATTRIBUTION REPORTING analyzes profit and loss
changes over specified time periods, and attributes such changes to (1)
variations in a commodity's price and volatility, (2) the passage of time
in the specified period and (3) new, changed or voided transactions
during the period.
- MONTE CARLO VALUE-AT-RISK (VaR) ANALYSIS uses the industry-standard Monte
Carlo VaR methodology optimized specifically for energy portfolios. This
analysis runs a portfolio through thousands of simulated market price and
volatility movements and reports a distribution for VaR, which is the
likely gain or loss.
- POTENTIAL CREDIT EXPOSURE ANALYSIS provides close monitoring of credit
risk by capturing volatility in credit exposure calculation to help
contain potential losses.
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Zai*Net Physicals Product Group
The Zai*Net Physicals software allows electric power and natural gas
traders and schedulers as well as management and back office staff to manage
physical energy scheduling operations and invoicing. The Zai*Net Physicals group
consists of three major products: Gas*Master, Power*Master and Plant*Master
software.
-GAS*MASTER software supports all aspects of physical natural gas
transportation, including scheduling, pipeline nominations and wellhead -- or
production-level -- accounting. Gas*Master software includes the following
modules:
-- GAS SCHEDULING assists users in planning and scheduling natural gas
transportation by pipelines, in and out of storage facilities, and to
and from gas pipeline interconnect and storage points.
-- GAS NOMINATIONS manages natural gas scheduling information and formats
the information to the specific requirements of various gas pipeline
systems, enabling bids and confirmations of complex physical gas
transactions. A Web-based electronic data interface, or EDI, allows
automatic transfer of all information exchange with the pipelines,
without requiring user intervention or data re-entry.
-- WELLHEAD ACCOUNTING enables companies with interest at the wellhead
level -- or production site -- to manage the division of interest and
royalty payments.
-POWER*MASTER allows users to schedule electric power across the various
transmission systems and electric power markets worldwide. It includes the
following modules:
-- LONG-TERM POWER SCHEDULING tracks power curtailments, actual electric
power flow and physical and financial transmission line losses by
transaction. The user-friendly interface matches energy transactions
(buys with sells), tracks the "paths" that the energy has flowed
through on the power grid and creates daily and monthly schedules of
planned power flows down to a minute level.
-- REAL-TIME POWER SCHEDULING captures and schedules purchases and sales
of power and transmission capacity, which is the flow of power between
points on the electrical grid networks, on a convenient, single-entry
screen. We designed this module in conjunction with traders and
schedulers to support hourly and real-time trading in the deregulating
power markets.
-PLANT*MASTER enables natural gas processing plant operators to track the
physical flows of gas through the facility and to manage title and allocation
throughout the process.
Zai*Net Models Product Group
Zai*Net Models provide support for long-term energy decisions with a
comprehensive suite of software solutions to analyze competitive electric power
and natural gas markets. Using sophisticated techniques, the models allow
accurate appraisals, capturing the embedded risk prevalent in many energy
assets. These models also perform sensitivity analysis, which involves valuation
testing against varying assumptions relating to fuel costs, price volatility,
operating costs and
11
<PAGE> 15
characteristics, and discount rates. The models use advanced methods for valuing
physical options -- options that reflect the risks of the physical energy
market -- and can be used for mark-to-market valuation and risk reporting. The
Zai*Net Models include:
- POWERMARKETS is a model that simulates the dynamics of competitive
electricity markets, including forward prices, operating performance of
generators and trading flows between markets and regions.
- POWEROPTIONS is a set of models that uses sophisticated analyses to value
energy assets.
- GASOPTIONS is a set of models that uses sophisticated analyses to value
storage assets and complex purchase and sale transactions.
- PROJECTFINANCE is a financial model that values new and existing assets
using a number of analytical techniques.
Product Pricing
We license our software for a one-time license fee, which typically
consists of a base fee plus charges for optional modules and system users. The
one-time license fee for base packages can range from $200,000 to $400,000 for a
system with basic functionality and a small number of users. Adding additional
functionality through optional modules, which are priced from $20,000 to over
$100,000, and additional users can increase system license fees to a range of
$500,000 to over $1 million. Customers also typically enter into an annual
maintenance agreement providing them with regular software upgrades and help
desk support. Customers pay an annual maintenance fee that is typically equal to
20% of the customer's license fee. A majority of our customers start with a
software solution providing basic functionality to a limited number of users and
add functionality and users as they expand their operations.
Software Services
We offer a broad range of professional services to assist our customers in
implementing our software products to meet their business needs. Our philosophy
is to focus on the needs of each specific customer and to tailor our services
accordingly. We provide the following services, primarily on a time and
materials basis:
- IMPLEMENTATION CONSULTING SERVICES to assist customers with the initial
installation of the software or newly licensed modules, conversion of the
customer's historical data, setting the operational parameters of the
system and ongoing training and support.
- APPLICATION CONSULTING SERVICES to help our customers gain the maximum
benefit from our systems and implement best practices in their trading
and risk management operations.
- POST-IMPLEMENTATION CUSTOMER SUPPORT to answer customer questions and
resolve problems through remote diagnosis and telephone hotline support.
These services and the professionals that deliver them contribute to a
strong relationship with our customers, enabling us to assess the future
requirements of our customers and sell them additional products and services. As
of December 31, 1999, our software consulting staff consisted of 43 employees
located in the U.S. and Europe.
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<PAGE> 16
STRATEGIC CONSULTING SERVICES
Based in Cambridge, England, our 28 strategic consultants provide European
governments with strategic advice on the deregulation and restructuring of the
energy industry and assist energy companies with global operations in choosing
and implementing strategies to remain competitive in deregulating energy
markets. Our reputation in strategic consulting is based on our experience and
in-depth understanding of competitive energy markets. We have significant
expertise in economics, regulation and strategy, and have been at the forefront
of changes in the United Kingdom energy sector, which has one of the most
deregulated natural gas and electric power markets in the world. Our knowledge
and information base covers the entire energy value chain from fuel production
through generation, transmission, distribution and trading, and we have a
detailed understanding of competitive wholesale trading arrangements in
international gas and electricity markets.
Our strategic consulting expertise, which is billed primarily on a time and
materials basis, is diverse and includes specialization in the following areas:
ACQUISITIONS. New entrants and existing players in deregulating markets
may choose to strengthen their market position through acquisitions of assets or
businesses. We have significant experience in the economic evaluation of new and
existing energy projects and have provided advice on more than 20 power projects
in the U.K., as well as a number of projects in Europe.
QUANTITATIVE ANALYSIS. We are experts in analyzing complex issues in
competitive energy markets. Our quantitative approach encompasses, among other
things, the effect of changing market structures on the key price drivers. Our
strategic consulting group first developed our suite of analytical models of the
England and Wales energy power pool in the late 1980s to assist our clients in
their negotiations with the U.K. government over the structure of the energy
power pool. Since then, we have refined these models into our comprehensive
suite of analytical Zai*Net Models that support strategic energy decisions.
RISK MANAGEMENT. Throughout Europe, competition is forcing natural gas and
electric utilities to re-evaluate their strategies for managing the risks in
their businesses. We offer a complete range of risk management consultancy
services, independently or in conjunction with our Zai*Net software suite. We
have developed electricity trading and risk management training courses for a
number of U.K., continental European and North American power companies. We have
also run several successful electricity trading and risk management workshops at
major European power conferences.
POLICY FORMULATION. Over the years, we have worked very closely with
British gas and electricity regulators to help design and establish the world's
first fully competitive gas and electricity markets. We are currently lead
economic advisors to the U.K. gas and electricity regulatory body, OFGEM, on the
Reform of Electricity Trading Arrangements. We have also developed a leading
advisory position on the transition to competition in other European energy
markets.
SALES AND MARKETING
We sell our products and services through a direct sales channel. We
believe the product and market expertise necessary to sell our highly
sophisticated
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<PAGE> 17
products cannot be delegated successfully to third parties, and we seek to hire
subject matter experts who can bring added value to the sales process. We do
believe, however, that third parties can provide us with valuable assistance in
our marketing efforts, especially in new geographic regions.
Direct Sales Model
As of December 31, 1999, our direct sales force consisted of 24 employees
selling from our U.S. and European offices. We have a single sales organization
in each region that is responsible for selling our entire suite of products and
services in that region. Each of the U.S. and European sales organizations is
led by a highly experienced vice president with a strong background in building
and leading large enterprise sales teams.
We use a team sales approach in which professional account representatives
work with pre-sales product and service experts. The account representative
generates and qualifies leads, manages the sales process and is responsible for
closing the sale. Most new customer sales cycles typically range from five to
six months from lead generation to contract execution. Territories are assigned
to account representatives on a geographic and named-account basis. Pre-sales
consultants support the sales process by assessing the prospect's business needs
and creating and delivering technical sales information and demonstrations.
Subject matter experts from strategic consulting and product development
supplement the sales team as the sales situation dictates. In addition, our
strategic and software consultants work closely with the sales team to identify
additional sales opportunities with existing customers. We have closely
coordinated team selling between the U.S. and European channels on global
enterprise opportunities.
Marketing Communications
To support our growing direct sales channel, we have devoted significant
resources to building strong marketing support. Our main marketing objectives
are to generate sales leads and increase the market's awareness and accurate
perception of us and our products and services. These efforts are focused on
industry advertising, public relations, trade shows, direct mailings, the
Internet and platform participation in major industry seminars. As of December
31, 1999, we had five marketing personnel.
STRATEGIC RELATIONSHIPS
We continue to develop relationships, most of which are informal, with
third parties that can assist us in generating sales leads and provide us with
cooperative marketing support. We formed the most significant of our formal
marketing relationships in July 1999 with ABB Energy Information Systems, a unit
of ABB Group. ABB Group is one of the world's largest vendors serving the energy
industry. Together with ABB Energy Information Systems, we are developing a
comprehensive end-to-end solution to provide vertically integrated energy
suppliers with the ability to manage risk along the entire energy value chain,
from wholesale acquisition of energy through retail sales. We also have joint
marketing arrangements with Financial Engineering Associates, PH Energy
Analysis, and SS&C Technologies.
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<PAGE> 18
RESEARCH AND DEVELOPMENT
A strong development capability is essential to delivering responsive
products to an emerging market, continually improving the quality and
functionality of our current products and enhancing our core technology. As of
December 31, 1999, we had 42 employees in our research and development area. We
spent approximately $1.2 million, $1.2 million and $3.9 million on research and
development during the year ended December 31, 1997, the period from inception
(April 29, 1998) through December 31, 1998 and the year ended December 31, 1999,
respectively.
We believe the best way to maximize our development capability is to have
small, entrepreneurial development teams, each of which is focused on a specific
product group. Our teams operate under a structure that provides an "umbrella"
of common strategy, plans, technology, standards, methodologies, processes and
culture. Our product teams consist of product mangers, programmers and
documentation and quality assurance specialists, and overall development
management consists of the leaders of each development team, led by the chief
technology officer. The leaders ensure that the teams operate under the common
umbrella and that they work closely with product marketing in a process designed
to ensure that we develop products that the market requires. The team leaders
manage the integration between products and coordinate overall product suite
quality assurance.
We are developing a variety of new products and product enhancements. One
product that we are developing is our Zai*Net Weather Delta product, which we
are designing to provide tools for energy risk professionals to integrate
weather data, one of the key factors in energy demand, into energy load
forecasts. We are designing Zai*Net Weather Delta to analyze the relationships
among load, price and weather. We are also designing the software to deliver
comprehensive reports showing financial volume-at-risk with the traditional
rigor of utility load forecasting. The product is in the design phase, and we
currently plan to release Zai*Net Weather Delta during 2000.
TECHNOLOGY
Written primarily in C/C++ with standard graphical user interfaces, the
Zai*Net software suite has an open, three-tier client/server architecture and
runs on Unix and NT servers with Windows95 and WindowsNT clients on Oracle,
Microsoft or Sybase database platforms. We typically store business logic in
objects that reside on the client or server side of the application. Objects are
usually coded in C++ using object-oriented programming techniques for improved
scalability.
The ability to integrate easily with other systems is a key competitive
advantage. To facilitate integration with a variety of architectures, the
Zai*Net suite of solutions provides standard interfaces to accept trades and
prices from other systems and sources. The suite processes trades and prices
into standard formats, easily processed by the risk system. It performs this
activity in random access memory-based server objects keeping slow disk access
to a minimum. The integrated result is an object-oriented, high-performance
system that will run on a variety of servers and databases.
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<PAGE> 19
CUSTOMERS
Our customers include a wide range of entities in the energy market,
including utilities, natural gas and electric power marketers, energy retailers,
natural gas and oil producers, local distribution companies, pipelines,
independent power producers, financial institutions and regulatory agencies. As
of December 31, 1999, we had approximately 100 energy enterprise customers
located primarily in the U.S., Canada, the U.K., Germany, Austria, Belgium, the
Netherlands, Spain and Venezuela. Our customers include:
UTILITIES
American Electric Power
Austin Energy (City of Austin, TX)
Bayernwerk
BC Hydro/Powerex
Consolidated Edison
Electrabel
GPU Energy
Ontario Power Generation
Pennsylvania Power & Light
Preussen Elektra
Public Service Electric & Gas
TXU Electric and Gas
SEP
NATURAL GAS AND ELECTRIC POWER MARKETERS
Bord Gais
Eastern Electricity plc
Merchant Energy Group of the Americas
PG&E Energy Trading
Valero Refining and Marketing
AES Electric Limited
ENERGY RETAILERS
NewEnergy
FINANCIAL INSTITUTIONS
Credit Suisse First Boston
GE Capital
REGULATORY AGENCIES
OFGEM
GAS AND OIL PRODUCERS
Amerada Hess
Anadarko Petroleum
Conoco
Ocean Energy/Seagull Energy
Petroleos de Venezuela S.A.
Phillips Petroleum Company
Ultramar Diamond Shamrock
Unocal Corporation
LOCAL DISTRIBUTION COMPANIES
Southwestern Energy
TXU Lone Star Gas
PIPELINES
Coastal Gas Services
Colorado Interstate Gas
Transok, Inc.
INDEPENDENT POWER PRODUCERS
AES Electric
TRANSMISSION COMPANIES
TenneT
National Grid Company plc
COMPETITION
We compete in a market that is new, rapidly evolving and very competitive.
We expect competition to persist and intensify. We currently face competition
from a number of sources.
The companies that compete against us in the provision of software
solutions to the energy industry include:
- a number of smaller companies that offer point solutions exclusively to
the energy market but do not provide the full range of products and
services required by market participants and do not have a significant
international presence;
- a small number of companies that provide a wide range of products and
services exclusively to the energy market but currently do not have a
strong international presence;
- internal development departments of a number of energy participants
developing systems for internal use or for sale to other market
participants; and
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<PAGE> 20
- large multi-product/market software companies or financial institutions
that offer or, in the future, may offer financial risk management and
other software addressing the energy market.
We believe that the principal competitive factors with respect to our
software solutions include:
- knowledge of market needs, product performance, scope, functionality,
ease of use and scalability;
- the existence of an international presence;
- the ability to integrate external data sources;
- product and company reputation;
- the existence of a referencable customer base;
- customer service and support; and
- price.
The principal competitors for our strategic consulting services are
customers who have internal expertise as well as large international consulting
and strategy firms. We believe that the principal competitive factors with
respect to our strategic consulting services include:
- subject matter expertise;
- responsiveness to customer needs;
- reputation;
- comprehensive delivery methodologies; and
- price.
We believe that we have a leadership position in the energy marketplace
because of our international presence, our subject matter expertise and our
ability to provide both software solutions and strategic consulting services to
our customers.
INTELLECTUAL PROPERTY
We rely on a combination of copyright, trademark and trade secret laws,
nondisclosure agreements and other contractual provisions to establish, maintain
and protect our proprietary rights. We have copyright and trade secret rights
for our products, consisting mainly of source code and product documentation. We
attempt to protect our trade secrets and other proprietary information through
agreements with suppliers, non-disclosure agreements with employees and
consultants and other security measures.
We rely on outside licensors for technology that is incorporated into and
is sometimes necessary for the operation of our products. However, we believe we
can obtain replacements from other vendors and we are in the process of
developing replacement products ourselves. For example, the core technology we
acquired from Positron has allowed us to develop similar technology into an
analytical tool that prices options that we license for resale.
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<PAGE> 21
EMPLOYEES
As of December 31, 1999, we had 184 full-time employees, consisting of 71
employees in consulting and services, 42 employees in research and development,
33 employees in finance and administration, 29 employees in sales and marketing
and nine employees in customer support. Of such employees, 109 were located in
the United States and 75 were employed in Europe. None of these employees is
covered by any collective bargaining agreements, and to date, we have not
experienced a work stoppage. We believe our relationship with our employees is
good.
ITEMS 2. PROPERTIES
Our principal administrative, sales, marketing, services and research and
development facility occupies approximately 17,000 square feet of office space
in New York, New York. The leases expire in September 2004. In addition, we
lease sales, services and research and development offices in the following
cities;
<TABLE>
<CAPTION>
CITY SQUARE FOOTAGE
- ---- --------------
<S> <C>
Dallas, Texas.................................. 5,300
Houston, Texas................................. 4,800
London, England................................ 3,600
Cambridge, England............................. 6,000
</TABLE>
Other than our Cambridge office, which is the headquarters of our strategic
consulting business, each of our offices houses personnel for both our software
and strategic consulting business segments. We believe that our facilities are
adequate for our current needs and that suitable additional or substitute space
will be available as needed to accommodate expansion of our operations.
ITEM 3. LEGAL PROCEEDINGS
From time to time we may be subject to legal proceedings and claims in the
ordinary course of our business. We are not aware of any legal proceedings or
claims that are believed will have, individually or in the aggregate, a material
adverse effect on our business, financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Pursuant to a Written Consent of Directors and Sole Stockholder of Caminus
Corporation, dated December 17, 1999, our sole stockholder, Caminus LLC, a
Delaware limited liability company and our predecessor entity, approved (i) the
merger agreement providing for the merger of Caminus LLC with and into us, (ii)
our assumption of Caminus LLC's 1998 Stock Incentive Plan and all outstanding
employee options thereunder, (iii) the filing of a registration statement on
Form S-8 in connection with the shares of our common stock issuable under the
1998 Plan, and (iv) the application for the listing on the Nasdaq National
Market of the shares registered under the 1998 Plan. On December 17, 1999,
Caminus LLC held 1,000 shares of our common stock.
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<PAGE> 22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has been quoted on the Nasdaq National Market under the
symbol "CAMZ" since January 28, 2000. Consequently, there was no established
public trading market for our common stock during the periods covered by the
financial statements included in this annual report.
As of March 14, 2000, we had 49 holders of record of our common stock.
Because certain of these shares are held by brokers and other institutions on
behalf of stockholders, we are unable to estimate the total number of
stockholders represented by these holders of record.
We have never declared or paid any cash dividends on our capital stock. We
intend to retain future earnings, if any, to finance our growth strategy. We do
not anticipate paying cash dividends on our common stock in the foreseeable
future. Payment of future dividends, if any, will be at the discretion of our
board of directors after taking into account various factors, including:
- our financial condition;
- our operating results;
- our current and anticipated cash needs;
- restrictions in our financing agreements; and
- our plans for expansion.
USE OF PROCEEDS
We are furnishing the following information with respect to the use of
proceeds from our initial public offering of common stock, $.01 par value per
share:
(1) The effective date of our registration statement on Form S-1,
commission file number 333-88437, was January 27, 2000.
(2) The date on which the offering commenced was January 28, 2000.
The underwriters exercised their over-allotment option in full on
January 31, 2000.
(3) Not applicable.
(4)(i) The offering terminated after the sale of all securities
registered pursuant to the registration statement. The closing of
the offering occurred on February 2, 2000.
(ii) The managing underwriters for the offering were:
Deutsche Bank Securities Inc.
Bear, Stearns & Co. Inc.
CIBC World Markets Corp.
(iii) We registered shares of our common stock, $.01 par value per
share, pursuant to the registration statement.
(iv) For our account (a) 4,088,119 shares of common stock were
registered pursuant to the registration statement, (b) the
aggregate offering price of the amount registered was $65,409,904,
(c) the amount sold pursuant to the offering was 4,088,119 shares
of common stock and (d) the aggregate offering price of the amount
sold was $65,409,904.
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<PAGE> 23
For the accounts of the selling stockholders in the offering, (a)
939,681 shares of common stock were registered pursuant to the
registration statement, (b) the aggregate offering price of the
amount registered was $15,034,896, (c) the amount sold pursuant to
the offering was 939,681 shares of common stock and (d) the
aggregate offering price of the amount sold was $15,034,896.
(v) In connection with the offering, the estimated expenses were as
follows:
<TABLE>
<S> <C>
Underwriting Discounts and Commissions............... $4,578,693
Other Expenses....................................... 1,325,000
----------
Total Expenses....................................... $5,903,693
==========
</TABLE>
Payment of expenses were to persons other than: directors,
officers, our general partners or their associates, persons owning
ten percent or more of any class of our equity securities, or our
affiliates.
(vi) Our estimated net offering proceeds after deducting the total
expenses described in (v) above were $59,506,211.
(vii) As of December 31, 1999, no net offering proceeds had been received
by us.
(viii) Not applicable.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data, which includes data of
our predecessor, Zai*Net Software, Inc., should be read together with the
consolidated financial statements and related notes and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
In the following table, "Adjusted EBITDA" is defined as earnings before
interest and other income, income taxes, depreciation, amortization, acquired
in-process research and development and non-cash compensation expense. EBITDA is
a non-GAAP measure commonly used by investors and analysts to analyze companies
on the basis of operating performance, leverage and liquidity. We present
Adjusted EBITDA, which is also a non-GAAP measure, to enhance the understanding
of our operating results. We believe Adjusted EBITDA is an indicator of our
operating profitability since it excludes items which are not directly
attributable to our ongoing business operations. However, Adjusted EBITDA relies
upon management's judgment to determine which items are directly attributable to
our ongoing business operations and as such is subjective in nature. Neither
EBITDA nor Adjusted EBITDA should be construed as an alternative to net income
as an indicator of a company's operating performance or as an alternative to
cash flow from operations as a measure of a company's liquidity. For information
about cash flows or results of operations in accordance with generally accepted
accounting principles, please see the audited consolidated financial statements
included elsewhere in this annual report.
20
<PAGE> 24
<TABLE>
<CAPTION>
ZAI*NET
(PREDECESSOR)
-------------------------------------------------
FOUR
MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------------ APRIL 30,
1995 1996 1997 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenues:
Licenses.................................. $1,575,104 $1,291,427 $1,521,447 $1,495,221
Software services......................... 973,235 1,429,860 2,667,807 1,334,473
---------- ---------- ---------- ----------
Total revenues.......................... 2,548,339 2,721,287 4,189,254 2,829,694
---------- ---------- ---------- ----------
Gross profit................................ 1,583,758 1,722,145 2,857,772 2,095,452
Operating expenses.......................... 1,444,477 1,619,084 2,862,008 1,659,422
---------- ---------- ---------- ----------
Operating income (loss)..................... 139,281 103,061 (4,236) 436,030
Other income (expense), net................. 9,511 (2,197) 17,591 8,294
Provision for income taxes.................. -- -- -- 23,816
---------- ---------- ---------- ----------
Net income.................................. $ 148,792 $ 100,864 $ 13,355 $ 420,508
========== ========== ========== ==========
OTHER DATA:
Cash provided by operating activities....... $ 146,142 $ 131,110 $ 401,048 $1,053,662
Cash used in investing activities........... 167,158 100,112 206,245 99,881
Cash provided by (used in) financing
activities................................ 22,687 54,450 (290,050) (3,000)
Adjusted EBITDA............................. 217,426 204,179 118,854 482,171
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................. $ 156,760 $ 242,208 $ 146,961
Total assets............................... 834,257 1,274,792 2,193,379
Long-term debt............................. 17,000 3,000 --
Stockholders' equity....................... 120,010 220,874 234,229
</TABLE>
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<PAGE> 25
<TABLE>
<CAPTION>
CAMINUS
--------------------------------
INCEPTION
(APRIL 29, 1998) YEAR
THROUGH ENDED
DECEMBER 31, DECEMBER 31,
1998 1999
---------------- ------------
<S> <C> <C>
STATEMENT OF OPERATIONS:
Revenues:
Licenses........................................... $ 3,639,143 $12,538,617
Software services.................................. 3,090,758 7,815,880
Strategic consulting............................... 2,896,102 6,556,156,
------------ -----------
Total revenues.................................. 9,626,003 26,910,653
------------ -----------
Gross profit......................................... 4,940,985 18,524,527
Operating expenses................................... 15,074,351 26,260,380
------------ -----------
Operating loss....................................... (10,133,366) (7,735,853)
Other income (expense), net.......................... 96,909 227,316
Provision for income taxes........................... 35,735 645,766
Minority interest.................................... (298,996) --
------------ -----------
Net loss............................................. $(10,371,188) $(8,608,935)
============ ===========
Basic and diluted net loss per share................. $ (1.41) $ (1.01)
Weighted average common shares -- basic and diluted.. 7,360,634 8,514,405
OTHER DATA:
Cash provided by (used in) operating activities...... $ 951,676 $(1,922,308)
Cash used in investing activities.................... 10,892,906 11,128,301
Cash provided by financing activities................ 12,699,637 10,953,866
Adjusted EBITDA...................................... 355,155 3,291,852
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1999
------------ ------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................... $ 2,770,538 $ 661,502
Total assets........................................ 31,069,002 41,477,937
Borrowings under credit facility, net of current
portion........................................... -- --
Current portion of credit facility.................. -- 3,050,000
Stockholders' equity................................ 17,159,782 25,739,419
</TABLE>
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<PAGE> 26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with "Selected Financial
Data" and our financial statements and related notes thereto appearing elsewhere
in this annual report. This discussion and analysis contains forward-looking
statements that involve risks, uncertainties and assumptions. The actual results
may differ materially from those anticipated in these forward-looking statements
as a result of certain factors, including but not limited to those set forth
under "Certain Factors That May Affect Our Business" and elsewhere in this
annual report.
