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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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) 515-3600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of July 31, 2001, there were 15,889,339 shares of Caminus Corporation common
stock outstanding.
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CAMINUS CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
a) Consolidated Balance Sheets as of June 30, 2001
(Unaudited) and December 31, 2000 ............................... 3
b) Consolidated Statements of Operations for the
three and six months ended June 30, 2001 and 2000 (Unaudited) .. 4
c) Consolidated Statements of Cash Flows for the six
months ended June 30, 2001 and 2000 (Unaudited) ................. 5
d) Notes to Consolidated Financial Statements ...................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................... 10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk ................................................... 21
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds ..................... 22
Item 4. Submission of Matters to a Vote of Security Holders ........... 23
Item 6. Exhibits and Reports on Form 8-K .............................. 23
Signatures ............................................................ 24
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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)
JUNE 30, DECEMBER 31,
2001 2000
--------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ................................... $ 33,890 $ 16,883
Investments in short term marketable securities ............. 5,321 12,368
Accounts receivable, net .................................... 16,501 16,322
Deferred income taxes ....................................... 527 1,288
Prepaid expenses and other current assets ................... 2,731 3,007
--------- ---------
Total current assets ..................................... 58,970 49,868
Investments in long-term marketable securities ................ 6,006 12,413
Fixed assets, net ............................................. 5,871 4,890
Acquired technology, net ...................................... 3,285 4,445
Other intangibles, net ........................................ 4,685 5,505
Goodwill, net ................................................. 20,190 25,165
Other assets .................................................. 1,759 1,759
--------- ---------
Total assets ............................................. $ 100,766 $ 104,045
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................ $ 1,286 $ 1,692
Accrued liabilities ......................................... 5,756 8,121
Income taxes payable ........................................ 2,878 2,273
Payable to related parties .................................. -- 100
Deferred revenue ............................................ 4,879 4,068
--------- ---------
Total current liabilities ................................ 14,799 16,254
--------- ---------
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par, 50,000 shares authorized; 17,643
shares issued and 15,881 shares outstanding at June 30, 2001;
17,453 shares issued and 15,691 shares outstanding at
December 31, 2000 ........................................... 176 174
Additional paid-in capital .................................... 129,739 127,092
Treasury stock, at cost ....................................... (4,911) (4,911)
Deferred compensation ......................................... (1,027) (128)
Accumulated deficit ........................................... (37,867) (34,497)
Accumulated other comprehensive income (loss) ................. (143) 61
--------- ---------
Total stockholders' equity ............................... 85,967 87,791
--------- ---------
Total liabilities and stockholders' equity ............... $ 100,766 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-----------------------------------------------
2001 2000 2001 2000
-------- -------- -------- --------
(UNAUDITED)
Revenues:
Licenses ......................... $ 7,498 $ 4,649 $ 13,864 $ 8,722
Software services ................ 8,353 4,375 15,906 7,085
Strategic consulting ............. 1,887 2,183 4,363 3,920
-------- -------- -------- --------
Total revenues ................ 17,738 11,207 34,133 19,727
-------- -------- -------- --------
Cost of revenues:
Cost of licenses ................. 103 194 280 497
Cost of software services ........ 3,915 1,951 7,963 3,777
Cost of strategic consulting ..... 1,098 757 2,267 1,476
-------- -------- -------- --------
Total cost of revenues ........ 5,116 2,902 10,510 5,750
-------- -------- -------- --------
Gross profit ................ 12,622 8,305 23,623 13,977
-------- -------- -------- --------
Operating expenses:
Sales and marketing .............. 2,712 2,369 5,435 4,215
Research and development ......... 3,034 1,408 5,870 2,782
General and administrative
(excluding IPO-related
expenses) ..................... 4,338 2,519 8,373 4,485
Amortization of intangible assets 3,241 2,556 6,977 5,112
IPO-related expenses ............. -- -- -- 12,335
-------- -------- -------- --------
Total operating expenses ...... 13,325 8,852 26,655 28,929
-------- -------- -------- --------
Loss from operations ............... (703) (547) (3,032) (14,952)
Other income (expense):
Interest income, net ............. 685 717 1,207 1,219
Other income (expense), net ...... 9 (2) 20 (91)
-------- -------- -------- --------
Total other income ............ 694 715 1,227 1,128
-------- -------- -------- --------
Income (loss) before provision
for income taxes ................... (9) 168 (1,805) (13,824)
Provision for income taxes ......... 938 754 1,565 775
-------- -------- -------- --------
Net loss ........................... $ (947) $ (586) $ (3,370) $(14,599)
======== ======== ======== ========
Basic and diluted net loss per share $ (0.06) $ (0.04) $ (0.21) $ (1.02)
======== ======== ======== ========
Weighted average shares used in
computing net loss per share ....... 15,798 15,261 15,762 14,321
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
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CAMINUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED JUNE 30,
