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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 JUNE 30, 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
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CAMINUS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-4081739
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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 July 31, 2000, there were 15,281,991 shares of Caminus Corporation
common stock outstanding.
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CAMINUS CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
a) Consolidated Balance Sheets as of June 30, 2000
(Unaudited) and December 31, 1999................... 2
b) Consolidated Statements of Operations for the three
and six months ended June 30, 2000 and 1999
(Unaudited)......................................... 3
c) Consolidated Statements of Cash Flows for the six
months ended June 30, 2000 and
1999 (Unaudited).................................... 4
d) Notes to Consolidated Financial Statements.......... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............... 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk............................................ 25
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds......... 25
Item 5. Other Information................................. 26
Item 6. Exhibits and Reports on Form 8-K.................. 25
Signatures................................................ 26
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CAMINUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 14,101 $ 662
Investments in short term marketable securities........... 19,445 --
Accounts receivable, net.................................. 12,365 7,360
Deferred income taxes..................................... 677 418
Prepaid expenses and other current assets................. 1,789 2,533
-------- --------
Total current assets................................... 48,377 10,973
Investments in long term marketable securities.............. 20,751 --
Fixed assets, net........................................... 2,928 1,645
Developed technology, net................................... 2,391 3,051
Other intangibles, net...................................... 3,361 3,974
Goodwill, net............................................... 17,977 21,816
Other assets................................................ 19 19
-------- --------
Total assets........................................... $ 95,804 $ 41,478
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,561 $ 1,444
Accrued liabilities....................................... 5,191 4,962
Borrowings under credit facility.......................... -- 3,050
Income taxes payable...................................... 1,719 388
Payable to related parties................................ 888 3,824
Deferred revenue.......................................... 2,540 2,071
-------- --------
Total current liabilities.............................. 11,899 15,739
-------- --------
Commitments and contingencies............................... -- --
Stockholders' equity:
Common stock, $0.01 par, 50,000 shares authorized, 17,040
shares issued and 15,278 shares outstanding at June 30,
2000; 11,058 shares issued and 9,296 shares outstanding at
December 31, 1999......................................... 170 110
Additional paid-in capital.................................. 122,522 52,670
Treasury stock, at cost..................................... (4,911) (4,911)
Subscriptions receivable.................................... (76) (2,907)
Deferred compensation....................................... (191) (235)
Accumulated deficit......................................... (33,579) (18,980)
Accumulated other comprehensive income...................... (30) (8)
-------- --------
Total stockholders' equity............................. 83,905 25,739
-------- --------
Total liabilities and stockholders' equity............. $ 95,804 $ 41,478
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
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CAMINUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -------------------
2000 1999 2000 1999
------- ------- -------- -------
(UNAUDITED) (UNAUDITED)
Revenues:
Licenses......................................... $ 4,649 $ 2,519 $ 8,722 $ 4,296
Software services................................ 4,375 2,057 7,085 4,006
Strategic consulting............................. 2,183 1,431 3,920 2,941
------- ------- -------- -------
Total revenues................................ 11,207 6,007 19,727 11,243
------- ------- -------- -------
Cost of revenues:
Cost of licenses................................. 194 30 497 86
Cost of software services........................ 1,951 1,258 3,777 2,179
Cost of strategic consulting..................... 757 666 1,476 1,270
------- ------- -------- -------
Total cost of revenues........................ 2,902 1,954 5,750 3,535
------- ------- -------- -------
Gross profit................................ 8,305 4,053 13,977 7,708
------- ------- -------- -------
Operating expenses:
Sales and marketing.............................. 2,369 678 4,215 1,093
Research and development......................... 1,408 932 2,782 1,697
General and administrative (excluding IPO-related
expenses)..................................... 2,519 1,892 4,485 3,653
Amortization of intangible assets................ 2,556 1,869 5,112 3,738
IPO-related expenses............................. -- -- 12,335 --
------- ------- -------- -------
Total operating expenses...................... 8,852 5,371 28,929 10,181
------- ------- -------- -------