OVERVIEW
We are a leading provider of software solutions and strategic consulting
services to participants in energy markets throughout North America and Europe.
We were organized as a limited liability company on April 29, 1998 and acquired
Zai*Net Software, L.P. and Caminus Limited in May 1998, Positron Energy
Consulting in November 1998 and DC Systems, Inc. in July 1999. Since the
completion of these acquisitions, we expanded our organization by hiring
personnel in key areas, particularly marketing, sales and research and
development. Our full-time employees increased from 116 at December 31, 1998 to
184 at December 31, 1999, and we intend to continue to increase our number of
employees throughout 2000.
We generate revenues from licensing our Zai*Net software products,
providing related services for implementation consulting and support and
providing strategic consulting services. We generally license one or more
Zai*Net products to our customers, who typically receive perpetual licenses to
use our products for a specified number of servers and concurrent users. After
the initial license, they may purchase licenses for additional products, servers
and users as needed. In addition, customers often purchase professional services
from us, including implementation and training services, and enter into
automatically renewable maintenance contracts that provide for software upgrades
and technical support over a stated term, typically 12 months. We also provide
strategic advice on deregulation and the restructuring of the energy industry
through our strategic consulting group. Implementation consulting and strategic
consulting are typically billed on a time and materials basis.
Our software license agreements are non-refundable. Payment terms require
that a significant portion of the license fee is payable on delivery of the
licensed product with the balance due in installments over a relatively short
period, generally four months or less.
We follow the provisions of Statement of Position ("SOP") No. 97-2,
"Software Revenue Recognition," as amended by SOP No. 98-4, "Deferral of the
Effective Date of Certain Provisions of SOP No. 97-2 and SOP 98-9, "Modification
of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions."
Under SOP No. 97-2, we recognize license revenues when a license is executed,
the product has been delivered, all significant company obligations are
fulfilled, the fee is fixed or determinable and collectibility is probable.
Under our current standard license agreement, we generally recognize license
revenues upon the execution of a license and delivery of the software. For those
license agreements
23
<PAGE> 27
where customer acceptance is required or the licensee requires significant
enhancements, we recognize license revenues only when our obligations under the
license agreement are completed and the software has been accepted. Accordingly,
for these contracts, payments received are deferred until our obligations under
the license agreement are completed. Maintenance and support revenues associated
with new product licenses and renewals are deferred and recognized ratably over
the contract period. Software services revenues and strategic consulting
revenues are recognized as such services are performed.
We also provide software to customers under long-term development contracts
that can require significant modification to adapt the software to the unique
specifications of the customer. If the service elements are considered essential
to the functionality of the software products, both the software product
revenues and service revenues are recognized using the completed contract method
as prescribed in accordance with the provisions of SOP 81-1, "Accounting for
Performance of Construction Type and Certain Production Type Contracts."
Accordingly, license and software enhancement revenues are recognized under the
completed contract method when all development, testing and installation is
completed and the purchaser formally accepts the software. Revenues and costs
are recognized upon completion of the contract and are based on the labor hours
incurred. Costs of software enhancements include the direct labor component of
programmer and consultant cost to perform the software enhancement or service as
well as the prorated share of technical support and overhead costs associated
with the enhancement and services. Anticipated losses, if any, on uncompleted
contracts are recognized in the period in which such losses are determined.
We sell our products through our direct sales forces in North America and
Europe. Our strategic relationships with third parties assist in generating
sales leads and provide cooperative marketing support. In addition, our
strategic consulting group not only develops its own client base but assists in
generating software sales leads.
Revenues from customers outside the United States represented 46% of our
total revenues for the year ended December 31, 1999. A significant portion of
our international revenues have been derived from sales of our strategic
consulting services and software products in the United Kingdom. We intend to
continue to expand our international operations and commit significant
management time and financial resources to developing our direct international
sales channels. International revenues may not, however, increase as a
percentage of total revenues.
We were formed as a limited liability company in April 1998. Accordingly,
until our initial public offering in January 2000, we were not subject to
federal and state income taxes, except for certain New York income taxes on
limited liability companies. During January 2000, the limited liability company
merged with and into Caminus Corporation, a Delaware C corporation formed in
September 1999. The adjustments to the income tax provision reflect the
additional tax provision we would have recorded had we been a C corporation for
the periods presented.
Due to our acquisitions and the respective dates of acquisition, and the
significant changes in our operations, the fluctuation of financial results,
including financial data expressed as a percentage of revenues for all periods,
did not necessarily provide a meaningful understanding of the expected future
results of our operations.
24
<PAGE> 28
RESULTS OF OPERATIONS
COMPARISON OF THE PERIOD FROM INCEPTION (APRIL 29, 1998) THROUGH DECEMBER 31,
1998 TO THE YEAR ENDED DECEMBER 31, 1999
The following table sets forth the consolidated financial information
expressed as a percentage of revenues for the period from inception (April 29,
1998) through December 31, 1998 and for the year ended December 31, 1999. The
consolidated financial information for the periods presented are derived from
the audited consolidated financial statements included elsewhere in this annual
report. The period from inception through December 31, 1998, which is
approximately eight months, is being compared to the year ended December 31,
1999. Accordingly, increases in revenues and expenses are primarily attributable
to the comparison of periods containing different numbers of months. The
discussion below outlines other trends in the business.
<TABLE>
<CAPTION>
INCEPTION THROUGH YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1999
------------------ -----------------
<S> <C> <C>
Revenues:
Licenses..................................... 38% 47%
Software services............................ 32 29
Strategic consulting......................... 30 24
---- ---
Total revenues............................ 100 100
Cost of revenues:
Cost of licenses............................. 2 3
Cost of software services.................... 24 17
Cost of strategic consulting................. 23 11
---- ---
Gross profit.............................. 51 69
Operating expenses:
Sales and marketing.......................... 5 15
Research and development..................... 12 15
General and administrative................... 33 29
Acquired in-process research and
development............................... 50 4
Amortization of intangible assets............ 57 32
Non-cash compensation expense................ -- 4
---- ---
Total operating expenses.................. 157 98
---- ---
Loss from operations........................... (106) (30)
Other income (expense)......................... 1 (1)
Provision for income taxes..................... -- (2)
Minority interest.............................. (3) --
---- ---
Net loss....................................... (108)% (32)%
==== ===
</TABLE>
Revenues
LICENSES. License revenues represented 38% and 47% of the total revenues
for the 1998 and 1999 periods, respectively, and increased $8.9 million, or
245%, from $3.6 million in the 1998 period to $12.5 million in 1999. This
increase was primarily attributable to increased demand for new and additional
licensings from new and existing customers, larger transaction sizes and the
expansion of our domestic and international sales personnel.
SOFTWARE SERVICES. Software services revenues represented 32% and 29% of
the total revenues for the 1998 and 1999 periods, respectively, and increased by
$4.7 million, or 153%, from $3.1 million in the 1998 period to $7.8 million in
1999. This
25
<PAGE> 29
increase was primarily attributable to the increased licensing activity
described above, which resulted in increased revenues from customer
implementations and maintenance contracts. The greater increase in license
revenues as compared to the increase in software services revenues was
attributable to the increase in sales of licenses whereby the revenues were
recognized upon the execution of the license agreement and delivery of the
software to the client. Typically, software services are provided subsequent to
the recognition of the license revenues.
STRATEGIC CONSULTING. Strategic consulting revenues represented 30% and
24% of the total revenues for the 1998 and 1999 periods, respectively, and
increased $3.7 million, or 126%, from $2.9 million in the 1998 period to $6.6
million in 1999 and are derived from the Caminus Limited subsidiary acquired in
May 1998. This increase was primarily attributable to an increased number of
engagements, which was partially attributable to an increase in the number of
our consultants.
Cost of Revenues
COST OF LICENSES. Cost of licenses primarily consists of the personnel
costs associated with completing product enhancements and the software license
costs associated with third-party software that is integrated into our products.
Cost of licenses as a percentage of revenues was 2% and 3% for the 1998 and 1999
periods, respectively, and increased $0.6 million, or 294%, from $0.2 million in
the 1998 period to $0.8 million in 1999. The increase was primarily attributable
to the costs of product enhancements performed by DC Systems subsequent to our
July 1999 acquisition of DC Systems.
COST OF SOFTWARE SERVICES. Cost of software services consists primarily of
personnel costs associated with providing implementations, support under
maintenance contracts and training through our professional service group. Cost
of software services as a percentage of revenues was 24% and 17% for the 1998
and 1999 periods, respectively, and increased $2.4 million, or 106%, from $2.3
million in the 1998 period to $4.7 million in 1999. This increase was primarily
attributable to the increase in the number of implementations, training and
technical support personnel, and related recruiting expenses, to support the
growth of the implementations and the installed customer base. During 1999, we
established a dedicated customer support desk, which also required additional
personnel. We plan to continue expanding our implementation and support services
group and, accordingly, expect the dollar amount of our cost of software
implementation and support services to increase.
COST OF STRATEGIC CONSULTING. Cost of strategic consulting consists of
personnel costs incurred in providing professional consulting services. Cost of
strategic consulting as a percentage of revenues was 23% and 11% for the 1998
and 1999 periods, respectively, and increased $0.7 million, or 32%, from $2.2
million in the 1998 period to $2.9 million in 1999. This increase was
principally attributable to an increase in the number of our consultants, and
related recruiting expenses, to support the growth in revenues. We plan to
continue expanding our strategic consulting organization and expect these
expenses to increase.
Operating Expenses
SALES AND MARKETING. Sales and marketing expenses consist primarily of
sales and marketing personnel costs, promotional and travel expenses and
commissions. Sales and marketing expenses as a percentage of revenues was 5%
26
<PAGE> 30
and 15% for the 1998 and 1999 periods, respectively, and increased $3.6 million,
or 774%, from $0.5 million in the 1998 period to $4.1 million in 1999. This
increase was primarily due to an increase in headcount, recruiting expenses and
promotional and travel expenses associated with the hiring of additional sales
and marketing personnel to support the expansion of our domestic and
international sales organizations. We plan to continue expanding our sales and
marketing organization and expect our sales and marketing expenses to increase.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of personnel costs for product development personnel and other related
direct costs associated with the development of new products, the enhancement of
existing products, quality assurance and testing. Research and development
expenses as a percentage of revenues was 12% and 15% for the 1998 and 1999
periods, respectively, and increased $2.8 million, or 241%, from $1.2 million in
the 1998 period to $3.9 million in 1999. This increase was primarily due to an
increased hiring of personnel and to other expenses associated with the
development of new products and enhancements of existing products. We plan to
continue expanding our research and development organization and expect our
research and development expenses to increase.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of personnel costs of executive, financial, human resource and
information services personnel as well as facility costs and related office
expenses, management fees and outside professional fees. General and
administrative expenses as a percentage of revenues were 33% and 29% for the
1998 and 1999 periods, respectively, and increased $4.6 million, or 146%, from
$3.1 million in the 1998 period to $7.7 million in 1999. This increase was
primarily due to increased staffing required to support our expanded operations
in the United States and internationally and, to a lesser extent, increased
costs of outside professional services and management fees.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT. Acquired in-process research
and development as a percentage of revenues was 50% and 4% for the 1998 and 1999
periods, respectively, and was $4.8 million in the 1998 period and $1.0 million
in 1999. Acquired in-process research and development represents the fair value
of the in-process research and development acquired during the 1998 purchase of
Zai*Net and the 1999 purchase of DC Systems, respectively. In the opinion of
management, the acquired in-process research and development had not yet reached
technological feasibility and had no alternative future uses. Accordingly, such
amount was expensed on the date of acquisition. Zai*Net had two major projects
in progress at the time of the acquisition: power trading and scheduling; and
gas trading and scheduling. Development of power trading and scheduling
proceeded as anticipated in our year end appraisal and began generating revenues
this year consistent with our appraisal. Gas trading and scheduling projects
were more complex than anticipated. Therefore, we revised the original estimated
completion date of April 1999 to mid-1999 and further revised this estimate in
conjunction with the DC Systems acquisition in July 1999. In conjunction with
the acquisition of DC Systems, we postponed this project in order to evaluate
comparable products of DC Systems. DC Systems had one major project in progress
at the time of the acquisition. This project added functionality to Plant
Master, and we estimate to complete this project in 2000. We believe there have
been no significant changes to these estimates as of December 31, 1999. See
27
<PAGE> 31
note 3 of the Caminus Corporation financial statements for a discussion of the
calculation of acquired in-process research and development.
AMORTIZATION OF INTANGIBLE ASSETS. The amortization of the intangible
assets represents the amortization of goodwill, which is the excess of the
purchase price over the net assets acquired from the acquisitions of Zai*Net,
Caminus Limited, Positron and DC Systems, and other intangible assets.
Amortization of intangibles as a percentage of revenues was 57% and 32% for the
1998 and 1999 periods, respectively, and increased $3.1 million, or 56%, from
$5.5 million in the 1998 period to $8.6 million in 1999. The increase was
primarily attributable to our incurring amortization expense related to the 1998
acquisitions for a full year versus eight months in the 1998 period, and the
additional amortization expense related to the DC Systems acquisition in the
1999 period.
NON-CASH COMPENSATION EXPENSE. Non-cash compensation expense in 1999
primarily represents the issuance in November 1999 of an aggregate 57,486 shares
of common stock for no cash consideration to three employees in connection with
our acquisition of Positron.
Loss From Operations
As a result of the variances described above, operating loss decreased by
$2.4 million, or 24%, from $10.1 million in the 1998 period to $7.7 million in
1999. Operating expenses as a percentage of revenues was 157% and 98% for the
1998 and 1999 periods, respectively.
Adjusted EBITDA
Adjusted EBITDA as a percentage of revenues was 4% and 12% for the 1998 and
1999 periods, respectively. Adjusted EBITDA increased $2.9 million, or 827%,
from $0.4 million in the 1998 period to $3.3 million in 1999.
Provision for Income Taxes
Our provision for income taxes for 1999 was $0.6 million and related
primarily to foreign income taxes. Our provision for income taxes for the 1998
period related to state and local taxes and was not significant. If we had been
a C-corporation, our provision (benefit) for income taxes would have been $0.2
million for the 1998 and 1999 periods.
Minority Interest
Minority interest represents the earnings attributable to the 29% of
Zai*Net that we did not own during the 1998 period.
IPO expenses
As a result of our initial public offering in January 2000, certain events
occurred which required us to record significant charges in the quarter ended
March 31, 2000. These transactions include the earning of an option granted to
the former shareholders of Caminus Energy Limited, which resulted in a charge of
approximately $7.0 million including taxes, a payment of approximately $0.5
million for a special one-time bonus to the former shareholders of Caminus
Energy Limited, a payment of $1.3 million for a termination fee to GFI to cancel
its consulting and advisory agreement and the granting of shares and the
forgiveness of a loan to our President and Chief Executive Officer, which will
result in a charge of approximately $3.7 million.
28
<PAGE> 32
COMPARISON OF THE ZAI*NET (PREDECESSOR) YEAR ENDED DECEMBER 31, 1997 TO THE
PERIOD FROM INCEPTION THROUGH DECEMBER 31, 1998
The following table sets forth the consolidated financial information as a
percentage of revenues for the year ended December 31, 1997 of Zai*Net, our
predecessor, and for the period from our inception through December 31, 1998.
The consolidated financial information for us and Zai*Net is derived from the
audited consolidated financial statements included elsewhere in this annual
report. The period from inception though December 31, 1998 is approximately
eight months and includes the consolidated results of operations of Zai*Net and
Caminus Limited, which is being compared to Zai*Net for the year ended December
31, 1997. Accordingly, there are fluctuations within the revenues and expenses
which are primarily attributable to the disparity between the periods and the
bases of the companies. The discussion below outlines other trends in our
business.
<TABLE>
<CAPTION>
CAMINUS
----------------
ZAI*NET INCEPTION
(PREDECESSOR) (APRIL 29, 1998)
----------------- THROUGH
YEAR ENDED DECEMBER 31,
DECEMBER 31, 1997 1998
----------------- ----------------
<S> <C> <C>
Revenues:
Licenses...................................... 36% 38 %
Software services............................. 64 32
Strategic consulting.......................... -- 30
--- -----
Total revenues............................. 100 100
Cost of revenues:
Cost of licenses.............................. -- 2
Cost of software services..................... 32 24
Cost of strategic consulting.................. -- 23
--- -----
Gross profit............................... 68 51
Operating expenses:
Research and development...................... 29 12
Selling, general and administrative........... 39 38
Acquired in-process research and development.. -- 50
Amortization of intangible assets............. -- 57
--- -----
Total operating expenses................... 68 157
--- -----
Loss from operations............................ -- (106)
--- -----
Other income.................................... -- 1
Provision for income taxes...................... -- --
Minority interest............................... -- (3)
--- -----
Net income (loss)............................... --% (108)%
=== =====
</TABLE>
Revenues
LICENSE. License revenues represented 36% and 38% of the total revenues
for the 1997 and 1998 periods, respectively, and increased $2.1 million, or
139%, from $1.5 million in 1997 to $3.6 million in 1998. This increase was
primarily attributable to sales to new customers, additional sales to existing
customers and, to a lesser extent, from an increase in the number of our sales
personnel.
29
<PAGE> 33
SOFTWARE SERVICES. Software services revenues represented 64% and 32% of
the total revenues for the 1997 and 1998 periods, respectively, and increased
$0.4 million, or 16%, from $2.7 million in 1997 to $3.1 million in 1998. This
increase was primarily attributable to the increased licensing activity
described above, which resulted in increased revenues from customer
implementations and maintenance contracts. The greater increase in license
revenues as compared to the increase in software services revenues was
attributable to the disproportional timing of the recognition of the respective
revenues. During 1997 many of our sales of licenses had acceptance criteria and,
accordingly, license revenues were deferred and the recognition of such revenues
occurred during 1998 when we completed our obligations under the license
agreement and the software had been accepted. Software services revenues were
recognized ratably over the implementation as such services were performed.
STRATEGIC CONSULTING. Strategic consulting revenues represented 0% and 30%
of the total revenues for the 1997 and 1998 periods, respectively, and were $2.9
million in 1998. There were no strategic consulting revenues in 1997 as the
predecessor company was not in that business.
Cost of Revenues
COST OF REVENUES. Cost of revenues during 1998 consisted primarily of
personnel costs associated with providing implementations, strategic consulting,
support under maintenance contracts and training through our professional
service group and the cost of licensing third-party software. Cost of revenues
during 1997 consisted primarily of personnel costs associated with providing
implementations, support under maintenance contracts and training through our
professional service group. Cost of licenses was insignificant for the
respective periods ended 1997. Cost of revenues as a percentage of revenues was
32% and 49% for the 1997 and 1998 periods, respectively, and increased $3.4
million, or 252%, from $1.3 million in 1997 to $4.7 million in 1998. This
increase was primarily attributable to the increase in the number of
implementation, training and technical support personnel, and related recruiting
expenses, to support the growth of the implementations and the installed
customer base. Additionally, there was no cost associated with the strategic
consulting business during 1997.
Operating Expenses
RESEARCH AND DEVELOPMENT. Research and development expenses as a
percentage of revenues were 29% and 12% for the 1997 and 1998 periods,
respectively, and was approximately $1.2 million in each of 1997 and 1998.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses as a percentage of revenues were 39% and 38% for the 1997 and 1998
periods, respectively, and increased $2.0 million, or 120%, from $1.6 million in
1997 to $3.6 million in 1998. This increase was primarily due to increased
staffing required to support our expanded operations in the United States and
internationally and, to a lesser extent, increased costs of outside professional
services and management fees.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT. Acquired in-process research
and development expenses as a percentage of revenues were 0% and 50% for the
1997 and 1998 periods, respectively, and $4.8 million during 1998
30
<PAGE> 34
represented the in-process research and development costs related to the
acquisition of Zai*Net. In the opinion of management and the third-party
appraiser, the acquired in-process research and development had not yet reached
technological feasibility and had no alternative future uses. See note 3 of the
Caminus Corporation financial statements for a discussion of the calculation of
acquired in-process research and development.
AMORTIZATION OF INTANGIBLE ASSETS. The amortization of the intangible
assets represents the amortization of goodwill, which is the excess of the
purchase price over the net assets acquired from the acquisitions of Zai*Net,
Caminus Limited and Positron, the amortization of intangible assets and the
write-off of the value of the SS&C Technologies, Inc. distribution agreement. As
of December 31, 1998, we had not sold any of the SS&C products acquired under
the distribution agreement. Further, we do not have an active plan to sell the
software, which was acquired pursuant to the terms of the distribution
agreement. Because we have not resold any SS&C software, nor do we have a formal
plan in place to resell this software, the total guaranteed minimum payments to
SS&C as stipulated in the distribution agreement have been recorded as a charge
in the statement of operations. For a discussion of the SS&C distribution
agreement, see note 13 of the Caminus Corporation financial statements.
Amortization of intangible assets as a percentage of revenues was 0% and 57% for
the 1997 and 1998 periods, respectively, and was $5.5 million in 1998. There was
no intangible asset amortization in 1997.
Loss From Operations
As a result of the write-off of the acquired in-process research and
development and the amortization of intangible assets during 1998, operating
loss increased from $0.0 million in 1997 to $10.1 million in 1998. Operating
expenses as a percentage of revenues were 68% and 157% for the 1997 and 1998
periods, respectively.
Adjusted EBITDA
Adjusted EBITDA as a percentage of revenues was 3% and 4% for the 1997 and
1998 periods, respectively. Adjusted EBITDA increased $0.2 million, or 199%, to
$0.4 million in 1998.
Minority Interest
Minority interest in 1998 represents the earnings attributable to the 29%
of Zai*Net that we did not own.
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following tables represent certain unaudited consolidated statement of
operations information for each quarter in the seven quarters ended December 31,
1999, as well as such information expressed as a percentage of total revenues
for the periods indicated. The information for the seven quarters ended December
31, 1999 was derived from unaudited financial statements and has been prepared
on the same basis as our audited consolidated financial statements and, in the
opinion of management, includes all adjustments, which consist of normal
recurring adjustments, that we consider necessary for the fair presentation of
such information when read in conjunction with our audited consolidated
financial
31
<PAGE> 35
statements and notes thereto, appearing elsewhere in this annual report. Due to
the acquisitions completed during 1998 and the significant changes in our
operations, the comparison of fluctuations for these time periods would not
provide a meaningful understanding of our on-going operations. We believe
quarter-to-quarter comparisons of financial results should not be relied upon as
an indication of future performance, and operating results may fluctuate from
quarter to quarter in the future. See "Certain Factors That May Affect Our
Business" and the financial statements contained elsewhere in this annual
report. We expect our results of operations will fluctuate and the price of our
common stock could fall if quarterly results are lower than the expectation of
securities analysts.