-------------------------
2001 2000
-------- --------
(UNAUDITED)
Cash flows from operating activities:
Net loss $ (3,370) $(14,599)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 7,839 5,490
Deferred taxes 761 (259)
Deferred costs 52 182
Non-cash IPO-related expenses -- 9,741
Non-cash compensation expense 330 104
Bad debt expense 116 --
Changes in operating assets and liabilities:
Accounts receivable (314) (4,954)
Prepaid expenses and other current assets (248) 611
Accounts payable (247) 191
Accrued liabilities (2,500) 165
Taxes payable 605 1,331
Deferred revenue 812 469
Other (24) (249)
-------- --------
Net cash provided by (used in) operating activities 3,812 (1,777)
-------- --------
Cash flows from investing activities:
Purchase of marketable securities (2,556) (40,185)
Proceeds from sales of marketable securities 16,303 --
Purchase of fixed assets (1,843) (1,661)
Acquisition of Nucleus Corporation (100) --
-------- --------
Net cash provided by (used in) investing activities: 11,804 (41,846)
-------- --------
Cash flows from financing activities:
Proceeds received from issuance of common stock, net -- 59,028
Cash received for stock options exercised 951 1,972
Cash received for stock under ESPP 469 --
Payments of obligation to affiliate -- (2,688)
Repayment of borrowing under credit facility, net -- (3,050)
Cash received for stock subscriptions receivable -- 1,942
-------- --------
Net cash provided by financing activities 1,420 57,204
-------- --------
Effect of exchange rates on cash flows (29) (142)
-------- --------
Net increase in cash and cash equivalents 17,007 13,439
Cash and cash equivalents, beginning of period 16,883 662
-------- --------
Cash and cash equivalents, end of period $ 33,890 $ 14,101
======== ========
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.
An investor group originally organized Caminus LLC as a Delaware limited
liability company on April 29, 1998. Caminus was formed for the purpose of
acquiring equity interests in and managing the business affairs of Caminus
Energy Limited, which is now known as Caminus Limited and Zai*Net Software, L.P.
("Zai*Net"), 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. 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-
and six-month periods ended June 30, 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.
New Accounting Pronouncements
In July 2001, the FASB issued Statement No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 as well as all purchase method business
combinations completed after June 30, 2001. Statement 141 also specifies
criteria that intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill, noting
that any purchase price allocable to an assembled workforce may not be accounted
for separately. Statement 142 will require that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of Statement 142.
Statement 142 will also require that intangible assets with definite useful
lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of.
The Company has adopted the provisions of Statement 141 immediately, and
will adopt Statement 142 effective January 1, 2002. Furthermore, any goodwill
and any intangible asset determined to have an indefinite useful life that are
acquired in a purchase business combination completed after June 30, 2001 will
not be amortized, but will continue to be evaluated for impairment in accordance
with the appropriate pre-Statement 142 accounting literature. Goodwill and
intangible assets acquired in business combinations completed before July 1,
2001 will continue to be amortized prior to the adoption of Statement 142.
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CAMINUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Statement 141 will require upon adoption of Statement 142, that the Company
evaluate its existing intangible assets and goodwill that were acquired in a
prior purchase business combination, and to make any necessary reclassifications
in order to conform with the new criteria in Statement 141 for recognition apart
from goodwill. Upon adoption of Statement 142, the Company will be required to
reassess the useful lives and residual values of all intangible assets acquired
in purchase business combinations, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. In addition,
to the extent an intangible asset is identified as having an indefinite useful
life, the Company will be required to test the intangible asset for impairment
in accordance with the provisions of Statement 142 within the first interim
period. Any impairment loss will be measured as of the date of adoption and
recognized as the cumulative effect of a change in accounting principle in the
first interim period.
In connection with the transitional goodwill impairment evaluation,
Statement 142 will require the Company to perform an assessment of whether there
is an indication that goodwill is impaired as of the date of adoption. To
accomplish this the Company must identify its reporting units and determine the
carrying value of each reporting unit by assigning the assets and liabilities,
including the existing goodwill and intangible assets, to those reporting units
as of the date of adoption. The Company will then have up to six months from the
date of adoption to determine the fair value of each reporting unit and compare
it to the reporting unit's carrying amount. To the extent a reporting unit's
carrying amount exceeds its fair value, an indication exists that the reporting
unit's goodwill may be impaired and the Company must perform the second step of
the transitional impairment test. In the second step, the Company must compare
the implied fair value of the reporting unit's goodwill, determined by
allocating the reporting unit's fair value to all of it assets (recognized and
unrecognized) and liabilities in a manner similar to a purchase price allocation
in accordance with Statement 141, to its carrying amount, both of which would be
measured as of the date of adoption. This second step is required to be
completed as soon as possible, but no later than the end of the year of
adoption. Any transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in the Company's statement of
earnings.
