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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(MARK ONE)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 2001
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 000-28085
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CAMINUS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-4081739
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
825 THIRD AVENUE
NEW YORK, NEW YORK 10022
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 888-3600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of April 30, 2001, there were 15,759,334 shares of Caminus Corporation
common stock outstanding.
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CAMINUS CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
a) Consolidated Balance Sheets as of March 31, 2001
(Unaudited) and December 31, 2000................... 2
b) Consolidated Statements of Operations for the three
months ended March 31, 2001 and 2000 (Unaudited).... 3
c) Consolidated Statements of Cash Flows for the three
months ended March 31, 2001 and 2000 (Unaudited).... 4
d) Notes to Consolidated Financial Statements.......... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............... 8
Item 3. Quantitative and Qualitative Disclosures About
Market Risk....................................... 20
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds......... 21
Item 6. Exhibits and Reports on Form 8-K.................. 22
Signatures................................................ 22
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CAMINUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
MARCH 31, DECEMBER 31,
2001 2000
------------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 11,515 $ 16,883
Investments in short term marketable securities........... 20,591 12,368
Accounts receivable, net.................................. 18,210 16,322
Deferred income taxes..................................... 1,213 1,288
Prepaid expenses and other current assets................. 2,075 3,007
-------- --------
Total current assets................................... 53,604 49,868
Investments in long term marketable securities.............. 7,361 12,413
Fixed assets, net........................................... 5,452 4,890
Acquired technology, net.................................... 3,786 4,445
Other intangibles, net...................................... 5,099 5,505
Goodwill, net............................................... 22,494 25,165
Other assets................................................ 1,759 1,759
-------- --------
Total assets........................................... $ 99,555 $104,045
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,251 $ 1,692
Accrued liabilities....................................... 4,445 8,121
Income taxes payable...................................... 2,701 2,273
Payable to related parties................................ -- 100
Deferred revenue.......................................... 4,965 4,068
-------- --------
Total current liabilities.............................. 13,362 16,254
-------- --------
Commitments and contingencies...............................
Stockholders' equity:
Common stock, $0.01 par, 50,000 shares authorized; 17,518
shares issued and 15,756 shares outstanding at March
31, 2001; 17,453 shares issued and 15,691 shares
outstanding at December 31, 2000.......................... 175 174
Additional paid-in capital.................................. 127,775 127,092
Treasury stock, at cost..................................... (4,911) (4,911)
Deferred compensation....................................... (101) (128)
Accumulated deficit......................................... (36,920) (34,497)
Accumulated other comprehensive income...................... 175 61
-------- --------
Total stockholders' equity............................. 86,193 87,791
-------- --------
Total liabilities and stockholders' equity............. $ 99,555 $104,045
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
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CAMINUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
MARCH 31,
------------------
2001 2000
------- -------
(UNAUDITED)
Revenues:
Licenses......................................... $ 6,366 $ 4,073
Software services................................ 7,553 2,710
Strategic consulting............................. 2,476 1,737
------- --------
Total revenues................................ 16,395 8,520
------- --------
Cost of revenues:
Cost of licenses................................. 177 303
Cost of software services........................ 4,048 1,826
Cost of strategic consulting..................... 1,169 719
------- --------
Total cost of revenues........................ 5,394 2,848
------- --------
Gross profit................................ 11,001 5,672
------- --------
Operating expenses:
Sales and marketing.............................. 2,723 1,846
Research and development......................... 2,836 1,374
General and administrative (excluding IPO-related 4,035 1,966
expenses).....................................