From the date of our formation as a limited liability company through
December 31, 1999, we were not subject to federal and state income taxes, except
for certain New York income taxes on limited liability companies. The amounts in
the line item of the statement of operations and other data table below titled
"Pro forma net income (loss)" reflect the additional tax provision that we would
have recorded had we been a C corporation for the periods presented.
32
<PAGE> 36
<TABLE>
<CAPTION>
CAMINUS
-----------------------------------------------------------------------------------------------------
QUARTER ENDED
-----------------------------------------------------------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1998 1998 1998 1999 1999 1999 1999
----------- ------------- ------------ ----------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Licenses................ $ 916,015 $ 1,009,842 $ 1,713,286 $ 1,776,579 $ 2,518,746 $ 3,793,296 $ 4,449,996
Software services....... 676,000 1,205,417 1,209,341 1,949,373 2,057,217 1,672,923 2,136,367
Strategic consulting.... 855,768 864,782 1,175,552 1,509,504 1,430,558 1,817,363 1,798,731
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenues........ 2,447,783 3,080,041 4,098,179 5,235,456 6,006,521 7,283,582 8,385,094
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit............. 1,369,971 1,485,264 2,085,750 3,654,117 4,052,222 4,966,777 5,851,411
Operating expenses....... 4,760,914 2,584,088 7,729,349 4,810,067 5,369,897 8,274,752 7,805,664
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating loss........... (3,390,943) (1,098,824) (5,643,599) (1,155,950) (1,317,675) (3,307,975) (1,954,253)
Other income (expense),
net..................... 25,438 31,097 40,374 3,247 (54,949) (75,154) (100,460)
Provision (benefit) for
income taxes............ 44,511 12,778 (21,554) 73,245 66,323 194,726 311,472
Minority interest........ (98,917) (91,002) (109,077) -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net loss................. $(3,508,933) $(1,171,507) $(5,690,748) $(1,225,948) $(1,438,947) $(3,577,855) $(2,366,185)
=========== =========== =========== =========== =========== =========== ===========
Pro forma net loss....... $(3,405,511) $(1,139,160) $(5,614,558) $(1,442,079) $(1,470,668) $(3,468,018) $(1,392,089)
=========== =========== =========== =========== =========== =========== ===========
Basic and diluted net
loss per common share... $(0.50) $(0.16) $(0.75) $(0.15) $(0.18) $(0.43) $(0.26)
Pro forma basic and
diluted net loss per
common share............ $(0.48) $(0.16) $(0.74) $(0.18) $(0.18) $(0.42) $(0.15)
Weighted average
shares -- basic and
diluted................. 7,074,526 7,309,717 7,604,362 7,966,928 7,993,157 8,296,539 9,274,954
</TABLE>
<TABLE>
<CAPTION>
CAMINUS
----------------------------------------------------------------------------------------------
QUARTER ENDED
----------------------------------------------------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1998 1998 1998 1999 1999 1999 1999
-------- ------------- ------------ --------- --------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Licenses............... 37% 33% 42% 34% 42% 52% 53%
Software services...... 28 39 29 37 34 23 25
Strategic consulting... 35 28 29 29 24 25 22
---- --- ---- --- --- --- ---
Total revenues....... 100 100 100 100 100 100 100
---- --- ---- --- --- --- ---
Gross profit............. 56 48 51 70 67 68 70
Operating expenses....... 194 84 189 92 89 114 93
---- --- ---- --- --- --- ---
Operating income
(loss)................. (138) (36) (138) (22) (22) (45) (23)
Other income (expense),
net.................... 1 1 1 -- (1) (1) (1)
Provision (benefit) for
income taxes........... 2 -- (1) 1 1 3 4
Minority interest........ (4) (3) (3) -- -- -- --
---- --- ---- --- --- --- ---
Net loss................. (143)% (38)% (139)% (23)% (24)% (49)% (28)%
==== === ==== === === === ===
Pro forma net loss....... (139)% (37)% (137)% (28)% (24)% (48)% (17)%
==== === ==== === === === ===
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
In February 2000, we closed the initial public offering of 5,027,800 shares
of our common stock, realizing net proceeds from the offering of approximately
$59.5 million.
Cash and cash equivalents as of December 31, 1999 were approximately $0.7
million, a decrease of approximately $2.1 million from December 31, 1998. Our
cash flow used in operating activities is primarily affected by, but not limited
to, cash received from customers, cash paid to compensate employees, cash paid
for professional fees, cash paid for the leasing of real estate and equipment
and cash paid to third party software licensors. We prepare our cash flow
statement using
33
<PAGE> 37
the indirect method which reconciles net income to cash used in operating
activities. Therefore, the following discussion explains the significant items
which impact the reconciliation of net income to cash flow from operating
activities. The explanations should be read in conjunction with our consolidated
statements of cash flow appearing elsewhere in this annual report. Net cash used
in operating activities for the year ended December 31, 1999 was approximately
$1.9 million. Net cash used in operating activities primarily resulted from our
net loss of $8.6 million, an increase in accounts receivable and prepaid
expenses of $4.0 million and $0.9 million, respectively, and a decrease in
deferred revenue of $2.6 million. This was partially offset by depreciation and
amortization of $9.0 million, acquired in-process research and development
write-offs of $1.0 million, non-cash compensation expense of $1.0 million and an
increase in accrued liabilities of $2.8 million. The increase in accounts
receivable was primarily attributable to the growth of our business. The
increase in accrued liabilities and prepaid expenses was primarily related to
professional fees associated with certain costs of our initial public offering.
Additionally, the increase in accrued liabilities was attributable to the
increase in accrued bonuses. Deferred revenues decreased approximately $2.6
million during the year ended December 31, 1999 primarily due to a decrease in
deferred license revenues, partially offset by an increase in deferred
maintenance revenues. Deferred license revenues decreased primarily due to
completion of our obligations under certain license agreements and the
acceptance of the software by the customers. Accordingly, certain license
revenues, which were deferred at December 31, 1998, were recognized during the
year ended December 31, 1999. During 1999, we modified our standard license
agreement by removing all acceptance criteria. As a result, our current license
agreements generally allow for the recognition of revenues upon the execution
and delivery of the software to the customer. Deferred maintenance revenues
increased primarily due to a change in billing practice, where most customers
are now invoiced on an annual or quarterly basis instead of a monthly basis.
Our cash flow used in investing activities is primarily affected by, but
not limited to, net cash paid to acquire businesses and cash paid for capital
expenditures. The discussions appearing below should be read in conjunction with
our consolidated statements of cash flow appearing elsewhere in this annual
report. Net cash used in investing activities during the year ended December 31,
1999 was approximately $11.1 million and resulted primarily from the purchase of
DC Systems for $9.9 million, net of cash acquired, and $1.2 million in capital
expenditures for computer and communications equipment, purchased software,
office equipment, furniture, fixtures and leasehold improvements.
Our cash flow provided by financing activities is primarily affected by,
but not limited to, net cash received from investors, net cash received under
borrowings from a credit facility, cash paid to affiliates and stockholders
under contractual obligations, and cash distributions paid to stockholders. The
discussions appearing below should be read in conjunction with our consolidated
statements of cash flow appearing elsewhere in this annual report. Net cash
provided by financing activities during the year ended December 31, 1999 was
approximately $11.0 million. During the year ended December 31, 1999, financing
activities provided cash of approximately $12.3 million from the sale of equity,
$3.0 million from borrowings under a credit agreement entered into in June with
Fleet Bank and approximately $1.8 million in subscriptions received. These funds
were used for the payment of the purchase price for DC Systems, an earnout to
the former owners of Zai*Net of
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$2.2 million, to repurchase an equity interest in us held by SS&C Technologies,
Inc. for $0.3 million and to pay the $1.7 million due under the distributor
agreement with SS&C and $0.3 million distribution to members for taxes.
On June 23, 1999, we entered into a credit agreement with Fleet Bank which
provided for total borrowings of up to $5.0 million under two facilities, a
revolving loan and a working capital loan. The revolving loan provided for
borrowings of up to $2.5 million and the working capital loan provided for
borrowings that were limited to 85% of eligible accounts receivable, less $0.5
million, which in the aggregate were not allowed to exceed $2.5 million. The
loans under this agreement bore interest either at the bank's reference rate,
which is generally equivalent to the published prime rate, or LIBOR plus an
applicable margin between 2.5% and 3.0%. The credit agreement required
maintenance of customary financial ratios. In February 2000, the then
outstanding balance was paid from the proceeds of our initial public offering
and our existing credit agreement was terminated.
We have historically funded our operations and acquisitions primarily from
the proceeds of equity sales and borrowings under our credit facility. We expect
that our working capital needs will continue to grow as we execute our growth
strategy. We believe the net proceeds from our initial public offering and cash
to be generated from operations will be sufficient to meet our expenditure
requirements for at least the next twelve months.
YEAR 2000 COMPLIANCE
We have not experienced any problems with our computer systems relating to
the inability of such systems to recognize appropriate dates associated with the
year 2000. We are also not aware of any material year 2000 problems with our
clients or vendors. Accordingly, we do not anticipate incurring material
expenses or experiencing any material operational disruptions as a result of any
year 2000 problems.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Financial
Accounting Standards Statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which is effective for the Company beginning in 2001.
FAS 133 establishes accounting and reporting standards for derivative financial
instruments and hedging activities related to those instruments, as well as
other hedging activities. Because we do not currently hold any derivative
financial instruments and do not engage in hedging activities, we expect the
adoption of FAS 133 will not have a material impact on our consolidated
financial condition, results of operations or cash flows.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition, "SAB 101", which provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements filed with the Securities and Exchange Commission. SAB 101 outlines
the basic criteria that must be met to recognize revenue and provides guidance
for disclosures related to revenue recognition policies. Management believes
that its revenue recognition policies and practices are in conformance with SAB
101.
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CERTAIN FACTORS THAT MAY AFFECT OUR BUSINESS
WE HAVE A LIMITED HISTORY AS A COMBINED OPERATING ENTITY THAT PROVIDES BOTH
SOFTWARE SOLUTIONS AND STRATEGIC CONSULTING SERVICES, AND WE MAY FACE
DIFFICULTIES ENCOUNTERED BY RECENTLY COMBINED COMPANIES THAT OPERATE IN
DIFFERENT GEOGRAPHIC REGIONS AND PROVIDE VARIED PRODUCTS AND SERVICES
In April 1998, we were organized as a limited liability company for the
purpose of acquiring Zai*Net Software, L.P., a software company based in New
York, and Caminus Limited, a strategic consulting practice based in Cambridge,
England. Accordingly, we have a limited history of combined operations and may
face difficulties encountered by recently combined companies that operate in
different geographic regions and provide varied products and services,
especially in rapidly evolving markets such as the energy market. Please see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview" for detailed information on our limited operating
history.
WE EXPECT OUR RESULTS OF OPERATIONS TO FLUCTUATE AND THE PRICE OF OUR COMMON
STOCK COULD FALL IF QUARTERLY RESULTS ARE LOWER THAN THE EXPECTATIONS OF
SECURITIES ANALYSTS
Our revenues and results of operations have fluctuated in the past and may
vary from quarter to quarter in the future. If our quarterly results fall below
the expectations of securities analysts, the price of our common stock could
fall. A number of factors, many of which are outside our control, may cause
variations in our results of operations, including:
- demand for our software solutions and strategic consulting services
- the timing and recognition of sales of our products and services
- unexpected delays in developing and introducing new products and services
- increased expenses, whether related to sales and marketing, product
development or administration
- changes in the rapidly evolving market for products and services in the
energy industry
- the mix of revenues derived from products and services
- the hiring, retention and utilization of personnel
- the mix of domestic and international revenues
- costs related to possible acquisitions of technologies or businesses
- general economic factors
- changes in the revenue recognition policies required by generally
accepted accounting principles
Accordingly, we believe that quarter-to-quarter comparisons of our results
of operations are not necessarily meaningful. You should not rely on the results
of one quarter as an indication of our future performance.
A substantial portion of our operating expenses is related to personnel
costs, marketing programs and overhead, which cannot be adjusted quickly and are
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therefore relatively fixed in the short term. Our operating expense levels are
based, in significant part, on our expectations of future revenues on a
quarterly basis. As a result, if revenues for a particular quarter are below our
expectations, we may not be able to reduce operating expenses proportionately
for that quarter, and therefore this revenue shortfall would have a
disproportionately negative effect on our operating results and cash flows for
that quarter.
In addition, we plan to increase our operating expenses to expand our sales
and marketing operations, fund greater levels of research and development,
broaden strategic consulting and software services and improve our operational
and financial systems. If our revenues do not increase as quickly as these
expenses, our results of operations and cash flows may suffer and our stock
price may decline.
OUR LENGTHY SALES CYCLE MAKES IT DIFFICULT TO PREDICT OUR QUARTERLY RESULTS AND
THE PRICE OF OUR COMMON STOCK COULD FALL IF QUARTERLY RESULTS ARE LOWER THAN THE
EXPECTATIONS OF SECURITIES ANALYSTS
Our long sales cycle, which can range from five to six months or more,
makes it difficult to predict the quarter in which sales may occur or revenues
may be recognized. Our sales cycle varies depending on the size and type of
customer considering a purchase and whether we have conducted business with a
potential customer in the past. These potential customers frequently need to
obtain internal approvals from multiple decision makers prior to making purchase
decisions. Delays in sales could cause significant variability in our revenues
and results of operations for any particular period. If our quarterly results
and cash flows fall below the expectations of securities analysts, our stock
price may decline.
WE MAY NOT BE ABLE TO OBTAIN OR SUSTAIN MARKET ACCEPTANCE FOR OUR PRODUCTS AND
SERVICES
Because the market for products and services in the energy industry is
rapidly evolving, a viable market for our products and services may not be
sustainable. We may not be able to continue to develop products and services
that serve the changing needs of energy market participants in this evolving
market. Organizations that have already invested substantial resources in
proprietary or other third-party solutions for buying, selling or trading energy
assets may be reluctant or slow to adopt a new approach that may replace, limit
or compete with their existing systems. These factors could inhibit the market's
acceptance of our products and services in particular.
THE MARKET FOR PRODUCTS AND SERVICES IN THE ENERGY INDUSTRY IS COMPETITIVE, AND
WE EXPECT COMPETITION TO INTENSIFY IN THE FUTURE; WE MAY NOT BE ABLE TO COMPETE
SUCCESSFULLY
The market for products and services in the energy industry is competitive,
and we expect competition to intensify in the future as participants in the
energy industry try to respond to increasing deregulation. Our primary
competition currently comes from internal development efforts of energy
participants for internal use or for sale to other market participants, vendors
of software solutions and providers of strategic consulting services.
Some of our current and many of our potential competitors have or may have
longer operating histories and significantly greater financial, technical,
marketing
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and other resources than we do, and may be able to respond more quickly than we
can to new or changing opportunities, technologies and customer requirements.
Also, our current and potential competitors have or may have greater name
recognition and more extensive customer bases that they can leverage to gain
market share. These competitors may be able to undertake more extensive
promotional activities, adopt more aggressive pricing policies and offer more
attractive terms to purchasers than we can. In addition, our current and
potential competitors have established or may establish cooperative
relationships among themselves or with third parties to enhance their products
and services and expand their markets. Accordingly, new competitors or alliances
among competitors may emerge and rapidly acquire significant market share.
Increased competition could result in price reductions, reduced revenues and the
loss of customers, which could result in increased losses or reduced profits.
WE MAY NOT BE ABLE TO SUFFICIENTLY EXPAND OUR SALES AND DISTRIBUTION
CAPABILITIES AND STRATEGIC CONSULTING SERVICES IN ORDER TO INCREASE MARKET
AWARENESS OF OUR PRODUCTS AND SERVICES AND INCREASE OUR REVENUES
We must expand our direct sales operations and strategic consulting
services in order to increase market awareness of our products and services and
generate increased revenues. We require sales and consulting personnel with
significant subject matter expertise in the energy industry. We may not be able
to hire a sufficient number of sales and consulting personnel in a timely,
cost-effective manner. Moreover, all of our strategic consultants are currently
based in Europe, and we may encounter significant start-up costs in connection
with establishing strategic consulting operations in the United States.
OUR REVENUES ARE SUBSTANTIALLY DEPENDENT UPON SALES OF A LIMITED NUMBER OF
SOFTWARE PRODUCTS AND RELATED SERVICES
Factors adversely affecting the pricing of or demand for our products and
services, such as competition or technological change, could have a material
adverse effect on our business, financial condition and results of operations.
To date, a significant percentage of our revenues has come from licensing our
Zai*Net Manager, Zai*Net Risk Analytics, Zai*Net Physicals and Zai*Net Models
software and providing related services. We currently expect that these
activities will account for a significant percentage of our revenues for the
foreseeable future. Our future financial performance will depend, in large part,
on the continued market acceptance of our existing products and the successful
development, introduction and customer acceptance of new or enhanced versions of
our software products and services, including the end-to-end energy software
solution that we are developing with ABB Energy Information Systems. We may not
be successful in developing and marketing our Zai*Net Manager, Zai*Net Risk
Analytics, Zai*Net Physicals and Zai*Net Models software.
WE MAY NOT BE ABLE TO MANAGE OUR EXPANDING OPERATIONS
Rapid growth in numerous geographic regions has placed and will continue to
place a significant demand on our management, financial and operational
resources. Such demands have already required us and may require us in the
future to engage third-party resources over which we have limited control to
assist us in implementing our growth strategy. We have expanded our operations
rapidly and
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currently have three offices in the United States and two in the United Kingdom.
We intend to continue to expand our U.S. and international operations in the
foreseeable future to pursue existing and potential market opportunities and to
support our growing customer base. In order to manage growth effectively, we
must implement and improve our operational systems, procedures and controls on a
timely and cost-effective basis. If we fail to improve our operational systems
in a timely and cost-effective manner, we could experience customer
dissatisfaction, cost inefficiencies and lost revenue opportunities.
WE FACE RISKS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS AND PLANS FOR
EXPANSION
One of our key strategies is to continue to expand our international
operations and sales and marketing efforts. If we are unsuccessful, we may lose
customers that operate globally, which will adversely affect our results of
operations. In addition, international operations are subject to inherent risks
that may limit our international expansion or cause us to incur significant
costs to compete effectively in international markets. These include:
- the need to comply with the laws and regulations of different countries
- difficulties in enforcing contractual obligations and intellectual
property rights in some countries
- difficulties and costs of staffing and managing foreign operations
- fluctuations in currency exchange rates and the imposition of exchange or
price controls or other restrictions on the conversion of foreign
currencies
- difficulties in collecting international accounts receivable and the
existence of potentially longer payment cycles
- language and cultural differences
- local economic conditions in foreign markets
WE MAY NOT BE ABLE TO INTEGRATE THE OPERATIONS FROM OUR RECENT AND FUTURE
ACQUISITIONS
As part of our business strategy, we have completed and expect to enter
into additional business combinations and acquisitions, such as our July 1999
acquisition of DC Systems.
Acquisition transactions are accompanied by a number of risks, including,
among other things:
- the difficulty of assimilating the operations and personnel of the
acquired companies
- the potential disruption of our ongoing business
- expenses associated with the transactions, including expenses associated
with amortization of acquired intangible assets
- the potential unknown liabilities associated with acquired businesses
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IF NEW MEMBERS OF OUR SENIOR MANAGEMENT ARE NOT SUCCESSFULLY INTEGRATED WITH OUR
MANAGEMENT TEAM, WE MAY NOT BE ABLE TO SUCCESSFULLY MANAGE OUR BUSINESS
Several members of our senior management recently joined us and have not
previously worked together. David M. Stoner, our chief executive officer, joined
us in October 1998, and Mark A. Herman, our chief financial officer, joined us
in February 1999. In addition, two of our founders, Nigel L. Evans, our senior
vice president and head of European operations, and Brian J. Scanlan, our chief
technology officer, have been working together only since our acquisitions of
Caminus Limited and Zai*Net Software, L.P. in May 1998. As a result, our senior
managers are still becoming integrated as a management team and may not work
effectively as a team to successfully manage our business.
IF WE FAIL TO ADAPT TO RAPID CHANGES IN THE ENERGY MARKET, OUR EXISTING PRODUCTS
COULD BECOME OBSOLETE
The market for our products is marked by rapid changes in the regulatory
environment, new product introductions and related technology enhancements,
uncertain product life cycles, changes in customer demands and evolving industry
standards. We may not be able to successfully develop and market new products or
product enhancements that comply with present or emerging technology standards.
Also, any new regulation or technology standard could increase our cost of doing
business.
New products based on new technologies or new industry standards could
render our existing products obsolete and unmarketable. To succeed, we will need
to enhance our current products and develop new products on a timely basis to
keep pace with developments related to the energy market and to satisfy the
increasingly sophisticated requirements of customers. Software addressing the
trading and management of energy assets is complex and can be expensive to
develop, and new products and product enhancements can require long development
and testing periods. Any delays in developing and releasing enhanced or new
products could cause us to lose revenue opportunities and customers and could
increase the cost of doing business.
OUR SOFTWARE PRODUCTS MAY CONTAIN ERRORS OR DEFECTS THAT COULD RESULT IN LOST
REVENUES, DELAYED OR LIMITED MARKET ACCEPTANCE OR PRODUCT LIABILITY CLAIMS WITH
SUBSTANTIAL LITIGATION COSTS
Complex software products such as ours often contain errors or defects,
particularly when first introduced or when new versions or enhancements are
released. Despite internal testing and testing by customers, our current and
future products may contain serious defects. Serious defects or errors could
result in lost revenues or a delay in market acceptance.
Because our customers use our products for critical business applications,
errors, defects or other performance problems could result in damage to our
customers. They could seek significant compensation for losses from us. Although
our license agreements typically contain provisions designed to limit our
exposure to product liability claims, existing or future laws or unfavorable
judicial decisions could negate these limitations. Even if not successful, a
product liability claim brought against us would likely be costly and
time-consuming, which would require our management to spend time defending the
claim rather than operating our business.
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UNAUTHORIZED PARTIES MAY OBTAIN AND PROFIT FROM OUR SOFTWARE, DOCUMENTATION AND
OTHER PROPRIETARY INFORMATION
We seek to protect the source code for our proprietary software both as a
trade secret and as a copyrighted work. Our policy is to enter into
confidentiality agreements with our employees, consultants, vendors and
customers and to control access to our software, documentation and other
proprietary information.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or obtain and use information that
we regard as proprietary. Policing unauthorized use of our products is
difficult, and while we are unable to determine the extent to which piracy of
our software products exists, such piracy can be expected to be a persistent
problem, particularly in international markets where the laws of foreign
countries are not as protective as they are in the U.S. Our trade secrets or
confidentiality agreements may not provide meaningful protection of our
proprietary information. We are aware of competitors which offer similar
functionality in their products. We can provide no assurance that others will
not independently develop similar technologies or duplicate any technology
developed by us.
We rely on outside licensors for technology that is incorporated into and
is necessary for the operation of our products. Our success will depend in part
on our continued ability to have access to such technologies that are or may
become important to the functionality of our products.
OTHERS MAY CLAIM THAT WE INFRINGE ON THEIR INTELLECTUAL PROPERTY RIGHTS, WHICH
MAY LIMIT OUR ABILITY TO CONDUCT OUR BUSINESS
As the number of software products in the energy industry increases and the
functionality of products from different software developers further overlaps,
software developers and publishers may increasingly become subject to claims of
infringement or misappropriation of the intellectual property or proprietary
rights of others. Although we are not currently subject to any claims of
infringement, third parties may assert infringement or misappropriation claims
against us in the future with respect to current or future products. Further, we
may be subject to additional risks as we enter into transactions in countries
where intellectual property laws are not well developed or are poorly enforced.
Legal protections of our rights may be ineffective in such countries, and
technology developed in such countries may not be protectable in jurisdictions
where protection is ordinarily available. In addition, we are obligated to
indemnify customers against claims that we infringe the intellectual property
rights of third parties. The results of any intellectual property litigation to
which we might become a party may force us to do one or more of the following:
- cease selling or using products or services that incorporate the
challenged intellectual property
- obtain a license, which may not be available on reasonable terms or at
all, to sell or use the relevant technology
- redesign those products or services to avoid infringement
- refund license fees that we have previously received
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OUR BUSINESS MAY BE HARMED IF WE LOSE THE SERVICES OF DAVID STONER, BRIAN
SCANLAN, NIGEL EVANS, RICHARD COURON OR OTHER KEY EMPLOYEES
Our success depends largely on the skills, experience and performance of
key employees, particularly David Stoner, our chief executive officer, Brian
Scanlan and Nigel Evans, two of our founders, and Richard Couron, the founder of
DC Systems. These employees have significant expertise in the energy industry
and would be difficult to replace. Our employment agreements with Messrs. Stoner
and Scanlan and Dr. Evans expire in 2001. If we lose one or more of our key
employees, our business could be harmed.