And finally, any unamortized negative goodwill existing at the date
Statement 142 is adopted must be written off as the cumulative effect of a
change in accounting principle.
As of the date of adoption, the Company expects to have unamortized
goodwill in the amount of $15.9 million and unamortized identifiable intangible
assets in the amount of $6.2 million, all of which will be subject to the
transition provisions of Statements 141 and 142. Amortization expense related to
goodwill was $8.7 million and $5.0 million for the year ended December 31, 2000
and the six months ended June 30, 2001, respectively. Because of the extensive
effort needed to comply with adopting Statements 141 and 142, it is not
practicable to reasonably estimate the impact of adopting these Statements on
the Company's financial statements at the date of this report, including whether
any transitional impairment losses will be required to be recognized as the
cumulative effect of a change in accounting principle.
Reclassifications
Certain reclassifications were made to prior period amounts to conform to
the current period presentation format.
Net Loss 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 options (2,069,920
outstanding as of June 30, 2001) to purchase common shares, as the effect of
including such options would be antidilutive.
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CAMINUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Comprehensive Loss
Total comprehensive loss for the six months ended June 30, 2001 and 2000
was as follows:
SIX MONTHS ENDED
JUNE 30,
----------------------
2001 2000
-------- --------
(IN THOUSANDS)
Net loss ................................ $ (3,370) $(14,599)
Reclassification from unrealized gains to
realized gains on marketable securities (222) --
Unrealized gains on marketable securities 47 11
Cumulative foreign currency translation
adjustment ............................ (29) (33)
-------- --------
Comprehensive loss ...................... $ (3,574) $(14,621)
======== ========
2. SUPPLEMENTAL CASH FLOW INFORMATION
SIX MONTHS ENDED JUNE 30,
-------------------------
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
Reclassification from unrealized gains to realized gains
on available-for-sale securities ........................ (222) --
Unrealized gains on available-for-sale securities ........ 47 11
3. STOCK OPTION PLAN
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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4. SEGMENT REPORTING
The Company has three reportable segments: software, strategic consulting
and corporate. 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. Corporate
includes general overhead and administrative expenses not directly related to
the operating segments. 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. In evaluating financial performance, management uses
earnings before interest and other income, income taxes, and amortization,
IPO-related expenses and non-cash compensation expense ("Adjusted EBITA") 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 three reportable segments.
The following tables illustrate the financial results of the three
reportable segments:
THREE MONTHS ENDED JUNE 30,
----------------------------------------------------------------------------------------------
2001 2000
--------------------------------------------- --------------------------------------------
(IN THOUSANDS)
STRATEGIC STRATEGIC
SOFTWARE CONSULTING CORPORATE TOTAL SOFTWARE CONSULTING CORPORATE TOTAL
-------- ---------- --------- -------- -------- ---------- --------- --------
Operating Results:
Revenues:
Licenses $ 7,498 $ -- $ -- $ 7,498 $ 4,649 $ -- $ -- $ 4,649
Software services 8,353 -- -- 8,353 4,374 -- -- 4,374
Strategic consulting -- 1,887 -- 1,887 -- 2,183 -- 2,183
-------- -------- -------- -------- -------- -------- -------- --------
Total revenues $ 15,851 $ 1,887 $ -- $ 17,738 $ 9,023 $ 2,183 -- $ 11,207
======== ======== ======== ======== ======== ======== ======== ========
Depreciation -- -- (452) (452) -- -- (213) (213)
-------- -------- -------- -------- -------- -------- -------- --------
Adjusted EBITA 6,140 736 (4,035) 2,841 3,159 1,366 (2,477) 2,048
Non-cash
compensation expense -- -- (303) (303) -- -- (39) (39)
-------- -------- -------- -------- -------- -------- -------- --------
EBITA 6,140 736 (4,338) 2,538 3,159 1,366 (2,516) 2,009
Amortization (3,068) (173) -- (3,241) (2,038) (518) -- (2,556)
-------- -------- -------- -------- -------- -------- -------- --------
Operating income(loss) $ 3,077 $ 563 $ (4,338) $ (703) $ 1,121 $ 848 $ (2,516) $ (547)
======== ======== ======== ======== ======== ======== ======== ========
SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------------------------------------------------
2001 2000
--------------------------------------------- -----------------------------------------------
