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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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)
DELAWARE 13-4081739
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
825 THIRD AVENUE
NEW YORK, NEW YORK 10022
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 515-3600
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $.01
PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the common equity held by non-affiliates of
the registrant, computed using the closing sale price of common stock on March
23, 2001, as reported on the Nasdaq National Market, was approximately
$170,487,001 (affiliates included for this computation only: directors,
executive officers and holders of more than 5% of the registrant's common
stock).
The number of shares outstanding of the registrant's common stock as of
March 23, 2001 was 15,755,877.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its 2001 Annual Meeting of
Stockholders are being incorporated by reference into Part III of the Form 10-K.
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CAMINUS CORPORATION
INDEX TO ANNUAL REPORT ON
FORM 10-K FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION
YEAR ENDED DECEMBER 31, 2000
ITEMS IN FORM 10-K
ITEM PAGE
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PART I. 1. Business.................................................... 3
2. Properties.................................................. 17
3. Legal Proceedings........................................... 17
4. Submission of Matters to a Vote of Security Holders......... 17
Executive Officers of the Registrant........................ 17
PART II. 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 18
6. Selected Financial Data..................................... 19
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 21
7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 40
8. Financial Statements and Supplementary Data................. 41
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 41
PART III. 10. Directors and Executive Officers of the Registrant.......... 41
11. Executive Compensation...................................... 41
12. Security Ownership of Certain Beneficial Owners and
Management................................................ 41
13. Certain Relationships and Related Transactions.............. 41
PART IV. 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 42
SIGNATURES.................................................................... 43
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This annual report contains forward-looking statements that involve risks
and uncertainties. The statements contained in this report that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. Without limiting the foregoing, the words "may," "will," "should,"
"could," "expects," "plans," "intends," "anticipates," "believes," "estimates,"
"predicts," "potential," "continue" and similar expressions are intended to
identify forward-looking statements. All forward-looking statements included in
this annual report are based on information available to us up to and including
the date of this document, and we assume no obligation to update any such
forward-looking statements. Our actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth below under "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Certain Factors
that May Affect Our Business" and elsewhere in this annual report. You should
also carefully review the risks outlined in other documents that we file from
time to time with the Securities and Exchange Commission, including our
Quarterly Reports on Form 10-Q that we will file in 2001.
We use the following registered trademarks: Caminus(R) and Zai*Net(TM). We
also use the following trademarks: Zai*Net Manager(TM), Zai*Net Risk
Analytics(TM), Zai*Net Physicals(TM), Zai*Net Models(TM), PowerMarkets(TM),
PowerOptions(TM), GasOptions(TM) ProjectFinance(TM), Zai*Net WeatherDelta(TM),
Gas*Master(TM), Power*Master(TM) and Plant*Master(TM). This annual report also
contains trademarks and registered trademarks of other companies, which are the
property of those other companies.
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PART I
ITEM 1. BUSINESS
OVERVIEW
Caminus Corporation is a leading provider of software solutions and
strategic consulting services to participants in energy markets throughout North
America and Europe, including utilities, electrical power generating companies,
energy marketers, electric power pools, gas producers, processors and pipelines.
We offer a suite of software solutions and associated services to enable energy
market participants to manage complex risk scenarios and effectively trade and
manage energy transactions, addressing multiple types of risk and energy
commodities, such as electric power, natural gas, crude oil and coal, across
varied geographies. In addition, our global strategic consulting practice, which
includes one of the leading consulting organizations in the European energy
industry, provides energy market participants with strategic advice regarding
where to compete and how to compete. Our team of subject matter experts provides
strategic advice on long-term energy investment decisions, including decisions
relating to the appropriate use of energy assets and the most effective
operating strategies in deregulating energy markets. As of December 31, 2000, we
had approximately 150 energy enterprise customers of our software solutions and
strategic consulting services. Many of our customers are leaders in the energy
industry, including BP Amoco, CMS Energy, Consolidated Edison, Conoco and TXU
Electric and Gas. For a discussion of our two business segments, software
solutions and strategic consulting, as well as geographic information about us,
please see the Caminus Corporation financial statements.
INDUSTRY BACKGROUND
The energy industry, which includes the electric power, natural gas and
energy trading markets, is currently one of the largest vertical markets in the
United States, with revenues of the electric power sector alone exceeding $300
billion and representing about half of the world's market for electric power.
Energy market participants have historically been single, highly integrated
organizations undertaking all activities of the energy value chain, from
exploration and generation to distribution and end-user support. In order to
introduce and stimulate competition in the energy industry, governments in the
United States, the United Kingdom and continental Europe have dramatically
reduced or eliminated their regulation of natural gas and electric power
markets.
In the United States, the deregulation of the natural gas industry began in
the early 1990s, while electric power deregulation began in the mid 1990s.
Deregulation is currently underway in more than half of the states, being
undertaken on a statewide basis in some jurisdictions and on a
provider-by-provider basis in others. The pace of this deregulation, both
nationally and on a statewide basis, is accelerating. Deregulation in the United
Kingdom and the Nordic region of Europe began in the late 1980s and early 1990s.
As a result of this deregulation:
- Vertically integrated suppliers are breaking up, energy trading is
becoming more complex and opportunities are being created for new market
entrants;
- Trading volumes are growing rapidly, and price volatility and risk
exposure are increasing significantly;
- Energy market participants must find information technology solutions and
services that enable them to compete effectively in deregulating energy
markets; and
- Few solutions exist that are specifically targeted to address the buying,
selling and trading of energy in deregulating environments.
Vertically integrated suppliers are breaking up, energy trading is becoming
more complex and opportunities are being created for new market entrants
Traditional, vertically integrated utilities are breaking up on their own
initiative in order to remain competitive and in response to deregulation. This
is creating substantial opportunities for new entrants in the changing energy
marketplace. Vertically integrated monopoly control of wholesale and retail
energy transactions has weakened, creating the necessity for traditional
utilities and new entrants to buy, sell and hedge
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energy in a rapidly deregulating wholesale market. For example, in some regions,
electric power is being sold by generators into electric power pools and then
purchased from the pool by electric power marketers and end users. In other
cases, competing suppliers are negotiating contracts directly with end users.
Often the market is a hybrid of these approaches. Today, energy purchase and
sale agreements contain different durations, terms, delivery points and volumes.
In addition, the definition of the product increasingly varies from contract to
contract in terms of power quality, reliability and other measurable attributes.
These factors have increased the range and number of participants in the
electric power, natural gas and energy trading markets. They include the
following:
MARKET PARTICIPANTS
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ELECTRIC POWER Power generating companies
Independent power producers
Independent system operators
Power pools
Transmission companies
Distributors
Marketers
Retailers
End users
NATURAL GAS Producers
Gatherers
Processors
Storage operators
Pipelines
Local distribution companies
Marketers
Retailers
End users
ENERGY TRADING Commodity exchanges
Over-the-counter traders
Brokers
Financial institutions
Trading volumes are growing rapidly, and price volatility and risk exposure
are increasing significantly
The increase in the number of market participants has in turn greatly
increased the number and complexity of energy transactions that must be managed
and associated trading risks that must be controlled. According to Enron Corp.,
the world's largest electric power trader, global wholesale electric power
trading volume increased tenfold from 1996 to 1998. In 1998, over 70% of
wholesale electric power trading was among energy marketers who neither produce,
transport nor consume electric power. This growth in market participants has
resulted in increased trading velocity, which is the number of times power is
traded before it is ultimately consumed.
The nature of energy commodities also adds to the complexity of the market.
For example, electric power has distinctive attributes that create more price
volatility than other commodities. Electric power, which is worth different
amounts in different locations, cannot be stored in significant quantities or
transported long distances at economic costs, and costs of generation and
transmission vary significantly. Demand and price in turn can vary dramatically,
with variations dependent upon time of day, day of the week and weather
conditions. All of these factors contribute to substantial price volatility and
thus growing risk exposure.
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The volatility and risk in energy markets is now a recurring front-page
theme in the world's press. For example, in the summer of 1998 Midwestern U.S.
wholesale electricity prices rose from $25 per megawatt hour to $2,600 per
megawatt hour due to record hot weather and transmission constraints. During the
summer of 1999, there were similar spikes in spot market prices for electrical
power. In 2000, weather-driven increases in demand coupled with shortages of
electrical power and gas exacerbated the natural market volatility of energy
prices worldwide in a manner not seen since the early 1970s. Nowhere was the
problem more acute than in California where wholesale energy prices increased
dramatically, rolling black-outs occurred and the state's two largest utilities
faced the possibility of bankruptcy. At December 31, 2000, California's crisis
continued, exacerbated by an uncertain regulatory environment and increasing
demand with virtually no increase in generating capacity. Both major California
utilities carried large short positions in energy, which exposed them to massive
price risk. While California's situation is unique in its complexity and
magnitude, virtually any regional energy market in the world faces many of the
same elements of volatility and risk.
Energy market participants must find information technology solutions and
services that enable them to compete effectively in deregulating energy
markets
Deregulation of the energy industry is forcing market participants to:
- better understand their current roles in the energy value chain;
- assess their long-term energy strategies, including where to compete and
how to compete; and
- invest in the right information technology solutions to analyze,
implement and support their energy strategies.
To compete in this rapidly changing market, energy market participants need
advice on how to make the transition from participating in a non-competitive,
regulated market to a highly complex, competitive market. For example, they need
to understand their role in interacting with multiple and diverse market
participants, trading multiple energy commodities and competing in several
markets.
The deregulating energy environment has created an immediate and growing
need for the same operational, trading and risk management infrastructure that
has supported other long-standing markets but, until recently, has been handled
in a rudimentary way in the energy sector. A study conducted by ABB Energy
Information Systems estimates that global energy information technology spending
will grow from $14 billion in 1999 to $24 billion in 2005. To successfully
compete in an environment of greater competition and price volatility, and
significant risk exposure, energy market participants require systems that
provide:
- transaction confirmation;
- portfolio management;
- risk management;
- trading system controls;
- demand, supply and price forecasting;
- decision support; and
- transaction management tools.
Few solutions exist that are specifically targeted to address the buying,
selling and trading of energy in deregulating environments
In response to deregulation in the natural gas industry in the United
States, software systems have been developed to manage the physical flow and
trading of natural gas. However, many of these systems are not capable of
supporting the requirements of energy participants in today's deregulating
energy markets because they do not adequately support electric power trading or
multiple types of risk and cannot be integrated with other segments of the
energy value chain. A number of existing solutions, including most internal
solutions, are point solutions that are designed to address costs in the energy
market but cannot conduct trades, manage risks or record and analyze the
numerous market-based variables affecting multiple energy assets across
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different geographies. These point solutions, which may consist of little more
than off-the-shelf software applications, first-generation portfolio management
tools and spreadsheets, are often not integrated with the operational and
analytical functions of the enterprise and may be unable to interface with other
participants in the energy industry, such as the emerging energy power pools.
In addition, energy participants have been analyzing energy assets with
traditional analytical models from the financial services industry, such as the
industry-standard Black-Scholes option pricing model, which may be appropriate
for financial instruments but does not account for all the variables relevant to
energy trading, such as volume risk. We believe that over the next several years
energy market participants will increasingly require new energy trading systems
in order to effectively compete in the continually changing energy marketplace.
OUR SOLUTION
We are a leading provider of software solutions and strategic consulting
services to participants in energy markets throughout North America and Europe.
We provide participants in the energy industry with sophisticated software
solutions to manage complex risk scenarios and effectively trade and manage
energy transactions. We also provide our customers with strategic advice
regarding where to compete, both by geographic region and position within the
energy value chain, and how to compete.
We provide energy market participants with sophisticated software systems
to compete in deregulated markets. Our Zai*Net suite of software features:
- AN INTEGRATED, MULTI-FUNCTIONAL SOLUTION TO TRADE AND MANAGE ENERGY
TRANSACTIONS THROUGHOUT THE ENERGY VALUE CHAIN. Our Zai*Net suite of
software products provides decision support for trading, corporate-wide
risk and credit management and complete tracking and invoicing of energy
as it flows through the energy value chain. We offer a solution with
modules ranging from sophisticated analytical tools for understanding and
measuring the unique opportunities and risks in the energy industry to
tools designed to electronically confirm energy flows with gas pipelines,
electric power pools and independent system operators.
- THE ABILITY TO SUPPORT MULTIPLE COMMODITIES AND TYPES OF RISKS ACROSS
VARIED GEOGRAPHIES. Our Zai*Net suite of integrated software products
supports multiple traded energy commodities, including electric power and
natural gas via various energy trading instruments. Our software includes
not only United States and European gas and electric power functionality,
but also specific geographic business capabilities, including functions
tailored for the North Sea and Asian crude oil markets.
We also have one of the leading strategic consulting practices in the
European energy industry. Based primarily in Cambridge, England, our team of
subject matter experts provides strategic advice on long-term energy investment
decisions, including decisions relating to the appropriate use of energy assets
and the most effective operating strategies in deregulating energy markets. Our
strategic consultants are among Europe's most respected energy experts and,
through their extensive consulting work with regulators, understand what
deregulated market participants require to be effective competitors. In the
third quarter of 2000, we opened our North American strategic consulting
practice located in New York, which offers consulting services to participants
in the North American energy markets similar to those offered by its European
counterpart.
Our customers seek solutions that enable them to compete globally in
rapidly changing energy markets. We believe that our strong presence in North
America and Europe gives us a significant advantage over our competitors and
positions us for strong penetration of these and other markets. We have offices
in the United States and in the United Kingdom. Our customers represent some of
the world's largest energy enterprises. We are the leading consultants on energy
policy to regulators in the United Kingdom, one of Europe's most deregulated
energy markets.
OUR STRATEGY
Our objective is to become the leading provider of software solutions and
strategic consulting services to participants in energy markets throughout the
world. Key elements of our strategy include:
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EXTEND OUR PRODUCT LEADERSHIP. We offer a sophisticated suite of software
solutions for the energy industry and plan to continue to introduce new products
that bring added value to energy market participants. We intend to expand our
product offerings by taking advantage of the flexible structure of our existing
software solutions, which allows us to integrate new product offerings easily.
Leveraging the significant subject matter expertise of our strategic
consultants, we continue to develop software solutions responsive to the
evolving needs of our current and potential customers. For example, during 2000
we introduced our Zai*Net WeatherDelta product, which we believe significantly
improves the ability of our customers to manage weather risk. We are also
continuing to systematically configure our products to be Web-enabled. We have
also established Web-based hosting of some of our applications to make our
products available cost-effectively to smaller market participants, and improve
the effectiveness of larger enterprises. We plan to invest heavily in the growth
of our global development capability and hire additional product development
personnel in both the United States and Europe.
MAINTAIN AND EXPAND OUR STRATEGIC CONSULTING LEADERSHIP. Our experience
and in-depth understanding of competitive energy markets has enabled our team of
strategic consultants to be at the forefront of changes in the United Kingdom
and continental European energy sectors. This leadership provides us with a
special understanding of the needs of our energy clients. We intend to build on
this leadership position by expanding our European strategic consulting services
in deregulating energy markets, including Germany, Spain and Italy. Since 1998,
we increased our number of strategic consultants in Europe from 23 to 50 to meet
the needs of our expanding consulting services, and we are planning to increase
personnel during the remainder of 2001. During 2000, we also began building
strategic consulting operations in the United States.
CONTINUE TO BUILD A GLOBAL DISTRIBUTION CHANNEL. The selling and marketing
of sophisticated software solutions to address the needs of global energy
markets requires a highly trained sales channel with comprehensive subject
matter expertise. During 2000, we hired a significant number of experts who can
bring added value to the sales and marketing process. We plan to expand the
scope of our sales channel beyond the larger energy enterprises to target mid
and small market participants on a global basis. We also intend to actively
pursue opportunities to sell our software solutions to our installed base of
strategic consulting customers as well as provide strategic consulting services
to our software customers.
EXPAND GLOBAL PRESENCE. We currently have four offices in the United
States, two in the United Kingdom and in February 2001 we opened one office in
Canada. As of December 31, 2000, we had 218 employees in the United States and
112 employees in Europe. We believe that our strong international presence
provides us with a competitive advantage in providing solutions to energy market
participants that are seeking to compete globally in rapidly changing energy
markets. We intend to continue to expand in the foreseeable future to pursue
market opportunities in other markets experiencing energy deregulation,
particularly markets in Europe.
DEVELOP STRATEGIC ALLIANCES. We are seeking to form relationships with
leading providers of products and services that complement our software
solutions. We have entered into strategic marketing arrangements with other
companies, including Financial Engineering Associates. We plan to develop
additional strategic relationships that will assist our sales and marketing
efforts in new geographic markets.
CONTINUE TO GROW THROUGH ACQUISITIONS. We have achieved a leadership
position through acquisitions that have helped us implement our business
strategy. We were formed as a limited liability company in April 1998 for the
purpose of acquiring Zai*Net Software, L.P. and Caminus Limited. In November
1998, we acquired Positron Energy Consulting. In July 1999, we acquired DC
Systems, Inc., a software and services company specializing in physical gas
systems, and in August 2000 we acquired Nucleus Corporation and Nucleus Energy
Consulting Corporation, which companies together market and service trading and
scheduling software for energy providers. We have successfully integrated the
operations of these companies. We plan to pursue acquisitions that continue to
add to our subject matter expertise, bring us new products and services and help
us aggressively grow our market share throughout the world. We currently have no
commitments or agreements with respect to any acquisition. We intend to analyze
potential acquisitions and pursue those opportunities that complement or
supplement our business strategy.
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OUR PRODUCTS AND SERVICES
Software Products
Our suite of software products is one of the most comprehensive in the
energy industry. Branded primarily under the "Zai*Net" name, our product suite
provides an integrated energy trading, risk management, scheduling and analytics
system to support multiple functional areas of the energy enterprise. It also
allows energy professionals to model physical assets so they can be effectively
employed in conjunction with a firm's trading and marketing operations.
The Zai*Net product suite offers a software solution covering a range of
functions, including trading, transaction management, risk management, analytics
and physical scheduling across front, middle and back office operations. Full
integration among the Zai*Net product suite enables energy market participants
to trade, process transactions and manage risk from the wholesale acquisition of
energy through its sale and scheduling. Key benefits of our product suite
include the ability to:
- Manage risk among multiple energy commodities on an enterprise-wide
basis;
- Provide and track operational results from a trader level to a business
unit or enterprise level;
- Maintain trading data in a centralized database with a single,
consolidated, auditable solution;
- Integrate energy trading, risk/control, credit, back office,
treasury/finance and management reporting on a single system;
- Analyze the financial risk and potential impact of long-term energy
investment decisions; and
- Simulate the behavior of deregulating energy markets to forecast future
market prices.
Our software solutions consist of the following three tightly integrated
product groups:
- Zai*Net Manager, our core product, supports energy trading operations and
records and manages transactions and risks of energy commodities;
- Zai*Net Risk Analytics provides advanced risk assessment and management
tools for competitive energy markets; and
- Zai*Net Physicals manages physical energy scheduling operations and
invoicing.
We also offer a fourth product group, Zai*Net Models, to analyze
competitive electric power and natural gas markets, and value energy assets.
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[ZAINET PRODUCT SUITE FLOWCHART]
The omitted graphic is a visual model of our Zai*Net product suite. There
are two boxes. The upper box contains the Zai*Net Models product group:
PowerMarkets, PowerOptions, GasOptions, and ProjectFinance. Below that, there is
a bullet-point list of their functions: long term energy investment analysis,
asset valuation and option valuation.
Below the Zai*Net Models box lies a second, larger box, containing three
smaller boxes within, each representing one of three tightly integrated product
groups. The first box is labeled "Zai*Net Risk Analytics." Inside the box is a
description of its purpose, Corporate Risk Management and a bullet-point list of
its functions: basis exposure, profit & loss attribution, Monte Carlo
Value-at-Risk and potential credit exposure.
The second box is labeled "Zai*Net Manager." Inside the box is a
description of its purpose, Trading, Transaction & Risk Management and a
three-column list of its functions. The first column, "Front Office", lists
trade capture, position/portfolio management, and pricing & profit & loss. The
second column, "Middle Office", lists Value-at-Risk, credit exposure, portfolio
stress analysis, and audit trail. The third column, "Back Office" lists
reporting confirmations and invoicing.
The third box is labeled "ZaiNet Physicals". This box is divided-side into
three software subgroups. The first subgroup is titled Power*Master. Its listed
functions are: hourly power schedules, curtailments & actualization, pathing
information, and tagging. The second software subgroup is titled Gas*Master and
lists as its functions: gas schedules, pipeline rate schedules, interconnect
movements, and storage. The third software subgroup is Plant*Master, which lists
its functions as: gas plants and processing management.
Zai*Net Manager Product Group
The Zai*Net Manager software is designed to increase the efficiency of a
customer's daily trading operations by recording and managing transactions and
associated risks of energy related commodities. It is used by energy traders and
marketers, risk managers, credit officers and others involved in trading energy
commodities and managing energy risk exposure. The Zai*Net Manager software
serves as the core system and integrates front, middle and back office trading
functionality for multiple traded energy commodities, including:
- electric power
- natural gas
- crude oil
- refined products
- natural gas liquids
- coal
- emission allowances
- weather derivatives
- foreign exchange transactions
The software also provides pricing and back office support for all traded
instruments, including multiple types of physicals, swaps, over-the-counter
options, listed options and futures.
The Zai*Net Manager software's real-time risk management capability
provides aggregated portfolio numbers that instantaneously reflect position and
price changes. The software is designed to handle enterprise-wide, high-level
risk management and is also capable of detailed energy commodity position
tracking, analysis and accounting for diverse local trading requirements.