IF WE FAIL TO CONTINUE TO ATTRACT AND RETAIN PERSONNEL WITH SALES EXPERIENCE,
SOFTWARE DEVELOPMENT SKILLS AND SUBJECT MATTER EXPERTISE IN THE ENERGY MARKET,
OUR BUSINESS MAY BE HARMED
Our future success will depend in large part on our ability to continue
attracting and retaining highly skilled personnel, particularly salespeople,
software developers and consultants who are both experts in their particular
fields and have strong customer relationship skills. In particular, the number
of people with significant knowledge about evolving energy markets is limited.
Newly hired employees will require training and it will take time for them to
achieve full productivity. We face intense competition in recruiting and may not
be able to hire enough qualified individuals in the future, and newly hired
employees may not achieve necessary levels of productivity.
WE MAY NEED ADDITIONAL FINANCING WHICH COULD BE DIFFICULT TO OBTAIN AND WHICH
COULD DILUTE YOUR OWNERSHIP INTEREST OR THE VALUE OF YOUR SHARES
We intend to grow our business rapidly and may require significant external
financing in the future. Obtaining additional financing will be subject to a
number of factors, including:
- market conditions
- our operating performance
- investor sentiment, particularly with respect to the emerging energy
market
These factors may make the timing, amount, terms and conditions of
additional financing unattractive for us. If we are unable to raise capital to
fund our operations, we may not be able to successfully grow our business.
If we raise additional funds through the sale of equity or convertible debt
securities, your percentage ownership will be reduced. In addition, these
transactions may dilute the value of our outstanding stock. We may have to issue
securities that have rights, preferences and privileges senior to our common
stock.
OUR PERFORMANCE WILL DEPEND ON THE CONTINUED GROWTH IN DEMAND FOR ENERGY
PRODUCTS AND SERVICES
Our future success depends heavily on the continued growth in demand for
energy products and services, which is difficult to predict. If demand for
energy products and services does not continue to grow or grows more slowly than
expected, demand for our products and services will be reduced. Because a
substantial portion of our operating expenses is fixed in the short term, any
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unanticipated reduction in demand for our products and services would negatively
impact our operating results. Utilities and other businesses may be slow to
adapt to changes in the energy marketplace or be satisfied with existing
services and solutions. This would cause there to be less demand for our
products and services than we currently expect. The market for energy trading
software and solutions that address the deregulating energy industry is
relatively new, and potential customers may wait for widespread adoption of
products before making purchase commitments. Even if there is significant market
acceptance of products and services for the energy industry, we may incur
substantial expenses adapting our solutions to changing or emerging
technologies.
THE GLOBAL ENERGY INDUSTRY IS SUBJECT TO EXTENSIVE AND VARIED GOVERNMENTAL
REGULATIONS, AND OUR BUSINESS MAY BE ADVERSELY AFFECTED IF WE ARE UNABLE TO
SUCCESSFULLY DEVELOP PRODUCTS AND SERVICES THAT ADDRESS NUMEROUS AND RAPIDLY
CHANGING REGULATORY REGIMES
Although the global energy industry is becoming increasingly deregulated,
the energy industry, which includes utilities, producers, energy marketers,
processors, storage operators, distributors, marketers, pipelines and others, is
still subject to extensive and varied local, national and regional regulation.
If we are unable to design and develop software solutions and strategic
consulting services that address the numerous and changing regulatory
requirements, or fail to alter our products and services rapidly enough, our
customers or potential customers may not purchase our products and services.
OUR FINANCIAL SUCCESS IS CLOSELY LINKED TO THE HEALTH OF THE ENERGY INDUSTRY
We currently derive substantially all of our revenues from licensing our
software and providing strategic consulting services to participants in the
energy industry. Our customers include a number of organizations in the energy
industry, and the success of these customers is linked to the health of the
energy market. In addition, because of the capital expenditures required in
connection with investing in our products and services, we believe that demand
for our products and services could be disproportionately affected by
fluctuations, disruptions, instability or downturns in the energy market, which
may cause customers and potential customers to leave the industry or delay,
cancel or reduce any planned expenditures for our software products and related
strategic consulting services.
PROJECTIONS INCLUDED IN THIS ANNUAL REPORT RELATING TO THE GROWTH OF THE ENERGY
INDUSTRY ARE BASED ON ASSUMPTIONS THAT COULD TURN OUT TO BE INCORRECT AND ACTUAL
RESULTS COULD BE MATERIALLY DIFFERENT FROM THE PROJECTIONS
This annual report contains various data and projections related to
revenues generated by the market for products and services to the energy
industry. These projections include assumptions regarding the expected growth in
information technology spending by energy market participants. Actual results or
circumstances may be materially different from the projections. This could
reduce our revenues and adversely affect anticipated demand for our products and
services. These data and projections are inherently imprecise, and you should
not place undue reliance on them.
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OUR STOCK PRICE MAY BE VOLATILE
The market price of our common stock may fluctuate significantly in
response to the following factors, some of which are beyond our control:
- variations in quarterly operating results
- announcements, by us or our competitors, of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments
- additions or departures of key personnel
- future sales of common stock
- changes in financial estimates by securities analysts
- loss of a major customer
WE MAY INCUR SIGNIFICANT COSTS FROM CLASS ACTION LITIGATION
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
stock. Such volatility has been particularly common in technology companies. We
may in the future be the target of securities litigation. Securities litigation
could result in substantial costs and divert management's attention and
resources.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD PREVENT
OR DELAY A CHANGE IN CONTROL OF US
Certain provisions of our certificate of incorporation and by-laws may
discourage, delay or prevent a merger, acquisition or other change in control,
even if the change in control would be beneficial to stockholders. Any of these
provisions could reduce the market price of our common stock. These provisions
include:
- providing for a classified board of directors with staggered, three-year
terms
- limiting the persons who may call special meetings of stockholders
- prohibiting stockholder action by written consent
- establishing advance notice requirements for nominations for election to
the board of directors or for proposing matters that can be acted on by
stockholders at stockholder meetings
We are subject to the provisions of Section 203 of the General Corporation
Law of Delaware. Section 203 will prohibit us from engaging in certain business
combinations, unless the business combination is approved in a prescribed
manner. Accordingly, Section 203 may discourage, delay or prevent someone from
acquiring or merging with us.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates related primarily
to our revolving line of credit facility. We used part of the proceeds from our
initial public offering to repay and terminate our revolving line of credit
facility. Accordingly, we no longer have any significant interest rate exposure.
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We have no derivative financial instruments in our cash and cash
equivalents. We invest our cash and cash equivalents in investment-grade, highly
liquid investments, consisting of money market instruments and bank certificates
of deposit. We anticipate investing the net proceeds from our initial public
offering in similar investment-grade and highly liquid investments pending their
use as described in this prospectus.
For the year ended December 31, 1999, approximately 38% of our revenues and
24% of our expenses was denominated in British pounds. Historically, the effect
of fluctuations in currency exchange rates has not had a material impact on our
operations. As we expand our operations outside the United States, our exposure
to fluctuations in currency exchange rates could increase.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our financial statements and notes thereto and the reports of
PricewaterhouseCoopers LLP, independent accountants, are set forth in the Index
to Financial Statements at Item 14 and incorporated herein by this reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Our directors and executive officers and their respective ages and
positions as of March 15, 2000 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ---- --- -----------
<S> <C> <C>
David M. Stoner...................... 58 President, Chief Executive Officer and
Director
Nigel L. Evans....................... 46 Senior Vice President, Director of European
Operations and Director
Brian J. Scanlan..................... 37 Senior Vice President, Chief Technology
Officer and Director
Mark A. Herman....................... 39 Vice President, Chief Financial Officer,
Secretary and Treasurer
Lawrence D. Gilson................... 51 Chairman of the Board of Directors
Christopher S. Brothers.............. 34 Director
Anthony H. Bloom..................... 61 Director
Richard K. Landers................... 52 Director
</TABLE>
DAVID M. STONER has served as our President and Chief Executive Officer and
as a director since October 1998. From April 1997 to October 1998, Mr. Stoner
served as President and Chief Operating Officer at SS&C Technologies, Inc., a
provider of asset management software to the financial services industry. From
August 1995 to February 1997, Mr. Stoner was President and Chief Operating
Officer of The Dodge Group, Inc., a software company providing PC-based general
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ledger systems. From December 1987 to August 1995, Mr. Stoner served as
Executive Vice President, Worldwide Operations at Marcam Corporation, an
international provider of enterprise applications and services.
NIGEL L. EVANS has served as our Senior Vice President and Director of
European Operations and as a director since May 1998. From 1985 to May 1998, Dr.
Evans served as Chairman and Chief Executive Officer of Caminus Limited,
formerly known as Caminus Energy Limited.
BRIAN J. SCANLAN has served as our Senior Vice President and Chief
Technology Officer since January 1999 and as a director since May 1998. From May
1998 to December 1998, Mr. Scanlan served as President of Zai*Net Software, L.P.
and from 1987 to May 1998 served as President of Zai*Net Software, Inc. See
"Certain Relationships and Related Transactions."
MARK A. HERMAN has served as our Chief Financial Officer since February
1999. Mr. Herman worked at GT Interactive Software Corp., a publicly held
software company, as Corporate Controller from November 1994 to March 1996 and
as Vice President and Corporate Controller from March 1996 to February 1999.
Prior to 1994, Mr. Herman held various management positions at companies such as
Grand Union, Deloitte & Touche LLP and PricewaterhouseCoopers LLP.
LAWRENCE D. GILSON has served as chairman of our board of directors since
May 1998. Mr. Gilson is President of GFI and a founder of each GFI entity
beginning in 1995. He previously founded and was President of Venture
Associates, a leading energy industry consulting firm from 1985 to 1995. When he
and his partners sold Venture Associates to Arthur Andersen & Co. in a two-stage
transaction in 1990 and 1992, Mr. Gilson also became Worldwide Head of Arthur
Andersen's Utility Consulting Practice. Prior to founding Venture Associates,
Mr. Gilson served as Vice President for Corporate Development and Government
Affairs of Amtrak from 1979 to 1983. He is the board chair of Power Measurement
Ltd. and Statordyne LLC and a member of the board of Trace Holdings, LLC.
CHRISTOPHER S. BROTHERS has served as a director since May 1998. Mr.
Brothers is a Senior Vice President of Oaktree Capital Management, LLC. Prior to
joining Oaktree in 1996, Mr. Brothers worked at the New York headquarters of
Salomon Brothers Inc., where he served as a Vice President in the Mergers and
Acquisitions group. Prior to 1992, Mr. Brothers was a Manager in the Valuation
Services group of PricewaterhouseCoopers LLP. Mr. Brothers serves on the boards
of directors of Cherokee International LLC, National Mobile Television, Inc.,
Power Measurement, Ltd. and Trace Holdings, LLC.
ANTHONY H. BLOOM has served as a director since May 1998. Mr. Bloom is an
international investor now based in London. Prior to his relocation to London in
July 1988, he lived in South Africa where he was the Chairman and Chief
Executive of The Premier Group, a multi-billion dollar conglomerate involved in
agribusiness, retail and consumer products, and a member of the boards of
directors of Barclays Bank, Liberty Life Assurance and South African Breweries.
After moving to the United Kingdom in 1988, he served as a member of the board
of directors of RIT Capital Partners plc, the publicly traded, London-based
investment company chaired by Lord Rothschild, and as Deputy Chairman of
Sketchley plc. Mr. Bloom presently provides investment advice to RIT Capital
Partners and is Chairman of Cine-UK Ltd.
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<PAGE> 50
RICHARD K. LANDERS has served as a director since May 1998. Mr. Landers is
a principal of GFI and a founder of each GFI entity beginning in 1995. From 1986
to 1995, he was a partner of Venture Associates and of Arthur Andersen & Co.
following that firm's acquisition of Venture Associates. From 1979 to 1986, Mr.
Landers held senior planning and strategy positions in Los Angeles and
Washington, D.C. with Southern California Gas Company and its holding company,
Pacific Enterprises. Before joining Southern California Gas, Mr. Landers served
as a foreign service officer in the U.S. State Department with special
responsibilities for international energy matters.
Each executive officer serves at the discretion of our board of directors
and holds office until his successor is elected and qualified or until his
earlier resignation or removal. There are no family relationships among any of
our directors or executive officers, except that Messrs. Gilson and Stoner are
brothers-in-law.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Because our common stock was not registered pursuant to Section 12 of the
Securities Exchange Act of 1934 until January 2000, our directors, officers and
10% stockholders were not required to comply with Section 16(a) of the Exchange
Act during fiscal year 1999.
ITEM 11. EXECUTIVE COMPENSATION
DIRECTOR COMPENSATION
We reimburse directors for reasonable out-of-pocket expenses incurred in
attending meetings of the board of directors and any meetings of its committees.
Each non-employee director is paid $1,500 for attendance at each meeting of the
board of directors or for each telephonic meeting of the board in which he
participates. Each non-employee director is further entitled to $1,500 for each
meeting of a committee of the board attended by the director which is held on a
day other than the day of, or the day before or after, the date of any meeting
of the full board of directors. Other directors are not entitled to compensation
in their capacities as directors. We may, in our discretion, grant stock options
and other equity awards to our non-employee directors from time to time under
our stock plans.
On January 28, 2000, each of our non-employee directors received an option
under our 1999 stock incentive plan to purchase 7,143 shares of common stock at
an exercise price of $16.00 per share. Each option cumulatively vests as to 25%
of the underlying shares on the first anniversary of the date of grant and
monthly thereafter for an additional three years.
EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid or accrued for
the years ended December 31, 1998 and 1999 to our:
- president and chief executive officer; and
- our three other executive officers at year-end.
We refer to all of these officers collectively as our Named Executive Officers.
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<PAGE> 51
The total compensation paid or accrued below includes compensation paid or
accrued by Caminus LLC, as well as Zai*Net and Caminus Limited. In accordance
with the rules of the Securities and Exchange Commission, the compensation set
forth in the table below does not include medical, group life or other benefits
which are available to all of our salaried employees, and perquisites and other
benefits, securities or property which do not exceed the lesser of $50,000 or
10% of the person's salary and bonus shown in the table. In the table below,
columns required by the regulations of the Securities and Exchange Commission
have been omitted where no information was required to be disclosed under those
columns. The compensation listed below in the "All Other Compensation" column
represents Caminus Limited's contribution to Dr. Evans' personal pension plan.
Dr. Evans' compensation in U.S. dollars is based on an exchange ratio of
approximately $1.65 and $1.62 per L1 as of December 31, 1998 and 1999,
respectively.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
-------------------- AWARDS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS SECURITIES UNDERLYING OPTIONS COMPENSATION
- --------------------------- ---- --------- --------- ----------------------------- ------------
<S> <C> <C> <C> <C> <C>
David M. Stoner............ 1999 $250,000 $125,000 -- --
President and Chief 1998 42,242 25,000 -- --
Executive Officer
Nigel L. Evans............. 1999 330,000 162,000 -- --
Senior Vice President and 1998 307,450 124,278 -- $21,522
Director of European
Operations
Brian J. Scanlan........... 1999 162,500 32,542 -- --
Senior Vice President and 1998 150,000 46,042 -- --
Chief Technology Officer
Mark A. Herman............. 1999 140,674 42,202 54,040 --
Vice President and Chief
Financial Officer
</TABLE>
OPTION GRANTS IN LAST FISCAL YEAR. The following table sets forth grants
of stock options to our Named Executive Officers for the year ended December 31,
1999. We have never granted any stock appreciation rights. The exercise price
per share was below the fair market value of the common stock on the date of
grant as determined by the board of directors. The potential realizable value is
calculated based on the ten-year term of the option. It is calculated assuming
that the fair market value of common stock on the date of grant appreciates at
the indicated rate compounded annually for the entire term of the option and
that the option is exercised and sold on the last day of its term for the
appreciated stock price. These numbers are calculated based on the requirements
of the Securities and Exchange Commission and do not reflect our estimate of
future stock price growth. Mr. Herman's option vested and became exercisable as
to 25% of the shares on February 8, 2000 and will vest as to 75% of the shares
in 36 equal monthly installments on the 8th of each month commencing in March
2000.
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<PAGE> 52
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------------------
PERCENT OF POTENTIAL REALIZABLE
TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS EXERCISE ANNUAL RATES OF STOCK PRICE
SECURITIES GRANTED TO PRICE APPRECIATION FOR OPTION
UNDERLYING EMPLOYEES IN PER MARKET VALUE TERM
OPTIONS FISCAL YEAR SHARE PER SHARE EXPIRATION -----------------------------
NAME GRANTED(#) (%) ($/SH) ($/SH) DATE 0% ($) 5%($) 10%($)
---- ---------- ------------ -------- ------------ ---------- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
David M. Stoner...... -- -- -- -- -- -- -- --
Nigel L. Evans....... -- -- -- -- -- -- -- --
Brian J. Scanlan..... -- -- -- -- -- -- -- --
Mark A. Herman....... 54,040 14.3% $5.46 $6.72 2/8/09 $68,090 $296,473 $646,856
</TABLE>
FISCAL YEAR-END OPTION VALUES. The following table provides certain
summary information concerning stock options held as of December 31, 1999 by our
Named Executive Officers. No options were exercised during fiscal 1999 by any of
the Named Executive Officers. The value of unexercised in-the-money options at
fiscal year-end is based on $16.00 per share, the initial public offering price,
less the exercise price per share.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY
FISCAL YEAR-END(#) OPTIONS AT FISCAL YEAR-END
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
David M. Stoner.......... -- -- -- --
Nigel L. Evans........... -- -- -- --
Brian J. Scanlan......... -- -- -- --
Mark A. Herman........... -- 54,040 -- $569,582
</TABLE>
EMPLOYMENT AGREEMENTS
On October 21, 1998, we entered into an employment agreement with David M.
Stoner. Under the terms of his agreement, Mr. Stoner's employment as president
and chief executive officer will continue until October 21, 2001, unless sooner
terminated. Mr. Stoner receives a base salary of $250,000 per year and received
a bonus for service during 1999 of $125,000. Mr. Stoner's eligibility for
bonuses for years after 1999 will be determined by our board of directors.
In connection with Mr. Stoner's employment agreement, we provided Mr.
Stoner with two loans. The first loan was for $100,000 at an annual interest
rate of 9% and was evidenced by a one-year demand recourse promissory note,
dated October 30, 1998. In October 1999, the repayment of this loan was
forgiven. The second loan was for $1,000,000 at an annual interest rate of 9%
and was evidenced by a ten-year secured recourse promissory note dated October
21, 1998. The second loan was secured by Mr. Stoner's equity, profits and
ownership of us pursuant to a pledge and security agreement. The purpose of the
second loan was to provide Mr. Stoner with the entire purchase price for
3,364,396 shares of Series A membership interest in Caminus LLC, which converted
into 320,418 shares of common stock prior to our initial public offering.
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<PAGE> 53
Upon the closing of our initial public offering, Mr. Stoner received a
bonus payment equal to (1) the then outstanding principal balance of the second
loan, which was $1,112,500, and (2) an award of 160,209 shares of common stock.
If we terminate Mr. Stoner's employment with cause or if Mr. Stoner resigns
for no good reason, he will receive all accrued compensation and vested
benefits, excluding any bonus amounts. If we terminate his employment without
cause or if Mr. Stoner resigns for good reason, Mr. Stoner will receive all
unpaid accrued compensation, vested benefits -- including any unpaid minimum
bonus with respect to the first twelve months of his employment -- and a
severance benefit equal to his base salary until the earlier of October 21, 2001
or twelve months following the date of termination. Upon Mr. Stoner's
termination, we have the right to purchase all of our securities then owned by
Mr. Stoner. In most cases, the purchase price paid by us will be the fair market
value of the securities on the date of termination.
Mr. Stoner's agreement contains a confidentiality provision and further
provides that Mr. Stoner may not work for, or hold 5% or more of the outstanding
capital stock of a publicly traded corporation, which is a competing business
anywhere in the world for one year after the conclusion of his employment. A
competing business is one that develops and markets (1) software or consulting
advisory services used to analyze or influence client and industry decisions
regarding energy pricing, investments, regulatory policy and financial and
strategic planning for clients in the natural gas, crude oil, refined products,
electric power and utility industries and (2) software or related products or
services which otherwise facilitate transactions or other participation in
competitive energy markets.
On May 12, 1998, Caminus Energy Limited, our wholly owned subsidiary,
entered into a service agreement with Dr. Nigel L. Evans, which was amended on
January 14, 2000. Under the terms of his agreement, Dr. Evans' employment as
chief executive officer of Caminus Limited will continue until May 5, 2001,
renewing annually for successive one-year terms unless sooner terminated. From
May 12, 1998 through the fiscal period ending December 31, 1999, Dr. Evans
received a base salary of L200,000 ($324,000 as of December 31, 1999) per year,
subject to annual review and increases, and was eligible to receive an annual
performance bonus, targeted at L100,000 ($162,000 as of December 31, 1999). For
fiscal year 1999, Dr. Evans was paid a bonus of $162,000. Commencing January 31,
2000, Dr. Evans' base salary is L163,500 per year and Dr. Evans is longer be
eligible to receive an annual bonus. Ten days after the closing of our initial
public offering, Dr. Evans received a one-time bonus of L158,723 ($257,131 as of
December 31, 1999). Dr. Evans is also eligible to participate in Caminus
Limited's profit sharing plan for key employees. If we terminate Dr. Evans'
employment without cause or Dr. Evans terminates his employment due to a
constructive dismissal, he will receive his current salary, bonus and other
benefits for twelve months from the date of termination. If Dr. Evans resigns,
he will receive all salary, bonus and other benefits that have accrued as of the
date of termination.
Dr. Evans' agreement contains a confidentiality provision and further
provides that he may not directly or indirectly act as an employee or
consultant, or hold more than a 5% investment in any class of securities quoted
on a stock exchange, in a competing business for one year after the date of
termination. A competing business has the same meaning in Dr. Evans' agreement
as in Mr. Stoner's agreement, as described above. On May 12, 1998, Dr. Evans
also entered into a
50
<PAGE> 54
covenant not to compete with Caminus Energy Limited, which extends his
obligations not to compete for two years after termination in certain
circumstances.
On May 12, 1998, Zai*Net Software, L.P., which was our majority-owned
subsidiary at the time, entered into an employment agreement with Brian J.
Scanlan, which was amended November 8, 1999. In March 1999, we assumed the
employment agreement when Zai*Net Software, L.P. was merged into us. Under the
terms of his agreement, Mr. Scanlan's employment as Senior Vice President, Chief
Technology Officer will continue until May 12, 2001, unless sooner terminated.
Mr. Scanlan currently receives a base salary of $175,000 per year, subject to
annual review and increases, and is eligible to participate in our annual profit
sharing plan for key employees. For fiscal year 1999, Mr. Scanlan was paid a
bonus of $32,542. If we terminate Mr. Scanlan's employment with cause or if he
resigns for no good reason, Mr. Scanlan will receive all accrued compensation
and vested benefits as of the termination date. If we terminate Mr. Scanlan's
employment without cause or if he resigns for good reason, Mr. Scanlan will
receive all accrued compensation and vested benefits as of the termination date
and a severance benefit of his base salary for the remainder of the term of his
agreement.
Mr. Scanlan is also a party to a covenant not to compete, dated May 12,
1998, which contains a confidentiality provision and further provides that he
may not perform services, or hold 5% or more of the outstanding capital stock of
a publicly traded corporation, in a competing business other than on behalf of
us or our affiliates anywhere in the world for the greater of (1) three and
one-half years from the date of the agreement or (2) two years after the date of
termination. A competing business includes developing, licensing, installing and
maintaining commodities trading and risk management software and providing
consulting and support services related to such software activities to the
foreign exchange, natural gas, crude oil, refined products and electric power
industries and software or related products or services which otherwise
facilitate transactions or other participation in competitive energy markets.
On January 26, 1999, we entered into an employment letter with Mark A.
Herman, our chief financial officer. Under the terms of his employment letter,
Mr. Herman receives a base salary of $165,000 annually and is eligible to
receive a yearly bonus. For 1999, Mr. Herman was paid a bonus of $42,202. On
February 8, 1999, Mr. Herman was granted an option to purchase 567,416 shares of
membership interests at an exercise price of $0.52 per share, which converted
into an option to purchase 54,040 shares of common stock at $5.46 per share. His
option vested as to 25% of the shares on February 8, 2000 and will vest as to
75% of the shares in 36 equal monthly installments thereafter.