(IN THOUSANDS)
STRATEGIC STRATEGIC
SOFTWARE CONSULTING CORPORATE TOTAL SOFTWARE CONSULTING CORPORATE TOTAL
-------- ---------- --------- -------- -------- ---------- -------- --------
Operating Results:
Revenues:
Licenses $ 13,864 $ -- $ -- $ 13,864 $ 8,722 $ -- $ -- $ 8,722
Software services 15,906 -- -- 15,906 7,085 -- -- 7,085
Strategic consulting -- 4,363 -- 4,363 -- 3,920 -- 3,920
-------- -------- -------- -------- -------- -------- -------- --------
Total revenues $ 29,770 $ 4,363 $ -- $ 34,133 $ 15,807 $ 3,920 -- $ 19,727
======== ======== ======== ======== ======== ======== ======== ========
Depreciation -- -- (861) (861) -- -- (379) (379)
-------- -------- -------- -------- -------- -------- -------- --------
Adjusted EBITA 10,349 1,969 (8,043) 4,275 3,812 3,167 (4,381) 2,598
Non-cash
compensation expense -- -- (330) (330) -- -- (104) (104)
IPO-related expenses -- -- -- -- -- -- (12,335) (12,335)
-------- -------- -------- -------- -------- -------- -------- --------
EBITA 10,349 1,969 (8,373) 3,945 3,812 3,167 (16,820) (9,841)
Amortization (6,286) (691) -- (6,977) (4,075) (1,036) -- (5,111)
-------- -------- -------- -------- -------- -------- -------- --------
Operating income(loss) $ 4,062 $ 1,278 $ (8,373) $ 3,032 $ (264) $ 2,131 $(16,820) $(14,952)
======== ======== ======== ======== ======== ======== ======== ========
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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 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
366 at June 30, 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.
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
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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 39% of our
total revenues for the six months ended June 30, 2001. A significant portion of
our international revenues has 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. 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 June 30, 2001 to the Three Months Ended
June 30, 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
June 30, 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. The three months ended June 30, 2000 and 2001 are
referred to herein as "2000" and "2001," respectively.
THREE MONTHS
ENDED
JUNE 30,
--------------
2001 2000
---- ----
Revenues:
Licenses ........................ 42% 41%
Software services ............... 47 39
Strategic consulting ............ 11 20
---- ----
Total revenues .......... 100 100
Cost of revenues:
Cost of licenses ................ 1 4
Cost of software services ....... 47 45
Cost of strategic consulting .... 58 35
Gross profit ...................... 71 74
Operating expenses:
Sales and marketing ............. 15 21
Research and development ........ 17 13
General and administrative ...... 25 22
Amortization of intangible assets 18 23
---- ----
Total operating expenses 75 79
---- ----
Loss from operations .............. (4) (5)
Other income ...................... 4 6
Provision for income taxes ........ 5 6
---- ----
Net loss .......................... (5)% (5)%
==== ====
Revenues
Licenses: License revenues increased $2.8 million, or 61%, from $4.7
million in 2000 to $7.5 million in 2001 due primarily to increased demand for
new and additional software licenses from new and existing customers, larger
transaction sizes, the expansion of our domestic and international sales
personnel, and the acquisition of Nucleus in August 2000.
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Software services: Software services revenues increased by $4.0 million, or
91%, from $4.4 million in 2000 to $8.4 million in 2001 due primarily 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 and the conclusion of certain percentage of
completion engagements. Typically, software services, including implementation
and support services, are provided subsequent to the recognition of the license
revenues.
Strategic consulting: Strategic consulting revenues decreased $0.3 million,
or 14%, from $2.2 million in 2000 to $1.9 million in 2001 due primarily to our
European strategic consulting business experiencing a quicker-than-anticipated
wind-down of the successful New Electricity Trading Arrangements (NETA)
consulting engagement.
Cost of Revenues
Cost of licenses: Cost of licenses primarily consists of the software
license costs associated with third-party software that is integrated into our
products. Cost of licenses decreased $0.1 million or 101% from $0.2 million in
2000 to $0.1 million in 2001 due primarily to higher sales of Company owned
product.
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 increased $1.9 million, or 101%, from $2.0 million in 2000
to $3.9 million in 2001 due to the increase in the number of implementation,
training and technical support personnel, including former Nucleus personnel.
