<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended March 31, 2000
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
-------------------------
CAMINUS CORPORATION
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 13-4081739
(State or other jurisdiction of (IRS employer identification no.)
incorporation or organization)
</TABLE>
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
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of May 1, 2000, there were 15,257,147 shares of Caminus
Corporation common stock outstanding.
================================================================================
<PAGE> 2
CAMINUS CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PAGE
a) Consolidated Balance Sheets as of
March 31, 2000 (Unaudited) and December 31, 1999 1
b) Consolidated Statements of Operations for the three months ended
March 31, 2000 and 1999 (Unaudited) 2
c) Consolidated Statements of Cash Flows for the three months ended
March 31, 2000 and 1999 (Unaudited) 3
d) Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
</TABLE>
<PAGE> 3
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CAMINUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amount)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------ -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 56,533 $ 662
Accounts receivable, net 6,306 7,360
Deferred taxes 551 418
Prepaid expenses and other current assets 1,038 2,533
------------ ----------
Total current assets 64,428 10,973
Fixed assets, net 1,907 1,645
Developed technology, net 2,722 3,051
Other intangibles, net 3,667 3,974
Goodwill, net 19,896 21,816
Other assets 19 19
------------ ----------
Total assets $ 92,639 $ 41,478
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,016 $ 1,444
Accrued liabilities 3,421 4,962
Borrowings under credit facility - 3,050
Taxes payable 502 388
Payable to related parties 3,324 3,824
Deferred revenue 1,973 2,071
------------ ----------
Total current liabilities 10,236 15,739
------------ ----------
Commitments and contingencies - -
Stockholders' equity:
Common stock, $0.01 par, 50,000 shares authorized,
17,014 shares issued and 15,251 shares outstanding at
March 31, 2000; 11,058 shares issued and 9,296
shares outstanding at December 31, 1999 170 110
Additional paid-in capital 122,448 52,670
Treasury stock, at cost (4,911) (4,911)
Subscriptions receivable (2,018) (2,907)
Unearned compensation (230) (235)
Accumulated deficit (32,993) (18,980)
Cumulative translation adjustment (63) (8)
------------ ----------
Total stockholders' equity 82,403 25,739
------------ ----------
Total liabilities and stockholders' equity $ 92,639 $ 41,478
============ ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
1
<PAGE> 4
CAMINUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------------------
2000 1999
----------------- -------------------
(Unaudited)
<S> <C> <C>
Revenues:
Licenses $ 4,073 $ 1,777
Software services 2,710 1,949
Strategic consulting 1,737 1,510
----------------- -------------------
Total revenues 8,520 5,236
----------------- -------------------
Cost of revenues:
Cost of licenses 303 56
Cost of software services 1,826 921
Cost of strategic consulting 719 604
----------------- -------------------
Total cost of revenues 2,848 1,581
----------------- -------------------
Gross profit 5,672 3,655
----------------- -------------------
Operating expenses:
Sales and marketing 1,846 415
Research and development 1,374 765
General and administrative (excluding IPO-related expenses) 3,266 1,761
Amortization of intangible assets 2,556 1,869
IPO-related expenses 11,035 -
----------------- -------------------
Total operating expenses 20,077 4,810
----------------- -------------------
Loss from operations (14,405) (1,155)
Other income:
Interest income, net 502 9
Deferred financing fee (89) -
Other expense, net - (6)
----------------- -------------------
Total other income 413 3
----------------- -------------------
Loss before provision for income taxes (13,992) (1,152)
Provision for income taxes 21 73
----------------- -------------------
Net loss $ (14,013) $ (1,225)
================== ===================
Basic and diluted net loss per share $ (1.05) $ (0.15)
================== ===================
Weighted average shares used in computing net loss per
share 13,380 7,967
================== ===================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
2
<PAGE> 5
CAMINUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------------
2000 1999
------------- ------------------
Cash flows from operating activities: (Unaudited)
<S> <C> <C>
Net loss $ (14,013) $ (1,225)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 2,722 1,949
Deferred taxes (132) -
Deferred costs 182 -
IPO-related expenses 9,741 -
Amortization of unearned compensation expense 65 -
Changes in operating assets and liabilities:
Accounts receivable 1,055 (127)
Prepaid expenses and other current assets 1,314 19
Accounts payable (417) (658)
Accrued liabilities (1,539) (84)
Taxes payable 114 -