If we terminate Mr. Herman's employment without cause during the first two
years of his employment, Mr. Herman will receive continuing base salary and
benefits for one year. The vesting of his option will also accelerate so that
his option will be exercisable for the greater of 25% or the then vested
percentage of the option. If we hire another chief financial officer or relieve
Mr. Herman of the duties and responsibilities of his position for reasons other
than his ability to perform to reasonable standards for the job, Mr. Herman's
option vests fully on an accelerated basis, unless such change is mutually
agreed upon.
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<PAGE> 55
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of our compensation committee are Messrs. Bloom, Brothers and
Landers. No executive officer has served as a director or member of the
compensation committee or other committee serving an equivalent function of any
other entity whose executive officers served as a director or member of the
compensation committee of our board of directors. During 1999, our board of
directors, including our chief executive officer, determined the compensation of
our executive officers.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of our common stock as of February 29, 2000, by:
- each person or entity we know to own beneficially more than 5% of our
common stock;
- each of our directors;
- each of the Named Executive Officers; and
- all directors and executive officers as a group.
Except as indicated below, none of these persons or entities has a
relationship with us. Unless otherwise indicated, each person or entity named in
the table has sole voting power and investment power, or shares such power with
his or her spouse, with respect to all shares of capital stock listed as owned
by such person or entity.
As of February 29, 2000, there were 15,230,261 shares of common stock
outstanding. The number of shares beneficially owned by each stockholder is
determined under rules promulgated by the Securities and Exchange Commission and
is not necessarily indicative of beneficial ownership for any other purpose.
Under these rules, beneficial ownership includes any shares as to which the
stockholder has sole or shared voting power or investment power and any shares
as to which the stockholder has the right to acquire beneficial ownership within
60 days after February 29, 2000 through the exercise of any stock option,
warrant or other right. The inclusion in the following table of those shares,
however, does not constitute an admission that the named stockholder is a direct
or indirect beneficial owner of those shares.
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF SHARES COMMON
OF COMMON STOCK STOCK
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OUTSTANDING
- ------------------------ ------------------ -------------
<S> <C> <C>
5% STOCKHOLDERS
OCM Principal Opportunities Fund, L.P.(1).............. 3,962,229 26.0%
333 South Grand Avenue
28th Floor
Los Angeles, CA 90071
Christopher S. Brothers(1)............................. 3,962,229 26.0
c/o OCM Principal Opportunities Fund, L.P.
333 South Grand Avenue
28th Floor
Los Angeles, CA 90071
Anthony H. Bloom(2).................................... 1,292,838 8.5
c/o RIT Capital Partners plc
Spencer House
27 St. James's Place
London SWIA 1NR
United Kingdom
</TABLE>
52
<PAGE> 56
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF SHARES COMMON
OF COMMON STOCK STOCK
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OUTSTANDING
- ------------------------ ------------------ -------------
<S> <C> <C>
Brian J. Scanlan(3).................................... 1,224,383 8.0%
747 Third Avenue
New York, NY 10017
RIT Capital Partners plc(4)............................ 1,032,294 6.8
Spencer House
27 St. James's Place
London SWIA 1NR
United Kingdom
OTHER DIRECTORS AND EXECUTIVE OFFICERS
David M. Stoner........................................ 454,389 3.0
Nigel L. Evans......................................... 739,180 4.9
Lawrence D. Gilson(5).................................. 432,681 2.8
Richard K. Landers(5).................................. 432,681 2.8
Mark A. Herman(6)...................................... 15,762 *
All executive officers and directors as a group (8
persons)(7).......................................... 8,121,462 53.2
</TABLE>
- -------------------------
* Less than 1%
(1) Christopher S. Brothers is a Senior Vice President of Oaktree Capital
Management, LLC, a registered investment adviser under the Investment
Advisers Act of 1940. Oaktree Capital Management, LLC is the general partner
of OCM Principal Opportunities Fund, L.P. and may be deemed to beneficially
own these shares. Mr. Brothers and Oaktree Capital Management, LLC disclaim
beneficial ownership of such shares, except to the extent of his and its
direct pecuniary interest therein.
(2) Consists of 1,032,294 shares held by RIT Capital Partners plc, one of our 5%
stockholders and an entity to which Mr. Bloom presently provides investment
advice and is a former director; 255,444 shares held by Durham Enterprises
Limited, which is owned indirectly by two discretionary trusts under which
Mr. Bloom's children and spouse are discretionary beneficiaries; and 5,100
shares held by a third discretionary trust, Clovelley Investments Ltd.,
under which Mr. Bloom's children and spouse are discretionary beneficiaries.
Mr. Bloom disclaims beneficial ownership of such shares, except to the
extent of his direct pecuniary interest therein.
(3) Includes 8,417 shares subject to outstanding stock options that we issued to
Mr. Scanlan's wife which are exercisable within the 60-day period following
February 29, 2000 and 1,195,758 shares which are owned by ZAK Associates,
Inc., an entity which is 100% owned by the Scanlan Family Limited
Partnership. Mr. Scanlan shares voting and dispositive power for the
remaining 20,208 shares of common stock with his wife.
(4) Anthony H. Bloom, a former director of RIT Capital Partners plc, provides
investment advice to RIT and may be deemed to beneficially own these shares.
Mr. Bloom disclaims beneficial ownership of such shares, except to the
extent of his direct pecuniary interest therein.
(5) Lawrence D. Gilson is President of GFI Two LLC and Richard K. Landers is a
principal of GFI Two LLC. Therefore, Messrs. Gilson and Landers may be
deemed to beneficially own these shares. Each of Messrs. Gilson and Landers
disclaims beneficial ownership of such shares, except to the extent of his
direct pecuniary interest therein.
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<PAGE> 57
(6) Consists of 15,762 shares subject to outstanding stock options which are
exercisable within the 60-day period following February 29, 2000.
(7) Includes 24,179 shares of common stock subject to outstanding options that
we issued as described in footnotes 3 and 6.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ZAI*NET SOFTWARE, L.P.
In connection with our acquisition of partnership interests in Zai*Net
Software, L.P. in May 1998, we and certain of our original limited liability
company investors paid $2,187,500 to Zak Associates, Inc., the successor to
Zai*Net Software, Inc., in June 1999 and will pay an additional $2,187,500 to
Zak Associates, Inc. on April 15, 2000. These investors include GFI Two LLC, OCM
Principal Opportunities Fund, L.P. and RIT Capital Partners plc, which entities
are each principal stockholders of us.
GFI
As part of our ongoing relationship with GFI Two LLC and its affiliated
entities, which are collectively referred to herein as GFI, we entered into an
arrangement pursuant to our operating agreement whereby GFI provided substantial
ongoing strategic advice, as well as financial, tax and general administrative
services for us and, in return, we paid GFI an annual fee, payable in monthly
installments. During 1999, such fees were $377,329. We and GFI agreed to
terminate GFI's advisory arrangement effective as of our reorganization from a
limited liability company to a corporation. As consideration for GFI's agreement
to terminate the formal advisory arrangement, we paid GFI a $1,300,000 fee from
the net proceeds of our initial public offering. Two members of our board of
directors, Lawrence D. Gilson and Richard K. Landers, are GFI affiliates.
OCM PRINCIPAL OPPORTUNITIES FUND, L.P.
In March 1999, we borrowed $1,250,000 from OCM Principal Opportunities
Fund, L.P., one of our principal stockholders. On March 31, 1999 we issued a
promissory note in the principal amount of such loan to OCM Principal
Opportunities Fund at an annual interest rate of 10%. The promissory note
required us to pay a 1% origination fee upon funding of the loan. We paid the
loan in full on its due date of June 30, 1999. OCM Caminus Investment, Inc. and
its sole stockholder, OCM Principal Opportunities Fund, L.P., are referred to
herein as OCM.
FLEET BANK PLEDGE AGREEMENTS
On June 23, 1999, we entered into a credit agreement with Fleet Bank, which
provided for revolving loans and working capital loans in an aggregate principal
amount of up to $5,000,000. Pursuant to the agreement, Fleet Bank maintained a
first and prior security interest in and lien on at least 75% of our capital
stock. To meet this demand, the following seven stockholders pledged their
capital stock as collateral for the loan in pledge agreements with Fleet Bank:
Brian J. Scanlan; Nigel L. Evans; OCM; RIT Capital Partners plc and GFI.
We used a portion of the proceeds from our initial public offering to repay
all amounts outstanding under the credit agreement and we terminated the credit
agreement following the closing of our initial public offering.
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<PAGE> 58
RIGHTS OFFERING
In July 1999, we conducted a rights offering whereby existing holders of
shares of our Series A membership interest were given the opportunity to
purchase additional Series A shares on a pro rata basis of the total $12 million
offering. We used the proceeds from the rights offering to purchase DC Systems,
pay the related transaction fees and for working capital. In connection with the
rights offering, the following directors, executive officers and 5% stockholders
purchased from us the stated number of shares of Series A membership interest:
- David Stoner purchased 254,618 shares, which converted into 24,249 shares
of our common stock prior to our initial public offering;
- Nigel Evans purchased 212,182 shares, which converted into 20,208 shares
of our common stock prior to our initial public offering;
- Brian Scanlan purchased 212,182 shares, which converted into 20,208
shares of our common stock prior to our initial public offering;
- OCM purchased 4,493,143 shares, which converted into 427,918 shares of
our common stock prior to our initial public offering; and
- RIT Capital Partners plc purchased 3,394,909 shares, which converted into
323,324 shares of our common stock prior to our initial public offering.
For a description of certain employment and other arrangements between our
Named Executive Officers and us, see "Executive Compensation -- Employment
Agreements."
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K:
1. Financial Statements. The following financial statements of Caminus
Corporation are filed as part of this Form 10-K on the pages
indicated:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CAMINUS CORPORATION AND SUBSIDIARIES
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets as of December 31, 1998 and
1999...................................................... F-3
Consolidated Statements of Operations for the Period from
Inception (April 29, 1998) Through December 31, 1998 and
the Year Ended December 31, 1999.......................... F-4
Consolidated Statements of Changes in Stockholders' Equity
for the Period from Inception (April 29, 1998) Through
December 31, 1998 and the Year Ended December 31, 1999.... F-5
Consolidated Statements of Cash Flows for the Period from
Inception (April 29, 1998) Through December 31, 1998 and
the Year Ended December 31, 1999.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
Schedule II -- Valuation and Qualifying Accounts............ F-30
ZAI*NET SOFTWARE, INC. (PREDECESSOR)
Report of Independent Accountants........................... F-31
Balance Sheets as of December 31, 1997 and April 30, 1998... F-32
Statements of Operations and Retained Earnings for the Year
Ended December 31, 1997 and for the Four Months Ended
April 30, 1998............................................ F-33
</TABLE>
55
<PAGE> 59
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Statements of Cash Flows for the Year Ended December 31,
1997 and for the Four Months Ended April 30, 1998......... F-34
Notes to the Financial Statements........................... F-35
Supplementary Financial Statement Schedules have been
omitted because the information required to be set forth
therein is either not applicable or is shown in the
financial statements or notes thereto
</TABLE>
2. Schedules other than the ones listed above are omitted as the
required information is inapplicable or the information is presented
in the consolidated financial statements or related notes.
3. Exhibits. The exhibits listed in the Exhibit Index immediately
preceding such Exhibits are filed as part of this Annual Report on
Form 10-K.
(b) Reports on Form 8-K.
No Reports on Form 8-K were filed in the quarter ended December 31,
1999.
56
<PAGE> 60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized, on the 28 day of March,
2000.
CAMINUS CORPORATION
(Registrant)
By: /s/ DAVID M. STONER
-----------------------------------
David M. Stoner
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 28 day of March, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ DAVID M. STONER President, Chief Executive Officer and
- --------------------------------------------------- Director (Principal Executive
David M. Stoner Officer)
/s/ MARK A. HERMAN Vice President, Chief Financial Officer
- --------------------------------------------------- and Treasurer (Principal Financial
Mark A. Herman and Accounting Officer)
/s/ LAWRENCE D. GILSON Chairman of the Board
- ---------------------------------------------------
Lawrence D. Gilson
/s/ NIGEL L. EVANS Director
- ---------------------------------------------------
Nigel L. Evans
/s/ BRIAN J. SCANLAN Director
- ---------------------------------------------------
Brian J. Scanlan
/s/ CHRISTOPHER S. BROTHERS Director
- ---------------------------------------------------
Christopher S. Brothers
/s/ ANTHONY H. BLOOM Director
- ---------------------------------------------------
Anthony H. Bloom
/s/ RICHARD K. LANDERS Director
- ---------------------------------------------------
Richard K. Landers
</TABLE>
57
<PAGE> 61
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
CAMINUS CORPORATION AND SUBSIDIARIES
Report of Independent Accountants....................... F-2
Consolidated Balance Sheets as of December 31, 1998 and
1999................................................... F-3
Consolidated Statements of Operations for the Period
From Inception (April 29, 1998) Through December 31,
1998 and for the Year Ended December 31, 1999
(unaudited)............................................ F-4
Consolidated Statements of Changes in Stockholders'
Equity for the Period From Inception (April 29, 1998)
Through December 31, 1998 and for the Year Ended
December 31, 1999...................................... F-5
Consolidated Statements of Cash Flows for the Period
From Inception (April 29, 1998) Through December 31,
1998 and for the Year Ended December 31, 1999.......... F-6
Notes to Consolidated Financial Statements.............. F-7
Schedule II -- Valuation and Qualifying Accounts........ F-30
ZAI*NET SOFTWARE, INC. (Predecessor)
Report of Independent Accountants....................... F-31
Balance Sheets as of December 31, 1997 and April 30,
1998................................................... F-32
Statements of Operations and Retained Earnings for the
Year Ended December 31, 1997 and for the Four Months
Ended April 30, 1998................................... F-33
Statements of Cash Flows for the Year Ended December 31,
1997 and for the Four Months Ended April 30, 1998...... F-34
Notes to the Financial Statements....................... F-35
Supplementary Financial Statement Schedules have been
omitted because the information required to be set
forth therein is either not applicable or is shown in
the financial statements or notes thereto.
</TABLE>
F-1
<PAGE> 62
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Caminus Corporation
In our opinion, the consolidated financial statements listed in the
accompanying index on page F-1 present fairly, in all material respects, the
financial position of Caminus Corporation and its subsidiaries (the "Company")
at December 31, 1998 and 1999 and the results of their operations and their cash
flows for the period from inception (April 29, 1998) through December 31, 1998
and for the year ended December 31, 1999, respectively, in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States which require that we
plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
New York, New York
February 22, 2000
F-2
<PAGE> 63
CAMINUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1999
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,770,538 $ 661,502
Accounts receivable, net.................................. 3,244,018 7,359,672
Deferred taxes............................................ -- 418,484
Prepaid expenses and other current assets................. 306,774 2,532,984
------------ ------------
Total current assets................................... 6,321,330 10,972,642
Fixed assets, net........................................... 780,076 1,645,595
Developed technology, net................................... 2,307,361 3,050,708
Other intangibles, net...................................... 1,789,859 3,973,799
Goodwill, net............................................... 19,863,548 21,815,791
Other assets................................................ 6,828 19,402
------------ ------------
Total assets........................................... $ 31,069,002 $ 41,477,937
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,615,547 $ 1,443,882
Accrued liabilities....................................... 1,029,139 4,961,946
Borrowings under credit facility.......................... -- 3,050,000
Taxes payable............................................. -- 387,650
Payable to related parties................................ 6,187,500 3,824,142
Deferred revenue.......................................... 2,139,534 2,070,898
------------ ------------
Total current liabilities.............................. 10,971,720 15,738,518
Payable to related parties.................................. 2,937,500 --
------------ ------------
Total liabilities...................................... 13,909,220 15,738,518
Commitments and contingencies............................... -- --
Stockholders' equity:
Common stock, $0.01 par, 50,000,000 shares authorized,
9,729,229 shares issued and 7,966,928 shares outstanding
at December 31, 1998; 11,057,875 shares issued and
9,295,574 shares outstanding at December 31, 1999......... 97,292 110,579
Additional paid-in capital.................................. 37,070,721 52,669,992
Treasury stock, 1,762,301 shares in treasury at December 31,
1998 and 1999 at cost..................................... (4,911,205) (4,911,205)
Subscriptions receivable.................................... (4,739,493) (2,907,065)
Unearned compensation....................................... -- (235,208)
Accumulated deficit......................................... (10,371,188) (18,980,123)
Cumulative translation adjustment........................... 13,655 (7,551)
------------ ------------
Total stockholders' equity............................. 17,159,782 25,739,419
------------ ------------
Total liabilities and stockholders' equity............. $ 31,069,002 $ 41,477,937
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 64
CAMINUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
(APRIL 29, 1998) THROUGH YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1999
------------------------ -----------------
<S> <C> <C>
Revenues:
Licenses............................................ $ 3,639,143 $12,538,617
Software services................................... 3,090,758 7,815,880
Strategic consulting................................ 2,896,102 6,556,156
------------ -----------
Total revenues................................... 9,626,003 26,910,653
------------ -----------
Cost of revenues:
Cost of licenses.................................... 194,968 768,548
Cost of software services........................... 2,278,433 4,694,870
Cost of strategic consulting........................ 2,211,617 2,922,708
------------ -----------
Total cost of revenues........................... 4,685,018 8,386,126
------------ -----------
Gross profit................................... 4,940,985 18,524,527
------------ -----------
Operating expenses:
Sales and marketing................................. 470,549 4,110,417
Research and development............................ 1,153,470 3,929,044
General and administrative.......................... 3,130,567 7,692,331
Acquired in-process research and development........ 4,822,000 1,000,000
Amortization of intangible assets................... 5,497,765 8,560,176
Non-cash compensation expense....................... -- 968,412
------------ -----------
Total operating expenses......................... 15,074,351 26,260,380
------------ -----------
Loss from operations.................................. (10,133,366) (7,735,853)
Other income and (expense):
Interest income..................................... 96,909 65,628
Interest expense.................................... -- (295,450)
Other expense, net.................................. -- 2,506
------------ -----------
Total other income (expense)..................... 96,909 (227,316)
------------ -----------
Loss before provision for income taxes................ (10,036,457) (7,963,169)
Provision for income taxes............................ 35,735 645,766
------------ -----------
Net loss before minority interest..................... (10,072,192) (8,608,935)
Minority interest..................................... (298,996) --
------------ -----------
Net loss.............................................. $(10,371,188) $(8,608,935)
============ ===========
Basic and diluted net loss per share.................. $ (1.41) $ (1.01)
============ ===========
Weighted average shares used in computing net loss per
share............................................... 7,360,634 8,514,425
Pro forma (unaudited):
Loss before provision for income taxes.............. $(10,036,457) $(7,963,169)
Pro forma income tax benefit........................ 176,224 190,315
Minority interest................................... (298,996) --
------------ -----------
Pro forma net loss.................................. $(10,159,229) $(7,773,854)
============ ===========
Pro forma basic and diluted net loss per share...... $ (1.38) $ (0.91)
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 65
CAMINUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
NUMBER OF COMMON PAID-IN TREASURY SUBSCRIPTIONS UNEARNED
SHARES STOCK CAPITAL STOCK RECEIVABLE COMPENSATION
---------- -------- ----------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at April 29, 1998
(inception)......................... $ -- $ -- $ -- $ -- $ --
Issuance of shares................... 6,712,764 67,128 20,122,002
Issuance of shares in connection with
the acquisition of Caminus Energy
Limited............................. 961,255 9,612 2,990,388
Issuance of shares in connection with
the acquisition of Zai*Net Software
L.P................................. 2,055,210 20,552 10,318,798
Stock subscriptions receivable....... (4,739,493)
Issuance of stock options in
connection with acquisitions........ 3,144,995
Purchase of treasury stock at cost... (1,762,301) 494,538 (4,911,205)
Net loss.............................
Translation adjustment...............
---------- -------- ----------- ----------- ----------- ---------
Balance at December 31, 1998......... 7,966,928 97,292 37,070,721 (4,911,205) (4,739,493) --
---------- -------- ----------- ----------- ----------- ---------
Comprehensive loss for the period
from inception through December 31,
1998................................
Receipt of membership subscription
receivable.......................... 1,832,428
Issuance of additional shares........ 1,028,667 10,287 12,328,651
Issuance of shares in connection with
the acquisition of DC Systems....... 242,493 2,425 2,997,575
Issuance of shares to former owners
of Positron......................... 57,486 575 804,229
Reacquisition of stock option........ (250,000)
Distribution to stockholders......... (680,000)
Issuance of stock options below fair
market value........................ 398,816 (398,816)
Amortization of unearned
compensation........................ 163,608
Net loss.............................
Translation adjustment...............
---------- -------- ----------- ----------- ----------- ---------
Balance at December 31, 1999......... 9,295,574 $110,579 $52,669,992 $(4,911,205) $(2,907,065) $(235,208)
========== ======== =========== =========== =========== =========
Comprehensive loss for the year ended
December 31, 1999...................
<CAPTION>
CUMULATIVE TOTAL CUMULATIVE
ACCUMULATED TRANSLATION STOCKHOLDERS' COMPREHENSIVE COMPREHENSIVE
DEFICIT ADJUSTMENT EQUITY LOSS LOSS
------------ ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at April 29, 1998
(inception)......................... $ -- $ -- $ --
Issuance of shares................... 20,189,130
Issuance of shares in connection with
the acquisition of Caminus Energy
Limited............................. 3,000,000
Issuance of shares in connection with
the acquisition of Zai*Net Software
L.P................................. 10,339,350
Stock subscriptions receivable....... (4,739,493)
Issuance of stock options in
connection with acquisitions........ 3,144,995
Purchase of treasury stock at cost... (4,416,667)
Net loss............................. (10,371,188) (10,371,188) $(10,371,188)
Translation adjustment............... 13,655 13,655 13,655
------------ -------- ------------ ------------
Balance at December 31, 1998......... (10,371,188) 13,655 17,159,782 $(10,357,533)
------------ -------- ------------ ============
Comprehensive loss for the period
from inception through December 31,
1998................................ (10,357,533)
------------
Receipt of membership subscription
receivable.......................... 1,832,428
Issuance of additional shares........ 12,338,938
Issuance of shares in connection with
the acquisition of DC Systems....... 3,000,000
Issuance of shares to former owners
of Positron......................... 804,804
Reacquisition of stock option........ (250,000)
Distribution to stockholders......... (680,000)
Issuance of stock options below fair
market value........................ --
Amortization of unearned
compensation........................ 163,608
Net loss............................. (8,608,935) -- (8,608,935) (8,608,935)
Translation adjustment............... (21,206) (21,206) (21,206)
------------ -------- ------------ ------------
Balance at December 31, 1999......... $(18,980,123) $ (7,551) $ 25,739,419 $(18,987,674)
============ ======== ============ ============
Comprehensive loss for the year ended
December 31, 1999................... $ (8,630,141)
============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 66
CAMINUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(APRIL 29, 1998)
THROUGH YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1999
----------------- ------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(10,371,188) $ (8,608,935)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization........................... 5,666,521 9,042,568
Acquired in-process research and development............ 4,822,000 1,000,000
Deferred taxes.......................................... -- (198,516)
Non-cash compensation expense........................... -- 968,412
Bad debt expense........................................ -- 75,000
Minority interest....................................... 298,996 --
Changes in operating assets and liabilities:
Accounts receivable..................................... (849,920) (3,997,793)
Prepaid expenses and other current assets............... (97,456) (906,350)
Accounts payable........................................ 183,433 (430,402)
Accrued liabilities..................................... 635,030 2,829,978
Taxes payable........................................... -- 382,280
Deferred revenue........................................ 704,450 (2,633,495)
Payable to related parties.............................. -- 636,642
Other................................................... (40,190) (81,697)
------------ ------------
Net cash provided by (used in) operating activities......... 951,676 (1,922,308)
------------ ------------
Cash flows from investing activities:
Purchases of fixed assets................................. (500,597) (1,209,109)
Acquisition of Caminus Energy Limited, net of cash
acquired................................................ (2,502,567) --
Acquisition of Zai*Net Software L.P., net of cash
acquired................................................ (7,242,258) --
Acquisition of Positron................................... (151,667) --
Acquisition of DC Systems, Inc., net of cash acquired..... -- (9,919,192)
Other acquisition costs................................... (495,817) --
------------ ------------
Net cash used in investing activities....................... (10,892,906) (11,128,301)
------------ ------------
Cash flows from financing activities:
Payments of obligation to affiliate....................... (250,000) (4,000,000)
Payments of obligation to stockholders.................... -- (2,187,500)
Proceeds from borrowings under credit facility............ -- 3,050,000
Distribution to stockholders.............................. -- (80,000)
Cash received for subscription receivable................. -- 1,832,428
Issuance of common stock.................................. 12,949,637 12,338,938
------------ ------------
Net cash provided by financing activities................... 12,699,637 10,953,866
------------ ------------
Effect of exchange rates on cash flows...................... 12,131 (12,293)
------------ ------------
Net increase (decrease) in cash and cash equivalents........ 2,770,538 (2,109,036)
Cash and cash equivalents, beginning of period.............. -- 2,770,538
------------ ------------
Cash and cash equivalents, end of period.................... $ 2,770,538 $ 661,502
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 67
CAMINUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
FORMATION OF THE BUSINESS
Caminus Corporation ("Caminus" or the "Company") was incorporated in
Delaware in September 1999. Caminus was formed to succeed Caminus LLC as the
parent organization for the subsidiaries formerly held by Caminus LLC.