Cost of strategic consulting: Cost of strategic consulting consists of
personnel costs incurred in providing professional consulting services. Cost of
strategic consulting increased $0.3 million, or 45%, from $0.8 million in 2000
to $1.1 million in 2001 due primarily to the increase in the number of our
consultants, including the formation of our strategic consulting practice in the
United States. We plan to continue expanding our strategic consulting
organization and expect these expenses to increase. The increase in the cost of
revenue percentage for the current quarter resulted from lower consultant
utilization percentages related to our transition from the NETA contract, along
with the ramp-up of our new domestic strategic consulting group. We expect this
cost of revenue percentage to decrease in future quarters.
Operating Expenses
Sales and marketing: Sales and marketing expenses consist primarily of
sales and marketing personnel costs, travel expenses, advertising and trade show
expenses and commissions. Sales and marketing expenses increased $0.3 million,
or 15%, from $2.4 million in 2000 to $2.7 million in 2001 due primarily to an
increase in headcount and advertising and promotional expenses in 2001 compared
to 2000. The increase in the cost of revenue percentage for the current quarter
resulted from lower consultant utilization percentages related to our transition
from the NETA contract, along with the ramp-up of our new domestic strategic
consulting group.
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 increased $1.6 million, or 115%, from $1.4 million in 2000 to $3.0
million in 2001 due primarily 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 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 increased $1.8 million, or 72%, from $2.5 million in
2000 to $4.3 million in 2001 due primarily to increased staffing required to
support our expanded operations in the United States and internationally along
with an increase in rent and other expenses in 2001 compared to 2000, related to
our increased consolidated headcount.
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 increased $0.6 million, or 27%, from $2.6 million in
2000 to $3.2 million in 2001 due primarily to our incurring amortization expense
related to the August 2000 acquisition of Nucleus. This was offset in part by
the completion of amortization of the goodwill recognized from the acquisition
of Caminus Limited.
Loss From Operations
As a result of the variances described above, operating loss increased by
$4.5 million, or 51%, from $8.9 million in 2000 to $13.3 million in 2001.
Operating expenses as a percentage of revenues were 79% and 75% for 2000 and
2001, respectively.
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Adjusted EBITA
Earnings before interest and other income (expense), income taxes, and
amortization, non-cash compensation expense, and IPO-related expenses, or
Adjusted EBITA, as a percentage of revenues were 16% and 18% for 2000 and 2001,
respectively. Adjusted EBITA increased $0.8 million, or 40%, from $2.0 million
in 2000 to $2.8 million in 2001.
Interest and Other Income
Interest and other income remained constant at $0.7 million for both 2000
and 2001. The interest income was primarily related to the interest earned on
the resulting investments from our IPO proceeds along with gains on the sales of
investments.
Provision for Income Taxes
Our tax provision increased $0.2 million or 25%, from $0.7 million in 2000
to $0.9 million in 2001. The primary reason for the increase in our tax
provision was the recognition of tax expense for domestic operations in 2001
compared with a tax benefit in 2000. This was partially offset by a decrease in
foreign taxes.
RESULTS OF OPERATIONS
Comparison of the Six Months Ended June 30, 2001 to the Six Months Ended June
30, 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 six months ended June
30, 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. The six months ended June 30, 2000 and 2001 are referred
to herein as "2000" and "2001," respectively.
SIX MONTHS
ENDED
JUNE 30,
--------------
2001 2000
---- ----
Revenues:
Licenses ........................ 41% 44%
Software services ............... 46 36
Strategic consulting ............ 13 20
---- ----
Total revenues .......... 100 100
Cost of revenues:
Cost of licenses ................ 2 6
Cost of software services ....... 50 53
Cost of strategic consulting .... 52 38
Gross profit ...................... 69 71
Operating expenses:
Sales and marketing ............. 16 21
Research and development ........ 17 14
General and administrative ...... 24 23
Amortization of intangible assets 20 26
IPO-related expenses ............ -- 63
---- ----
Total operating expenses 78 147
---- ----
Loss from operations .............. (9) (76)
Other income ...................... 4 6
Provision for income taxes ........ 5 4
---- ----
Net loss .......................... (10)% (74)%
==== ====
Revenues
Licenses: License revenues increased $5.2 million, or 59%, from $8.7
million in 2000 to $13.9 million in 2001 due primarily to increased demand for
new and additional software licenses from new and existing customers, larger
transaction sizes, the expansion of our domestic and international sales
personnel, and the acquisition of Nucleus in August 2000.