Loss from operations............................... (547) (1,318) (14,952) (2,473)
Other income (expense):
Interest income (expense)........................ 717 (55) 1,219 (46)
Financing fee.................................... -- -- (89) --
Other expense, net............................... (2) -- (2) (6)
------- ------- -------- -------
Total other income (expense).................. 715 (55) 1,128 (52)
------- ------- -------- -------
Income (loss) before provision for income taxes.... 168 (1,373) (13,824) (2,525)
Provision for income taxes......................... 754 66 775 139
------- ------- -------- -------
Net loss........................................... $ (586) $(1,439) $(14,599) $(2,664)
======= ======= ======== =======
Basic and diluted net loss per share............... $ (0.04) $ (0.18) $ (1.02) $ (0.33)
======= ======= ======== =======
Weighted average shares used in computing net loss
per share........................................ 15,261 7,997 14,321 7,980
======= ======= ======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
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CAMINUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
-------------------
2000 1999
-------- -------
(UNAUDITED)
Cash flows from operating activities:
Net loss.................................................. $(14,599) $(2,664)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization.......................... 5,490 3,886
Deferred taxes......................................... (259) (9)
Deferred costs......................................... 182 --
IPO-related expenses................................... 9,741 --
Non-cash compensation expense.......................... 104 60
Changes in operating assets and liabilities:
Accounts receivable.................................... (4,954) (1,665)
Prepaid expenses and other current assets.............. 611 (151)
Accounts payable....................................... 191 (916)
Accrued liabilities.................................... 165 1,169
Income taxes payable................................... 1,331 --
Deferred revenue....................................... 469 (39)
Other.................................................. (249) (9)
-------- -------
Net cash used in operating activities....................... (1,777) (338)
-------- -------
Cash flows from investing activities:
Purchase of marketable securities......................... (40,185) --
Purchase of fixed assets.................................. (1,661) (435)
-------- -------
Net cash used in investing activities:...................... (41,846) (435)
-------- -------
Cash flows from financing activities:
Payments of obligation to affiliate....................... (2,688) (6,188)
(Payments) borrowings under credit facility, net.......... (3,050) 3,250
Payment of distribution to shareholders................... -- (290)
Cash received for subscriptions receivable................ 1,942 1,832
Proceeds received from issuance of common stock, net...... 59,028 339
Cash received for options exercised....................... 1,972 --
-------- -------
Net cash provided by (used in) financing activities......... 57,204 (1,057)
-------- -------
Effect of exchange rates on cash flows...................... (142) (54)
-------- -------
Net increase (decrease) in cash and cash equivalents........ 13,439 (1,884)
Cash and cash equivalents, beginning of period.............. 662 2,771
-------- -------
Cash and cash equivalents, end of period.................... $ 14,101 $ 887
======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
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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 and Sale of Common Stock
In February 2000, the Company closed the initial public offering ("IPO") of
shares of its common stock, issuing 4,088,119 shares of common stock and
realizing net proceeds from the offering of approximately $59.0 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's common stock, Caminus
recapitalized as a C Corporation and therefore commencing January 27, 2000 is no
longer 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, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission ("SEC"). Certain information and note
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 and six-month periods ended June 30, 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 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
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CAMINUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Comprehensive Income
Total comprehensive loss for the six months ended June 30, 2000 and 1999
was as follow:
SIX MONTHS ENDED
JUNE 30,
-------------------
2000 1999
-------- -------
(IN THOUSANDS)
Net loss.................................................... $(14,599) $(2,664)
Unrealized gains on marketable securities................... 11 --
Cumulative translation adjustment........................... (33) (59)
-------- -------
Comprehensive loss.......................................... $(14,621) $(2,723)
======== =======
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 conformity with SAB 101.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133 establishes methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities, and is effective for
fiscal years beginning after June 15, 2000, as amended by SFAS No. 138. The
Company believes the adoption of this pronouncement will have no material impact
on the Company's financial position and results of operations.
In March 2000, FASB Interpretation No. 44 -- "Accounting for Certain
Transactions involving Stock Compensation, an interpretation of APB Opinion No.