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The Value-at-Risk, or VaR, functionality computes corporate-wide VaR, a
widely accepted method for evaluating and measuring market risk, by a number of
categories. The VaR software analyzes information about the risk, or likely gain
or loss, in a given portfolio. The software also provides credit risk analysis
on a real-time basis to minimize current exposure. Portfolio stress analysis
enables risk managers to monitor the impact of price and volatility movements,
and the passage of time on a specified portfolio's position and profit and loss.
Full system audit capability tracks "who did what when" in the system, and "as
of" reporting -- the ability to recreate a previous day's profit and loss
position -- is integrated throughout the system.
Zai*Net Risk Analytics Product Group
Zai*Net Risk Analytics software provides an advanced set of risk assessment
and management tools designed specifically for competitive energy markets. It is
used by energy traders and marketers, risk managers, credit officers and others
involved in managing energy risk exposure. The software utilizes sophisticated
modeling, analysis and simulation methods to help understand business risks.
Zai*Net Risk Analytics software complements and is integrated with Zai*Net
Manager and Zai*Net Physicals software to facilitate the accurate valuation and
management of energy portfolios.
The Zai*Net Risk Analytics software allows users to track portfolio
performance versus projected risks so they can better understand the behavior of
the portfolio under a range of possible price movements, enabling them to more
effectively manage trading and risk.
Zai*Net Risk Analytics software provides capabilities that allow energy
market participants to carefully monitor their risk profiles and credit
positions to manage, analyze and isolate specific risks. It includes the
following modules:
- BASIS BREAKDOWN REPORTING breaks down the risk factors of a single
transaction or group of transactions according to varying price
movements, which are commonly referred to as fixed, basis and index
prices. This enables more detailed analysis of each element of portfolio
risk.
- PROFIT & LOSS (P&L) ATTRIBUTION REPORTING analyzes profit and loss
changes over specified time periods, and attributes such changes to (1)
variations in a commodity's price and volatility, (2) the passage of time
in the specified period and (3) new, changed or voided transactions
during the period.
- MONTE CARLO VALUE-AT-RISK (VaR) ANALYSIS uses the industry-standard Monte
Carlo VaR methodology optimized specifically for energy portfolios. This
analysis runs a portfolio through thousands of simulated market price and
volatility movements and reports a distribution for VaR, which is the
likely gain or loss.
- POTENTIAL CREDIT EXPOSURE ANALYSIS provides close monitoring of credit
risk by capturing volatility in a credit exposure calculation to help
contain potential losses.
Zai*Net Physicals Product Group
The Zai*Net Physicals software allows electric power and natural gas
traders and schedulers as well as management and back office staff to manage
physical energy scheduling operations and invoicing. The Zai*Net Physicals group
consists of three major products: Gas*Master, Power*Master and Plant*Master
software.
- GAS*MASTER software supports all aspects of physical natural gas
transportation, including scheduling, pipeline nominations and
wellhead -- or production-level -- accounting. Gas*Master software
includes the following modules:
-- GAS SCHEDULING assists users in planning and scheduling natural gas
transportation by pipelines, in and out of storage facilities, and to
and from gas pipeline interconnect and storage points.
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-- GAS NOMINATIONS manages natural gas scheduling information and formats
the information to the specific requirements of various gas pipeline
systems, enabling bids and confirmations of complex physical gas
transactions. A Web-based electronic data interface, or EDI, allows
automatic transfer of all information exchange with the pipelines,
without requiring user intervention or data re-entry.
-- WELLHEAD ACCOUNTING enables companies with interest at the wellhead
level -- or production site -- to manage the division of interest and
royalty payments.
- POWER*MASTER allows users to schedule electric power across the various
transmission systems and electric power markets worldwide. It includes
the following modules:
-- LONG-TERM POWER SCHEDULING tracks power curtailments, actual electric
power flow and physical and financial transmission line losses by
transaction. The user-friendly interface matches energy transactions
(buys with sells), tracks the "paths" that the energy has flowed
through on the power grid and creates daily and monthly schedules of
planned power flows down to a minute level.
-- REAL-TIME POWER SCHEDULING captures and schedules purchases and sales
of power and transmission capacity, which is the flow of power between
points on the electrical grid networks, on a convenient, single-entry
screen. We designed this module in conjunction with traders and
schedulers to support hourly and real-time trading in the deregulating
power markets.
- PLANT*MASTER enables natural gas processing plant operators to track the
physical flows of gas through the facility and to manage title and
allocation throughout the process.
Zai*Net Models Product Group
Zai*Net Models provide support for long-term energy decisions with a
comprehensive suite of software solutions to analyze competitive electric power
and natural gas markets. Using sophisticated techniques, the models allow
accurate appraisals, capturing the embedded risk prevalent in many energy
assets. These models also perform sensitivity analysis, which involves valuation
testing against varying assumptions relating to fuel costs, price volatility,
operating costs and characteristics, and discount rates. The models use advanced
methods for valuing physical options -- options that reflect the risks of the
physical energy market -- and can be used for mark-to-market valuation and risk
reporting. The Zai*Net Models include:
- POWERMARKETS is a model that simulates the dynamics of competitive
electricity markets, including forward prices, operating performance of
generators and trading flows between markets and regions.
- POWEROPTIONS is a set of models that uses sophisticated analyses to value
energy assets.
- GASOPTIONS is a set of models that uses sophisticated analyses to value
storage assets and complex purchase and sale transactions.
- PROJECTFINANCE is a financial model that values new and existing assets
using a number of analytical techniques.
WeatherDelta
We launched our Zai*Net WeatherDelta software in October 2000. WeatherDelta
addresses a key concern in the electric power industry -- the impact of weather
on profit and loss in an energy asset portfolio. WeatherDelta is an application
designed to allow energy traders to assess the value and risk of assets and
obligations in the context of a complete portfolio, and to quantify the impact
of weather on volume and price risk. It analyzes the impact of weather on load,
generation, pricing, retail contracts and traded positions using weather-based
risk assessment methods.
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Product Pricing
We license our software for a one-time license fee, which typically
consists of a base fee plus charges for optional modules and system users. The
one-time license fee for base packages can range from $200,000 to $400,000 for a
system with basic functionality and a small number of users. Adding additional
functionality through optional modules, which are priced from $20,000 to over
$100,000, and additional users can increase system license fees to a range of
$500,000 to over $1 million. Customers also typically enter into an annual
maintenance agreement providing them with regular software upgrades and
technical support. Customers pay an annual maintenance fee that is typically
equal to 20% of the customer's license fee. A majority of our customers start
with a software solution providing basic functionality to a limited number of
users and add functionality and users as they expand their operations.
Software Services
We offer a broad range of professional services to assist our customers in
implementing our software products to meet their business needs. Our philosophy
is to focus on the needs of each specific customer and to tailor our services
accordingly. We provide the following services, primarily on a time and
materials basis:
- IMPLEMENTATION CONSULTING SERVICES to assist customers with the initial
installation of the software or newly licensed modules, conversion of the
customer's historical data, setting the operational parameters of the
system and ongoing training and support.
- APPLICATION CONSULTING SERVICES to help our customers gain the maximum
benefit from our systems and implement best practices in their trading
and risk management operations.
- POST-IMPLEMENTATION CUSTOMER SUPPORT to answer customer questions and
resolve problems through remote diagnosis and telephone hotline support.
These services and the professionals that deliver them contribute to a
strong relationship with our customers, enabling us to assess the future
requirements of our customers and sell them additional products and services. As
of December 31, 2000, our software consulting staff consisted of 82 employees
located in the United States and Europe.
Financial information about our software products and services is set forth
in our consolidated financial statements at Item 14 and is incorporated herein
by reference.
STRATEGIC CONSULTING SERVICES
Based primarily in New York and Cambridge, England, our strategic
consulting practice provides energy market participants and governments with
strategic advice on the deregulation and restructuring of the energy industry
and assists energy companies with global operations in choosing and implementing
strategies to remain competitive in deregulating energy markets. Our reputation
in strategic consulting is based on our experience and in-depth understanding of
competitive energy markets. We have significant expertise in economics,
regulation and strategy, and have been at the forefront of changes in the United
Kingdom energy sector, which has one of the most deregulated natural gas and
electric power markets in the world. Our knowledge and information base covers
the entire energy value chain from fuel production through generation,
transmission, distribution and trading, and we have a detailed understanding of
competitive wholesale trading arrangements in international gas and electricity
markets.
In the third quarter of 2000, we opened our North American strategic
consulting practice located in New York, which offers consulting services to
participants in the North American energy markets similar to those offered by
its European counterpart.
Our strategic consulting expertise, which is billed primarily on a time and
materials basis, is diverse and includes specialization in the following areas:
ACQUISITIONS. New entrants and existing players in deregulating markets
may choose to strengthen their market position through acquisitions of assets or
businesses. We have significant experience in the economic evaluation of new and
existing energy projects and have provided advice on more than 20 power projects
in the United Kingdom, as well as a number of projects in Europe.
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QUANTITATIVE ANALYSIS. We are experts in analyzing complex issues in
competitive energy markets. Our quantitative approach encompasses, among other
things, the effect of changing market structures on the key price drivers. Our
strategic consulting group first developed our suite of analytical models of the
England and Wales energy power pool in the late 1980s to assist our clients in
their negotiations with the United Kingdom government over the structure of the
energy power pool. Since then, we have refined these models into our
comprehensive suite of analytical Zai*Net Models that support strategic energy
decisions.
RISK MANAGEMENT. Throughout North America and Europe, competition is
forcing natural gas and electric utilities to re-evaluate their strategies for
managing the risks in their businesses. We offer a complete range of risk
management consultancy services, independently or in conjunction with our
Zai*Net software suite. We have developed electricity trading and risk
management training courses for a number of United Kingdom, continental European
and North American power companies. We have also run several successful
electricity trading and risk management workshops at major European power
conferences.
POLICY FORMULATION. Over the years, we have worked very closely with
British gas and electricity regulators to help design and establish the world's
first fully competitive gas and electricity markets. We are currently lead
economic advisors to the United Kingdom gas and electricity regulatory body,
OFGEM, on the Reform of Electricity Trading Arrangements. We have also developed
a leading advisory position on the transition to competition in other European
energy markets.
In 1998, the British government selected us as a consultant in the
development of New Electricity Trading Arrangements, or NETA. We continue to
advise the British government on NETA and are now providing NETA-compliant
Zai*Net software to a number of the United Kingdom's major energy companies,
including British Energy, Powergen, London Electricity and Yorkshire
Electricity.
Financial information about our strategic consulting services is set forth
in our consolidated financial statements at Item 14 and is incorporated herein
by reference.
SALES AND MARKETING
We sell our products and services through a direct sales channel. We
believe the product and market expertise necessary to sell our highly
sophisticated products cannot be delegated successfully to third parties, and we
seek to hire subject matter experts who can bring added value to the sales
process. We do believe, however, that third parties can provide us with valuable
assistance in our marketing efforts, especially in new geographic regions.
Direct Sales Model
As of December 31, 2000, our direct sales force consisted of 33 employees
selling from our United States and European offices. We have a single sales
organization in each region that is responsible for selling our entire suite of
products and services in that region. Each of the United States and European
sales organizations is led by a highly experienced vice president with a strong
background in building and leading large enterprise sales teams.
We use a team sales approach in which professional account representatives
work with pre-sales product and service experts. The account representative
generates and qualifies leads, manages the sales process and is responsible for
closing the sale. Most new customer sales cycles typically range from five to
six months from lead generation to contract execution. Territories are assigned
to account representatives on a geographic and named-account basis. Pre-sales
consultants support the sales process by assessing the prospect's business needs
and creating and delivering technical sales information and demonstrations.
Subject matter experts from strategic consulting and product development
supplement the sales team as the sales situation dictates. In addition, our
strategic and software consultants work closely with the sales team to identify
additional sales opportunities with existing customers. We have closely
coordinated team selling between the United States and European channels on
global enterprise opportunities.
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Marketing Communications
To support our growing direct sales channel, we have devoted significant
resources to building strong marketing support. Our main marketing objectives
are to generate sales leads and increase the market's awareness and accurate
perception of us and our products and services. These efforts are focused on
industry advertising, public relations, trade shows, direct mailings, the
Internet and platform participation in major industry seminars. As of December
31, 2000, we had seven marketing personnel.
STRATEGIC RELATIONSHIPS
We continue to develop relationships, most of which are informal, with
third parties that can assist us in generating sales leads and provide us with
cooperative marketing support. We also have a joint marketing arrangement with
Financial Engineering Associates by which we resell FEA's software as a part of
our Zai*Net software.
In August 2000, we entered into a strategic alliance with Structure
Consulting Group L.L.C., a premier business and technology solution provider to
the energy industry. We and Structure Consulting are jointly developing a
collaborative software solution, consisting of our Zai*Net trading systems and
Structure Consulting's nMarket(TM) business solution, for energy companies
bidding into North American markets administered by independent systems
operators, or ISOs. The combined solution will offer power trading operations in
ISO-administered energy markets with straight-through interfaces to these
markets. Structure Consulting is also a preferred systems implementation manager
for our Zai*Net systems.
RESEARCH AND DEVELOPMENT
A strong development capability is essential to delivering responsive
products to an emerging market, continually improving the quality and
functionality of our current products and enhancing our core technology. As of
December 31, 2000, we had 83 employees in our research and development area. We
spent approximately $1.2 million, $3.9 million and $6.6 million on research and
development during the period from inception (April 29, 1998) through December
31, 1998 and the years ended December 31, 1999 and 2000, respectively.
We believe the best way to maximize our development capability is to have
small, entrepreneurial development teams, each of which is focused on a specific
product group. Our teams operate under a structure that provides an "umbrella"
of common strategy, plans, technology, standards, methodologies, processes and
culture. Our product teams consist of product managers, programmers and
documentation and quality assurance specialists, and overall development
management consists of the leaders of each development team, led by the chief
technology officer. The leaders ensure that the teams operate under the common
umbrella and that they work closely with product marketing in a process designed
to ensure that we develop products that the market requires. The team leaders
manage the integration between products and coordinate overall product suite
quality assurance.
TECHNOLOGY
Written primarily in C/C++ with standard graphical user interfaces, the
Zai*Net software suite has an open, three-tier client/server architecture and
runs on Unix and NT servers with Windows95 and WindowsNT clients on Oracle,
Microsoft or Sybase database platforms. We typically store business logic in
objects that reside on the client or server side of the application. Objects are
usually coded in C++ using object-oriented programming techniques for improved
scalability.
The ability to integrate easily with other systems is a key competitive
advantage. To facilitate integration with a variety of architectures, the
Zai*Net suite of solutions provides standard interfaces to accept trades and
prices from other systems and sources. The suite processes trades and prices
into standard formats, easily processed by the risk system. It performs this
activity in random access memory-based server objects keeping slow disk access
to a minimum. The integrated result is an object-oriented, high-performance
system that will run on a variety of servers and databases.
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CUSTOMERS
Our customers include a wide range of entities in the energy market,
including utilities, natural gas and electric power marketers, energy retailers,
natural gas and oil producers, local distribution companies, pipelines,
independent power producers, financial institutions and regulatory agencies. As
of December 31, 2000, we had approximately 150 energy enterprise customers
located primarily in the United States, Canada, the United Kingdom, Germany,
Austria, Belgium, the Netherlands, Spain and Venezuela. Our customers include:
UTILITIES
Austin Energy (City of Austin, TX)
Bayernwerk
BC Hydro/Powerex
Carolina Power & Light
Consolidated Edison
Electrabel
Florida Power & Light
GPU Energy
Ontario Power Generation
Pennsylvania Power & Light
Preussen Elektra
Public Service Electric & Gas
TXU Electric and Gas
SEP
NATURAL GAS AND ELECTRIC POWER MARKETERS
Bord Gais
Dynegy
Eastern Electricity plc
Merchant Energy Group of the Americas
PG&E Energy Trading
Valero Refining and Marketing
AES Electric Limited
ENERGY RETAILERS
NewEnergy
FINANCIAL INSTITUTIONS
Credit Suisse First Boston
GE Capital
REGULATORY AGENCIES
OFGEM
GAS AND OIL PRODUCERS
Amerada Hess
Anadarko Petroleum
BP Amoco
Conoco
Ocean Energy/Seagull Energy
Petroleos de Venezuela S.A.
Phillips Petroleum Company
Ultramar Diamond Shamrock
Unocal Corporation
LOCAL DISTRIBUTION COMPANIES
Southwestern Energy
TXU Lone Star Gas
PIPELINES
Coastal Gas Services
Colorado Interstate Gas
El Paso Merchant Energy
Transok, Inc.
INDEPENDENT POWER PRODUCERS
AES Electric
Calpine
TRANSMISSION COMPANIES
TenneT
National Grid Company plc
Information regarding domestic and foreign revenues is set forth in our
consolidated financial statements at Item 14 and is incorporated herein by
reference.
COMPETITION
We compete in a market that is new, rapidly evolving and very competitive.
We expect competition to persist and intensify. We currently face competition
from a number of sources.
The companies that compete against us in the provision of software
solutions to the energy industry include:
- a number of smaller companies that offer point solutions exclusively to
the energy market but do not provide the full range of products and
services required by market participants and do not have a significant
international presence;
- a small number of companies that provide a wide range of products and
services exclusively to the energy market but currently do not have a
strong international presence;
- internal development departments of a number of energy participants
developing systems for internal use or for sale to other market
participants; and
- large multi-product/market software companies or financial institutions
that offer or, in the future, may offer financial risk management and
other software addressing the energy market.
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We believe that the principal competitive factors with respect to our
software solutions include:
- knowledge of market needs, product performance, scope, functionality,
ease of use and scalability;
- the existence of an international presence;
- the ability to integrate external data sources;
- product and company reputation;
- the existence of a referencable customer base;
- customer service and support; and
- price.
The principal competitors for our strategic consulting services are
customers who have internal expertise as well as large international consulting
and strategy firms. We believe that the principal competitive factors with
respect to our strategic consulting services include:
- subject matter expertise;
- responsiveness to customer needs;
- reputation;
- comprehensive delivery methodologies; and
- price.
We believe that we have a leadership position in the energy marketplace
because of our international presence, our subject matter expertise and our
ability to provide both software solutions and strategic consulting services to
our customers. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Certain Factors That May Affect Our Business -- 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" for a description of risks relating to our competition.
INTELLECTUAL PROPERTY
We rely on a combination of copyright, trademark and trade secret laws,
nondisclosure agreements and other contractual provisions to establish, maintain
and protect our proprietary rights. We have copyright and trade secret rights
for our products, consisting mainly of source code and product documentation. We
attempt to protect our trade secrets and other proprietary information through
agreements with suppliers, non-disclosure agreements with employees and
consultants and other security measures.
We rely on outside licensors for technology that is incorporated into and
is sometimes necessary for the operation of our products. However, we believe we
can obtain replacements from other vendors and we are in the process of
developing replacement products ourselves. For example, the core technology we
acquired from Positron has allowed us to develop similar technology into an
analytical tool that prices options that we license for resale.
EMPLOYEES
As of December 31, 2000, we had 330 full-time employees, consisting of 132
employees in consulting and services, 83 employees in research and development,
55 employees in finance and administration, 40 employees in sales and marketing
and 20 employees in customer support. Of such employees, 218 were located in the
United States and 112 were employed in Europe. None of these employees is
covered by any collective bargaining agreements, and to date, we have not
experienced a work stoppage. We believe our relationship with our employees is
good.
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ITEM 2. PROPERTIES
Our principal administrative, sales, marketing, services and research and
development facility occupies approximately 22,000 square feet of office space
in New York, New York. The leases expire in January 2011. In addition, we lease
sales, services and research and development offices in the following cities:
CITY SQUARE FOOTAGE
- ---- --------------
Dallas, Texas............................................... 5,300
Houston, Texas (two offices)................................ 19,400
London, England............................................. 6,925
Cambridge, England.......................................... 6,000
Other than our Cambridge office, which is the headquarters of our strategic
consulting business, each of our offices houses personnel for both our software
and strategic consulting business segments. We believe that our facilities are
adequate for our current needs and that suitable additional or substitute space
will be available as needed to accommodate expansion of our operations.
ITEM 3. LEGAL PROCEEDINGS
From time to time we may be subject to legal proceedings and claims in the
ordinary course of our business. We are not aware of any legal proceedings or
claims that are believed will have, individually or in the aggregate, a material
adverse effect on our business, financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers and their respective ages and positions as of March
23, 2001, are as follows:
NAME AGE POSITION
---- --- --------
David M. Stoner 59 President and Chief Executive Officer
Nigel L. Evans 47 Executive Vice President and Director of European Operations
Brian J. Scanlan 38 Executive Vice President and Chief Technology Officer
DAVID M. STONER has served as our President and Chief Executive Officer
since October 1998. From April 1997 to October 1998, Mr. Stoner served as
President and Chief Operating Officer at SS&C Technologies, Inc., a provider of
asset management software to the financial services industry. From August 1995
to October 1996, Mr. Stoner served as President and Chief Operating Officer of
The Dodge Group, Inc., a software company providing PC-based general ledger
systems. From December 1987 to August 1995, Mr. Stoner served as the Executive
Vice President, Worldwide Operations at Marcam Corporation, an international
provider of enterprise applications and services.
NIGEL L. EVANS has served as our Executive Vice President and Director of
European Operations since November 2000. From May 1998 to November 2000, Dr.
Evans served as our Senior Vice President and Director of European Operations
and from 1985 to May 1998, he served as Chairman and Chief Executive Officer of
Caminus Limited, a European strategic consultancy acquired by us in May 1998.
BRIAN J. SCANLAN has served as our Executive Vice President and Chief
Technology Officer since November 2000. From January 1999 to November 2000, Mr.