Deferred revenue (98) 414
Other (56) 14
------------- ----------------
Net cash provided by (used in) operating activities (1,062) 302
------------- ----------------
Cash flows from investing activities:
Purchase of fixed assets (428) (185)
------------- ----------------
Net cash used in investing activities: (428) (185)
------------- ----------------
Cash flows from financing activities:
Payments of obligation to affiliate (500) (3,625)
Payments of borrowing under credit facility, net (3,050) -
Proceeds from borrowings from affiliate - 1,250
Cash received for subscription receivable - 1,832
Proceeds received from issuance of common stock, net 59,073 -
Cash received for options exercised 1,853 -
------------- ----------------
Net cash provided by (used in) financing activities 57,376 (543)
------------- ----------------
Effect of exchange rates on cash flows (15) (5)
------------- ----------------
Net increase (decrease) in cash and cash equivalents 55,871 (431)
Cash and cash equivalents, beginning of period 662 2,771
------------- ----------------
Cash and cash equivalents, end of period $ 56,533 $ 2,340
============= ================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE> 6
CAMINUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
RECAPITALIZATION
In February 2000, the Company closed the initial public offering
("IPO") of its common stock, issuing 4,088,119 shares of common stock and
realizing net proceeds from the offering of approximately $59.1 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.
BASIS OF PRESENTATION
The unaudited consolidated financial statements included herein have
been prepared by the Company, pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted pursuant to such
rules and regulations. However, the Company believes that the disclosures are
adequate to make the information presented not misleading. These unaudited
consolidated financial statements should be read in conjunction with the
financial statements and the notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1999. The unaudited
consolidated financial statements included herein reflect all adjustments (which
include only normal, recurring adjustments) which are, in the opinion of
management, necessary to state fairly the results for the periods presented. The
results for the three-month period ended March 31, 2000 are not necessarily
indicative of the results expected for the full fiscal year.
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.
EARNINGS (LOSS) 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.
4
<PAGE> 7
CAMINUS CORPORATION AD SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At March 31, 2000 and 1999, outstanding stock options, as well as
contingently issuable options outstanding at March 31, 1999, were excluded from
the calculation of diluted net loss per share as the effect would have been
antidilutive.
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting
Comprehensive Income". SFAS 130 established new rules for the reporting and
display of comprehensive income and its components. SFAS 130 requires
unrealized gains or losses on the Company's foreign currency translation
adjustments to be included in other comprehensive income. Total comprehensive
loss for the three months ended March 31, 2000 and 1999 was as follow:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------------------------------
2000 1999
---------------------------- ----------------------
(IN THOUSANDS)
<S> <C> <C>
Net loss .................................................... $ (14,013) $ (1,225)
Cumulative translation adjustment.............................. (55) 9
------------------ ---------------
Comprehensive loss............................................. $ (14,068) $ (1,216)
================== ================
</TABLE>
NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," ("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.
2. IPO-RELATED EXPENSES
As a result of our IPO in January 2000, certain events occurred which
required us to record approximately $11.0 million of charges in the quarter
ended March 31, 2000. These transactions are part of our general and
administrative expenses, but are separately identified on the statement of
operations. The transactions include the cost 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, and the granting of shares and the forgiveness of a loan to our
President and Chief Executive Officer, which resulted in a charge of
approximately $3.7 million.
Concurrently, the Company paid $1.3 million to GFI Two LLC, a
principal stockholder, to cancel its consulting and advisory agreement. This
payment to GFI Two LLC has been included in general and administrative expenses
on our statement of operations.
3. 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, IPO-related expenses and termination fee
("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 of the Company's Annual Report on Form 10-K. There are no
inter-segment revenues or expenses between the two reportable segments.