25" ("FIN 44") was issued. FIN 44 clarifies the application of APB No. 25
regarding (a) the definition of "Employee" for purposes of applying APB No. 25,
(b) the criteria for determining whether a plan qualifies as a noncompensatory
plan, (c) the accounting consequence of various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an exchange
of stock compensation awards in a business combination. FIN 44 does not address
the application of the fair value method of Statement No. 123. This
Interpretation is effective July 1, 2000, but certain conclusions in this
Interpretation cover specific events that occur after either December 15, 1998,
or January 12, 2000. To the extent that this Interpretation covers events
occurring during the period after December 15, 1998 or January 12, 2000, but
before the effective date of July 1, 2000, the effects of applying this
Interpretation are recognized on a prospective basis from July 1, 2000. The
Company has not yet assessed the impact of FIN 44.
2. IPO-RELATED EXPENSES
As a result of the Company's IPO in January 2000, certain transactions
occurred which resulted in significant charges in the first quarter of 2000.
These transactions include the earning of additional common shares that were
contingently issuable upon an IPO to the former shareholders of Caminus Energy
Limited, which resulted in a charge of approximately $7.0 million (including
taxes), a payment of approximately
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CAMINUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$0.5 million for a special one-time bonus to the former shareholders of Caminus
Energy Limited, payment of a $1.3 million termination fee to GFI Two LLC, a
principal stockholder, to cancel its consulting and advisory agreement and the
granting of shares and the forgiveness of a loan to the Company's President and
Chief Executive Officer, which resulted in a charge of approximately $3.7
million.
3. INVESTMENTS IN MARKETABLE SECURITIES
The Company invests its excess cash in investment grade debt instruments of
state and municipal governments and their agencies and high quality corporate
issuers. All instruments with maturities at the time of purchase greater than
three months and maturities less than twelve months from the balance sheet date
are considered short-term investments, and those with maturities greater than
twelve months from the balance sheet date are considered long-term investments.
The Company's marketable securities are classified as available-for-sale
and are reported at fair value, with unrealized gains and losses, net of tax,
recorded in stockholders' equity. Realized gains or losses and permanent
declines in value, if any, on available-for-sale securities are reported in
other income or expense as incurred.
The contractual maturities of available-for-sale debt securities are as
follows at June 30, 2000 (in thousands):
Due within one year......................................... $19,445
Due after one year through two years........................ $20,751
-------
$40,196
=======
At June 30, 2000, the Company recorded net unrealized gains on its
marketable debt securities of approximately $11,500.
4. 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 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 of the Company's Annual Report on Form 10-K. There are no
inter-segment revenues or expenses between the two reportable segments.
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CAMINUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table illustrates the financial results of the two reportable
segments:
SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------------
2000 1999
----------------------------------- ----------------------
(IN THOUSANDS)
STRATEGIC STRATEGIC
SOFTWARE CONSULTING OTHER SOFTWARE CONSULTING
-------- ---------- --------- -------- ----------
STRATEGIC
Operating Results:
Revenues:
Licenses......................... $ 8,722 $ -- $ -- $ 4,296 $ --
Software services................ 7,085 -- -- 4,006 --
Strategic consulting............. -- 3,920 -- -- 2,941
------- ------- -------- ------- -------
Total revenues................. $15,807 $ 3,920 -- 8,302 2,941
======= ======= ======== ======= =======
Adjusted EBITDA....................... 1,293 1,684 947 526
Non-cash compensation expense......... (104) -- -- (60) --
IPO-related expenses.................. -- -- (12,335) -- 526
------- ------- -------- ------- -------
1,189 1,684 (12,335) 887 526
Depreciation and amortization......... (4,403) (1,087) -- (2,814) (1,072)
------- ------- -------- ------- -------
Operating Income (loss)............... $(3,214) $ 597 $(12,335) $(1,927) $ (546)
======= ======= ======== ======= =======
Other Data:
AS OF JUNE 30,
-------------------------------------------------------------
2000 1999
----------------------------------- ----------------------
(IN THOUSANDS)
Total assets.......................... $84,449 $11,355 $ -- $21,946 $ 5,617
======= ======= ======== ======= =======
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.