Scanlan served as our Senior Vice President and Chief Technology Officer. From
May 1998 to December 1998, Mr. Scanlan served as President of Zai*Net Software,
L.P. and from 1987 to May 1998 he served as President of Zai*Net Software, Inc.,
a software firm and our predecessor.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has been quoted on the Nasdaq National Market under the
symbol "CAMZ" since January 28, 2000. Consequently, there was no established
public trading market for our common stock during the periods prior to 2000
covered by the financial statements included in this annual report.
The following table sets forth the range of high and low sales prices for
each period indicated:
2000
----------------
HIGH LOW
------ ------
First Quarter*............................................. $33.50 $16.50
Second Quarter............................................. 29.00 7.63
Third Quarter.............................................. 42.00 14.00
Fourth Quarter............................................. 46.94 14.89
- ---------------
* The first quarter of 2000 reflects the period from our first trading date on
January 28, 2000 through March 31, 2000.
As of March 23, 2001, we had 46 holders of record of our common stock.
Because certain of these shares are held by brokers and other institutions on
behalf of stockholders, we are unable to estimate the total number of
stockholders represented by these holders of record.
We have never declared or paid any cash dividends on our capital stock. We
intend to retain future earnings, if any, to finance our growth strategy. We do
not anticipate paying cash dividends on our common stock in the foreseeable
future. Payment of future dividends, if any, will be at the discretion of our
board of directors after taking into account various factors, including:
- our financial condition;
- our operating results;
- our current and anticipated cash needs;
- restrictions in our financing agreements; and
- our plans for expansion.
USE OF PROCEEDS
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 (in
thousands):
Underwriting Discounts and Commissions...................... $4,578
Other Expenses.............................................. 1,804
------
Total Expenses.............................................. $6,382
======
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 $59,028 (in thousands).
From the effective date of the Registration Statement through December 31,
2000, we used the net proceeds from the offering as follows (in thousands):
Repayment of Indebtedness................................... $ 4,309
Capital Expenditures........................................ 4,348
Termination Fee for Consulting Services..................... 1,300
Lease Termination Fee....................................... 186
Bonus Payments.............................................. 522
Earn-out Payment to Zak Associates, Inc..................... 355
Security Deposit on New York Lease.......................... 1,739
Acquisition of Nucleus...................................... 13,584
Acquisition of DC Systems................................... 184
Investments in Marketable Securities........................ 26,808
Cash Equivalents............................................ 5,693
-------
$59,028
=======
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) $289 (in thousands) of
the bonus payments, which was paid to Nigel L. Evans, our Executive 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 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data, which includes data of
our predecessor, Zai*Net Software, Inc., should be read together with the
consolidated financial statements and related notes and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
In the following table, "Adjusted EBITDA" is defined as earnings before
interest and other income, income taxes, depreciation, amortization, acquired
in-process research and development, non-cash compensation expense, IPO-related
expenses and loss on office relocation. EBITDA is a non-GAAP measure commonly
used by investors and analysts to analyze companies on the basis of operating
performance, leverage and liquidity. We present Adjusted EBITDA, which is also a
non-GAAP measure, to enhance the understanding of our operating results. We
believe Adjusted EBITDA is an indicator of our operating profitability since it
excludes items which are not directly attributable to our ongoing business
operations. However, Adjusted EBITDA relies upon management's judgment to
determine which items are directly attributable to our ongoing business
operations and as such is subjective in nature. Neither EBITDA nor Adjusted
EBITDA should be construed as an alternative to net income as an indicator of a
company's operating performance or as an alternative to cash flow from
operations as a measure of a company's liquidity. For information about cash
flows or results of operations in accordance with generally accepted accounting
principles, please see the audited consolidated financial statements included
elsewhere in this annual report.
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ZAI*NET
(PREDECESSOR)
-----------------------------
FOUR
YEAR ENDED MONTHS
DECEMBER 31, ENDED
---------------- APRIL 30,
1996 1997 1998
------ ------ ---------
(IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Revenues:
Licenses.................................................. $1,291 $1,521 $1,495
Software services......................................... 1,430 2,668 1,335
------ ------ ------
Total revenues......................................... 2,721 4,189 2,830
------ ------ ------
Gross profit................................................ 1,722 2,858 2,095
Operating expenses.......................................... 1,619 2,862 1,659
------ ------ ------
Operating income (loss)..................................... 103 (4) 436
Other income (expense), net................................. (2) 17 8
Provision for income taxes.................................. -- -- 24
------ ------ ------
Net income.................................................. $ 101 $ 13 $ 420
====== ====== ======
OTHER DATA:
Cash provided by operating activities....................... $ 131 $ 401 $1,054
Cash used in investing activities........................... (100) (206) (100)
Cash provided by (used in) financing activities............. 54 (290) (3)
Adjusted EBITDA............................................. 204 119 482
DECEMBER 31,
----------------
1996 1997
------ ------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 242 $ 147
Total assets................................................ 1,275 2,193
Long-term debt.............................................. 3 --
Stockholders' equity........................................ 221 234
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CAMINUS
----------------------------------------
INCEPTION
(APRIL 29, 1998) YEAR ENDED
THROUGH DECEMBER 31,
DECEMBER 31, --------------------
1998 1999 2000
---------------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues:
Licenses............................................. $ 3,639 $ 12,538 $ 24,573
Software services.................................... 3,091 7,816 18,576
Strategic consulting................................. 2,896 6,556 8,565
-------- -------- --------
Total revenues.................................... 9,626 26,910 51,714
-------- -------- --------
Gross profit........................................... 4,941 18,523 36,395
Operating expenses..................................... 15,074 26,259 51,854
-------- -------- --------
Operating loss......................................... (10,133) (7,736) (15,459)
Other income (expense), net............................ 97 (228) 2,258
Provision for income taxes............................. 36 646 2,315
Minority interest...................................... (299) -- --
-------- -------- --------
Net loss............................................... $(10,371) $ (8,610) $(15,516)
======== ======== ========
Basic and diluted net loss per share................... $ (1.41) $ (1.01) $ (1.04)
Weighted average common shares -- basic and diluted.... 7,361 8,514 14,925
OTHER DATA:
Cash provided by (used in) operating activities........ $ 952 $ (1,922) $ 4,095
Cash used in investing activities...................... (10,893) (11,128) (44,795)
Cash provided by financing activities.................. 12,700 10,953 57,145
Adjusted EBITDA........................................ 356 3,275 10,279
DECEMBER 31,
----------------------------------------
1998 1999 2000
---------------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 2,771 $ 662 $ 16,883
Total assets........................................... 31,069 41,478 104,045
Borrowings under credit facility....................... -- 3,050 --
Stockholders' equity................................... 17,160 25,739 87,791
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with "Selected Financial
Data" and our financial statements and related notes thereto appearing elsewhere
in this annual report. This discussion and analysis contains forward-looking
statements that involve risks, uncertainties and assumptions. The actual results
may differ materially from those anticipated in these forward-looking statements
as a result of certain factors, including but not limited to those set forth
under "Certain Factors That May Affect Our Business" and elsewhere in this
annual report.
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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 Energy Limited in May 1998, Positron Energy
Consulting in November 1998, DC Systems, Inc. in July 1999 and certain assets
and liabilities of both Nucleus Corporation and Nucleus Energy Consulting
Corporation, which we refer to in this annual report as "Nucleus," in August
2000. Since the completion of these acquisitions, we expanded our organization
by hiring personnel in key areas, particularly marketing, sales and research and
development. Our full-time employees increased from 116 at December 31, 1998 to
184 at December 31, 1999 to 330 at December 31, 2000, and we intend to continue
to increase our number of employees throughout 2001.
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.
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 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 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. 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 service 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 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. Accordingly, for these
contracts, payments received and software license costs are deferred until our
obligations under the license agreement are completed. Anticipated losses, if
any, on uncompleted contracts are recognized in the period in which such losses
are determined. Prior to 2000, there were no circumstances where the percentage
of completion method of contract accounting was required to be applied.
Maintenance and support revenues associated with new product licenses and
renewals are deferred and recognized ratably over the contract period. Software
services revenues, where the services do not significantly modify the licensed
products and are not essential to their functionality and payment obligations
for the licensed products are not dependent upon the performance of the
services, and strategic consulting revenues are typically billed on a time and
materials basis and 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.
22
24
Our results of operations may experience seasonal fluctuations as customers
and potential customers in our industry face budgetary pressures to invest in
energy software before year end. Accordingly, we may tend to report greater than
expected revenues during the fourth quarter of the year and less than expected
revenues during the first quarter.
Revenues from customers outside the United States represented 41% and 46%
of our total revenues for the years ended December 31, 2000 and 1999. A
significant portion of our international revenues have been derived from sales
of our strategic consulting services and software products in the United
Kingdom. We intend to continue to expand our international operations and commit
significant management time and financial resources to developing our direct
international sales channels. International revenues may not, however, increase
as a percentage of total revenues.
We were formed as a limited liability company in April 1998. Accordingly,
until our initial public offering in January 2000, we were not subject to
federal and state income taxes, except for certain New York income taxes on
limited liability companies. During January 2000, the limited liability company
merged with and into Caminus Corporation, a Delaware Corporation formed in
September 1999. The adjustments to the income tax provision reflect the
additional tax provision we would have recorded had we been a C Corporation for
the periods presented.
Due to our acquisitions of DC Systems, Inc. and Nucleus 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.
RESULTS OF OPERATIONS
Comparison of the Year Ended December 31, 2000 to the Year Ended December 31,
1999
The following table sets forth the consolidated financial information
expressed as a percentage of revenues for the years ended December 31, 2000 and
1999. The consolidated financial information for the periods presented are
derived from the audited consolidated financial statements included elsewhere in
this annual report. The discussion below outlines trends in the business.
YEAR ENDED
DECEMBER 31,
------------
2000 1999
---- ----
Revenues:
Licenses.................................................. 48% 47%
Software services......................................... 36 29
Strategic consulting...................................... 16 24
--- ---
Total revenues.................................... 100 100
Cost of revenues:
Cost of licenses.......................................... 2 3
Cost of software services................................. 21 17
Cost of strategic consulting.............................. 7 11
--- ---
Gross profit...................................... 70 69
23
25
YEAR ENDED
DECEMBER 31,
------------
2000 1999
---- ----
Operating expenses:
Sales and marketing....................................... 19 15
Research and development.................................. 13 15
General and administrative................................ 21 32
Acquired in-process research and development.............. -- 4
Amortization of intangible assets......................... 22 32
IPO-related expenses...................................... 24 --
Loss on office relocation................................. 1 --
--- ---
Total operating expenses.......................... 100 98
--- ---
Loss from operations........................................ (30) (29)
Other income (expense)...................................... 4 (1)
Provision for income taxes.................................. 4 2
--- ---
Net loss.................................................... (30)% (32)%
=== ===
Revenues
Licenses. License revenues represented 48% and 47% of the total revenues
for 2000 and 1999, respectively, and increased $12.0 million, or 96%, from $12.5
million in 1999 to $24.6 million in 2000. This increase was primarily
attributable to increased demand for new and additional software licenses from
new and existing customers, larger transaction sizes and the expansion of our
domestic and international sales personnel.
Software services. Software services revenues represented 36% and 29% of
the total revenues for 2000 and 1999, respectively, and increased by $10.8
million, or 138%, from $7.8 million in 1999 to $18.6 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. The greater percentage increase in
software services revenues as compared to the increase in license revenues was
primarily attributable to the increase in the customer base that has maintenance
contracts. Typically, software services, including implementation and support
services, are provided subsequent to the recognition of the license revenues.
Strategic consulting. Strategic consulting revenues represented 16% and
24% of the total revenues for 2000 and 1999, respectively, and increased $2.0
million, or 31%, from $6.6 million in 1999 to $8.6 million in 2000 and are
primarily derived from the Caminus Limited subsidiary acquired in May 1998. The
increase in absolute dollars was 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 license revenues was 4% and 6% for 2000 and
1999, respectively, and increased $0.2 million, or 27%, from $0.8 million in
1999 to $1.0 million in 2000. The increase in absolute dollars was primarily
attributable to the costs of product enhancements performed by Nucleus
subsequent to our August 2000 acquisition of Nucleus and the increase in license
revenues.
24
26
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 software services revenues was 58% and
60% for 2000 and 1999, respectively, and increased $6.0 million, or 128%, from
$4.7 million in 1999 to $10.7 million in 2000. This increase in absolute dollars
was primarily attributable to the increase in the number of implementations,
training and technical support personnel, including former DC Systems and
Nucleus 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 strategic consulting revenues was 43%
and 45% for 2000 and 1999, respectively, and increased $0.7 million, or 24%,
from $2.9 million in 1999 to $3.6 million in 2000. This increase in absolute
dollars was principally attributable to an increase in the number of our
consultants, including the formation of our strategic consulting practice in the
United States, 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 19%
and 15% for 2000 and 1999, respectively, and increased $5.7 million, or 139%,
from $4.1 million in 1999 to $9.8 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 13% and 15% for 2000 and 1999,
respectively, and increased $2.7 million, or 68%, from $3.9 million in 1999 to
$6.6 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, management fees and outside professional fees. General and
administrative expenses as a percentage of revenues were 21% and 32% for 2000
and 1999, respectively, and increased $2.2 million, or 25%, from $8.7 million in
1999 to $10.9 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.
Acquired in-process research and development. Acquired in-process research
and development as a percentage of revenues was 4% for 1999, or $1.0 million.
Acquired in-process research and development represents the fair value of the
in-process research and development acquired during the 1999 purchase of DC
Systems. In the opinion of management, the acquired in-process research and
development had not yet reached technological feasibility and had no alternative
future uses. Accordingly, such amount was expensed on the date of acquisition.
DC Systems had one major project in progress at the time of the acquisition.
This project added functionality to Plant*Master, and was completed in the third
quarter of 2000.
25
27
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, DC Systems and Nucleus, and other intangible assets.
Amortization of intangibles as a percentage of revenues was 22% and 32% for 2000
and 1999, respectively, and increased $3.2 million, or 37%, from $8.6 million in
1999 to $11.7 million in 2000. The increase in absolute dollars was primarily
attributable to our incurring amortization expense related to the Nucleus
acquisition in the 2000 period and a full year of amortization related to the DC
Systems acquisition.
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 included the earning of
an option granted to the former shareholders of Caminus Energy Limited, which
resulted in a charge of approximately $7.0 million including taxes, a payment of
approximately $0.5 million for a special one-time bonus to the former
shareholders of Caminus Energy Limited, a payment of $1.3 million for a
termination fee to GFI 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 $3.6 million.
Loss on Office Relocation
The loss on office relocation primarily represents the cost of disposing of
the furniture and leasehold improvements from our old corporate headquarters,
net of the proceeds received from the sale. Total loss on office relocation as a
percentage of 2000 revenues was 1% and totaled $0.5 million.
Loss From Operations
As a result of the variances described above, operating loss increased by
$7.7 million, or 100%, from $7.7 million in 1999 to $15.5 million in 2000.
Operating expenses as a percentage of revenues was 100% and 98% for 2000 and
1999, respectively.
Adjusted EBITDA
Earnings before interest and other income (expense), income taxes,
depreciation and amortization, non-cash compensation expense, IPO-related
expenses and loss on office relocation expense, or Adjusted EBITDA, as a
percentage of revenues were 20% and 12% for 2000 and 1999, respectively.
Adjusted EBITDA increased $7.0 million, or 212%, from $3.3 million in 1999 to
$10.3 million in 2000.
Interest and Other Income
Interest and other income for 2000 primarily consisted of net interest
income of $2.3 million. The interest income was primarily related to the
interest earned on the resulting investments from our IPO proceeds.
Provision for Income Taxes
Our provision for income taxes for 1999 was $0.6 million and related
primarily to foreign income taxes. If we had been a C Corporation, our provision
for income taxes would have been $0.5 million for 1999. In January 2000, we were
reorganized as a C Corporation. Accordingly, in 2000 we pay income taxes instead
of passing income through to our shareholders. We recorded a tax provision of
$2.3 million for the 2000 period which primarily consists of foreign income
taxes.
26
28
Comparison of the period from Inception (April 29, 1998) through December 31,
1998 to the Year Ended December 31, 1999
The following table sets forth the consolidated financial information
expressed as a percentage of revenues for the period from inception (April 29,
1998) through December 31, 1998 and for the year ended December 31, 1999. The
consolidated financial information for the periods presented are derived from
the audited consolidated financial statements included elsewhere in this annual
report. The period from inception through December 31, 1998, which is
approximately eight months, is being compared to the year ended December 31,
1999. Accordingly, increases in revenues and expenses are primarily attributable
to the comparison of periods containing different numbers of months. The
discussion below outlines other trends in the business.
INCEPTION
(APRIL 29, 1998)
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ----------------
Revenues:
Licenses.................................................. 47% 38%
Software services......................................... 29 32
Strategic consulting...................................... 24 30
--- ----
Total revenues.................................... 100 100
Cost of revenues:
Cost of licenses.......................................... 3 2
Cost of software services................................. 17 24
Cost of strategic consulting.............................. 11 23
--- ----
Gross profit...................................... 69 51
Operating expenses:
Sales and marketing....................................... 15 5
Research and development.................................. 15 12
General and administrative................................ 32 33
Acquired in-process research and development.............. 4 50
Amortization of intangible assets......................... 32 57
--- ----
Total operating expenses.................................... 98 157
--- ----
Loss from operations........................................ (29) (106)
Other income (expense)...................................... (1) 1
Provision for income taxes.................................. 2 --
Minority interest........................................... -- (3)
--- ----
Net loss.................................................... (32)% (108)%
=== ====
Revenues
Licenses. License revenues represented 47% and 38% of the total revenues
for the 1999 and 1998 periods, respectively, and increased $8.9 million, or
245%, from $3.6 million in the 1998 period to $12.5 million in 1999. This
increase was primarily attributable to increased demand for new and additional
software licenses from new and existing customers, larger transaction sizes and
the expansion of our domestic and international sales personnel.
Software services. Software services revenues represented 29% and 32% of
the total revenues for the 1999 and 1998 periods, respectively, and increased by
$4.7 million, or 153%, from $3.1 million in the 1998 period to $7.8 million in
1999. This increase was primarily attributable to the increased licensing
activity described above, which resulted in increased revenues from customer
implementations and maintenance contracts. The greater increase in license
revenues as compared to the increase in software services revenues was
attributable to the increase in sales of licenses whereby the revenues were
recognized upon the execution of the license agreement and delivery of the
software to the client. Typically, software services are provided subsequent to
the recognition of the license revenues.
27
29
Strategic consulting. Strategic consulting revenues represented 24% and
30% of the total revenues for the 1999 and 1998 periods, respectively, and
increased $3.7 million, or 126%, from $2.9 million in the 1998 period to $6.6
million in 1999 and are derived from the Caminus Limited subsidiary acquired in
May 1998. This increase was primarily attributable to an increased number of
engagements, which was partially attributable to an increase in the number of
our consultants.
Cost of Revenues
Cost of licenses. Cost of licenses as a percentage of revenues was 3% and
2% for the 1999 and 1998 periods, respectively, and increased $0.6 million, or
294%, from $0.2 million in the 1998 period to $0.8 million in 1999. The increase
was primarily attributable to the costs of product enhancements performed by DC
Systems subsequent to our July 1999 acquisition of DC Systems.
Cost of software services. Cost of software services as a percentage of
revenues was 17% and 24% for the 1999 and 1998 periods, respectively, and
increased $2.4 million, or 106%, from $2.3 million in the 1998 period to $4.7
million in 1999. This increase was primarily attributable to the increase in the
number of implementations, training and technical support personnel, and related
recruiting expenses, to support the growth of the implementations and the
installed customer base. During 1999, we established a dedicated customer
support desk, which also required additional personnel.
Cost of strategic consulting. Cost of strategic consulting as a percentage
of revenues was 11% and 23% for the 1999 and 1998 periods, respectively, and
increased $0.7 million, or 32%, from $2.2 million in the 1998 period to $2.9
million in 1999. This increase was principally attributable to an increase in
the number of our consultants, and related recruiting expenses, to support the
growth in revenues.
Operating Expenses
Sales and marketing. Sales and marketing expenses as a percentage of
revenues were 15% and 5% for the 1999 and 1998 periods, respectively, and
increased $3.6 million, or 773%, from $0.5 million in the 1998 period to $4.1
million in 1999. This increase was primarily due to an increase in headcount,
recruiting expenses and promotional and travel expenses associated with the
hiring of additional sales and marketing personnel to support the expansion of
our domestic and international sales organizations.
Research and development. Research and development expenses as a
percentage of revenues were 15% and 12% for the 1999 and 1998 periods,
respectively, and increased $2.8 million, or 241%, from $1.2 million in the 1998
period to $3.9 million in 1999. This increase was primarily due to an increased
hiring of personnel and to other expenses associated with the development of new
products and enhancements of existing products.
General and administrative. General and administrative expenses as a
percentage of revenues were 32% and 33% for the 1999 and 1998 periods,
respectively, and increased $5.5 million, or 177%, from $3.1 million in the 1998
period to $8.7 million in 1999. This increase was primarily due to increased
staffing required to support our expanded operations in the United States and
internationally and, to a lesser extent, increased costs of outside professional
services and management fees.