5
<PAGE> 8
CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table illustrates the financial results of the two
reportable segments:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------------------------------------------------------------
2000 1999
---------------------------------------------- ------------------------------
(IN THOUSANDS)
STRATEGIC STRATEGIC
SOFTWARE CONSULTING OTHER SOFTWARE CONSULTING
-------- ---------- ----- -------- ----------
<S> <C> <C> <C> <C> <C>
Operating Results:
Revenues:
Licenses $ 4,073 $ -- $ -- $ 1,777 $ --
Software services 2,710 -- -- 1,949 --
Strategic consulting -- 1,737 -- 1,510
----------- ----------- ----------- ----------- ----------
Total revenues $ 6,783 $ 1,737 -- 531 263
=========== =========== =========== =========== ==========
Adjusted EBITDA 108 609 -- --
Non-cash compensation expense (65) -- -- -- --
-- --
Termination fee -- -- (1,300) -- --
IPO-related expenses -- -- (11,035) -- --
----------- ----------- ----------- ----------- ----------
43 609 (12,335) 531 263
Depreciation and amortization (2,161) (561) -- (1,409) (540)
----------- ----------- ---------- ----------- ----------
Operating loss $ (2,118) $ 48 $ (12,335) $ (878) $ (277)
=========== =========== ----------- ----------- ----------
Other Data:
<CAPTION>
AS OF MARCH 31,
----------------------------------------------------------------------------------------
2000 1999
---------------------------------------------- ------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Total assets..................... $ 85,680 $ 6,959 $ 24,327 $ 6,031
=========== =========== =========== ==========
</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.
4. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------------------------------
2000 1999
----------------------- -------------------------
(IN THOUSANDS)
<S> <C> <C>
Cash paid for interest........................................ $ 27 $ 1
Option exercised for no cash consideration.................... 9 --
Option exercised in exchange for recourse note receivable 111 --
</TABLE>
6
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This quarterly 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 quarterly 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 quarterly
report. You should also carefully review the risks outlined in other documents
that we file from time to time with the Securities and Exchange Commission.
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
185 at March 31, 2000, and we intend to continue to increase our number of
employees throughout 2000.
We generate revenues from licensing our software products, providing
related services for implementation consulting and support and providing
strategic consulting services. We generally license one or more 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
generally require that a significant portion of the license fee is payable on
delivery of the licensed product with the balance due in installments.
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 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
7
<PAGE> 10
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
approximately 42% of our total revenues for the quarter ended March 31, 2000. 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 acquisition of DC Systems, Inc. and the significant
changes in our operations, the fluctuation of financial results, including
financial data expressed as a percentage of revenues for all periods, do not
necessarily provide a meaningful understanding of the expected future results
of our operations.
8
<PAGE> 11
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1999 TO THE THREE MONTHS ENDED
MARCH 31, 2000.
The following table sets forth the consolidated financial
information for the periods indicated as a percentage of total revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------------------------------
1999 2000
---------------------- -------------------
(UNAUDITED)
<S> <C> <C>
Revenues:
Licenses 34% 48%
Software services 37 32
Strategic consulting 29 20
----------- --------
Total revenues 100 100
Cost of revenues:
Cost of licenses 1 4
Cost of software services 17 21
Cost of strategic consulting 12 8
---------- --------
Total cost of revenues 30 33
---------- --------
Gross profit 70 67
Operating expenses:
Sales and marketing 8 22
Research and development 14 16
General and administrative (excluding IPO related expenses) 34 38
Amortization of intangible assets 36 30
IPO-related
expenses -- 129
----------- --------
Total operating expenses 92 236
----------- --------
Loss from operations (22) (169)
Other income
Interest income, net -- 6
Deferred financing fees -- (1)
Other expense, net -- --
----------- --------
Total other income -- 5
----------- --------
Loss before provision for income taxes (22) (164)
Provision for income taxes 1 --
----------- --------
Net loss (23)% (164)%
============ =========
</TABLE>
Revenues
LICENSES. License revenues represented 34% and 48% of the total
revenues for the three months ended March 31, 1999 ('1999") and 2000 ("2000"),
respectively, and increased $2.3 million, or 129%, from $1.8 million in 1999 to
$4.1 million in 2000. This increase was primarily attributable to increased
demand for new and additional licenses from new and existing customers, larger
transaction sizes and the expansion of our domestic and international sales
activity.