5. SUPPLEMENTAL CASH FLOW INFORMATION
SIX MONTHS ENDED
JUNE 30,
----------------
2000 1999
---- -----
(IN THOUSANDS)
Cash paid for interest...................................... $27 $1
Option exercised for no cash consideration.................. 9 --
6. SUBSEQUENT EVENT
On July 31, 2000 the Company entered into a letter of intent agreement to
acquire Nucleus Corporation for cash and common stock. The acquisition is
anticipated to close in the third quarter of 2000.
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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" and "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 184 at December 31, 1999 to
222 at June 30, 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 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.
Customer payments under 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 98-9, "Modification of SOP
97-2, Software Revenue Recognition with Respect to Certain Transactions." Under
SOP No. 97-2, if the license agreement does not provide for significant
customization of or enhancements to the software, we recognize software license
revenues when a license agreement 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 and it is not probable, we recognize license
revenues when the software has been accepted. For those license agreements where
the licensee requires significant enhancements or customization to adapt the
software to the unique specifications of the customer or the service elements of
the arrangement are considered essential to the functionality of the software
products, we recognize both the license revenues and services revenues using
contract accounting. If acceptance of the software and related software services
is probable, we use the percentage of completion method to recognize revenue for
those types of license agreements, where progress towards completion is measured
by comparing software services hours incurred to estimated total hours for each
software license
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agreement. If acceptance of the software and related software services is not
probable, then we use the completed contract method and recognize license
revenues only when our obligations under the license agreement are completed and
the software has been accepted. Anticipated issues, if any, on uncompleted
contracts are recognized in the period in which such losses are determined.
Accordingly, for these contracts, payments received and software license costs
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 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
55% of our total revenues for the six months ended June 30, 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, does not necessarily
provide a meaningful understanding of the expected future results of our
operations.
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RESULTS OF OPERATIONS
Comparison of the Three Months Ended June 30, 2000 to the Three Months Ended
June 30, 1999.
The following table sets forth the consolidated financial information for
the periods indicated as a percentage of total revenues:
THREE MONTHS ENDED
JUNE 30,
------------------
2000 1999
----- ----
(UNAUDITED)
Revenues:
Licenses.................................................. 41% 42%
Software services......................................... 39 34
Strategic consulting...................................... 20 24
--- ---
Total revenues......................................... 100 100
Cost of revenues:
Cost of licenses.......................................... 2 --
Cost of software services................................. 17 22
Cost of strategic consulting.............................. 7 11
--- ---
Total cost of revenues................................. 26 33
--- ---
Gross profit.............................................. 74 67
Operating expenses:
Sales and marketing....................................... 21 11
Research and development.................................. 13 16
General and administrative................................ 22 31
Amortization of intangible assets......................... 23 31
--- ---
Total operating expenses............................... 79 89
--- ---
Loss from operations........................................ (5) (22)
Other income
Interest income, net...................................... 6 (1)
--- ---
Total other income..................................... 6 (1)
--- ---
Loss before provision for income taxes...................... 1 (23)
Provision for income taxes.................................. 6 1
--- ---
Net loss.................................................... (5)% (24)%
=== ===
Revenues
LICENSES. License revenues represented 41% and 42% of the total revenues
for the three months ended June 30, 2000 ("2000") and 1999 ("1999"),
respectively, and increased $2.1 million, or 84%, from $2.5 million in 1999 to
$4.6 million in 2000. This increase was primarily attributable to increased
demand for new and additional licenses from new and existing customers, larger
average transaction sizes and the expansion of our domestic and international
sales personnel.
SOFTWARE SERVICES. Software services revenues represented 39% and 34% of
the total revenues for 2000 and 1999, respectively, and increased by $2.3
million, or 113%, from $2.1 million in 1999 to $4.4 million in 2000. This
increase was primarily attributable to the increased licensing activity
described above, which resulted in increased revenues from customer
implementations and maintenance contracts.