Acquired in-process research and development. Acquired in-process research
and development as a percentage of revenues was 4% and 50% for the 1999 and 1998
periods, respectively, and was $4.8 million in the 1998 period and $1.0 million
in 1999. Acquired in-process research and development represents the fair value
of the in-process research and development acquired during the 1998 purchase of
Zai*Net and the 1999 purchase of DC Systems, respectively. In the opinion of
management, the acquired in-process research and development had not yet reached
technological feasibility and had no alternative future uses. Accordingly, such
amount was expensed on the date of acquisition. Zai*Net had two major projects
in progress at the time of the acquisition: power trading and scheduling; and
gas trading and scheduling. Development of power trading and scheduling
proceeded as anticipated in our year end appraisal and began generating revenues
in 1999 consistent with our appraisal. Gas trading and scheduling projects were
more complex than anticipated. Therefore, we revised the original estimated
completion date of April 1999 to mid-1999 and further revised this estimate in
conjunction with the DC Systems acquisition in July 1999. In conjunction with
the acquisition of DC Systems, we postponed this project in order to evaluate
comparable products of DC Systems. This
28
30
project was abandoned in 2000. DC Systems had one major project in progress at
the time of the acquisition. This project added functionality to Plant*Master,
which was completed in 2000. We believe there have been no significant changes
to these estimates as of December 31, 1999. See note 4 of the Caminus
Corporation financial statements for a discussion of the calculation of acquired
in-process research and development.
Amortization of intangible assets. The amortization of the intangible
assets represents the amortization of goodwill, which is the excess of the
purchase price over the net assets acquired from the acquisitions of Zai*Net,
Caminus Limited, Positron and DC Systems, and other intangible assets.
Amortization of intangibles as a percentage of revenues was 32% and 57% for the
1999 and 1998 periods, respectively, and increased $3.1 million, or 56%, from
$5.5 million in the 1998 period to $8.6 million in 1999. The increase was
primarily attributable to our incurring amortization expense related to the 1998
acquisitions for a full year versus eight months in the 1998 period, and the
additional amortization expense related to the DC Systems acquisition in the
1999 period.
Loss From Operations
As a result of the variances described above, operating loss decreased by
$2.4 million, or 24%, from $10.1 million in the 1998 period to $7.7 million in
1999. Operating expenses as a percentage of revenues were 157% and 98% for the
1998 and 1999 periods, respectively.
Adjusted EBITDA
Adjusted EBITDA as a percentage of revenues was 12% and 4% for the 1999 and
1998 periods, respectively. Adjusted EBITDA increased $2.9 million, or 827%,
from $0.4 million in the 1998 period to $3.3 million in 1999.
Provision for Income Taxes
Our provision for income taxes for 1999 was $0.6 million and related
primarily to foreign income taxes. Our provision for income taxes for the 1998
period related to state and local taxes and was not significant. If we had been
a C Corporation, our provision for income taxes would have been $0.2 million
each for the 1998 and 1999 periods.
Minority Interest
Minority interest represents the earnings attributable to the 29% of
Zai*Net that we did not own during the 1998 period.
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following tables represent certain unaudited consolidated statement of
operations information for each quarter in the years ended December 31, 2000 and
1999, as well as such information expressed as a percentage of total revenues
for the periods indicated. The information was derived from unaudited financial
statements and has been prepared on the same basis as our audited consolidated
financial statements and, in the opinion of management, includes all
adjustments, which consist of normal recurring adjustments, that we consider
necessary for the fair presentation of such information when read in conjunction
with our audited consolidated financial statements and notes thereto, appearing
elsewhere in this annual report. Due to the acquisitions and the significant
changes in our operations, the comparison of fluctuations for these time periods
would not provide a meaningful understanding of our on-going operations. We
believe quarter-to-quarter comparisons of financial results should not be relied
upon as an indication of future performance, and operating results may fluctuate
from quarter to quarter in the future. See "Certain Factors That May Affect Our
Business" and the financial statements contained elsewhere in this annual
report. We expect our results of operations will fluctuate and the price of our
common stock could fall if quarterly results are lower than the expectation of
securities analysts.
From the date of our formation as a limited liability company through
December 31, 1999, we were not subject to federal and state income taxes, except
for certain New York income taxes on limited liability companies. The amounts in
the line item of the statement of operations and other data table below titled
"Proforma net income (loss)" reflect the additional tax provision that we would
have recorded had we been a C Corporation for the periods presented.
29
31
QUARTER ENDED
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2000 2000 2000 2000
--------- -------- ------------- ------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues:
Licenses......................................... $ 4,073 $ 4,649 $ 7,045 $ 8,806
Software services................................ 2,710 4,375 5,397 6,094
Strategic consulting............................. 1,737 2,183 2,275 2,370
-------- ------- ------- -------
Total revenues........................... 8,520 11,207 14,717 17,270
-------- ------- ------- -------
Gross profit....................................... 5,672 8,305 10,189 12,229
Operating expenses................................. 20,077 8,852 10,515 12,410
-------- ------- ------- -------
Operating loss..................................... (14,405) (547) (326) (181)
Other income, net.................................. 413 715 668 462
Provision for income taxes......................... 21 754 711 829
-------- ------- ------- -------
Net loss........................................... $(14,013) $ (586) $ (369) $ (548)
======== ======= ======= =======
Basic and diluted net loss per common share........ $ (1.05) $ (0.04) $ (0.02) $ (0.03)
Weighted average shares -- basic and diluted....... 13,380 15,261 15,397 15,660
QUARTER ENDED
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2000 2000 2000 2000
--------- -------- ------------- ------------
(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Revenues:
Licenses.......................................... 48% 41% 48% 51%
Software services................................. 32 39 37 35
Strategic consulting.............................. 20 20 15 14
---- --- --- ---
Total revenues............................ 100 100 100 100
---- --- --- ---
Gross profit........................................ 67 74 69 71
Operating expenses.................................. 236 79 71 72
---- --- --- ---
Operating loss...................................... (169) (5) (3) (1)
Other income, net................................... 5 6 5 3
Provision for income taxes.......................... -- 7 5 5
---- --- --- ---
Net loss............................................ (164)% (5)% (3)% (3)%
==== === === ===
30
32
QUARTER ENDED
---------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1999 1999 1999 1999
----------- -------- ----------------- ----------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues:
Licenses................................. $ 1,777 $ 2,519 $ 3,793 $ 4,449
Software services........................ 1,949 2,057 1,673 2,137
Strategic consulting..................... 1,510 1,431 1,817 1,798
------- ------- ------- -------
Total revenues................... 5,236 6,007 7,283 8,384
------- ------- ------- -------
Gross profit............................... 3,655 4,053 4,967 5,848
Operating expenses......................... 4,810 5,371 8,275 7,803
------- ------- ------- -------
Operating loss............................. (1,155) (1,318) (3,308) (1,955)
Other income (expense), net................ 3 (55) (75) (101)
Provision for income taxes................. 73 66 195 312
------- ------- ------- -------
Net loss................................... $(1,225) $(1,439) $(3,578) $(2,368)
======= ======= ======= =======
Pro forma net loss......................... $(1,442) $(1,471) $(3,468) $(1,392)
======= ======= ======= =======
Basic and diluted net loss per common
share.................................... $ (0.15) $ (0.18) $ (0.43) $ (0.26)
Pro forma basic and diluted net loss per
common share............................. $ (0.18) $ (0.18) $ (0.42) $ (0.15)
Weighted average shares -- basic and
diluted.................................. 7,967 7,993 8,297 9,275
QUARTER ENDED
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1999 1999 1999 1999
--------- -------- ------------- ------------
(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Revenues:
Licenses.......................................... 34% 42% 52% 53%
Software services................................. 37 34 24 25
Strategic consulting.............................. 29 24 25 22
--- --- --- ---
Total revenues............................ 100 100 100 100
--- --- --- ---
Gross profit........................................ 70 67 68 70
Operating expenses.................................. 92 89 114 93
--- --- --- ---
Operating loss...................................... (22) (22) (45) (23)
Other income (expense), net......................... -- (1) (1) (1)
Provision for income taxes.......................... -- 1 3 4
--- --- --- ---
Net loss............................................ (23)% (24)% (49)% (28)%
=== === === ===
Pro forma net loss.................................. (28)% (24)% (48)% (17)%
=== === === ===
LIQUIDITY AND CAPITAL RESOURCES
In February 2000, we closed the initial public offering of 4.1 million
shares of our common stock, realizing net proceeds from the offering of
approximately $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 an expired credit facility.
Cash and cash equivalents as of December 31, 2000 were approximately $16.9
million, an increase of approximately $16.2 million from December 31, 1999. Our
cash flow used in operating activities was 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 or loss to
cash used in operating activities. Therefore, the following discussion explains
the significant items which impact the reconciliation of net loss to cash flow
from operating activities. Net cash provided by operating activities for the
year ended December 31, 2000 was approximately $4.1 million. Net cash provided
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by operating activities primarily resulted from our net loss of $15.5 million,
which was more than offset by non-cash IPO-related expenses of $9.7 million and
depreciation and amortization of $12.7 million. The increase in accounts
receivable of $8.2 million was primarily related to the increase in revenues in
the fourth quarter of 2000 compared to the fourth quarter of 1999. The increase
in income taxes payable of $1.6 million was primarily attributable to our
provision for income taxes. The loss related to the office relocation of $0.3
million is primarily the net book value of furniture and leasehold improvements
of our old headquarters at the time of their disposal, less proceeds received
from their sale.
Our cash flow used in investing activities was primarily affected by cash
paid for investments in marketable securities, acquisitions and capital
expenditures. Net cash used in investing activities during the year ended
December 31, 2000 was approximately $44.8 million and resulted from the
investment (net of related sales) of $26.8 million of the net IPO proceeds in
marketable securities primarily consisting of investment-grade obligations of
state and municipal governments and their agencies. Additionally, we paid $13.6
million in connection with the Nucleus acquisition in August 2000. Capital
expenditures of $4.3 million were primarily for computer and communications
equipment, purchased software, office equipment, furniture, fixtures and
leasehold improvements.
Our cash flow provided by financing activities was primarily affected by,
but not limited to, net cash received from issuances of common stock, cash paid
to affiliates and stockholders under contractual obligations, and repayment of
borrowings under the credit facility. Net cash provided by financing activities
during the year ended December 31, 2000 was approximately $57.1 million. During
the year ended December 31, 2000, financing activities provided cash of
approximately $59.0 million from the sale of common stock in connection with our
IPO and $2.3 million from the exercise of stock options. Also, we collected
subscription receivables of $2.0 million. A portion of these funds was used to
repay the $3.1 million outstanding balance of our credit facility and pay $3.2
million due to related parties.
Cash and cash equivalents as of December 31, 1999 were approximately $0.7
million, a decrease of approximately $2.1 million from December 31, 1998. Net
cash used in operating activities for the year ended December 31, 1999 was
approximately $1.9 million. Net cash used in operating activities primarily
resulted from our net loss of $8.6 million, an increase in accounts receivable
and prepaid expenses of $4.0 million and $0.9 million, respectively, and a
decrease in deferred revenue of $2.6 million. This was partially offset by
depreciation and amortization of $9.0 million, acquired in-process research and
development write-offs of $1.0 million, non-cash compensation expense of $1.0
million and an increase in accrued liabilities of $2.8 million. The increase in
accounts receivable was primarily attributable to the growth of our business.
The increase in accrued liabilities and prepaid expenses was primarily related
to professional fees associated with certain costs of our initial public
offering. Additionally, the increase in accrued liabilities was attributable to
the increase in accrued bonuses. Deferred revenues decreased approximately $2.6
million during the year ended December 31, 1999 primarily due to a decrease in
deferred license revenues, partially offset by an increase in deferred
maintenance revenues. Deferred license revenues decreased primarily due to
completion of our obligations under certain license agreements and the
acceptance of the software by the customers. Accordingly, certain license
revenues, which were deferred at December 31, 1998, were recognized during the
year ended December 31, 1999. During 1999, we modified our standard license
agreement by removing all acceptance criteria. As a result, our license
agreements in 1999 generally allowed for the recognition of revenues upon the
execution and delivery of the software to the customer. Deferred maintenance
revenues increased primarily due to a change in billing practice, where most
customers are now invoiced on an annual or quarterly basis instead of a monthly
basis.
Our cash flow used in investing activities is primarily affected by, but
not limited to, net cash paid to acquire businesses and cash paid for capital
expenditures. Net cash used in investing activities during the year ended
December 31, 1999 was approximately $11.1 million and resulted primarily from
the purchase of DC Systems for $9.9 million, net of cash acquired, and $1.2
million in capital expenditures for computer and communications equipment,
purchased software, office equipment, furniture, fixtures and leasehold
improvements.
Our cash flow provided by financing activities is primarily affected by,
but not limited to, net cash received from investors, net cash received under
borrowings from a credit facility, cash paid to affiliates and
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stockholders under contractual obligations, and cash distributions paid to
stockholders. Net cash provided by financing activities during the year ended
December 31, 1999 was approximately $11.0 million. During the year ended
December 31, 1999, financing activities provided cash of approximately $12.3
million from the sale of equity, $3.1 million from borrowings under a credit
agreement entered into in June with Fleet Bank and approximately $1.8 million in
subscriptions received. These funds were used for the payment of the purchase
price for DC Systems, an earnout to the former owners of Zai*Net of $2.2
million, to repurchase an equity interest in us held by SS&C Technologies, Inc.
for $0.3 million and to pay the $1.7 million due under the distributor agreement
with SS&C and $0.3 million distribution to members for taxes.
On June 23, 1999, we entered into a credit agreement with Fleet Bank which
provided for total borrowings of up to $5.0 million under two facilities, a
revolving loan and a working capital loan. The revolving loan provided for
borrowings of up to $2.5 million and the working capital loan provided for
borrowings that were limited to 85% of eligible accounts receivable, less $0.5
million, which in the aggregate were not allowed to exceed $2.5 million. The
loans under this agreement bore interest either at the bank's reference rate,
which is generally equivalent to the published prime rate, or LIBOR plus an
applicable margin between 2.5% and 3.0%. In February 2000, the then outstanding
balance was paid from the proceeds of our initial public offering and our
existing credit agreement was terminated.
We 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 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 138. We have no
derivative financial instruments and thus believe the adoption of this
pronouncement will not have a material impact on our financial position and
results of operations.
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. Since that time we also acquired Positron Energy Consulting, DC Systems
and certain assets and liabilities of Nucleus. 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
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- 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.
OUR LENGTHY SALES CYCLE MAKES IT DIFFICULT TO PREDICT OUR QUARTERLY RESULTS AND
THE PRICE OF OUR COMMON STOCK COULD FALL IF QUARTERLY RESULTS ARE LOWER THAN THE
EXPECTATIONS OF SECURITIES ANALYSTS
Our long sales cycle, which can range from five to six months or more,
makes it difficult to predict the quarter in which sales may occur or revenues
may be recognized. Our sales cycle varies depending on the size and type of
customer considering a purchase and whether we have conducted business with a
potential customer in the past. These potential customers frequently need to
obtain internal approvals from multiple decision makers prior to making purchase
decisions. Delays in sales could cause significant variability in our revenues
and results of operations for any particular period. If our quarterly results
and cash flows fall below the expectations of securities analysts, our stock
price may decline.
SEASONAL TRENDS MAY CAUSE OUR QUARTERLY OPERATING RESULTS TO FLUCTUATE, WHICH
COULD RESULT IN LESS THAN EXPECTED REVENUES
Our results of operations may experience seasonal fluctuations as customers
and potential customers in our industry face budgetary pressures to invest in
energy software before year end. Accordingly, we may tend to report greater than
expected revenues during the fourth quarter of the year and less than expected
revenues during the first quarter.
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.
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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.
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
primarily based in Europe, and we may encounter significant start-up costs in
connection with further developing our 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. We may not be successful in continuing to
develop and market our Zai*Net Manager, Zai*Net Analytics, Zai*Net Physicals and
Zai*Net Models software.
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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
For the year ended December 31, 2000, approximately 41% of our revenues and
33% of our operating expenses were denominated in British pounds. Our exposure
to fluctuations in currency exchange rates is likely to increase as we expand
our international operations.
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 August 2000
acquisition of Nucleus Corporation and Nucleus Energy Consulting Corporation.
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 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
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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 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 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 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.
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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 and software industries and would be difficult to
replace. Our employment agreements with Messrs. Stoner and Scanlan and Dr. Evans
expire in 2001. If we lose one or more of our key employees, our business could
be harmed.
IF WE FAIL TO CONTINUE TO ATTRACT AND RETAIN PERSONNEL WITH SALES EXPERIENCE,
SOFTWARE DEVELOPMENT SKILLS AND SUBJECT MATTER EXPERTISE IN THE ENERGY MARKET,
OUR BUSINESS MAY BE HARMED
Our future success will depend in large part on our ability to continue
attracting and retaining highly skilled personnel, particularly salespeople,
software developers and consultants who are both experts in their particular
fields and have strong customer relationship skills. In particular, the number
of people with significant knowledge about evolving energy markets is limited.
Newly hired employees will require training and it will take time for them to
achieve full productivity. We face intense competition in recruiting and may not
be able to hire enough qualified individuals in the future, and newly hired
employees may not achieve necessary levels of productivity.
WE MAY NEED ADDITIONAL FINANCING WHICH COULD BE DIFFICULT TO OBTAIN AND WHICH
COULD DILUTE 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, 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.
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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.
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
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
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companies. We may in the future be the target of securities litigation.
Securities litigation could result in substantial costs and divert management's
attention and resources.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD PREVENT
OR DELAY A CHANGE IN CONTROL OF US
Certain provisions of our certificate of incorporation and by-laws may
discourage, delay or prevent a merger, acquisition or other change in control,
even if the change in control would be beneficial to stockholders. Any of these
provisions could reduce the market price of our common stock. These provisions
include:
-- providing for a classified board of directors with staggered,
three-year terms
-- limiting the persons who may call special meetings of stockholders
-- prohibiting stockholder action by written consent
-- establishing advance notice requirements for nominations for election
to the board of directors or for proposing matters that can be acted
on by stockholders at stockholder meetings
We are subject to the provisions of Section 203 of the General Corporation
Law of Delaware. Section 203 will prohibit us from engaging in certain business
combinations, unless the business combination is approved in a prescribed
manner. Accordingly, Section 203 may discourage, delay or prevent someone from
acquiring or merging with us.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have no derivative financial instruments. 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 December 31, 2000, we
invested the net proceeds from our initial public offering in similar
investment-grade and highly liquid investments.
Our earnings are affected by fluctuations in the value of our subsidiaries'
functional currency as compared to the currencies of foreign denominated sales
and purchases. The results of operations of our subsidiaries, as reported in
U.S. dollars, may be significantly affected by fluctuations in the value of the
local currencies in which we transact 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 December 31, 2000, our
foreign currency translation adjustment was not material and, for the year ended
December 31, 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 year ended December 31, 2000, approximately 41% of our revenues and
33% of our operating expenses were 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 European Monetary Union. There is a single currency
within certain countries of the European Union, known as the euro, and one
organization, the European Central Bank is responsible for setting European
monetary policy. We have reviewed the impact the euro has 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.
40
42
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our financial statements and notes thereto and the reports of KPMG LLP and
PricewaterhouseCoopers LLP, independent accountants, are set forth in the Index
to Financial Statements at Item 14 and incorporated herein by reference.
Our "Selected Quarterly Results of Operations" set forth in Item 7 are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information called for by Item 10 of Form 10-K is set forth under the
headings "Directors and Nominees" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in our proxy statement for the 2001 annual meeting of
stockholders, which is incorporated herein by reference, and under the heading
"Executive Officers of the Registrant" included in Part I and incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information called for by Item 11 of Form 10-K is set forth under the
headings "Director Compensation," "Executive Compensation," "Compensation
Committee Interlocks and Insider Participation" and "Certain Relationships and
Related Transactions" in our 2001 proxy statement, which is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information called for by Item 12 of Form 10-K is set forth under the
heading "Beneficial Ownership of Common Stock" in our 2001 proxy statement,
which is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information called for by Item 13 of Form 10-K is set forth under the
heading "Certain Relationships and Related Transactions" in our 2001 proxy
statement, which is incorporated herein by reference.
41
43
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K:
1. Financial Statements. The following financial statements of Caminus
Corporation are filed as part of this Form 10-K on the pages indicated:
PAGE
----
CAMINUS CORPORATION AND SUBSIDIARIES
Independent Auditors' Report................................ F-2
Report of Independent Accountants........................... F-3
Consolidated Balance Sheets as of December 31, 2000 and
1999...................................................... F-4
Consolidated Statements of Operations for the Years Ended
December 31, 2000 and 1999 and for the Period from
Inception (April 29, 1998) Through December 31, 1998...... F-5
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 2000 and 1999 and for the Period
from Inception (April 29, 1998) Through December 31,
1998...................................................... F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000 and 1999 and for the Period from
Inception (April 29, 1998) Through December 31, 1998...... F-7
Notes to Consolidated Financial Statements.................. F-8
ZAI*NET SOFTWARE, INC.
Report of Independent Accountants........................... F-28
Balance Sheet as of April 30, 1998.......................... F-29
Statement of Operations and Retained Earnings for the Four
Months Ended April 30, 1998............................... F-30
Statement of Cash Flows for the Four Months Ended April 30,
1998...................................................... F-31
Notes to Financial Statements............................... F-32
2. Schedules are omitted as the required information is inapplicable
or the information is presented in the consolidated financial statements or
related notes.
3. Exhibits. The exhibits listed in the Exhibit Index immediately
preceding such Exhibits are filed as part of this Annual Report on Form
10-K.
(b) Reports on Form 8-K.
During the quarter ended December 31, 2000, we filed two amendments to the
Current Report on Form 8-K, dated August 30, 2000. Amendment No. 1 to Current
Report on Form 8-K/A was filed on November 13, 2000 and Amendment No. 2 to
Current Report on Form 8-K/A was filed on November 21, 2000. The original Form
8-K was filed regarding our purchase of certain assets and liabilities of
Nucleus Corporation and Nucleus Energy Consulting Corporation pursuant to Item 2
of Form 8-K. Amendment No. 1 was filed for the purpose of filing the financial
statements of Nucleus Corporation and Nucleus Energy Consulting Corporation
required by Item 7(a) and the pro forma information required by Item 7(b).