Amortization of intangible assets................ 3,736 2,556
IPO-related expenses............................. -- 12,335
------- --------
Total operating expenses...................... 13,330 20,077
------- --------
Loss from operations............................... (2,329) (14,405)
Other income (expense):
Interest income, net............................. 522 502
Other income (expense), net...................... 11 (89)
------- --------
Total other income............................ 533 413
------- --------
Loss before provision for income taxes............. (1,796) (13,992)
Provision for income taxes......................... 627 21
------- --------
Net loss........................................... $(2,423) $(14,013)
======= ========
Basic and diluted net loss per share............... $ (0.15) $ (1.05)
======= ========
Weighted average shares used in computing net loss
per share........................................ 15,725 13,380
======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
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CAMINUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three Months Ended March 31,
------------------------------------
2001 2000
------------- ------------------
Cash flows from operating activities: (Unaudited)
Net loss $ (2,423) $ (14,013)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 4,146 2,722
Deferred taxes 75 (132)
Deferred costs 52 182
Non-cash IPO-related expenses -- 9,741
Non-cash compensation expense 27 65
Bad debt expense 100 -
Changes in operating assets and liabilities:
Accounts receivable (2,007) 1,055
Prepaid expenses and other current assets 408 1,314
Accounts payable (282) (417)
Accrued liabilities (3,811) (1,539)
Taxes payable 428 114
Deferred revenue 898 (98)
Other - (56)
---------------- -------------
Net cash used in operating activities (2,389) (1,062)
---------------- -------------
Cash flows from investing activities:
Acquisition of Nucleus Corporation (100) -
Purchase of marketable securities (2,556) -
Purchase of fixed assets (972) (428)
---------------- -------------
Net cash used in investing activities: (3,628) (428)
---------------- -------------
Cash flows from financing activities:
Cash received for stock issued under employee stock purchase plan 469 -
Payments of obligation to affiliate - (500)
Repayment of borrowing under credit facility, net - (3,050)
Proceeds received from issuance of common stock, net - 59,073
Cash received for stock options exercised 214 1,853
---------------- -------------
Net cash provided by financing activities 683 57,376
---------------- -------------
Effect of exchange rates on cash flows (34) (15)
---------------- -------------
Net increase (decrease) in cash and cash equivalents (5,368) 55,871
Cash and cash equivalents, beginning of period 16,883 662
---------------- -------------
Cash and cash equivalents, end of period $ 11,515 $ 56,533
================ =============
The accompanying notes are an integral part of these
consolidated financial statements.
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CAMINUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BUSINESS AND ORGANIZATION
Formation of the Business
Caminus Corporation ("Caminus" or the "Company") was incorporated in
Delaware in September 1999. Caminus was formed to succeed Caminus LLC as the
parent organization for the subsidiaries formerly held by Caminus LLC.
Caminus LLC was originally organized as a Delaware limited liability
company on April 29, 1998 ("Inception") by an investor group. Caminus was formed
for the purpose of acquiring equity interests in and managing the business
affairs of Caminus Energy Limited ("CEL") and Zai*Net Software, L.P. ("Zai*Net"
or "ZNLP"), and to provide industry expertise and risk management software
products in the evolving competitive gas and energy markets worldwide.
Basis of Presentation
The unaudited consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission ("SEC"). Certain information and note
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted pursuant to such
rules and regulations. However, the Company believes that the disclosures are
adequate to make the information presented not misleading. These unaudited
consolidated financial statements should be read in conjunction with the
financial statements and the notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2000. The unaudited
consolidated financial statements included herein reflect all adjustments (which
include only normal, recurring adjustments) which are, in the opinion of
management, necessary to state fairly the results for the periods presented. The
results for the three-month period ended March 31, 2001 are not necessarily
indicative of the results expected for the full fiscal year.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Caminus Corporation and its subsidiaries. All intercompany transactions and
balances have been eliminated.
Reclassifications
Certain reclassifications were made to prior period amounts to conform to
the current period presentation format.
Earnings per Share
Basic and diluted net loss per share is computed by dividing net loss for
the period by the weighted average number of shares outstanding for the period.
The calculation of diluted net loss per share excludes
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CAMINUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
options (1,599,192 outstanding as of March 31, 2001) to purchase common shares
as the effect would be antidilutive.
Comprehensive Loss
Total comprehensive loss for the three months ended March 31, 2001 and
2000 was as follows:
THREE MONTHS ENDED
MARCH 31,
-------------------
2001 2000
-------- -------
(IN THOUSANDS)
Net loss.................................................... $(2,423) $(14,013)
Unrealized gains on marketable securities................... 144 --
Cumulative foreign currency translation adjustment.......... (30) (55)
-------- --------
Comprehensive loss.......................................... $(2,309) $(14,068)
======== ========
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CAMINUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SEGMENT REPORTING
The Company has two reportable segments: software and strategic consulting.