STRATEGIC CONSULTING. Strategic consulting revenues represented 20% and
24% of the total revenues for 2000 and 1999, respectively, and increased $0.8
million, or 53%, from $1.4 million in 1999 to $2.2 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.
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Cost of Revenues
COST OF LICENSES. Cost of licenses primarily consists of 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 less than one
percent for 2000 and 1999, respectively, and increased $0.2 million, or 547%,
from $30 thousand in 1999 to $0.2 million in 2000. The increase was primarily
attributable to the costs of third party software related to the larger license
revenues in 2000.
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 22% for 2000 and
1999, respectively, and increased $0.7 million, or 55%, from $1.3 million in
1999 to $2.0 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 7% and 11% for 2000 and
1999, respectively, and increased $0.1 million, or 14%, to $0.8 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 21%
and 11% for 2000 and 1999, respectively, and increased $1.7 million, or 249%,
from $0.7 million in 1999 to $2.4 million in 2000. This increase was primarily
due to an increase in commissions due to the increase in license revenue,
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 13% and 16% for 2000 and 1999,
respectively, and increased $0.5 million, or 51%, from $0.9 million in 1999 to
$1.4 million in 2000. This increase in absolute dollars 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, and outside professional fees. General and administrative expenses as
a percentage of revenues were 22% and 31% for 2000 and 1999, respectively, and
increased $0.6 million, or 33%, from $1.9 million in 1999 to $2.6 million in
2000. This increase in absolute dollars was primarily due to increased staffing
required to support our expanded operations in the United States and
internationally.
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 23% and 31% for 2000
and 1999, respectively, and increased $0.7 million, or 37%, from $1.9 million in
1999 to $2.6 million in 2000. The increase in absolute dollars was
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primarily attributable to our incurring amortization expense related to the
additional intangible assets related to the DC Systems acquisition in mid-1999.
NON-CASH COMPENSATION EXPENSE. Non-cash compensation expense in 2000
primarily represents the amortization of unearned compensation in connection
with the issuance of stock options with exercise prices below fair market value.
Loss From Operations
As a result of the variances described above, operating loss decreased by
$0.8 million, or 58% from $1.3 million in 1999 to $0.5 million in 2000.
Operating expenses as a percentage of revenues was 79% and 89% for 2000 and
1999, respectively.
Adjusted EBITDA
Earnings before interest and other income (expense), income taxes,
depreciation and amortization, IPO-related expenses and non-cash compensation
expense ("Adjusted EBITDA") as a percentage of revenues was 21% and 14% for 2000
and 1999, respectively. Adjusted EBITDA increased $1.5 million, or 232%, from
$0.7 million in 1999 to $2.3 million in 2000.
INTEREST AND OTHER INCOME. Interest and other income for 2000 primarily
consisted of net interest income of $0.7 million. The interest income was
primarily related to the interest earned on the resulting investments from our
IPO proceeds.
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 provision
for income taxes would have increased by $32,000 for 1999. In January 2000, we
were reorganized as a C corporation. Accordingly, the Company pays income taxes
instead of passing income through to its shareholders. We recorded a tax
provision for federal and state income taxes of $0.8 million for the 2000
period.
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RESULTS OF OPERATIONS
Comparison of the Six Months Ended June 30, 2000 to the Six Months Ended June
30, 1999.