Amendment No. 2 was filed for the purpose of filing amended financial statements
required by Item 7(a). No other reports on Form 8-K were filed by us during the
quarter ended December 31, 2000.
42
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized, on the 29th day of
March, 2001.
CAMINUS CORPORATION (Registrant)
By: /s/ DAVID M. STONER
------------------------------------
David M. Stoner
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 29th day of March, 2001.
SIGNATURE TITLE
--------- -----
/s/ DAVID M. STONER President, Chief Executive Officer and Director
- --------------------------------------------------- (Principal Executive and Principal Financial
David M. Stoner Officer)
/s/ MICHAEL R. MURRAY Controller and Treasurer (Principal Accounting
- --------------------------------------------------- Officer)
Michael R. Murray
/s/ LAWRENCE D. GILSON Chairman of the Board
- ---------------------------------------------------
Lawrence D. Gilson
/s/ NIGEL L. EVANS Director
- ---------------------------------------------------
Nigel L. Evans
/s/ BRIAN J. SCANLAN Director
- ---------------------------------------------------
Brian J. Scanlan
/s/ CHRISTOPHER S. BROTHERS Director
- ---------------------------------------------------
Christopher S. Brothers
/s/ ANTHONY H. BLOOM Director
- ---------------------------------------------------
Anthony H. Bloom
/s/ RICHARD K. LANDERS Director
- ---------------------------------------------------
Richard K. Landers
/s/ CLARE M. J. SPOTTISWOODE Director
- ---------------------------------------------------
Clare M. J. Spottiswoode
43
45
INDEX TO FINANCIAL STATEMENTS
PAGE
----
CAMINUS CORPORATION AND SUBSIDIARIES
Independent Auditors' Report................................ F-2
Report of Independent Accountants........................... F-3
Consolidated Balance Sheets as of December 31, 2000 and
1999...................................................... F-4
Consolidated Statements of Operations for the Years Ended
December 31, 2000 and 1999 and for the Period from
Inception (April 29, 1998) Through December 31, 1998...... F-5
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 2000 and 1999 and for the Period
from Inception (April 29, 1998) Through December 31,
1998...................................................... F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000 and 1999 and for the Period from
Inception (April 29, 1998) Through December 31, 1998...... F-7
Notes to Consolidated Financial Statements.................. F-8
ZAI*NET SOFTWARE, INC.
Report of Independent Accountants........................... F-28
Balance Sheet as of April 30, 1998.......................... F-29
Statement of Operations and Retained Earnings for the Four
Months Ended April 30, 1998............................... F-30
Statement of Cash Flows for the Four Months Ended April 30,
1998...................................................... F-31
Notes to Financial Statements............................... F-32
F-1
46
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Caminus Corporation
We have audited the accompanying consolidated balance sheet of Caminus
Corporation and Subsidiaries as of December 31, 2000 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Caminus
Corporation and Subsidiaries as of December 31, 2000 and the results of their
operations and their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.
KPMG LLP
New York, New York
February 8, 2001
F-2
47
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Caminus Corporation
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, consolidated statements of
stockholders' equity and consolidated statements of cash flow present fairly, in
all material respects, the financial position of Caminus Corporation and its
subsidiaries (the "Company") at December 31, 1999 and the results of their
operations and their cash flows for the period from inception (April 29, 1998)
through December 31, 1998 and for the year ended December 31, 1999,
respectively, in conformity with accounting principles generally accepted in the
United States. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States which require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
New York, New York
February 22, 2000
F-3
48
CAMINUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN 000S, EXCEPT PER SHARE INFORMATION)
DECEMBER 31,
--------------------
2000 1999
-------- --------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 16,883 $ 662
Investments in short-term marketable securities........... 12,368 --
Accounts receivable, net.................................. 16,322 7,360
Deferred taxes............................................ 1,288 418
Prepaid expenses and other current assets................. 3,007 2,533
-------- --------
Total current assets.............................. 49,868 10,973
-------- --------
Other assets:
Investments in long-term marketable securities............ 12,413 --
Fixed assets, net......................................... 4,890 1,645
Acquired technology, net.................................. 4,445 3,051
Other intangibles, net.................................... 5,505 3,974
Goodwill, net............................................. 25,165 21,816
Other assets.............................................. 1,759 19
-------- --------
Total assets...................................... $104,045 $ 41,478
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,692 $ 1,444
Accrued liabilities....................................... 8,121 4,962
Borrowings under credit facility.......................... -- 3,050
Income taxes payable...................................... 2,273 388
Payable to related parties................................ 100 3,824
Deferred revenue.......................................... 4,068 2,071
-------- --------
Total current liabilities......................... 16,254 15,739
-------- --------
Commitments and contingencies............................... -- --
Stockholders' equity:
Common stock, $0.01 par, 50,000 shares authorized; 17,453
shares issued and 15,691 shares outstanding at December
31, 2000, 11,058 shares issued and 9,296 shares
outstanding at December 31, 1999....................... 174 110
Additional paid-in capital................................ 127,092 52,670
Treasury stock, 1,762 shares in treasury at cost.......... (4,911) (4,911)
Subscriptions receivable.................................. -- (2,907)
Deferred compensation..................................... (128) (235)
Accumulated deficit....................................... (34,497) (18,981)
Accumulated other comprehensive income (loss)............. 61 (7)
-------- --------
Total stockholders' equity........................ 87,791 25,739
-------- --------
Total liabilities and stockholders' equity........ $104,045 $ 41,478
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
49
CAMINUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN 000S, EXCEPT PER SHARE INFORMATION)
PERIOD FROM
INCEPTION
(APRIL 29, 1998)
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
------------------------ ----------------
2000 1999 1998
-------- ------------ ----------------
REVENUES:
Licenses........................................... $ 24,573 $12,538 $ 3,639
Software services.................................. 18,576 7,816 3,091
Strategic consulting............................... 8,565 6,556 2,896
-------- ------- --------
Total revenues............................. 51,714 26,910 9,626
-------- ------- --------
COST OF REVENUES:
Cost of licenses................................... 978 769 195
Cost of software services.......................... 10,698 4,695 2,278
Cost of strategic consulting....................... 3,643 2,923 2,212
-------- ------- --------
Total cost of revenues..................... 15,319 8,387 4,685
-------- ------- --------
Gross profit............................... 36,395 18,523 4,941
-------- ------- --------
OPERATING EXPENSES:
Sales and marketing................................ 9,836 4,110 471
Research and development........................... 6,601 3,929 1,153
General and administrative......................... 10,852 8,660 3,131
Acquired in-process research and development....... -- 1,000 4,822
Amortization of intangible assets.................. 11,722 8,560 5,497
IPO-related expenses............................... 12,335 -- --
Loss on office relocation.......................... 508 -- --
-------- ------- --------
Total operating expenses................... 51,854 26,259 15,074
-------- ------- --------
LOSS FROM OPERATIONS................................. (15,459) (7,736) (10,133)
-------- ------- --------
Other income (expense):
Interest income.................................... 2,346 66 97
Interest expense................................... (89) (296) --
Other income....................................... 1 2 --
-------- ------- --------
Total other income (expense)............... 2,258 (228) 97
-------- ------- --------
LOSS BEFORE PROVISION FOR INCOME TAXES............... (13,201) (7,964) (10,036)
Provision for income taxes........................... 2,315 646 36
-------- ------- --------
Net loss before minority interest.................... (15,516) (8,610) (10,072)
Minority interest.................................... -- -- (299)
-------- ------- --------
NET LOSS............................................. $(15,516) $(8,610) $(10,371)
======== ======= ========
BASIC AND DILUTED NET LOSS PER SHARE................. $ (1.04) $ (1.01) $ (1.41)
======== ======= ========
Weighted average shares used in computing basic and
diluted net loss per share......................... 14,925 8,514 7,361
PRO FORMA (UNAUDITED):
Loss before provision for income taxes............. $(7,964) $(10,036)
Pro forma income tax benefit....................... 190 176
Minority interest.................................. -- (299)
------- --------
Pro forma net loss................................. $(7,774) $(10,159)
======= ========
Pro forma basic and diluted net loss per share..... $ (0.91) $ (1.38)
======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
50
CAMINUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN 000S)
NUMBER OF ADDITIONAL
OUTSTANDING COMMON PAID-IN TREASURY SUBSCRIPTIONS DEFERRED ACCUMULATED
SHARES STOCK CAPITAL STOCK RECEIVABLE COMPENSATION DEFICIT
----------- ------ ---------- -------- ------------- ------------ -----------
BALANCE AT APRIL 29, 1998
(INCEPTION)....................... -- $ -- $ -- $ -- $ -- $ -- $ --
Issuance of shares................. 6,713 67 20,122
Issuance of shares in connection
with the acquisition of Caminus
Energy Limited.................... 961 10 2,990
Issuance of shares in connection
with the acquisition of Zai*Net
Software L.P...................... 2,055 20 10,319
Stock subscriptions receivable..... (4,739)
Issuance of stock options in
connection with acquisitions...... 3,145
Purchase of treasury stock at
cost.............................. (1,762) 495 (4,911)
Net loss........................... (10,371)
Translation adjustment.............
------ ---- -------- ------- ------- ----- --------
BALANCE AT DECEMBER 31, 1998....... 7,967 97 37,071 (4,911) (4,739) -- (10,371)
------ ---- -------- ------- ------- ----- --------
Receipt of membership subscription
receivable........................ 1,832
Issuance of additional shares...... 1,029 10 12,329
Issuance of shares in connection
with the acquisition of DC
Systems........................... 243 2 2,998
Issuance of shares to former owners
of Positron....................... 57 1 803
Reacquisition of stock option...... (250)
Distribution to stockholders....... (680)
Issuance of stock options below
fair market value................. 399 (399)
Amortization of unearned
compensation...................... 164
Net loss........................... (8,610)
Translation adjustment.............
------ ---- -------- ------- ------- ----- --------
BALANCE AT DECEMBER 31, 1999....... 9,296 110 52,670 (4,911) (2,907) (235) (18,981)
------ ---- -------- ------- ------- ----- --------
Forgiveness of subscription
receivable........................ 1,000
Issuance of shares for IPO......... 4,088 41 58,987
Issuance of shares to related
parties........................... 1,521 15 8,726
Receipt of subscription
receivables....................... 2,018
Issuance of options below fair
market value...................... 60 (60)
Amortization of deferred
compensation...................... 167
Unrealized gain on marketable
securities........................
Issuance of shares related to
employee stock purchase plan...... 33 451
Issuance of shares for acquisition
of Nucleus........................ 261 3 3,754
Stock option exercises............. 492 5 2,444 (111)
Net loss........................... (15,516)
Translation adjustment.............
------ ---- -------- ------- ------- ----- --------
BALANCE AT DECEMBER 31, 2000....... 15,691 $174 $127,092 $(4,911) $ -- $(128) $(34,497)
====== ==== ======== ======= ======= ===== ========
ACCUMULATED
OTHER
COMPREHENSIVE TOTAL
INCOME STOCKHOLDERS' COMPREHENSIVE
(LOSS) EQUITY LOSS
------------- ------------- -------------
BALANCE AT APRIL 29, 1998
(INCEPTION)....................... $ -- $ --
Issuance of shares................. 20,189
Issuance of shares in connection
with the acquisition of Caminus
Energy Limited.................... 3,000
Issuance of shares in connection
with the acquisition of Zai*Net
Software L.P...................... 10,339
Stock subscriptions receivable..... (4,739)
Issuance of stock options in
connection with acquisitions...... 3,145
Purchase of treasury stock at
cost.............................. (4,416)
Net loss........................... (10,371) $(10,371)
Translation adjustment............. 13 13 13
----- -------- --------
BALANCE AT DECEMBER 31, 1998....... 13 17,160 $(10,358)
----- -------- ========
Receipt of membership subscription
receivable........................ 1,832
Issuance of additional shares...... 12,339
Issuance of shares in connection
with the acquisition of DC
Systems........................... 3,000
Issuance of shares to former owners
of Positron....................... 804
Reacquisition of stock option...... (250)
Distribution to stockholders....... (680)
Issuance of stock options below
fair market value................. --
Amortization of unearned
compensation...................... 164
Net loss........................... (8,610) $ (8,610)
Translation adjustment............. (20) (20) (20)
----- -------- --------
BALANCE AT DECEMBER 31, 1999....... (7) 25,739 $ (8,630)
----- -------- ========
Forgiveness of subscription
receivable........................ 1,000
Issuance of shares for IPO......... 59,028
Issuance of shares to related
parties........................... 8,741
Receipt of subscription
receivables....................... 2,018
Issuance of options below fair
market value...................... --
Amortization of deferred
compensation...................... 167
Unrealized gain on marketable
securities........................ 183 183 $ 183
Issuance of shares related to
employee stock purchase plan...... 451
Issuance of shares for acquisition
of Nucleus........................ 3,757
Stock option exercises............. 2,338
Net loss........................... (15,516) (15,516)
Translation adjustment............. (115) (115) (115)
----- -------- --------
BALANCE AT DECEMBER 31, 2000....... $ 61 $ 87,791 $(15,448)
===== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
51
CAMINUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN 000S)
PERIOD FROM
INCEPTION
YEAR ENDED (APRIL 29, 1998)
DECEMBER 31, THROUGH
------------------- DECEMBER 31,
2000 1999 1998
-------- -------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(15,516) $ (8,610) $(10,371)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization........................... 12,728 9,043 5,667
Acquired in-process research and development............ -- 1,000 4,822
Deferred taxes.......................................... (146) (199) --
Non-cash compensation expense........................... 167 968 --
Non-cash IPO related expenses........................... 9,741 -- --
Write-off of property and equipment related to office
relocation........................................... 322 -- --
Bad debt expense........................................ 138 75 --
Minority interest....................................... -- -- 299
Changes in operating assets and liabilities net of effects
of acquisitions:
Accounts receivable..................................... (8,185) (3,998) (850)
Prepaid expenses and other current assets............... 199 (907) (97)
Accounts payable........................................ 311 (430) 183
Accrued liabilities..................................... 2,407 2,830 635
Income taxes payable.................................... 1,585 382 --
Deferred revenue........................................ 346 (2,633) 704
Payable to related parties.............................. -- 637 --
Other................................................... (2) (80) (40)
-------- -------- --------
Net cash provided by (used in) operating activities......... 4,095 (1,922) 952
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities........................ (40,831) -- --
Proceeds from sales of marketable securities.............. 14,023 -- --
Purchases of fixed assets................................. (4,348) (1,209) (501)
Proceeds from sale of furniture and leasehold
improvements............................................ 129 -- --
Acquisition of Nucleus Corporation........................ (13,584) -- --
Acquisition of Caminus Energy Limited, net of cash
acquired................................................ -- -- (2,503)
Acquisition of Zai*Net Software L.P., net of cash
acquired................................................ -- -- (7,242)
Acquisition of Positron................................... -- -- (151)
Acquisition of DC Systems, Inc., net of cash acquired..... (184) (9,919) --
Other acquisition costs................................... -- -- (496)
-------- -------- --------
Net cash used in investing activities....................... (44,795) (11,128) (10,893)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of common stock, net........... 59,028 12,339 12,950
Cash received for stock options exercised................. 2,338 -- --
Cash received for stock issued under employee stock
purchase plan........................................... 451 -- --
Payments of obligation to affiliate....................... (1,000) (4,000) (250)
Payments of obligation to stockholders.................... (2,188) (2,188) --
Proceeds from borrowings under credit facility............ -- 3,050 --
Repayment of borrowings under credit facility............. (3,050) -- --
Payment of distribution to the former shareholders of
Caminus LLC............................................. (452) (80) --
Cash received for subscriptions receivable................ 2,018 1,832 --
-------- -------- --------
Net cash provided by financing activities................... 57,145 10,953 12,700
-------- -------- --------
Effect of exchange rates on cash flows...................... (224) (12) 12
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........ 16,221 (2,109) 2,771
Cash and cash equivalents, beginning of period.............. 662 2,771 --
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 16,883 $ 662 $ 2,771
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
52
CAMINUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN 000S, EXCEPT PER SHARE INFORMATION)
1. BUSINESS AND ORGANIZATION
FORMATION OF THE BUSINESS
Caminus Corporation ("Caminus" or the "Company") was incorporated in
Delaware in September 1999. Caminus was formed to succeed Caminus LLC as the
parent organization for the subsidiaries formerly held by Caminus LLC.
Caminus LLC was originally organized as a Delaware limited liability
company on April 29, 1998 ("Inception") by an investor group. Caminus was formed
for the purpose of acquiring equity interests in and managing the business
affairs of Caminus Energy Limited ("CEL") and Zai*Net Software, L.P. ("Zai*Net"
or "ZNLP"), and to provide industry expertise and risk management software
products in the evolving competitive gas and energy markets worldwide.
In conjunction with the formation of the Company and as consideration for
the identification of the acquired entities, an option, with an anti-dilution
provision, to acquire a 10% interest in Caminus LLC was granted to a member of
the investor group. This option has been valued at $1,648 using the
Black-Scholes option pricing model and has been accounted for as part of the
purchase price of ZNLP and CEL. Any additional grants made under the
anti-dilution provision were made at the current market price. In connection
with the Company's initial public offering ("IPO") this option was exercised,
which resulted in the issuance of 975 shares of common stock to a related party.
On May 12, 1998, Caminus LLC acquired a 71% ownership interest in ZNLP and
a 100% ownership interest in CEL; on December 31, 1998, Caminus LLC acquired the
remaining 29% ownership interest in ZNLP. The value assigned to these shares was
consistent with the value per share established immediately prior to these
acquisitions based on cash capital contributions from founders upon formation of
Caminus LLC. (For more complete disclosure, see Note 4 -- Acquisitions).
RECAPITALIZATION AND IPO
On January 27, 2000, the Company sold 4,088 shares of common stock in its
IPO, realizing net proceeds of approximately $59,028. The accompanying 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 entities under common control,
and the proportionate ownership interests of the members pre- and post-merger
were preserved.
In connection with the IPO of the Company, Caminus recapitalized as a C
Corporation and therefore is no longer treated as a limited liability company
for tax purposes. Accordingly, the consolidated statements of operations for
periods prior to 2000 include pro forma net loss assuming the Company was
taxable as a C Corporation and pro forma loss per share based on pro forma net
loss divided by the weighted average number of shares outstanding.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Caminus Corporation and its subsidiaries. All intercompany transactions and
balances have been eliminated.
REVENUE RECOGNITION
The Company generates revenues from licensing its software products,
providing related services for implementation consulting and support and
providing strategic consulting services. The Company follows the
F-8
53
CAMINUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, software license revenues are recognized when a
license agreement is executed, the product has been delivered, all significant
obligations are fulfilled, the fee is fixed or determinable and collectibility
is probable. For those license agreements where customer acceptance is required
and it is not probable, license revenues are recognized 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, both the
license revenues and services revenues are recognized using contract accounting.
If acceptance of the software and related software services is probable, the
percentage of completion method is used 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 agreement. If acceptance of the software and related software services
is not probable, then the completed contract method is used and license revenues
are recognized only when the Company's obligations under the license agreement
are completed and the software has been accepted. Accordingly, for these
contracts, payments received and software license costs are deferred until the
Company's obligations under the license agreement are completed. Anticipated
losses, if any, on uncompleted contracts are recognized in the period in which
such losses are determined. Prior to 2000, there were no circumstances where the
percentage of completion method of contract accounting was required to be
applied. Maintenance and support revenues associated with new product licenses
and renewals are deferred and recognized ratably over the contract period.
Software services revenues, where the services do not significantly modify the
licensed products and are not essential to their functionality and payment
obligations for the licensed products are not dependent upon the performance of
the services, and strategic consulting revenues are typically billed on a time
and materials basis and are recognized as such services are performed.
FOREIGN CURRENCY TRANSLATION
The Company's foreign subsidiaries maintain their accounting records in the
local currency, which is their functional currency. The assets and liabilities
are translated into U.S. dollars based on exchange rates at the end of the
respective reporting periods and the effect of the foreign currency translation
is reflected as a component of stockholders' equity. Income and expense items
are translated at an average exchange rate during the period. Transaction gains
and losses are included in the determination of the results from operations.
SOFTWARE DEVELOPMENT COSTS
Capitalization of software development costs begins upon establishment of
technological feasibility of the product. After technological feasibility is
established, material software development costs are capitalized. The
capitalized cost is then amortized on a straight-line basis over the estimated
product life, or on the ratio of current revenues to total projected product
revenues, whichever is greater. To date, the period between achieving
technological feasibility, which the Company has defined as establishment of a
working model which typically occurs when beta testing commences, and the
general release of such software has been short, and software development costs
qualifying for capitalization have been insignificant. Accordingly, the Company
has not capitalized any software development costs to date.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of short-term, highly liquid investments with
original maturities at the time of purchase of three months or less.
F-9
54
CAMINUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACCOUNTS RECEIVABLE
Accounts receivable, net consist of the following:
YEAR ENDED
DECEMBER 31,
-----------------
2000 1999
------- ------
Trade..................................................... $14,705 $7,664
Unbilled.................................................. 2,059 --
Allowance for doubtful accounts........................... (442) (304)
------- ------
$16,322 $7,360
======= ======
Unbilled receivables arise as revenues are recognized under the
percentage-of-completion method, but are not contractually billable until
specified dates or milestones are achieved, which are expected to occur within
one year. All amounts included in unbilled receivables are related to long-term
contracts and are reduced by appropriate progress billings.