Software services: Software services revenues increased by $8.8 million, or
125%, from $7.1 million in 2000 to $15.9 million in 2001 due primarily to the
increased licensing activity described above, which resulted in increased
revenues from customer
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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 increased $0.4 million,
or 11%, from $4.0 million in 2000 to $4.4 million in 2001 due primarily 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 decreased $0.2 million, or 44% from $0.5
million in 2000, to $0.3 million in 2001, due primarily to higher sales of
Company owned products.
Cost of software services: Cost of software services increased $4.2
million, or 111%, from $3.8 million in 2000 to $8.0 million in 2001 due
primarily 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.
Cost of strategic consulting: Cost of strategic consulting increased $0.8
million, or 54%, from $1.5 million in 2000 to $2.3 million in 2001 due primarily
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. The
increase in the cost of revenue percentage for the six month period resulted
from lower consultant utilization percentages related to our transition from the
NETA contract, along with the ramp-up of our new domestic strategic consulting
group.
Operating Expenses
Sales and marketing: Sales and marketing expenses increased $1.2 million,
or 29%, from $4.2 million in 2000 to $5.4 million in 2001 due to an increase in
advertising and promotional expenses, headcount, recruiting expenses 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 increased $3.1
million, or 111%, from $2.8 million in 2000 to $5.9 million in 2001 due
primarily to 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 increased
$3.9 million, or 87%, from $4.5 million in 2000 to $8.4 million in 2001 due
primarily to increased staffing required to support our expanded operations in
the United States and internationally along with an increase in rent and other
expenses in 2001 compared to 2000, related to our increased consolidated
headcount.
Amortization of intangible assets: Amortization of intangibles increased
$1.9 million, or 36%, from $5.1 million in 2000 to $7.0 million in 2001 due
primarily to our incurring amortization expense related to the August 2000
acquisition of Nucleus. This was offset in part by the completion of
amortization of the goodwill recognized upon the acquisition of Caminus Limited.
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 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
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 $12.0
million, or 80%, from $15.0 million in 2000 to $3.0 million in 2001. Operating
expenses as a percentage of revenues were 147% and 78%for 2000 and 2001,
respectively.
Adjusted EBITA
Earnings before interest and other income (expense), income taxes, and
amortization, non-cash compensation expense, and IPO-
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related expenses, or Adjusted EBITA, as a percentage of revenues were 12% and
13% for 2000 and 2001, respectively. Adjusted EBITA increased $1.6 million, or
62%, from $2.6 million in 2000 to $4.2 million in 2001.
Interest and Other Income
Interest and other income increased $0.1 million, or 9%, from $1.1 million
in 2000 to $1.2 million in 2001. The interest income was primarily related to
the interest earned on the resulting investments from our IPO proceeds along
with gains on the sale of investments.
Provision for Income Taxes
Our tax provision increased $0.8 million, or 102%, from $0.8 million in
2000 to $1.6 million in 2001. The primary reason for the increase in our tax
provision was an increase in domestic tax expense in 2001.
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 six months ended June 30, 2001,
our highly liquid assets increased by $3.6 million or 9% from $41.7 million at
December 31, 2000 to $45.2 million at June 30, 2001. We believe that our highly
liquid assets are sufficient to satisfy our liquidity requirements.
Cash and cash equivalents as of June 30, 2001 were $33.9 million, an
increase of $16.9 million from December 31, 2000.
Net cash provided by operating activities for the six months ended June 30,
2001 was $3.8 million. Net cash provided by operating activities primarily
resulted from our net loss of $3.4 million, which included $9.1 million of
non-cash expenses such as depreciation and amortization of $7.8 million and
deferred taxes of $0.8 million. This was partially offset by a reduction of
accrued liabilities of $2.5 million.
Our cash flow provided by investing activities was primarily affected by
the sale of investments in marketable securities, and offset in part by the
purchase of capital expenditures and the acquisition of additional investments
in marketable securities. Net cash provided by investing activities during the
six months ended June 30, 2001 was $11.8 million and resulted from the sale of
$16.3 million in marketable securities primarily consisting of investment grade
obligations of state and municipal governments and their agencies. Capital
expenditures of $1.8 million were primarily for computer and communications
equipment, purchased software, office equipment, furniture, fixtures and
leasehold improvements.