The following table sets forth the consolidated financial information for
the periods indicated as a percentage of total revenues:
SIX MONTHS ENDED
JUNE 30,
------------------
2000 1999
---- ----
(UNAUDITED)
Revenues:
Licenses.................................................. 44% 38%
Software services......................................... 36 36
Strategic consulting...................................... 20 26
--- ---
Total revenues......................................... 100 100
Cost of revenues:
Cost of licenses.......................................... 3 1
Cost of software services................................. 19 19
Cost of strategic consulting.............................. 7 11
--- ---
Total cost of revenues................................. 29 31
--- ---
Gross profit.............................................. 71 69
Operating expenses:
Sales and marketing....................................... 21 10
Research and development.................................. 14 15
General and administrative................................ 22 33
Amortization of intangible assets......................... 26 33
IPO-related expenses...................................... 63 --
Non-cash compensation expense............................. 1 --
--- ---
Total operating expenses............................... 147 91
--- ---
Loss from operations........................................ (76) (22)
Other income
Interest income, net...................................... 6 --
Financing fees............................................ -- --
Other expense, net........................................ -- --
--- ---
Total other income..................................... 6 --
--- ---
Loss before provision for income taxes...................... (70) (22)
Provision for income taxes.................................. 4 1
--- ---
Net loss.................................................... (74)% (23)%
=== ===
Revenues
LICENSES. License revenues represented 44% and 38% of the total revenues
for the six months ended June 30, 2000 ("2000") and 1999 ("1999") respectively,
and increased $4.4 million, or 102%, from $4.3 million in 1999 to $8.7 million
in 2000. This increase was primarily attributable to increased demand for new
and additional licenses from new and existing customers, larger average
transaction sizes and the expansion of our domestic and international sales
personnel.
SOFTWARE SERVICES. Software services revenues represented 36% of the total
revenues for 2000 and 1999 and increased by $3.1 million, or 77%, from $4.0
million in 1999 to $7.1 million in 2000. This increase was primarily
attributable to the increased licensing activity described above, which resulted
in increased revenues
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from customer implementations and maintenance contracts. The greater increase in
license revenues as compared to the increase in software services revenues was
attributable to certain license revenues that 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 20% and
26% of the total revenues for 2000 and 1999, respectively, and increased $1.0
million, or 33%, from $2.9 million in 1999 to $3.9 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 as a percentage of revenues was 3% and
1% for 2000 and 1999, respectively, and increased $0.4 million, or 478%, from
$0.1 million in 1999 to $0.5 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 and the increase in the
license revenue.
COST OF SOFTWARE SERVICES. Cost of software services as a percentage of
revenues was 19% for both 2000 and 1999, and increased $1.6 million, or 73%,
from $2.2 million in 1999 to $3.8 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 as a percentage
of revenues was 7% and 11% for 2000 and 1999, respectively, and increased $0.2
million, or 16%, from $1.3 million in 1999 to $1.5 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 as a percentage of
revenues were 21% and 10% for 2000 and 1999, respectively, and increased $3.1
million, or 286%, from $1.1 million in 1999 to $4.2 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 as a
percentage of revenues were 14% and 15% for 2000 and 1999, respectively, and
increased $1.1 million, or 64%, from $1.7 million in 1999 to $2.8 million in
2000. This increase in absolute dollars 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 as a
percentage of revenues were 22% and 33% for 2000 and 1999, respectively, and
increased $0.7 million, or 23%, from $3.7 million in 1999 to $4.5 million in
2000. This increase in absolute dollars was primarily due to increased staffing
required to support our expanded operations in the United States and
internationally.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangibles as a
percentage of revenues was 26% and 33% for 1999 and 2000, respectively, and
increased $1.4 million, or 37%, from $3.7 million in 1999 to $5.1 million in
2000. The increase in absolute dollars was primarily attributable to our
incurring amortization expense related to the additional intangible assets
related to the DC Systems acquisition in mid-1999.
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NON-CASH COMPENSATION EXPENSE. Non-cash compensation expense in 2000
primarily represents the amortization of deferred compensation in connection
with the issuance of stock options with exercise prices below fair market value.
IPO-Related expenses
As a result of our initial public offering in January 2000, certain
transactions occurred which resulted in significant charges in the first quarter
of 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 a $1.3 million termination fee to GFI Two LLC, a
principal stockholder, 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 resulted in a charge of approximately $3.7 million.
Loss From Operations
As a result of the variances described above, operating loss increased by
$12.5 million, or 505% from $2.5 million in 1999 to $15.0 million in 2000.
Operating expenses as a percentage of revenues was 147% and 91% for 2000 and
1999, respectively.