Software comprises the licensing of the Company's software products and the
related implementation and maintenance services. Strategic consulting provides
energy market participants with professional advice regarding where and how to
compete in their respective markets. In evaluating financial performance,
management uses earnings before interest and other income, income taxes,
depreciation and amortization, IPO-related expenses and non-cash compensation
expense ("Adjusted EBITDA") as the measure of a segment's profit or loss.
The accounting policies of the reportable segments are the same as those
described in Note 2 of the Company's Annual Report on Form 10-K. There are no
inter-segment revenues or expenses between the two reportable segments.
The following table illustrates the financial results of the two reportable
segments:
THREE MONTHS ENDED MARCH 31,
---------------------------------------------------------------------------------------
2001 2000
----------------------------- ----------------------------------------------
(IN THOUSANDS)
STRATEGIC STRATEGIC
SOFTWARE CONSULTING SOFTWARE CONSULTING OTHER
-------- ---------- -------- ---------- -----
Operating Results:
Revenues:
Licenses $ 6,366 $ -- $ 4,073 $ -- $ --
Software services 7,553 -- 2,710 -- --
Strategic consulting -- 2,476 -- 1,737
----------- ---------- ----------- ----------- -----------
Total revenues 13,919 2,476 $ 6,783 $ 1,737 --
=========== ========== =========== =========== -----------
Adjusted EBITDA 955 889 108 609
Non-cash compensation expense (27) -- (65) -- --
IPO-related expenses -- -- -- -- (12,335)
----------- ---------- ----------- ----------- -----------
928 889 43 609 (12,335)
Depreciation and amortization (3,595) (551) (2,161) (561) --
----------- ---------- ----------- ----------- ----------
Operating income (loss) $ (2,667) $ 338 $ (2,118) $ 48 $ (12,335)
=========== ========== =========== =========== ===========
Other Data:
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.
3. SUPPLEMENTAL CASH FLOW INFORMATION
THREE MONTHS ENDED MARCH 31,
----------------------------------------------------------
2001 2000
----------------------- -------------------------
(IN THOUSANDS)
Cash paid for interest........................................ $ -- $ 27
Option exercised for no cash consideration.................... -- 9
Option exercised in exchange for recourse note receivable -- 111
Unrealized gain on available-for-sale securities.............. 144 --
4. SUBSEQUENT EVENT
On May 2, 2001, the shareholders authorized an additional 716,631
shares to be available for grant under the 1999 Stock Incentive Plan ("1999
Plan"). The Company had previously contingently granted, subject to shareholder
approval, approximately 182,000 options with exercise prices ranging from
$20.13 to $29.63. The closing price of the Company's stock on May 2, 2001 was
$31.15. As a result in May 2001, the Company recorded deferred compensation
of approximately $1.2 million which will be amortized over the four-year
vesting period of the options. The related non-cash compensation expense
for 2001 will be approximately $0.6 million.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This quarterly report contains forward-looking statements that involve
risks and uncertainties. The statements contained in this report that are not
purely historical are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Without limiting the foregoing, the words "may," "will," "should,"
"could," "expects," "plans," "intends," "anticipates," "believes," "estimates,"
"predicts," "potential," "continue" and similar expressions are intended to
identify forward-looking statements. All forward-looking statements included in
this quarterly report are based on information available to us up to and
including the date of this document, and we assume no obligation to update any
such forward-looking statements. Our actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth below under "Certain Factors that May Affect
Our Business" and elsewhere in this quarterly report. You should also carefully
review the risks outlined in other documents that we file from time to time
with the Securities and Exchange Commission.
OVERVIEW
We are a leading provider of software solutions and strategic consulting
services to participants in energy markets throughout North America and Europe.
We were organized as a limited liability company on April 29, 1998 and acquired
Zai*Net Software, L.P. and Caminus 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 quarterly 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 330 at December 31, 2000 to
362 at March 31, 2001, 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. 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, 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.
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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.
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
a proportionate amount of revenues during the fourth quarter of the year and
less revenues during the first quarter.
Revenues from customers outside the United States represented 34% of our
total revenues for the three months ended March 31, 2001. 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.