Net cash provided by financing activities during the six months ended June
30, 2001 was $1.4 million. During the six months ended June 30, 2001, financing
activities provided cash of $0.5 million from the sale of common stock in
connection with our employee stock purchase plan and $1.0 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 EXPECT OUR RESULTS OF OPERATIONS TO FLUCTUATE AND THE PRICE OF OUR COMMON
STOCK COULD FALL IF QUARTERLY RESULTS ARE LOWER THAN THE EXPECTATIONS OF
SECURITIES ANALYSTS
Our revenues and results of operations have fluctuated in the past and may
vary from quarter to quarter in the future. If our quarterly results fall below
the expectations of securities analysts, the price of our common stock could
fall. A number of factors, many of which are outside our control, may cause
variations in our results of operations, including:
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- demand for our software solutions and strategic consulting
services;
- the timing and recognition of sales of our products and services;
- unexpected delays in developing and introducing new products and
services;
- increased expenses, whether related to sales and marketing,
product development or administration;
- changes in the rapidly evolving market for products and services
in the energy industry;
- the mix of revenues derived from products and services;
- the hiring, retention and utilization of personnel;
- costs related to possible acquisitions of technologies or
businesses;
- general economic factors; and
- 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.
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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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.
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
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.
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 and Nucleus 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 and Nucleus software.
WE MAY NOT BE ABLE TO MANAGE OUR EXPANDING OPERATIONS
Rapid growth in numerous geographic regions has placed and will continue to
place a significant demand on our management, financial and operational
resources. Such demands 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 may need to 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
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existence of potentially longer payment cycles;
- language and cultural differences; and
- local economic conditions in foreign markets.
For the six months ended June 30, 2001, approximately 29% of our revenues
and 22% 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 FUTURE ACQUISITIONS
As part of our business strategy, we have completed and expect to enter
into additional business combinations and acquisitions. 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; and
- 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 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.
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UNAUTHORIZED PARTIES MAY OBTAIN AND PROFIT FROM OUR SOFTWARE, DOCUMENTATION AND
OTHER PROPRIETARY INFORMATION
We seek to protect the source code for our proprietary software both as a
trade secret and as a copyrighted work. Our policy is to enter into
confidentiality agreements with our employees, consultants, vendors and
customers and to control access to our software, documentation and other
proprietary information.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or obtain and use information that
we regard as proprietary. Policing unauthorized use of our products is
difficult, and while we are unable to determine the extent to which piracy of
our software products exists, such piracy can be expected to be a persistent
problem, particularly in international markets where the laws of foreign
countries are not as protective as they are in the U.S. Our trade secrets or
confidentiality agreements may not provide meaningful protection of our
proprietary information. We are aware of competitors that offer similar
functionality in their products. We can provide no assurance that others will
not independently develop similar technologies or duplicate any technology
developed by us.
We rely on outside licensors for technology that is incorporated into and
is necessary for the operation of our products. Our success will depend in part
on our continued ability to have access to such technologies that are or may
become important to the functionality of our products.
OTHERS MAY CLAIM THAT WE INFRINGE THEIR INTELLECTUAL PROPERTY RIGHTS, WHICH MAY
LIMIT OUR ABILITY TO CONDUCT OUR BUSINESS
As the number of software products in the energy industry increases and the
functionality of products from different software developers further overlaps,
software developers and publishers may increasingly become subject to claims of
infringement or misappropriation of the intellectual property or proprietary
rights of others. Although we are not currently subject to any claims of
infringement, third parties may assert infringement or misappropriation claims
against us in the future with respect to current or future products.
Further, we may be subject to additional risks as we enter into transactions in
countries where intellectual property laws are not well developed or are poorly
enforced. Legal protections of our rights may be ineffective in such countries,
and technology developed in such countries may not be protectable in
jurisdictions where protection is ordinarily available. In addition, we are
obligated to indemnify customers against claims that we infringe the
intellectual property rights of third parties. The results of any intellectual
property litigation to which we might become a party may force us to do one or
more of the following:
- cease selling or using products or services that incorporate the
challenged intellectual property;
- obtain a license, which may not be available on reasonable terms
or at all, to sell or use the relevant technology;
- redesign those products or services to avoid infringement; or
- refund license fees that we have previously received.
OUR BUSINESS MAY BE HARMED IF WE LOSE THE SERVICES OF KEY EXECUTIVES OR OTHER
KEY EMPLOYEES
Our success depends largely on the skills, experience and performance of
key executives and other key employees. These employees have significant
expertise in the energy and software industries and would be difficult to
replace. If we lose one or more of our key executives or other 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
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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, including through potential
acquisitions, and may require external financing in the future. Obtaining
additional financing will be subject to a number of factors, including:
- market conditions;
- our operating performance; and
- investor sentiment, particularly with respect to the emerging
energy market.
These factors may make the timing, amount, terms and conditions of
additional financing unattractive for us. If we are unable to raise capital to
fund our operations, we may not be able to successfully grow our business.
If we raise additional funds through the sale of equity or convertible debt
securities, your percentage ownership will be reduced. In addition, these
transactions may dilute the value of our outstanding stock. We may have to issue
securities that have rights, preferences and privileges senior to our common
stock.