Caminus LLC was originally organized as a Delaware limited liability
company on April 29, 1998 ("Inception") by an investor group. Caminus was formed
for the purpose of acquiring equity interests in and managing the business
affairs of Caminus Energy Limited ("CEL") and Zai*Net Software, L.P. ("Zai*Net"
or "ZNLP"), and to provide industry expertise and risk management software
products in the evolving competitive gas and energy markets worldwide.
In conjunction with the formation of the Company and as consideration for
the identification of the acquired entities, an option, with an anti-dilution
provision, to acquire a 10% interest in Caminus LLC was granted to a member of
the investor group. This option has been valued at $1.6 million using the
Black-Scholes option pricing model and has been accounted for as part of the
purchase price of ZNLP and CEL. Any additional grants made under the
anti-dilution provision are required to be made at the current market price. The
option expires ten years from the date of the formation of Caminus LLC. In
connection with the initial public offering ("IPO") this option was exercised.
On May 12, 1998, Caminus LLC acquired a 71% ownership interest in ZNLP and
a 100% ownership interest in CEL; on December 31, 1998, Caminus LLC acquired the
remaining 29% ownership interest in ZNLP. The value assigned to these shares was
consistent with the value per share established immediately prior to these
acquisitions based on cash capital contributions from founders upon formation of
Caminus LLC. (For more complete disclosure, see Note 3 -- Acquisitions).
RECAPITALIZATION
In February 2000, we closed the initial public offering of 5,027,800 shares
of our common stock, realizing net proceeds from the offering of approximately
$59.5 million. These financial statements reflect the recapitalization on
January 27, 2000 of Caminus LLC as a corporation, and the conversion of each
membership interest in the limited liability company into .095238 of one share
of common stock of the corporation. This transaction affects the legal form only
of the entities under common control, and the proportionate ownership interests
of the members pre-and post-merger are preserved.
In connection with the IPO of the Company, Caminus recapitalized as a C
Corporation and therefore will no longer be treated as a limited liability
company for tax purposes. Accordingly, the consolidated statements of operations
include pro forma net income for all periods assuming the Company was taxable as
a C Corporation and pro forma earnings based on pro forma net income divided by
the weighted average number of shares outstanding.
F-7
<PAGE> 68
CAMINUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Caminus Corporation and its subsidiaries. All intercompany transactions and
balances have been eliminated.
REVENUE RECOGNITION
The Company generates revenue from several sources, including the licensing
of its software products, performing services related to the implementation,
training and support of these products, and through providing strategic
consulting services to clients in the areas where the Company has subject matter
expertise. The Company follows the provisions of Statements of Position ("SOP")
97-2 "Software Revenue Recognition", SOP 98-4 "Deferral of the Effective Date of
Certain Provisions of SOP 97-2, and SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions".
License revenue is recognized upon the execution of a license agreement,
when the licensed product has been delivered, fees are fixed and determinable,
collectibility is probable and when all other significant obligations have been
fulfilled. For license agreements in which customer acceptance is a condition to
earning the license fees, revenue is not recognized until acceptance occurs. For
arrangements containing multiple elements, such as software license fees,
consulting services and maintenance, and where vendor-specific objective
evidence ("VSOE") of fair value exists for all undelivered elements, the Company
accounts for the delivered elements in accordance with the "residual method"
prescribed by SOP 98-9. The adoption of SOP 98-9 did not have a material impact
on the consolidated financial position, results of operations or cash flows of
the Company. For arrangements containing multiple elements where VSOE does not
exist, all revenue is deferred until all elements of the arrangement have been
delivered.
The Company also provides software to customers under long-term development
arrangements that can require significant modification to adapt the software to
the unique specifications of the customer. If the service elements are
considered essential to the functionality of the software products, both the
software product revenue and service revenue are recognized using the completed
contract method as prescribed in accordance with the provisions of SOP 81-1,
"Accounting for Performance of Construction Type and Certain Production Type
Contracts." Accordingly, license and software enhancement revenue is recognized
under the completed contract method when all development, testing and
installation is completed and the purchaser formally accepts the software. Costs
associated with these contracts are deferred until contract completion. Deferred
costs are classified in "Prepaid expenses and other current assets" on the
consolidated balance sheet. Costs of software enhancements include the direct
labor component of programmer and consultant cost to perform the software
enhancement or service as well as the prorated share of technical support and
overhead costs associated with the enhancement and services. Anticipated losses,
if any, on uncompleted contracts are recognized in the period in which such
losses are determined.
F-8
<PAGE> 69
CAMINUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Software services revenue includes consulting fees for installation, data
conversion, training and product support services related to the use of the
Company's licensed products. Customers often enter into arrangements for these
services concurrent with execution of license agreements. The services do not
require significant modification of the licensed products, are not essential to
their functionality and are available from other vendors. Payment obligations
with respect to the licensed products are not dependent upon the performance of
these services. Accordingly, the Company recognizes revenues for these services
as they are performed. Maintenance and support revenues associated with new
product licenses and renewals, where VSOE of fair value exists, are deferred and
recognized ratably over the contract period. Contracts provide for an initial
maintenance period, which is annual, and a renewal period after expiration of
the initial maintenance period. Customers are permitted, but not required, to
renew their maintenance with us after expiration of the initial annual period.
The renewal rate for maintenance services is based on the initial license fee
and is used to establish VSOE for maintenance revenues.
Strategic consulting revenue is recognized as such services are performed.
FOREIGN CURRENCY TRANSLATION
The Company's foreign subsidiaries maintain their accounting records in the
local currency, which is their functional currency. The assets and liabilities
are translated into U.S. dollars based on exchange rates at the end of the
respective reporting periods and the effect of the foreign currency translation
is reflected as a component of members' equity. Income and expense items are
translated at an average exchange rate during the period. Transaction gains and
losses are included in the determination of the results from operations.
SOFTWARE DEVELOPMENT COSTS
Capitalization of software development costs begins upon establishment of
technological feasibility of the product. After technological feasibility is
established, material software development costs are capitalized. The
capitalized cost is then amortized on a straight-line basis over the estimated
product life, or on the ratio of current revenues to total projected product
revenues, whichever is greater. To date, the period between achieving
technological feasibility, which the Company has defined as establishment of a
working model which typically occurs when beta testing commences, and the
general release of such software has been short, and software development costs
qualifying for capitalization have been insignificant. Accordingly, the Company
has not capitalized any software development costs to date.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of short-term, highly liquid investments with
original maturities of three months or less.
F-9
<PAGE> 70
CAMINUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACCOUNTS RECEIVABLE
The Company periodically reviews accounts receivable for collectibility and
provides for an allowance for doubtful accounts to the extent that amounts are
not expected to be collected. The allowance for doubtful accounts was
approximately $229,000 and $304,000 at December 31, 1998 and 1999, respectively.
FIXED ASSETS
Fixed assets are recorded at cost. Depreciation is calculated using the
straight-line method over the estimated useful life of the related asset, which
generally ranges from three to seven years. Leasehold improvements are amortized
using the straight-line method over the lesser of the remaining lease term or
the estimated useful lives of the related assets.
GOODWILL, DEVELOPED TECHNOLOGY AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets are amortized on a straight-line basis
over the estimated future periods to be benefited ranging from three to five
years. Developed technology is amortized on a straight-line basis over the
estimated product life, generally three years, or on the ratio of current
revenues to total projected product revenues, whichever is greater.
Goodwill and other intangible assets are reviewed for impairment quarterly
or whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of the assets to future
undiscounted cash flows of the businesses acquired. If the assets are considered
to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the assets. To
date, no impairment has occurred. This analysis is performed according to the
asset groupings established at the time of the acquisition and at the enterprise
level.
INCOME TAXES
During the periods presented by these financial statements, the Company was
taxed as a partnership for federal and state tax purposes. There were no entity
level income taxes imposed by jurisdictions in which the Company conducted its
business and, therefore, these financial statements do not reflect any federal
or state income tax expense. The profit or loss is deemed passed through to the
stockholders and they are obligated to report such profit or loss on their own
tax returns in the relevant jurisdictions. Prior to the IPO in January 2000, the
Company converted to a C corporation and is subject to federal and state income
taxes in 2000.
The Company has a wholly owned subsidiary located in the United Kingdom. As
such, the entity is liable for taxes to the Inland Revenue. For U.S. purposes,
an election was made to include the foreign income and expenses in the U.S. tax
F-10
<PAGE> 71
CAMINUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
returns. As a result of this election, the Company will be liable for U.K.
taxes. Foreign tax credits are passed through to the stockholders.
New York City, one of the local jurisdictions in which the Company conducts
its business, imposes an Unincorporated Business Tax at a rate of 4%, on
unincorporated entities, such as the Company. This tax is reduced to the extent
any stockholder is itself subject to New York City income tax. In addition, this
tax is imposed only on the portion of taxable income allocable to New York City
as per certain allocation factors (i.e., receipts, payroll and property).
The tax expense recorded in these financial statements reflects foreign
taxes and the New York City Unincorporated Business Tax on the Company's
allocable portion of the taxable income.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable, accrued liabilities and
borrowings under a credit facility. The current carrying amount of these
instruments approximates fair market value due to the relatively short period of
time to maturity for these instruments.
EARNINGS PER SHARE
The Company computes net income (loss) per share in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings per Share" ("SFAS 128") and SEC Staff Accounting Bulletin No. 98 ("SAB
98"). Under the provisions of SFAS 128 and SAB 98, basic and diluted net loss
per share is computed by dividing net loss for the period by the weighted
average number of shares outstanding for the period. The calculation of diluted
net loss per share excludes options to purchase shares as the effect would be
antidilutive.
At December 31, 1998 and 1999, outstanding options to purchase 604,891 and
941,734 shares, respectively, with exercise prices ranging from $2.31 to $4.62
and $2.31 to $13.97, respectively, as well as contingently issuable options to
purchase 1,935,483 and 1,977,986 shares, respectively, with exercise prices
ranging from $1.89 to $6.51 were excluded from the calculation of diluted loss
per share as the effect would have been anti-dilutive.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company follows SFAS No. 123, "Accounting for Stock-Based
Compensation," ("SFAS 123"). As permitted by this statement, the Company
continues to apply Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," ("APB 25") to account for its stock-based employee
compensation arrangements.
F-11
<PAGE> 72
CAMINUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
USE OF ESTIMATES
The accompanying consolidated financial statements are prepared in
conformity with generally accepted accounting principles which require
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133")
which is effective for the Company beginning in 2001. SFAS 133 establishes
accounting and reporting standards for derivative financial instruments and
hedging activities related to those instruments, as well as other hedging
activities. Because the Company does not currently hold any derivative financial
instruments and does not engage in hedging activities, the adoption of SFAS 133
is not expected to have a material impact on the consolidated financial
position, results of operations or cash flows of the Company.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue recognition, "SAB 101", which provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements filed with the Securities and Exchange Commission. SAB 101 outlines
the basic criteria that must be met to recognize revenue and provides guidance
for disclosures related to revenue recognition policies. Management believes
that its revenue recognition policies and practices are in conformance with SAB
101.
3. ACQUISITIONS
ZAI*NET SOFTWARE, L.P.
On May 12, 1998, the Company acquired a 71% ownership interest in ZNLP for
$7,740,000 in cash. ZNLP licenses, customizes and services Zai*Net, an
integrated real-time front, middle, and back office software trading system for
foreign exchange, commodities, energy, options and other financial products. The
terms of the purchase agreement required the payment of additional consideration
totaling $4,375,000 to the former shareholder of ZNLP if revenues from ZNLP
products were in excess of certain thresholds as defined in the purchase
agreement. Payment of this additional consideration was guaranteed in connection
with the acquisition of the remaining 29% interest in ZNLP by the Company in
December 1998. The acquisition of the 71% ownership interest was accounted for
using the purchase method of accounting, and accordingly, the results of ZNLP's
operations are included in the Company's consolidated financial statements from
the date of acquisition.
On December 31, 1998, the Company acquired the remaining 29% interest in
ZNLP in exchange for a 21% equity interest in the Company. The acquisition of
the
F-12
<PAGE> 73
CAMINUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
minority interest was accounted for using the purchase method of accounting.
Also as of December 31, 1998, Zai*Net had 4,988,209 options outstanding with an
average strike price of $2.31. These options were valued at their market value
and recorded as additional consideration for the acquisition of ZNLP. In March
1999, in connection with this transaction, ZNLP was merged into the Company. In
addition, the Company agreed that the amounts included as earnout payments in
the original acquisition agreement will be due and payable in various
installments through April 15, 2000.
A summary of the total purchase price for the acquisition of ZNLP is as
follows:
<TABLE>
<S> <C>
Cash..................................................... $ 7,740,000
Issuance of notes payable................................ 4,375,000
Issuance of equity....................................... 10,339,350
Issuance of options (see Note 1)......................... 1,173,071
Issuance of options to ZNLP employees.................... 1,496,463
Other direct acquisition costs........................... 602,969
-----------
$25,726,853
===========
</TABLE>
A summary of the allocation of the total purchase price is as follows:
<TABLE>
<S> <C>
Tangible net assets acquired............................. $ 899,191
Acquired in-process research and development............. 4,822,000
Developed technology..................................... 2,596,000
Other identifiable intangible assets..................... 2,023,000
Goodwill................................................. 15,386,662
-----------
$25,726,853
===========
</TABLE>
The fair value assigned to intangible assets acquired was based on an
appraisal of the purchased in-process technology, developed technology, and
other intangible assets. Of the acquired intangible assets, $4,822,000
represents management's estimate of acquired in-process research and development
(IPR&D) that had not yet reached technological feasibility and had no
alternative future use. Accordingly, this amount was immediately expensed in the
consolidated statement of operations upon acquisition. The value assigned to
IPR&D was determined by identifying research projects in areas for which
technological feasibility had not been established. The value was determined by
estimating the costs to develop the IPR&D into commercially viable products,
estimating the resulting net cash flows from such projects, and discounting the
net cash flows back to their present value.
In estimating the net discounted cash flows from such projects, no material
changes from historical pricing, margins and expense levels are anticipated. The
most significant and uncertain assumptions included completion of the products
in process on schedule, expectations about revenue growth and eventual
replacement
F-13
<PAGE> 74
CAMINUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of these products with new products over a three to four year period. No
residual cash flows of the Company were assumed to relate to IPR&D. The discount
rate of 25-35% included a factor that takes into account the uncertainty
surrounding the successful development of the IPR&D. Additionally, consideration
was given to the stage of completion of each research and development project at
the date of acquisition.
The acquired IPR&D includes the power trading and scheduling, gas trading
and scheduling and the foreign exchange products. The Company estimated that
these products were approximately 87.5%, 75% and 90% complete at the date of
acquisition based on costs incurred through the date of acquisition as compared
to total estimated expenditures over the product's development cycle. DC Systems
has gas trading and scheduling products that are comparable to those of Zai*Net.
The Company has decided to delay the development of the gas trading and
scheduling until the comparable DC Systems products can be evaluated. The
Company released the other products during 1999.
The nature of the efforts required to develop and integrate the acquired
IPR&D into a commercially viable product, feature or functionality within the
Company's suite of existing products related to the completion of all planning,
design and testing activities that are necessary to establish that the product
can be produced to meet design and performance requirements. The Company
currently expects that the product utilizing the acquired IPR&D will be
successful, but there can be no assurance that commercial viability of any of
these products will be achieved. Further, future developments in the software
industry, changes in the technology, changes in other products and offerings or
other developments may cause the Company to alter, or abandon, its product
plans.
Developed technology represents the fair value of applications and
technologies existing at the date of acquisition. Other intangible assets
represent the fair value of other acquired intangible assets including primarily
customer lists and work force in place. Goodwill represents the excess of the
purchase price over the fair value of identifiable tangible and intangible
assets acquired.
CAMINUS ENERGY LIMITED
On May 12, 1998, the Company acquired CEL, a consulting and professional
services organization, which provides services and research to companies in the
energy market sector, for $3,022,924 in cash, plus an equity interest of 10.1%
of the Company valued at $3.0 million. The acquisition was accounted for using
the purchase method of accounting, and accordingly, the results of CEL's
operations are included in the Company's consolidated financial statements from
the date of acquisition.
F-14
<PAGE> 75
CAMINUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the purchase price for the acquisition is as follows:
<TABLE>
<S> <C>
Issuance of equity........................................ $3,000,000
Cash...................................................... 3,022,924
Issuance of options (see Note 1).......................... 475,461
Other direct acquisition costs............................ 100,000
----------
$6,598,385
==========
</TABLE>
A summary of the allocation of the purchase price is as follows:
<TABLE>
<S> <C>
Tangible net assets acquired.............................. $ 380,515
Goodwill.................................................. 6,217,870
----------
$6,598,385
==========
</TABLE>
Goodwill represents the excess of the purchase price over the fair value of
identifiable tangible and intangible assets acquired.
Pursuant to the Agreement, the Company also granted options to purchase
480,952 shares to two officers of CEL (288,571 and 192,381 shares, respectively)
for $3.12 per share (total proceeds to Caminus of approximately $1.5 million).
These options are exercisable only in the event of a sale or public offering,
compliance with a service agreement and achievement of certain internal rates of
return. The number of shares that ultimately vest and become exercisable is
contingent upon all of these conditions. No amounts were recorded for these
options, as the conditions under which they would vest were not met as of
December 31, 1999. However, upon consummation of the IPO in 2000, the Company
recorded a compensation related charge for the exercise of these options of
approximately $7.0 million.
POSITRON ENERGY CONSULTING
On November 13, 1998, the Company acquired Positron Energy Consulting
("Positron"). The Company paid $151,667 in cash for certain assets and
liabilities of Positron. The acquisition was accounted for using the purchase
method of accounting and the excess of the purchase price over the net assets
acquired was recorded as goodwill. Also in connection with the acquisition,
restricted shares of common stock of the Company were granted to three
employees/principals of Positron. The restrictions lapse only upon the
resolution of contingencies identified in the purchase agreement.
In November 1999, the Company's managing committee determined that all of
the contingencies identified in the purchase agreement were satisfied.
Accordingly, the restrictions on the shares have been lifted and the three
employees/principals of Positron received 57,486 unrestricted shares. The
Company recorded a compensation charge in November 1999 of approximately $0.8
million related to the issuance of these shares.
F-15
<PAGE> 76
CAMINUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DC SYSTEMS ("DCS")
On July 31, 1999, Caminus acquired DCS, a provider of software solutions to
the gas industry. The Company paid $10,000,000 in cash, and issued 242,493
shares of Caminus valued at $3,000,000. In connection with this transaction,
Caminus incurred approximately $500,000 of other direct acquisition costs. A
summary of the allocation of the purchase price is as follows:
<TABLE>
<S> <C>
Tangible net assets acquired......................... $ (953,706)
Acquired in-process research and development......... 1,000,000
Developed technology................................. 1,800,000
Other intangible assets.............................. 3,030,000
Goodwill............................................. 8,623,706
-----------
$13,500,000
===========
</TABLE>
The fair value assigned to intangible assets acquired was based on an
appraisal of the purchased in-process technology, developed technology, and
other intangible assets. Of the acquired intangible assets, $1,000,000
represents management's estimate of acquired in-process research and development
(IPR&D) that had not yet reached technological feasibility and had no
alternative future use. Accordingly, this amount was immediately expensed in the
consolidated statement of operations upon acquisition. The value assigned to
IPR&D, was determined by identifying research projects in areas for which
technological feasibility had not been established. The value was determined by
estimating the costs to develop the IPR&D into commercially viable products,
estimating the resulting net cash flows from such projects, and discounting the
net cash flows back to their present value.
In estimating the net discounted cash flows from such projects, no material
changes from historical pricing, margins and expense levels are anticipated. The
most significant and uncertain assumptions included completion of the products
in process on schedule, expectations about revenue growth and eventual
replacement of these products with new products over a three to four year
period. No residual cash flows of the Company were assumed to relate to IPR&D.
The discount rate of 25% included a factor that takes into account the
uncertainty surrounding the successful development of the IPR&D. Additionally,
consideration was given to the stage of completion of each research and
development project at the date of acquisition.
The acquired IPR&D includes the Plant*Master and other products. The
Company estimated that these products were approximately 50% complete at the
date of acquisition based on costs incurred through the date of acquisition as
compared to total estimated expenditures over the product's development cycle.
The Company expects to have these products available for release during 2000
with estimated future development costs totaling approximately $600,000 at the
time of acquisition. The Company intends to offer other products to its
customers under general release once completed.
F-16
<PAGE> 77
CAMINUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The nature of the efforts required to develop and integrate the acquired
IPR&D into a commercially viable product, feature or functionality within the
Company's suite of existing products related to the completion of all planning,
design and testing activities that are necessary to establish that the product
can be produced to meet design and performance requirements. The Company
currently expects that the product utilizing the acquired IPR&D will be
successful, but there can be no assurance that commercial viability of any of
these products will be achieved. Further, future developments in the software
industry, changes in the technology, changes in other products and offerings or
other developments may cause the Company to alter, or abandon, its product
plans.
Developed technology represents the fair value of applications and
technologies existing at the date of acquisition. Other intangible assets
represent the fair value of other acquired intangible assets including primarily
customer lists and work force in place. Goodwill represents the excess of the
purchase price over the fair value of identifiable tangible and intangible
assets acquired.
In July 1999, DC Systems declared a dividend to the existing shareholders
to cover the estimated tax liability associated with the sale of DC Systems to
the Company. This dividend amounted to $184,000 and is included in payable to
related parties on the consolidated balance sheet.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The above acquisitions were accounted for using the purchase method. Had
the acquisitions of ZNLP, CEL, Positron and DC Systems occurred on January 1,
1998 the unaudited pro forma revenue, net loss and related basic and diluted
loss per share for the years ended December 31, 1998 and 1999 would have been:
$14.8 million and $27.3 million; $13.3 million and $14.7 million; and $1.76 and
$1.72, respectively. These results, which are based on various assumptions, are
not necessarily indicative of what would have occurred had the acquisitions been
consummated on January 1, 1998.
F-17
<PAGE> 78
CAMINUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
--------- ----------
<S> <C> <C>
Computer hardware, software and office equipment..... $ 699,574 $1,721,291
Furniture, fixtures and leasehold improvements....... 240,678 544,595
Automobiles.......................................... 8,580 14,185
--------- ----------
948,832 2,280,071
Less -- Accumulated depreciation and amortization.... (168,756) (634,476)
--------- ----------
$ 780,076 $1,645,595
========= ==========
</TABLE>
Depreciation expense for the period from Inception through December 31,
1998 and for the year ended December 31, 1999 amounted to $168,756 and $468,392,
respectively.
5. INTANGIBLE ASSETS
The intangible assets arising from the acquisition transactions discussed
in Note 3 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1999
----------- ------------
<S> <C> <C>
Developed technology............................. $ 2,607,457 $ 4,407,457
Goodwill......................................... 21,737,898 30,361,604
Other intangible assets.......................... 2,029,845 5,059,845
----------- ------------
26,375,200 39,828,906
Less -- Accumulated amortization................. (2,414,432) (10,998,608)
----------- ------------
$23,960,768 $ 28,840,298
=========== ============
</TABLE>
Amortization expense for developed technology, goodwill and other
intangible assets for the period from Inception through December 31, 1998 and
for the year ended December 31, 1999 were $300,096, $1,874,350 and $239,986,
respectively; and $1,056,653, $6,671,463 and $846,060, respectively.