Activity in the allowance for doubtful accounts is as follows:
PERIOD FROM
INCEPTION
DECEMBER 31, (APRIL 29, 1998)
------------ THROUGH
2000 1999 DECEMBER 31, 1998
---- ---- -----------------
Balance, beginning of year........................... $304 $229 $229
Provision.......................................... 138 75 --
Recoveries and charge-offs......................... -- -- --
---- ---- ----
Balance, end of year................................. $442 $304 $229
==== ==== ====
INVESTMENTS IN MARKETABLE SECURITIES
Investments are recorded at fair value and classified as
available-for-sale. Unrealized gains and losses, net of taxes, on securities
classified as available-for-sale are carried as a separate component of
stockholders' equity. Management determines the appropriate classification of
its investments in debt securities at the time of purchase and reevaluates such
determination at each balance sheet date. At December 31, 2000 the Company
recorded cumulative unrealized gains of $183 on investments classified as
available for sale. Realized gains and losses and permanent declines in value on
available-for-sale securities are reported in other income or expense as
incurred.
FIXED ASSETS
Fixed assets are recorded at cost. Depreciation is calculated using the
straight-line method over the estimated useful life of the related asset, which
generally ranges from three to seven years. Leasehold improvements are amortized
using the straight-line method over the lesser of the remaining lease term or
the estimated useful lives of the related assets.
GOODWILL, ACQUIRED TECHNOLOGY AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets are amortized on a straight-line basis
over the estimated future periods to be benefited ranging from three to five
years. Acquired technology is amortized on a straight-line basis over the
estimated product life, generally three years, or on the ratio of current
revenues to total projected product revenues, whichever is greater.
F-10
55
CAMINUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Goodwill and other intangible assets are reviewed for impairment quarterly
or whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of the assets to future
undiscounted cash flows of the businesses acquired. If the assets are considered
to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the assets.
Through December 31, 2000, no impairment has occurred. This analysis is
performed according to the asset groupings established at the time of the
acquisition and at the enterprise level.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Through January 27, 2000, the Company was taxed as a partnership for
federal and state tax purposes. There were no entity level income taxes imposed
by jurisdictions in which the Company conducted its business and, therefore, the
financial statements through that date do not reflect any federal or state
income tax expense. The profit or loss is deemed passed through to the
stockholders and they are obligated to report such profit or loss on their own
tax returns in the relevant jurisdictions. Prior to the IPO in January 2000, the
Company converted to a C Corporation and is subject to federal, state and local
income taxes in 2000.
The Company has a wholly owned subsidiary located in the United Kingdom. As
such, the entity is liable for income taxes to the Inland Revenue. Prior to
January 27, 2000, for U.S. purposes, an election was made to include the foreign
income and expenses in the U.S. tax returns. Therefore, the Company was liable
for U.K. taxes and foreign tax credits were passed through to the stockholders.
New York City, one of the local jurisdictions in which the Company conducts
its business, imposes an Unincorporated Business Tax at a rate of 4%, on
unincorporated entities, such as the Company through January 27, 2000. This tax
is reduced to the extent any stockholder is itself subject to New York City
income tax. In addition, this tax is imposed only on the portion of taxable
income allocable to New York City as per certain allocation factors (i.e.,
receipts, payroll and property).
The tax expense recorded in the financial statements for periods prior to
2000 reflects foreign income taxes and the New York City Unincorporated Business
Tax on the Company's allocable portion of the taxable income.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash
equivalents, investments in marketable securities, accounts receivable, accounts
payable and accrued liabilities. The carrying amount of these instruments
approximates fair value due to the relatively short period of time to maturity
for these instruments.
EARNINGS (LOSS) PER SHARE
Basic loss per share is computed based upon the weighted average number of
shares of common stock outstanding and diluted loss per share is computed based
upon the weighted average number of shares of common stock outstanding increased
by dilutive common stock options. The calculation of diluted net loss per share
excludes options as the effect would be antidilutive.
F-11
56
CAMINUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 2000, 1999 and 1998, outstanding options to purchase 1,142,
942 and 605 shares, respectively, with exercise prices ranging from $2.74 to
$29.63, $2.31 to $13.97 and $2.31 to $4.62, respectively, as well as
contingently issuable options at December 31, 1999 to purchase 1,978 shares,
with exercise prices ranging from $1.89 to $6.51 were excluded from the
calculation of diluted loss per share as the effect would have been
anti-dilutive.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company follows Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation." As permitted by this
statement, the Company continues to apply Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," ("APB 25") to account for
its stock-based employee compensation arrangements.
LONG-LIVED ASSETS
The Company reviews long-lived assets, such as fixed assets and certain
identifiable intangibles to be held and used or disposed of, for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. If the sum of the expected cash flows,
undiscounted and without interest, is less than the carrying amount of the
asset, an impairment loss is recognized as the amount by which the carrying
amount of the asset exceeds its fair value.
USE OF ESTIMATES
The accompanying consolidated financial statements are prepared in
conformity with generally accepted accounting principles which require
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133")
which is effective for the Company beginning in 2001. SFAS 133, as amended by
SFAS 138, establishes accounting and reporting standards for derivative
financial instruments and hedging activities related to those instruments, as
well as other hedging activities. Because the Company does not currently hold
any derivative financial instruments and does not engage in hedging activities,
the adoption of SFAS 133 is not expected to have any impact on the consolidated
financial position, results of operations or cash flows of the Company.
RECLASSIFICATIONS
Certain reclassifications were made to prior period amounts to conform to
the current period presentation format.
3. 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 386 shares of common stock that were
contingently issuable upon an IPO to the former shareholders of Caminus Energy
Limited, which resulted in a charge of $6,950 (including $772 of taxes), a
payment of approximately $522 for a special one-time bonus to the former
shareholders of Caminus Energy Limited, payment of a $1,300 termination fee to
GFI Two LLC, a principal stockholder, to cancel its consulting and advisory
agreement and the granting of 160 shares and the forgiveness of a $1,000 loan,
recorded as a subscription receivable, to the Company's President and Chief
Executive Officer, which resulted in a charge of $3,563.
F-12
57
CAMINUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. ACQUISITIONS
NUCLEUS CORPORATION
On August 30, 2000, the Company acquired certain assets and assumed certain
liabilities of Nucleus Corporation and Nucleus Energy Consulting Corporation
(collectively, "Nucleus"), a provider of software solutions to the energy
industry. The purchase price of $17,606 consisted of $13,584 in cash, the
issuance of 261 shares of common stock with a fair value of $3,757 and
approximately $265 of other direct acquisition costs. A summary of the purchase
price of the acquisition is as follows:
Fair value of net liabilities assumed.................... $ (391)
Acquired technology...................................... 2,960
Other identifiable intangible assets..................... 3,007
Goodwill................................................. 12,030
-------
$17,606
=======
The acquisition was accounted for under the purchase method of accounting.
The fair value assigned to intangible assets acquired was based on an appraisal.
Acquired technology represents the fair value of applications and technologies
existing at the date of acquisition. Other intangible assets represent the fair
value of other acquired intangible assets including primarily customer lists, a
covenant not to compete and work force in place.
ZAI*NET SOFTWARE, L.P. ("ZNLP")
On May 12, 1998, the Company acquired a 71% ownership interest in ZNLP for
$7,740 in cash. ZNLP licenses, customizes and services Zai*Net, an integrated
real-time front, middle, and back office software trading system for foreign
exchange, commodities, energy, options and other financial products. The terms
of the purchase agreement required the payment of additional consideration
totaling $4,375 to the former shareholder of ZNLP if revenues from ZNLP products
were in excess of certain thresholds as defined in the purchase agreement.
Payment of this additional consideration was guaranteed in connection with the
acquisition of the remaining 29% interest in ZNLP by the Company in December
1998. The acquisition of the 71% ownership interest was accounted for using the
purchase method of accounting, and accordingly, the results of ZNLP's operations
are included in the Company's consolidated financial statements from the date of
acquisition.
On December 31, 1998, the Company acquired the remaining 29% interest in
ZNLP in exchange for a 21% equity interest in the Company. The acquisition of
the minority interest was accounted for using the purchase method of accounting.
Also as of December 31, 1998, Zai*Net had 4,988 options outstanding with an
average exercise price of $2.31. These options were valued at their fair value
and recorded as additional consideration for the acquisition of ZNLP. In March
1999, in connection with this transaction, ZNLP was merged into the Company. In
addition, the Company agreed that the amounts included as earnout payments in
the original acquisition agreement were due and payable in various installments
through April 15, 2000.
F-13
58
CAMINUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the total purchase price for the acquisition of ZNLP is as
follows:
Cash........................................................ $ 7,740
Issuance of notes payable................................... 4,375
Issuance of equity.......................................... 10,339
Issuance of options (see Note 1)............................ 1,173
Issuance of options to ZNLP employees....................... 1,497
Other direct acquisition costs.............................. 603
-------
$25,727
-------
A summary of the allocation of the total purchase price is
as follows:
Tangible net assets acquired................................ $ 899
Acquired in-process research and development................ 4,822
Acquired technology......................................... 2,596
Other identifiable intangible assets........................ 2,023
Goodwill.................................................... 15,387
-------
$25,727
=======
The fair value assigned to intangible assets acquired was based on an
appraisal of the purchased in-process technology, acquired technology, and other
intangible assets. Of the acquired intangible assets, $4,822 represents
management's estimate of acquired in-process research and development (IPR&D)
that had not yet reached technological feasibility and had no alternative future
use. Accordingly, this amount was immediately expensed in the consolidated
statement of operations upon acquisition. The value assigned to IPR&D was
determined by identifying research projects in areas for which technological
feasibility had not been established. The value was determined by estimating the
costs to develop the IPR&D into commercially viable products, estimating the
resulting net cash flows from such projects, and discounting the net cash flows
back to their present value.
In estimating the net discounted cash flows from such projects, no material
changes from historical pricing, margins and expense levels are anticipated. The
most significant and uncertain assumptions included completion of the products
in process on schedule, expectations about revenue growth and eventual
replacement of these products with new products over a three to four year
period. No residual cash flows of the Company were assumed to relate to IPR&D.
The discount rate of 25-35% included a factor that takes into account the
uncertainty surrounding the successful development of the IPR&D. Additionally,
consideration was given to the stage of completion of each research and
development project at the date of acquisition.
The acquired IPR&D includes the power trading and scheduling, gas trading
and scheduling and the foreign exchange products. The Company estimated that
these products were approximately 87.5%, 75% and 90% complete at the date of
acquisition based on costs incurred through the date of acquisition as compared
to total estimated expenditures over the product's development cycle. DC Systems
has gas trading and scheduling products that are comparable to those of Zai*Net.
Subsequent to the acquisition of DC Systems, the Company decided to abandon the
development of the Zai*Net gas trading and scheduling product and utilized the
comparable DC Systems products. The Company released the other products during
1999.
The nature of the efforts required to develop and integrate the acquired
IPR&D into a commercially viable product, feature or functionality within the
Company's suite of existing products related to the completion of all planning,
design and testing activities that are necessary to establish that the product
can be produced to meet design and performance requirements. The Company
currently expects that the products utilizing the acquired IPR&D will be
successful, but there can be no assurance that commercial viability of any of
these products will be achieved. Further, future developments in the software
industry, changes in the
F-14
59
CAMINUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
technology, changes in other products and offerings or other developments may
cause the Company to alter, or abandon, its product plans.
Acquired technology represents the fair value of applications and
technologies existing at the date of acquisition. Other intangible assets
represent the fair value of other acquired intangible assets including primarily
customer lists and work force in place. Goodwill represents the excess of the
purchase price over the fair value of identifiable tangible and intangible
assets acquired.
CAMINUS ENERGY LIMITED ("CEL")
On May 12, 1998, the Company acquired CEL, a consulting and professional
services organization, which provides services and research to companies in the
energy market sector, for $3,023 in cash, plus an equity interest of 10.1% of
the Company valued at $3,000. The acquisition was accounted for using the
purchase method of accounting, and accordingly, the results of CEL's operations
are included in the Company's consolidated financial statements from the date of
acquisition.
A summary of the purchase price for the acquisition is as follows:
Issuance of equity.......................................... $3,000
Cash........................................................ 3,023
Issuance of options (see Note 1)............................ 475
Other direct acquisition costs.............................. 100
------
$6,598
======
A summary of the allocation of the purchase price is as follows:
Tangible net assets acquired................................ $ 380
Goodwill.................................................... 6,218
------
$6,598
======
Goodwill represents the excess of the purchase price over the fair value of
identifiable tangible and intangible assets acquired.
Pursuant to the Agreement, the Company also granted options to purchase 481
shares to two officers of CEL (289 and 192 shares) for $3.12 per share. These
options were exercisable only in the event of a sale or public offering,
compliance with a service agreement and achievement of certain internal rates of
return. The number of shares that ultimately vest and become exercisable is
contingent upon all of these conditions. No amounts were recorded for these
options through December 31, 1999, as the conditions under which they would vest
were not met as of December 31, 1999. However, upon consummation of the IPO in
2000, the Company recorded a $6,950 compensation-related charge for the excess
of the fair value of common shares issued over the exercise price, including
applicable taxes of $772, for the exercise of these options. As the options were
exercised on a cashless basis, the exercise resulted in the issuance of 386
shares of common stock.
POSITRON ENERGY CONSULTING ("POSITRON")
On November 13, 1998, the Company acquired Positron. The Company paid $152
in cash for certain assets and liabilities of Positron. The acquisition was
accounted for using the purchase method of accounting and the excess of the
purchase price over the fair value of the net assets acquired was recorded as
goodwill. Also in connection with the acquisition, restricted shares of common
stock of the Company were granted to three employees/principals of Positron. The
restrictions lapse only upon the resolution of contingencies identified in the
purchase agreement.
F-15
60
CAMINUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In November 1999, the Company's managing committee determined that all of
the contingencies identified in the purchase agreement were satisfied.
Accordingly, the restrictions on the shares have been lifted and the three
employees/principals of Positron received 57 unrestricted shares. The Company
recorded a compensation charge in November 1999 of approximately $0.8 million
related to the issuance of these shares.
DC SYSTEMS ("DCS")
On July 31, 1999, Caminus acquired DCS, a provider of software solutions to
the gas industry. The Company paid $10,000 in cash, and issued 242 shares of
common stock valued at $3,000. In connection with this transaction, Caminus
incurred approximately $500 of other direct acquisition costs. A summary of the
allocation of the purchase price is as follows:
Tangible net liabilities assumed........................... $ (954)
Acquired in-process research and development............... 1,000
Acquired technology........................................ 1,800
Other intangible assets.................................... 3,030
Goodwill................................................... 8,624
-------
$13,500
=======
The fair value assigned to intangible assets acquired was based on an
appraisal of the purchased in-process technology, acquired technology, and other
intangible assets. Of the acquired intangible assets, $1,000 represents
management's estimate of acquired in-process research and development (IPR&D)
that had not yet reached technological feasibility and had no alternative future
use. Accordingly, this amount was immediately expensed in the consolidated
statement of operations upon acquisition. The value assigned to IPR&D was
determined by identifying research projects in areas for which technological
feasibility had not been established. The value was determined by estimating the
costs to develop the IPR&D into commercially viable products, estimating the
resulting net cash flows from such projects, and discounting the net cash flows
back to their present value.
In estimating the net discounted cash flows from such projects, no material
changes from historical pricing, margins and expense levels were anticipated.
The most significant and uncertain assumptions included completion of the
products in process on schedule, expectations about revenue growth and eventual
replacement of these products with new products over a three to four year
period. No residual cash flows of the Company were assumed to relate to IPR&D.
The discount rate of 25% included a factor that takes into account the
uncertainty surrounding the successful development of the IPR&D. Additionally,
consideration was given to the stage of completion of each research and
development project at the date of acquisition.
The acquired IPR&D includes the Plant*Master and other products. The
Company estimated that these products were approximately 50% complete at the
date of acquisition based on costs incurred through the date of acquisition as
compared to total estimated expenditures over the product's development cycle.
Estimated future development costs totaled approximately $600 at the time of
acquisition. The Company released these products during 2000.
The nature of the efforts required to develop and integrate the acquired
IPR&D into a commercially viable product, feature or functionality within the
Company's suite of existing products related to the completion of all planning,
design and testing activities that are necessary to establish that the product
can be produced to meet design and performance requirements. The Company
currently expects that the product utilizing the acquired IPR&D will be
successful, but there can be no assurance that commercial viability of any of
these products will be achieved. Further, future developments in the software
industry, changes in the technology, changes in other products and offerings or
other developments may cause the Company to alter, or abandon, its product
plans.
F-16
61
CAMINUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Acquired technology represents the fair value of applications and
technologies existing at the date of acquisition. Other intangible assets
represent the fair value of other acquired intangible assets including primarily
customer lists and work force in place. Goodwill represents the excess of the
purchase price over the fair value of identifiable tangible and intangible
assets acquired.
In July 1999, DCS declared a dividend to the existing shareholders to cover
the estimated tax liability associated with the sale of DCS to the Company. This
dividend amounted to $184 and was paid during 2000.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The above acquisitions were accounted for using the purchase method. Had
the acquisitions of Nucleus and DC Systems occurred on January 1, 1999 the
unaudited pro forma revenues, net loss and basic and diluted net loss per share
for the years ended December 31, 2000 and 1999 would have been: $58,538 and
$31,083; $18,148 and $19,827; and $1.20 and $2.22, respectively. The per share
amounts were based on a weighted average number of shares outstanding of 15,099
and 8,917 for 2000 and 1999, respectively. These results, which give effect to
certain adjustments, including the amortization of goodwill and other intangible
assets, provision for income taxes and additional shares outstanding are not
necessarily indicative of results that would have occurred had the acquisitions
been consummated on January 1, 1999 or that may be obtained in the future.
5. 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.
DECEMBER 31, 2000
---------------------------------------------------
GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COSTS GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
Municipal bonds......................... $16,778 $107 -- $16,885
Corporate debt securities............... 7,820 76 -- 7,896
------- ---- -- -------
$24,598 $183 -- $24,781
======= ==== == =======
The contractual maturities of available-for-sale debt securities are as
follows:
DECEMBER 31, 2000
-----------------
Due within one year.................................. $12,368
Due after one year through two years................. 12,413
-------
$24,781
=======
F-17
62
CAMINUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. FIXED ASSETS
Fixed assets consist of the following:
DECEMBER 31,
-----------------
2000 1999
------- ------
Computer hardware, software and office equipment.......... $ 3,737 $1,721
Furniture, fixtures and leasehold improvements............ 2,642 545
Automobiles............................................... -- 14
------- ------
6,379 2,280
Less accumulated depreciation and amortization............ (1,489) (635)
------- ------
$ 4,890 $1,645
======= ======
Depreciation expense for the years ended December 31, 2000 and 1999 and for
the period from Inception through December 31, 1998 amounted to $1,006, $468 and
$169, respectively.
In December 2000, the Company relocated its headquarter offices in New York
City resulting in a disposal and write-off of furniture, fixtures, and leasehold
improvements with a net book value of $451.
7. INTANGIBLE ASSETS
The intangible assets arising from the acquisition transactions discussed
in Note 4 are as follows:
DECEMBER 31,
--------------------
2000 1999
-------- --------
Acquired technology.................................... $ 7,367 $ 4,407
Goodwill............................................... 42,391 30,362
Other intangible assets................................ 8,067 5,060
-------- --------
57,825 39,829
Less accumulated amortization.......................... (22,710) (10,988)
-------- --------
$ 35,115 $ 28,841
======== ========
Amortization expense for acquired technology for the years ended December
31, 2000 and 1999 and for the period from Inception through December 31, 1998
amounted to $1,566, $1,057 and $300, respectively. Amortization expense for
goodwill for the years ended December 31, 2000 and 1999 and for the period from
Inception through December 31, 1998 amounted to $8,681, $6,671 and $1,874,
respectively. Amortization expense for other intangible assets for the years
ended December 31, 2000 and 1999 and for the period from Inception through
December 31, 1998 amounted to $1,475, $846 and $240, respectively.
F-18
63
CAMINUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
DECEMBER 31,
----------------
2000 1999
------ ------
Accrued bonuses and commissions............................ $4,990 $2,600
Accrued professional fees.................................. 584 1,466
Accrued rent expense....................................... 549 --
Accrued management fees.................................... -- 253
Other accrued expenses..................................... 1,998 643
------ ------
$8,121 $4,962
====== ======
9. DEFERRED REVENUE
Deferred revenue consists of the following:
DECEMBER 31,
----------------
2000 1999
------ ------
Deferred license revenue................................... $ 541 $1,430
Deferred maintenance revenue............................... 3,325 641
Deferred consulting revenue................................ 202 --
------ ------
$4,068 $2,071
====== ======
Deferred revenue consists of cash received from customers or amounts billed
in advance of revenue recognition.
10. CREDIT FACILITY
On June 23, 1999, the Company entered into a credit agreement with Fleet
Bank ("the Bank"), pursuant to which the Company could borrow up to $5,000 under
a revolving loan and a working capital loan. Pursuant to the agreement, the
Company was required to repay the facilities in full upon the event of a public
offering of common stock. Accordingly, the Company repaid all amounts
outstanding under the loan in February 2000 and the facility was terminated.
The revolving loan provided the Company with borrowing capacity of up to
$2,500. The borrowing base under the working capital loan was equal to 85% of
eligible receivables, less $500, and in the aggregate, could not exceed $2,500.
Credit facilities under the agreement bore interest at either the Bank's
reference rate, generally equivalent to prime rate, or LIBOR plus an applicable
margin (may vary between 2.5% and 3% depending on certain ratios of the Company
as defined in the agreement). The applicable borrowing rate at December 31, 1999
was 8.5%.