SOFTWARE SERVICES. Software services revenues represented 37% and
32% of the total revenues for 1999 and 2000, respectively, and increased by
$0.8 million, or 39%, from $1.9 million in 1999 to $2.7 million in 2000. This
increase in absolute dollars 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.
9
<PAGE> 12
STRATEGIC CONSULTING. Strategic consulting revenues represented 29%
and 20% of the total revenues for 1999 and 2000, respectively, and increased
$0.2 million, or 15%, from $1.5 million in 1999 to $1.7 million in 2000. This
increase in absolute dollars 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 1% and 4%
for 1999 and 2000, respectively, and increased $0.2 million, or 441%, from $0.1
million in 1999 to $0.3 million in 2000. 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 17% and 21%
for 1999 and 2000, respectively, and increased $0.9 million, or 98%, from $0.9
million in 1999 to $1.8 million in 2000. 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. 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 12% and 8% for 1999 and
2000, respectively, and increased $0.1 million, or 19%, from $0.6 million in
1999 to $0.7 million in 2000. This increase in absolute dollars 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 were 8%
and 22% for 1999 and 2000, respectively, and increased $1.4 million, or 345%,
from $0.4 million in 1999 to $1.8 million in 2000. 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 were 14% and 16% for 1999 and
2000, respectively, and increased $0.6 million, or 80%, from $0.8 million in
1999 to $1.4 million in 2000. 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,
excluding IPO-related 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 34% and 38% for 1999 and 2000, respectively, and increased $1.5
million, or 8%, from $1.8 million in 1999 to $1.9 million in 2000. This
increase in absolute dollars was primarily due to a payment of $1.3 million for
a termination fee to GFI Two, a principal stockholder, to cancel its consulting
and advisory agreement and 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.
10
<PAGE> 13
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 36% and 30% for
1999 and 2000, respectively, and increased $0.7 million, or 37%, from $1.9
million in 1999 to $2.6 million in 2000. The increase was primarily
attributable to our incurring amortization expense related to the additional
amortization expense related to the DC Systems acquisition.
IPO-RELATED EXPENSES
As a result of our initial public offering in January 2000, certain
events occurred which required us to record approximately $11.0 million charges
in the quarter ended March 31, 2000. These transactions are part of our general
and administrative expenses, but are separately identified on our statement of
operations. The transactions include the cost 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 and the granting of shares and the forgiveness of a loan to our
President and Chief Executive Officer, which resulted in a charge of
approximately $3.7 million.
Loss From Operations
As a result of the variances described above, operating loss
increased by $13.3 million, or 1,147% from $1.2 million in 1999 to $14.4
million in 2000. Operating expenses as a percentage of revenues was 92% and
236% for 1999 and 2000, respectively.
Adjusted EBITDA
Earnings before interest and other income expense, income taxes, depreciation
and amortization IPO-related expenses and termination fee ("Adjusted EBITDA") as
a percentage of revenues was 15% and 8% for the 1999 and 2000, respectively.
Adjusted EBITDA decreased $0.1 million, or 10%, from $0.8 million in 1999 to
$0.7 million in 2000.
OTHER INCOME. Interest and other income for 2000 primarily
consisted of net interest income of $0.5 million and a write-off deferred
financing fees of $0.1 million. The interest income was primarily related to
the interest earned on our IPO proceeds. The write-off of deferred financing
fees related to a credit facility which was retired in February 2000.
PROVISIONS FOR INCOME TAXES
Our provision for income taxes for 1999 was $0.1 million and related
primarily to foreign income taxes. If we had been a C corporation, our
provisions for income taxes would be been $0.3 million for 1999. In January
2000, we were reorganized as C corporation accordingly, the Company pays taxes
instead of passing income through to the shareholders. We recorded a tax
provision for federal and state taxes of $21,000 for the 2000 period. During
the 2000 period, we recorded a deferred tax asset related to the loss before
income taxes. However, due to the uncertainty of future taxable income we
recorded a full valuation allowance against the deferred tax asset.
LIQUIDITY AND CAPITAL RESOURCES
In February 2000, we closed the initial public offering of our
common stock, issuing 4,088,119 shares of common stock and realizing net
proceeds of $59.1 million. Prior to the offering, we had funded our operations
and acquisitions primarily from the proceeds of private equity sales and
borrowings under our credit facility.