Adjusted EBITDA
Earnings before interest and other income (expense), income taxes,
depreciation and amortization, IPO-related expenses and non-cash compensation
expense ("Adjusted EBITDA") as a percentage of revenues was 15% for both 2000
and 1999. Adjusted EBITDA increased $1.5 million, or 102%, from $1.5 million in
1999 to $3.0 million in 2000.
INTEREST AND OTHER INCOME. Interest and other income for 2000 primarily
consisted of net interest income of $1.2 million and a write-off of deferred
financing fees of $0.1 million. The interest income was primarily related to the
interest earned on the resulting investments from our IPO proceeds. The
write-off of deferred financing fees related to the repayment of the outstanding
balance under 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 provision
for income taxes would have been $0.4 million for 1999. In January 2000, we were
reorganized as a C corporation. Accordingly, the Company pays income taxes
instead of passing income through to its shareholders. We recorded a tax
provision for federal and state income taxes of $0.8 million for the 2000
period.
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
$59.0 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 June 30, 2000 were approximately $14.1
million, an increase of approximately $13.4 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 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 six
months ended June 30, 2000 was approximately $1.8 million. Net cash used in
operating
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activities primarily resulted from our net loss of $14.6 million, and increase
in accounts receivable of $5.0 million. This was partially offset by IPO-related
expenses of $9.7 million, depreciation and amortization of $5.5 million, and
increases in income taxes payable of $1.3 million; deferred revenue of $0.5
million; accounts payable of $0.2 million; and a decrease in prepaid expenses of
$0.6 million. The increase in accounts receivable was primarily related to the
increase in revenue in the second quarter of 2000 as compared to the fourth
quarter of 1999. The decrease in prepaid expenses was primarily related to the
realization of our prepaid offering expenses upon completion of the IPO. The
increase in income taxes payable was primarily attributable to our provision for
income taxes.
Our cash flow used in investing activities is primarily affected by cash
paid for investments in marketable securities and capital expenditures. Net cash
used in investing activities during the six months ended June 30, 2000 was
approximately $41.8 million and resulted from the investment of $40.2 million of
the net IPO proceeds in marketable securities primarily consisting of investment
grade obligations of state and municipal governments and their agencies. Also,
capital expenditures of $1.7 million were for computer and communications
equipment, purchased software, office equipment, furniture, fixtures and
leasehold improvements for our new offices in London.
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 six months ended June 30, 2000 was approximately $57.2 million.
During the six months ended June 30, 2000, financing activities provided cash of
approximately $59.0 million from the sale of common stock in connection with our
IPO and $2.0 million from the exercise of stock options. Also, we collected
subscription receivables of $1.9 million. A portion of these funds were used to
pay $3.1 million of our credit facility and pay the $2.7 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.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133 establishes methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities, and is effective for
fiscal years beginning after June 15, 2000, as amended by SFAS No. 138. The
Company believes the adoption of this pronouncement will have no material impact
on the Company's financial position and results of operations.
In March 2000, FASB Interpretation No. 44 -- "Accounting for Certain
Transactions involving Stock Compensation, an interpretation of APB Opinion No.
25" ("FIN 44") was issued. FIN 44 clarifies the application of APB No. 25
regarding (a) the definition of "Employee" for purposes of applying APB No. 25,
(b) the criteria for determining whether a plan qualifies as a noncompensatory
plan, (c) the accounting consequence of various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an exchange
of stock compensation awards in a business combination. FIN 44 does not address
the application of the fair value method of Statement No. 123. This
Interpretation is effective July 1, 2000, but certain conclusions in this
Interpretation cover specific events that occur after either December 15, 1998,
or January 12, 2000. To the extent that this Interpretation covers events
occurring during the period after December 15, 1998 or January 12, 2000, but
before the effective date of July 1, 2000, the effects of applying
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this Interpretation are recognized on a prospective basis from July 1, 2000. The
Company has not yet assessed the impact of FIN 44.
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.
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 operation 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
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.
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OUR LENGTHY SALES CYCLE MAKES IT DIFFICULT TO PREDICT OUR QUARTERLY RESULTS AND
THE PRICE OF 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.
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.
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 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 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.