Due to our acquisition of 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 Three Months Ended March 31, 2001 to the Three Months Ended
March 31, 2000
The following table sets forth, except for the cost of revenues which are
expressed as a percentage of their related revenues, the consolidated financial
information expressed as a percentage of revenues for the three months ended
March 31, 2001 and 2000. The consolidated financial information for the periods
presented are derived from the unaudited consolidated financial statements
included elsewhere in this quarterly report. The discussion below outlines
trends in the business.
THREE MONTHS
ENDED
MARCH 31,
------------
2001 2000
---- ----
Revenues:
Licenses.................................................. 39% 48%
Software services......................................... 46 32
Strategic consulting...................................... 15 20
--- ---
Total revenues.................................... 100 100
Cost of revenues:
Cost of licenses.......................................... 3 7
Cost of software services................................. 54 67
Cost of strategic consulting.............................. 47 41
Gross profit................................................ 67 67
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THREE MONTHS
ENDED
MARCH 31,
------------
2001 2000
---- ----
Operating expenses:
Sales and marketing....................................... 17% 22%
Research and development.................................. 17 16
General and administrative................................ 24 23
Amortization of intangible assets......................... 23 30
IPO-related expenses...................................... -- 145
--- ----
Total operating expenses.......................... 81 236
--- ----
Loss from operations........................................ (14) (169)
Other income................................................ 3 5
Provision for income taxes.................................. 4 --
--- ----
Net loss.................................................... (15)% (164)%
=== ====
Revenues
Licenses. License revenues represented 39% and 48% of the total revenues
for 2001 and 2000, respectively, and increased $2.3 million, or 56%, from $4.1
million in 2000 to $6.4 million in 2001. 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 46% and 32% of
the total revenues for 2001 and 2000, respectively, and increased by $4.8
million, or 179%, from $2.7 million in 2000 to $7.6 million in 2001. 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 15% and
20% of the total revenues for 2001 and 2000, respectively, and increased $0.7
million, or 43%, from $1.7 million in 2000 to $2.5 million in 2001 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 3% and 7% for 2001 and
2000, respectively, and decreased $0.1 million, or 42%, from $0.3 million in
2000 to $0.2 million in 2001. The decrease was primarily attributable to the
recognition in 2000 of $0.2 million of contract costs which was being accounted
for under the completed contract method of accounting. In 2001, $0.1 million of
costs associated with contracts accounted for under the completed contract
method were recorded.
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5 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 54% and
67% for 2001 and 2000, respectively, and increased $2.2 million, or 122%, from
$1.8 million in 2000 to $4.0 million in 2001. This increase in absolute dollars
was primarily attributable to the increase in the number of implementations,
training and technical support personnel, including former 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 47%
and 41% for 2001 and 2000, respectively, and increased $0.5 million, or 63%,
from $0.7 million in 2000 to $1.2 million in 2001. This increase 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 17%
and 22% for 2001 and 2000, respectively, and increased $0.9 million, or 47%,
from $1.8 million in 2000 to $2.8 million in 2001. This increase in absolute
dollars 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 17% and 16% for 2001 and 2000,
respectively, and increased $1.5 million, or 106%, from $1.4 million in 2000 to
$2.8 million in 2001. This increase was primarily due to an increased hiring of
personnel and to other expenses associated with the development of new products
and enhancements of existing products. We plan to continue expanding our
research and development organization and expect our research and development
expenses to increase.
General and administrative. General and administrative expenses consist
primarily of personnel costs of executive, financial, human resource and
information services personnel as well as facility costs and related office
expenses, management fees and outside professional fees. General and
administrative expenses as a percentage of revenues were 24% and 22% for 2001
and 2000, respectively, and increased $2.1 million, or 105%, from $2.0 million
in 2000 to $4.0 million in 2001. This increase in absolute dollars was primarily
due to increased staffing required to support our expanded operations in the
United States and internationally.
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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 23% and 30% for 2001
and 2000, respectively, and increased $1.2 million, or 46%, from $2.6 million in
2000 to $3.7 million in 2001. The increase in absolute dollars was primarily
attributable to our incurring amortization expense related to the August 2000
acquisition of Nucleus.
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 From Operations
As a result of the variances described above, operating loss decreased by
$12.1 million, or 84%, from $14.4 million in 2000 to $2.3 million in 2001.
Operating expenses as a percentage of revenues were 81% and 236% for 2001 and
2000, respectively.