Cash and cash equivalents as of March 31, 2000 were approximately
$56.5 million, an increase of approximately $55.9 million from December 31,
1999. 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
11
<PAGE> 14
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 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. Net cash used in operating activities for the quarter ended March
31, 2000 was approximately $1.1 million. Net cash used in operating activities
primarily resulted from our net loss of $14.0 million, and decreases in accrued
liabilities of $1.5 million and accounts payable of $0.4 million. This was
partially offset by IPO-related expenses of $9.7 million, depreciation and
amortization of $2.7 million, and decreases in both prepaid expenses of $1.4
million and accounts receivable of $1.1 million. The decrease in prepaid
expenses was primarily related to the realization of our prepaid offering
expenses upon completion of the IPO. The decrease in accounts receivable was
primarily attributable to the collection of license fees. Additionally, the
decrease in accrued liabilities was attributable to the payment of accrued
bonuses and commissions.
Our cash flow used in investing activities is primarily affected by
cash paid for capital expenditures. Net cash used in investing activities
during the quarter ended March 31, 2000 was approximately $0.4 million and
resulted from 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 issuance of common stock, cash
paid to affiliates and stockholders under contractual obligations, and
repayment of borrowing under the credit facility. Net cash provided by
financing activities during the quarter ended March 31, 2000 was approximately
$57.4 million. During the quarter ended March 31, 2000, financing activities
provided cash of approximately $59.1 million from the sale of common stock in
connection with our IPO and $1.9 million from the exercise of stock options.
These funds were used to pay $3.1 million of the Fleet Credit Facility and pay
the $0.5 million due to an affiliate.
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.
NEW ACCOUNTING PRONOUNCEMENTS
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.
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 my 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.
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 realties of operations, including:
12
<PAGE> 15
<TABLE>
<S> <C>
- 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
</TABLE>
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
personal costs, marketing programs and overhead, which cannot be adjusted
quickly and are therefore relatively fixed in the short term. Our operating
expenses 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 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 analysis, our
stock price may decline.
A LIMITED NUMBER OF CUSTOMERS MAY ACCOUNT FOR A SIGNIFICANT PERCENTAGE OF OUR
REVENUES, WHICH MAY DECLINE IF WE CANNOT KEEP OR REPLACE THESE CUSTOMER
RELATIONSHIPS
As our business has grown, the size of our license agreements has
increased. Accordingly, we anticipate that our results of operations in any
given period may depend to a significant extent upon revenues from a small
number of customers. In addition, we anticipate that such customers will
continue to vary over time, so that the achievement of our long-term goals will
require us to obtain additional significant customers on an ongoing basis. Our
failure to enter into a sufficient number of large licensing agreements during
a particular period could have a significant adverse effect on our revenues.
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.
13
<PAGE> 16
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 and other resources than we do, and my 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 service 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 Manger, 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 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.
14
<PAGE> 17
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
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.
15
<PAGE> 18
New products based on new technologies or new industry standard
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 for 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.
UNAUTHORIZED PARTIES MAY OBTAIN AND PROFIT FROM OUR SOFTWARE, DOCUMENTATION AND
OTHER PROPRIETARY INFORMATION
We seek to protect the source code for our propriety 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 propriety 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 propriety 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 developer 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 obliged 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:
16
<PAGE> 19
- 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
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 or 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 level 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
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 deregulation 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
17
<PAGE> 20
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 other, 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 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.
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 meeting of stockholders
- prohibiting stockholder action by written consent
18
<PAGE> 21
- 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 prevent
someone from acquiring or merging with us.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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. As of March 31, 2000, we invested the net proceeds
from our initial public offering in similar investment-grade and highly liquid
investments.
For the quarter ended March 31, 2000, approximately 42% of our
revenues and 46% of our operating expenses was denominated in British pounds.