F-18
<PAGE> 79
CAMINUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1999
---------- ----------
<S> <C> <C>
Accrued bonuses and commissions..................... $ 515,722 $2,600,040
Accrued professional fees........................... 227,778 1,466,156
Accrued management fees............................. 100,000 252,942
Other accrued expenses.............................. 185,639 642,808
---------- ----------
Total accrued liabilities...................... $1,029,139 $4,961,946
========== ==========
</TABLE>
7. DEFERRED REVENUE
Deferred revenue consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1999
---------- ----------
<S> <C> <C>
Deferred license revenue............................ $2,139,534 $1,430,432
Deferred maintenance revenue........................ -- 640,466
---------- ----------
$2,139,534 $2,070,898
========== ==========
</TABLE>
Deferred revenue consists of cash received from customers or amounts billed
in advance of revenue recognition. During 1999, the Company changed its
maintenance billing practices for most customers from a monthly billing cycle to
a quarterly or annual billing cycle, depending upon the customer, thereby giving
rise to deferred maintenance revenue at December 31, 1999.
8. CREDIT FACILITY
On June 23, 1999, the Company entered into a credit agreement with Fleet
Bank ("the Bank"), pursuant to which the Company may borrow up to $5.0 million
under a revolving loan and a working capital loan.
The revolving loan provides the Company with borrowing capacity of up to
$2.5 million. Quarterly payments under the terms of the loan must equal or
exceed $250,000 beginning December 31, 1999. The borrowing base under the
working capital loan is equal to 85% of eligible receivables, less $500,000, and
in the aggregate, can not exceed $2.5 million. The loan expires on May 31, 2000
and may be extended for an additional year.
Credit facilities under the agreement bear interest at either the Bank's
reference rate, generally equivalent to prime rate, or LIBOR plus an applicable
margin (may vary between 2.5% and 3% depending on certain ratios of the
F-19
<PAGE> 80
CAMINUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company as defined in the agreement). The applicable borrowing rate at December
31, 1999 was 8.5%.
Borrowing under the loans on December 31, 1999 amounted to $3.1 million, of
which $2.0 million was related to the revolving loan and $1.1 million was
related to the working capital loan.
Under the terms of the credit agreement, the Company is required to
maintain certain financial ratios. The loans are secured by substantially all
assets of the Company. In addition, the Bank has a pledge from certain
affiliates of approximately 75% of the common stock outstanding. The Bank has
first security in and a lien on these shares of common stock.
Pursuant to the agreement, the Company is required to repay the facilities
in full upon the event of a public offering. Accordingly, the Company repaid all
amounts outstanding under the loan in February 2000.
9. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION YEAR
THROUGH ENDED
DECEMBER 31, 1998 DECEMBER 31, 1999
----------------- -----------------
<S> <C> <C>
Current tax provision
Foreign taxes......................... $ -- $590,963
State and City........................ 35,735 54,808
------- --------
Total current tax provision... 35,735 645,766
Deferred tax provision
Foreign............................... -- --
State and City........................ -- --
------- --------
Total deferred tax
provision.................. -- --
------- --------
Provision for income taxes.............. $35,735 $645,766
======= ========
</TABLE>
F-20
<PAGE> 81
CAMINUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The effective income tax rate differs from the statutory U.S. Federal
income tax rate for the following reasons:
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
THROUGH YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1999
----------------- -----------------
<S> <C> <C>
Statutory U.S. federal income tax....... $ -- $ --
Local income taxes, net of federal
income tax benefit.................... 35,735 54,803
Foreign income taxes.................... -- 590,963
Taxes receivable........................ -- --
------- --------
Provision for income taxes, at effective
rate.................................. $35,735 $645,766
======= ========
</TABLE>
10. 401(k) SAVINGS PLAN
ZNLP had previously maintained a 401(k) Savings Plan (the "Plan").
Effective with the acquisition of ZNLP by Caminus, the ZNLP plan was extended to
all eligible domestic employees of Caminus. Employees are eligible to
participate in the Plan upon completion of six months of service with the
Company. Eligible employees may contribute up to 15% of their annual
compensation to the Plan on a pre-tax basis. Participant contributions to the
Plan are immediately vested. In addition, under the terms of the Plan, the
Company, at its discretion, may match all or a portion of a participant's
contribution to the Plan up to 10% of the participant's compensation. This
matching percentage is determined by the Company prior to the start of each Plan
year. The Company matching contribution is made at calendar year end.
Participants become vested in Company matching contributions to the Plan at the
rate of 20% per year of service with the Company. For 1998, the Company elected
to match 100% of participant contributions up to a maximum of $1,000 per
participant. The 401(k) expense for the period from Inception through December
31, 1998 and the year ended December 31, 1999 totaled $30,445 and $82,377,
respectively.
11. STOCK OPTION PLANS
In May 1998, ZNLP established its stock option plan (the "ZNLP Plan"). Upon
closing of the purchase of the remaining 29% of ZNLP by the Company on December
31, 1998, Caminus canceled the options outstanding under the ZNLP Plan and
issued to the employees options to purchase shares of Caminus common stock.
Costs associated with this transaction were accounted for as part of the ZNLP
acquisition purchase price. In February 1999, the Management Committee approved
the adoption of the ZNLP Plan for all eligible Caminus employees (the "1998
Plan"). In September 1999, the Company established a new stock option plan
("1999 Plan"). All future grants will be made under the 1999 Plan. There
F-21
<PAGE> 82
CAMINUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
were no grants made under the 1999 Plan as of December 31, 1999. Both the 1998
Plan and the 1999 Plan provide for the issuance of stock options to key
employees and consultants of the Company. Under the terms of the Plan, options
are granted to purchase common stock in the Company at a price not less than
100% of the fair market value on the date of the grant. The options generally
vest over a period of four years and are exercisable for a period of ten years
from the date of the grant. Upon adoption of the 1998 Plan, the Company reserved
shares equivalent to 9.0% of total outstanding shares of common stock for the
exercise of vested options. Upon adoption of the 1999 Plan, the Company reserved
502,312 shares of common stock.
The following table summarizes the Company's option plan activity:
<TABLE>
<CAPTION>
1998 PLAN
-------------------------------------------------------
PERIOD FROM INCEPTION YEAR ENDED
THROUGH DECEMBER 31, 1998 DECEMBER 31, 1999
-------------------------- --------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE PRICE EXERCISE PRICE
OPTIONS PER SHARE OPTIONS PER SHARE
------- ---------------- ------- ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning
of period.............. -- 604,891 $2.74
Granted.................. 604,891 $2.74 392,260 7.29
Exercised................ -- --
Canceled................. -- (55,417) 2.97
------- -------
Outstanding at end of
year................... 604,891 $2.74 941,734 $4.62
======= =======
Options exercisable at
period end............. -- 202,433 $2.76
======= =======
</TABLE>
The following table summarizes information about stock options outstanding
under the 1998 Plan at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------------------------------
NUMBER
OUTSTANDING WEIGHTED AVERAGE WEIGHTED
RANGE OF AT DECEMBER 31, REMAINING AVERAGE EXERCISE
EXERCISE PRICES 1999 CONTRACTUAL LIFE PRICE
- --------------- --------------- ---------------- ----------------
<S> <C> <C> <C>
$2.31-$5.78 821,917 8.8 years $ 3.69
$9.03-$13.97 119,817 9.6 years 11.01
-------
941,734 4.62
=======
</TABLE>
At December 31, 1999, options to purchase approximately 6,200 shares and
502,312 shares were available for grant under the 1998 Plan and 1999 Plan,
respectively.
F-22
<PAGE> 83
CAMINUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company applies APB 25 and related interpretations in accounting for
its Plan and other stock-based compensation issued to employees. During the
period from Inception through December 31, 1998 the Company did not recognize
compensation expense related to option grants. The Company recognized $163,608
of compensation expense associated with options granted to employees below fair
market value. No options have been granted to consultants.
Had compensation cost for the Company's option plan been determined based
upon the fair value at the grant date for awards under the plan consistent with
the methodology prescribed under SFAS 123, the Company's net loss would have
been increased by approximately $67,000 and $315,000 in the period from
Inception through December 31, 1998 and the year ended December 31, 1999,
respectively. This additional compensation expense would have resulted in a net
loss and net loss per share of $10.4 million and $1.42 and $8.9 million and
$1.05 for the period from Inception through December 31, 1998 and the year ended
December 31, 1999, respectively. The fair values of options granted to employees
has been determined on the date of the respective grant using the Black-Scholes
option pricing model incorporating the following weighted average assumptions:
(1) risk-free interest rate of 5.50% for 1998 and 4.88% to 6.20% for 1999; (2)
dividend yield of 0.00%; (3) expected life of five years; and (4) volatility of
40% for 1998 and 60% for 1999.
The pro forma effects above may not be representative of the effects on
future years because of the prospective application required by SFAS 123 and the
fact that options vest over several years and new grants generally are made each
year.
12. COMMITMENTS AND CONTINGENCIES
The Company leases office space in New York City, London and Houston under
long-term leases.
Future minimum annual lease commitments are as follows:
<TABLE>
<S> <C>
2000........................................................ $1,653,536
2001........................................................ 1,537,903
2002........................................................ 1,240,111
2003........................................................ 1,191,715
2004........................................................ 989,147
Thereafter.................................................. 959,621
----------
$7,572,037
==========
</TABLE>
Rent expense for the period from Inception through December 31, 1998 and
the year ended December 31, 1999 was $320,800 and $1,008,575, respectively.
From time to time, in the ordinary course of business, the Company is
subject to legal proceedings. While it is not possible to determine the ultimate
outcome of such matters, it is management's opinion that the resolution of any
pending issues will not have a material adverse effect on the financial
position, results of operations or cash flows of the Company.
F-23
<PAGE> 84
CAMINUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. RELATED PARTY TRANSACTIONS
SS&C
In May 1998 SS&C Technologies ("SS&C") purchased 1,762,301 shares of common
stock for $3.0 million of cash and the contribution of an exclusive distribution
agreement for 39 months to sell certain products developed by SS&C having an
initial value of $2.5 million. In addition, SS&C was granted a warrant to
purchase an additional 800,952 shares of common stock with an exercise price of
$0.11 per share. The original distribution agreement was capitalized as an asset
and would have been amortized to income on a straight line basis over its life.
Under the terms of the original distribution agreement, the warrant would vest
and become exercisable at the earlier of 39 months from the grant or the sale or
public offering of the Company. The number of shares exercisable was dependent
on the revenue levels derived from the sales of SS&C products by the Company. No
value was assigned to this warrant due to the great uncertainty as to the amount
of revenue, if any, that would be derived under the original distribution
agreement. The Company initially expected that the Caminus and SS&C products
would complement each other. However, Caminus later determined that it would not
invest its resources to sell this product.
On December 31, 1998, the Company repurchased all of the common stock and
the warrant to acquire common stock held by SS&C for total consideration of
approximately $4.9 million. The consideration of $4.9 million, which was charged
to treasury stock, consisted of cash of approximately $2.3 million, the net
value of the cancelled distribution agreement of approximately $2.2 million and
the issuance of an option to acquire 277,052 shares of common stock of the
Company for $1.8 million (the "SS&C Option"), which has been valued at
approximately $0.5 million using the Black-Scholes option pricing model. The
SS&C Option was fully vested as of December 31, 1998 and expires on December 31,
2003. As of December 31, 1998, the Company recorded a note payable for the cash
portion of the repurchase of equity. The SS&C Option was exercised in the
quarter ended March 31, 2000 in connection with the IPO.
Simultaneously with the repurchase of the SS&C shares of common stock, the
Company entered into a distribution agreement with SS&C (the "Distribution
Agreement"). This agreement gives the Company the exclusive right to sell the
same SS&C software products as the original distribution agreement into the
energy market. Total guaranteed minimum payments under the terms of the
Distribution Agreement, as amended, were $2,750,000 of which $2,000,000 had been
paid through December 31, 1999.
As of December 31, 1998, the Company had not sold any of the SS&C products
acquired under the Distribution Agreement. Further, the Company does not have an
active plan to sell the software, which was acquired pursuant to the terms of
the distribution agreement. Because the Company has not resold any SS&C
software, nor does it have a formal plan in place to resell this software, the
total guaranteed minimum payments to SS&C as stipulated in the Distribution
Agreement have been recorded as a charge in the statement of operations. The
amount of $2,750,000 has
F-24
<PAGE> 85
CAMINUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
been included in "Amortization of intangible assets" in the consolidated
statement of operations for the period from Inception through December 31, 1998.
OTHER TRANSACTIONS
On October 21, 1998, in connection with his employment with the Company,
the Chief Executive Officer ("CEO") was loaned $1,000,000 by the Company in
order to acquire shares of common stock. The loan bears interest at a rate of
9%, and all accrued and unpaid interest is payable upon maturity (October 2008).
The loan is secured by the shares of common stock. In addition, on October 21,
1998, the Company loaned the CEO $100,000. The loan bears interest at a rate of
9%; all accrued and unpaid interest is payable upon maturity. The $100,000 loan
was repaid, including interest, in November 1999.
Additionally, in connection with the CEO's employment agreement, if certain
performance criteria and other conditions are met, the CEO would receive a bonus
based on forgiveness of the entire outstanding amount of the $1.0 million loan
plus accrued interest as well as additional shares of common stock. Such amounts
were earned upon the IPO and will result in a compensation related charge in the
quarter ended March 31, 2000 of approximately $3.7 million.
During 1999, Caminus made a distribution of $80,000 and recorded an
obligation to distribute $600,000 to its shareholders, for the estimated tax
associated with the former LLC's taxable income.
In connection with the acquisition of the 29% minority interest in ZNLP,
the earnout payments to the shareholder of ZNLP were guaranteed. The remaining
amounts owed are recorded as "payable to related parties" in the consolidated
balance sheet.
On September 1, 1998, in connection with his employment with the Company,
an employee was loaned $74,638 by the Company to acquire a portion of his shares
of common stock. The loan bears interest at a rate of 9%, and all accrued and
unpaid interest is payable upon maturity (September 2008). The loan is secured
by the common stock.
Upon the IPO closing in February 2000, the Company paid two officers of the
Company (the former shareholders of CEL) a special bonus of $476,000.
As outlined in the former LLC Agreement, the Company is required to pay to
GFI Energy Ventures ("GFI"), a shareholder of the Company, an annual management
fee as consideration for financial, tax and general and administrative services.
This fee is calculated as 1% of the shareholders aggregate adjusted capital
contribution. Total management fees incurred for the period from Inception
through December 31, 1998 and for the year ended December 31, 1999 were
approximately $160,000 and $377,000, respectively. In November 1999, the Company
agreed to terminate its advisory arrangement with GFI effective as of the IPO
closing in February 2000. As consideration, the Company paid GFI $1,300,000 from
the net proceeds of the initial public offering.
F-25
<PAGE> 86
CAMINUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade accounts receivable.
The Company controls this risk through credit approvals, customer limits and
monitoring procedures. Additionally, the Company can limit the amount of support
provided to its customers in the event of non-payment. During the period from
Inception through December 31, 1998 and the year ended December 31, 1999, there
were no customers who represented more than 10% of consolidated revenues. At
December 31, 1998, there were no customers who represented more than 10% of the
Company's accounts receivable. At December 31, 1999 the combined balances of two
customers represented 31% of accounts receivable, net.
15. SEGMENT REPORTING
The Company has two reportable segments: software and strategic consulting.
Software comprises the licensing of the Company's software products and the
related implementation and maintenance services. Strategic consulting provides
energy market participants with professional advice regarding where and how to
compete in their respective markets. In evaluating financial performance,
management uses earnings before interest and other income, income taxes,
depreciation and amortization, the write-off of acquired IPR&D, and non-cash
compensation expense ("Adjusted EBITDA") as the measure of a segment's profit or
loss.
The accounting policies of the reportable segments are the same as those
described in Note 2. There are no inter-segment revenues or expenses between the
two reportable segments.
The following table illustrates the financial results of the two reportable
segments:
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION YEAR ENDED
THROUGH DECEMBER 31, 1998 DECEMBER 31, 1999
------------------------- -------------------------
STRATEGIC STRATEGIC
SOFTWARE CONSULTING SOFTWARE CONSULTING
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Operating Results:
Revenues:
Licenses............ $ 3,639,143 $ -- $12,538,617 $ --
Software services... 3,090,758 -- 7,815,880 --
Strategic
consulting........ -- 2,896,102 -- 6,556,156
----------- ----------- ----------- -----------
Total revenues.... $ 6,729,901 $ 2,896,102 $20,354,497 $ 6,556,156
=========== =========== =========== ===========
</TABLE>
F-26
<PAGE> 87
CAMINUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION YEAR ENDED
THROUGH DECEMBER 31, 1998 DECEMBER 31, 1999
------------------------- -------------------------
STRATEGIC STRATEGIC
SOFTWARE CONSULTING SOFTWARE CONSULTING
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Adjusted EBITDA........ $ 364,859 $ (9,704) $ 1,464,457 $ 1,827,395
Non-cash compensation
expense............. -- -- (968,412) --
Acquired IPR&D......... (4,822,000) -- (1,000,000) --
----------- ----------- ----------- -----------
(4,457,141) (9,704) (503,955) 1,827,395
Depreciation and
amortization........ (4,247,077) (1,419,444) (6,888,526) (2,170,768)
----------- ----------- ----------- -----------
Operating loss......... (8,704,218) (1,429,148) (7,392,480) (343,373)
=========== =========== =========== ===========
Other Data:
Capital expenditures... $ 379,677 $ 120,920 $ 913,794 $ 295,315
=========== =========== =========== ===========
AS OF AS OF
DECEMBER 31, 1998 DECEMBER 31, 1999
------------------------- -------------------------
Total assets........... $24,477,822 $ 6,591,180 $34,290,734 $ 7,187,203
=========== =========== =========== ===========
</TABLE>
The Company maintains a corporate division solely for administrative
purposes. This division does not generate revenues, and corporate expenses,
which are not significant, are primarily contained in the software segment.
Additionally, items recorded in the consolidated financial statements for
purchase accounting, such as goodwill, intangible assets and related
amortization, have been pushed down to the respective segments for segment
reporting purposes.
F-27
<PAGE> 88
CAMINUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Geographic information for the Company, for the period from Inception
through December 31, 1998 and for the year ended December 31, 1999 is summarized
in the table below. The Company's international revenues were derived primarily
from the United Kingdom and the Company's international long-lived assets at
December 31, 1998 and 1999 resided primarily in the United Kingdom.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
THROUGH YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1999
----------------- -----------------
<S> <C> <C>
Revenues:
United States......................... $ 5,743,168 $14,644,108
International (principally the United
Kingdom)........................... $ 3,882,835 $12,266,545
</TABLE>
<TABLE>
<CAPTION>
AS OF
--------------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1999
----------------- -----------------
<S> <C> <C>
Long-lived assets:
United States......................... $19,681,870 $27,334,815
International (principally the United
Kingdom)........................... $ 5,065,802 $ 3,170,481
</TABLE>
16. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
THROUGH YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1999
----------------- -----------------
<S> <C> <C>
Accrual of SS&C option buyback.......... $ -- $ 250,000
Issuance of equity in connection with
the acquisition of DC Systems......... 3,000,000
Notes payable issued in connection with
the acquisition of Zai*Net Software,
L.P................................... 4,375,000 --
Issuance of equity in connection with
the acquisition of Caminus Energy
Limited............................... 3,000,000 --
Issuance of equity for the contributed
distribution agreement................ 2,500,000 --
Issuance of equity in connection with
the acquisition of Zai*Net Software,
L.P. minority interest................ 10,339,350 --
</TABLE>
F-28
<PAGE> 89
CAMINUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
THROUGH YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1999
----------------- -----------------
<S> <C> <C>
Purchase of treasury stock by issuing a
note payable ($2,250,000),
cancellation of the original
distribution agreement ($2,166,667)
and grant of an option to acquire
common stock of the Company
($494,538)............................ 4,911,205 --
Notes receivable for sale of stock...... 1,000,000 --
</TABLE>
F-29
<PAGE> 90
CAMINUS CORPORATION AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
Allowance for doubtful accounts:
<TABLE>
<S> <C>
Balance, April 29, 1998..................................... $228,644
Provision................................................. --
Recoveries................................................ --
Charge-offs............................................... --
--------
Balance, December 31, 1998.................................. 228,644
Provision................................................. 75,000
Recoveries................................................ --
Charge-offs............................................... --
--------
Balance, December 31, 1999.................................. $303,644
========
</TABLE>
F-30
<PAGE> 91
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of ZAI*NET Software, Inc.
In our opinion, the financial statements listed in the accompanying index
on page F-1 present fairly, in all material respects, the financial position of
ZAI*NET Software, Inc. at December 31, 1997 and April 30, 1998, and the results
of its operations and its cash flows for the year ended December 31, 1997 and
the four months ended April 30, 1998, in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 12, as of December 31, 1998, ZAI*NET Software, Inc.
sold 100% of its assets to GFI Caminus LLC.
PRICEWATERHOUSECOOPERS LLP
New York, New York
August 28, 1998
F-31
<PAGE> 92
ZAI*NET SOFTWARE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, APRIL 30,
1997 1998
------------ ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 146,961 $1,097,742
Certificate of deposit.................................... 54,355 54,355
Accounts receivable....................................... 1,704,551 1,678,491
Prepaid expenses and other current assets................. 28,934 125,487
---------- ----------
Total current assets................................... 1,934,801 2,956,075
---------- ----------
Fixed assets, net........................................... 248,338 302,078
Other assets................................................ 10,240 11,950
---------- ----------
Total assets........................................... $2,193,379 $3,270,103
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable.......................................... $ 185,275 $ 188,407
Accrued expenses.......................................... 431,441 991,875
Deferred revenue.......................................... 1,339,434 1,435,084
Loan payable to stockholder............................... -- --
Loan payable to employee.................................. -- --
Loan payable to related party............................. -- --
Current portion of note payable for repurchase of
options................................................ 3,000 --
---------- ----------
Total current liabilities.............................. 1,959,150 2,615,366
---------- ----------
Note payable for repurchase of options...................... -- --
---------- ----------
Total liabilities...................................... 1,959,150 2,615,366
---------- ----------
Stockholder's equity:
Common stock, without par value; 2,000 shares authorized;
480 shares issued and outstanding...................... 1 1
Retained earnings......................................... 234,228 654,736
---------- ----------
Total stockholder's equity............................. 234,229 654,737
---------- ----------
Total liabilities and stockholder's equity............. $2,193,379 $3,270,103
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE> 93
ZAI*NET SOFTWARE, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
FOUR MONTHS
YEAR ENDED ENDED
DECEMBER 31, APRIL 30,
1997 1998
------------ -----------
<S> <C> <C>
Revenues:
Licenses....................................... $1,521,447 $1,495,221
Software services.............................. 2,667,807 1,334,473
---------- ----------
Total revenues.............................. 4,189,254 2,829,694
---------- ----------
Cost of revenues................................. 1,331,482 734,242
---------- ----------
Gross profit................................ 2,857,772 2,095,452
---------- ----------
Operating expenses:
Research and development....................... 1,223,715 580,031
Selling, general and administrative............ 1,638,293 1,079,391
---------- ----------
Total operating expenses.................... 2,862,008 1,659,422
---------- ----------
Income (loss) from operations.................... (4,236) 436,030
---------- ----------
Interest income (expense), net................... 17,591 8,294
---------- ----------
Income before provision for income taxes......... 13,355 444,324
---------- ----------
Provision for income taxes....................... -- 23,816
---------- ----------
Net income.................................. 13,355 420,508
---------- ----------
Retained earnings, beginning of year............. 220,873 234,228
---------- ----------
Retained earnings, end of year................... $ 234,228 $ 654,736
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE> 94
ZAI*NET SOFTWARE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOUR MONTHS
YEAR ENDED ENDED
DECEMBER 31, APRIL 30,
1997 1998
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 13,355 $ 420,508
--------- ----------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 123,090 46,141
Stock option repurchases............................... -- --
Changes in operating assets and liabilities:
Accounts receivable.................................... (916,444) 26,060
Prepaid expenses and other current assets.............. (8,494) (96,553)
Other assets........................................... (5,741) (1,710)
Accounts payable....................................... 1,065 3,132
Accrued expenses....................................... 241,499 560,434
Deferred revenue....................................... 952,718 95,650
--------- ----------
Net cash provided by operating activities................... 401,048 1,053,662
--------- ----------
Cash flows from investing activities:
Purchase of certificate of deposit........................ -- --
Purchases of fixed assets................................. (206,245) (99,881)
--------- ----------
Net cash used in investing activities....................... (206,245) (99,881)
--------- ----------
Cash flows from financing activities:
Repayment of loan payable to a related party.............. (100,000) --
Repayment of loans payable to stockholder................. (154,500) --
Repayment of loans payable to employee.................... (6,550) --
Repayment of notes payable for repurchase of options...... (29,000) (3,000)
--------- ----------
Net cash used in financing activities....................... (290,050) (3,000)
--------- ----------
Net (decrease) increase in cash and cash equivalents........ (95,247) 950,781
Cash and cash equivalents, beginning of year................ 242,208 146,961
--------- ----------
Cash and cash equivalents, end of year...................... $ 146,961 $1,097,742
========= ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest............................................... $ 6,015 $ --
Issuance of note payable for stock option repurchase... $ -- $ --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE> 95
ZAI*NET SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
ZAI*NET Software, Inc. (the "Company") is a Delaware corporation
headquartered in New York, which licenses, customizes and services ZAI*NET, an
integrated real-time front, middle, and back office software trading system for
foreign exchange, commodities, energy, options and other financial products.