Borrowing under the loans on December 31, 1999 amounted to $3,050, of which
$2,000 was related to the revolving loan and $1,050 was related to the working
capital loan.
F-19
64
CAMINUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. INCOME TAXES
The provision for income taxes consists of the following:
YEAR ENDED
DECEMBER 31,
--------------
2000 1999
------ ----
Current tax provision
Foreign taxes............................................. $2,315 $591
State and City............................................ -- 55
------ ----
Total current tax provision....................... 2,315 646
------ ----
Deferred tax provision
Foreign................................................... -- --
State and City............................................ -- --
------ ----
Total deferred tax provision...................... -- --
------ ----
Provision for income taxes.................................. $2,315 $646
====== ====
The provision for income taxes differs from income tax expense at the
statutory U.S. Federal income tax rate for the following reasons:
YEAR ENDED
DECEMBER 31,
---------------
2000 1999
------- ----
Income taxes at statutory US Federal income tax rate....... $(4,488) $ --
Local income taxes, net of Federal income tax benefit...... -- 55
Tax-exempt investment income............................... (122) --
Loss allocable to Caminus LLC.............................. 394 --
Nondeductible IPO-related expenses......................... 2,540 --
Other nondeductible expenses............................... 1,504 --
Foreign tax rate differential.............................. (430) 591
Increase in valuation allowance............................ 3,206 --
Other...................................................... (289) --
------- ----
Provision for income taxes, at effective rate.............. $ 2,315 $646
======= ====
The tax effects of temporary differences that give rise to the net deferred
tax assets as of December 31, 2000 and 1999 are as follows:
DECEMBER 31,
--------------
2000 1999
------ ----
Goodwill amortization....................................... $2,246 $ --
Other intangible assets amortization........................ 794 --
Deferred revenue............................................ 179 418
Federal net operating loss carryforwards.................... 1,275 --
------ ----
4,494 418
Less: valuation allowance................................... 3,206 --
------ ----
$1,288 $418
====== ====
F-20
65
CAMINUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 2000, the Company has a U.S. tax net operating loss
carryforward of approximately $3,750 expiring in 2020. At December 31, 2000, the
Company provided a valuation allowance of $3,206 against its net deferred tax
assets due to the uncertainty of realization of these assets.
12. 401(K) SAVINGS PLAN
ZNLP (the "Prior Plan Sponsor") had previously maintained a 401(k) Savings
Plan (the "Plan"). Caminus LLC became the sponsor of the Plan upon its
acquisition of the Prior Plan Sponsor. On January 27, 2000, the Company assumed
sponsorship of the Plan, which was renamed the Caminus Corporation 401(k)
Savings Plan on November 1, 2000. All domestic employees of the Company are
eligible to participate in the Plan upon completion of six months of service
with the Company. Eligible employees may contribute up to 15% of their annual
compensation to the Plan on a pre-tax basis. Participant contributions to the
Plan are fully vested. In addition, under the terms of the Plan, the Company, at
its discretion, may match all or a portion of a participant's contribution to
the Plan up to a maximum contribution of $1,000 per participant. The Company
matching contribution is determined at calendar year end and is payable only to
those participants employed on that day. Participants become vested in Company
matching contributions to the Plan at the rate of 20% per year of service with
the Company. For the years ended December 31, 2000, 1999 and for the period from
Inception through December 31, 1998, the Company elected to match 100% of
participant contributions up to a maximum of $1,000 per participant. The 401(k)
expense for the years ended December 31, 2000 and 1999 and for the period from
Inception through December 31, 1998 totaled $95, $82 and $30, respectively.
13. STOCK OPTION AND PURCHASE PLANS
In May 1998, ZNLP established its stock option plan (the "ZNLP Plan"). Upon
closing of the purchase of the remaining 29% of ZNLP by the Company on December
31, 1998, Caminus canceled the options outstanding under the ZNLP Plan and
issued to the employees options to purchase shares of Caminus common stock.
Costs associated with this transaction were accounted for as part of the ZNLP
acquisition purchase price. In February 1999, the Board of Directors approved
the adoption of the ZNLP Plan for all eligible Caminus employees (the "1998
Plan"). In September 1999, the Company established a new stock option plan (the
"1999 Plan"). All future grants will be made under the 1999 Plan. Both the 1998
Plan and the 1999 Plan provide for the issuance of stock options to key
employees and consultants of the Company. Under the terms of the plans,
incentive stock options are granted to purchase common stock in the Company at a
price not less than 100% of the fair market value on the date of grant. The
options generally vest over a period of four years and are exercisable for a
period of ten years from the date of grant. Under the 1998 Plan, the Company
reserved 818 shares of common stock. The Company has reserved 1,219 shares of
common stock for issuance under the 1999 Plan, 717 of which are subject to
shareholder approval.
The following table summarizes the Company's option plan activity under the
1999 Plan:
1999 PLAN
-----------------------------------------------------------------------------
SHARES UNDER OPTION WEIGHTED WEIGHTED
-------------------------- AVERAGE OPTIONS AVERAGE
INCENTIVE NON-INCENTIVE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------- ------------- -------------- ----------- --------------
OUTSTANDING DECEMBER 31,
1999......................... -- -- $ --
Granted........................ 579 34 17.33
Exercised...................... -- -- --
Cancelled...................... (29) -- 12.99
--- -- --
OUTSTANDING DECEMBER 31,
2000......................... 550 34 17.54 -- $ --
=== == --
F-21
66
CAMINUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options outstanding
under the 1999 Plan at December 31, 2000:
OPTIONS OUTSTANDING
-----------------------------------------------
WEIGHTED AVERAGE WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE
- --------------- ----------- ---------------- --------------
$11.95 - $22.63 471 9.5 years $14.66
$29.63 113 9.9 years 29.63
---
584 17.54
===
The following table summarizes the Company's option plan activity under the
1998 Plan:
1998 PLAN
-----------------------------------------------------------------------------
SHARES UNDER OPTION WEIGHTED WEIGHTED
-------------------------- AVERAGE OPTIONS AVERAGE
INCENTIVE NON-INCENTIVE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------- ------------- -------------- ----------- --------------
OUTSTANDING AT INCEPTION
(APRIL 29, 1998)............. -- -- $ --
Granted........................ 605 -- 2.74
Exercised...................... -- -- --
Cancelled...................... -- -- --
---- -- ---
OUTSTANDING DECEMBER 31,
1998......................... 605 -- 2.74 -- $ --
---- -- ---
Granted........................ 392 -- 7.29
Exercised...................... -- -- --
Cancelled...................... (55) -- 2.97
---- -- ---
OUTSTANDING DECEMBER 31,
1999......................... 942 -- 4.62 202 $2.76
---- -- ---
Granted........................ 9 -- 13.97
Exercised...................... (215) -- 3.25
Cancelled...................... (178) -- 3.87
---- -- ---
OUTSTANDING DECEMBER 31,
2000......................... 558 -- 5.55 108 $6.17
==== == ---
The following table summarizes information about stock options outstanding
under the 1998 Plan at December 31, 2000:
OPTIONS OUTSTANDING
-----------------------------------------------
WEIGHTED AVERAGE WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE
- --------------- ----------- ---------------- --------------
$2.74 - $5.78 442 7.7 years $ 4.06
$9.03 - $13.97 116 8.7 years 11.21
---
558 5.55
===
At December 31, 2000, options to purchase 635 shares were available for
grant under the 1999 Plan.
The Company applies APB 25 and related interpretations in accounting for
its plans and other stock-based compensation issued to employees. During the
period from Inception through December 31, 1998 the Company did not recognize
compensation expense related to option grants. For the years ended December 31,
2000 and 1999, the Company recognized $167 and $164 of compensation expense,
respectively, associated with options granted to employees with exercise prices
below fair market value on the date of grant.
F-22
67
CAMINUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Had compensation cost for the Company's option plans been determined based
upon the fair value at the grant date for awards under the plans consistent with
the methodology prescribed under SFAS 123, the Company's net loss would have
been increased by approximately $635, $315 and $67 for the years ended December
31, 2000 and 1999 and for the period from Inception through December 31, 1998,
respectively. This additional compensation expense would have resulted in a net
loss and net loss per share of $16,151 and $1.08, $8,925 and $1.05, and $10,438
and $1.42 for the years ended December 31, 2000 and 1999 and for the period from
Inception through December 31, 1998, respectively. The fair values of options
granted to employees have been determined on the date of the respective grant
using the Black-Scholes option pricing model incorporating the following
weighted average assumptions: (1) risk-free interest rate of 5.75% to 5.94% for
2000, 4.88% to 6.20% for 1999 and 5.50% for 1998; (2) dividend yield of 0.00%;
(3) expected life of five years; and (4) volatility of 60% for 2000 and 1999 and
40% for 1998.
The pro forma effects above may not be representative of the effects on
future years because options vest over several years and new grants generally
are made each year.
Effective September 30, 1999, the Company adopted an employee stock
purchase plan to provide employees who meet eligibility requirements an
opportunity to purchase shares of its common stock through payroll deductions of
up to 10% of eligible compensation. Bi-annually, participant account balances
are used to purchase shares of stock at 85% of the fair market value of shares
on the exercise date or the offering date. The plan remains in effect unless
terminated by the Board of Directors. A total of 95 shares are available for
purchase under the plan. In 2000, 33 shares were purchased under the plan for
$451.
14. COMMITMENTS AND CONTINGENCIES
The Company leases office space in New York City, London, Cambridge, Dallas
and Houston under long-term leases.
Future minimum annual lease commitments are as follows:
2001....................................................... $ 2,243
2002....................................................... 2,087
2003....................................................... 1,724
2004....................................................... 1,706
2005....................................................... 1,615
Thereafter................................................. 8,265
-------
$17,640
=======
Rent expense for the years ended December 31, 2000 and 1999 and for the
period from Inception through December 31, 1998 was $2,232, $1,009 and $321,
respectively.
From time to time, in the ordinary course of business, the Company is
subject to legal proceedings. While it is not possible to determine the ultimate
outcome of such matters, it is management's opinion that the resolution of any
pending issues will not have a material adverse effect on the financial
position, results of operations or cash flows of the Company.
15. RELATED PARTY TRANSACTIONS
SS&C TECHNOLOGIES, INC. ("SS&C")
In May 1998, SS&C purchased 1,762 shares of common stock for $3,000 of cash
and the contribution of an exclusive distribution agreement for 39 months to
sell certain products developed by SS&C having an initial value of $2,500. In
addition, SS&C was granted a warrant to purchase an additional 801 shares of
common stock with an exercise price of $0.11 per share. The original
distribution agreement was capitalized as
F-23
68
CAMINUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
an asset and would have been amortized to income on a straight line basis over
its life. Under the terms of the original distribution agreement, the warrant
would vest and become exercisable at the earlier of 39 months from the grant or
the sale or public offering of the Company. The number of shares exercisable was
dependent on the revenue levels derived from the sales of SS&C products by the
Company. No value was assigned to this warrant due to the great uncertainty as
to the amount of revenue, if any, that would be derived under the original
distribution agreement. The Company initially expected that the Caminus and SS&C
products would complement each other. However, Caminus later determined that it
would not invest its resources to sell this product.
On December 31, 1998, the Company repurchased all of the common stock and
the warrant to acquire common stock held by SS&C for total consideration of
approximately $4,911. The consideration of $4,911, which was recorded as
treasury stock, consisted of cash of approximately $2,300, the net value of the
cancelled distribution agreement of approximately $2,200 and the issuance of an
option to acquire 277 shares of common stock of the Company for $1,800 (the
"SS&C Option"), which has been valued at approximately $500 using the
Black-Scholes option pricing model. The SS&C Option was fully vested as of
December 31, 1998 and expires on December 31, 2003. As of December 31, 1998, the
Company recorded a note payable for the cash portion of the repurchase of
equity. The SS&C Option was exercised in February 2000 in connection with the
IPO and resulted in the issuance of 277 shares of common stock.
Simultaneously with the repurchase of the SS&C shares of common stock, the
Company entered into a distribution agreement with SS&C (the "Distribution
Agreement"). This agreement gives the Company the exclusive right to sell the
same SS&C software products as the original distribution agreement into the
energy market. Total guaranteed minimum payments under the terms of the
Distribution Agreement, as amended, were $2,750 which were paid in full as of
December 31, 2000.
As of December 31, 1998, the Company had not sold any of the SS&C products
acquired under the Distribution Agreement. Further, the Company does not have an
active plan to sell the software, which was acquired pursuant to the terms of
the distribution agreement. Because the Company has not resold any SS&C
software, nor does it have a formal plan in place to resell this software, the
total guaranteed minimum payments to SS&C as stipulated in the Distribution
Agreement were recorded as a charge in the statement of operations. The amount
of $2,750 has been included in "Amortization of intangible assets" in the
consolidated statement of operations for the period from Inception through
December 31, 1998.
OTHER TRANSACTIONS
On October 21, 1998, in connection with his employment with the Company,
the Chief Executive Officer ("CEO") was loaned $1,000 by the Company in order to
acquire shares of common stock. The loan bears interest at a rate of 9%, and all
accrued and unpaid interest was payable upon maturity in October 2008. In
addition, on October 21, 1998, the Company loaned the CEO $100. The loan bore
interest at a rate of 9%. The $100 loan was repaid, including interest, in
November 1999.
Additionally, in connection with the CEO's employment agreement, if certain
performance criteria and other conditions are met, the CEO would receive a bonus
based on forgiveness of the entire outstanding amount of the $1,000 loan plus
accrued interest as well as additional shares of common stock. Such amounts were
earned upon the IPO and resulted in a compensation related charge in the quarter
ended March 31, 2000 of $3,563.
During 2000 and 1999, Caminus made distributions of $452 and $80,
respectively, to its shareholders, for the estimated tax associated with the
former LLC's taxable income.
In connection with the acquisition of the 29% minority interest in ZNLP,
the earnout payments to the shareholder of ZNLP were guaranteed. The remaining
amounts owed are included in "payable to related parties" in the consolidated
balance sheets.
F-24
69
CAMINUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On September 1, 1998, in connection with his employment with the Company,
an employee was loaned $75 by the Company to acquire a portion of his shares of
common stock. The loan bore interest at a rate of 9% and was repaid in April
2000.
Upon the IPO closing in February 2000, the Company paid two officers of the
Company (former shareholders of CEL) a special bonus of $476.
As outlined in the former LLC Agreement, the Company was required to pay to
GFI Energy Ventures ("GFI"), a shareholder of the Company, an annual management
fee as consideration for financial, tax and general and administrative services.
This fee was calculated as 1% of the shareholders aggregate adjusted capital
contribution. Total management fees incurred for the year ended December 31,
1999 and for the period from Inception through December 31, 1998 were
approximately $377 and $160, respectively. In November 1999, the Company agreed
to terminate its advisory arrangement with GFI effective as of the IPO closing
in February 2000. As consideration, the Company paid GFI $1,300 from the net
proceeds of the initial public offering.
16. CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade accounts receivable.
The Company controls this risk through credit approvals, customer limits and
monitoring procedures. Additionally, the Company can limit the amount of
maintenance and support provided to its customers in the event of non-payment.
During the years ended December 31, 2000 and 1999 and the period from Inception
through December 31, 1998, there were no customers who represented more than 10%
of consolidated revenues. At December 31, 1999 the combined balances of two
customers represented 31% of accounts receivable, net.
17. 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, income taxes, depreciation and
amortization, non-cash compensation expense, the write-off of acquired IPR&D,
IPO-related expenses and loss on office relocation ("Adjusted EBITDA") as the
measure of a segment's profit or loss.
The accounting policies of the reportable segments are the same as those
described in Note 2. There are no inter-segment revenues or expenses between the
two reportable segments. The following table illustrates the financial results
of the two reportable segments:
F-25
70
CAMINUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PERIOD FROM
YEAR ENDED YEAR ENDED INCEPTION THROUGH
DECEMBER 31, 2000 DECEMBER 31, 1999 DECEMBER 31, 1998
-------------------------------- ----------------------- ----------------------
STRATEGIC STRATEGIC STRATEGIC
SOFTWARE CONSULTING OTHER SOFTWARE CONSULTING SOFTWARE CONSULTING
-------- ---------- -------- ---------- ---------- -------- ----------
Operating Results:
Revenues:
Licenses............ $24,573 $ -- $ -- $12,538 $ -- $ 3,639 $ --
Software services... 18,576 -- -- 7,816 -- 3,091 --
Strategic
consulting........ -- 8,565 -- -- 6,556 -- 2,896
------- ------ -------- ------- ------ ------- -------
Total
revenues..... $43,149 $8,565 $ -- $20,354 $6,556 $ 6,730 $ 2,896
======= ====== ======== ======= ====== ======= =======
Adjusted EBITDA.......... $ 6,503 $3,776 -- $ 1,448 $1,827 $ 366 $ (10)
Non-cash compensation
expense................ (167) -- -- (968) -- -- --
Acquired IPR&D........... -- -- -- (1,000) -- (4,822) --
Loss on office
relocation............. -- -- $ (508) -- -- -- --
IPO-related expenses..... -- -- (12,335) -- -- -- --
------- ------ -------- ------- ------ ------- -------
6,336 3,776 (12,843) (520) 1,827 (4,456) (10)
Depreciation and
amortization........... (10,553) (2,175) -- (6,872) (2,171) (4,247) (1,420)
------- ------ -------- ------- ------ ------- -------
Operating loss........... $(4,217) $1,601 $(12,843) $(7,392) $ (344) $(8,703) $(1,430)
======= ====== ======== ======= ====== ======= =======
Other Data:
Capital expenditures..... $ 3,019 $1,329 $ 914 $ 295 $ 380 $ 121
======= ====== ======= ====== ======= =======
AS OF AS OF AS OF
DECEMBER 31, 2000 DECEMBER 31, 1999 DECEMBER 31, 1998
-------------------------------- ----------------------- ---------------------
Total assets........... $ 90,900 $13,145 $ -- $34,291 $ 7,187 $24,478 $ 6,591
======== ======= ======= ======= ======= =======
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.
Geographic information for the Company, for the years ended December 31,
2000 and 1999 and for the period from Inception through December 31, 1998 is
summarized in the table below. The Company's international revenues were derived
primarily from the United Kingdom and the Company's international long-lived
assets at December 31, 2000, 1999 and 1998 resided primarily in the United
Kingdom.
YEAR ENDED
DECEMBER 31, PERIOD FROM
----------------- INCEPTION THROUGH
2000 1999 DECEMBER 31, 1998
------- ------- -----------------
Revenues:
United States............................................... $30,733 $14,644 $5,743
International (principally the United Kingdom).............. 20,981 12,266 3,883
------- ------- ------
$51,714 $26,910 $9,626
======= ======= ======
AS OF DECEMBER 31,
---------------------------
2000 1999 1998
------- ------- -------
Long-lived assets (includes all non-current assets):
United States............................................. $51,721 $27,335 $19,682
International (principally the United Kingdom)............ $ 2,456 $ 3,170 $ 5,066
F-26
71
CAMINUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. SUPPLEMENTAL CASH FLOW INFORMATION
YEAR ENDED
DECEMBER 31, PERIOD FROM
--------------- INCEPTION THROUGH
2000 1999 DECEMBER 31, 1998
------ ------ -----------------
Unrealized gain on available for sale securities............ $ 183 $ -- $ --
Issuance of equity in connection with the acquisition of
Nucleus................................................... 3,757 -- --
Accrual of SS&C option buyback.............................. -- 250 --
Issuance of equity in connection with the acquisition of DC
Systems................................................... -- 3,000 --
Notes payable issued in connection with the acquisition of
Zai*Net Software, L.P..................................... -- -- 4,375
Issuance of equity in connection with the acquisition of
Caminus Energy Limited.................................... -- -- 3,000
Issuance of equity for the contributed distribution
agreement................................................. -- -- 2,500
Issuance of equity in connection with the acquisition of
Zai*Net Software, L.P. minority interest.................. -- -- 10,339
Purchase of treasury stock by issuing a note payable,
$2,250, cancellation of the original distribution
agreement, $2,167, and grant of an option to acquire
common stock of the Company, $494......................... -- -- 4,911
Notes receivable for sale of stock.......................... -- -- 1,000
Interest paid............................................... 27 285 --
Income taxes paid........................................... 90 -- --
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth certain quarterly financial information for
fiscal 2000:
QUARTER ENDED
--------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2000 2000 2000 2000 TOTAL
--------- -------- ------------- ------------ --------
Revenues................................. $ 8,520 $11,207 $14,717 $17,270 $ 51,714
Gross profit............................. $ 5,672 $ 8,305 $10,189 $12,229 $ 36,395
Net loss................................. $(14,013) $ (586) $ (369) $ (548) $(15,516)
Basic and diluted net loss per share..... $ (1.05) $ (0.04) $ (0.02) $ (0.03) $ (1.04)
The following table sets forth certain quarterly financial information for
fiscal 1999:
QUARTER ENDED
-------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1999 1999 1999 1999 TOTAL
--------- -------- ------------- ------------ -------
Revenues.................................. $ 5,236 $ 6,007 $ 7,283 $ 8,384 $26,910
Gross profit.............................. $ 3,655 $ 4,053 $ 4,967 $ 5,848 $18,523
Net loss.................................. $(1,225) $(1,439) $(3,578) $(2,368) $(8,610)
Basic and diluted net loss per share...... $ (0.15) $ (0.18) $ (0.43) $ (0.26) $ (1.01)
The sum of the quarterly net loss per share amounts do not always equal the
annual amount reported, as per share amounts are computed independently for each
quarter and for the twelve months based on the weighted average common and
common equivalent shares outstanding in each such period. In 2000, the annual
loss per share was also impacted by the issuance of a significant number of
shares from the Company's IPO.