Adjusted EBITDA
Earnings before interest and other income (expense), income taxes,
depreciation and amortization, non-cash compensation expense, and IPO-related
expenses, or Adjusted EBITDA, as a percentage of revenues were 11% and 8% for
2001 and 2000, respectively. Adjusted EBITDA increased $1.1 million, or 157%,
from $0.7 million in 2000 to $1.8 million in 2001.
Interest and Other Income
Interest and other income increased $0.1 million, or 29%, from $0.4 million
in 2000 to $0.5 million in 2001. 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 2001 and 2000 related primarily to
foreign income taxes. Our tax provision increased $0.6 million, or 2,886%, from
$0.02 million in 2000 to $0.6 million in 2001. The primary reason for the
increase in our tax provision was related to the increase in our foreign taxable
income.
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LIQUIDITY AND CAPITAL RESOURCES
In February 2000, we closed the initial public offering of our common
stock, issuing 4.1 million shares of common stock and realizing net proceeds of
$59.0 million. Prior to the offering, we had funded our operations and
acquisitions primarily from the proceeds of private equity sales and borrowings
under our credit facility.
Our highly liquid assets consist of cash and cash equivalents plus our
investments in marketable securities. For the three months ended March 31, 2001,
our highly liquid assets decreased by $2.2 million or 5% from $41.7 million at
December 31, 2000 to $39.5 million at March 31, 2001. We believe that our highly
liquid assets are sufficient to satisfy our liquidity requirements.
Cash and cash equivalents as of March 31, 2001 were approximately $11.5
million, a decrease of approximately $5.4 million from December 31, 2000. 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 used in operating activities for the three months ended March 31,
2001 was approximately $2.4 million. Net cash used in operating activities
primarily resulted from our net loss of $2.4 million, and a reduction of accrued
liabilities of $3.8 million which, was partially offset by depreciation and
amortization of $4.1 million. The decrease in accrued liabilities primarily
resulted from the payment of accrued bonuses for 2000 paid in the first quarter
of 2001.
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 three months
ended March 31, 2001 was approximately $3.6 million and resulted from the
investment of $2.6 million in marketable securities primarily consisting of
investment grade obligations of state and municipal governments and their
agencies. Capital expenditures of $1.0 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
borrowing under the credit facility. Net cash provided by financing activities
during the three months ended March 31, 2001 was approximately $0.7 million.
During the three months ended March 31, 2001, financing activities provided cash
of approximately $0.5 million from the sale of common stock in connection with
our employee stock purchase plan and $0.2 million from the exercise of stock
options.
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.
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
a proportionate amount of revenues during the fourth quarter of the year and
less 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 three months ended March 31, 2001, approximately 34% of our
revenues and 23% 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 3. 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 March 31, 2001, 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 its subsidiaries'
functional currency as compared to the currencies of its foreign denominated
sales and purchases. The results of operations of our subsidiaries,
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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 March 31,
2001, our foreign currency translation adjustment was not material and, for the
three months ended March 31, 2001, 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 three months ended March 31, 2001, approximately 34% of our
revenues and 23% 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 Europe Monetary Union. We have also
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
fluctuations in the value of the euro will have any material effect on our
business, financial condition or results of operations.
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The following information relates to the use of proceeds from our initial
public offering of common stock. The effective date of our Registration
Statement on Form S-1, commission file number 333-88437, relating to our initial
public offering, was January 27, 2000.
In connection with the offering, the estimated expenses were as follows
(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.
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 March 31,
2001, we used the net proceeds from the offering as follows (in thousands):
Repayment of Indebtedness............................... $ 4,309
Capital Expenditures.................................... 5,320
Termination Fee for Consulting Services................. 1,300
Bonus payments.......................................... 522
Lease Termination Fee................................... 186
Earn-out Payment to Zak Associates, Inc. ............... 355
Security Deposit on New York lease...................... 1,739
Acquisition of DC Systems............................... 184
Acquisition of Nucleus.................................. 13,684
Investments in Marketable Securities.................... 29,363
Cash Used in Operations................................. 2,066
-----------
$ 59,028
===========
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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. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 14, 2001
CAMINUS CORPORATION
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Registrant
/s/ JOSEPH P. DWYER
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Chief Financial Officer
and
Registrant's Authorized Officer
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