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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, our strategic consulting operations 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 of 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
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 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
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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, Inc.
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 business
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 requirement 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 decision 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 that 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
OUR BUSINESS MAY BE HARMED IF WE LOSE THE SERVICES OF DAVID STONER, BRIAN
SCANLAN, NIGEL EVANS OR OTHER KEY EMPLOYEES
Our success depends largely on the skills, experience and performance of
key employees, particularly David Stoner, our chief executive officer, and Brian
Scanlan and Nigel Evans, two of our founders. 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.
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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 STOCKHOLDER OWNERSHIP INTERESTS OR THE VALUE OF OUR COMMON STOCK
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, stockholder ownership percentages 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 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.
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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.
OUR STOCK PRICE MAY BE VOLATILE
Fluctuations in market price and volume are particularly common among
technology companies. 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 provision 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.
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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, debt
instruments of state and municipal governments and their agencies and high
quality corporate issuers, money market instruments and bank certificates of
deposit. As of June 30, 2000, we invested the net proceeds from our initial
public offering in similar investment-grade and highly liquid investments.
The Company's earnings are affected by fluctuations in the value of its
subsidiaries' functional currency as compared to the currencies of its foreign
denominated sales and purchases. The results of operations of the Company's
subsidiaries, as reported in U.S. dollars, may be significantly affected by
fluctuations in the value of the local currencies in which the Company transacts
business. Such amount is recorded upon the translation of the foreign
subsidiaries' financial statements into U.S. dollars, and is dependent upon the
various foreign exchange rates and the magnitude of the foreign subsidiaries'
financial statements. At June 30, 2000, the Company's foreign currency
translation adjustment is not material and, for the three months ended June 30,
2000, net foreign currency transaction losses were insignificant. In addition to
the direct effects of changes in exchange rates, which are a changed dollar
value of the resulting sales and related expenses, changes in exchange rates
also affect the volume of sales or the foreign currency sales price as
competitors' products become more or less attractive.
For the six months ended June 30, 2000, approximately 55% of our revenues
and 41% 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.
The Company is not exposed to the material future earnings or cash flow
exposures from changes in interest rates on long-term obligations since the
majority of the Company's long-term obligations are at fixed rates.
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:
Underwriting Discounts and Commissions................... $4,578,693
Other Expenses........................................... $1,803,669
Total Expenses........................................... $6,382,362
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.
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Our net offering proceeds, after deducting the total expenses described
above were $59,027,542.
From the effective date of the Registration Statement through June 30,
2000, we used the net proceeds from the offering as follows:
Repayment of Indebtedness............................... $ 4,308,983
Termination Fee for Consulting Services................. $ 1,300,000
Bonus payments.......................................... $ 521,570
Earn-out Payment to Zak Associates, Inc. ............... $ 355,091
Investments in Marketable Securities.................... $40,197,019
Cash Equivalents........................................ $12,344,879
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, (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, and (iii) the earn-out payment
to Zak Associates, Inc., which entity is 100% owned by a partnership affiliated
with our Chief Technology Officer and one of our directors, Brian J. Scanlan.
ITEM 5. OTHER INFORMATION
On July 31, 2000, we announced that we entered into a letter of intent to
acquire the Nucleus Corporation of Texas ("Nucleus"), a supplier of trading
systems for energy. The founder of Nucleus will continue to run Nucleus as one
of our separate business units and we will continue to market and support the
combined product lines of both companies. The proposed acquisition is subject to
the negotiation and execution of a definitive purchase agreement and the
satisfaction of customary closing conditions.
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
During the quarter ended June 30, 2000, we filed two reports on Form
8-K, dated May 19, 2000 and June 8, 2000. Each Form 8-K was filed regarding
a change in our certifying accountant pursuant to Item 4 of Form 8-K. No
other reports on Form 8-K were filed by us during the quarter ended June
30, 2000.
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.
Date: August 9, 2000
CAMINUS CORPORATION
--------------------------------------
Registrant
/s/ MARK A. HERMAN
--------------------------------------
Chief Financial Officer
and
Registrant's Authorized Officer
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