F-27
72
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of ZAI*NET Software, Inc.
In our opinion, the accompanying balance sheet, and the related statement
of operations and retained earnings and statement of cash flow present fairly,
in all material respects, the financial position of ZAI*NET Software, Inc. at
April 30, 1998, and the results of its operations and its cash flows for the
four months ended April 30, 1998, in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with auditing standards generally accepted in
the United States which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
As discussed in Note 11, as of December 31, 1998, ZAI*NET Software, Inc.
sold 100% of its assets to GFI Caminus LLC.
PRICEWATERHOUSECOOPERS LLP
New York, New York
August 28, 1998
F-28
73
ZAI*NET SOFTWARE, INC.
BALANCE SHEET
APRIL 30,
1998
----------
ASSETS
Current assets:
Cash and cash equivalents................................. $1,097,742
Certificate of deposit.................................... 54,355
Accounts receivable....................................... 1,678,491
Prepaid expenses and other current assets................. 125,487
----------
Total current assets.............................. 2,956,075
----------
Fixed assets, net........................................... 302,078
Other assets................................................ 11,950
----------
Total assets...................................... $3,270,103
==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable.......................................... $ 188,407
Accrued expenses.......................................... 991,875
Deferred revenue.......................................... 1,435,084
----------
Total liabilities................................. 2,615,366
----------
Stockholder's equity:
Common stock, without par value; 2,000 shares authorized;
480 shares issued and outstanding...................... 1
Retained earnings......................................... 654,736
----------
Total stockholder's equity........................ 654,737
----------
Total liabilities and stockholder's equity........ $3,270,103
==========
The accompanying notes are an integral part of these financial statements.
F-29
74
ZAI*NET SOFTWARE, INC.
STATEMENT OF OPERATIONS AND RETAINED EARNINGS
FOUR MONTHS
ENDED
APRIL 30,
1998
-----------
REVENUES:
Licenses.................................................. $1,495,221
Software services......................................... 1,334,473
----------
Total revenues.................................... 2,829,694
----------
COST OF REVENUES............................................ 734,242
----------
Gross profit...................................... 2,095,452
----------
OPERATING EXPENSES:
Research and development.................................. 580,031
Selling, general and administrative....................... 1,079,391
----------
Total operating expenses.......................... 1,659,422
----------
INCOME FROM OPERATIONS...................................... 436,030
----------
Interest income, net........................................ 8,294
----------
Income before provision for income taxes.................... 444,324
----------
Provision for income taxes.................................. 23,816
----------
NET INCOME........................................ 420,508
----------
RETAINED EARNINGS, BEGINNING OF PERIOD...................... 234,228
----------
RETAINED EARNINGS, END OF PERIOD............................ $ 654,736
==========
The accompanying notes are an integral part of these financial statements.
F-30
75
ZAI*NET SOFTWARE, INC.
STATEMENT OF CASH FLOWS
FOUR MONTHS
ENDED
APRIL 30,
1998
-----------
Cash flows from operating activities:
Net income................................................ $ 420,508
----------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 46,141
Changes in operating assets and liabilities:
Accounts receivable.................................... 26,060
Prepaid expenses and other current assets.............. (96,553)
Other assets........................................... (1,710)
Accounts payable....................................... 3,132
Accrued expenses....................................... 560,434
Deferred revenue....................................... 95,650
----------
Net cash provided by operating activities................... 1,053,662
----------
Cash flows from investing activities:
Purchases of fixed assets................................. (99,881)
----------
Net cash used in investing activities....................... (99,881)
----------
Cash flows from financing activities:
Repayment of notes payable for repurchase of options........ (3,000)
----------
Net cash used in financing activities....................... (3,000)
----------
Net increase in cash and cash equivalents................... 950,781
Cash and cash equivalents, beginning of period.............. 146,961
----------
Cash and cash equivalents, end of period.................... $1,097,742
==========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest............................................... $ --
The accompanying notes are an integral part of these financial statements.
F-31
76
ZAI*NET SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
ZAI*NET Software, Inc. (the "Company") is a Delaware corporation
headquartered in New York, which licenses, customizes and services ZAI*NET, an
integrated real-time front, middle, and back office software trading system for
foreign exchange, commodities, energy, options and other financial products.
REVENUE RECOGNITION
The Company generates revenue from the licensing of its software products
and performing services related to the implementation, training and support of
these products. The Company has adopted the provisions of Statements of Position
(SOP) 97-2 "Software Revenue Recognition". Adoption of this accounting
pronouncement did not materially affect the Company's financial statements.
License revenue is recognized upon the execution of a license agreement,
when the licensed product has been delivered, fees are fixed and determinable,
collectibility is probable, and when all other significant obligations have been
fulfilled. For license agreements in which customer acceptance is a condition to
earning the license fees, revenue is not recognized until acceptance occurs. For
arrangements containing multiple elements, such as software license fees,
consulting services and maintenance, and where vendor-specific objective
evidence of fair value exists for all undelivered elements, the Company accounts
for the delivered elements in accordance with the SOP 97-2.
Software Services revenue includes consulting services for installation,
data conversion and training related to the use of the Company's licensed
products. Customers often enter into arrangements for these services concurrent
with execution of license agreements. The services do not require significant
modification of the licensed products, are not essential to their functionality,
are available from other vendors and payment obligations with respect to the
licensed products are not dependent upon the performance of these services.
Accordingly, the Company recognizes revenues for these services as they are
performed. Maintenance and support revenues associated with new product licenses
and renewals where vendor-specific objective evidence exists, are deferred and
recognized ratably over the contract period. Contracts provide for an initial
maintenance period, which is annual, and a renewal period after expiration of
the initial maintenance period. Customers are permitted, but not required, to
renew their maintenance with us after expiration of the initial annual period.
The renewal rate for maintenance services is based on the initial license fee
and is used to establish the VSOE for maintenance revenues.
SOFTWARE DEVELOPMENT COSTS
All costs incurred in developing software products are expensed as research
and development expenses in the period incurred. Software development costs
incurred subsequent to the establishment of technological feasibility are not
material.
CASH AND CASH EQUIVALENTS
Cash equivalents are defined as highly liquid investments with an initial
maturity of three months or less.
FIXED ASSETS
Fixed assets are stated at cost, less accumulated depreciation.
Depreciation is calculated using the straight-line method over the estimated
useful life of the related asset. Estimated useful lives generally range from
three to five years.
F-32
77
ZAI*NET SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
The Company has elected to be treated as a Subchapter S Corporation for
federal and state income tax purposes. Accordingly, the sole stockholder of the
Company is responsible for federal and state income taxes resulting from the
Company's earnings. The Company is subject to certain other state and city
taxes, which are charged to operations as incurred.
The Company accounts for income taxes under the requirements of SFAS 109,
"Accounting for Income Taxes," which uses an asset and liability approach to
measure income tax expense. The asset and liability approach requires the
recognition of deferred tax assets and liabilities for the expected future
consequences of temporary differences between the financial statement amounts
and the tax basis of certain assets and liabilities. At April 30, 1998, $77,486
was recorded for state and local income taxes payable by the Company. Subsequent
to April 30, 1998, the tax status of the Company changed. Refer to Note 11,
subsequent events, for further details.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation." As permitted by
this Statement, the Company continues to apply Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," in accounting for
its stock-based employee compensation arrangements. No compensation expense has
been recognized for the Company's stock-based compensation plans as the exercise
price of the stock options is not less than the fair value of the underlying
common stock on the date of grant.
FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, accounts
receivable, accounts payable and loans payable. The current carrying amount of
these instruments approximates fair market value.
USE OF ESTIMATES
The financial statements were prepared in conformity with generally
accepted accounting principles, which require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. FIXED ASSETS
Fixed assets consist of the following:
APRIL 30,
1998
---------
Computer and office equipment............................. $658,591
Furniture and fixtures.................................... 73,530
Automobile................................................ 21,403
--------
753,524
Less -- Accumulated depreciation and amortization......... 451,446
--------
$302,078
========
F-33
78
ZAI*NET SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. ACCRUED EXPENSES
Accrued expenses consist of the following:
APRIL 30,
1998
---------
Payroll and benefits...................................... $397,382
Legal and professional fees............................... 363,073
Litigation settlement..................................... 175,000
Other expenses............................................ 56,420
--------
$991,875
========
4. EMPLOYEE STOCK OPTIONS
In August 1996, the Company repurchased, from a former employee, options to
purchase 5 shares of the Company's common stock in exchange for a $20,000
non-interest bearing note. Payments of this note are in monthly installments of
$1,000 commencing August 1, 1996. The note was repaid in full in March 1998.
The following table summarizes the Company's stock option activity for the
four months ended April 30, 1998:
FOUR MONTHS ENDED
APRIL 29, 1998
------------------------
WEIGHTED
AVERAGE
EXERCISE PRICE
SHARES PER SHARE
------ --------------
Outstanding at beginning of period...................... 300 $3,799
Granted................................................. -- --
Exercised............................................... -- --
Canceled................................................ -- --
Repurchased............................................. -- --
Outstanding at end of period............................ 300 $3,799
Options exercisable at period end....................... 300 $3,799
The range of exercise prices for options outstanding at April 30, 1998 was
$1,000 -- $4,400.
The weighted average remaining contractional life for options with a
weighted average exercise price of $3,799 is 7.8 years.
The Company continues to apply APB 25, "Accounting for Stock Issued to
Employees," in accounting for stock options issued to employees. Accordingly, no
compensation expense has been recognized for its stock based compensation plans.
Had compensation cost for the Company's stock option plan been determined based
on the fair value at the grant date, consistent with the methodology prescribed
under Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," the impact on net income for the four months ended
April 30, 1998 would not have been material.
5. 401(K) SAVINGS PLAN
The Company maintains a 401(k) Savings Plan (the "Plan"). Employees are
eligible to participate in the Plan upon completion of six months of service
with the Company. Eligible employees may contribute up to 15% of their annual
compensation to the Plan on a pre-tax basis. Participant contributions to the
Plan are immediately vested. In addition, under the terms of the Plan, the
Company, at its discretion, may match all or
F-34
79
ZAI*NET SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
a portion of a participant's contribution to the Plan up to 10% of the
participant's compensation. This matching percentage is determined by the
Company prior to the start of each Plan year. The Company matching contribution
is made at calendar year end and participants become vested in Company matching
contributions to the plan at the rate of 20% per year of service. The Company
elected to match 100% of participant contributions up to a maximum of $1,000 per
participant for 1998. Compensation expense for the plan was approximately $7,500
for the four months ended April 30, 1998.
6. LINE OF CREDIT
The Company maintained a $150,000 demand line of credit with a bank.
Interest on outstanding borrowings under the line of credit was based on the
prime lending rate plus two percent. The line of credit required the Company to
maintain a $50,000 interest bearing certificate of deposit with the bank. There
were no amounts outstanding under the line of credit at April 30, 1998.
7. INCOME TAXES
The provision for income taxes for the four-month period ended April 30,
1998 consists of the following:
Current provision......................................... $ 77,486
Deferred benefit.......................................... (53,670)
--------
Total provision........................................... $ 23,816
========
Since the Company's basis of accounting for tax purposes is the cash
receipts and disbursements method, the most significant components of the
deferred tax asset are accrued items of income and expense not recognized for
tax purposes until received or paid.
8. COMMITMENTS
The Company leases office space in New York City, London, Houston and
Singapore under long-term leases. Future minimum annual lease commitments are as
follows:
May 1, 1998 Through December 31, 1998.................... $ 238,933
1999..................................................... 384,842
2000..................................................... 354,202
2001..................................................... 354,177
Thereafter............................................... 430,039
----------
$1,762,193
==========
Rent expense for the four months ended April 30, 1998 totaled $116,712.
9. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
The Company's customer base consists primarily of companies in the
financial services and energy industry groups. Although the Company is directly
affected by the well being of these industries, management does not believe
significant credit risks exists as of April 30, 1998.
Two customers accounted for 17% and 10% of accounts receivable at April 30,
1998 and one customer accounted for 18% of revenues for the four months ended
April 30, 1998.
F-35
80
ZAI*NET SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. LITIGATION
An action was commenced in 1989 against the Company in which a former
employee (the "plaintiff") alleged four causes of action and sought monetary
damages of $2,000,000. The plaintiff also alleged two additional causes of
action against the current stockholder and a former stockholder and sought
aggregate damages of $5,000,000. These actions relate to the plaintiff's claim
that the Company promised the plaintiff an ownership interest in the Company and
a share of the Company's profits derived from software the plaintiff allegedly
developed in exchange for the plaintiff's promise to work for the Company. The
case was settled for $175,000 on May 11, 1998 and all required liabilities were
accrued at April 30, 1998.
11. SUBSEQUENT EVENTS
On May 12, 1998, the Company transferred substantially all of its assets
and liabilities to ZAI*NET SOFTWARE, L.P. (the "Partnership"), a Partnership 99%
owned by the Company and 1% owned by the sole stockholder of the Company.
Immediately following this transfer the Partnership agreed to sell 70% of its
ownership interest and the stockholder agreed to sell his 1% ownership interest
to GFI Caminus LLC ("GFI"). The Company retained the remaining 29% ownership
interest in the newly formed Partnership. The remaining ownership interest was
sold to GFI on December 31, 1998. (Unaudited)
F-36
81
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------- -----------
2.1* Merger Agreement among the Registrant, Caminus LLC and
Caminus Merger LLC, dated December 17, 1999.
2.2*+ Purchase Agreement by and among Zai*Net Software, Inc.,
Zai*Net Software, L.P., GFI Caminus LLC and Brian J.
Scanlan, dated May 12, 1998.
2.3*+ Stock Purchase Agreement by and among GFI Caminus LLC,
Caminus Energy Limited, Dr. Nigel L. Evans, Ph.D. and Dr.
Michael B. Morrison, Ph. D., dated May 12, 1998.
2.4*+ Purchase Agreement by and between Zai*Net Software, L.P. and
Corwin Joy, an individual, doing business as Positron Energy
Consulting, dated November 13, 1998.
2.5*+ Agreement of Merger by and between Caminus LLC and Zai*Net
Software, L.P., dated February 26, 1999.
2.6*+ Purchase Agreement by and among DC Systems, Inc., Caminus
LLC, Caminus/DC Acquisition Corp., and the Shareholders (as
defined in the agreement) dated July 31, 1999.
2.7**+ Nucleus Purchase Agreement by and among Caminus Corporation,
Nucleus Corporation, Nucleus Energy Consulting Corporation,
David C. Meyers, and John H. Gerold, dated August 30, 2000.
3.1* Certificate of Incorporation of the Registrant.
3.2 Amended and Restated Bylaws of the Registrant.
4* Specimen certificate for shares of Common Stock, $0.01 par
value per share, of the Registrant.
10.1*# 1998 Stock Incentive Plan.
10.2*# 1999 Stock Incentive Plan, including forms of stock option
agreement for incentive and nonstatutory stock options.
10.3*# 1999 Employee Stock Purchase Plan.
10.4* Limited Liability Company Agreement of GFI Caminus LLC,
dated May 12, 1998.
10.5* Assignment and Assumption Agreement by and among Zai*Net
Software, Inc., Zai*Net Software, L.P. and Brian J. Scanlan,
dated May 12, 1998.
10.6* Second Assignment and Assumption Agreement by and between
Zai*Net Software, Inc. and Rooney Software, L.L.C., dated
May 12, 1998.
10.7* Conversion Agreement and Amendment of Purchase Agreement by
and among Caminus Energy Ventures LLC, Zak Associates, Inc.,
Zai*Net Software, L.P., Brian Scanlan and Rooney Software,
L.L.C., dated December 31, 1998.
10.8* Credit Agreement by and between Caminus LLC and Fleet Bank,
N.A., dated June 23, 1999.
10.9* Security Agreement by and between Caminus LLC and Fleet
Bank, N.A., dated June 23, 1999.
10.10* Debenture issued by Caminus Energy Limited to Fleet Bank,
N.A., dated June 23, 1999.
10.11* Debenture issued by Caminus Limited to Fleet Bank, N.A.,
dated June 23, 1999.
10.12* Debenture issued by Zai*Net Software Limited to Fleet Bank,
N.A., dated June 23, 1999.
10.13* Guarantee by Caminus Energy Limited in favor of Fleet Bank,
N.A., dated June 23, 1999.
10.14* Guarantee by Caminus Limited in favor of Fleet Bank, N.A.,
dated June 23, 1999.
10.15* Guarantee by Zai*Net Software Limited in favor of Fleet
Bank, N.A., dated June 23, 1999.
10.16* Mortgage of Stock and Shares by Caminus Limited in favor of
Fleet Bank, N.A., dated June 23, 1999.
10.17* Mortgage of Stock and Shares by Caminus LLC in favor of
Fleet Bank, N.A., dated June 23, 1999.
10.18*# Employment Agreement by and between David M. Stoner and
Caminus Energy Ventures LLC, dated October 21, 1998.
10.19* Pledge and Security Agreement by and between David M. Stoner
and Caminus Energy Ventures LLC, dated October 21, 1998.
10.20*# Service Agreement by and between Dr. Nigel L. Evans and
Caminus Energy Limited, dated May 12, 1998.
10.21*# Covenant Not to Compete by and among Dr. Nigel L. Evans, Dr.
Michael B. Morrison and Caminus Energy Limited, dated May
12, 1998.
10.22*# Amendment No. 1 to Employment Agreement between Dr. Nigel
Evans and Caminus Limited, dated January 14, 2000.
10.23*# Employment Agreement by and between Brian J. Scanlan and
Zai*Net Software, L.P., dated May 12, 1998.
82
EXHIBIT
NO. DESCRIPTION
- ------- -----------
10.24*# Amendment No. 1 to Employment Agreement between Brian
Scanlan and Caminus LLC, dated November 8, 1999.
10.25*# Covenant Not to Compete by and between Brian J. Scanlan and
Zai*Net Software, L.P., dated May 12, 1998.
10.26*# Employment Letter between Mark A. Herman and Caminus LLC
dated January 26, 1999.
10.27* Agreement by and between Caminus LLC and GFI Two LLC, dated
January 21, 2000.
10.28* Revolving Promissory Note issued by Caminus LLC to Fleet
Bank, N.A., dated June 23, 1999.
10.29* Working Capital Promissory Note issued by Caminus LLC to
Fleet Bank, N.A., dated June 23, 1999.
10.30* Mortgage of Stocks and Shares, by Caminus Limited in favor
of Fleet Bank, N.A., dated June 23, 1999.
10.31* Mortgage of Stocks and Shares, by Caminus LLC in favor of
Fleet Bank, N.A., dated June 23, 1999.
10.32* Pledge Agreement between Caminus LLC and Fleet Bank, N.A.,
dated September 1, 1999.
10.33* Pledge Agreement between DC Systems, Inc. and Fleet Bank,
N.A., dated August 30, 1999.
10.34* Pledge Agreement between Caminus/DC Acquisition Corp. and
Fleet Bank, N.A., dated August 30, 1999.
10.35* Security Agreement between DC Systems, Inc. and Fleet Bank,
N.A., dated September 1, 1999.
10.36* Security Agreement between Caminus/DC Acquisition Corp. and
Fleet Bank, N.A., dated September 1, 1999.
10.37* Security Agreement between DCS*Gasnet Corporation and Fleet
Bank, N.A., dated September 1, 1999.
10.38* Guarantee made by DC Systems, Inc. in favor of Fleet Bank,
N.A., dated September 1, 1999.
10.39* Guarantee made by Caminus/DC Acquisition Corp. in favor of
Fleet Bank, N.A., dated September 1, 1999.
10.40* Guarantee made by DCS*Gasnet Corp. in favor of Fleet Bank,
N.A., dated September 1, 1999.
10.41* Exchange Agreement between Caminus Corporation and OCM
Caminus Investment, Inc., dated January 21, 2000.
10.42* Amendment to Limited Liability Company Agreement among
Caminus LLC and certain members of Caminus LLC, dated
January 19, 2000.
10.43*** Termination Agreement between Caminus Corporation and David
M. Stoner dated August 3, 2000.
10.44** Registration Rights Agreement, dated as of August 30, 2000,
by and among Caminus Corporation, Nucleus Corporation and
Nucleus Energy Consulting Corporation.
10.45** Escrow Agreement, dated as of August 30, 2000, by and among
Caminus Corporation, Nucleus Corporation, Nucleus Energy
Consulting Corporation, David C. Meyers, John H. Gerold and
State Street Bank and Trust Company of California N.A.
10.46*** Lease Agreement between Caminus Corporation and Advance
Magazine Publishers Inc. dated September 13, 2000.
21.1**** Subsidiaries of the Registrant.
23.1 Consent of KPMG LLP.
23.2 Consent of PricewaterhouseCoopers LLP.
- -------------------------
* Incorporated herein by reference to the Registrant's Registration Statement
on Form S-1 (File No. 333-88437).
** Incorporated herein by reference to the Registrant's Current Report on Form
8-K (File No. 000-28085) dated August 30, 2000.
*** Incorporated herein by reference to the Registrant's Quarterly Report on
Form 10-Q (File No. 000-28085) for the fiscal quarter ended September 30,
2000.
**** Incorporated herein by reference to the Registrant's Annual Report on Form
10-K (File No. 000-28085) for the year ended December 31, 1999.
+ The Registrant hereby agrees to furnish supplementally a copy of any
omitted schedules to this agreement to the Securities and Exchange
Commission upon its request.
# Management contract or compensatory plan or arrangement filed in response
to Item 14(a)(3) of the instructions to Form 10-K.