OUR PERFORMANCE WILL DEPEND ON THE CONTINUED GROWTH IN DEMAND FOR ENERGY
PRODUCTS AND SERVICES
Our future success depends heavily on the continued growth in demand for
energy products and services, which is difficult to predict. If demand for
energy products and services do 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. 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.
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OUR STOCK PRICE MAY BE VOLATILE
The market price of our common stock may fluctuate significantly in
response to the following factors, some of which are beyond our control:
-- variations in quarterly operating results;
-- announcements, by us or our competitors, of significant
contracts, acquisitions, strategic partnerships, joint ventures
or capital commitments;
-- additions or departures of key personnel;
-- future sales of common stock;
-- changes in financial estimates by securities analysts; and
-- loss of a major customer.
WE MAY INCUR SIGNIFICANT COSTS FROM CLASS ACTION LITIGATION
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
stock. Such volatility has been particularly common in technology companies. We
may in the future be the target of securities litigation. Securities litigation
could result in substantial costs and divert management's attention and
resources.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD PREVENT
OR DELAY A CHANGE IN CONTROL OF US
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; and
-- 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 specified
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 June 30, 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 our subsidiaries'
functional currency as compared to the currencies of our 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 June 30, 2001,
our foreign currency translation adjustment was not material and, for the three
months ended June 30, 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 affect the volume of sales or the foreign currency
sales price as competitors' products become more or less attractive.
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For the six months ended June 30, 2001, approximately 29% of our revenues
and 22% 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 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 June 30,
2001, we used the net proceeds from the offering as follows (in thousands):
Repayment of Indebtedness .............. $ 4,309
Capital Expenditures ................... 6,191
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 ... 26,392
Cash Used in Operations ................ 4,166
-------
$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 Chairman 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.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At our Annual Meeting of Stockholders held on May 2, 2001, our stockholders
approved the following items:
1. The election of Nigel L. Evans, Lawrence D. Gilson and Brian J.
Scanlan as Class II Directors for the ensuing three years.
2. An amendment to our 1999 Stock Incentive Plan, increasing from
502,312 to 1,218,943 the number of shares of our common stock
authorized for issuance under such plan and the continuance of the
1999 Stock Incentive Plan, as amended.
3.The ratification of the appointment of KPMG LLP as our independent
auditors for the current year.
The other directors of the Company whose terms of office continued after the
Annual Meeting are Anthony H. Bloom, Christopher S. Brothers, Richard K.
Landers, Clare M. J. Spottiswoode and David M. Stoner. There were 15,755,877
shares of our common stock issued, outstanding and eligible to vote on the
record date of March 16, 2001. The results of the voting for each matter are set
forth below.
ELECTION OF DIRECTORS VOTES FOR VOTES WITHHELD
--------------------- --------- --------------
NIGEL L. EVANS 12,757,579 774,023
LAWRENCE D. GILSON 13,012,636 518,966
BRIAN J. SCANLAN 12,757,579 774,023
AMENDMENT TO, AND APPROVAL
OF THE CONTINUATION OF, BROKER
THE 1999 STOCK INCENTIVE PLAN VOTES FOR VOTES AGAINST ABSTENTIONS NON-VOTES
----------------------------- --------- ------------- ----------- ---------
9,230,003 2,887,095 4,185 1,410,319
RATIFICATION OF AUDITORS VOTES FOR VOTES AGAINST ABSTENTIONS
------------------------ --------- ------------- -----------
13,482,689 48,338 575
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits listed on the Exhibit Index immediately preceding such
exhibits are filed as part of this report.
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 10, 2001
CAMINUS CORPORATION
-------------------
Registrant
/s/ Joseph P. Dwyer
-------------------------------
Joseph P. Dwyer
Chief Financial Officer
and
Registrant's Authorized Officer
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EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
10.1 1999 Stock Incentive Plan, as amended.
10.2 Form of Certificate of Stock Option Grant.
10.3 Form of Incentive Stock Option Agreement, as amended, granted under
the 1999 Stock Incentive Plan.
10.4 Form of Nonstatutory Stock Option Agreement, as amended, granted
under the 1999 Stock Incentive Plan.
10.5* Employment Letter between Caminus Corporation and Joseph P. Dwyer,
dated April 10, 2001.
10.6 Nonstatutory Stock Option Agreement between Caminus Corporation and
Joseph P. Dwyer, dated May 7, 2001.
- -----------------
* Confidential treatment has been requested as to certain portions, which
portions have been omitted and filed separately with the Securities and
Exchange Commission.
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