REVENUE RECOGNITION
The Company generates revenue from the licensing of its software products
and performing services related to the implementation, training and support of
these products. The Company has adopted the provisions of Statements of Position
(SOP) 97-2 "Software Revenue Recognition". Adoption of this accounting
pronouncement did not materially affect the Company's financial statements.
License revenue is recognized upon the execution of a license agreement,
when the licensed product has been delivered, fees are fixed and determinable,
collectibility is probable, and when all other significant obligations have been
fulfilled. For license agreements in which customer acceptance is a condition to
earning the license fees, revenue is not recognized until acceptance occurs. For
arrangements containing multiple elements, such as software license fees,
consulting services and maintenance, and where vendor-specific objective
evidence of fair value exists for all undelivered elements, the Company accounts
for the delivered elements in accordance with the SOP 97-2.
Software Services revenue includes consulting services for installation,
data conversion and training related to the use of the Company's licensed
products. Customers often enter into arrangements for these services concurrent
with execution of license agreements. The services do not require significant
modification of the licensed products, are not essential to their functionality,
are available from other vendors and payment obligations with respect to the
licensed products are not dependent upon the performance of these services.
Accordingly, the Company recognizes revenues for these services as they are
performed. Maintenance and support revenues associated with new product licenses
and renewals where vendor-specific objective evidence exists, are deferred and
recognized ratably over the contract period. Contracts provide for an initial
maintenance period, which is annual, and a renewal period after expiration of
the initial maintenance period. Customers are permitted, but not required, to
renew their maintenance with us after expiration of the initial annual period.
The renewal rate for maintenance services is based on the initial license fee
and is used to establish the VSOE for maintenance revenues.
SOFTWARE DEVELOPMENT COSTS
All costs incurred in developing software products are expensed as research
and development expenses in the period incurred. Software development costs
incurred subsequent to the establishment of technological feasibility are not
material.
F-35
<PAGE> 96
ZAI*NET SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
CASH AND CASH EQUIVALENTS
Cash equivalents are defined as highly liquid investments with an initial
maturity of three months or less.
FIXED ASSETS
Fixed assets are stated at cost, less accumulated depreciation.
Depreciation is calculated using the straight-line method over the estimated
useful life of the related asset. Estimated useful lives generally range from
three to five years.
INCOME TAXES
The Company has elected to be treated as a Subchapter S Corporation for
federal and state income tax purposes. Accordingly, the sole stockholder of the
Company is responsible for federal and state income taxes resulting from the
Company's earnings. The Company is subject to certain other state and city
taxes, which are charged to operations as incurred.
The Company accounts for income taxes under the requirements of SFAS 109,
"Accounting for Income Taxes," which uses an asset and liability approach to
measure income tax expense. The asset and liability approach requires the
recognition of deferred tax assets and liabilities for the expected future
consequences of temporary differences between the financial statement amounts
and the tax basis of certain assets and liabilities.
For the four-month period ended April 30, 1998, $77,486 was recorded for
state and local income taxes payable by the Company. Subsequent to April 30,
1998, the tax status of the Company changed. Refer to Note 12, subsequent
events, for further details.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation." As permitted by
this Statement, the Company continues to apply Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," in accounting for
its stock-based employee compensation arrangements. No compensation expense has
been recognized for the Company's stock-based compensation plans as the exercise
price of the stock options is not less than the fair value of the underlying
common stock on the date of grant.
FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, accounts
receivable, accounts payable and loans payable. The current carrying amount of
these instruments approximates fair market value.
F-36
<PAGE> 97
ZAI*NET SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
USE OF ESTIMATES
The financial statements were prepared in conformity with generally
accepted accounting principles, which require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, APRIL 30,
1997 1998
------------ ---------
<S> <C> <C>
Computer and office equipment....................... $565,973 $658,591
Furniture and fixtures.............................. 66,267 73,530
Automobile.......................................... 21,403 21,403
-------- --------
653,643 753,524
Less -- Accumulated depreciation and
amortization...................................... 405,305 451,446
-------- --------
$248,338 $302,078
======== ========
</TABLE>
3. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, APRIL 30,
1997 1998
------------ ---------
<S> <C> <C>
Payroll and benefits................................ $149,592 $397,382
Legal and professional fees......................... -- 363,073
Litigation settlement............................... 175,000 175,000
Other Expenses...................................... 106,849 56,420
-------- --------
$431,441 $991,875
======== ========
</TABLE>
4. EMPLOYEE STOCK OPTIONS
In August 1996, the Company repurchased, from a former employee, options to
purchase 5 shares of the Company's common stock in exchange for a $20,000
non-interest bearing note. Payments of this note are in monthly installments of
$1,000 commencing August 1, 1996. The note was repaid in full in March 1998.
In May 1995, the Company repurchased, from a former employee, options to
purchase 17 shares of the Company's common stock in exchange for an $87,000
noninterest-bearing note, of which $36,000, $34,000, and $17,000 were paid in
1995, 1996, and 1997, respectively.
F-37
<PAGE> 98
ZAI*NET SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following tables summarizes the Company's stock option activity for the
year ended December 31, 1997 and the four months ended April 30, 1998:
<TABLE>
<CAPTION>
YEAR ENDED FOUR MONTHS ENDED
DECEMBER 31, 1997 APRIL 29, 1998
------------------------- -------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE PRICE EXERCISE PRICE
SHARES PER SHARE SHARES PER SHARE
------ ---------------- ------ ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year.............. 300 $3,799 300 $3,799
Granted....................................... -- -- -- --
Exercised..................................... -- -- -- --
Canceled...................................... -- -- -- --
Repurchased................................... -- --
Outstanding at end of year.................... 300 $3,799 300 $3,799
Options exercisable at year end............... 300 $3,799 300 $3,799
</TABLE>
The range of exercise prices for options outstanding at December 31, 1997
and April 30, 1998 was $1,000 - $4,400.
The weighted average remaining contractional life for options with a
weighted average exercise price of $3,799 is 7.8 years.
The Company continues to apply APB 25, "Accounting for Stock Issued to
Employees," in accounting for stock options issued to employees. Accordingly, no
compensation expense has been recognized for its stock based compensation plans.
Had compensation cost for the Company's stock option plan been determined based
on the fair value at the grant date, consistent with the methodology prescribed
under Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," the impact on net income would not have been material
for any period.
5. 401(K) SAVINGS PLAN
The Company maintains a 401(k) Savings Plan (the "Plan"). Employees are
eligible to participate in the Plan upon completion of six months of service
with the Company. Eligible employees may contribute up to 15% of their annual
compensation to the Plan on a pre-tax basis. Participant contributions to the
Plan are immediately vested. In addition, under the terms of the Plan, the
Company, at its discretion, may match all or a portion of a participant's
contribution to the Plan up to 10% of the participant's compensation. This
matching percentage is determined by the Company prior to the start of each Plan
year. The Company matching contribution is made at calendar year end and
participants become vested in Company matching contributions to the plan at the
rate of 20% per year of service. The Company elected to match 100% of
participant contributions up to a maximum of $1,000 per participant for 1997 and
1998. Compensation expense for the plan was approximately $16,000 and $7,500 for
1997 and for the four months ended April 30, 1998, respectively.
F-38
<PAGE> 99
ZAI*NET SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. TRANSACTIONS WITH RELATED PARTIES
LOAN PAYABLE TO RELATED PARTY
In September 1996, the Company borrowed $100,000 from the family of a
shareholder of the Company. The loan bore interest at the rate of 8% and $2,000
and $6,000 of interest expense was paid in 1996 and 1997, respectively. This
loan was repaid in full in 1997.
7. LINE OF CREDIT
The Company maintained a $150,000 demand line of credit with a bank.
Interest on outstanding borrowings under the line of credit was based on the
prime lending rate plus two percent.
The line of credit required the Company to maintain a $50,000 interest
bearing certificate of deposit with the bank. There were no amounts outstanding
under the line of credit for any period.
8. INCOME TAXES
The provision (benefit) for income taxes for the four-month period ended
April 30, 1998 consists of the following:
<TABLE>
<S> <C>
Current provision........................................... $ 77,486
Deferred benefit............................................ (53,670)
--------
Total provision............................................. $ 23,816
========
</TABLE>
Since the Company's basis of accounting for tax purposes is the cash
receipts and disbursements method, the most significant components of the
deferred tax asset are accrued items of income and expense not recognized for
tax purposes until received or paid.
9. COMMITMENTS
The Company leases office space in New York City, London, Houston and
Singapore under long-term leases. Future minimum annual lease commitments are as
follows:
<TABLE>
<S> <C>
May 1, 1998 Through December 31, 1998....................... $ 238,933
1999........................................................ 384,842
2000........................................................ 354,202
2001........................................................ 354,177
Thereafter.................................................. 430,039
----------
$1,762,193
==========
</TABLE>
Rent expense in 1997 and for the four months ended April 30, 1998 totaled
$239,303 and $116,712, respectively.
F-39
<PAGE> 100
ZAI*NET SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
The Company's customer base consists primarily of companies in the
financial services and energy industry groups. Although the Company is directly
affected by the well being of these industries, management does not believe
significant credit risks exists as of April 30, 1998.
Two customers accounted for 13% and 10% of total accounts receivable at
December 31, 1997 and 29% of revenues for 1997. Two customers accounted for 17%
and 10% of accounts receivable at April 30, 1998 and one customer accounted for
18% of revenues for the four months ended April 30, 1998.
11. LITIGATION
An action was commenced in 1989 against the Company in which a former
employee (the "plaintiff") alleged four causes of action and sought monetary
damages of $2,000,000. The plaintiff also alleged two additional causes of
action against the current stockholder and a former stockholder and sought
aggregate damages of $5,000,000. These actions relate to the plaintiff's claim
that the Company promised the plaintiff an ownership interest in the Company and
a share of the Company's profits derived from software the plaintiff allegedly
developed in exchange for the plaintiff's promise to work for the Company. The
case was settled for $175,000 on May 11, 1998 and all required liabilities were
accrued at December 31, 1997 and April 30, 1998.
12. SUBSEQUENT EVENTS
On May 12, 1998, the Company transferred substantially all of its assets
and liabilities to ZAI*NET SOFTWARE, L.P. (the "Partnership"), a Partnership 99%
owned by the Company and 1% owned by the sole stockholder of the Company.
Immediately following this transfer the Partnership agreed to sell 70% of its
ownership interest and the stockholder agreed to sell his 1% ownership interest
to GFI Caminus LLC ("GFI"). The Company retained the remaining 29% ownership
interest in the newly formed Partnership. The remaining ownership interest was
sold to GFI on December 31, 1998. (Unaudited)
F-40
<PAGE> 101
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION FORM NUMBER
- ------- ----------- ---- ------
<C> <S> <C> <C>
2.1* Merger Agreement among the Registrant, Caminus LLC and
Caminus Merger LLC, dated December 17, 1999............. S-1 2.1
2.2*+ Purchase Agreement by and among Zai*Net Software, Inc.,
Zai*Net Software, L.P., GFI Caminus LLC and Brian J.
Scanlan, dated May 12, 1998............................. S-1 2.2
2.3*+ Stock Purchase Agreement by and among GFI Caminus LLC,
Caminus Energy Limited, Dr. Nigel L. Evans, Ph.D. and
Dr. Michael B. Morrison, Ph.D., dated May 12, 1998...... S-1 2.3
2.4*+ Purchase Agreement by and between Zai*Net Software, L.P.
and Corwin Joy, an individual, doing business as
Positron Energy Consulting, dated November 13, 1998..... S-1 2.4
2.5*+ Agreement of Merger by and between Caminus LLC and
Zai*Net Software, L.P., dated February 26, 1999......... S-1 2.5
2.6*+ Purchase Agreement by and among DC Systems, Inc.,
Caminus LLC, Caminus/DC Acquisition Corp., and the
Shareholders (as defined in the agreement) dated July
31, 1999................................................ S-1 2.6
3.1* Certificate of Incorporation of the Registrant.......... S-1 3.1
3.2* Bylaws of the Registrant................................ S-1 3.2
4* Specimen certificate for shares of Common Stock, $0.01
par value per share, of the Registrant.................. S-1 4
10.1*# 1998 Stock Incentive Plan............................... S-1 10.1
10.2*# 1999 Stock Incentive Plan, including forms of stock
option agreement for incentive and nonstatutory stock
options................................................. S-1 10.2
10.3*# 1999 Employee Stock Purchase Plan....................... S-1 10.3
10.4* Limited Liability Company Agreement of GFI Caminus LLC,
dated May 12, 1998...................................... S-1 10.4
10.5* Assignment and Assumption Agreement by and among Zai*Net
Software, Inc., Zai*Net Software, L.P. and Brian J.
Scanlan, dated May 12, 1998............................. S-1 10.5
10.6* Second Assignment and Assumption Agreement by and
between Zai*Net Software, Inc. and Rooney Software,
L.L.C., dated May 12, 1998.............................. S-1 10.6
10.7* Conversion Agreement and Amendment of Purchase Agreement
by and among Caminus Energy Ventures LLC, Zak
Associates, Inc., Zai*Net Software, L.P., Brian Scanlan
and Rooney Software, L.L.C., dated December 31, 1998.... S-1 10.7
10.8* Cooperation Agreement by and between ABB Energy
Information Systems and Caminus LLC, dated July 13,
1999.................................................... S-1 10.8
10.9* Credit Agreement by and between Caminus LLC and Fleet
Bank, N.A., dated June 23, 1999......................... S-1 10.9
10.10* Security Agreement by and between Caminus LLC and Fleet
Bank, N.A., dated June 23, 1999......................... S-1 10.10
</TABLE>
1
<PAGE> 102
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION FORM NUMBER
- ------- ----------- ---- ------
<C> <S> <C> <C>
10.11* Debenture issued by Caminus Energy Limited to Fleet
Bank, N.A., dated June 23, 1999......................... S-1 10.11
10.12* Debenture issued by Caminus Limited to Fleet Bank, N.A.,
dated June 23, 1999..................................... S-1 10.12
10.13* Debenture issued by Zai*Net Software Limited to Fleet
Bank, N.A., dated June 23, 1999......................... S-1 10.13
10.14* Guarantee by Caminus Energy Limited in favor of Fleet
Bank, N.A., dated June 23, 1999......................... S-1 10.14
10.15* Guarantee by Caminus Limited in favor of Fleet Bank,
N.A., dated June 23, 1999............................... S-1 10.15
10.16* Guarantee by Zai*Net Software Limited in favor of Fleet
Bank, N.A., dated June 23, 1999......................... S-1 10.16
10.17* Mortgage of Stock and Shares by Caminus Limited in favor
of Fleet Bank, N.A., dated June 23, 1999................ S-1 10.17
10.18* Mortgage of Stock and Shares by Caminus LLC in favor of
Fleet Bank, N.A., dated June 23, 1999................... S-1 10.18
10.19*# Employment Agreement by and between David M. Stoner and
Caminus Energy Ventures LLC, dated October 21, 1998..... S-1 10.19
10.20* Pledge and Security Agreement by and between David M.
Stoner and Caminus Energy Ventures LLC, dated October
21, 1998................................................ S-1 10.20
10.21*# Service Agreement by and between Dr. Nigel L. Evans and
Caminus Energy Limited, dated May 12, 1998.............. S-1 10.21
10.22*# Covenant Not to Compete by and among Dr. Nigel L. Evans,
Dr. Michael B. Morrison and Caminus Energy Limited,
dated May 12, 1998...................................... S-1 10.22
10.23*# Employment Agreement by and between Brian J. Scanlan and
Zai*Net Software, L.P., dated May 12, 1998.............. S-1 10.23
10.24*# Covenant Not to Compete by and between Brian J. Scanlan
and Zai*Net Software, L.P., dated May 12, 1998.......... S-1 10.24
10.25*# Employment Agreement by and between Simon Young and
Zai*Net Software, L.P., dated May 12, 1998.............. S-1 10.25
10.26*# Covenant Not to Compete by and between Simon Young and
Zai*Net Software, L.P., dated May 12, 1998.............. S-1 10.26
10.27* Distributor Agreement by and between SS&C Technologies,
Inc. and GFI Caminus LLC, dated May 12, 1998............ S-1 10.27
10.28* Agreement by and between Caminus LLC and GFI Two LLC,
dated January 21, 2000.................................. S-1 10.28
10.29* Lease Agreement by and between Sage Realty Corporation
and Zai*Tech Software, Inc., as amended, dated February
15, 1991 (including Amendment Nos. 1, 2 and 3,
reflecting the name changes to Zai*Net Software, Inc.
Zai*Net Software, L.P. and Caminus LLC, respectively)... S-1 10.29
10.30*# Service Agreement by and between Dr. Michael B. Morrison
and Caminus Energy Limited, dated May 12, 1998.......... S-1 10.30
</TABLE>
2
<PAGE> 103
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION FORM NUMBER
- ------- ----------- ---- ------
<C> <S> <C> <C>
10.31* Purchase and Option Agreement, as amended, by and
between Caminus Energy Ventures LLC and SS&C
Technologies, Inc., dated December 31, 1998............. S-1 10.31
10.32* Revolving Promissory Note issued by Caminus LLC to Fleet
Bank, N.A., dated June 23, 1999......................... S-1 10.32
10.33* Working Capital Promissory Note issued by Caminus LLC to
Fleet Bank, N.A., dated June 23, 1999................... S-1 10.33
10.34* Mortgage of Stocks and Shares, by Caminus Limited in
favor of Fleet Bank, N.A., dated June 23, 1999.......... S-1 10.34
10.35* Mortgage of Stocks and Shares, by Caminus LLC in favor
of Fleet Bank, N.A., dated June 23, 1999................ S-1 10.35
10.36* Amendment to Limited Liability Company Agreement among
Caminus LLC and certain members of Caminus LLC, dated
January 19, 2000........................................ S-1 10.36
10.37*# Employment Letter between Mark A. Herman and Caminus LLC
dated January 26, 1999.................................. S-1 10.54
10.38*# Amendment No. 1 to Employment Agreement between Brian
Scanlan and Caminus LLC, dated November 8, 1999......... S-1 10.38
10.39*# Amendment No. 1 to Employment Agreement between Dr.
Nigel Evans and Caminus Limited, dated January 14,
2000.................................................... S-1 10.39
10.40*# Amendment No. 1 to Employment Agreement between Simon
Young and Caminus LLC, dated November 8, 1999........... S-1 10.40
10.41*# Amendment No. 1 to Employment Agreement between Dr.
Michael Morrison and Caminus LLC, dated November 8,
1999.................................................... S-1 10.41
10.42* Pledge Agreement between Caminus LLC and Fleet Bank,
N.A., dated September 1, 1999........................... S-1 10.42
10.43* Pledge Agreement between DC Systems, Inc. and Fleet
Bank, N.A., dated August 30, 1999....................... S-1 10.43
10.44* Pledge Agreement between Caminus/DC Acquisition Corp.
and Fleet Bank, N.A., dated August 30, 1999............. S-1 10.44
10.45* Security Agreement between DC Systems, Inc. and Fleet
Bank, N.A., dated September 1, 1999..................... S-1 10.45
10.46* Security Agreement between Caminus/DC Acquisition Corp.
and Fleet Bank, N.A., dated September 1, 1999........... S-1 10.46
10.47* Security Agreement between DCS*Gasnet Corporation and
Fleet Bank, N.A., dated September 1, 1999............... S-1 10.47
10.48* Guarantee made by DC Systems, Inc. in favor of Fleet
Bank, N.A., dated September 1, 1999..................... S-1 10.48
10.49* Guarantee made by Caminus/DC Acquisition Corp. in favor
of Fleet Bank, N.A., dated September 1, 1999............ S-1 10.49
10.50* Guarantee made by DCS*Gasnet Corp. in favor of Fleet
Bank, N.A., dated September 1, 1999..................... S-1 10.50
</TABLE>
3
<PAGE> 104
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION FORM NUMBER
- ------- ----------- ---- ------
<C> <S> <C> <C>
10.51*# Amendment No. 2 to Employment Agreement between Dr.
Michael B. Morrison and Caminus Limited, dated January
14, 2000................................................ S-1 10.51
10.52* Exchange Agreement between Caminus Corporation and OCM
Caminus Investment, Inc., dated January 21, 2000........ S-1 10.53
21.1 Subsidiaries of the Registrant...........................Filed herewith
23.1 Consent of PricewaterhouseCoopers LLP. ..................Filed herewith
27 Financial Data Schedule..................................Filed herewith
</TABLE>
- -------------------------
* Incorporated herein by reference to the Registrant's Registration Statement
on Form S-1 (File No. 333-88437).
# Management contract or compensatory plan or arrangement filed in response to
Item 14(a)(3) of the instructions to Form 10-K.
+ The Registrant hereby agrees to furnish supplementally a copy of any omitted
schedule to this agreement to the Securities and Exchange Commission upon its
request.
4
<PAGE> 1
Exhibit 21.1
WHOLLY OWNED SUBSIDIARIES OF THE REGISTRANT
Company Jurisdiction
------- ------------
1. Caminus Limited United Kingdom
(subsidiary of the Registrant)
2. DC Systems, Inc. Texas
(subsidiary of the Registrant)
3. Caminus Energy Limited United Kingdom
(subsidiary of Caminus Limited)
4. Zai*Net Software Limited United Kingdom
(subsidiary of Caminus Limited)
5. Caminus Consultants Limited United Kingdom
(subsidiary of Caminus Limited)
6. DCS*Gasnet Corporation Texas
(subsidiary of DC Systems, Inc.)
7. Caminus/DC Acquisition Corp. Delaware
(subsidiary of the Registrant)
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (File Nos. 333-95533, 333-31004 and 333-31006) of Caminus
Corporation of our report dated February 22, 2000, relating to the consolidated
financial statements and financial statement schedule of Caminus Corporation,
and of our report dated August 28, 1998, relating to the financial statements of
ZAI*NET Software, Inc., which appear in this Form 10-k.
PricewaterhouseCoopers LLP
New York, NY
March 28, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 8-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> APR-29-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 DEC-31-1999
<CASH> 2,770,538 661,502
<SECURITIES> 0 0
<RECEIVABLES> 3,472,662 7,663,316
<ALLOWANCES> 228,644 303,644
<INVENTORY> 0 0
<CURRENT-ASSETS> 6,321,330 10,972,642
<PP&E> 948,832 2,280,071
<DEPRECIATION> 168,756 634,476
<TOTAL-ASSETS> 31,069,002 41,477,937
<CURRENT-LIABILITIES> 10,971,720 15,738,518
<BONDS> 0 0
0 0
0 0
<COMMON> 97,292 110,579
<OTHER-SE> 17,062,490 25,628,840
<TOTAL-LIABILITY-AND-EQUITY> 31,069,002 41,477,937
<SALES> 0 0
<TOTAL-REVENUES> 9,626,003 26,910,653
<CGS> 0 0
<TOTAL-COSTS> 4,490,050 7,617,578
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 295,450
<INCOME-PRETAX> (10,036,457) (7,963,169)
<INCOME-TAX> 35,735 645,766
<INCOME-CONTINUING> (10,371,188) (8,608,935)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (10,371,188) (8,608,935)
<EPS-BASIC> (1.41) (1.01)
<EPS-DILUTED> (1.41) (1.01)
</TABLE>