Historically, the effect of fluctuations in currency exchange rates has not had
a material impact on our operations. Our exposure to fluctuations in currency
exchange rates will increase as we expand our international operations. We
conduct our European operations in the United Kingdom and the countries of the
European Union which are part of the Europe Monetary Union. On January 1, 1999,
eleven of the existing members of the European Union joined the European
Monetary Union. Ultimately there will be a single currency within certain
countries of the European Union, known as the euro, and one organization, the
European Central Bank, responsible for setting European monetary policy. We
have reviewed the impact the euro will have on our business and whether this
will give rise to a need for significant changes in our commercial operations
or treasury management functions. Because our European transactions are
primarily denominated in British pounds and as yet we have not experienced any
significant impact on our European operations from the fluctuations in the
exchange rate between euro and British pounds, we do not believe that the euro
conversion will have any material effect on our business, financial condition
or results of operations.
19
<PAGE> 22
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The following information relates to the use of proceeds from our
initial public offering of common stock. The effective date of our Registration
Statement on Form S-1, commission file number 333-88437, relating to our
initial public offering, was January 27, 2000.
In connection with the offering, the estimated expenses were as
follows:
<TABLE>
<S> <C>
Underwriting Discounts and Commissions $ 4,578,693
Other Expenses 1,757,919
-------------
Total Expenses $ 6,336,612
=============
</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.
Our net offering proceeds, after deducting the total expenses
described above, were $59,073,292.
From the effective date of the Registration Statement through March
31, 2000, we used the net proceeds from the offering as follows:
<TABLE>
<S> <C>
Repayment of Indebtedness $ 4,308,983
Termination Fee for Consulting Services $ 1,300,000
Bonus payments $ 521,570
Cash Equivalents $ 52,942,738
</TABLE>
All of the above listed payments were direct or indirect payments to
persons other than: directors, officers, general partners or their associates,
persons owning ten percent or more of any class of our equity securities, or our
affiliates, except for: (i) the termination fee for consulting services which
was paid to GFI Two LLC, where our directors Lawrence D. Gilson and Richard K.
Landers are President and a principal, respectively and (ii) $288,666 of the
bonus payments, which was paid to Nigel L. Evans, our Senior Vice President,
Director of European Operations and one of our directors.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
Pursuant to a Written Consent of Sole Stockholder in Lieu of 2000
Annual Meeting, dated January 11, 2000, our sole stockholder, Caminus LLC, a
Delaware limited liability company and our predecessor entity (i) approved the
election of Anthony H. Bloom and Richard K. Landers as Class I Directors, each
to serve until the 2003 Annual Meeting of Stockholders, and (ii) ratified the
selection by our board of directors of PricewaterhouseCoopers LLP as our
independent certified public accountants for the fiscal year ending December
31, 2000. On January 11, 2000, Caminus LLC held 1,000 shares of our common
stock.
In addition to the directors elected pursuant to the written
consent, the term of office of the following directors also continued following
the meeting: Christopher S. Brothers, Nigel L. Evans, Lawrence D. Gilson,
Brian J. Scanlan and David M. Stoner.
20
<PAGE> 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed as part of this report:
Exhibit 27 -- Financial Data Schedule
(b) Reports on Form 8-K
None
21
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C>
CAMINUS CORPORATION
-------------------------------
Registrant
Date: May 15, 2000
/S/ MARK A. HERMAN
-------------------------------
Chief Financial Officer
and
Registrant's Authorized Officer
</TABLE>
22
<PAGE> 25
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- ------------
<S> <C>
27 FINANCIAL DATA SCHEDULE
</TABLE>
23
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY IN
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 56,533
<SECURITIES> 0
<RECEIVABLES> 6,306
<ALLOWANCES> 304
<INVENTORY> 0
<CURRENT-ASSETS> 64,428
<PP&E> 3,641
<DEPRECIATION> 1,734
<TOTAL-ASSETS> 92,639
<CURRENT-LIABILITIES> 10,236
<BONDS> 0
0
0
<COMMON> 170
<OTHER-SE> 82,233
<TOTAL-LIABILITY-AND-EQUITY> 92,639
<SALES> 0
<TOTAL-REVENUES> 8,520
<CGS> 0
<TOTAL-COSTS> 2,838
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 413
<INCOME-PRETAX> (13,992)
<INCOME-TAX> 21
<INCOME-CONTINUING> (14,013)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,013)
<EPS-BASIC> (1.05)
<EPS-DILUTED> (1.05)
</TABLE>
